author: Van Fleet, V. O.

text:
    Amos H. Van Horn, Limited, v. Dominick Coogan et al.
    1. One trader has no right to use a name, a mark, letters or other indicia by which he may induce purchasers to believe that the goods he is selling are the goods of a rival trader.
    2. Where one trader is attempting to palm off his goods as the goods of his rival, it is not necessary that the injured trader should show, in order to entitle himself to relief, that he has an exclusive property in the name by which his goods are distinguished on the market, for equity will restrain the use of any imitative device by which one trader attempts to beguile the public-into buying his goods as those of his rival.
    3. The law governing the rights of rival traders is founded on honesty and designed to rebuke and suppress fraud; hence, if it appears that he who asks protection against the fraud of his rival, is himself defrauding others, no protection can be extended to him.
    On application for an injunction. Heard on bill and affidavits and answer and affidavits and depositions taken pursuant to-an order of the court.

      Mr. Robert II. McCarter, for the complainant.

      Mr. Abner Kalisch, for the defendants.
   Van Fleet, V. O.

This is an application for an injunction to prevent the defendants from fraudulently competing in business with the complainant. The complainant is a corporation and has succeeded to the business, business reputation and good-will of Amos H. Van Horn. Mr. Van Horn is its president. For more than thirty years prior to the complainant’s organization, Mr. Van Horn had carried on business in Newark as a dealer in household goods, and had established a large and lucrative trade. Among the articles which he sold for two or three years prior to the time when he transferred his business to the complainant, was a cooking stove or range, called “ Portland,” which was made for him alone and sold by the manufacturer to no other dealer in-Newark. In consequence of extensive advertising and its qualities, this stove became well and favorably known in the Newark market, and a large number were sold at a handsome profit. For the year preceding the commencement of this suit, the complainant sold over five hundred. Until the defendants put their stove on the market, no dealer in Newark, except the complainant and its predecessor in its business, had, for some years, dealt in a cooking stove, known on the market, by the name “Portland.” The complainant and defendants are rivals in business. Their places of business are on the same side of the same street, ■with but one building intervening, the street number of the complainant being 73 and that of the defendants being 77. A few days before the bill in this case was filed, the defendants commenced selling, at their store, a cooking stove which they had caused to be named “ Portland,” and which is quite similar in appearance to the stove of the complainant, but which had been previously sold on the market as the “ Columbian Dandy.” The defendants undersold the complainant, and when they commenced the competition, of -which the complainant complains, "they advertised their stove, by hanging placards and signs in front of their store, containing these words: “ Famous Portland ” — “ Famous Portland Range reduced — has no equal.” They had previously hung out signs, in front of their store, with the number “73” on them.. The complainant insists that they did this for the purpose of deceitfully luring purchasers, who were looking for its store, into theirs. The special protection for which the complainant asks is, that th'e defendants may be restrained from making any use of the name “ Portland ” which will enable them to palm off their stove on purchasers as the stove of the complainant.

The legal principles which must govern the decision of this case are well established and familiar. The law not only allows' but encourages fair, open and honest competition, but while it demands that the markets shall be open and free to all dealers, and that each shall enjoy the utmost freedom in competing, by fair and honest means, with his rivals, it absolutely interdicts each from taking a fraudulent advantage of his rivals, by dealing under false colors and selling his goods as those of his rival, and thus cheating the public and defrauding his rival. In the words of Mr. Justice Knapp: Rivalry of that kind “is not fair competition; it is closer akin to piracy.” Miller Tobacco Manufactory v. Commerce, 16 Vr. 18, 24. As declared by Lord Kingsdown in Leather Cloth Co. v. American Leather Cloth Co., 11 H. L. Cas. 523, 538: “ The fundamental rule is, that one man has no right to put off his goods for sale as the goods of a rival trader, and he cannot therefore be allowed to use names, marks, letters or other indicia, by which he may induce pur•chasers to believe that the goods he is selling are the same goods sold by a rival trader.” This is, in substance, the rule laid down by Lord Langdale in Perry v. Truefitt, 6 Beav. 66, and which has been generally adopted by the courts as a correct exposition of the law.

But it is contended that a geographical name, like Portland, cannot be a trade-mark, nor be so used as to give the dealer, who first adopts it, an exclusive property in it. This, I think, may •be conceded without impairing, in the slightest degree, the complainant’s right to the protection it asks. For, as was said, in substance, by Lord Langdale in the case just cited, the question, in cases like this, is not whether the complainant has a property in the name by which his goods are distinguished in the market, but, on the contrary, the pertinent inquiry is, has the defendant a right to use the name by which the complainant’s goods are known for the purposes of deception, and in order to attract to himself that custom which, without the improper use of such name, would have flowed to the complainant ? And the answer to the inquiry is, that the defendant has no such right. The supreme court of the United States, in Coats v. Merrick Thread Co., 149 U. S. 562, 566, recently said, speaking by Mr. Justice Brown, that there can be no question as to the soundness of the proposition that, irrespective of the technical question of trademark, one trader has no right to dress up his goods in such manner as to deceive an intending purchaser, and induce, him to believe he is buying the goods of a rival trader. Rival manufacturers may lawfully compete for the patronage of the public in the price and quality of their goods, in the beauty and tastefulness of their enclosing packages, in the extent of their advertising, and in the employment of agents, but they have no right, by imitative devices, to beguile the public into buying their wares under the impression they are buying those of their rivals.” Chief-Justice Fuller had in the prior case of Lawrence Manufacturing Co. v. Tennessee Manufacturing Co., 138 U. S. 537, 549, announced the same doctrine, and. in stating the grounds upon which it rested, he cited with approval the views expressed by Mr. Justice Bradley in Putnam Nail Co. v. Bennett, 43 Fed. Rep. 800. The complainant, in the case just mentioned, alleged, that it had been engaged, for some years, in making and selling-bronzed horseshoe nails; that the bronzing of its nails constituted a trade-mark, and that the defendants had recently bronzed the nails which they sold, in imitation of the complainant’s, and were, by this means, enabled to palm off their nails on the public a^ the nails of the complainant. The complainant also alleged, that purchasers had been deceived and misled into buying- the nails of the defendants in the belief that they were those of the complainant. The defendants demurred, insisting that the complainant could not acquire a trade-mark by simply bronzing-its nails. In overruling the demurrer, Judge Bradley said: “Whether this [bronzing nails] is in itself a good trade-mark or not, it is a style of goods adopted by the complainant, which the defendants have imitated for the purpose of deceiving, and have deceived the public thereby, and induced them to buy their goods as the goods of the complainant. This is a fraud. * * * The allegation that the complainant’s peculiar style of goods is a trade-mark may be regarded as a matter of inducement to the charge of fraud. The latter is the substantial charge.”

These authorities demonstrate, I think, that the complainant is not bound to show, as an indispensable prerequisite to its right to relief, an exclusive property in the name “ Portland,” but that its right to the protection it asks must be considered to be fully established if it satisfactorily appears that the defendants have made use of this name as an imitative device for the purposes of deception — to beguile the public into buying their stove under the belief that they were buying the stove of the complainant. That such was the purpose of the defendants is proved, I think, by their own acts. It is undisputed, that they changed the name of their stove from “ Columbian Handy ” to the name by which the complainant’s stove was known in the Newark market, and under which it had there achieved a renown, and that they then advertised their stove, by signs and placards, as the “ Famous Portland Range reduced,” meaning, obviously and unquestionably, that they were selling, at a reduced price, a range which had become famous in the Newark market under the name “ Portland.” The truth, however, appears to be, that up until a few weeks before the commencement of this suit, the defendants had never sold a stove by the name of “Portland,” and also, that when they first offered a stove for sale by that name, its name had just been changed, so that when they hung out placards, advertising their stove as the “ Famous Portland Range,” the fact was that their stove was wholly unknown by its new name. It was without reputation or fame and unknown. The only stove then on the market in Newark which was known by the name “ Portland ” was the stove of the complainant. These facts will bear but one interpretation. They show that the defendants meant to defraud the complainant, by beguiling the public into buying their stove under the belief that they were buying the stove of the complainant.

But the defendants set up another defence. They recriminate. They charge that whatever reputation the complainant’s stove acquired on the market, has been established by falsehood and deception. They allege that the stove which the complainant calls “ Portland,” and sells under that name, is, in all respects, identical with a stove known as the “ Canopy,” and which has been on the Newark market for a long time, and is now sold by dealers in Newark for less money than the complainant sells its stove for. The charge, it will be perceived, is that the complainant is selling its stove under a false name. There can be no question that a complainant Avho seeks judicial protection in a case of this kind, must, to succeed, come into court with clean hands and a pure conscience, nor that it will be the duty of the court to refuse him protection against the fraud of his rival if it appears that he is himself committing a fraud on the public. No such thing as an exclusive privilege to defraud the public is known to the law, and no man can successfully assert a right to judicial protection for profits derived from a business carried on in such manner as to deceive and cheat the public. The law governing the rights of rival traders is founded in honesty and good sense. It is not intended to protect fraud but to rebuke and suppress it and to promote honesty and fair dealing. While the cases so declaring are numerous, only three will be cited. Fetridge v. Wells, 4 Abb. 144; Wolfe v. Burke, 56 N. Y. 115; Manhattan Medicine Co. v. Wood, 108 U. S. 218.

The branch of the defence now under consideration rests on these facts : That the complainant is engaged in selling a stove which was originally named “ Canopy,” but which, for some years past, the complainant and its predecessor in business have called Portland” and sold under that name, while other dealers in Newark have sold, and are now selling, the same stove under its original name for less money than the complainant does. If this is assumed to be true, how does it show fraud or furnish evidence of falsehood or deception ? There is no law forbidding a manufacturer from changing the name of a stove made by him, provided the change is not made to be used as an imitative device by which one trader’may sell his goods as those of his rival. The proof shows that the practice is quite general among stove manufacturers to make a stove for a single dealer in one market by a certain name, and to make the same stove, for another dealer ini another market, by a different name. If it had been shown that there was a stove on the Newark market with an established reputation by the name of Portland,” superior to the stove called “ Canopy,” and that the complainant had beén engaged in palming off the inferior stove under the name of the superior, the proof of deception would be sufficient to disentitle the complainant to relief. But there is no evidence of that kind. There is no stove now on the Newark market called “ Portland,” and has not been for years, except those offered for sale by the complainant and defendants. The Buckwalter Stove Company is the only manufacturer that makes the stove called Canopy.” It also manufactures the t£ Portland ” sold by the complainant, and is under an obligation to the complainant not to make the ££ Portland ” for any other dealer in Newark. The Portland ” and Canopy ” are not identical. They differ in material respects. The “ Portland ” is made with a duplex grate and the Canopy ” with a flat grate — the weight of the evidence shows that the former is better than the latter — the ££ Portland ” is manufactured with a separate base, called a piano or portable base, on which it is set and may be lifted off, while the ££ Canopy ” rests on feet which are driven or pushed into clinches on its bottom; the “ Portland ” has a receiver or pan into which the ashes drop and the “ Canopy ” has not; the “ Portland ” is made with ventilated ■doors and Canopy ” with solid doors; and the “ Portland ” has a grate-shaker or agitator and the Canopy ” has not. Some of the most important of these additions and improvements were made by the direction of the complainant. Looking at them in their entirety, it is obvious, as I think, that although the Portland ” is, in its body, constructed after patterns made for the Canopy,” still that the two stoves differ so widely, in important respects, that their maker was fully justified in putting them on the market under different names, and that in doing so no wrong of any kind was committed. In my judgment, nothing has been shown which disentitles the complainant to the relief it asks. An injunction will be granted.


source: Caselaw Access Project

author: Van Fleet, V. C.

license: Public Domain

text:
    Eseck Wolcott, executor of the will of Eliza Harris, deceased, v. Ruth Jackson.
    1. A court of equity will not entertain a bill for a new trial in an action at law when the party seeking such relief can obtain it by application to the law court.
    2. By the statute of 1885 {Rev. Sup. p. 810) the time within which an application for a new trial may be made to a law court is made co-extensive with that within which such an application may be made to a court of equity.
    On motion to dismiss bill.

      Mr. Franh P. McDermott, for the motion.

      Mr. James Steen and Mr. Robert Allen, Jr., for the complainant.
   Van Fleet, V. C.

The complainant’s primary object in bringing this suit is to-obtain a new trial on the ground of newly-discovered evidence. The material facts alleged in the bill, are: The recovery by the-defendant of a judgment against the complainant, in his representative capacity, on the 13th day of June, 1893, in the Monmouth pleas, for a little over $475, for services rendered by the-defendant to the complainant’s testatrix; a rule to show cause why a new trial should not be ordered was afterwards, on the-application of the complainant, alleging, as his bill states, that he had obtained “additional evidence,” granted, which, after argument, was discharged; the defence made to the defendant’s, action was, that the testatrix, a few days before her death, settled with the defendant and paid her in full and took her receipt written in testatrix’s account-book; though the complainant made diligent search for the book containing this receipt, both before and after the trial, he was unable to find it, or to discover-who had taken it, or what had become of it, but he has recently,, and about the 1st of December, 1893, and after the discharge of the rule to show cause, discovered evidence which shows that the defendant, between the date when the testatrix died and the date when he took possession of her effects, fraudulently carried this book away from the house where the testatrix died to the house-of another person, where it was destroyed by burning. This summary exhibits the complainant’s whole equity.

It will be perceived that the newly-discovered evidence on-which the complainant’s bill rests, consists entirely of the alleged-abstraction and destruction by the defendant of the book containing the receipt. The defendant, on notice pursuant to paragraph 213 of the Rules, moves to dismiss the bill on three-grounds. As one of them, in my judgment, disentitles the complainant to maintain this action, that one alone will be considered. It is this: As the law now stands, the complainant has an adequate and complete remedy at law ; or, stated in another form, if he can establish a case which will entitle him to a new trial, he can obtain it on application to the court which pronounced the judgment against him. And it is manifest that if he can get adequate relief there, there is great propriety in compelling him to seek it there. That court has the prior jurisdiction, and cannot be ousted, according to established principle, except it is made to appear that full and complete justice cannot be done there. The complainant’s newly-discovered evidence does show not an equitable but a legal defence. The question which its production will raise is one which the defendant has a right, in the orderly and regular administration of justice, to have determined by the verdict of a jury. Consequently, if this court took jurisdiction, and on final hearing it should appear that the complainant was entitled to a new trial, it is plain, that the only just and appropriate relief that could be administered, would be to restrain the defendant from enforcing her judgment unless she consented to a new trial at law. Cairo and Fulton R. R. Co. v. Titus, 8 Stew. Eq. 384. To allow the forum of litigation to be changed simply to try the question whether or not a new trial shall be had, when that question can be just as fully and fairly tried by the court which must try the case on its merits, if a new trial should be ordered, would be, to speak in the words of Lord Redesdale, just as unconscientious and vexatious a proceeding as to bring into a court of equity a discussion which might have been had at law.” Bateman v. Willoe, 1 Sch. & L. 201, 206.

From the earliest times the cardinal rule of jurisdiction in this class of cases has been, that where the remedy at law is adequate •equity will not interfere. And it is only by a strict observance of this principle that the boundaries of the two jurisdictions can be properly maintained, and vexatious and ruinous litigation prevented. There was a time when the common-law courts of England did not grant new trials. During this period the English court of chancery sometimes arrested the enforcement •of a judgment at law for the purpose of inquiring and deciding, whether or not, a new trial should be had in order to prevent serious wrong, but this power was always exercised with great ■caution. Since, however, the law courts of England and this country have exercised the power of granting new trials, a part •of the original jurisdiction of courts of equity, in this class of eases, has become unnecessary and obsolete. The pertinent doctrine now in force in this state was declared by the court of errors and appeals, speaking by Mr. Justice Reed, in these words : The disuse of bills for new trials results from the fact that, since the relaxation by the common-law courts of the rules-for granting of new trials, scarcely any legal ground for a rehearing can now be asserted in a court of equity which may not be asserted with equal effect in the common-law tribunals. As the courts of law have extended their jurisdiction over this subject, courts of equity have in this instance withdrawn theirs, in accordance with the principle that, where a court of law can furnish an adequate remedy, equity will not interfere.” Hannon v. Maxwell, 4 Stew. Eq. 318, 329. The words in italics have been interpolated, but it is quite evident that they or equivalent words formed part of the opinion as originally written.

It remains to be shown that the complainant has an adequate-remedy at law; in other words, that if he has discovered new evidence which entitles him to a new trial, he can obtain it by applying to the Monmouth pleas. Formerly it was a rule of practice of all the law courts of this state, that an application for a new trial, on the ground of newly-discovered evidence, must be made within the term at which the trial was had' and not afterwards. While that rule was in force, it was competent for this court to entertain a bill fór a new trial, in any case where the new evidence made a new trial necessary to the accomplishment of justice, and it was made to appear that the new evidence could not have been discovered, by the exercise of reasonable effort and diligence, in time to have been used on the trial or on-an application to the law court for a new trial. Had equity not assumed jurisdiction in such cases, it is evident, that a defeated litigant in a suit at law, who, according to the real truth of the-case, had right on his side, would have been remediless, and that is a condition of affairs which no enlightened system of jurisprudence will tolerate. But the rule of limitation above mentioned has been abrogated. The period within which a law-court may now grant a new trial, is quite as unlimited as that within which this court may do so. By a statute passed in 1885, it is enacted—

“ That it shall not be necessary to file a bill in equity to obtain a new trial in an action at law, merely because the term in which the verdict was rendered has expired, but a new trial may be granted by a law court after the expiration of the term.” Bev. Sup. p. 810 § IS.

There can be no question, I think, that if the complainant can establish a sufficient case, he can, by force of this statute, obtain a new trial in the Monmouth pleas. The time within which he must make his application is not defined or limited by the statute, but, in order to put an end to the litigation and to bring about a state of repose, he is required, by general principles of justice, to proceed with diligence and make his application within a reasonable time. The purpose of this statute, as I think is manifest on its face, is merely to extend the time within which a law court may entertain an application for a new trial, and not to curtail or diminish the jurisdiction of this court, but, as it is a rule of jurisdiction of this court, not to interfere in any case when an adequate remedy at law exists, even in cases where this court may exercise a concurrent jurisdiction with the law courts and a law court has already acquired jurisdiction, it would seem to be entirely clear, in a case of this kind, where a law court already has jurisdiction and the remedy at law is not only adequate but more expeditious and less expensive than that which this court can give, that this court should, in obedience to one of its own principles, decline jurisdiction.

The complainant’s bill will be dismissed, with costs.


author: Bird, V. C.

text:
    John Wright, receiver of the Ott & Brewer Company, v. The First National Bank et al.
    1. Under the statutes respecting corporations in this state, a director of a corporation ceases to be a director on making an assignment of his estate for the benefit of his creditors, and until it is shown that his creditors have been satisfied and some of his stock remains undisposed of, the presumption that he is no longer a bona fide stockholder will prevail.
    2. No person can be elected a director who is not a bona fide holder of some of the stock at the time of such election, and he ceases to be a director when he has disposed of his stock.
    3. Though such a director had not made an assignment, but had nevertheless become bankrupt and immediately fled from the state, the like result would follow, that he ceased to be a director by removing himself from the state.

      4. If a board be constituted of three members and one of them ceases to be a director for any reason whatever, there is no longer such a board of directors as the statute contemplates, and cannot be until the provisions of the act for such emergency are complied with, that is, the.election of a new director by the remaining members of the board.
    5. From the facts that all the mortgagees lived in the same city in which the corporation mortgagor did business, and several months before tlie execution of the mortgage one of the three directors made an assignment for the benefit of creditors and fled the state, his assignment having been placed on record, the mortgagees were chargeable with knowledge that such person had ceased to be a director, and that consequently there was no board authorized to execute the mortgage.
    On final hearing on pleadings and proofs.

      Mr. James Buchanan, for the receiver.

      Mr. Woodbury E>. Holt and Mr. William M. Banning, for the First National Bank.

      Mr. Garret B). W. Vroom and Mr. Edwin Robert Walker, for the defendants Kuser.
   Bird, V. C.

The Ott & Brewer Company was engaged in the business of manufacturing pottery. In the month of June, 1891, it was managed by three directors. In that month one of those directors, Thomas A. Bell, made an assignment for the benefit of his creditors, and almost immediately left the state, and his whereabouts since then have never been ascertained by any of the residents in •and about Trenton with whom he had business relations. These facts are admitted on all sides in this case. The deed of assignment was recorded according to the statute on the 6th day of •July, 1891. In the month of November, the company, by a resolution passed by the two remaining directors, executed a mortgage to one of the defendants in this cause, the First National Bank of Trenton, for the sum of $7,600. That mortgage was recorded on the 27th of November. On the 30th day of August, 1892, the •company executed three several chattel mortgages to three of the defendants, which mortgages were duly recorded according to law. Subsequent to all these transactions, a bill was filed for the purpose of declaring the company insolvent and having a receiver ■appointed. Such proceedings were taken as led to the appointment of the complainant in this cause as receiver.

The receiver files this bill for the purpose of determining the rights of the general creditors and these alleged lienholders with ■respect to such liens.

The facts above outlined are set forth in his bill. It is ■alleged that the said mortgages are invalid and not binding as to general creditors — -first, because there were but two directors at the time of the execution of said mortgages, and consequently no board of directors, either de jure or defacto ; and second, because the mortgagees are not bona fide holders for value without notice. The sixteenth section of the act respecting corporations {Rev. p. 180) declares that the business of every such corporation “ shall be managed and conducted by the directors thereof, who shall respectively be shareholders therein.” This section declares that every director shall be a shareholder. The forty-seventh section declares— .

It shall not be lawful for any person to be elected a director of any body corporate in this state, issuing stock, unless that person shall be at the time-of his election a bona fide holder of some of the stock thereof.”

Clearly, the legislature intended to guard against every pretence or mere color and all deceit.

The seventeenth section declares—

“ The directors shall not be less than three in number, and they shall be-chosen annually by the stockholders at such time and place as shall be provided by the by-laws of the company, and shall hold their office for one year- and until others are chosen and qualified in their stead.”

The twentieth section declares—

“ When any vacancy occurs among the directors or secretary or treasurer by death, resignation, removal or otherwise, it shall be filled for the remainder of the year in such manner as may be provided for by the by-laws of the said company.”

The forty-eighth section declares—

When any person, a director of any body corporate, shall cease to be a' bona fide holder of some of the stock thereof, he shall cease thereupon to be a director thereof.”

The forty-ninth section provides for the filing of a list of the directors and all other officers with the secretary of state.

With these explicit requirements of the statute respecting the organization and management of corporations, what must the judgment be upon the first proposition, which is that, at the time of the execution of these mortgages, there was no board of directors or other authority to execute them? This leads to the inquiry whether or not Bell, in any sense, could be regarded as a director aftér the assignment referred to of all of his estate, real and personal, for the benefit of his creditors. It is urged that he was, defacto if not dejure. This is put upon the ground that his name appeared upon the books of the company as owner of certain stock. But this seems to me to be most fallacious. It will be seen that the forty-seventh section declares that no person shall be elected a director who is hot a bona fide holder of some of the stock at the time of such election. The sixteenth section declares that the business of the corporation shall be managed by a board of directors, who shall be shareholders therein. Reading these two provisions together, I think no one will insist that they will be complied with in the remotest degree in case that the next day after the person should be elected he-'should dispose of all his stock, especially when the forty-eighth section is read, which declares that in such case he shall cease tO' be a director. The assignment of Bell being established, he ceased to be a bona fide holder of stock. He parted with all his. interest in such stock for the benefit of his creditors, and until it is shown that his creditors have been satisfied and this stock, or some of it, remains undisposed of, the presumption that he is no longer a bona fide stockholder will prevail. Such a case is radically different from the one where stock is hypothecated to secure a loan or other like indemnity.

But besides the certain result just established, the like must follow from the fact that Bell immediately fled from the state. To insist upon it that he continued to be a director after this act would be a most flagrant perversion of every principle of the law. Besides, the twentieth section anticipates this condition and }>rovides that—

“When any vacancy shall occur by death, resignation, removal or otherwise it shall be filled for the remainder of the year as may be provided for by the by-laws of the said company.”

I think the provisions of the law are so broad as to fully comprehend this case and to exclude Bell from the directorship de facto as tvell as de jure. To say that when a stockholder and director has gone into bankruptcy and voluntarily made an assignment of all his interests and fled the state, he can be regarded as a bona fide shareholder and director, would be extremely inconsistent and open the way for innumerable frauds. In some respects at least, as Mr. Justice Depue shows in the case to which reference will hereafter be made, the law requires and deals Avith actualities, not with shadows, Avith facts and not ■with fiction. And it often happens that this principle may be invoked by one class of creditors against another when the debtor would not be heard as against the latter.

Therefore, Bell not being a director, and the statute expressly requiring three, can the two remaining directors execute a mortgage upon lands or goods and chattels which will give the holders thereof priority as to the things mortgaged over the claims of general creditors? It will be seen that the question is not whether or not the company itself is estopped from setting up the illegality or voidable nature of the act, but whether general creditors are estopped from so doing. They have a right to rely upon the provisions of the act. It is their only protection. The general creditors have a right to rely upon the statute which requires three directors, who are bona fide stockholders, to manage the affairs of the company for their benefit. They are entitled to the advice, skill and judgment of three. The statute has assured them of this safeguard. The statute declares that every such corporation shall be managed by a board of directors consisting of not less than three bona fide shareholders. Would it be at all reasonable or just for the court to say, in the face of the statute, that a board may consist of two directors only ? There is no authority for such an assumption of power. If a board be constituted of three, and one of them ceases to be a director for any reason whatever, there is no longer such a board of directors .as the statute contemplates, and cannot be until the provisions of the act for such emergency are complied with, that is, the election of a new director by the remaining members of the board. This the twentieth section of the statute provides for. This certainly would be the result in case of the death or resignation of one of three members of the board. I presume this will not be disputed by any one. The insistment that in such ca«e the company could transact no business whatsoever does not by any means follow. The ordinary internal affairs of such corporation, under such circumstances, would be carried on by necessity as well as by fair implication. Such necessity would be of brief duration, for the statute provides that the remaining members of the board may elect a new director.

To say that in case of death or removal, or where one director,, in any event, ceases to be such, that there is still a defacto board which may perform all of the duties devolving upon a board of directors, whether it pertain to the indoor or outdoor management of the corporation, is equivalent to saying that one individual stockholder could properly act as a director and be regarded by the outside world as being a de facto corporation. Under such circumstances it seems to me that it will not do for the courts to allow the continuing members of a board to despise or set at naught the solemn provisions of the law which were enacted for the protection of the public against fraud and wrongdoing.

I think this case is clearly within the exceptions so fully considered by Mr. Justice Depue, in the case of Hackensack Water Co. v. De Kay, 9 Stew. Eq. 548, with respect to the rights and obligations of those dealing with such corporation in matters pertaining to the internal or external affairs of the corporation. With respect to the latter, he says (at p. 568): “ In all the external circumstances, competent legislative authority, an organization de facto, directors and officers de facto, the corporate seal affixed with the secretary’s oath that it was legally affixed, the transaction was proved legal. These are matters which persons dealing in corporate securities are bound to take notice of. The imperfections arose from the omission of acts which the directors should have done in the management of the private business of the company. Those are the matters with respect to which third persons are not obliged to be informed. Finding the power to make the mortgage in the charter, and that the power might be made complete on certain conditions to be performed by the corporation in the management of its internal affairs, third persons would be justified in assuming that such conditions had, been complied with, and that everything had been done by the corporation, or its directors, which was necessary to validate the securities before they were put in circulation. As against a bona fide holder, who has taken it upon the faith that the security is what it appears to be, a corporation cannot defend on the ground of such omission on its part or by its directors.”

In that case the court distinctly held that it was incumbent upon those dealing with pretended corporations to know that there was a defacto corporation and a defacto board of directors. Certainly there must be such number acting, or who are apparently clothed with authority to act, in order to constitute even a ■de facto board. So much with respect to the general fundamental principles in the interpretation and application of statutory provisions to the case in hand.

Nor have I been able to find any authority, after the most careful and exteusive research, which in any wise questions the conclusions to which I have been led. But my investigations .have guided me to authorities directly in point which very fully support the views above expressed. The first to which I would refer is that of Coryell et al., Exrs. of Holcomb, v. The President and Managers of New Hope and Delaware Bridge Co., 1 Stock 457, in which the chancellor announced the following doctrine: Where the charter of a company required, five managers to constitute a quorum, and there were but four present when a resolution was passed authorizing the execution •of a mortgage, the mortgage is null and void, from the fact that it never received the sanction of the board of directors.” In Kupfer v. South Parish of Augusta, 12 Mass. 185, the court said : Where a parish appointed a committee of three to build ■a meeting-house, a contract made by one of the number was not binding on the parish.” In this case materials were furnished and the parish had the benefit of them. In the case of Beatty v. The Marine Ins. Co., 2 Johns. 109, 110, it was held that, Where the act incorporating an insurance company provides that no losses shall be settled or paid without the approbation of at least four of the directors, with the president or two assistants, or a plurality of them, the acceptance of an abandonment by the assured for a total loss will not be valid or binding on the company unless it appear to have been done at a board of directors constituted according to the act, and by a majority of them present. A body corporate can only act in the mode prescribed by the law creating such corporation.”

But if it should be considered in such cases that persons entering into contracts, bona fide and for a valuable consideration, with one or two individuals claiming to be a board of directors, then a further question arises upon the facts before me, whether ■or not these conveyances were taken bona fide and without notice. I think that the holders of them are clearly chargeable with notice of the situation. The facts very fully sustain this view. All of the parties interested lived in Trenton and in the same immediate vicinity. The records of the mortgages and of the other instruments, as well as the admissions of counsel upon the argument, all sustain this view. Bell made an assignment in June, 1891. The assignment was recorded on the 6th day of July following. About the same time the inventory of the assignee and the three appraisers was filed in the surrogate’s office. As stated above, Bell, immediately after making this assignment, fled from the state, and has never been heard of since by anyone who is interested in the defendant company. The mortgage of the bank was dated more than four months afterwards, and was not recorded until about five months after the assignment. The chattel mortgages were made and delivered about fourteen months after the assignment. When the public nature of such an assignment is considered — the recording ■of the assignment in the surrogate’s office and in the clerk’s office, both offices for the keeping of public records, and the advertisements and notices required to be given by the assignee and the numerous creditors interested — and the nature of the interests of the mortgagee taken into the account, together with the vigilance which ordinarily prudent men, under such circumstances, give to their own private affairs, it is impossible to believe that they did not know that Bell had ceased to be a director, and consequently that there was no board of directors. The presumption is so strong that it must stand against them until they overcome it by direct proof.

It was urged upon the argument that notwithstanding the assignment, Bell still had some interest in the things assigned; that is, that after the payment of the debts, if any of his estate remains, such estate was his, and that because of this fact he might be considered to have sufficient interest to enable him to-be a director. When his own statements in the assignment, together with the inventory, come to be considered, saying nothing about his • flight, it becomes manifest that the most fertile imagination would not expect the smallest equity to his-own profit resulting from the legal process which he had inaugurated.

Coming to the conclusion that the mortgages cannot be sustained, it is unnecessary for me to determine the question which was debated with respect to the priority of the one over the-other as against the goods and chattels.


text:
    George R. Whittaker, assignee, complainant, v. The Amwell National Bank et al., defendants.
    . 1. Where the assignee of one of the directors of an insolvent corporation-, files a bill against the receiver of such corporation and others for the administration of both estates and for the marshaling of assets, and the receiver of such insolvent corporation answers and files a cross-bill, alleging that the directors of said corporation had declared and paid numerous dividends contrary to the statute which limits their liability for the payment of such illegal, dividends to the period of six years prior to the commencement of the suit, it is competent for such receiver to show errors and falsifications of the accounts of such corporation at any reasonable time prior to the commencement of the period of six .years within which -suit to recover may be had.
    2. In such case, although the receiver represents the corporation and produces its books of account, this does not prevent him from contradicting the entries therein for the reason that he represents creditors also.
    3. Under the Corporation act, as revised in 1875, the directors of a corporation may execute to themselves mortgages to secure the actual or contingent liability of the corporation to them, even though this be done in contemplation of immediate application for the appointment of a receiver, and the lien secured thereby will be valid and prior to those of general creditors, which is contrary to the statute as it existed prior to the revision.

      4. One who declines to accept of the office of director of a corporation and declines to perform any duties thereof, cannot be regarded as a director simply because he was nominated therefor and formally elected.
    5. The act of a corporation which depends for its validity upon proper notice to all of its directors, is not affected by want of notice to a person who has been nominated and elected as director but who has declined to accept the office and refused to perform any of its duties.
    6. Where A, being secondarily liable, has taken collateral security from B, the principal debtor, and such security lias been sold by the order of the court while in the hands of the receiver, A cannot compel the receiver to pay the proceeds of such sale to him until A has himself discharged the debt. In such case the court will order the receiver to pay the money directly to the principal creditor.
    7. Where there are two funds, and A has a lien on both and B has a lien on one only, B can compel A to exhaust his remedy against the fund on which B has no lien, or to assign his lien to B.
    8. A creditor who has claims against several insolvent estates for the same debt may prosecute his claim against each until the whole amount due him is satisfied.
    9. Where a debtor assigns to different persons assets as collateral security for their claims, after such claims are satisfied, from whatever source, if any balance from such assets remain they are bound to return such balance to the debtor or to his representative.
    On final hearing on pleadings and proofs.

      Mr. George W. Maepherson and Mr. Garret B). W. Vroom, for the complainant.

      Mr. James Buehanan and Mr. William M. Banning, for the defendants.
   Bird, V. C.

The Star Rubber Company, one of the defendants in this suit, became insolvent and a receiver was appointed to wind up its affairs. Subsequently, Jonathan Steward, who was one of the directors of the Star Rubber Company, made an assignment for the benefit of his creditors. Mr. Steward, at the time of making his assignment, held large claims against the Star Rubber Company, and in order to ascertain their character and value, his assignee filed a bill against the receiver of the Star Rubber .Com-party and numerous other creditors of the Star Rubber Company, including twenty-five national banks. This bill also aimed at a. complete administration of the claims of the creditors against Mr. Steward, and to a large extent necessarily involving the rights of the creditors of the Star Rubber Company.

The receiver of the Star Rubber Company filed an answer and an answer by way of cross-bill against the claim of the assignee of Mr. Steward as one of the directors of the Star Rubber Company, as well as against the other directors of said company, alleging that Mr. Steward and the other directors were personally liable, under the seventh section of the act respecting corporations, for the declaring and payment of dividends contrary to the provisions of the seventh section of said act. This section provides that—

“It shall not be lawful for the directors of such corporation to make dividends except from the surplus of net profits arising from the business of the corporation, nor to divide, withdraw or in any way pay to the stockholders, or any of them, any part of the capital stock of the said corporation, or to reduce the said capital stock, except according to this act, without the consent of the legislature, and in case of any violation of the provisions of this section, the directors under whose administration the same may happen, shall, in their individual and private capacities, jointly and severally be liable at any time within the period of six years after paying any such dividend to the said corporation- and to the directors thereof, in the event of its dissolution or insolvency, to the full amount of the dividend made or capital stock so divided.”

Semi-annual dividends were declared during the years 1887, 1888 and 1889, and one in 1890, amounting in all to over $68,000. The allegation.is, that all of these were in violation of the statute referred to.

It is perhaps just to remark that there are many circumstances connected with this transaction which necessarily arouse very grave suspicion, and perhaps made it incumbent upon the receiver to make a most diligent investigation. For example: It appears that in the year 1881 the real estate and machinery, according to the books of the company, were valued at $62,000 and $67,000 respectively. At the close of the year 1886 they had been increased, according to the books, to $101,000 and $110,000 respectively, making, it will be seen, over $211,000. At the' period of the declaration of insolvency, the real estate had been advanced in value, by resolution of the board, $50,000. From time to time, between the years 1887'and 1890, these accounts had been credited with various sums besides the $50,-•000, so that when the affairs of the Star Rubber Company came to the hands of the receiver its books exhibited a valuation of these two principal items of capital of over $286,000.

After what appears to me to be a very careful and elaborate inventory, made by the receiver, with the aid of a very intelligent, cautious and experienced expert, these two items are placed at $169,783.34, making a difference between the book value, as given, and the two items of real estate and machinery of over $116,000.

Besides these observations, which it is but fair to say must necessarily have' attracted the attention of the receiver and all creditors of the Star Rubber Company j it is due to all concerned to add that when the real estate and machinery were sold, and Fsold as a plant, the highest bid which the receiver could get for LJFern was $65,000, and this, too, after unusual efforts made and very extraordinary opportunities given to all persons in anywise interested to increase that bid, or to show cause why it should not be accepted and the sale for that consideration confirmed by the court. These observations make it quite apparent that the receiver had strong reasons for diligent inquiry as to the real basis upon which the directors made their dividends, while the market value of the plant during that period should depreciate so enormously in value.

It is alleged that Mr. Steward and seven others, directors of the said corporation, just upon the eve of dissolution of the Star Rubber Company, and with the view of ail application to the court to have a receiver appointed, procured to be made to themselves mortgages upon the assets of said corporation to a very large amount, contrary to law and consequently injurious to other creditors, and fraudulent.

It is further alleged that if the execution of these mortgages was not in violation of well-settled rules of law, under the circumstances in which they were executed and delivered, yet they are illegal as to creditors because they are not properly executed.. The defect in this respect, it is alleged, consists iu the fact that the meeting at which they were executed was a special meeting, and that only the directors who were interested in procuring the execution of these mortgages to themselves respectively attended the meeting, and that two other members of the board had no-notice whatsoever of such meeting, and were not present.

I shall first consider whether or not the dividends so declared and paid were paid out of the surplus or net earnings of the-company.

l/ This proposition is to be determined by ascertaining the actual value of all the live assets of the company at the termination of six months, during which the supposed surplus or net earnings-are said to have accrued. / This can only truly be done by taking into the account the cost of repairs and also a reasonable allowance for depreciation for wear and tear or constant use, giving-credit for all actual permanent improvements.^ The statute not. only warrants but compels this course. The capital invested by corporations is all that creditors have for their protection. The-legislature, which creates them and gives them favors which individuals do not have, imposes upon them the necessity of maintaining their capital to its maximum value before they can reap-any benefit from the venture. In view of these statements, but against the protest of counsel for the assignee of Mr. Steward,, testimony was admitted showing that, as above stated, in 1881 and 1882 the real estate and machinery accounts were valued at $62,000 and $67,000 respectively, and that at the end of the period of six months, during which the first dividend of $6,000 was declared, the real estate and machinery accounts had been advanced to $101,000 and $110,000 respectively. From this large increase' in value, according to the books qf the company,, it was urged that a fraud had been perpetrated upon the creditors. It Avas thought at the time that such testimony was rele- ^ vant; however, as avíII be seen, by no means controlling. I still think it was properly received, and in the view I find myself compelled to take of the case, of the highest importance.

To aid in a proper understanding of the ease, besides the books •of the company in which its accounts were kept, there is the testimony of expert witnesses. One of these witnesses, Mr. Ridgway, who had been with the company for fifteen years, and for several years prior to 1882, as a mechanical engineer, says that during that year the entire plant was reconstructed, and that all of the old machinery except the grinders and calenders was cast aside and new machinery put in its place. The account-books of the company make no mention of this significant and far-reaching fact. This statement suffices to show that it is impossible for me to rely entirely upon the books of account of the company as a guide and do justice to the parties interested. According to the testimony of Mr. Ridgway, the old machinery that was cast aside was inventoried at over $47,104. If it be said that this is an enormously large amount of old machinery to have been cast aside, the reply is, that that is only an inference, and that I cannot set at naught the positive statements of the witnesses by a mere inference. Nor is it necessary that I should be guided by an inference rather than by direct and unimpeached evidence. Neither am I required to place implicit confidence in the books. The new machinery that was placed in the mill and the old machinery that was used therein after the 31st day of December, 1881, was nearly all, if not all, there at the time of the appointment of the receiver, and the price paid for it was known to Mr. Ridgway. He not only knew the cost price of it but approximately the value added thereto when it was located ready for use in the plant. Of these things he testifies. There is much more certainty, therefore, in coming to a just conclusion by following his statements under'oath than by adhering implicitly to the books, which were in no sense verified but which have been most seriously impeached. The other •experts, who were called by the directors to speak v^tíi reference to the value of the machinery, in the main, as will be seen hereafter, sustain Mr. Ridgway, or at least do not seriously conflict with him.

I shall therefore determine the validity of the dividends by the testimony of the experts rather than by the books.

The inquiry therefore will be, What was the fair value of the machinery on the 31st day of December, 1886, when the surplus, or net profits were supposed to be iL33J|67. upon wh-icli the first dividend of $6,000 Avas declared ? MI' Ridgway Avas called by the receiver to assist him in making an inventory and valuation upon the machinery. 1 He rendered such assistance. When called as a Avitness, with this inventory in his hands, he Avas. interrogated as to the value of the machinery, and fixed such value, being, as he said, the cost thereof ’to the company, at $49,723.13. After fixing the cost price, he said that the machinery, as there located ready for use, AAras worth very nearly $100,000. This includes the cost of. the foundations and all other costs and expenses in placing or locating the machinery for actual use. The cost of the foundations he and one other of the experts fixed at $15,000, while the third makes it $20,700. This item of cost of foundations, however, should not be reckoned in the machinery account, because, as I believe from an examination, it has been placed in the real estate account.

Again, it must be remembered that the present object is to ascertain the value of the machinery on the 31st day of December, 1886, but Mr. Ridgway, in his estimate, values all of the machinery that was in the plant at- the period of the appointment of the receiver, being an increase, according to the books, of over $19,000. Therefore, to ascertain the fair value on the 31st day of December, 1886, when the -first dividend Avas declared, all that was added after that date must be deducted from the total value as given by the experts.

Hence, what is to be understood by the statement of Mr. RidgAvay when he says the value of that machinery so located for use was very nearly $100,000? I am obliged to deal with that statement. In doing so I must have regard for the rights of creditors as well as of the directors. I can find nothing in the case to justify me in placing the valuation of all the machinery beyond $90,000. This is a liberal view,'taking both the books and the testimony of Mr. Ridgway as a guide, deducting from the book value the Amine of the machinery which Mr. Ridgway says was cast aside at the period of the reconstruction» Besides, if there is any uncertainty about it, neither the creditors nor the receiver are or is responsible.

Placing .the whole value, therefore, at $90,000, there must be deducted therefrom the value of the foundations, $15,000, and the value of the machinery purchased after the 31st day of December, 1886, which was over $19,000, according to the books. These items aggregate $34,000; deducting them from the $90,000 and we have $56,000 as the value of the machinery at the time when the first dividend complained of was declared.

But the book value of the machinery at that time was, as above stated, $110,324.38, being $54,324.38 in excess of the true value, according to the testimony of Mr. Ridgway. This book value was of course carried into the trial Jba].ance and employed in making the surplus or net profits upon which the first dividend of $6,000 was declared. This supposed surplus or net profits appears upon the trial balance to be $33,667. This statement reduces the book assets more than $20,000 beyond the supposed surplus or net profits. So that in pronouncing judgment on this first dividend, I must conclude that it was declared in violation of the provisions of the statute.

Taking all the other items upon the trial balance as correct, except the one concerning machinery, was the value of that item so increased on all of the other balance-sheets, at the time of the declaration of all the other dividends complained of, as to justify such -dividends? A brief statement will show the result.

The second dividend decláred was $10,720, upon a supposed surplus or net profits of $38.099.66. upon a book valuation which had increased to $111,813.38, but upon a real valuation of $5^r48f). which shows that the book valuation was in excess of the true value the sum of $54,324.38, being over $16,200 in excess of the supposed surplus or net profits.

The third dividend declared was $9,530, upon a supposed surplus or net profits of $37.934. upon a book valuation ivhich had increased to $113?717, but upon a real valuation of $5^¿22y* which shows, as before, that the book valuation was in excess of the true value the sum of $54,324.38, being over $16,390 in excess of the supposed surplus or net profits.

The fourth dividend was $15,000, upon a supposed net surplus of $50,446.66, upon a book valuation which had increased to $116,513, but upon a real valuation of $62,189, which shows, as before, that the book valuation was in excess of the true value the sum of $54,324.38, being over $3,878 in excess of the supposed surplus or net profits.

The fifth dividend declared was $16,800, upon a supposed surplus of $40,905, upon a book valuation which had increased to $117,144, but upon a real valuation of $62,822, which shows, as before, that the book valuation was in excess of the true value the sum of $54,324.38, being over $13,419.38 in excess of the supposed surplus or net profits.

The sixth dividend declared was $11,424, upon a supposed surplus or net profits of $35,854, upon a book valuation which had increased to $124,096, but upon a real valuation of $69,771, which, as before, shows that the book valuation was in excess of the true value $54,324.38, being over $18,470 in excess of the supposed surplus of net .profits.

The seventh dividend declared was $8,568, upon a supposed surplus or net profits of $29,378, upon a book valuation which had increased to $129,362, but upon a real valuation of $75,037, which shows, as before, that the book valuation was in excess of the true value $54,324.38, being over $24,946 in excess of the supposed surplus or net profits.

It'will be seen that all of the dividends except the last were declared at the expiration of every six months, or semi-annually, and the last at the expiration of a little over a year from the one immediately preceding. This last dividend was not declared until after the real estate had been advanced $50,000 by resolution of the board, as above described.

^ From the foregoing statements it must appear that all of the 1/ dividends declared were in violation of the statute. And since it has been shown that the directors were all present and partieinated in the meetings when such dividends were declared, and no entered protest, they are jointly and severally liable to the / extent of the dividends so declared and paid.

But recurring again to the statement of Mr. Ridgway, to the effect that when the plant was reconstructed in 1882 all of the •old machinery was set aside except the grinders and the calenders, and proceeding with that in view, and being guided solely by the books, after making the deductions which his statements justify, the result will not greatly differ from that above reached. The cost price of the grinders and calenders, from the testimony of the experts, was about $10,600. According to their testimony, the reasonable cost' of locating the same for use would not exceed $10,000, making in all $20,600. The book value of the machinery, therefore, on the 31st of December, 1881, was $67,-704, only $20,600 of which was retained in-actual use in reconstruction. This $20,600, and what was actually added after the 31st of December, 1881,. and before the 31st of December, 1886, will give, the full book value of the machinery at the last-named period. The value of the machinery added between those dates, according to the books, is $42,616, and the old machinery retained is the $20,600, making a total of $63,416. In the above calculation I reach the conclusion that on the 31st of December, 1886, the fair value of the machinery was $56,000; by the last •calculation I make it $7,200 -more, which shows that the book value at that date was $43,104.12 in excess of the true value. Allowing all the other items on the trial-balance to stand, this reduces the machinery account, on the 31st of December, 1886, so as to leave no surplus or net profits at the period on the 30th day of June, 1888,-when the books show a surplus or net profits of $50,400. Taking this statement as true, there was then a iiet surplus of $7,780. In my judgment this should not stand, because it is fully overcome in the wear and tear of machinery and in the depreciation of real estate, and in the items of articles sold which have not been entered in the accounts, to which should be added the $5,500, the increase of the machinery, and real estate account in the year 1882, which, so far as I can discover, was purely arbitrary.

It cannot be successfully contended that all such machinery •is not subject to depreciation from wear and tear or actual use. That all machinery does not suffer alike is equally plain. Those <£who deal in or use the different kinds are best informed as to \y) the extent of depreciation in the different articles. The testi- ^ mony in this case leads me to the conclusion that the deprecia- ,/ lion was at least two per cent, a year. Detail is unnecessary, but calculation will show that if $5,000 be charged to this item it will be moderate. No testimony was offered showing the i/' probable depreciation in real estate of this character. Fourteen hundred dollars at least should have been credited in the machinery account for an article which was sold for $800, but which cost $2,200, and so appears in the account.

If I had made the first calculation on the basis of $100,000 valuation instead of $90,000, the result would not have differed very materially from the last calculation.

On this branch of the case it is eminently proper that I should say that the books of account of the company have not been established in the ordinary sense in which books of account are required to be established before they are received as evidence of what they contain. No person acquainted with the books during the period of time which they cover, and who had any general or special knowledge of the entries made in them, has been called to speak concerning their truthfulness. No clerk or secretary or other person authorized to make entries therein, or who actually made entries therein, or from time to time witnessed the making of entries therein, has been produced. Experts in bookkeeping have been called. One of these, with no little reason, insists that in making up the trial-balance which, exhibits the supposed net surplus or earnings, entries have been falsely made; by means of which, such surplus or net profits have been unjustifiably increased. The other states, generally, that the books have been kept upon correct principles in all respects. Neither of these experts knew anything about the correctness of the different items which w7ere entered in these , books.

Under these circumstances, although the receiver represents the corporation whose boobs he brings into court, he is not bound by all the statements therein, because he represents creditors as well as the corporation.

It is also proper that I should make some observations respecting the testimony of Mr. Wilkes and Mr. Bates, the two-experts called by the directors to fix the value of the machinery. I allude to Mr. Bates only because he, in a very general way, supported Mr. Wilkes, a mode of giving evidence which I regard as very unsatisfactory. Mr. Wilkes is no doubt a perfectly honest man, but in his testimony he exhibited not a little the enthusiasm of a salesman, and therefore I am free to say, lessened the influence which his testimony otherwise would have had; but I make reference to the testimony of Mr. Wilkes also in this connection rather for the purpose of showing that I am justified in not taking his estimate at the maximum by another circumstance which I have not heretofore alluded to. He says that he examined this plant with a view of purchasing it at the receiver’s sale, and upon such examination he concluded that the machinery was worth from $120,000 to $130,000. Notwithstanding this estimate and his statement of the value of much of the machinery, that its value in the market was as much or more than that given to it by him, and as in the plant worth $90,000, he allowed the entire plant, including both real estate and machinery, to be sold at public vendue for $65,000. The real estate, according to the books, was estimated at $101,000. Adding this to his estimate of the value of the machinery when he examined it with a view of purchasing, and there is a value of $220,000 at least. It seems to me incredible that a fair-minded man, sufficiently well acquainted with business to speak, under oath, as an expert about such matters, should seriously consider purchasing a plant worth $220,000, and estimate the-machinery at its market value at $90,000, should allow the whole plant to be sold for less than one-third of its value at public vendue. It is also plain that there is a great deal of uncertainty in the mind of this witness as to what part of such a plant is machinery and what part is real estate, and whether the-water-power should be estimated in the one or the other.

For these reasons I am persuaded that his testimony should be qualified by what seems to me to be the clearer and more-intelligent judgment of Mr. Ridgway.

■ The second disputed point is as to the validity of the ten mortgages executed by the directors upon the eve of application for the appointment of a receiver. Seven of these mortgages were to seven directors — one mortgage to each director, as will hereafter be seen — and three to as many different banks. The company was established by virtue of a special charter approved in the year 1872. By virtue of that charter it was authorized to mortgage its property to secure loans to the extent of $25,-000. At the time of the execution of the ten mortgages objected to, it had about exhausted its power to raise money by mortgage under the act referred to. It is therefore claimed that these ten mortgages were ultra vires, and since not for cash loaned but as security for previous advancements or against their own endorsements, tligyjre void as to general creditors and cannot be enforced in equity. Whatever limitations the special charter creating this company may have imposed, it is my judgment that the revision of the Corporation law removes every such restriction and •extends to this company the rights, powers and privileges which were by such revision intended to be given to corporations -organized thereunder. The first section of the act (see Rev. p. 175 § 1) speaks of “every corporation,” and declares that—

“ Every such corporation shall have power to hold, purchase and convey such real and personal estate as the purposes of the corporation shall require, not exceeding the amount limited by its charter, 'x" * * and to mortgage any real estate, with their franchises.”

The one hundred and fourth section of this act (Rev. p. 196) declares “ that all acts and parts of acts, general or special, inconsistent herewith, be and the same are hereby repealed.” The plain object of the revision was to place all corporations upon the same footing. The first section does not say every corporation organized under this act, but every corporation. And the repealer is as broad as though every act inconsistent therewith had been named. I think a careful study of the decisions giving interpretation to legislative enactments of this general character will show that this is the view taken of them by the courts. Bowyer v. Camden, 21 Vr. 87; Hoetzel v. East Orange, 21 Vr. 354; Haynes v. Cape May, 21 Vr. 55; Mechanics’ and Traders’ Bank v. Bridges, 1 Vr. 112.

It is insisted upon the part of the receiver of the Star Rubber Company that certain mortgages which were executed by that company to its directors and others are illegal and void as to creditors, because conceived in fraud and for the purpose of cheating, delaying and hindering said creditors. These mortgages were all made and delivered on the 22d of May, 1891, one to each of the seven directors, the total amount secured thereby being $396,400.

One to the Trenton Banking Company............................... §1,975
One to the First National Bank of Trenton........................ 43,500
(And. to secure other advances not exceeding §50,000.)
One to the Bordentown National Banking Company for........ 32,700
§78,175

They were all recorded in the Mercer county clerk’s office on the 25th day of May, at five minutes past twelve o’clock in the morning. It was stipulated in each of said mortgages that they should be concurrent liens. The mortgages to the directors were given to secure promissory notes on which they were either accommodation endorsers or accommodation makers, or for promissory notes held by them for money actually loaned. The amounts so secured to them by the said mortgages were as follows :

Jonathan Steward...................................................... §154,500
Philip Dunn............................................................. 56,000
Thomas A. Bell......................................................... 88,700
William I. Yannest.................................................... 47,200
William Ivins............................................................ 10,000
A. V. Manning..............................<.......................... 10,000
Mahlon Hutchinson.................................................... 30,000

On the 28th day of the same month an application was made to this court by Jonathan Steward for the appointment of a receiver for the Star Rubber Company, and the defendant O. O. Bowman was appointed such receiver.

When all these conditions are taken into the account,' the mind is forced to the conviction that the execution and delivery ■of these mortgages was part of a plan to secure the mortgagees against the inevitable and legal consequences of a forced dissolution. Nothing is plainer than that it was foreseen by the company composed of the directors who executed these mortgages to themselves as mortgagees, that the company was in a state of irretrievable 'insolvency, and that unless they secured to themselves the bulk of the tangible assets their loss as credir,-.-'tors would be very great, and as the actual output has proved, simply enormous.

The eightieth section of the act respecting corporations provides that in making distribution of the funds of such insolvent corporation the receiver shall pay the

“creditors proportionately to the amount of their respective debts, except mortgage and judgment creditors, when the judgment has been by confession for the purpose of preferring creditors.”

The act of which this is a revision included in the exception mortgagees as well as judgment creditors when a preference was intended. It would not only be inconceivable but marvelou-s why mortgagees should be omitted from the exception, if it were not understood that the omission was an oversight and in no sense intended by the revisors. It seems never to have been discovered until years afterwards. The omission is certainly unfortunate for a business-confiding community. It was doubtless this consideration that induced the counsel for the assignee of Mr. Steward to admit that a very great many authorities in this country denounced every such transaction fraudulent and void as against creditors, tie insisted, however, as he justly might, that the decisions of the court of last resort in this state were to the contrary, and according to their interpretation these mortgages must be sustained. The cases referred to are those of Wilkinson v. Bauerle, 14 Stew. Eq. 635; Bergen v. Porpoise Fishing Co., 15 Stew. Eq. 397. See, also, the case of Boehme v. Rall, 6 Pick. Ch. Rep. 542. These cases sustain the mortgages made by the directors to themselves respectively, even though they absorbed everything and were executed as a preliminary step to a declaration of insolvency. The legislation upon the subject makes this conclusion inevitable. The omission above alluded to compels the court to conclude, notwithstanding. the explanation, given as to the absence of the word “mortgagees” from the •excepting clause, that the legislature intended to make a distinction between mortgages and judgments by confession, when such judgments were confessed for the purpose of preferring creditors, although a much simpler and easier method of accomplishing the mischief, and one which is altogether more likely to be resorted to under all circumstances, than that of obtaining a preference by procuring a judgment by confession. It seems to me that a mischief so glaring can only be remedied by legislative authority, being the authority which made provision tolerating it.

The claim that two of the members of the board of directors were not notified of the special meeting which authorized the •execution of these mortgages, and were not present at such meeting, has not been sustained. The persons alluded to were not directors of the company; although formally elected they did not accept the office in any manner, nor did either of them ever pretend to act in any capacity. Until there is satisfactory evidence of such acceptance in a formal manner, or by conduct iu harmony therewith, no responsibility can be attached and no rights can be claimed by or through them.

Another disputed point is as to the direction which the court shall give to the moneys secured by these mortgages.

First, the banks are entitled to the amounts which shall appear to be due to each of them upon the claims intended to be secured by the mortgages given to them. What as to the funds covered by the other seven mortgages held by the directors ? I speak of funds, because, by the direction of the court, the receiver sold all the real estate and personal property of the Star' Rubber Company, including that which was embraced in the said mortgages, reserving to the several mortgagees the same rights as against the funds that they were entitled to as against the real or personal property. It is conceded that the receiver must pay to the banks the amounts due upon their several claims so far as the assets secured by their mortgages will extend. But who shall make immediate distribution as between the assignee of Mr. Steward and the receiver of the Star Rubber Company? Since all of the persons liable upon the notes secured by said mortgages have become insolvent and are represented by receivers or assignees, the principal question is, who-is entitled to the money in the hands of the receiver of the Star Rubber Company, the proceeds of the sale of said real and personal estate, so far as the mortgages referred to are liens, in order to make final distribution thereof? Eor example: Jonathan Steward, one of said mortgagees, has made an assignment, and his assignee is the complainant in this suit. Mr. Steward became liable as accommodation maker or endorser for the Star Rubber Company to various creditors, for the sum of $154,500, against which accommodation he was intended to be secured by the mortgage given to him. These obligations given by the-Star Rubber Company, and upon which Mr. Steward became liable, and which were outstanding and unpaid at the time of the appointment of the receiver of the Star Rubber Company,, have been presented as just and valid claims to the receiver of the Star Rubber Company, and remain unpaid. The holders-of such obligations have also filed claims for the amounts due thereon with Mr. 'Whitaker as the assignee of Mr. Steward.

Now, the receiver of the Star Rubber Company having these funds in hand, and claims having been made by the holders of these obligations, both against the Star Rubber Company and against the estate of Mr. Steward in the hands of his assignee, and such assignee having filed his bill in this court for the administration of these funds, ought the receiver of the Star-Rubber Company be directed to pay the money which he shall be required to pay under the Steward mortgage to the original and real creditor, or to the assignee of Mr. Steward, who was only secondarily liable? The Star Rubber Company was the principal debtor and consequently first liable. Mr. Steward, being secondarily liable, has no rights whatsoever as against the-Star Rubber Company, and could claim nothing until he altered his position by discharging the debt and putting himself in the position of a payee or obligee. Neither Mr. Steward nor hisassignee can take a single step in advance against the Star Rubber Company or its receiver until either Mr. Steward or his assignee discharges the obligations referred to. When that is done he becomes a creditor and may claim the rights which pertain to his position the same as any other creditor. It cannot be said that, because Mr. Steward held this mortgage that he was, by force of that instrument, a creditor to the amount of the various claims referred to therein, for it is expressly mentioned that it is given as collateral for certain endorsements. All that the assignee of Mr. Steward can claim by this bill is that there are certain equitable assets in the hands of the receiver of the Star Rubber Company which he is entitled to have applied to the liquidation of these claims, on which Mr. Steward is liable as well as the Star Rubber Company, and which the latter attempted to secure by the mortgage to the former, in order that he, as such assignee, may be enabled to make proper distribution of the assets which have come to his hands.

. It is plainly the duty of the court to apply these funds directly, in discharge of the obligations of the Star Rubber Company, to the party primarily entitled, rather than to. risk their reaching that same destination in any circuitous manner. The real creditor is entitled to the funds, with as little delay as possible, without any unnecessary diminution thereof by way of fees or .commissions.

I shall therefore advise a decree in accordance with these views. The authorities seem to be fully in harmony with this conclusion. It is quite well settled that every creditor may file his claim against as many different persons as are liable thereon, or in case of their death or insolvency, against their representatives, as he may desire, and press his claim until the whole amount is paid. Byles Bills (6th Am. ed.) 439, 447; Chitiy Bills (11th Am. ed.) 536, 722, 724; 34 Eden Bank. L. 155; Ex parte Wildman, 2 Ves. Sr. 113.

The undoubted- general rule is, that the holder of negotiable paper may pursue his remedies against all the parties liable thereon at the same time. 2 Pars. Bills & N. 457. It would be absurd to say that his rights in this respect would be diminished by the insolvency of one or all of the parties so liable.

It is also safe to say that when the principal debtor has given to his surety, endorser or guarantor any portion of his estate as a protection against liability, and both become insolvent, the creditor is entitled to be subrogated to the rights of such surety, guarantor or endorser, and to claim directly and not through the representative of such surety, guarantor or endorser the application to the discharge of his claim of all such’ assets. Sheld. Sub. § 163; Harr. Sub. § 550; New Bedford Institute v. Fairhaven Bank, 9 Allen 175; Aldrich v. Blake, 134 Mass. 585.

Still another question is presented. Mr. Steward made assignment of certain securities which he held to different creditors as collateral security for their claims. What are their rights as against the general creditors of Mr. Steward? It is my judgment that they may file their claims with the assignee for the whole amount due them, without being compelled, in the first instance, to release their collaterals; but they are only entitled, as against general creditors, to a dividend out of the assets in the hands of the assignee, upon the balance of their claim after having received the value of such collaterals. Stew. Dig. p. 388 275 and cases cited; Vandervere v. Conover, 1 Harr. 491; Moses v. Thomas, 2 Dutch. 128; Bell v. Fleming’s Exrs., 1 Beas. 30; S. C., 1 Beas. 495.

What is said by the court in the case of Wilson v. Staats, 6 Stew. Eq. 531, recognizes this principle. Story Eq. Jur. § 564 b.

These cases proceed upon the old and long-established principle that where one creditor has two securities and others only one, the former must exhaust his claim to that which is entirely his own before he can resort to that which they hold in common. Hudkins v. Ward, 30 W. Va. 204; Ellis v. Temple, 4 Coldw. 315; General Ins. Co. v. United States Ins. Co., 10 Md. 517; Woollen’s Exrs. v. Hillon’s Exr., 9 Gill 185; Jones v. Zollieoffer, 2 Hawks 623; Ramsey’s Appeal, 2 Watts 228; Bank of Muskingum v. Carpenter, 7 Ohio 253; Terry v. Woods, 6 Sm. & M. 139.

The cause will be referred to a special master to take and state the accounts of the different assignees and receivers according to the practice of the court, ándito report thereon.


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    The Inhabitants of the Township of Hamilton v. Daniel Wainwright.
    1. The owner of land abutting upon a highway will be restrained by injunction, prayed for by the inhabitants of the township, from obstructing a •culvert placed in the highway at a point where falling rains and melting snows would collect and flow to and upon the defendant’s land if no highway were there, and which, without such culvert, causes the highway to become •miry, founderous and out of repair.
    2. Whatever may be the rights of the owners of lower tenements, as against upper tenements, with respect to surface-waters, the rights of public authorities who have charge of highways and are responsible for their maintenance in good condition, to secure the flow of such waters according to the laws of gravity and as the natural condition of the surface of the earth would indicate, are clear.
    3. The inhabitants of a township, asking the aid of a court of equity, must come with clean hands.
    4. Equity will not aid the inhabitants of a township, by injunction, against the owner of land abutting upon a highway, restraining him from obstructing .a culvert located to carry off surface-water which would naturally flow on to the defendant’s land if there were no highway there, when it appears that the inhabitants have contributed to materially increase the flow of that water by widening and deepening a gutter along the highway so as to more effectually •conduct the waters which are used at and discharged from a manufacturing ■establishment.
    Ou final hearing on pleadings and proofs.

      Mr. John Syhes and Mr. William M. Lanning, for the complainant.

      Messrs. Barton & Daioes, for the defendant.
   Bird, V. C.

This suit is brought by the inhabitants of the township qf Hamilton to restrain the defendant from obstructing a culvert which the inhabitants caused to be placed in the highway for the purpose of conducting the waters which accumulate there from falling rain and melting snow across said road. The testimony shows that at the place where the culvert is located there was such a natural depression in the surface of the earth as that, if there were no road there, the waters so accumulating would flow in the direction in which they are conducted by the culvert when it is not obstructed. Since the obstruction of the culvert causes the highway, in case of heavy rains and melting snows, to become miry and founderous and out of repair, and renders the township liable to prosecution, and since Mr. Wainwright has insisted upon obstructing the said culvert as often as the township authorities have caused it to be opened, which has been frequently the case, it is very clear that the township is entitled to the relief prayed for unless some other material question presents itself for consideration.

The inhabitants of a township, being liable to be indicted should its. highways become founderous and out of repair, and to prevent such result they construct a culvert in the highway for conducting all surface-water at a place where the natural depression of the earth’s surface is such that all surface-water would accumulate and flow across the place where such culvert is located, in case there was no highway there, and without such culvert would cause the highway to become miry, founderous and out of repair, and an adjoining owner insists upon obstructing said culvert as often as the inhabitants cause it to be opened, they, having a special interest in the highways because of their liability beyond the public at large, are justified in asking the aid of this court by injunction. Inhabitants of Greenwich v. Easton and Amboy R. R. Co., 9 C. E. Gr. 217; Township of Raritan v. Port Reading R. R. Co., 4 Dick. Ch. Rep. 11; Jersey City v. Central R. R. Co., 13 Stew. Eq. 417; 1 High Inj. (3d ed.) § 759.

Counsel for defendant insisted that since these waters were only accumulations of falling rain and melting snow, the doctrine laid down in the case of Bowlsby v. Speer, 2 Vr. 351, which is to the effect that the owner of an inferior or lower tenement may obstruct the:flow of such waters, whatever the damage may be, is applicable here and should control this case. It needs no extended argument to show that the rights of the parties in this case are radically different from the rights of two private individuals similarly situated. The public have the right to have all highways maintained in good repair, and the duty to so maintain them is imposed upon the township, for the neglect of which it is liable to be indicted.

It is insisted upon the part of Mr. Wainwright that if, upon •the facts above presented, the court should conclude that the township is entitled to equitable relief, yet there are other facts which show that the township authorities have so far by their conduct contributed to the mischief which results from the flow •of this water as to deprive them of a favorable consideration in a court of equity. Hot far from the place where the culvert is located, and on the side of the highway opposite to Mr. Wainwright, is a manufacturing establishment called a rubber mill, which discharges almost constantly a very large quantity of water directly into the gutter on the south side of the highway, which is opposite to Mr. Wainwright’s land. About eight years ago the gutter on the side of the road next to the mill had become nearly filled up. The township authorities caused the gutter to be opened and deepened several inches, from the culvert or from near thereto to the rubber mill, for the purpose of permitting the water running from said mill more freely to flow along said gutter. The evidence makes it clear that several inches of water are constantly flowing in this gutter towards the culvert, and must to that extent increase the quantity of water accumulating at the point where the culvert is, and necessarily increase the quantity cast upon Mr. Wainwright when that culvert is unobstructed.'

The well-established principle that the complainant must come into court with clean hands is applicable here. While it is unquestionably true that the township had the same right under the law to open and to keep open this gutter on the side of the highway for the purpose of maintaining the highway in proper repair, notwithstanding the location of the rubber mill and the fact that the waters which it used were cast into the gutter on the highway without any liability whatever on the part of the township, but without any abridgment of their rights as against Mr. Wainwright or others, had the township done nothing more,, yet when the township not only makes the ordinary or usual repairs in the gutter, but expressly directs the gutter to be widened and deepened for the purpose of more effectually carrying off the water from the rubber mill, it takes a step which is not authorized by any act of the legislature nor by any consideration of public policy. Private individuals have no right to impose such burdens upon the public highway, nor have the public authorities any right to aid them or to encourage them in their attempts to do so. Nothing can be plainer than that it was the duty of the township to prevent the rubber mill from using the highway for any such purpose, rather than to devise means-by which another private individual might be injured. This-action upon the part of the township puts them in the wrong.

Therefore, the defendant was justified in resisting the additional burden thus cast upon his premises, e^en though in doing so the public suffer to the extent of having the highway made founderous and out of repair. Such encroachments upon private rights cannot be justified, whether made by many or by few, by a single individual or the body politic. Nor does an inter-mixture of good with the evil sanctify the whole. I think the utmost limit to which the authorities extend is, as between private individuals, that the owner of the dominant or superior tenement may make ordinary and reasonable improvements to his lands, and if in so doing he increases the natural flow of water upon and across the servient or inferior tenement, the latter cannot complain, unless such increase works actual damage.

This general view of the rights of private individuals, when their lands adjoin and the surface-waters naturally flow from the one to the other, is sustained by the following authorities: Boynton v. Longley, 19 Nev. 69; Rhoades v. Davidheiser, 133 Pa. St. 226; Gregory v. Bush, 64 Mich. 37; Rowe v. St. Paul, M. & M. R. R. Co., 41 Minn. 384; Martin v. Jett, 18 La. 501; Kauffman v. Griesemer, 86 Pa. St. 407.

While a reasonable application of the rule expressed in the foregoing authorities may be regarded as just and equitable,. neither the rule nor the authorities so cited give any countenance whatever to the action of the inhabitants of the township in facilitating the flow of the waters from the rubber mill along the gutters of the highway to the culvert which, when open, will conduct them to the lands of the defendant. Many cases may be presented which must be considered one way or the other because of peculiar features or circumstances in connection therewith. And while it may be said that all corporate bodies which have control of streets and highways may construct and repair such streets and highways without regard to the consequences to private individuals resulting from the damming up and precipitation of surface-water, yet I apprehend that almost every well-considered case disapproves the right of such authorities to pursue a course of construction or repair which will result in the collection of large quantities of mere surface-water, and especially of water which is used by a private individual in manufacturing his wares, and diverting them from the channels or courses in vfhich they would naturally flow and conducting them to the lands of a private individual. Soule v. Passaic, 2 Dick. Ch. Rep. 28; Miller et al. v. Mayor &c., 2 Dick. Ch. Rep. 62; Field v. Inhabitants of Township of West Orange, 9 Stew. Eq. 118; S. C., 10 Stew. Eq. 600; Noonan v. City of Albany, 79 N. Y. 470; Haskell v. City of New Bedford, 108 Mass. 208; Brayton v. City of Fall River, 113 Mass. 218; Byrnes v. City of Cohoes, 67 N. Y. 204, 205; Rychlicki v. City of St. Louis, 98 Mo. 497; Pettigrew v. The Village of Evansville, 25 Wis. 223; Davis v. City of Crawfordsville, 119 Ind. 1; Krug v. St. Mary’s Borough, 152 Pa. St. 30; Sleight v. Kingston, 11 Hun 594; Clark v. Rochester, 43 Hun 271; Gillison v. City of Charleston, 16 W. Va. 282; O’Brien v. St. Paul, 25 Minn. 331.

The fact that there are surface-waters which the inhabitants of the township have a right to carry off by the gutter made for that purpose to this culvert, and thence upon the lauds of the defendant, does not justify them in increasing the flow of such waters by the addition of the waste-water from the rubber mill, is clearly established by the case of Soule v. Passaic, supra. In that case the land of the complaining party was already burdened with a running stream from other sources. Moran v. McClearns, 63 Barb. 185.

The principle involved in these cases controlled the court in the case of Slack v. Lawrence Township, 19 Atl. Rep. 663; Rathke v. Gardner, 134 Mass. 14.

I think that the fundamental principle is found in the constitutional right of the citizen to be protected in his private property against any invasion or encroachment, although public interests be involved, until just compensation be made to him, and that there can be no limitation of this right even by legislative enactment. Ward v. Peck, 20 Vr. 42.

None of these authorities are in the slightest degree in conflict with the doctrine first above laid down, that the township has the right to maintain and preserve the flow of the surface-water in the same manner and to the same extent, for the maintenance and proper repair of the highway, that such water would flow in case there was no highway there.

The bill should be dismissed, wdth costs, and I will so advise.


author: Bird, Y. C.

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    Charles Alpaugh, administrator &c. of Elizabeth C. Wilson v. Richard H. Wilson et al.
    The rule of the common law that husband and wife are to be regarded as one person has not been abrogated in New Jersey, and the statute of limitations will not run against the claims of the wife for money belonging to her received by the husband during his lifetime. Such debts, in their relation to the passage of time, must be regulated altogether on an equitable basis.
    On final hearing on pleadings and proofs.

      Mr. Richard S. Kuhl, for the complainant.

      Mr. Charles S. Skilhnan, for the defendants.
   Bird, Y. C.

Mrs. Wilson brought this suit against the executors of the last will and testament of her late husband, to recover the amount claimed to be due upon a promissory note given' by him to her on the 2d day of April, 1883. Mrs. Wilson died pending the suit and the present complainant was substituted in her stead.

The principal defence in this suit-is the statute of limitations. The parties to the transaction being husband and wife, it must be determined whether or not the statute applies. I think that it is not seriously disputed but that under the common law the wife could not maintain an action against her husband for the reason that in legal contemplation they were one. Nor has it been successfully maintained that this unity has been severed by implication under any acts of the legislature respecting married women. Such acts being in derogation of the common law, all ■courts have persisted in a strict construction of them. The true view has been clearly expressed by Chief-Justice Beasley, in Gray v. Gray, 12 Stew. Eq. 511, 512. This view was considered controlling in Yeomans v. Petty, 13 Stew. Eq. 495. See, also, Barnett v. Harsbarger’s Admr., 5 N. E. Rep. 718; Dice v. Ervin, 110 Ind. 561; Second National Bank v. Merrill et al., 81 Wis. 151.

The court has, therefore, to dispose of such questions as justicie mid equity may require according to the general rules which have long been established for its guidance. Doubtless many ■cases may be presented which would be attended with such-cir■cumstances of laches, unfairness or uncertainty as would justify 'the court in rejecting them.

That the testator received the $800 has been established beyond question by the production of a note for that amount with his signature. Nothing lias been shown to raise the slightest presumption that the note was ever surrendered, or that any portion of it has been paid.

I think that the complainant is entitled to the amount of principal mentioned in the note, with interest, and to be paid by the executors out of the estate in ihe ordinary course of administration, together with costs.