text:
    Florence E. Cahill v. Town of Harrison et al.
    [Decided March 19th, 1917.]
    1. A bill for injunction against a town and its collector to restrain the selling of lands held by virtue of a tax title to satisfy an alleged lien for taxes reported subsequent to the tax sale to complainant, must be sustained, if at ail, upon the power of the court to remove a cloud from the title, or to enjoin a proceeding which will cast a cloud on title.
    2. Although the bill does not specifically pray that such cloud may be removed; it may be amended to include proper allegations and prayers.
    3. If equity has jurisdiction of a case it will settle all questions, legal and equitable.
    4. The action of a circuit court in confirming the report of adjustment commissioners is not judicial, and therefore not binding in this court.

      5. Where all the provisions of the statutes concerning tax sales are strictly fulfilled, the title to the property sold is in the purchaser at the tax sale, and all liens prior to the sale are discharged.
    6. Where a town sells land for taxes, it waives its lien for taxes levied prior 'to the sale, and it is not necessary for the purchaser to serve a notice to redeem upon the town.

      7. A purchaser at a tax sale to compel payment of current taxes under section. 52, General Tax act (P. L. 190S p. 891/; 1/ Comp. Stat. p. 5183), takes the property free from preceding- taxes, and an adjustment commission under the Town Adjustment act (P. L. 1898 p. 1/1/2; 1/ Comp. Stat. p. 521/6 § 1/03) cannot by a subsequent report impose a lien based on such preceding taxes, notwithstanding the fact that the commission had been appointed prior to the sale.
    On bill.

      Messrs. Raymond, Mountain, Van Blarcom & Marsh, for the complainant.

      Messrs. Michael T. & TIu-gh G. Barrett, for the defendants.
   Lane, V. C.

The bill was filed May 10th, 1911, to secure' an injunction restraining the town of Harrison and its collector from' selling lands-of the complainant to satisfy an alleged lien for adjusted taxes imposed under chapter 193, laws of 1898. 4 Comp. Stat. p. 5246 § 403, &c., the Town Adjustment act.

The bill as filed had reference to several lots, but since then the controversy has been narrowed so that a decree will apply only to lot 20, block 99, Second ward, town of Harrison.

On August 16th, 1907, complainant purchased from the collector of the town the lot in question for the sum of $9.95 at a sale held under the General Tax act. P. L. 1903 p. 391/,■ 1/ Comp. Stat. p.- 5075. On August 29th, 1907, a certificate of sale was delivered to complainant. Due notice to redeem- was served on all persons interested in the property except the town, if it- be held that it was a person interested. No one redeemed and the certificate with proof of service of notices was recorded in the register’s office-of Hudson county. On April 1st, 1902, under the Town Adjustment act (chapter 193, laws of 1898, page 442; 4 Comp. Stat. p. 5246 § 403), commissioners of adjustment for the town were appointed by the circuit court of Hudson county. They qualified, and on July 1st, 1910, made a report to the circuit court fixing, adjusting and determining the amount of arrearages of taxes, assessments and water rents “which ought in fairness, equity and justice to be held, assessed and .charged against and actually collected from said lands and premises” at the sum of $375.53. Thereupon the collector advertised the lot for sale under the act to satisfy this lien and the bill was then filed to enjoin the sale.

No question was raised as to the jurisdiction of the court in, the answer or on the argument. Jurisdiction must be rested, if it exists, upon the power of the court to remove a cloud on title, or to enjoin such a proceeding as will create a cloud on title. Ludington v. City of Elizabeth, 34 N. J. Eq. 357; Kirkpatrick v. New Brunswick, 40 N. J. Eq. 46; affirmed, 41 N. J. Eq. 347; Bogert v. Elizabeth, 27 N. J. Eq. 568; Field v. West Orange, 37 N.J.Eq.434; Union Pacific Railroad Co. v. Cheyenne, 113 U. S. 516; 28 L. Ed. 1098; Fargo v. Hart, 193 U. S. 495; 48 L. Ed. 761; Ogden v. Armstrong, 168 U. S. 225; 42 L. Ed. 444; Scofield v. Lansing, 17 Mich. 437; Northern Pacific v. Carland, 3 Pac. Rep. 134; Weeler v. City of St. Paul, 5 Minn. 95; Vogler v. Montgomery, 54 Mo. 577; Kansas City v. King (Circuit Court of Appeals, Sixth Circuit), 120 Fed. Rep. 614.

The rule seems to be that where under a statute providing for tax sales, &c., a deed delivered will be presumptive evidence of title, equity may intervene to either prevent the sale, or if the deed be delivered, to cancel it. Under the statute, section 8, a deed is made “presumptive evidence of title in the grantee therein named in all courts and places and at any proceedings or actions.”

While tlie bill does not specifically pray that the cloud cast upon the title by the report of the adjustment commissioners should be removed, or that the town should be prevented from taking such proceedings as will cast a cloud upon the title, and although it does not specifically allege that the result of "the conduct of the town would be, if permitted, a deprivation of complainant’s constitutional rights, if counsel are so • advised, it may be amended. If this court has jurisdiction it will settle all questions, legal and equitable. Bullock v. Adams, 20 N. J. Eq. 367; Decker v. Caskey, 1 N. J. Eq. 427; Mosser v. Pequest Mining Co., 26 N. J. Eq. 200; Melick v. Cross, 62 N. J. Eq. 545. The action of the circuit court in confirming the report-of the adjustment commissioners was not judicial, and therefore is not binding upon this court. East Orange v. Hussey, 70 N. J. Law 244; Rutherford v. Maginnis, 72 N. J. Law 445. In the stipulation of facts there is no statement that complainant was notified of application to confirm the report of the adjustment commissioners.

I come now to a discussion of the points at issue which are—

1. Whether after a town has sold under the General Tax act of 1903 to satisfy the lien of taxes for a specific year, adjustment commissioners who had been previously appointed may adjust taxes, &c., for years preceding that for which the property was sold and impose a new lien, after the property has been sold, and the town then proceeds to sell to satisfy the adjusted lien. In other words, whether the amount of the adjustment-made after the sale becomes a lien prior to the right of the purchaser at the sale.

2. Whether it is necessary for the purchaser at the sale where there are prior unpaid taxes and an adjustment commission in existence to.serve notice upon the town so that .the town may have an opportunity to redeem.

I,

Under the General Tax act of 1903, section 409 (4 Comp. Stat. p. 5229), unpaid taxes are made on and after the 20th day of December next after the assessment a first lien on the land on which they are assessed prior to every interest except the lien of subsequent taxes. The effect of .this provision is that the fax of each year as it is imposed becomes a lien prior to all other interests in the property, including prior taxes. Keene v. Sheehan, 154 Mass. 208; Smith v. Specht, 58 N. J. Eq. 51.

Under section 52 of the act (4 Comp. Stat. p. 5188), in case of non-pajmient, the collector of the municipality may sell the land to such person as will purchase the same for the shortest term, * * * -or in fee where no one will bid for a shorter term. Upon a purchase, the collector is directed to give a certificate of sale. Notice may then be given by the purchaser to redeem and the certificate and proof of notice may be recorded after the time to redeem has expired as a conveyance of the land. Section 56.

The effect of proceedings under the statute if properly carried out is to put the title of the property in the purchaser at the tax sale free, clear and discharged of all liens and encumbrances of every nature and description existing prior to the sale. This includes prior taxes and prior rights obtained by the municipality under a sale to satisfy the lien of taxes for preceding years. Smith v. Specht, supra.

The town insists that the adjustment commissioners under the provisions of chapter 193 (P. L. 1898), may, after such a sale, report with respect to taxes, assessments and water rents imposed prior to such sale, and that if -the report is confirmed by the court subsequent to the sale, then by virtue of section 3, whereby the amount reported becomes a valid and binding tax, assessment and lien on the lands in lieu and insteád of ail outstanding claims of the said town, &c., and shall be a valid lien having priority over all other liens, &c., except taxes, assessments or water rates levied after the making of said report, the land becomes subject in the hands of the purchaser to a lien for the amount reported the adjustment commissioners. In other words, as applied to the case sub judice the contention of the. town is that, although concededly it .could take no proceedings under the General Tax act to enforce the payment of taxes imposed prior to 1907, yet, because, in 1902 it had applied to the circuit court for the' appointment of adjustment commissioners under the Adjustment act, it may now take proceedings to enforce the payment of an adjusted tax reported by these commissioners several years after the sale ’to enforce, the payment of the tax of 1907. I think not. It has been held that the' adjustment commissioners are without power to impose a lien for taxes, the lien of which has expired prior to the appointment of the commissioners .in ease a bona fide purchaser for value has intervened. In re Commissioners of Plainfield, 21 N. J. L. J. 334.

No case has been brought to .my attention which directly governs that at bar. While it is clear that so'long as property-remains in the possession of the person who owned it at the time a tax was sought to be imposed, the legislature may provide, irrespective of whether the-original lien has expired or not, for a re-imposition óf tlie lien, and while it may possibly be said that even if property comes into the hands of a bona fide purchaser for value, if there was a lien at the time of the appointment of the commissioners of adjustment, -such lien may be reimposecl, if prior to.the devolution of title and the report the original lien has expired (which I doubt), it can hardly be said that-where a town has taken'proceeding under a statute to enforce the collection of a tax lien, made by the statute paramount to the lien of all prior taxes that thereafter it may, acting through legislative agencies, resurrect the prior taxes and their lien. That is practically what is sought to be done. If these prior taxes had been paid before the report of the adjustment commissioners, a new lien could not have been imposed. T think the effect of the sale by the town to satisfy the lien of tax of 1907 is equivalent in law to a pajunent of the taxes levied for all preceding taxes. Upon the appointment of the adjustment commissioners, in 1903, all unpaid taxes, &c., by force of the statute became subject to their jurisdiction. The effect of the sale to enforce the collection of the tax of 1907 was to destroy, cancel and obliterate the preceding taxes, and hence, of course, to withdraw them from the jurisdiction of the adjustment commissioners. To hold otherwise would lead" to endless confusion, and practically prevent municipalities from enforcing by sale of land payment of current taxes, and the result could only be reached, I think, by utterly ignoring the intent of the legislature as expressed in the General Tax act of 1903. Many municipalities are operating under the Adjustment act, some of the largest—Jersey City, Camden, Elizabeth and New Brunswick. In many instances the amounts of taxes accrued upon properties are more than the values of' the properties, and yet the municipalities continue from year to year to. levy Current taxes. It would be impossible to secure a purchaser at a tax sale in such municipalities for a property upon which there were prior taxes if a prospective bidder knew that if the adjustment commissioners did not report he would, if he bought, take the property free, clear and discharged of the lien of the prior taxes, but that if they did report some time after the purchase, he would be obliged to pay the amount of the adjusted tax. The owner of property has nothing whatever to do with the proceedings before the adjustment commissioners. There is no way by which he can compel a report. The matter is entirely within the control of the municipality. It is by force of the statute that upon their appointment the adjustment commissioners become vested with jurisdiction with respect to all unpaid taxes. If the adjustment commissioners may wait for three years after a sale to satisfy a current tax before reporting, they may wait for ten or fifteen years. In the meantime there is no way by which the purchaser at a tax sale can know the amount which he may finally be obliged to pay. He may, of course, pay the entire amount of the preceding taxes, but if he be obliged to do so, then the provisions- of the General Tax act making each year’s tax a paramount lien is rendered of no effect.

My conclusion, therefore, is that the right of the complainant herein is superior to the right of the town under the adjusted tax.

li-

lt is next contended that complainant was obliged under the General Tax act to give notice to the town so that the town might have an opportunity to redeem.

The statute provides that notice should be given (section 59) to any person interested, and that (section 57) the owner, mortgagee, occupant or other person having an interest in the land may redeem.

I cannot believe that this applies to the town. It is the town that is selling. It could hardly be within the legislative contemplation that a municipality would sell to enforce the payment of the tax of one 3rear, and would then, in order to protect a lien of prior taxes, pa3r to the purchaser the amount which the town received from the purchaser. When the town sold to enforce the payment of the taxes of 1907, it elected to, and did, actually waive all rights which it had theretofore existing in the property. By its action, its lien for prior taxes, if any existed, was obliterated. No legislation has been brought to my attention which would permit a town under the circumstances existing here to redeem.

I will advise a decree in accordance with this opinion to be settled on notice.


source: Caselaw Access Project

author: Lane, Y. C.

license: Public Domain

text:
    Joseph H. Allen v. The Distilling Company of America et al. United States Industrial Alcohol Company v. The Distilling Company of America et al. Samuel M. Rice et al. v. The Distilling Company of America et al.
    [Decided March 22d, 1917.]
    1. Where a corporation has entered into a legal contract of guaranty to pay dividends on the stock of another corporation, it cannot dissolve, or its stockholders be permitted to vote their stock in favor of such dissolution without making adequate provision for the contingent liability on its contract of guaranty.
    2. In such case a court of equity will enjoin dissolution proceedings, the corporation being solvent.
    3. Stockholders may estop, and in this case, it is held, they have estopped themselves from exercising their right under the statute to vote to dissolve a corporation without making adequate provision to take care of contingent obligations.
    4. The jurisdiction of equity considered and defined.
    On bill, &c.

      Messrs. Pitney, Hardin & Skinner (Mr. Hardin and Mr. Adrian II. Larkin, of tbe New York bar), for the complainants Joseph H. Allen and the United States Industrial Alcohol Company. • \

      Messrs. Vredenburgh, Wall ib Garey (Mr. Wall and Mr. Glmdes H. Stoll, of the New York bar), for the complainants Samuel M. Eice and others.

      Messrs. Linddhury, Depue & Faullcs (Mr. Linddhury, Mr. Faullcs and Mr. Levy Mayer, of the Illinois bar), for the defendants.
   Lane, Y. C.

The three suits involve the same facts. The difference is as to the nature of the relief prayed. The point at issue is whether the Distilling Company of America (hereafter called “Distilling Company”) may be dissolved by its stockholders without providing for the contingent liability of the corporation upon its guaranties of the payment of dividends upon the preferred stocks of 'the United States Industrial Alcohol Company (hereafter called the “Industrial Companj'”) and the Cuba Distilling Company (hereafter called the “Cuba Company”). Complainant Allen is a preferred stockholder of the Industrial Company. Complainant Industrial Company is a preferred stockholder of the Cuba Company. Complainants Eice and others are preferred stockholders of both the Industrial and Cuba Companies.

The Allen and Industrial bills seek to enjoin the dissolution of the Distilling Company. The Eice bill seeks to inipress upon the assets, after dissolution, a lien or trust for the benefit of the preferred stockholders of the Industrial and Cuba Companies, and to have this court take over the proceedings in dissolution by the appointment of a receiver.

Upon the filing of the bills, orders to show cause were allowed with, ad interim restraint. Motions have been made in the Allen and Industrial suits to strike out the bills upon the ground that they fail to set up facts sufficient to constitute any cause of action in equity or to entitle the complainants to the relief therein prayed for, or to any other relief in the premises. The hearing-has been had upon the orders to show cause and the motions to strike out.

The facts are as follows: On October 17th, 1906, the Distilling Company entered into a contract with the Industrial Company and each and all of the then present and future holders of record of all or any part of the preferred stock of the Industrial Compan)7, the pertinent portions of which read:

“Now, therefore, for good, valuable and adequate consideration to each of the first and second parties in hand paid, the receipt of which by them respectively is hereby acknowledged, it is hereby agreed as follows:
“1. The first party hereto guarantees to said George and to each and all of the present and future holders of record of all or any part of said preferred stock severally, so long as the same shall be outstanding, during said fifty (50) years, that said Industrial Co. shall and will always during said fifty (50) years have and possess adequate, sufficient and available surplus or net profits out of which to pay, and that said Industrial Co. shall and will promptly pay during said fifty (50) years out of said surplus or net profits said quarterly dividend of one and three-fourths per cent. (1%%), on the said fifteenth days of "January, Aprils July and October in each year during said fifty (50) years, beginning with the year 1907, on all of said preferred stock, so long as the same shall be outstanding during said fifty (50) years, and in case of any default by said Industrial Cq. in making any such payment or payments, on any of said respective dates, the first party hereby guarantees that it shall and will immediately upon such default, pay to the then holder or holders of record of all or any part of said preferred stock, so long as the same shall be outstanding during said fifty (50) years, the amount of such' defaulted payment or payments. It being understood and agreed, however, that to the extent of any and all payments which the first party may make by reason of this guaranty it shall and will be subrogated to all of the rights of said holders of record of said preferred stock to whom the first party has made or may make payment or payments hereunder, and the amount of such payments or payments, together with interest thereon at - the rate of five per cent. (5%) per annum shall, and said Industrial Co. hereby agrees will be promptly repaid to the first party by said Industrial Co. from time to time as soon as said Industrial Co. has surplus or net profits sufficient to make siicli repayment in whole or in part.
“2. This guaranty shall be irrevocable. No voluntary or involuntary dissolution or. merger or consolidation of said Industrial Co. or of the i first party shall, except by and with the written consent of the holders j of record of all of said preferred stock outstanding at the time, release,J discharge, modify or affect said guaranty in any way.”

Oil March 25th, 1907, the Distilling Company entered into a similar contract with the Cuba Company and all of the then present and future holders of its preferred stock.

The Distilling Company under its charter had full authority to enter into these contracts. They were for valuable considerations, were authorized by the board of directors and ratified and approved by the stockholders of the Distilling Company. The Industrial Company has outstanding $6,000,000 of preferred stock, and the Cuba Company $2,500,000, upon each and every certificate of which the guaranty is printed. The Distilling Company has outstanding, common and preferred stock, to the extent of seven hundred and seventy-three thousand six hundred and ninety-eight shares of the par value of $100 each, of which the Distillers Securities Corporation (hereafter, called the “Securities' Company”) owns seven hundred and seventy thousand and twenty-six shares, or more than ninety-nine and one-half per cent. It is conceded that the only shares not held by He Securities • Company are such as cannot be located. At the time the guaranties were entered into the stock ownership of the- Distilling Company was the same as now. Prior to November 27th, 1916, the directors and stockholders (i. c., the Securities Company) of the Distilling Company took proceedings to dissolve it, and on that date there was filed with the secretary of state the record of the proceedings under the terms of the statute. The consent to the dissolution was executed by the Securities Company as a holder of more than two-thirds of the stock of He Distilling Company. Thereupon the secretary of state issued his certificate. Publication was begun and would have been completed about December 20th, 1916, if ad interim restraint had not intervened.

It will.be at_once pereei.ved .that He same stock ownership as approved the contracts of . guaranty now assert the power to dissolve His..guarantor company wiHout regard to any supposed riglxts„eNthe=guaraiite.e.d_.preferred_ stockholders. The stock of He Securities Company is widely distributed. It is dealt in on the New York stock exchange. The Industrial and Cuba Companies are prosperous operating concerns. The Distilling Company has never yet been called upon to respond to the guarantees. It is a holding corporation having assets of a par, and, concedeály, real, value of approximately $66,000,000.

The effect of the dissolution will be substantially a turning over of the assets of the Distilling Company to the Securities Company. There is then nothing to prevent the Securities Company from dissolving and the distribution of its assets, including those now of the Distilling Company, or their value, to its stockholders, who are, as before stated, very numerous and who reside in many parts of the United States, and probably in foreign countries. The guaranties have about forty years yet to run. The Industrial and Cuba Companies now have assets which, if reduced to cash, would be sufficient to retiré the preferred stock at par and above.

The preferred stockholders of the Industrial and Cuba Companies cannot be put in stoius quo. The consideration is executed. ^

The issue is:' If A corporation authorized by a provision in\ its charter to guarantee payment of dividends on stock of B corporation, does so guarantee such payment for a period of forty years yet to run, for a valuable consideration, executed, so that the parties cannot be placed in status quo, such contract of guaranty being approved by the stockholders of A corporation, can it be permitted to dissolve and may the holders of the stock of A corporation who have approved the contract of guaranty be permitted to vote such stock in favor of such dissolution, without making some adequate provision, for the contingent lia-1 bility of A corporation to the stockholders of B corporation ? J

Defendants insist that under sections 1, 31, 53, 54 and 58 of the act concerning corporations (Revision of 1896), the Distilling Company may be dissolved by its stockholders and its assets distributed among them after payment of its debts (section 54), and that such contingent liabilities as "are sought to be asserted by the complainants are not debts within the meaning of the statute, and that complainants are not creditors within the meaning of section 58, which provides that the trustees or receivers on. dissolution shall pajr, ratably, so far as the money and property of the corporation shall enable them, all of the creditors who prove their debts in the manner directed by the court, and that the balance, after the payment of such debts, be distributed among stockholders.

.The eases relied upon are those which hold that upon insolvency or bankruptcy obligations of this character cannot be enforced against assets on a par with creditors holding certain claims. Riggin v. Magwire, 15 Wall. 549; Dunbar v. Dunbar, 190 U. S. 340; Conklin v. United States Shipbuilding Co., 136 Fed. Rep. 1006; 143 Fed. Rep. 631; In re Pettingill, 137 Fed. Rep. 143; People v. Metropolitan Surety Co., 205 N. Y. 135. Those which hold that upon the administration of the estate of a -deceased such obligations cannot be enforced. Field v. Thistle, 58 N. J. Eq. 339; affirmed, 60 N. J. Eq. 444; Terhune v. White, 34 N. J. Eq. 98. Those which hold that the court will not prevent the distribution of an estate in order to permit such claims to ripen into certain obligations. Jervis v. Wolferstan, 18 L. R. Eq. Cas. 18; In re Nixon (1904), 1 Ch. Div. 638. Those which hold that the existence of such a 'contingent liability does not bring a voluntary conveyance within the rule that the contemporaneousness of a gift and the. existence of a debt is conclusive of fraud in proceedings to set aside an alleged fraudulent conveyance. Severs v. Dodson, 53 N. J. Eq. 633; Mason v. Somers, 59 N. J. Eq. 451. These latter cases must be confined to the very point decided. Dodson v. Taylor, 53 N. J. Law 200; New Jersey Ins. Co. v. Meeker, 37 N. J. Law 282. They also rely upon the opinion of Vice-Chancellor Stevenson in Hoopes v. Basic Co., 69 N. J. Eq. 679.

Complainants insist that the assets of a corporation are a trust fund to secure the payment of its debts or obligations, certain or contingent, and that it is unjust and inequitable to permit the distribution of this trust fund to stockholders unless adequate provision is first made to take care of the contingent liability to the preferred stockholders of the Cuba and Industrial Companies; that their rights are superior to any rights <rf stockholders; lat the stockholders of the -Distilling Company have by the ■ ns of the contracts of guaranty estopped themselves from taking any- action to dissolve the Distilling Compaiiy without making adequate provision for these contingent obligations; that to permit dissolution in the manner contemplated would be to deprive complainants of any remedy upon the contracts of guaranty. J

To this the defendants reply that complainants accepted such contracts of guaranty with full knowledge of the law, and that the dissolution of the Distilling Company does not in fact deprive complainants of a remedy because by virtue of the statute, sections 53, 87 and 90 of tire Corporation act, corporate existence is continued for certain purposes, among which is that of being sued upon this class of liabilities; that if, in the future, there should be a default in the payment of dividends by the Cuba and Industrial Companies which would convert the contingent into a certain liability, the preferred stockholders might sue the corporation, make service upon it, obtain judgment against it, and then enforce the judgment against its assets in the hands of its stockholders, or against its stockholders for the value of the assets that they have received.

The mere statement of the remedy reserved to the preferred stockholders of the Cuba and Industrial Companies proves its total inadequacy. If the assets mUha—Distil ling Company are turned over to the Securities Company, the Securities^Company in turn may be rli'sanlverl nnrl its assets distributed.Umong its stockholders^^idinff-Jn.- nlLparts, of the United States and foreign-canairies. I cannot believe a remedy which would oblige these preferred stockholders, upon a breach of the contracts of guaranty thirty or forty years hence, to follow the assets of the Distilling Company or the stockholders of the Securities Company. wherever they might then be, is in reality any remedy.

It was apparently seriously contended upon the oral argument that because, upon the dissolution of this corporation, its assets will go to'the Securities Company, substantially the single stockholder, it was a mere conversion, and the preferred stockholders, in case of default, might sue the Securities'Company and that the relative rights are not altered. This is not true. The liabilities of the Securities Company are substantially different from those of the Distilling Company. There are no liabilities of the Distilling Company, save those under the contracts of guaranty. The case must be treated precisely as if the corporation, instead of having one stockholder, had twenty thousand. Unless relief can be granted in these cases in some form, a guaranty of a corporation solemnly entered into by ifs directors and approved by its stockholders, may be, by action of the corporation and its stockholders, rendered of no force or effect. One party to a contract would be given the absolute privilege of avoiding it without liability. Guaranties of corporations would be of substantially the value of the paper upon which they were written.

For the purposes of this opinion it may be conceded that it is settled law that in cases of bankruptcy or insolvency or the estates of deceased, claims of this nature may not be asserted, but tire underlying reason for the rule is convenience. Natural justice requires that contingent obligations should be protected as well as certain. It is only because there is no method by which their money worth can be presently ascertained, and because to withhold distribution of assets of insolvents and estates of deceased until such worth could be ascertained would be im-‘ practicable that the courts have been forced to adopt the prevailing rule.

Judge Noyes, in Pennsylvania Steel Co. v. New York City Railway Co. (Circuit Court of Appeals, Second Circuit), 198 Fed. Rep. 721, clearly points this out as does the court in Gay Manufacturing Co. v. Gittings (Circuit Court of Appeals, Fourth Circuit), 53 Fed. Rep. 45; in the latter case the court says:

“This case has been decided as between creditors and persons claiming to be creditors. It was stated at the bar that the property of the Gay Manufacturing Company may realize more than enough to pay the liens and the proved past-due debts. Should this be the result of the sale, there may arise a very different question with regard to this surplus as between the petitioners and the stockholders. No opinion is expressed on this point.”

The case in its facts was very similar to those presented by the bills 'in the cases sub judice. The guaranty there dealt with was of the principal and interest of a bond issue, and, in the present instance, is of dividends on preferred stock. In People v. Metropolitan Surety Co., 205 N. Y. 135; 98 N. E. Rep. 412, the court of appeals of New York, although excluding participation of holders of contingent obligations in assets on a par with creditors holding certain claims, said:

“They (that is, the orders under review) do not affect his right to share in any surplus which would otherwise be returned to the corporation or paid to its stockholders. They simply exclude him on account of sound public policy, founded on convenience, if not necessity, from sharing in a trust found applicable only to claims in existence when the court through its receiver took possession of the corporate assets. The contest is between creditors of the corporation, not between the claimant and the corporation.”

The court modified tire orders below so that they would state that they were without prejudice to the right of claimant to share-in the surplus, if any, after payment of the provable debts at the date of dissolution. I am firmly of the opinion that the rule ought not to be extended further than its reason requires. Holders of this class of contingent obligations have been recognized as creditors (Tod v. Kentucky Union Land Co., 57 Fed. Rep. 47; Marbury v. Kentucky Union Land Co. (Circuit Court of Appeals, Sixth Circuit), 62 Fed. Rep. 335), and entitled to share with other creditors in assets where a method could be devised of ascertaining the money worth of the claim.

There is great force in the argument of' complainants that the legislature never intended to permit a voluntary dissolution of a corporation and the distribution of its assets to stockholders, under the provisions of the statute heretofore referred to, until all of the obligations of the corporation, contingent, or otherwise, should have been adequately provided for and that the terms “debt” and “creditors” used in the sections of the statute dealing with dissolution, include holders of contingent obligations as well as certain, and are synonymous with the words used in, section 107 with respect to merger or consolidation, “debts, liabilities and duties.”

The words “debt” and “creditors,” used in that portion of the Corporation act dealing with insolvency, have been held to have no narrow, restricted or technical meaning. Rosenbaum v. Credit System Co., 61 N. J. Law 543, 548; Spader v. Mural Decoration Manufacturing Co., 47 N. J. Eq. 18; Bolles v. Crescent Drug and Chemical Co., 53 N. J. Eq. 614; Lehigh and Wilkesbarre Co. v. Stevens & Condit Transportation Co., 63 N. J. Eq. 107. It is not because of any technical signification of the words “debt” or “creditor” that courts have been constrained to rule that holders of contingent obligations cannot in case of insolvency prove against assets. It is because of sheer necessity.

• It maj'' well be, therefore, that in those sections of the act dealing with voluntary dissolution the words “debt” and “creditor” must be held to include holders of contingent obligations, for the rule of necessity does not apply, fóan it be conceived that the legislature ever intended to give avc3rporation.express power to enter into siiclTYOTityacts and at the same time_ give its stocTEtioTdCTS^xpreffi power to, jwheneveTTl^yeíñct, jcrojidtyhe contractNbyjvpluirtary^jiissoIuiifin^leasdn^ndre^etlienqDarties^ to thejcontracts (where Urey have parted with valuable consideration of.which the stockholders have the advantage) to the inadequate remedy of, at some subsequent time, when the contingent liabilities have ripened into certain, suing the dissolved corporation and then following its assets and its stockholders? A corporation might enter into a contract of guaranty to run for twenty years and might receive the sum of $100,000, the next day,' or shortly thereafter, proceedings might be taken to dissolve it, the $100,000 might be distributed among its stockholders and the holders of the guaranty left helpless. The language of Mr. Justice Parker, in Hould v. Squire & Co., 81 N. J. Law 103, 105, is as applicable here as it was to tire caseHhen before"the CMrt. He was dealing with the right of a holder of a contingent obligation to sue a .corporation after dissolution, and, determining that he could, he said:

“To hold otherwise would enable a corporation to defeat valid causes of action for heavy damages by the simple expedient of dissolution and organization of a new corporation taking over the assets of the old one.”

To hold 'that a corporation after entering into contracts of guaranty may be dissolved by its stockholders without regard to the rights of the guaranteed would, in my view, • permit a situation to exist as unjust as that denounced by Mr! Justice Parker. The language of Vice-Chancellor Stevenson, in Hoopes v. Basic Co., supra, with respect to the qualifications a creditor must possess in order to institute proceedings in insolvency, lias no applicátion to what I am now discussing. What the vice-chancellor said, I think, was obiter.j It may be that in order to institute the equitable quo wanrcmio provided for under the statute that a creditor must be such as, at least prima facie, is entitled to an immediate payment out of assets, but I can hardly believe-that the holder of a contingent obligation is not entitled upon voluntary dissolution to intervene for the protection of the trust fund, the assets of the corporation, which is the security for the performance of the contingent liability.

The conclusion which I have reached, however, makes it . unnecessaryYh^a^YpoxW£ENbTOadr^1TeStibh“as'To whether or not, under any circumstances, the stockholders of a corporation which-Jias entered into contingent obligations will be permitted to dissolveA4-jvEImTit..maldug_a.flftqnji.t.fta-pa^viflien for such obligations^ I think the stockholders have effectively estopped themselves from exercising their right under the statute in the manner in which they are now attempting to exercise it. The j contracts of guaranty, stamped upon the back of each of- the certificates of preferred stock, the dividends upon which were I guaranteed, contain this provision:

“This guaranty shall be irrevocable. No voluntary or involuntary dissolution or merger or consolidation of said Industrial Oo. or of the first party shall, except by and with the written consent of the holders of record of all said preferred stock outstanding at the time, release, discharge, modify or affect said guaranty in any way.”

Defendants insist, that this clause indicates that the parties had in contemplation that there might be a voluntary dissolution, that the clause was inserted to avoid what counsel indicated was the law of New York, i. e., that upon voluntary dissolution such a contract would become absolutely null and void so that no relief could be had bjr following assets or proceeding against stockholders—that the intent of the parties was merely to preserve such rights. I cannot believe that, as matter of fact, this was the understanding of the holders of the stock. I have already indicated that such a remedy would be inadequate, and I do not believe that the holders of the guaranteed stock ever assumed that they were receiving such practically worthless obligations. My construction of the clause is that the parties agreed that no proceedings shoTRd^eJ^e^^MijrpiüdY'yeleáse. discharge, modify or affect,” the guaranty; that if voluntary proceedings in dissolution cannot be taken without affecting the gnaranty, the Distilling Company and its stockholders contracted that no such proceedings should be taken; that the' taking of such proceedingAis-aJn^a.dir-dUdi.e-ccmHaetAdnnh this court may prevent because of the iriadeqriate_nem.ad.w_ at law. While it may be true that, as matter of law, voluntary dissolution does not discharge or release the contract-of guaranty nor. modify its terms, yet it clearly affects it, and that in a most vital particular, i. e., the remedy to which the holders of the guaranteed stock would be entitled; that a. corporation nr if.s-s.tQp.kholders may eston themselves from exercising statutory rights' needgjno citation of authority.

There is no wánt ffit" jurisdiction or of power in this court. The court may enjoin a defendant from disenabling himself from performing a continuing contract. Hooper v. Broderick, 9 L. J. Ch. (N. S.) 321; 59 Eng. Reprint 791; DeMattos v. Gibson, 4 De G. & J. 276; 28 L. J. Ch. 165, 498; 45 Eng. Reprint 108; Cockrell v. Warner, 14 Ark. 345; Southern Railway Co. v. Franklin and Pittsylvania Rd. Co., 96 Va. 693; 32 S. E. Rep. 485; 44 L. R. A. 297. Dissolution of corporations has been prevented. Fisk v. Railroad Company, 10 Blatchf. 518; Fed. Cas. 4830, referred to in Louisiana State Lottery Co. v. Fitzpatrick, 3 Wood 222; Fed. Cas. 8541; Kessler v. Continental Construction and Improvement Co., 42 Fed. Rep. 258. While it may be said that these cases are not directly in point, yet they recognize the jurisdiction of a court of equity to enjoin a party from disenabling himself from performing a contract and the power of the court to enjoin the dissolution of a corporation.

Mr. Justice Pitney, in Central Trust Co. of Illinois v. Chicago Auditorium Association, 240 U. S. 581 (at p. 591); 60 L. E. 811, said:

“Commercial credits are, to a large extent, based on the reasonable expectation that pending contracts of acknowledged validity will be performed in due course; and the same principle that entitles the promisee to continued willingness entitles him to continued ability on the part of the promisor. In short, it must be deemed an implied term of every contract that the promisor will not permit himself, through insolvency or acts of bankruptcy, to be disabled from making performance; and, in this view, bankruptcy proceedings are but the natural and legal consequence of something done or omitted to be done by the bankrupt, in violation of his engagement.”

And he, therefore, reaches the conclusion that bankruptcy proceedings are an equivalent of an anticipatory breach of a continuing agreement.

A promisee being entitled, as matter of law, to continued willingness and continued ability on the part of the promisor has, upon the promisor’s disenabling himself, an action at law for damages, but he also may go into a court of equity to enjoin the promisor from voluntarily disenabling himself if the remedy at law for the breach-be inadequate, as in these cases. The court is, of course, without power to prevent bankruptcy or insolvency just as it is without power to prevent a man who has deliberately asserted that he intends to commit suicide in order that his estate may be distributed without regard to contingent obligations from carrying out his threat, because its decree would be ineffective. There is no such want of power, however, to prevent a corporation from dissolving if equitable consideration requires that this should be done.

Much confusion has been created by a failure to distinguish between lack of jurisdiction and-lack of power to enforce a decree or order. So long as courts of equity are to serve the purpose of the creation of the court of chancery of England, and in this state the court of chancery, is the successor, in all that such terms implies, of that court, jurisdiction must depend only upon the existence of, or a threatened, wrong, and the absence of an adequate remedy at law. The court has full and complete jurisdiction, if there be no adequate remedy at law, to compel a singer to perform his contract, to compel an inn keeper to keep open an inn, to compel a person to so act as to continue solvent in order to permit the performance of a contract, and cases of like nature. The court will not act, however, directly in such cases because its order or decree would be wholly ineffective. It is, therefore, often improperly said to lack jurisdiction; that this is not so is clearly indicated by the fact that if a negative order or decree would be effective, the court grants it. Due to our habit of endeavoring to find decided cases to fit each situation, we too often overlook the fun- . ' damental reasons for tire creation or evolution of the court. It received no grant of express powers nor were express duties imposed upon it. The law courts were left to deal with the violation of all rights for which they could give an adequate remedy. The duty of relieving against any remaining wrongs was imposed upon the court of chancery. If equity is to be held bound by fixed rules and limitations of jurisdiction as law is, there will be the necessity of a third court to serve, as to equity, the purpose of the institution of equity as to law. In the cases sub judice I have found the existence of a threatened wrong, and the absence of an adequate remedy at law which gives jurisdiction, and no obstacle against the exercise of such jurisdiction.

Courts have intervened for tire protection of contingent rights. Van Duyne v. Vreeland, 12 N. J. Eq. 142; Flight v. Cook, 2 Ves. Sr. 619; 28 Eng. Reprint 394.

Bijur v. Standard Distilling and Distributing Co., 74 N. J. Eq. 546, presents no obstacle to the granting of relief. In that , case Vice-Chancellor' EiueiwHr^Hlrrt'tiSe'^TOs^.o remaining ' obligaHraTcmThe partmf .th.e,.eom-pa.ny_.t!^]^^^jánd.Kecandly, that the estoppel claimed, which was based on fraud, had notN been-.proven— That .there„is.no precedent.jd-U-not prevent a court.of equity, frjomja£Ünff- Earle v. American Sugar Refining Co., 74 N. J. Eq. 751, where the present chancellor, then vice-chancellor, said the principles of equity will be applied to new cases as they are presented, and relief will not be withheld merely on the ground that no precedent can be found. And he reiterated this in Palmer v. Palmer, 84 N. J. Eq. 550.

The factors in this case which distinguish it from any other brought to my attention are, first, the corporation. wa&nspressly authorized to enter into the contracts: second, the stockholders of tlre-ampm^iiitoi-app$OTied-43íe--contracts; third,jhejcqntracts were for valuable considerations executed and the parties cannot be put in status quoj fourth, the corporation and its stockholders expressly contracted that no voluntary dissolution would affect the contracts. ™

I have concluded, therefore, to deny the motions to dismiss the Allen and Industrial Company bills and to enjoin the dissolution of the Distilling Company. This results in making unnecessary and improper any expression of opinion upon the merits of the Rice bill. I am of the opinion, resting upon the jurisdiction of this court’ to enjoin a person from disenabling himself to perform a contract where the remedy at lajv is inadequate, to enjoin a breach of a contract'and to conipel its specific performance where there is no adequate remedy at law, and to protect the rights of cestui que trustents in trust funds, that the dissolution of the corporation may be prevented. ' I am unwilling to say whether I would or would not be inclined to grant relief under the Rice bill if I am wrong in enjoining dissolution. The fact that dissolution has been, enjoined, however, removes from the Rice bill its element of anticipated damage, and no order, therefore, can be made under it. I am sorry for this because I had hoped that all three cases might go to the'-court of erro-rs and appeals at one time. I have asked counsel to devise some plan and both they and I have failed. I have concluded, however, not to dismiss the Rice bill but to postpone consideration of it until such time as the court of errors and appeals may pass upon the Allen and Industrial Company bills, or it is evident that no appeals are to be taken. The orders, therefore, will be in the Allen and Industrial Company cases denying the motions to strike out making the orders to show cause absolute and granting the injunction asked for. In the Rice bill the order will be that consideration of the case be postponed, but that either party may have the right to bring it on or to make such applications as they see fit upon five days’ notice.


author: Lane, V. C.

text:
    Chester S. Edwards, petitioner, v. Ruth Edwards.
    [Decided March 29th, 1917.]
    1. A divorce petitioner’s perjury may constitute contempt of court as well as a crime.
    2. Where such perjury is admitted or demonstrated, it should be punished as contempt, but, where the facts are in dispute, sound public policy generally requires that the offender be left to the criminal law.
    S. A divorce petitioner’s testimony that he had not seen his wife during a period when he was shown to have been living with her, constitutes perjury punishable as contempt of court.
    On petition for divorce'. On application to open decree. On proceedings to punish for contempt.

      Mr. Charles M. Myers, intervening for the court and state.

      Mr. Jerome T. Congleton, for the petitioner.
   Lane, V. C.

(at conclusion of hearing).

This is a hearing upon an order requiring respondent, Chester S. Edwards, to show cause why he should not be punished for contempt for imposition and fraud upon the court and perjury committed by him before a special master in an uncontested divorce suit brought by him against his wife which resulted in a final decree and which could not have so resulted if the petitioner had testified truly. The questions which were asked him, to which the false replies were made, were material and were in my judgment known by the petitioner to have been material at the time he testified. There is also an application to open the decree and to permit an intervener for the state to interpose an answer denying the guilt of the defendant and setting up the defence of condonation. Upon the facts coming to the knowledge of the court in another suit these proceedings were initiated by the court. A solicitor was appointed to prosecute the contempt for the court and to intervene for the state in the divorce suit. The testimony which has been taken upon the application to punish for contempt is applicable to the final hearing upon the petition and answer, assuming it to have been filed. Under the circumstances, counsel have very properly agreed that if the record can be perfected and put in such shape as that it may be done, this may also be considered as a hearing upon the petition and answer, that a proper formal answer will be filed and a proper order of reference obtained. Counsel for petitioner frankly admits that in tire present state of the testimony there can be but one decree in this divorce suit, and that a decree dismissing the petition, and if an order of reference is made to me, that will be the order. Counsel asked me to advise such a decree “without prejudice,” so that petitioner may-file a new petition based upon acts of adultery alleged to have been committed by the wife since those mentioned in the present petition. A request of this kind from a petitioner who stands here charged with' and convicted of contempt of court comes with poor grace. I will advise a decree, if the order of reference is made to me, dismissing the petition upon its merits; whether that will bar petitioner from bringing a new suit based upon acts committed since those alleged in the present petition or since the last time that the husband and wife lived together is for the court in some subsequent case to determine.

. There has been in this class of cases such a vast amount of perjury that when the court finds itself in a position to make an example of a party who has been guiltys it becomes its duty, no matter what its personal feelings may be, to make such an example. The judgment I have reached is not one that has been arrived at hastily. I have- considered for years, that until courts of this state take the same ground that the federal courts have taken (149 Fed. Rep. 244; 164 Fed. Rep. 71; 182 Fed. Rep. 349; 194 Fed. Rep. 552; 188 Fed. Rep. 677; 195 Fed. Rep. 299; 202 Fed. Rep. 419; 208 Fed. Rep. 461), and that was the common law rule, that perjury committed in a cause is a contempt of court which may and should,' under certain circumstances, he dealt with by the court as a contempt, although it may also be a crime, there will continue this outrageous condition. The onfy effective way to stop this class of perjury, when it has, as in this case, been demonstrated to have been committed, is to punish it as a contempt. It is a contempt and may be punished as such. It may also be punished as a crime. The one act constitutes two offences, one against the court, the other against the state, just as an assault committed in court may be both a contempt and a crime. The power to-punish for contempt is an arbitrary power, and should be used only when absolutely necessary, in the interest-of justice, and then with great care and discretion. Courts will not ordinarily, when the facts are in dispute, punish perjury as a contempt, not because of lack of power, but because sound public policy requires that the offender should be left to the criminal law. But where the •’facts are admitted or demonstrated, it seems to me that the court would be shirking a clear duty if it did not act. And circumstances may arise which would.make it the duty of the court to act even-if it was obliged to weigh evidence. Perjury committed by a petitioner which has induced the court to grant a decree of divorce presents one of this class of cases.

The contempt of the petitioner was most flagrant. After the tiling of the petition he lived with his wife in practically the same manner as they had theretofore been living. He would have me believe that' he did not realize ihat this resulted or might result in condonation. He says, however, that he was advised some time in January, 1915, before he lived with his wife in May, 1915, that he ought not to meet her. Notwithstanding his denial, I am convinced that he was fully advised at that time of the consequences if he did, or what the consequences might be. He their deliberately, before the special master, testified that-he had not-seen his-wife during all of this space of time that he had-been living with her. He knew at the time, and must have known, because there was no reason for his false testimony if he had not known, that if he did not testify the way he did the result would be that his divorce would be denied. He deliberately falsely testified for the purpose of inducing the court to grant him this divorce. When a condition of this kind arises, and it is demonstrated, it is the duty- of the court to punish the respondent for what he has done. It may serve as an example to others, and we may eradicate to some extent at least this pernicious perjury. Therefore, I think it is my duty, notwithstanding the sympathy I feel for the petitioner, and notwithstanding his youth, to punish him, and I think that no punishment would be adequate that did not carry with it a term of imprisonment. I might say, here, that I will direct the petitioner, under the statute, to pay the costs of the intervener, together with counsel fee of $150. I adjudge the defendant guilty of contempt of court, and the punishment will be that he be confined in the county jail of the county of Essex. I am not going in this ease to give a long term or a term which, under ordinary circumstances, would be adequate punishment-for an offence of this kind. It is the first that has been prosecuted in this way. If another comes.up it will not be treated so leniently, because the parties will then know that I have determined, so far as within my power, at least, to stop this condition of affairs. The punishment that I now mete out is no indication of what I will do in a subsequent case under similar circumstances. I think that the mere fact that this young man must go to jail for any length of time is punishment in itself—lie will be committed to the county jail of Essex county for a period of ten days, and thence until the costs of this application are paid. Counsel may draw a commitment.

I have not overlooked the case of In re Gonzales, 88 N. J. Law 536, and In the Matter of the Appeal of Verdon, 97 Atl. Rep. 783, and particularly the remarks of Mr. Justice Garrison at the conclusion of the latter opinion. No question of the method of procedure is before me in this case.

Mr. Myers—In connection with the counsel fee your honor spoke of. Will your honor consider at this time an application for alimony for the defendant in the pending divorce suit?

Mr. Oongleton—It is dismissed.

Mr. Myers—No, your honor said you could not dismiss it' until after answer filed and an order of reference was made.

The Court—No, it must be considered as having been dismissed as of this'date.

Mr. Myers—Oh, I did not understand, your honor.

The Court—I might say that there is no imputation upon Judge Lambert in' any manner, shape or form. The petitioner will be paroled in the custody of his counsel until, the order and warrant can be drawn.

Mr. Myers—I will draw it to-day'and present it to the court in the morning.


author: Lane, A7. G.

text:
    Fidelity Trust Company, receiver, v. Federal Trust Company et al.
    [Decided March 26th, 1917.]
    1. Where moneys were loaned by one corporation to an individual and by him loaned to another corporation, which mingled them with other moneys so that their identity was completely lost, the' receiver of the first corporation cannot proceed against the receiver of the second corporation, both being insolvent, on the ground that such moneys were trust funds, since, unless the fund can be identified, such action will not lie.
    2. In such case the receiver of the first corporation takes such claim in the right of the individual as he finds it, subject to the fact that it has been satisfied in whole or in part, and to any rights of estoppel.
    3. In such case the receiver of the first corporation cannot proceed against the receiver of the second corporation for money had and received.
    4. The second corporation is not charged with knowledge that the moneys it received from. the individual did not properly come into his possession, although the individual was an officer and stockholder in both corporations.
    5. The proposal of the individual as president of the second corporation for liquidation of the loan by issuance of stock or bonds amounted to an offer on his part to receive such' securities in liquidation of the loan, and the action of the directors and stockholders thereon, authorizing the issuance of the stock and bonds for such purpose, amounted to an acceptance of this offer.

      6. The net proceeds of these securities should be credited against the claim of the assignee of the individual as it existed at the time of the approval of the issue of these securities by the stockholders of the company.
    7. Where such bonds indicate on their face that they were intended to be secured by a mortgage, and both parties dealt with them on that assumption, the assignee of the creditor is estopped from asserting the invalidity of the mortgage because of its improper record.
    8. As against those claiming in the right of the individual president the stock will be considered as issued, where it appears that the intent was that it should be, syid the parties acted as if it were, although in fact no certificates were issued.
    9. One claiming in the right of an individual, who has negotiated for his own benefit bonds which indicate on their face' that they were intended to be secured by a mortgage on chattels, is estopped from asserting as a creditor of the mortgagor that the mortgage is invalid because of improper record.-
    On bill, &c.

      Mr. Francis Lafferty, for the complainant.

      Mr. Lo-uis IIoocl, for the assignee, James Smith, Jr.

      Mr. Hugh B. Reed, for the receiver, J. II. Halsey & Smith.

      Messrs. Pitney, Hardin é Skinner (Mr. HaA'din) and Mr. Frank H. Sommer, for the Federal Trust Company and Mechanics and Metals National Bank.

      Messrs. Wolber .£ Blake, for the American National Bank.
   Lane, A7. G.

(after submission of briefs).

First. Does the relationship of creditor and debtor exist as between J. H. Halsejr & Smith and the Newark Advertiser Company? I have not changed my mind that the original intent was that J. H. Halsey & Smith should advance the moneys that it did to James Smith, Jr., and that James Smith, Jr., should advance them to the Newark Advertiser Company, and that no express contract relation existed between the two corporations. It is now said that the relation of creditor and debtor exists by reason of the fact that J. H. Halsey & Smith was without an-' tliority to make the loans to James Smith, Jr.; that the loans were made for the benefit of the Newark Advertiser Company, and the Newark Advertiser Company having received the benefit of the trust fund became a debtor of J. H. Halsey & Smith. The legal theories upon which these contentions are predicated are the right to follow trust funds and the right to sue for moneys in the possession of one, legally or equitably, belonging to another, as for money had and received. . The difficulty with the trust fund theory is that there is no trust fund in the possession of the Newark Advertiser Company to follow which can be identified; the moneys advanced by James Smith, Jr., to the Newark Advertiser Company have been commingled with other ■moneys and their identity completely lost; they are not represented by investments in property. Unless the trust fund can be in some way identified, as I read the cases, there can be no relief on this theory. Shaler v. Trowbridge, 28 N. J. Eq. 595; Ferry v. Laible, 31 N. J. Eq. 566; reversed, Laible v. Ferry, 32 N. J. Eq. 791; Standish v. Babcock, 52 N. J. Eq. 628; Ellicott v. Kuhl, 60 N. J. Eq. 333, in which Magie, ordinary, said:

“It is now a well-settled doctrine that the ceslui que trust who can trace the trust funds into a particular property may assert a- right to that property and its proceeds, if sold, if the proceeds remain traceable, and are found in the hands of those who can assert no better right thereto.” First National Bank of Freehold v. Thompson, 61 N. J. Eq. 188; Bohle v. Hasselbrock, 64 N. J. Eq. 334; James v. Aller, 66 N. J. Eq. 69. Under the circumstances, therefore, the trust res, if any exist, is the claim of James Smith, Jr., against .the Newark Advertiser Company, or his interest in that company as holder of the increased stock hereafter noticed. If this is the sole trust res, then the receiver of J. H. Halsey '& Smith is bound to take the claim in the position that he finds it. If it had been satisfied, in whole or in part, or if there is an estoppel existing in favor of' particular rights, the receiver takes the claim subject to these. ■

The light to sue for money had and received is predicated upon the broad rule expressed by the supreme court in Spengeman v. Palestine Building Association of Hudson County, 60 N. J. Law 357:

“Where the defendant has received money from a third person, even though he received it under a claim of title to it in opposition to the plaintiff’s right, yet if he had by law authority to receive it from such third person,' and in equity the plaintiff ought to have it, this count for money had and received can be sustained."’

But the circumstances of that case and this are entirely different. There the defendant, a real estate agent and officer of the plaintiff corporation, agreed with the corporation that if it would purchase Tompkins’ land he would allow his commission to the association and thus reduce the price. Belying on this agreement the association bought the land at the price of $8,-750, paid that sum'to Tompkins, who thereupon paid part of it to the defendant. The statement of facts, I think, indicates the inapplicability-of the case to the conditions existing in the one at bar.

It is unquestioned that J. H. Halsey & Smith had no authority to make the loans it did to James Smith, Jr. Earle v. American Sugar Refining Co., 74 N. J. Eq. 751 (at p. 762). It might, however, have legitimately'paid these sums of money to Janies Smith, Jr., for James Smith, Jr., might have loaned money to J. IT. Halsey & Smith, and the moneys advanced by J. IT. Halsey & Smith might have been repayments. As matter of fact, when the moneys were first advanced there was a credit balance on the books of J. IT. Halsey & Smith in favor of James Smith. Jr. The Newark Advertiser Company is not charged with knowledge that the moneys it received from James Smith, Jr., or from J. IT. Halsey &. Smith on account of James Smith, Jr., did not properly come into his possession. First National Bank v. Christopher, 40 N. J. Law 435. My view is that in this complicated situation the two corporations dealing must be treated as separate and distinct, and as if there were really three parties dealing, entirely .unconnected, to wit, J. H. Halsey & Smith, James Smith, Jr., and the Newark Advertiser Company. By this manner of treatment only do I think a result can be arrived at which will be equitable to the creditors of the.two insolvent corporations. The Newark Advertiser Company had power to borrow money from James Smith, Jr., and James’ Smith, Jr., might, of course, advance moneys to it. It did so borrow moneys and ivas enabled thereby to continue business and incur liabilities. Its creditors must be assumed to have believed the moneys so advanced were being advanced by James Smith, Jr., the sole substantial stockholder of the Newark Advertiser Company. It is conceivable that if they had understood moneys were being advanced by outsiders they would have acted in an entirely different way. Balancing the equities of the creditors of J. H. Iialsejr & Smith, and the Newark Advertiser Company, I think that the strict rule of law should be applied; that the statute forbids the advance of money by a corporation to its officers and directors, I do not think alters the situation, for the only effect would be to permit J. H. Halsey & Smith to proceed against the Newark Advertiser Company either upon the trust theory or for money had and received, which I hold cannot be done. I do not think that the statute in any way enlarges the rights of J. H. Halsey & Smith as against the Newark Advertiser Company. I conclude, therefore, that any claim that the receiver of J. H. .Halsey & Smith may have against the assets of the Newark Advertiser Company must be based upon subrogation to the claim of the assignee of Janies Smith, Jr., and is , subject to the condition of that claim as it now exists. Whether there is such subrogation I have not determined, as it has not been urged.

Second. Must.there be credited against any claim of the assignee of James Smith, Jr.—(1) the proceeds of a bond issue of $500,000 other than that used to take up a prior issue of bonds; (2) the amount of the increase of capital stock, $400,-000, authorized at a meeting of the stockholders June 22d, 1912, at the same time the bonds were directed to be issued; (3) the increase of the capital stock $800,000 authorized at a meeting of the board of directors December 28th, 1914 ?

The bonds were actually delivered to James Smith, Jr., and the $100,000 of the prior bond issue surrendered. The bonds were then used by James Smith, Jr., as will hereafter appear. It is conceded that to the extent of the difference between the amount due upon the $100,000 of bonds surrendered and the $500,000, there must be a credit on the James Smith, Jr., claim. At a meeting of the directors of 'the corporation, June 19th, 1912, at which James Smith, Jr., was present, he, as president, called attention to the fact of the indebtedness of the company on the outstanding issue of $100,000 of bonds, and for moneys loaned to it and on open account, and it was then determined “for the purpose of refunding the said bonds and of enabling the company to reduce its other indebtedness and secure additional working capital,” the company should malee a new bond issue of $500,000, secured by a mortgage upon all of its franchises and ■property, and also increase its capital stock to $500,000. The resolution further provided, in respect to the capital stock, that as soon as it had been increased the officers were authorized to issue and sell any or all of it, and also to use it or any part of it in satisfaction or liquidation of any part of the indebtedness of the compan}"-, at not less than the par value. At a stockholders’ meeting—and it must be kept in mind that James Smith, Jr., was really the sole stockholder—the recommendations of the directors were adopted; steps necessary to effect the bond issue and to increase the stock were then taken; certificates of stock were actually printed; no certificates were actually issued. The substantial indebtedness of the corporation consisted only of moneys due to James Smith, Jr., in the account carried in the name of J. H. Halsey & Smith. The corporation and its officers recognized the stock as issued, the treasurer su testified. In March, 1914, he made a return for purposes of taxation to the state, reporting the capital stock outstanding as $500,000. This also was the understanding of James Smith, Jr. It appears that he, as president, together with the treasurer, made an income tax return to the federal government, stating the stock outstanding at $500,000. At a meeting, December 28th, 1914, the board of directors declared it advisable to further increase the capital stock from $500,000 to $1,300,000. ' At this meeting James Smith, Jr., was present. The resolution of increase provided that, as soon as it had been increased the president and treasurer of the company should be authorized to issue and sell such additional stock, or any part thereof, and

“also to use such additional stock or any part thereof, in satisfaction or liquidation of any part of the present indebtedness of the company at not less than the par value of such additional stock so used, provided the stockholders should unanimously approve and ratify such sale or use of such additional stock by their approval or ratification of the resolution.”

At a meeting of the stockholders, December 31st, 1914, James Smith, Jr., was present; he called attention to the fact that the company was largely indebted for money loaned to it and on open account, and that it was desirable to take care of said loans and open account, and also stated that $800,000 of said-loans and open account could be canceled and discharged by the issuance of new stock of the company for like amount therefor. The minutes state that after a full discussion of the matter it was deemed advisable by all the stockholders for the purpose of procuring the cancellation and discharge of $800,000 of the company’s debts for moneys loaned to it and upon open accounts that the capital stock should be increased from $500,000 to $1,-300,000. The resolution of the directors was ratified and approved. The steps necessary to effect the.increase were duly taken; the certificates were changed so as to indicate that the capital stock was $1,300,000. The action of James Smith, Jr., on December 31st, 1914, clearly indicates to my mind that he considered- that the amount of the increase from $100,000 to $500,000 had been issued, and that the indebtedness had been reduced by that amount, and that he, or someone for him, was the owner of the stock. No certificates representing the increase from $500,000 to $1,300,000 were ever in fact issued. It is clear that the intent was to use the increase for the reduction of the debt due to James Smith, Jr., standing upon the books as J. H.. 'Halsey & Smith; the items and the interest had been carefully calculated for the purpose of liquidating the account. The return made to the state March 4th, 1916, for the purpose of taxation states the outstanding capital stock as $1,300,000. The treasurer testifies that the only reason for not issuing the certificates representing either increase was that James Smith,‘Jr., asked him to delay it until he should receive definite advice as to how it should be issued; that he received this instruction at the meetings at which the increases were authorized; he testitied that "it was said, and I think once by James Smith, Jr., it was uncertain how to issue it; he couldn’t make up his mind how to issue it.” He further testified that it was the purpose to convert the debt which appeared upon the books in the name of J. H, Halsey & Smith into stock. I think that when James Smith. Jr., stated that he was uncertain how to issue the stock 'he did not mean, as contended for by the Fidelity Trust Company as assignee of James Smith, Jr., that it was uncertain how much should be issued for cash and how much for indebtedness, but that it was uncertain as to whom to issue it, whether to J. H. Halsey & Smith, T. P. Howell & Company or James Smith, Jr., or some other nominee of. James Smith, Jr. I think the 'circumstances and the evidence clearly .demonstrate that it was not only the intent to issue these increases in partial liquidation of the J. H. Halsey & Smith account, but that it was conceded by all to be a completed transaction, the mechanical details alone being lacking. I think that the actions of James Smith, Jr., at the two meetings amounted to offers and the actions of the corporation to acceptance; that there was no credit given upon the books of the Newark Advertiser Company is of little significance, because there was no credit given for the difference represented by the increase in the bond issue. The explanation of failure to make entries upon the books is similar to the explanation of failure to' actually issue the • certificates. There was doubt as to how the account was to be cárried, but, however carried, the increases were to be in liquidation of the J. H. Halsey & Smith or James Smith, Jr., account. James Smith, Jr., was in court during the trial of the case, and I think the circumstances and the testimony pointed so strongly to the result that I have reached that the burden was upon those asserting the contrary to call him if they desired to insist the contrary. To effectuate an issue of stock it is not necessary that a certificate issue. American Pig Iron Storage Co. v. State Board of Assessors, 56 N. J. Law 389. My conclusion, therefore, is, that to the extent of the difference between the amount necessary to liquidate the $100,000 prior bond issue and the $500,000 authorized bond issue, there must be a credit on the J. H. Halsey & Smith or James Smith, Jr., account, and to the extent of the .difference between the capital stock of $100,000 and $1,300,000 there must be a like credit. If this does not "entirely liquidate the J. H. Halsey & Smith or James Smith, Jr., account, there must be a reference to a master. Of course, if there was on December 31st, 1914, less due upon tire J. H. Halsey & Smith account than enough to make necessary the use of all of these increases to liquidate it, only so much as necessary may be used, .and any indebtedness created after December 31st, 1914, is not affected in any manner.

Third. Is the holder of the James Smith, Jr., account es-topped from taking advantage of the improper record of. the mortgage securing the bonds?

I have already adverted to the authorization of the mortgage which covered all of the property of the Newark Advertiser Company to secure the issue of bonds to the extent of $500,-000. The mortgage, although dated on June 1st, 1912, and acknowledged upon June 25th, 1912, was not recorded until April lltli, 1913, nor were any bonds issued under it until that date, at which time all of the bonds, $500,000 in amount, were issued to James Smith, Jr.; some of them were at various times negotiated by him, and they are now held as follows: $135,000 by his assignee, $200,000 by the Federal Trust Company, $50,000 by the Mechanics and Metals National Bank, $100,000 by Edward H. Hatch, $15,000 by the American National Bank, all except those held by his assignee pledged to secure indebtedness owing by James Smith, Jr. The mortgage was recorded as a real estate mortgage; the funds in the hands of the receiver of the Newark Advertiser Company-is the proceeds of chattels, and the mortgage therefore is void as against creditors. The bondholders and the Federal Trust Company, as trustee, insist that James Smith, Jr., and his assignee are 'estopped to set up the invalidity of the mortgage as against his claim. The receiver of J. H. Halsey & Smith and the assignee of James Smith, Jr., insist the contrary. Counsel for the assignee of James Smith, Jr., rely upon the proposition that when James Smith, Jr., negotiated the bonds, he warranted but four things under the Negotiable Instrument act (Comp-. Stak. p. S71¡2 ¶ 65)—first, that the instrument was genuine and in all respects what it purported to be; second, that he had good title to it; third, that all prior parties liad capacity to contract; fourth, that he had no knowledge of any fact which would impair the validity,of the instrument or render it valueless. The answer is that all these warranties enter into the negotiation of any negotiable in-' strument, yet there is nothing which will prevent further warranties or the operation of an equitable estoppel. The bonds upon their face clearly indicates that' they were intended to be ’secured by a mortgage which would be effective as against gen- , eral creditors; both parties dealt with the securities upon this assumption; the mistake was not a mistake of law but one of fact, mutual to both. Big. Est. (6th ed.) 491, says:

“One class of cases (of estoppel) is designated in this book as Estoppel by Contract, a term which is intended to embrace (1) all cases in which there is an actual or virtual undertaking to treat a fact as settled, so that it must stand specifically as agreed.”

See, also, p. 495. As between the mortgagor and the mortgagee the mortgage is valid. James Smith, Jr., is not only a creditor of the corporation, but he is the sole stockholder. He cannot, now, simply because his interest has changed, nor can his assignee take a position inconsistent with that previously assumed, to the prejudice of his pledgees. 11 Am. & Eng. Encycl. L., tit. “Estoppel,” 446; Daniels v. Tearney, 102 U. S. 422. Nor do I think that there is any distinction between the debt incurred to Smith after the negotiation of the’bonds and that which had been incurred before; both parties continued to deal upon the assumption that the mortgage was a valid security. I conclude, therefore, that the assignee of James Smith, Jr., is estopped from asserting the invalidity of the mortgage.

As to the method in which the equities of the parties should be worked out, in view of this estoppel, I am inclined to agree with Mr. Hood. The debts of the corporation, excluding those due to James Smith, Jr., should be ascertained. The bondholders will then be entitled to that proportion of the fund in court as tlieir debt bears to the whole debt. There then should be figured all the debts of the corporation allowed, including bondholders and general claims. The general creditors, other than the Smith claim, will be entitled to that proportion of .the amount in court as the amount of their claims bears to. all the claims of the corporation, and the Smith claim will be entitled to .the balance.

Decree may be settled on notice.


text:
    Russell A. Flint et al. v. Myron E. Flint et al.
    [Decided April 9th, 1917.]
    1. Partnership real estate not necessary for the payment of partnership debts descends to the heirs-at-law.
    2. One who voluntarily places improvements, upon the land of another with or without the owner’s consent, loses his right thereto, unless there is an agreement to the contrary.
    3. Where improvements are made by a partnership on lands of one partner, ¿he relationship of the parties is sufficient to prevent the operation of the rule, and the partnership and those representing it are entitled to compensation, but this right is personal property, not real.
    4. Improvements made with partnership funds on lands of one partner and used for partnership purposes are not real assets entitling the heirs of a deceased partner to partition, the partnership right being against and not in the property.
    On motion to strike out bill.

      Messrs. Burnett, Qornish & Borg (Mr. I). Frederick Burneii), for the motion.

      Mr. Borden D. Whiting, contra.

   Lane, Y. C.

This is a bill filed by the heirs-at-law of Walter A. Flint, deceased (one of them is am infant), for the partition of certain property alleged to be real estate of a partnership which was composed of the deceased Walter and his brother, Myron E. Flint, one of the defendants. The business of the partnership was the retail dealing in butter, eggs, poultry and dairy products. In 1908 or thereabouts it caused land and premises mentioned in the bill which were and are admittedly' (if there is any other inference to be drawn from the bill the situation was made clear’ at the hearing) the sole property of the defendant Myron E. Flint, to be improved at an expenditure of some $9,000, by the erection of a cement and concrete office and storage building, stable and wagon shed with roadway. The entire cost of the improvements was paid out of partnership funds and the improvements were used for partnership purposes until the dissolution of the firm by the death of Walter A. Flint. . Lottie E. Flint, his wife, one of the defendants, was appointed administratrix, and on July 2d, 1914, she individually and as -administratrix entered into an agreement with Myron E. Flint for the sale to him of .all of her and the estate’s interest in the assets of the partnership, for the sum of $14,000. This sum represented approximately one-half of the net assets of the partnership, including the value of the improvements. The sum was paid and a bill of sale delivered. The debts of the property have been paid and the value of the improvements will not be needed to .meet any of the obligations of the partnership. The complainants, heirs-at-law of 'the deceased partner, now claim'that the improvements were and are real estate and as such their value not being necessary for the payment of partnership debts, descended to them as heirs-at-law of the deceased ■partner and that the agreement and bill of sale are ineffective as. against them. The technical situation which would exist, if the complainants’ position be sound, is that the legal title of the soil will be in the defendant Myron Flint. The defendant Myron Flint will also have a half interest in the improvements. Each complainant 'will have a one-fourth interest in the improvements. The bill asks partition and other relief. The position of the defendant Myron Flint' is that whatever right the partnership had in the improvements was- from the beginning and continued to be, so far as the partnership and the individual parties are concerned, personalty.- Passing the question which arises upon the- face oí 'the bill whether, it appearing that the legal title-is in dispute, there can be partition until the title is settled, which was not raised on the motion to strike, out in lany.way, I will consider the merits. Country Homes Land Co. v. De Gray, 71 N. J. Eq. 283. The bill prays for other relief and it may well be argued that any relief that could be granted must be bjr reason of the relationship of the parties in this court.

i The-law is well settled that partnership real estate, not necessary for the1 payment of partnership debts, descends to heirs-at-l-aw. Craighead v. Pike, 58 N. J. Eq. 15; Campbell v. Campbell, 30 N. J. Eq. 415. There are exceptions. Patrick v. Patrick, 71 N. J. Eq. 347. That, so far as the owner of the soil is concerned, the improvements are real estate, admits of no question; Leo Company v. Jersey City Bill Posting Co., 78 N. J. Law 150; Palmeteer v. Robinson, 60 N. J. Law 433. They became real estate not because 'of a change of a physical nature but because of annexation to the soil. The rule originally, I think, was based upon the practical impossibility of removal after annexation without great injury. One who voluntarily places improvements upon the land of another, with or without the consent of the owner of the soil, loses his right to the personal’property unless there is an express agreement which takes the case out of the rule and even where such an agreement is present which might be effective between the owner of the soil and the person making the improvements it would be ineffective ■as against subsequent purchaser without notice. The reason for this is stated by Mr. Justice Trendiard in Leo Company v. Jersey City Bill Posting Co., 78 N. J. Law 152. It is conceded by defendants that the fact that the land was the land of one of the partners and the improvements were made with partnership funds operates to prevent the owner of the soil from asserting as against thé partnership and its representatives the right to hold the improvements without some compensation. The question is, what is the right of the partnership? Is it.a right in the property or a right against the property? Is it a right of ownership in the property or is it in the nature of a lien against the-property for the value put into it ? I think the latter. What the partnership used was money, personal property. This money was used to purchase personal property. That personal property was put upon real estate and although its physical nature was not in anywise altered, it became by virtue of a rule of convenience real estate, but not, I think, the real estate of the partnership. By virtue of the relations existing between the parties a duty arose upon the part of the owner of the soil in this case to account to the partnership. The right of the partnership was a right to recover from the owner of the soil not real estate but personal property, to wit, money. Deveney v. Mahoney, 23 N. J. Eq. 247. Such a right is a chose in action which is personal property. To hold otherwise would result in endless com fusion. It is impossible or impracticable, of course, to sell the improvements apart from the soil. It is impossible to actually partition the improvements apart from the soil. The effect would be to create an interest of the partnership in the soil, for he who can compel the sale of the soil, as would be the result in this case, if complainant’s position is sound, has an interest in it. The rule which had as one of its objects the protection of the owner of the soil would operate to his great disadvantage. It is suggested that an equitable result may be worked out by having the value of the soil appraised and the value of the improvements, then selling the whole and apportioning the proceeds upon the basis of proportions. This, I think, would be practically impossible, and it would be inequitable to the owner of the soil. The duty of the owner of the soil is to pay money, not to give real estate or an interest therein.

Having concluded that the right of the partnership is personal propertjq the motion to strike out the bill must prevail.