text:
    The Easton National Bank v. The American Brick and Tile Company et al.
    On appeals of Frederick Green, individually, and Frederick Green, executor, &c., of Henry Green, deceased.
    [Argued December 1st, 1905.
    Decided June 18th, 1906.]
    1. In the winding up of an insolvent corporation the receiver instituted proceedings by petition against certain stockholders for enforcement of their liability for unpaid subscriptions to the extent' required for the payment of the claims of certain creditors, including one G., he being both a creditor of the company and at the same time a delinquent stockholder. G. was a party upon the record in the court of chancery, but only as a defendant stockholder. The court of chancery held the stockholders liable to the extent required for payment of the claims of certain creditors, but excluded the claim of G. from those entitled to contribution. From the latter part of the decree G. entered an appeal in due form and filed his petition of appeal in this court. The respondents here (they being the other delinquent stockholders) answered the petition of- appeal, but in the answers raised no question of G.’s right to appeal.—Held, that an objection first raised at the hearing of the appeal, that G. had no status as a party in the court below such as would entitle him to an appeal from so much of the decree as denied relief to- the receiver in respect to his claim, came too late.
    2. The receiver of an insolvent corporation filed a petition in ehaneerty against certain stockholders to require them to contribute their unpaid stock subscriptions to the extent required to satisfy certain debts of the company, including a debt claimed by G., which had been accepted and admitted by the receiver as a claim against the corporation. The stockholders answered the receiver’s petition and thereby questioned the right of G. to resort to the stockholders’ liability, without, however, questioning the validity of his claim as against the company or asserting that it was barred by the statute of limitations.—Held, that upon appeal the delinquent stockholders would not be permitted to raise the question whether the claim of G. was barred by the statute of limitations.
    8. The bar of the statute of limitations must be specially pleaded, unless the facts that raise it appear to be admitted.
    4. Indulgence will not be granted to a party who fails in due time and proper form to invoke the protection of the statute of limitations.

      5. An agreement between a corporation organized under the General Corporation act of 3875 (1 Gen. Stat. p. 907), and its stockholders, to the effect that corporate stock shall be issued to them without receipt by the company of money or property equivalent in value to the liar value of the stock, is void because contrary to the spirit and policy of the act.
    6. Under the General Corporation act of 1875 (1 Gen. Slat. p. 907 §§ 5, 54, ¿fe.) a creditor’s knowledge that stock was improperly issued as “full paid” and as “issued for'property purchased,” when the fact was otherwise, is not sufficient to debar him from relief against the recipients of the stock.
    7. A stockholder who participated actively in a transaction. that resulted in an improper issuance of stock as “issued for property purchased,” and himself received a part of such stock—Sol^ not estopped from participating as a creditor in proceedings taken to enforce the liability of delinquent stockholders by the circumstance that their stock certificates were marked “full paid” and “issued for property purchased,” since the stockholders knew the fact to be otherwise.
    8. One who participates as a stockholder and office&jjn am ^proper issuance of stock certificates marked “full paid’,’ and “issued for property purchased,” is not debarred by operation .of the maxim in pari delieto potior est conditio defendentis from enforcing against the stockholders any just claims he may have as a creditor of the company. The agreement for improper issuance of the stock being absolutely void on grounds of public policy, his rights as a creditor remain unimpaired.
    On appeals from a decree of the court of chancery, advised by Vice-Chancellor Bergen, whose opinion is reported in 69 N. J. Eq. 326.

      Mr. Sylvester G. Smith and Mr. B. G. Stewart (of the Pennsylvania bar), for the appellants.

      Messrs. Guild & Martin, for the respondent Hen.ry A. Potter.

      Mr. Bichará V. Lindabury, for the respondents Elisha P. Wilbur and Fidelity Trust Company, executor, &c., of Edward M. Paxson, deceased.
   The opinion of the court was delivered by

Pitney, J.

In the winding up of the American Brick and Tile Company as an insolvent corporation, the appellant- Frederick Green, in his individual right, presented to the receiver a sworn claim for moneys loaned by him to the company, amounting, with interest, to $6,655, and in his capacity as executor of his father, Henry Green, deceased, presented a sworn claim for moneys advanced by the latter in his lifetime showing a balance due of $22,947.88, besides interest. In a proceeding instituted by the receiver against certain stockholders for enforcement of their liability for unpaid subscriptions, the learned vice-chancellor, while upholding'the right of the receiver to recover for the benefit of other creditors (and in this his decree has just been affirmed by this court), held that the Green claims Avere not properly chargeable against the delinquent stockholders. From this part of the decree the present appeals are taken.

• The grounds upon which the vice-chancellor decided against the Green claims were that Henry Green was a director in and the president of the defendant corporation, and Frederick Green was its secretary and treasurer at the time the stock found to be unpaid was issued; that each of them, at the time they became creditors, kneAV the exact condition of the company, and knew that the stock in question was not issued for property at its value, as it purported to be. • He held that the right to hold subscribers for unpaid balances on account of stock issued depends entirely upon the fact that the stock Avas issued fraudulently as to creditors, and that in the present case, if it Avas so issued, it AAras by act of the directors, including Henry Green, and with the knowledge of the treasurer, Frederick Green, and that they'each extended credit to the-company, with notice that the stock was not full paid, and that the company had entered into a contract with its stockholders that no further payments Avould be" required.

Before dealing with this matter, some questions of practice require to be disposed of. First, it is insisted that the present appeals are not properly taken and ought to be dismissed, and this on the ground that Frederick Green, either individually or as executor, was not a party to the proceeding in the court below, except so far as he appeared in his capacity as executor resisting the claim of the receiver to hold Henry Green’s estate liable for the unpaid subscription upon Ms stock. It is true, as pointed out by counsel, that- so far as the Green claims are concerned, they were represented in the proceedings below solely by the receiver, who filed his petition in their behalf as well as in the behalf of other creditors. It is, however, obvious that the present appellant, both in his individual and in his representative capacity, is directly concerned in the decree so far as it denies relief with respect to his claims, and he is therefore in a substantial sense a party aggrieved. Promptly after the filing of the decree he entered notices of appeal, and in due season filed petitions of appeal in this court. Answers were filed to these petitions, and in the answers no question was raised of his right to 'appeal. If the objection that is now raised had been promptly taken he could have intervened formally as a party, or have applied to the receiver to enter an appeal in his interest. The objection to the form of the procedure having been withheld until the appeals were brought on here for final argument, the matters at issue will be determined upon the merits, and the proceeding amended, if necessary, in such a manner as to support the status of the appellant.

It is next insisted that the Frederick Green claim is wholly barred by the statute of limitations, and that the Henry Green claim is likewise thus barred, with the exception of items aggregating $2,300. The insistment is that, with this exception, all the loans and advances in question were made more than six years before the filing of the bill in the insolvency matter, and that certain payments on account thereof, proved to have been made within the six years, were made under such circdmstances as not to evidence a new promise by the company." Upon' the evidence that is before us, there would seem to. be some question whether the claims are not barred by the statute. But can the respondents be permitted, here, to raise the question? The receiver’s petition filed in the court below against the delinquent stockholders, among whom were' the present respondents, sets forth sundry claims that had been presented to him against the company, and among them the above-mentioned claims of the appellant, averring that he had accepted and admitted them as claims against the corporation. The present respondents severally answered the petition, and in their answers neither admitted nor denied the truth of this averment, leaving the petitioner to make proof thereof. The answers of Wilbur and Paxson set up that inasmuch as Henry Green procured tire company to be organized, and, as a member of the board of directors and president of the company, took part in the purchase of the patents and patent rights and the issue therefor of the capital stock, and himself caused the certificates to be issued as- for property purchased, he and his executor were estopped from alleging that the stock was not fully paid and non-assesáablo. And as to the claim of Frederick Green in his own behalf, they set up that the claim was contracted by him with full knowledge that all the capital stock had been issued either for cash or for property at par. Beyond this they did not challenge the Green claim.

Each of these answers contained this further averment:

“This respondent further says that any liability that may be asserted against him as the holder of stock of said corporation cannot be based upon any contractual obligation upon his part, but only a statutory liability in favor of creditors, and that the claimants are now precluded by their laches and by the statute of limitations from asserting or enforcing the same.”

The effect of this is clearly to raise the bar of the statute of limitations only with respect to the stockholders’ liability to contribute unpaid stock subscriptions for the benefit of creditors, a ground that is not now pressed. The answers contain no averment invoking the statute as a bar to the validity of any of the creditors’ claims as against the company.

The answer of Potter did not in anywise challenge the Green claims, nor raise any question of the statute of limitations.

Subsequently Judge Paxson filed a petition averring himself aggrieved by the proceedings and determination of the receiver in allowing the said several claims, and appealing to the chancellor from the allowance of the claims and of each of them, but without setting up any matter of defence to the claims.

In this state of the pleadings the matter came on for hearing before the vice-chancellor upon the petition of the receiver for relief against the stockholders and the answers thereto. At the beginning of the hearing counsel for Judge Paxson and Mr. Wilbur stated to the court that doubts had arisen in the minds of counsel whether a full inquiry into the claims presented could be made under this proceeding, although, as he said, the answers 'challenged the claims. In the language of counsel:

“It is said that they were outlawed and presented too late and other defences set up, such as the want of authority on the part of the corporation to contract some of the debts or claims: these are questions that go to the validity of the claims altogether, and while it may be true that parties, against whom this assessment is asked, would have the right to challenge those claims in this proceeding and to deny their validity for any purpose, yet, I think, it would be more in accordance with the practice of the court if they should appeal from the allowance of the claims by the receiver.”

To this counsel for the receiver responded, objecting that the time for such appeal had gone by, but submitting it to the discretion of the court-to allow an appeal. The learned vice-chancellor thereupon announced that he would permit the creditors to first prove their claims as if appeals had been filed, and the parties then proceeded with their proofs-—first to establish the validity of the creditors’ claims as against the company and afterwards to establish the liability of the stockholders for unpaid subscriptions to capital.

It is clear, we think, that in this informal method of proceeding the only questions that can be deemed as having been raised for determination by the vice-chancellor respecting the validity of the claims are the questions that were raised by the answers of Wilbur and Paxson to the receiver’s petition. The statement of counsel just quoted had the effect of referring the court and opposing counsel to the answers for a specification of the grounds of his opposition to the affirmance of the claims. Those grounds did not include the bar of the statute of limitations as between the creditors and the company.

The statutory bar must be specially pleaded unless the facts that raise it appear to be admitted, which is not the case here. Brand v. Longstreet, 4 N. J. Law (1 South.) 325; Gulick v. Loder, 13 N. J. Law (1 Gr.) 68: Partridge v. Wells, 30 N. J. Eq. (3 Stew.) 176; 31 N. J. Eq. (4. Stew.) 362.

And indulgence will not be granted to a party who fails in due time and proper form to invoke the protection of the statute. West Hoboken v. Syms, 49 N. J. Law (20 Vr.) 546.

The proof is clear that the claims in question are just and true, and that they remain unpaid. Simply because the proofs as taken tend to indicate that they were in whole or in part barred by the statute, we cannot assume that such is the fact, for the claimants were not called upon to produce such evidence as thejr may have possessed to show the contrary. Under the circumstances we think the delinquent stockholders cannot be heard in this court to set up the bar of the statute as against the validity of the claims.

This brings us to a consideration of the grounds upon which the learned vice-chancellor denied the receiver’s prayer for relief so far as the Green claims are concerned.. There is a line of reported cases holding that stockholders who participate or aid in the issue of paid-up stock ilpon payment of less than its par value, or who have knowledge of the act and acquiesce therein, cannot afterwards complain of the transaction, either as stockholders or as creditors. Some of these are cited in Cook Stock. § Si), referred to in the opinion of the vice-chancellor. Others will be cited below. So far as we have observed, however, all well-considered decisions that adopt this doctrine are based upon general principles of equitjr, in the absence of any controlling statute or public policy, resort being had alone to the “trust fund theory” as a basis for the stockholder’s liability to creditors. The theory of these cases is that, as between the stockholder and the company, there is no absolute liability to pay for his stock in full, and no legal prohibition standing in the way of an agreement that the stock shall be issued to him for less than full payment. An agreement to this effect is therefore treated as valid between the parties, and subject to avoidance only at the instance of those creditors who have been defrauded by their reliance upon the stock issues as representative of capital actually paid in to the company.

The “trust fund theory” has been repeatedly adopted by the courts of this state to the extent that it deals with the capital stock paid in or subscribed for as a fund for the payment of debts of which the directors are trustees, so that they cannot ■dispose of it to the prejudice of creditors without an equivalent consideration, nor defeat the trust by accepting any simulated payment of a stock subscription, or by any other device short of actual payment in good faith. National Trust Co. v. Miller, 33 N. J. Eq. (6 Stew.) 155, 163; Wetherbee v. Baker, 35 N. J. Eq. (8 Stew.) 501, 512; Bickley v. Schlag, 46 N. J. Eq. (1 Dick.) 533, 537.

But so far as this so-called “trust fund doctrine” excludes any creditors from relief against the stockholders, it does so on the theory that the liability of the latter rests alone upon their having held out the capital of the company to persons extending credit to it as the source from which repayment might be expected. If this be the only foundation of the stockholder’s liability, it is perhaps not irrational to debar creditors whose claims accrued prior to the stock issue in question, and subsequent creditors who had notice when they extended credit that the stock issue did not represent in whole or in part what it purported to represent—that is, an equivalent amount in value added to the assets of the company.

But in this state the stockholder’s liability to creditors does not depend alone or chiefly upon the theory of “holding out.” It depends upon the stockholder’s voluntary acceptance, for consideration touching his own interest, of a statutory scheme to which watered stock, under whatever device issued, is absolutely alien, and which requires stock subscriptions to be made good for the benefit of creditors of insolvent companies, without distinction between prior and subsequent creditors, or between creditors who had notice and those who had none: The corporation now under consideration was organized in 1886, under the General Corporation act of New Jersey as it then stood—that is, the act of 1875 and its supplements. Rev. 1877 p. 175; 1 Gen. Stat. p. 907. Section 5 of this act declares that

“where the whole capital of a corporation shall not have been paid in, ancl the capital paid shall be insufficient to satisfy the claims of its creditors, each stockholder shall be bound to pay on each share held by him the sum necessary to complete the amount of such share, as fixed by the charter of the company, or such proportion of that sum as shall be required to satisfy the debts of the company.”

Section 54 declares:

“that nothing but money shall be considered as payment of any part of the capital stock of any company organized under this act,, except as hereinafter provided for the purchase of property, and no loan of money shall be made to a stockholder or officer therein,” &c.

Section 55 provides for the issuance of stock for property ■purchased, to the fair value 'of such property, hut as it has already-been determined that this section was not complied with in the present case, it need not be quoted here. Other sections (7, 33, 53, &e.) contain provisions intended to prevent the withdrawal by stockholders, directly or indirectly, of any part of the capital stock to the detriment of creditors.

The express prohibition of section 54 and the whole spirit and policy of the act are so clearly opposed to any arrangement by which corporate stock shall be issued without receipt by the company of an equivalent in value to its par that any agreement to this effect must lie deemed void as contrary to the policy of the law. If any doubt has existed upon this question it must be taken as settled bj1- the decision of this court in Volney v. Nixon, 68 N. J. Eq. 605.

Nor do we deem that the weight of authority in other jurisdictions is to the contrary of this. As already remarked, those cases which, are apparently opposed proceed upon a view of the equitable rights of the parties as they exist in the absence of express statutory mandate or prohibition. Of the decisions cited in the briefs of counsel, the following will be briefly discussed:

In the federal courts, the trust fund doctrine seems to have been first declared in an opinion delivered by Judge Story at the circuit. Wood v. Dummer (1824), 3 Mas. 308, 311.

The doctrine was recognized by the United States supreme court in Sawyer v. Hoag (1873), 17 Wall. 610, 620. In this case, Sawyer, having subscribed for $5,000 of stock in a company, undertook to páy for it by giving to the company his check for the full amount, taking back, at the same time, the • company’s check for $4,250, for which latter amount he gave his note to the company, payable in five years, with good collateral security. Mr. Justice Miller, who delivered the opinion, said, arguendo, that this transaction, if nothing unfair was intended, was one that the parties, could do effectually, so far as they alone were• concerned, and he said: “In any controversy which might grow out of the matter between the company and Sawyer we are not prepared to say that the company, as a corporate body, could deny that the stock was paid in full.” The company having become insolvent, however, it was held that Sawyer was liable to pay the note in money as representing the balance of his unpaid subscription, the court denying his right to set off a claim against the company that he had bought from another creditor. It will be observed that what was said about the propriety of the transaction as between Sawyer and the company was unnecessary for the decision. Moreover, the charter of the company expressly authorized it to begin business upon payment of one-tenth of its capital, the residue to> be secured, so that Sawyer’s subscription was secured substantially in accordance with the charter.

The case of Scovill v. Thayer (1881), 105 U. S. US, 143, is a clear illustration of the relation of the “trust fund theory” to the more positive rules of law that depend upon express statutory enactments. Here a corporation, organized under the laws, of the State of Kansas, had commenced' with $100,000 capital, and had undertaken to successively increase its capital—first, to $200,000: then to $300,000, and afterwards to $400,000. Thayer, who held stock of each of the first two issues, attended, by proxies, the meetings of the stockholders at which the third and fourth issues were voted, and he became a holder of a part of each of those issues. None of his stock was .paid up by him in full, and the company having become insolvent, the assignees in bankruptcy petitioned for an assessment against the stockholders, including Thayer. He insisted—first, that the third and fourth issues of stock, having been made in excess of the limit of capital prescribed by the laws of Kansas, were absolutely void, and that no assessment could be made against him by reason of his holding shares of those issues; and secondly, that the suifis voluntarily paid by him upon his void stock should be applied to the payment of the balance due upon his valid stock. The court held that the third and fourth issues were in excess of the limit prescribed by law and therefore void, and that notwithstanding Thayer’s assent to those issues, and the fact that after such increase the company had held itself out as possessing a capital of $400,000, and invited and obtained credit on the faith of such representations, he was not estopped from denying the validity of this stock and his obligation to pay for it in full. With respect to his valid stock, it appeared that by the agreement between him and the company he was not to be called upon to pay any further assessments upon it, the same contract being made with all the other shareholders and the fact being known to all. The court held that as between them and the company this was a valid agreement, since it was “not forbidden by the charter or by any law or public policy.” It is entirely clear that if there had existed in Kansas any prohibition similar to that contained in our Corporation act, the court would have reached a different conclusion upon the latter question.

In Coit v. North Carolina Gold, Co. (1882), 14 Fed. Rep. 12; affirmed (1886), 119 U. S. 343, Mr. Justice Bradley, sitting in the circuit court, held that where for the purchase of additional property the capital of the company had been increased by the issue and distribution of new stock to a much larger extent than the cost or value of the property, the stockholders could not be held individually liable at the suit of a creditor who was cognizant of the whole transaction and acquiesced in it. The decision was affirmed by tire supreme court, Mr. Justice Field delivering the opinion, saying (119 U. S., at p. 347) “the plaintiff had placed no reliance upon the supposed paid-up capital of the company on the increased shares, and therefore has no cause of complaint by reason of their subsequent recall. Had a new indebtedness been created by the company after the issue of the stock and before its recall, a different question would have arisen. The creditor, in that case, relying on the value of the stock being fully paid, might have insisted upon its full payment. But no such new indebtedness was created, and we think, therefore, that the stockholders cannot be called upon, at the suit of the plaintiff, to pay in the amount of the stock which, though issued, was soon afterwards recalled and canceled.” But here, again, the ease turned upon the general principles of equity, no statute being cited that prohibited the issuance of stock without payment in full in money or money’s worth.

Clark v. Bever (1891), 139 U. S. 96, is a case of somewhat similar character, the court (at p. 108, &c.), in terms, placing its decision upon the absence of a statute disabling the corporation from disposing of its stock at less than par, and in the syllábus the circumstance that there was no statute forbidding the transaction that was under attack is made prominent.

In Handley v. Stutz (1891), 139 U. S. 417, it was held that when a stockholder who assents to an increase in the capital stock and its gratuitous distribution among the shareholders receives such stock as full-paid stock, an obligation arises to pay for it in full when called upon to do so by creditors whose debts are subsequent to the authorization of the increase, but that this equity does not exist in favor of a creditor whose debt was contracted prior to such authorization—and this on the ground {p. 485) that prior creditors could not be presumed to have trusted the company upon the faith of the increased stock.

Dickerman v. Northern Trust Co. (1900), 176 U. S. 181, 203 (a case arising under our Corporation act-of 1875), contains a dictum by Mr. Justice Brown to the effect that as between the corporation and its stockholders a declaration upon the face of the certificate that the shares are fully paid and unassessable is binding, although untrue. The learned justice quotes from Scovill v. Thayer to the effect that such an arrangement was “not forbidden by the charter or-by any law or public policy,” apparently overlooking that what might be true of the Kansas statutes was not true of the Corporation law of Kew Jersey.

Rickerson Roller Mill Co. v. Farrell (1896), 75 Fed. Rep. 554, 560, holds simply tha-t “m the absence of statutory or chewier provisions” a corporation may agree with a subscriber to its stock to receive less than the par value therefor, and that a creditor of the company who becomes such with knowledge of such an agreement cannot require the subscriber, upon the insolvency of the corporation, to pay his stock in full.- The words in italics indicate the limitations of the decision.

First National Bank v. Gustin, &c., Mining Co. (1890), 42 Minn. 327; 44 N. W. Rep. 198; 6 L. R. A. 676; 18 Am. St. Rep. 510. In this case the supreme court of Minnesota had to do with the individual liability of a shareholder in a corporation organized under the laws of Dakota. The code of Dakota provided that each stockholder should bo individually liable for the debts of the corporation to the extent of the amount that was unpaid upon the stock held by him, but seems to have contained no express prohibition against the issuance of stock for less than its par value. It was held that where a corporation, with which a creditor had dealt with knowledge that its nominal paid-up capital was not in fact paid, issues new shares after the claim of the creditor arises, he has no right to insist upon a contribution from the holders of those shares. Justice Mitchell said: “The whole doctrine that the capital stock of corporations is a trust fund for the payment of creditors rests upon the equitable consideration that the distribution of the capital among stockholders, without making adequate provision for the payment of debts, or the issue of fictitiously paid-up stock, is a fraud upon creditors who contract with the corporation in reliance upon fits capital remaining intact, or in reliance upon the professed capital having been in fact paid up in full. But when the reason for the rule does not exist, the rule itself ceases to apply. This trust does not arise absolutely in every case in favor of every and anjr creditor,” &e.

Hospes v. Northwestern Manufacturing Co. (1892), 48 Minn. 174; 50 N. W. Rep. 1117; 15 L. R. A. 470; 45 Alb. L. J. 277; 36 Am. & Eng. Corp. Cas. 206; 31 Am. St. Rep. 637. This is another decision by the'same judge who wrote in the case last cited. The Corporation in question was organized under the laws of Minnesota.' It was held that if stock is issued by such a corporation upon a contract that it shall not be paid for, its creditors cannot recover payment for such stock on account of the implied promise of the persons receiving it that such payment will be made. Manifestly'such a decision could not properly be reached with respect to any corporation organized under the New Jersey law. The opinion contains an interesting criticism of the “trust fund doctrine,” resulting in what seems to be its virtual repudiation. As showing, however, that the doctrine, where recognized, must give place to an express statutory provision, the following excerpt from the opinion is instructive: “In England, since the act of 1867, there is ah implied contract created by statute that 'every share in any company shall be deemed and be táken to have been issued and to be held subject to the payment of the whole amount thereof in cash.’ This statutory contract makes every contrary contract void. Such a statute would be entirely just to all, for everyone would lie advised of its-provisions and could conduct himself accordingly. And in view of the fact that 'watered’ and 'bonus’ stock is one of the greatest abuses connected with the management of modern corporations, such a law might, on grounds of public policy, be very desirable. But this is a matter for the legislature, and not for the courts. We have no such statute.”

We do not wish to be understood as assenting to the reasoning of the foregoing cases so far as they debar from recourse to the stockholder’s liability those creditors whose claims accrued before the stock issue in question, and those subsequent creditors who extended credit to the company with knowledge that the stock was issued as full paid when it was not full paid in fact. With respect to prior creditors, the query arises, Why may they not resort to after-acquired property of the company, and as well stock subscriptions as more tangible assets? With respect to subsequent creditors, the query is, Why, if they knew the stock issued as full paid was not full paid in fact, may they not be justified in dealing with 'the very stockholder’s liability thus arising as a part of the assets of the company for the purpose of satisfying creditors’ claims ? But without spending time in discussion of these questions, we content ourselves with saying that our Corporation act places the stockholder’s liability to creditors upon a firmer foundation than the “trust fund doctriné” as expounded in the above cases, the statute absolutely prohibiting agreements for the issue oí stock for a consideration less than its par value, and affording relief to all creditors without distinction.

As to the status of Frederick Green in the case before us, the evidence does not satisfy us that he participated in the arrangement for the issuance of this stock for the patents. He was secretary and treasurer of the company, and signed the certificates, but he appears to have done this as a ministerial officer, by the direction of the president. There is nothing, therefore,, to bar his individual claim save that he had notice of the fact that the stock was issued as full paid for property purchased. As already shown, such notice is not sufficient to debar him.

As to the claim of Henry Green, he, of course, did participate actively in the transaction that resulted in the improper issuance of the stock in question, and he received a part of the stock himself. But there is nothing to show that he intended any actual fraud upon his fellow stockholders, Messrs. Wilbur, Paxson and Potter, upon whom (together with the Henry Green estate) the decree under review fixes a liability for unpaid subscriptions. There appears to have been a perfect understanding among these gentlemen, and there is much in the evidence to indicate that they expected, if they did not actually agree between themselves, to contribute, not merely $10,000 each, but whatever additional sums might be needed to exploit the patents and put the company upon a paying basis, and that, in the event of failure, they would wind up the enterprise and pay the company’s debts, if any, out of their own pockets. Such an understanding would be quite consistent with the legal obligation that was assumed by them when they subscribed to the articles of association and accepted the stock. We do not believe that at that time it was at all contemplated that any creditor of the company would be permitted to remain unpaid. Judge Green was, by common consent, permitted to assume and exercise the entire management of the concerns of the company, all parties being at the time sanguine of its ultimate success. The moneys that he loaned to the company were advance jl for the general benefit of the stockholders, including himself. They are a just and lawful claim as against the company, and not an inequitable claim as against the delinquent stockholders.

His estate cannot be debarred on the ground of estoppel, for his associates, who are now disputing their individual liability to pay, were not at all misled by the circumstance that their stock certificates were marked “full paid” and for “property purchased” since they knew the fact to be otherwise.

Nor is the Green estate debarred by the operation of the maxim in pari delicto potior est conditio defendentis. If it were seeking any advantage out of the unlawful agreement, this maxim would apply. But that agreement being absolutely void on grounds of public policy, his rights as a creditor for moneys actually advanced remain unimpaired. Cone v. Russell, 48 N. J. Eq. (3 Dick..) 208, 217, and cases cited; Delaware, Lackawanna and Western Railroad Co. v. Trautwein, 52 N. J. Law (28 Vr.) 169; Newbury v. Luke, 68 N. J. Law (39 Vr.) 189.

As against the delinquent stockholders, therefore (including, of course, the Henry Green estate as one), both the Green claims are entitled to payment. Payment of the Henry Green claim should, of course, be deferred until his estate contributes its proper portion of the amount necessary to satisfy the decree.

Whether either or both of the Green claims ought to be postponed to the claims of the other creditors (the Easton National Bank and Henry Short), who had no connection with the internal management of the company, is a question not fairly presented by the present record. It will be left for future determination, if necessary.

So far as the decree debars the Green claims from participation in the fund, and limits the recovery against the delinquent stockholders to the amount that would be necessary to satisfy the claims other than the Green claims, it will be reversed and the cause remitted for further proceedings in accordance with the views above expressed.

For affirmance—Hendrickson, Vroom—2.

For reversal—The- Giiiee-Justice, Garrison, Garretson, Pitney, Swayze, Eeed, Bogert, Vredenburgii, Green, Gray, Dill—11.


source: Caselaw Access Project

author: Reed, J.

license: Public Domain

text:
    Michael Brady, appellant, v. Carteret Realty Company, respondent.
    [Submitted July 10th, 1905.
    Reargued March 27th, 1906.
    Decided November 19th, 1906.]
    1. A defendant in a suit brought under the act to quiet title of real estate (3 Gen. Stat. p. 31/88) is not entitled, as a constitutional right, tó a trial'by jury in an action at law, as distinguished from a trial of an issue at law directed by the court of chancery.
    2. The refusal of the chancellor to grant a new trial of an issue at law directed by him, under section 5 of the act to quiet title, is an appealable order.
    On appeal from an order of the court of chancery refusing a motion to grant a new trial of an issue framed in the supreme court.

      Mr. Ephraim. Gutter and Mr. Willard F. Yoorhees, for the appellant.

      Messrs. Collins & Corbin, for the respondent.
   The opinion of the court wa£ delivered by

Reed, J.

Michael Brady, the appellant, filed a bill against the realty company to have his, complainant’s, title determined. The bill sets out the complainant’s peaceable possession of the land in question, and sets out that the Carteret Realty Company claims to own the land, and that no suit was pending to enforce or test the validity of such claim.

After issue joined in this suit the chancellor made an order for the framing of an issue in the supreme court, to be ’tried in the ordinary manner, between the Carteret Realty Company, as plaintiff, and Brady, as defendant, to determine whether the realty company was entitled to the possession of the tract as against Brady.

The issue so framed was tried and a verdict returned for the realty company. This verdict was certified to the chancellor by the trial justice, with the opinion of the latter magistrate that the verdict was warranted by the evidence.

Brady then moved for a new trial, which motion was heard and afterwards denied by the chancellor. From the order of the chancellor denying this new trial, this appeal is taken.

Two preliminary questions precede the discussion of the action of the court of chancery in refusing the new trial. These questions involve the right of the court of chancery to deal with the verdict at all, for the query is whether the function exercised by the chancellor is not one which belongs alone to the supreme court.

The solution of these questions requires an examination of the legislation under which this proceeding was taken.

This suit was brought under the provisions of “An act to compel the determination of claims to real estate in certain cases and to quiet the title to same.” 3 Gen. Stat. p. 3486.

The first section of this act provides that

“when any perso-n is in possession of lands in this state, claiming to own the same, and his title thereto or to any part thereof is denied or disputed, or any other person claims or is claimed to own the same or any part thereof or any interest therein, or to hold any lien or encumbrance thereon, and no suit shall be pending to enforce or test the validity of such title, claim or encumbrance, it'shall be lawful for such person so in possession to bring and maintain a suit in chancery to settle the title of said lands, and to clear up all doubts and disputes concerning same.”

The fifth section of the statute provides that

“upon the application of either party an issue at law shall be directed to try the validity of such claim or to settle the facts, or any specified portion of facts upon which the same depends; and the court of chancery shall be bound by the result of such issue, but may, for sufficient reasons, order a new trial thereof, according to the practice in such cases.”

The remaining portion of the section provides, in substance, that when the issue is not applied for the court shall proceed to determine such claim according to the practice of that court.

The first question involves an ascertainment of the intent of the legislature in declaring, in the fifth section, that the “court of chancery shall be bound by the result of such verdict"—whether it meant that the verdict, when returned by the jury, should constitute the “result of such issue,” or whether it intended that there should be a judgment entered upon the verdict in the supreme court.

The legislative intent seems to- be clear that the words “issue at law" mean such an issue as has been always known and employed in the administration of equity jurisprudence. The only additional force to be given to the verdict in this statutory suit is that, so long as it is permitted to stand, the court of chancery is bound by it. It is clear that the trial judge’s certificate is to be sent to the chancellor, for, by the terms of the act, he, for sufficient reasons, may grant a new trial, according to the practice in such cases. It would be absurd to suppose that it was the intention of the legislature, in the face of this express power lodged in the court of chancery, that the supreme •court should also have the power to review the finding of the jury upon a rule to show cause, or the validity of a judgment entered upon it by a writ of error.

What the legislature intended was that an issue at law should be awarded, and not an action at law directed. In the former the verdict is reported at the court of chancery; in the latter the postea goes to the supreme court. The distinction between the two and the practice attending each is well defined. Trenton Banking Co. v. Rossell, 2 N. J. Eq. (1 Gr.) 492; American Dock and Improvement Co. v. Trustees for the Support of Public Schools, 37 N. J. Eq. (10 Stew.) 266.

The answer to the first question is that the statute means, by the use of the words “result of such verdict," the verdict as returned by the jury and certified to the chancellor.

The second question is whethei*, in view of the constitutional division of judicial powers between the court of chancery and the law courts, the legislature can authorize the chancellor to .set aside or disregard the result of the issue in such case, when there are no equitable considerations involved.

It is, of course, apparent that if the action involves a question which belongs alone to the law courts, it follows that the statute strips the supreme court of a prerogative insured to it by the constitution of 1844, by its language that the several ■courts of law and equity, except as otherwise provided, shall continue with like powers and jurisdiction as if the constitution had not been adopted.

It cannot be doubted that it is entirely settled in this state that it is beyond the competency of the legislature to confer a purely legal faculty upon the court of chancery or a purely equitable faculty on a court of common law. Jersey City v. Lembeck, 31 N. J. Eq. (4 Stew.) 255, 266.

So it cannot be doubted that if the question involved in this suit is one purely legal, then the legislature has deprived the supreme court of its constitutional right—or, rather, deprived the citizen of his right to try an issue of this kind in that court— for, although the statute preserves the right of trial by jury, yet so long as the trial and its results are under the exclusive supervision of the .court of chancery it is not a trial by law under the rightful control of the supreme court.

The doctrine which underlies the present -litigation is as .ancient as equity itself. It is a doctrine upon which all suits quia timet, including suits to remove clouds fuom the title of persons in possession, rest. The doctrine is that where there is none, or an inadequate remedy at law for any wrong, equity will furnish a remedy.

The wrong in this class of cases is that there is outstanding an illegal but colorable claim against the complainant, which vexes and harasses him, destroys his credit or depreciates -his property. This claim may become the more dangerous by the passage of time, by reason of the loss of testimony, and by the fact that the claim is permitted to remain unchallenged. If the complainant is seemingly or actually the maker of a note, bond, mortgage or deed, which is in fact a nullity, the law provides him'no way to bring the matter to a judicial test. So, if he is In possession of land, the title to which is menaced by an outstanding claim, mortgage, judgment or deed, which is in fact invalid, he is placed at the same disadvantage at law.

Judge Story sums up> the equitable doctrine in these words:

“If an instrument ought not to be used or enforced, it is against conscience for the party bolding it to retain it, since he can only retain it for some sinister purpose. If it is a negotiable instrument, it may be used for a fraudulent or improper purpose to the injury of a third person. If it is a deed, purporting to convey lands or other hereditaments, its existence in an uncancelled state necessarily has a tendency to throw a cloud over the title. If it is a mere written agreement, solemn or otherwise, still while it exists, it is always liable to be applied to improper purposes; and it may be vexatiously litigated at a distance of time when the proper evidence to repel the claim may have been lost or obscured; or when the other may be disabled from contesting its validity with as much ability and force as he can contest it at the present moment.” 1 Story Bq. Jur. § 700.

Mr. Pomeroy remarks:

“If the legal remedies administered by the judicial machinery and methods adopted in law courts are fully adequate to establish, protect and enforce the party’s legal estates, interests and rights, a court of equity will not interfere in his behalf with the purely remedial branch of its exclusive jurisdiction; if the legal remedies, either from their own essential nature, or from the imperfection of the legal procedure, are inadequate, then the court of equity will interpose.” Pom. Eq. Jur.

The writer .illustrates by reference to the cancellation of instruments, because in such a case, if the present unlawful holder of the instrument'—although legal defence in an action by him would be perfect—should transfer the security to a bona fide purchaser, the complainant would be without an adequate legal remedy.

• It hardly needs a citation from tírese recognized authorities to recall the well-known doctrine that in suits of this class jurisdiction rests upon the non-existence of an' adequate legal remedy by which the rights of the complainant may be properly asserted and protected. Thus, by reason of the inability of a complainant to bring the validity of a note, deed or other instrument to a test in an action at law, a question, otherwise purely legal, becomes cognizable in a court of equity.

The principle is illustrated by the result in the case of Jersey City v. Lembeck, supra, where a bill to remove and set aside municipal assessments was dismissed because there was a complete remedy by certiorari. In Sheppard v. Nixon, 43 N. J. Eq. (16 Stew.) 627, the bill was dismissed, as a suit under the statute now under consideration, because there was no actual possession by the complainant, and dismissed as a bill quia timet, irrespective of the statute, because there was a remedy at law by an action of ejectment.

Bills of peace rest upon the same principle, namely, the inadequacy of an action at law to finally determine title. Indeed, as pointed out by Mr. Spence (Spence Eq. Jur. p. 691), originally the court of equity did not scruple to entertain bills concerning legal rights, although there was a remedy at law. The exercise of this jurisdiction was later discontinued. It is true that, as a general rule, a court of equity will not entertain a bill of peace to quiet title until a right to possession has been established in a court of law.

This, however, seems not to have been an infallible rule, for it was held, in York v. Pilkington, 1 Atk. 282, that when a man had been in possession of a fishery for a long time, he might exhibit a bill to quiet his possession, although he had not established his title.

What the present statute does is to extend the scope of equitable relief by abolishing the necessity of a previous trial at law in cases where the complainant is so placed that he cannot bring such an action. In the present case there was no way by which the complainant could institute a proceeding at law to test the relative rights of the parties to the locus in quo, nor any way in law by which he could compel the defendant to do so.

Assuming that the courts of equity would not formerly have granted relief in this, specific instance, it is not perceivable how the statute, which merely extends the operation of a well-settled equitable maxim, creates a proceeding which is other than what the statute describes it, namely, an equitable suit; nor is it perceptible in what way the statute strips the courts of law of any of their constitutional functions.

Mr. Justice Eieid, in delivering the- opinion in Holland v. Challen, 110 U. S. 15, a case which, involves the enforcement of a Nebraska statute to quiet title, observed: “The truth is that the jurisdiction to relieve holders of real property from vexatious claims to it, casting a cloud upon their title and thus disturbing them in its peaceable use and enjoyment, is inherent in a court of equity; and though conditions for its exercise have at different times been prescribed by that court, both in England and this country, they may at any time be changed or dispensed with by the legislature without impairing the general authority of the court." Again, he observes: “It does not follow that by allowing,- in the federal courts, a suit for relief under the statute of Nebraska, controversies properly cognizable in a court of law will be drawn into a court of equity. There can be no controversy in a court of law respecting the title or right of possession to real property when neither of the parties is in possession. An action at law, whether in the ancient form of ejectment or in the form now commonly used, will lie only against the party in possession. Should suit be brought in a federal court under the Nebraska statute against the party in possession, there would be force in the objection that a legal controversy was withdrawn from a court of law."

The views thus expressed by Mr. Justice Feld were reviewed and reiterated by him in the subsequent ease of Whitehead v. Shattuck, 138 U. S. 146. In the last case the federal supreme court held that no relief could be afforded under the provisions of an Iowa, statute to quiet titles, because in the case then before the court there was an adequate remedy at law.

For the reasons expressed, we are of the opinion that an action provided by our statute is a purely equitable suit, to be conducted according to the practice in our court of chancery.

In respect to the right of trial by jury, it is entirely settled that the right to a jury trial preserved by the constitution does not apply to courts of equity, which, as Chief-Justice Kinsey remarked, in the case of Wood v. Potter, 1 N. J. Law (Coxe) 153, 158, could always proceed without the intervention of a jury. What the chief-justice meant was that a court of equity always had the right to so proceed. 3 Am. & Eng. Encycl. L. (1st ed.) 722.

It is true that the courts of equity often send to a jury the determination of perplexing questions of fact, particularly where a question of title of property becomes involved in the administration of some equitable relief. This practice, however, is the-creature of the equity judges. If, however, it should be conceded that at the time of the adoption of our constitution the practice to submit to a jury a particular class of questions—as, for instance, the question of title to real estate—had become so inveterate that it could be said that a trial at law had become a right, nevertheless, that fact would not invalidate the provisions ■of this statute, for it cannot be pretended that there was any practice in the equity courts of England or of this state which conferred the right to a trial by jury in an action at law. The practice was either to direct the trial of an issue or to direct an .action at law.

In the old case of Pomfert v. Smith, 4 Bro. P. C. 700, it was .said that courts of equity had adopted the practice, when they ■saw that the dispute was a mere question of law, of either directing an issue or giving the parties leave, within a limited time, to bring an action at law.

The instances of a trial of legal questions by a jury by means ■of an issue at law instead of an action at law are numerous. It was the practice adopted in a suit to settle the boundaries between two manors (Lethieullier v. Castlemain, Dick. 46); to try the question whether defendant or plaintiff was heir-at-law (Newton v. Newton, Dick. 443); to determine in whom the right to have a legal estate was vested (Burkett v. Randall, 3 Meriv. 466).

Such an issue was directed where the crown sought to recover lands alleged to have been reclaimed from the sea and the defendants disputed title to lands between the then present high and low-water mark (Attorney-General v. Chamberlaine, 4 Kay & J. 292), .and where a man set up an exclusive right and those who disputed it were numerous (Tenham v. Herbert, 2 Atk. 483.

The practice in this state is exhibited by the cases collected in Stewart’s Digest, p. 448, under the equity head of “Issue at Law."

Inasmuch as the act to quiet title now under discussion confers upon the defendant the privilege of demanding such an issue, his right to a jury trial—conceding that such right exists ■—is secure. The conclusion is that the statute is in all respects constitutional, and the chancellor, in directing an issue and in reviewing the verdict returned by the jury, was acting within the jurisdiction with which his court is invested.

It is insisted by the respondent that the order of the chancellor refusing a new trial is not an appealable order. We think it is. Such an order was reviewed by the house of lords in McGregor v. Topham, 3 H. L. Cas. 132, and also in Boyse v. Rossborough, 6 H. L. Gas. 1.

It was held by this court, in Newark and New York Railroad Co. v. Newark, 23 N. J. Eq. (8 C. E. Gr.) 515, that an order for an issue was appealable.

The opinion expressed by Judge Whelpley, in Black v. Shreve, 13 N. J. Eq. (2 Beas.) 455, 467, to the effect that the action of the chancellor respecting an issue and upon the finding of a jury therein was not appealable, was based entirely upon the existence of a discretion in the equity court to regard or disregard the verdict, and upon the fact that the whole object of the issue was to inform the conscience of the court. But under Qur act to quiet titles an issue must be allowed, and when the verdict is returned it is a final determination of the question submitted, so long as the verdict is permitted to stand. The order refusing to set such a verdict aside is clearly appealable.

In exercising our right to review the grounds upon which the chancellor refused a new trial, it is sufficient to say that our examination has led ús to concur in the views expressed by the chancellor in the opinion delivered in the court of chancery, and for the reasons therein given the order is affirmed.

For affirmance—The Chiee-Justice, Garrison, Port, Garretson, Pitney, Reed, Bogert, Yredenburgi-i, Yroom, Green, Gray, Dill—12.

For reversal—None.


text:
    Gustav W. Lembeck v. Jarvis Terminal Cold Storage Company. On appeals of Natalie Jarvis and Erie Railroad Company.
    [Submitted December 12th, 1905.
    Decided June 18th, 1906.]
    1. The title of bona fide holders of coupon mortgage bonds issued by a corporation and payable to bearer, which are taken before maturity, is like the title to commercial paper so taken, good against all secret equities claimed by the corporation or third party.
    2. A person claimed that there was an agreement between her and a corporation that she should have seven bonds of a proposed issue of $150,000 mortgage bonds; the seven bonds were never delivered to her or set apart for her, but the entire issue came to the hands of holders for value who received them without notice of the claim.—Held, that the title of the holders was complete.
    3. Since the act of 1902 (P. L. 1902 p. 459), providing that no corporation shall set up the defence of usury in an action brought against it to recover damages or enforce a remedy on any obligation executed by said corporation, no junior mortgagee can set up the defence of usury against an older mortgagee, as he is precluded from setting up a defence which the mortgagor could not interpose.
    On appeal from a decree of tlie court of chancery advised By Vice-Chancellor Garrison, whose opinion is reported in 69 N. J. Eq. 450.

      Messrs. McDermott & Enright, for the appellant Natalie Jarvis.

      Messrs. Collins & Corbin, for the appellant Erie Railroad Company.

      Mr. Alfred A. Wheat and Mr: Pierre F. Coolc, for Young & Irvin.
   The opinion of the court was delivered by

Reed, J.

The cause, as entitled, is a suit to have the Jarvis Terminal Cold Storage Company decreed insolvent and to have a receiver appointed.

The appeals bring up orders made in the cause relating to the distribution of the assets of the insolvent company. The first is an appeal taken from an order made by the court of chancery on a petition of Natalie Jarvis.. The facts involved in that appeal are fully stated by the learned vice-chancellor, in his opinion, reported in 69 N. J. Eq. J¡£0. It appears that the property of the insolvent company was encumbered by a mortgage for $150,000, made to secure one hundred and fifty bonds. There is in court, as the product of the sale of the mortgaged property by the receiver, the sum of $7,668.28, which sum the holders of the secured bonds are entitled to have divided among them. Mrs. Jarvis claims that she is entitled to share in the distribution as the holder of seven of these $1,000 bonds. Her alleged claim arises in this way: She was the owner of the land upon which the cold storage plant was constructed and when that company purchased the land, it gave her, in part payment, a mortgage upon the property for $14,000. .The company afterwards, wishing to make a first mortgage for $150,000, already mentioned, induced Mrs. Jarvis to cancel her $14,000 mortgage under an agreement, as it is insisted, that she should receive $7,000 in cash and for the remaining $7,000 a sixty-day note of the corporation, secured by seven of the $1,000 bonds to be issued under the security of the $150,000 mortgage. She never received these bonds, nor were they set apart for her.

The following is a brief history of the disposition of this issue of $150,000 of bonds: By the provision of the trust mortgage $125,000 of the bonds were to be issued at once and the remaining $25,000 was to be issued for addition and extension of the works of the company, but were to be used only when a certificaie that the work was completed was executed by the company and delivered to the trustee under the mortgage, who was to deliver the bonds. The first issue of $125,000 was all taken by persons who had subscribed for them and paid for them eighty-eight per cent, on the dollar. The issue of $25,000 was regularly certified and was delivered to the trust company which had advanced to the cold storage company the sum of $20,000. By reason of some dispute between Mr. Jarvis, representing the storage company, and the trust company, respecting the custody of the subscription agreement, the trust company announced its intention to hold the $25,000 bond issue then in its possession as an additional security for $15,500 owing by the storage company. Some time after this the trust company surrendered five of the twenty-five bonds to the Crane company as collateral to secure a debt owing by the cold storage company to the Crane company. Subsequently, it was agreed that the remaining twenty bonds should be held by the trust company, as collateral security, in consideration of the trust company making additional advances of money sufficient to pay the accruing interest on the $125,000 issue of bonds. This money was advanced by the trust company.

After the insolvency of the cold storage company, a new corporation was formed to take over tire property from the purchasers at the receiver's sale. One hundred and thirty of the bonds were assigned to Young & Irvin by the holders thereof in exchange for an equal amount of bonds in the new company. The twenty bonds held by the trust company were assigned to Young & Irvin for a similar consideration.

It is to be remarked that these bonds were unmatured coupon bonds, payable to tire bearer or registered holder thereof, in 1925. They were negotiable so far as the bona ficle possessor would be held to have a good title. Morris Canal and Banking Co. v. Fisher, 9 N. J. Eq. (1 Stock.) 667. The title of the purchaser of such a security for a valuable consideration has the qualities of the title of the holder of commercial paper. Boyd v. Kennedy, 38 N. J. Law (9 Vr.) 146. How, the five bonds placed with Crane were sold for $2,481. To whom does not appear, but the title to them is now in Young & Irvin. The title to the twenty bonds is also in Young & Irvin. If they are bona fide purchasers, or if they got title through a bona fide purchaser, their title is perfect against all latent equities, including that of Mrs. Jarvis. Wow, it is not pretended that Young & Irvin had any notice of the claim of Mrs. Jarvis to any of these bonds, unless such notice arose from something appearing in che proceedings of insolvency1, before their purchase of the bonds. Nothing had occurred in those proceedings to /warn them of such a claim. The claim put in to the receiver by Mrs. Jarvis contained no allusion to a right to seven bonds of this issue, or to any bond whatever. So Young & Irvin, or the new corporation, for whom they seemed to have purchased, are bona fide holders.

Indeed, so far as concerns the five bonds deposited with the Crane company, they were sold by the company', passed to some purchaser undisclosed, whose title was good, and then passed to Young & Irvin. Respecting the twenty bonds held by the trust company, they would seem, even if deposited as collateral security for an antecedent debt, to have been held by a- good title against unknown equities. The holder of commercial paper, taken for a precedent debt in payment thereof or as security, is a bona fide holder for valuable consideration, and entitled to protection as such. Brooklyn City, &c., Railroad Co. v. National Bank, 102 U. S. 14; reaffirming Swift v. Tyson, 16 Pet. 1; Allaire v. Hartshorne, 21 N. J. Law (1 Zab.) 665, decided in this court, adopting the doctrine of Swift v. Tyson; Oliphant v. Vannest, 58 N. J. Law (29 Vr.) 162.

Negotiable bonds, like these in question, stand upon the same footing, as to transfer and as to the title of the holder, as commercial paper. McMurray v. Moran, 134 U. S. 150, 158.

But this question is not in the case, for the trust company advanced money at the lime it was agreed that they should retain the twenty' bonds as security, and the amount due is in excess of the face value of the bonds. The corporation had the right to borrow the money for the payment of interest on its bonds and for the completion of its plant, and had the right to pledge its bonds to secure such loan. Duncomb v. New York, Housatonic and Northern Railroad Co., 84 N. Y. 190, 202; Cook Corp. § 762; Coleb. Col. § 43. And the bona, fide pledgee has the same rights as a bona fide purchaser to the extent of his interest in the pledge. Thompson v. St. Nicholas National Bank, 146 U. S. 240; Cook Corp. § 473. But whether those from whom Young & Irvin got the bonds were or were not bona fiáe holders' for value, Young & Irvin were such, and as such their title to them is perfect against the latent equity of Mrs. Jarvis.

Upon this ground the order of the court of chancery excluding Mrs. Jarvis from participation in the fund in court is affirmed.

An appeal is also taken by the Erie Eailroad Company, who holds a mortgage upon the property of the insolvent corporation subsequent to the mortgage given to secure the $150,000 bond issue. The counsel for this appellant made a point that inasmuch as $125,000 of the bonds were issued by the cold storage company to purchasers who paid eighty-eight per cent, only of the par value of the bonds, therefore the holders of the bonds, by force of the Usury act, are entitled to a lien for only eighty-eight per cent, of $125,000. They have already received credit for $110,000, which amounts to eighty-eight per cent, by the application of this amount upon the consideration paid the receiver at the sale of the corporate property. The insistence is that, by force of the Usury act, the bondholders could not maintain an action against the cold storage company to recover more than eighty-eight per cent, of the face value of these bonds.

But against this position the bondholders invoice the provision of the act relating to usury passed in 1902. P. L. 1902 p. 459. This act reads as follows:

“No corporation shall hereafter plead or set up the defence of usury to any action brought against it to recover damages or enforce a remedy on any obligation executed by said corporation.”

The view of the counsel for the Erie railroad is that inasmuch as the present proceeding is not an action brought against the corporation, therefore the provision of the statute does not control in the present instance. It is obvious, however, that the statute was passed to protect those that had made loans of money and had taken the paper or bonds of a corporation. As to such creditors it was doubtless intended to abolish the defence of usury in to to. It seems obvious that if a subsequent encumbrancer can still attack a claim of such creditors on the ground of usury,- the act itself could be easily defeated. Nor do I think that such a construction of the act has a logical foundation in our decision.

The rule in respect to the rights of those who hold interests derived from a mortgagor to attack a previous mortgage for usury is defined in the case of Warwick v. Dawes, 26 N. J. Eq. (11 C. E. Gr.) 548, 553. Chief-Justice Beasley, speaking for the court of errors respecting the doctrine laid down by Chancellor Green in Brolasky v. Miller, 9 N. J. Eq. (1 Stock.) 312, proceeded to say: “The rule there propounded is that although the statute declares a mortgage founded upon a usurious contract to be void, such instrument, nevertheless, is voidable only by the mortgagor and those claiming under him and invested with his rights. Unless the mortgagor, or those who in this-respect have the right to represent him, chooses to interpose the statute as a defence, the mortgage will remain a legal encumbrance upon the land embraced in it.” In the case of Warrick v. Dawes, supra, it was held that a usurious mortgage may, by the act of the parties to it, be so purged of the legal taint that it would stand as a legal security against the mortgages of all persons subsequently acquiring interest under the mortgagor.

Now, it is perceived, by the doctrine of this case, the right of the Erie railroad to raise the question of usury rests upon the right of the mortgagor to do so at the time the last mortgage was made. The Jarvis Cold Storage Company, being stripped of the right by the statute to raise the question of usury, no such right passed to the Erie railroad by the execution of the subsequent mortgage. This is along the same line as the conclusion reached in Perrina v. First National Bank, 55 N. J. Law (26 Vr.) 402.

There are statutes in several states prohibiting the defence of usury on the part of corporations, and concerning them Mr. Cook remarks that in all the states the courts go to the extreme in defeating this defence, if possible. Cook Corp. § 766b. Concerning the New York statute, it is to be remarked that in the case of Vigilancia, 68 Fed. Rep. 781, a New York corporation had issued its bonds at eighty cents on the dollar, and creditors who held judgments subsequent to the mortgage securing these bonds, attacked the bonds as having been issued usuriously. It was held, however, in the federal district court, and afterwards in the circuit court of appeals (73 Fed. Rep. 452), that the New York act shut off not only the corporation itself, but all creditors of the corporation, from availing themselves of the statute of usury.

It has been thought useful to dispose of this question as it was involved in this appeal, although, as is admitted by the appellant, the previous conclusion, holding that the last issue of twenty-five bonds was valid, leads to the same result, namely, that the appellant has no interest in the fund in court.

I may remark, also, that the result reached also disposes of another appeal taken by the Erie -Railroad Company from a previous order in the insolvency proceedings, an order making allowances out of the fund of $25,000, which was paid into the court as part of the consideration of the sale of the mortgaged property by the receiver. The appeal was'taken from an order of the court of chancery allowing, out of this $25,000, the payment of the expenses of the administration in the insolvency proceedings, allowing counsel fees to the solicitors of the complainants, of the receiver and commissions to the receiver himself. Inasmuch as it appears that the Erie Railroad Company would ha-ve no interest in the fund, even if it were still $25,000, it can have no interest in the depletion of that fund, and so that appeal must be dismissed.

For affirmance—Ti-xe Chibe-Justice, Garrison, Fort, Garretson, Hendrickson, Pitney, Swayze, Reed, Bogert, Vre-DENBURGH, VROOM, GREEN, GRAY, DlLL-14.

For reversal—None.


author: Vredenbuegh, J.

text:
    Heinrich Fretz, respondent, v. Carl Roth et al., appellants.
    [Submitted December 12th, 1905.
    Decided June 18th, 1906.]
    1. A voluntary deed, executed by a husband through another, to his wife, conveying all his realty, will not, at the instance of the grantor, be declared void for improvidence, nor because of the absence of provision for rexoca.tion or reversion in the deed, nor because- executed without' the benefit of proper, independent and competent advice, unless there is satisfactory proof, also, that it was rhe acx' of a person whose mental capacity was so enfeebled that he' did not undex-stand the effect of the instrument, or of some other x-ecognized ground for equitable interference.
    2. Whox-e a use is declared by a deed operating under the statute of uses, no other use or trust (not manifested in writing) can be shown to result.
    On appeal from a decree of the court of chancery advised by Vice-Chancellor Garrison, whose opinion is reported in 68 N. J. Eq. 516.

      Mr. Frederick Beggs and Mr. Francis Scoli, for the appellants.

      Mr. William M. Bysdyk and Mr. Michael Dunn, for the respondent.
   The opinion of the court was delivered by

Vredenbuegh, J.

The decree appealed from declares void two warranty deeds of conveyance dated April 15th, 1891, by means of which was effected the transmission of title from the-complainant, through an intermediary, to his late wife, Louisa, of a house and lot of land in the city of Paterson, N. -J. The same decree also adjudges that the defendant Carl Roth shall, within ten days, convey to complainant the property, and makes perpetual an injunction which restrained Roth from proceeding with an ejectment suit against the complainant. By virtue of these deeds Louisa became seized of the fee of the property and remained so seized for more than ten years, and until her death, in September, 1901. She left a will devising the premises to her natural son, the said Roth, who, having brought ejectment for the premises against the complainant, the latter filed the present bill, seeking “that it be decreed that said Roth (and his wife) have no right, title or interest in said premises,” and to restrain the ejectment suit. Neither fraud, accident, undue influence nor incapacity was charged in the bill of complaint as ground for relief. The specification for equitable relief made by complainant in his bill-—-to quote its language—is,

“that his wife, Louisa Fretz, at the time of her death, held title to the said land and premises under an agreement with your orator, which she failed to perform in that she was to have conveyed said premises to your orator at such time as he might request, or that she would make a will leaving the same to him absolutely; that although she died without executing and delivering the said deed to your orator, or without making said will as aforesaid, your orator is in equity entitled to have such agreement enforced by the decree of this court, and to have it decreed that the said Louisa Fretz, his wife, held title to the same in trust for him, and to be deeded or willed to him in case he survived her.”

The right to any relief upon this specification, under the evidence otfered, was denied by the learned vice-chancellor who heard the cause, and whose opinion refers to the material facts. He considered that there was, he said, “no testimony of a clear and distinct agreement between the parties made at the time of the conveyance, and if there were, it could not be taken advantage of by this complainant because of the statute of frauds and of the canon of evidence which forbids the reception of oral proof to vary written instruments.”

To these conclusions, both of fact and of law, we agree, but we are unable to concur in the further view he expressed, which denies to the deeds in question their validity on the ground of improvidence under the principles of equity affecting voluntary conveyances of this character. A leading and instructive ease dealing with the rules of equity governing the effect to be given to voluntary deeds founded upon consideration of love and affection is that of Legendre v. Goodridge, reported in 46 N. J. Eq. (1 Dick.) 419, decided by the late Vice-Chancellor VanEleet in the year 1890. His opinion states the settled equity doctrine applicable in these words, viz.: “Without proof of incapacity, fraud or undue influence, a deed which appears to have been executed under all the safeguards provided by law for the protection of the grantor against coercion and imposition, though supported by no consideration but love and affection, is entitled to stand on its own inherent strength. * * * The grantee is not required to prove that it was fairly obtained.” The decree he there-advised was affirmed unanimously by this court in 48 N. J. Eq. (3 Dick.) 308.

The recent, decision of this court of the case of James v. Aller, 68 N. J. Eq. 666, November 20th, 1905, quite distinctly, I think, reaffirms the same principle, although differently expressed. It is there epitomized by Chief-Justice Gummere, who delivered the opinion of the court, in the following terms, viz.: “A voluntary settlement by a father, after a second marriage, on the children of the first marriage, covering substantially all his property, but executed when he was steadily accumulating money, with knowledge of the effect of the instruments, was not subject to revocation in equity at his instance as improvident.” After critically distinguishing and reconciling the cases relied upon to sustain the decree below (which set aside the deeds questioned in that case), the opinion proceeds to give effect to the presumptive .and inherent force of the terms of the instruments themselves, and lays down the rule that “a gift absolute in its terms made voluntarily, and with a full understanding of its effect, cannot be revoked by the donor either by his own act alone or with the aid of a judicial tribunal.” The conveyances attacked in this latter case were made by a father to his children of his homestead and other property, and the opinion, after referring to the proofs sustaining the mental capacity of the grantor to convey away the property he had acquired, considers and determines the rationale of the principle which, I think, lies at the very root of the .controversy now before us: In explaining the reasons upon which the reversal of the decree of the court of •chancery was based, the opinion continues as follows, viz.: “It may well be doubted whether a man in such a situation necessarily acts improvidently in giving to his children the property which he has then accumulated. But assuming this to be so, it does not, in our view, afford any ground for declaring such a transaction voidable at his option. The law permits anyone to •dispose of his property gratuitously, if he pleases, provided tire rights of creditors are not injuriously affected thereby. He may, if he sees fit, reserve to himself the right to revoke his gift, or, if he desires, he may make the gift absolute and irrevocable, and his power in this regard does not depend upon the providence or improvidence of his act/’ I have thus quoted quite fully the reasons given for this decision in this court because they seem to bear directly upon somewhat opposing views of the subject elaborately discussed and apparently fortified by numerous authorities cited in the opinion below. But these authorities will be found to be clearly distinguishable, I think, in their essential facts from the case at bar. Many of them deal with, and are only applicable to, the acts of grantors whose mental capacity to execute their deeds was, by reason of either old age or disease, much weakened and enfeebled, if not found to be below the normal standard; such, for instance, as in the cases of Anderson v. Elsworth, 3 Giff. 154; 7 Jur. N. S. 1047; Coffey v. Sullivan, 63 N. J. Eq. (18 Dick.) 296; Collins v. Collins, 63 N. J. Eq. (l8 Dick.) 602; Thorp v. Smith, 63 N. J. Eq. (18 Dick.) 70, 92; Grant v. Baird, 61 N. J. Eq. (16 Dick.) 389; White v. White, 60 N. J. Eq. (15 Dick.) 104; Mulock v. Mulock, 31 N. J. Eq. (4 Stew.) 594. In these cases it should be noted that the absence of provision for revocation or reversion in the deeds, and the fact that many of them were executed without the benefit of proper and competent advice, became important factors in their decision only because of the lack of normal mental capacity of the grantors. In the others cited certain elements deemed material to their decision existed which do not exist in the case under review, such as the delinquency (adultery) of the wife, fraud or undue influence, or accident or mistake, and the like. Nor does the case at bar seem to us to come within the operation of the general principle stated in 2 Story Eq. Jur. § 1374, referred to below. Its -language is as follows, viz.:

“Thus, for example, if a husband should, by deed, grant all his estate or property to his wife, the deed would be held inoperative in equity, as it would be in law, for it could in no just sense be deemed .a reasonable provision for her (which is all that courts of equity hold the wife entitled to), and in giving her the whole he would surrender all his own interests.”

Without going into a detail of the evidence, it is apparent from it (and such was the construction put upon it by the vice-chancellor), that the conveyed house and lot constituted but a portion in value of the husband’s entire property.

In Garnsey v. Munday, 24 N. J. Eq. (9 C. E. Gr.) 243 (the authority especially invoked to sustain the position taken below), the late Chancellor Runyon, in reviewing the facts, considered, to use his language on page 248 of the opinion, that “there is no room for doubt that the grantor was induced * * * to execute a voluntary deed whose effect she and they not only did not understand, but, on the other hand, misapprehended, and which, so far from being according to their intentions, was, in two very important respects at least, admittedly precisely the reverse.”

No such inference is justifiable in the present case, either •from the charges of the bill or from the evidence. Taking the complainant’s own version in his bill of his alleged “arrangement” with his wife, there rvas no improper procurement of the deed from him by her, nor any false statement by her to him as to any fact, nor any misapprehension of any fact by them. His charges against her consist of alleged breaches by her of parol promises to be performed in the remote future. It is evident from the further statements of the bill, as well as from the testimony, that the complainant voluntarily executed the deed. After its delivery he did not insist upon nor take any legal steps to compel his wife to reconvey the property to him upon her alleged failure so to do at his request. Her failure to leave it to him by her will, if it be believed that she promised him to that effect, became at most only a broken verbal promise, wdthout mutuality of promise or other consideration to support it, and was void under the statute of frauds. The complainant’s mental capacity to execute the deed has not been questioned by the charges of the bill, nor do we think that it has been seriously, much less successfully, attacked in the proofs. He was about forty years of age, in the prime of life, and the evidence is replete with instances of his successful transactions of various kinds of business and of his accumulation of property.. It is remarked in the opinion below that he “was ignorant of our language,” and “had no understanding, in the proper sense of that word, as to what the effect of the conveyance was.” But it cannot be conceded that his ignorance of our language can have any controlling weight under the circumstances. He certainly must have understood its contents. That instrument was executed, as well as acknowledged, by him under all the legal formalities placed by our statute for the protection of the ignorant and unvigilant around such solemn transactions. The truth of the statements of the acknowledging officer’s certificate upon the deed—that its contents were made known by him to the grantor at its execution —has not been denied nor even questioned by the complainant. Presumably that officer did his duty, and in making known its contents, explained and translated them into the complainant’s language, or at least into words and expressions the meaning of which the grantor fully then understood. The proofs, extrinsic of the deed, show that the complainant could not have been very ignorant of the English language, and could not have misunderstood the nature and effect of his grant. Thomas W. Randall, a well-known and reputable lawyer of the city of Paterson, who drew the papers, testified, without contradiction, that the complainant came with his wife to the witness when the papers were signed, and that “they understood thoroughly” the nature of the papers, and that he “gave them both to understand what the papers were.” But there is still more convincing proof from the complainant’s deliberate admissions in his bill that he understood not only the contents, but also the effect of the conveyances he was making to his wife. In it he charges that it was (to quote)

“arranged between your orator and his wife, Louisa Fretz, that before departing from the United States on his proposed visit, ■ and in the event of anything happening him. while absent, he would transfer the premises hereinabove described to his wife, in trust for him, upon the express understanding and arrangement that when he returned home, and at his request, the said Louisa Fretz would reconvey said premises to your orator, or that she would make her will leaving the said property to him,”

and that in pursuance of this agreement he conveyed the premises “by deed of warranty” through an intermediary, to his wife. He therefore knew that he was to give a “deed of warranty” to his wife, conveying the property to her, and that is exactly what he did in fact. He does not in his bill allege, nor does he testify, that he supposed that the deed he gave contained a trust clause, or that he was misled or deceived in any respect as to its contents or as to its effect either in fact or in law. On the contrarjr, his donative purpose toward his wife in executing the deed is exhibited by the following extract from his testimony, viz.:

“Q. Well, at the time you were talking about going, was there anything said about turning the'property over to your wife?
"A. Yes.
“Q. Well, now, what was said?
"A. Well, she said to me that I should sign the property over to her, in ease there was anything happened on the water, that she would have the property."

Even if it be admitted that the complainant did not understand the legal effect of the deed he gave, it, nevertheless, must be held, under long-settled principles, that he is remediless. He was bound to know that a trust, not manifested in writing, could not be implied in his favor. His deed declared, by its habendum clause, the use to be for the grantee. Where a use is declared by a deed operating under the statute of uses, no other use or trust, not expressed in writing, can be shown to result. Coffey v. Sullivan, ubi supra, and authorities there cited. The deed he seeks to repudiate he suffered to remain in the possession of his grantee unchallenged and unquestioned for more than ten years. In the meantime death has intervened to seal the lips and silence forever the tongue of the only person, other than himself, who had intimate knowledge of the mutual intentions of the two parties in interest, and.of all the facts leading np to and surrounding the transaction. As the case stands, the presumption of the donative purpose of the husband toward his wife, inherent in the language of the deeds themselves, has not, we think, been overcome by legal evidence, entitled to weight, and consequently the decree invalidating the deeds should be reversed.

For affirmance—Garrison, Garretson, Hendrickson, Heed, Vroom—5.

For reversal—The Chibe-Justice, Fort, Pitney, Swayze, Bogbrt, Yredenburgh, Green, Gray, Dili.,—9.


author: Pee Curiam.

text:
    Henry Puster, receiver, &c., appellant, v. Parker Mercantile Company, respondent.
    [Argued November 23d and 24th, 1905.
    Decided June 18th, 1906.]
    1. A foreign corporation which has no office, agent or place of business within the state, and has never made" application for the right of trans.acting business under the laws of the state, and has no contract to be performed in the state, and which has not been legally served with process, may raise the question of jurisdiction by a preliminary plea to the jurisdiction, asking the judgment of the court on whether it should answer the bill.
    2. Such a corporation was not brought into court by due process of law by service of process upon its vice-president, who was a resident of the state of its incorporation, and who was not authorized or directed by the corporation to make the trip into this state on the occasion when the .attempted service of process was made.
    On appeal from an order of Chancellor Magie, who filed the following opinion:

      The bill in this ease was filed by Henry Pusterj as receiver of the United States Gasoline Engine Company, against a single defendant, the Parker Mercantile Company, which company is declared in the bill to be a corporation created by and existing ■under the laws of the State of Missouri.
    The subpoena which issued upon the bill was returned as served upon one John H. Muren, a director and vice-president of the defendant company.
    The defendant filed a plea to the jurisdiction of the court, the pertinent statements of which are as follows:
    “That this court ought not to compel it to appear or answer in the aforesaid action, because at the time of the commencement of the said suit, and at the time when the service of the subpoena issued therein was attempted to be made upon it, this defendant was not an inhabitant, nor found within the State of New Jersey, nor was it a resident or citizen of the said state, nor existing as a body corporate under or by virtue of its corporate laws; that it has no office, agent or agency or place of business within the said state, nor has it ever had any; that it is a body corporate existing under and by virtue of the laws of the State of Missouri; that it has never made application for the right or privilege of transacting business under the laws of the State of New Jersey; that it has no contract to be performed in this state, and never has had; that it has not been served with process therein (although service has been attempted to-be made and a pretended return made upon the subpoena) ; that the said process in this suit was served upon Jacob H. Muren, who is a director and the vice-president of this defendant; that said Jacob H. Muren (wrongly designated on the return of said subpoena as John H. Muren) is a resident of the city of St. Louis, in the State of Missouri, and has been continuously a resident of said city for more than twenty years last past; that the said Jacob H. Muren was not authorized and was not directed to go to New Jersey, nor to make the trip on the occasion of which the attempted service of process against this defendant was made upon him, either by the board of directors or by the officers of this defendant ; that said Muren was not authorized by said Parker Mercantile Company, this defendant, or by its officers or directors, to act for or on its behalf in the matter or purpose of this suit in any manner whatever, or in any other matter whatever in this state; that no process or other legal notice of this suit has been served upon any person duly authorized in the defendant’s behalf in the matter of this suit, or upon any property to it belonging, by reason whereof this defendant humbly submits that this honorable court has not now, nor ever had or obtained, jurisdiction over the person or property of this defendant, and that this defendant is not compellable to appear in response to said writ, and does not accept or waive service thereof.”

      No reply having heen made to this plea it has been brought. to hearing, and the question thus raised is whether the plea is good.
    Upon this question, I conceive I am bound by authority. In Wilson v. American Palace Car Co., 65 N. J. Eq. (20 Dick.) 730, a plea substantially identical with that before me was interposed, and it was held by the court of errors and appeals that such a defendant had a right to thus raise the question of jurisdiction, and to demand, in limine, the judgment of the court whether he should answer the bill. Upon the facts pleaded in that case, it was further held (overruling this court) that defendants had not been brought' into court by due process of law, and were not obliged to answer the bill. Upon this authority the plea here interposed must be sustained.

      Mr. Robert H. Hudspeth and Mr. J. Merritt Lane, for the appellant.

      Mr. Robert M. Boyd, Jr., for the respondent.
   Pee Curiam.

The order in this case is affirmed, for the reasons contained in the opinion delivered in the court of chancery by the chancellor.

Por affirmance—The Chief-Justice, Garrison, Port, Garretson, Hendrickson, Pitney, Swayze, Reed, Bogert, Vre-DENBURGH, VeOOM, GREEN, GRAY, Dll/L-14.

Por reversal—None.


text:
    John S. De Hart et al., executors, &c., respondents, v. Charles R. De Hart, executor, &c., appellant.
    [Argued November 27th, 1905.
    Decided June 18th, 1906.]
    An agent having authority to invest the money of his principal is bound not only to act in good faith, but to exercise ordinary diligence and such care and skill as is ordinarily possessed and employed by persons of common capacity engaged in the same business.
    On appeal from a decree of the court of chancery, advised by Vice-Chancellor Stevens, who filed the following opinion:
    William S. Cooper executed two bonds and mortgages for $1,000.each to Thomas S. Godwin. They are dated October 15th, 1890, and were assigned to complainants’ testatrix, Sarah E. De Hart, on October 23d, 1890. The mortgages were both second mortgages on real estate in New York City. The first mortgages, held by the New York Life Insurance Company, were foreclosed in 1891, and the properties were bid in by the first mortgagee for less than the sums owing to it. Notwithstanding these foreclosures, either the mortgagor (Cooper) or the assignor of the second mortgages (Godwin) appears to have paid interest on them up to the death of Sarah E. De Hart. This interest was paid to her, not directly, but through Charles C. De Hart, of whom the defendant is executor. No part of the principal has been paid; the mortgagor is dead, and his estate is probably insolvent. It is admitted that the money paid for the assignment of the mortgages belonged to Mrs. De Hart; that it was actually paid to the assignor, in Mrs. De Hart’s absence, by Charles De Hart, and that he held possession of the mortgages and assignments up to the time of his death.
    The insistment of complainants, who are Mrs. De Hart’s executors, is that in making the above loan of $2,000 Charles C. De Hart acted as Sarah De Hart’s agent; that he was entrusted not only with the money itself, but with its investment, and that it was lost through his culpable negligence. The insistment of defendant is that the proof falls short of showing that Charles De Hart stood in a fiduciary relation to his sister-in-law; that all that it shows is that he had the'money, and that he handed it over to the assignee of the mortgagor; that it does not show that the investment may not have been her own, made at her instance or with her approval.
    Because of the death of the actors, direct proof, either way, is wanting. I think, however, that the circumstances sufficiently indicate that Charles De Hart was something more than a mere conduit for the transmission of the money.
    The undisputed facts are these: Mrs. De Hart’s husband had died many years before. She cultivated a farm, and was a woman of considerable means. Charles De Hart, who was her brother-in-law, lived not far away, and was himself a farmer and a business man. She appears to have consulted and trusted him in matters of business. He invested other money for her about the time the money in question was invested, and he not only invested the money, but retained the securities. He told the Rev. Mr. Honeyman that he had invested for her, and that he could invest and get good securities for her in the future, if necessary. Just before the assignments were made, he said to Mr. Sire, the attorney who drew the papers, that he had $2,000 belonging to Sarah E. De Hart, with which he proposed to take the assignments, and that he had been up to see the houses which constituted the security. He was informed by Sire that the mortgages were second mortgages. It further appears that Sire did not know Mrs. De Hart in the matter; that Charles De Hart did not put the assignments of the mortgages on record; that he collected and transmitted the interest; that he kept himself informed of a litigation which was undoubtedly the foreclosure of the first mortgages, and that after Mrs. De Hart’s death, instead of making a full statement of what he knew, he told his co-executors that the mortgages were' good and would soon be paid; that there was litigation, and that he had been offered $1,800 for them. Prom these circumstances unexplained, it would seem that Charles De Hart was more than a mere conduit. The fair, and I think unavoidable, inference is that he was entrusted by complainants’ testatrix with the making of the loan. That being the case it was his duty to see that the money was safely invested. He was bound not only to act in good faith, but to exercise ordinary diligence and such care and skill as is ordinarily possessed and employed by persons of common capacity engaged in the same business. Story Ag. § 183. He failed to do this in two particulars. He took, as I have said, second mortgages, which within a }rear were shown to be worthless (see Whitney v. Marline, 88 N. Y. 535; King v. Mackellar, 109 N. Y. 215), and he failed to have the assignments recorded, and thereby deprived Mrs. De Hart of the benefit of a notice in the foreclosure proceedings—a notice that would have afforded her an opportunity of protecting herself if she saw fit. Subsequently he seems to have made, in addition, the unfortunate mistake of declining an offer of $1,800, which he said had been made to him, and of doing so without consulting his principal.
    T am of opinion, on the facts disclosed, that the complainants are entitled to relief.

      Mr. Frederick jEF. Beach and Mr. Willard W. Gutter, for the appellant.

      Mr. James FF. Neighbour, for the respondents.
   Pee Curiam.

The decree appealed from is affirmed, for the reasons stated in the opinion delivered in the court of chancery by Vice-Chancellor Stevens.

For affirma'nce—The Chibe-Justice, Garrison, Poet, Garretson, Hendrickson, Pitney, Swayze, Reed, Bogert, Vredenburgh, Vroom, Green, Gray, Dill—14.

For reversal—None.