author: Pitney, Y. C.

text:
    Enos A. Wall v. The Utah Copper Company et al.
    [Submitted September 29th, 1905.
    Decided October 2d, 1905.]
    Each stockholder in a corporation, all of whose capital stock has been issued, is entitled to share in any additional or new stock proposed to be issued, in proportion to the amount of his present holdings in the existing issue, upon the same terms that the new stock shall be issued to other parties. An issue of bonds containing the privilege to the holder to convert the same into stock amounts to an issue of stock, and can only be issued subject to the right of each stockholder to share ratably therein.
    On order to show cause why injunction should not issue. Heard on bill and. one.affidavit, and one affidavit in opposition thereto.

      Mr. Edward A. Day and Mr. Gilbert Collins, for the complainant.

      Mr. Robert II. McCarter and Mr. Thomas Thatcher (of the Hew York bar), for the defendants.
   Pitney, Y. C.

The complainant, Wall, a resident of Salt Lake City, Utah,, is a holder of ninety thousand shares (par value, $900,000), being one-fifth of the capital stock of the defendant the Utah Copper Company, a corporation of this state, and is one of the-seven directors thereof, and also vice president thereof.

The defendants, six in number, other than the corporation, are the other directors thereof, and the defendant MacHeill is the president thereof.

On the 11th of September the complainant presented his bill, with one affidavit annexed, the object of which is to restrain the issuing by the corporation of $3,000,000 of bonds, secured by a mortgage, which bonds shall contain’ a clause giving the holders an option 'to convert the same into the stock of the company on certain terms presently to be stated. An order to show cause, with interim restraint, was granted thereon, returnable on the 22d instant.

On the return day of the order the defendants appeared and filed one affidavit in answer to the allegations of the bill. That affidavit had not been previously served upon the complainant, and upon being read by his counsel# was discovered that it contained new matters not in direct reply to those set forth in the bill, and apparently not within the knowledge of complainant. The complainant did not ask for time to answer this new matter, but submitted to the argument being had upon the papers, including the new matter, upon tire understanding, of course, that he was to have the benefit, if any, of the new matter, in all respects as if he had set it out and relied upon it in his bill, and the bill might be considered as amended accordingly.

The facts are that the whole of the capital stock, $4,500,000, provided for by the articles of association, was duly issued, and the proceeds invested in a copper mine and property near the town of Bingham, in the - county of Salt Lake, in the State of Utah, and about twenty-five miles southwest of Salt Lake. The mine, so far as developed, has proved very promising and profitable in its working, and can be made still more profitable by a judicious expenditure of money in the erection of a large smelting works on the shore of Salt Lake and a railroad from the mine to it. The whole encumbrance at present is $750,000.

The defendants MacNeill & Penrose are the largest holders of stock except the complainant-.

On the 7th of July, 1905, MacNeill & Penrose, on the one part, entered into a written agreement 'with the Guggenheim Exploration Company, a corporation of New Jersey, of the other part, by which it was agreed that MacNeill & Penrose should cause the defendant corporation to authorize an issue of $3,000,000 of the par value of its bonds of $1,000 each, payable in ten j^ears, with interest at six per cent., and secured by a mortgage to the Morton Trust Company, each of which bonds “shall be convertible, at the option of the holder, at any time "within five years from the date thereof, into fifty (50) shares, of the par value of ten dollars ($10) each, of the stock of said copper company.”

The agreement further provided that MacNeill & Penrose should cause the defendant company and its stockholders forthwith to take proceedings to increase its capital stock to the extent required for the proposed conversion of bonds into capital stock, and to authorize the issue of such increased stock in exchange or in lieu of the convertible bonds. This, it will be seen, will require a provision for the issue of $1,500,000 of new stock, increasing the total issue from $4,500,000 to $6,000,000.

The contract further provided that the defendant corporation should agree in writing to give the exploration company the right to take the whole issue of bonds at ninety-eight cents on the dollar.

MacNeill & Penrose further agreed to give the exploration company the option to purchase from them one hundred and fifty-six thousand shares of the stock of the company (par value, $.10) at $20 per share.

The result of this agreement, so far, if carried out, would be to give the exploration company the right, by virtue of its ownership of $3,000,000 of convertible bonds, to acquire $1,500,-000 of the new stock of the company, which would thereby be increased to $6,000,000, and by the delivery to it of one hundred and fifty-six thousand shares of present existing stock to make it the owner of $3,600,000, which will be a majority of the whole issue of $6,000,000.

The contract contains the further provision that MacNeill & Penrose should have the right and option to take on their own account one-half ($1,500,000) of the whole issue of $3,000,000 of bonds, upon condition that if they should exercise the option and convert the bonds into stock they should sell and transfer a certain 'portion of the stock to the exploration company, at $20 per share.

In pursuance of this agreement the president, on the 14th of July, 1905, issued a call for a meeting of the directors of the defendant eompaixy, to be held on Saturday, the 33d of July, at Colorado Springs, for the following purposes:

Firsi. To consider the advisability of, and, if deemed advisable, to authorize an issue and sale of $3,000,000, par value, bonds of the company, to be secured by mortgage on all of the property now owned by the company, and which may be acquired by it in the future, and to decide upon the rate of interest, time and terms of said proposed issue.

Second. In the event the bond issue, as above, be authorized by the board of directors, then to authorize the calling of a stockholders’ meeting for the purpose of ratifying the action of the board of directors in authorizing and providing for the issuance and sale of the aforesaid bonds, if necessarjg and to transact any and all other business connected therewith Qr incident thereto which, in the judgment of the board of directors, or under the charter or by-laws of the company, or under the law's of the State of Hew Jersey, it is necessary to submit to the stockholders of the company.

Third. To transact any and all business pertaining to the affairs of the company which may be brought to the attention of the board of directors.

Complainant in his bill alleges that he was unable to attend that meeting, “but that he protested in writing against the proposed action to be taken thereat, giving his reasons for his said protest.” This written protest was not produced at the hearing, though it was not disputed that it had been received by the defendant officers of the corporation.

On the 36th of July a meeting of the board of directors, adjourned from tire 33d, was held at the office of the company at Colorado Springs, at which meeting were present four of the directors—MacKeill, Hawkins, Babbitt and Jackling—Messrs. Penrose, McLaren and the complainant being absent.

Mr. McLaren is -the Hew Jersey director, and holds only so much stock as to qualify him as such.'

At that meeting the minutes show that the president, MacHeill, laid before the meeting a proposed agreement to be entered into between the defendant company and the exploration company, and called attention to the fact that its performance would require the issue of bonds convertible into stock, and this would necessitate a corresponding increase in the stock, whereupon it was resolved that the agreement be approved and the officers of the company authorized to execute the same.

Then follows in the minutes a formal resolution, subject to the ratification of the stockholders, for the borrowing of $3,-000,000, secured by bonds, convertible into the stock of the company, at the rate of $500, par value, of the stock of the corporation for each $1,000 bond, at the option of the holder.

It was further resolved that it was advisable that the capital stock of the corporation should be increased from $4,500,000 to $0,000,000, and the fourth paragraph or section of its certificate of incorporation should be amended accordingly, specifying the amendment, and it was further resolved that a special meeting of the stockholders be called, to be held at its office in Jersey City, on September 5th, to take action upon the increase of stock and the issuing of bonds.

The proposed agreement to be executed, and which was in fact executed, between the copper company and the exploration company, is in substance the same as that entered into on the 7th of July between MacKeill & Penrose and the exploration company, except that it does not mention those provisions of the first agreement which enabled the exploration company to become the holder of a majority of stock of the defendant company, and does not mention that provision which gives MacEeill & Pen-rose an interest with the exploration company in the new issue of convertible bonds.

Immediately after the meeting of the directors last stated, to wit, on August 1st, a notice was sent out to the stockholders for a meeting, to be held on September 5th, at Jersey City, to take action upon the proposed increase of the capital stock from $4,500,000 to $6,000,000, and also upon the proposed issue of $3,000,000 of convertible bonds of the character previously stated.

Complainant received this notice on the 2d of August, and had an interview as soon as practicable with the defendant MachTeill, and protested to him personally against the proposed action, and was informed, as he understood, by MacNeill that he (complainant) would have no. right to his proportionate share or any of the proposed increased stock or issue of convertible bonds unless he would join with MacNeill and the other stockholders of the company in giving an option of a purchase of fifty-one per cent, of his holdings of stock to- the American Smelters Security Company, at $19.60 a share.

So far as the case shows, this was the first notice complainant had of the proposition .to issue convertible bonds and to give some other company the control of a majority of the stock of the defendant company.

In order to protect himself complainant sent an attorney to the meeting of the stockholders held in pursuance of the notice and submitted a written protest there, the material parts of which are as follows:

“The plan for the subscription to, and distribution of, the said proposed increased shares of stock prevents any stockholders, myself included, from subscribing for his pro rata share thereof unless he shall agree to sell, assign or exchange one-half of fifty-one per cent., or some share of his present holdings, for mortgage bonds of said company; whereas, I am advised that any stockholder, myself included, has the legal right to subscribe for such proportionate number of said increased shares as his present holdings of stock bear to the present number of shares in said company, unconditionally.
“X object to and protest against such proposed increase of said capital stock for the further reason that the proposed plan of sale, distribution and exchange thereof compels a subscribing stockholder to pay more than the par value for shares subscribed for by him; whereas I am advised any stockholder, myself included, has the legal right to subscribe for and have such increased shares at their par value, the exercise of which right I respectfully insist shall be accorded me.
, “I am now the holder of one-fifth, or twenty per cent., of the present number of shares of the company, and the proposed sale, distribution and exchange of such inci'eased stock will diminish my holdings from twenty to but fifteen per cent., as respects the whole number of shares in said company, thereby reducing the value of my shares by twenty-five per cent.; and said plan will, to the same extent, diminish the voting power of my said holdings in said corporation.
“I further object and protest against said proposed plan because the proposed issue, distribution and exchange of said new shares is to be made upon the illegal consideration that the company will thereby barter such increased shares of stock of the corporation for the purpose of enabling the president and officers, and other stockholders of the corporation, to make a sale and exchange of their own present holding's and stock in said company.
“I further object to and protest against the issue of said increased capital stock, and the borrowing of the sum of three million dollars upon the proposed plan, or at all, because the mine and mill of the company at Bingham are capable of earning, if the same are operated with ordinary skill and ability, sufficient money to meet the cost of the proposed improvements.
“I further object and protest against the proposed plan because the fact is that the sum of $3,000,000, after deducting the $750,000 for paying the existing mortgage indebtedness, is far in excess of the requirements of said company for making such improvements; that said improvements consist mainly of two items, as follows: (1) the building
of a railroad from the mine at Bingham to the site of the proposed new mill, on the south shore of Groat Salt lake; (2) the building of said mill and its appurtenant power plant; that the said railroad can be built and equipped with rolling stock for a sum not to exceed $350,000: that I have offered to, aud do now hereby offer, to build and equip the same as aforesaid for said company for the sum of $350,000; that said mill can be built and equipped with first-class, modem machinery and appliances, adapted to all the uses required of it, for a sum not exceeding $750,000, and I have offered, and do hereby offer, to construct the same in manner aforesaid for said sum.
“1 further object and protest because the fact is, as I am informed and believe, that money to the extent of $4,000,000 on the simple contract notes of said company can be borrowed at the rate of five per cent, per annum, from a company financially responsible, to wit, the General Electric Company, conditioned only that the company will sell, at market rates, its copper product to the General Electric Company.
“The increased stock can be sold at par for more money than is needed to pay the expense of said improvements.
“I further protest and object against said proposed action by the company because I have been, and am now ready, able and willing to contribute my share of one-fifth of the money necessary to pay the expense of said proposed improvements upon the plant of the company, as well as the payment of said mortgage indebtedness.
“That the notice of the directors’ meeting, at which the issue of the bonds and stock now contemplated was recommended, contained no reference to or notification of the proposed increase of stock, and that therefore the proposed proceedings to increase said stock are illegal and void; and
“That there is no warrant at law for the issue of bonds of the tenor and effect set out in the notice of this meeting, and that such bonds, if issued, will be illegal and void.”

Several objections are made by complainant to tire proposed proceedings.

Eirst, it is objected that the notice of the meeting of directors sent to the complainant is insufficient, in that it does not set forth truly and fully the business to be brought before the directors.

It will be remembered that the notice is confined to specifying the mere issue of bonds to bo secured by mortgage, and the rate of interest and term of the bonds, and to authorize the calling of the stockholders’ meeting to ratify the action of the board.

The other contents of the notice are quite general.

There is nothing in it to indicate that an increase of capital stock was contemplated, or that it was proposed to issue the bonds and negotiate them in a mass to one party.

Now, it will be observed that the twenty-seventh section of the' Corporation act, which authorizes an increase of capital stock, prescribes the mode in which it shall be done. The board of directors must pass a resolution declaring that such increase is advisable and calling a meeting of stockholders to take action thereon.

Counsel for complainant draws a clear distinction between meetings of directors held for the purpose of supervising and directing the ordinary business transactions of the company, and providing for such emergencies and exigencies as may arise therein, and a meeting of directors to consider the matters provided for in section 27, and they contend, and I think rightly, that while little or even no notice is required to be given to each director of a meeting to transact business of the former character, a special notice is not only proper, but necessary, to be given in tire latter case, and that such notice should state fully the object of the meeting, so that each director may be informed in advance and fully appreciate the importance of his personal attendance. The defendants seem to have felt the force of these considerations, for they did attempt to state the object of the meeting, and the complaint of Colonel Wall is that they did not state it fully.

It seems clear enough, from the affidavits and the statements of counsel, that he was aware of the desire of the other directors to increase the indebtedness of the company, and may have thought that it was useless, even if it were practicable for him to leave his home and place of business at Salt Lake Git)'', near the works of the corporation, and travel several hundred miles to Colorado Springs, to oppose the issue of bonds, and therefore contented himself with a written protest, while, if he had known tliat the scheme included the issuing of $1,500,000 more stock, and placing that stock under the control of a single corporation, ho would have attended the meeting and exercised his influence by argument against it.

This was his undoubted right, and it is no argument against his exercising it to say that it is quite clear that it would have been unavailing. The law presumes that the result of a meeting of a body of that kind cannot be determined with judicial certainty by canvassing the individual views of the members, but that in law it depends upon a conference of the several members, met as a body, after an interchange of views and of arguments.

It is impossible to hold that the presence of Colonel Wall a.t the meeting of directors here relied on might not have changed the result. I can see no reason why Colonel Wall should not have been apprised, not only of the proposed contract of July 2Gth between the copper company and the exploration company, but also of the previous contract of July 7th between MadSTeill & Penrose and the exploration company.

I do not deem it necessary, at present, to express any definite ©¡union on this objection.

The next objection is that the meeting of directors in question was invalid because not held by a quorum of directors competent to vote thereat oar the anatter before them. Only four were present, a bare quorum. Of these four, complainants contend that Madseill was incompetent by reason of his personal interest iar the question before tire boai’d.

This allegation of interest is based on tire sixth paragraph of the contract of July 7th, heretofore mentioned. By that paragraph the exploration company agreed that MadSTeill & Penrose may take the whole or airy part of $1,500,000 of the convertible bonds, upon condition, that they shall sell to the exploration company one-half of such stock as they shall receive from the company under the option of conversion to be inserted in the bonds.

I may not have properly construed the section, but it certainly does give Messrs. MadSTeill & Penrose a personal interest iir the transaction, and complainant claims that it is fatal to the resolution in question, upon the principle laid down in the books that director who is disqualified by reason of personal interest in a matter before a directors’ meeting, loses pro hac vice his character as director, and he cannot be counted fox the purpose of making out a quorum.” This principle was acted upon and approved by our court of errors and appeals in Metropolitan Telephone and Telegraph Co. v. Domestic Telegraph and Telephone Co., 44 N. J. Eq. (17 Stew.) 568 (at p. 573).

The answer made by defendants to this position is that this reservation to MacNeill & Penrose was intended by them to be held in trust for' the benefit of all the other stockholders who chose, to come in and take a share of it and contribute towards making up the one hundred and fifty-six thousand shares of stock which they had agreed to sell to the exploration company, in order to give them the majority of all the stock.

Complainant’s answer to this is that there is nothing in writing, signed by either MacNeill or Penrose, by which this trust can be established.

So far as appears to the court, it is supported only by the affidavit of Mr. Babbitt, one of the directors, and the counsel of the company.

It probably furnishes the explanation of the complainant’s allegation that he was told by MacNeill, or some one representing him, that he could only obtain his share in the new issue of bonds by contributing shares of stock toward making up the fifty-one per cent, of the whole issue required by the exploration company. I shall not express any definite opinion upon this point made by the complainant at this stage of the cause.

The next point made by the complainant is that there is no authority by the common law or by our statute for issuing con- • Avertible bonds of this character. They argue, and rightly, that the right to issue bonds and secure them by mortgage is not given by any statute, but rests entirely upon the common law right of a corporation to incur indebtedness, and that right does '¿not include a right to issue bonds convertible into stock.

In this connection reference was made at the argument to the second section of the act of March 28th, 1902. P. L. 1902 p. 217. That section, as is well known, was supposed to have been passed' at the instance of the great steel trust, and came under review in the case of Berger v. United States Steel Corporation, 63 N. J. Eq. (18 Dick.) ‘506, by Vice-Chancellor Emery, and again (at p. 809) by the court of errors and appeals. But that act, by its terms, provides for convertible bonds issued by a corporation having certain qualifications and characteristics which the present corporation in question does not possess. I do1 not deem it necessary to express any definite opinion at this time on this objection.

The last and most serious objection urged by complainant is'/ that the proposed action will deprive him of a clear and indisputable right which he has by the law of the land to participate in any issue of new stock to an extent measured by the comparative amount of his present holdings of stock, and upon the same terms that other parties shall participate therein. In other words, that he is entitled to an opportunity to take and pay for one-fifth of the proposed new issue, and that the contract to dispose of all that issue to the exploration company infringes on that right.

This right, as I understand it, is based on two grounds.

First. That the complainant became the owner of one-fifth of the property of this corporation with the full understanding that he would thereby have a voice and influence in its management due, among other things, to that share, and that an increase of the stock issued to other people will diminish his voice and influence just so much.

Second. That at present he is entitled by law to one-fifth ofj the whole property of the corporation, whatever may be its value,! and he is entitled to one-fifth of any increase of that value, whether such increase be. due to the accumulation of actual earnings or to anticipated increase as the effect of the knowledge, by physical development, of its present value, and any issue of capital stock is of necessity a diminution of his sháre in that increase, and that in order to protect him against an undervaluation of the new stock to be issued, however that' undervaluation may arise, he is entitled to Hie privilege of taking a proportionate share of the new stock, and especially is he so entitled in the preskat case, where there is no present sale of. the new stock at an appraised value, but where an option is given to purchase at any time within five years, at a price now fixed, and which, when the option comes to he exercised, may prove to be entirely inadequate. Thus the holder of the option will have the whole of five years, during which the mining property is being developed, to ascertain and determine whether it is worth while 'for it to exercise its option. If the property does not improve in value and the stock is not worth $20 per share, it will not exercise its option, but will enforce the pa3rment of the bond. If, on the other hand, the property does, either by its development or by the addition of undivided earnings, increase in value so as to be worth, as it may, many times the price fixed, it will exercise its option, and in such case it will gain at the expense and loss of the complainant.

The complainant’s contention is, in my judgment, thoroughly based upon justice and law.

The leading case, of course, upon the subject is Gray v. Portland Bank, 3 Mass. 364 (1807). There the bank was organized with $100,000 capital, with the privilege by its charter to increase it to $300,000. After it had been in successful operation for several years, and the stock was worth something more than par, the directors resolved to issue the remaining stock, as I read the case, at par. The plaintiff demanded the right to take his share, which was $14,000, in the new stock and was refused, whereupon lie brought his suit against the bank for damages, and recovered. The case was elaborately argued and opinions delivered by two judges, putting his right on substantially the grounds above stated.

That case has been followed with almost unbroken uniformity in most of the states of the union.

Mr. Morawetz, in his valuable work on corporations (Morawetz Corp. §§ 454, 455), states the rule as follows:

“When a corporation declares a stock dividend in wholly or partially paid-up shares, the new shares are paid up in the jvhole or in part out of the profits which belong to the existing shareholders. It is evident, therefore, that each shareholder is entitled to share in the dividend, to the same extent as if it were paid in cash.
“It is equally clear that a corporation cannot issue new shares at less than their full market value, except by equal distribution among all the shareholders, for whatever the new shares are worth is represented by capital or profits belonging in equity to the existing shareholders.
“It seems that if a corporation resolves to increase the amo.unt of its capital by issuing and selling new shares, every stockholder has a right of pre-emption of a fractional part of the new issue, proportionate to his fractional share in the company’s entire stock. Each stockholder is thus enabled to preserve unimpaired his voice in the management of the company’s affairs.”

To the same effect is Ang. A. Corp. §§ 554, 555; also 2 Beack Corp. § 473. Mr. Cook, in Ms book (Cook Slock. § 286), lays clown the same rule. To the same effect is Mr. Thompson’s elaborate book (2 Thomp. Corp. Off. § 2094)

Numerous adjudged cases were cited by counsel for the complainant in support of the general proposition, of which I will mention a few.

One is Jones v. Concord and Montreal Railroad, 67 N. H. 119; 38 Atl. Rep. 120.

In the very recent case of Electric Company of America v. Edison Electric Illuminating Co., 200 Pa. St. 516; 50 Atl. Rep. 164 (1901), the question came under consideration in the review by the supreme court of a learned opinion of the presiding judge of the common pleas of Blair county. He there cites the authority of several text-writers and refers to previous decisions in Pennsylvania, arid holds to the rule as laid down by the text-writers, and his decree was sustained on appeal by the supreme court for the reasons given in the court below. The head-note is this: “Stockholders have a right to purchase a pro rata share of a new issue of stock, so that the directors may not provide that the new issue shall be sold to the one making the highest secret bid.” There the complainants already held a majority of the stock, but had only a minority in the board of directors. That body, by a majority vote, resolved to issue new stock and sell it to the person who would make the highest sealed bid for it. This action was restrained by the court.

In our own state we have the case of Way v. American Grease Co., 60 N. J. Eq. (15 Dick.) 263, decided by Vice-Chancellor Grey in 1900. The head-note is this: “The directors of a corporation which is fully organized and in the active conduct of its business are bound to afford to. existing stockholders an opportunity to subscribe lor any new issue oí shares of its capital stock, in proportion to their holdings, before' disposing of such new shares in any other way.” In support of that proposition, he cites (p. £69) Gray v. Portland Bank. It is true that there .\were circumstances of actual fraud found in that case, but the principle applies to the present case.

I understand that the court of errors and appeals acted upon the same principle in Berger v. United States Steel Corporation, 63 N. J. Eq. (18 Dick.) 809. The first two head-notes are to that effect.

Against this doctrine defendants rely on the case of Mcredith v. New Jersey Zinc and Iron Co., 55 N. J. Eq. (10 Dick.) 211, decided by myself, and affirmed on appeal, 56 N. J. Eq. (11 Dick.) 454, on my opinion. What is expressly relied upon is found upon p. 220, 55 N. J. Eq. (10 Dick.), and counsel seem to think that the interpolation of the words in parentheses, “if there be such,” after the words “general rule,” manifested a doubt in my mind as to its existence. It is proper for me to say here'that what I there said was the result of not more than ten minutes of consideration, and the only study given to the question was the reading of the section referred to in £ Beach Gorp. And if I had then had at command time to give the subject proper consideration, I am not at all sure that I should have dictated the sentence which immediately follows the citation of the Massachusetts case, which was not necessary fox the decision of the cause. But be that as it may, 'the reading of the whole case shows that it is quite different from the one in hand. In the. first'place, the complainants were the holders of less than one per cent, of the whole stock of the corporation. In the second place, the defendants offered at tire hearing to' give them an opportunity to purchase their proportion of the new stock at par. In the third place, the property purchased had been appraised in the most careful manner and bargained to be purchased between parties entirely at arms’ length, excluding the least suspicion that the element existed of a party making a contract with himself. "

In the present case there is no purchase of property, no1 appraisement of value by disinterested parties; but a simple, clear contract to give a third party the absolute right, by way of option, to purchase stock of a corporation, at a price now fixed, if at a future day that party should feel it his interest to make the purchase. I think that not only is that in direct violation!! of the complainant’s individual right as a stockholder, even if \ it were an issue of stock in prcesenti for a fixed price, but that ¡1 the optional character of tire contract is vicious in itself, and !, not warranted by that clause in the statute which authorizes the 1 creation and issue of new stock.

Against the general line of authority above cited defendant relies upon the very recent case of Stokes v. Continental Trust Co., decided by the appellate division of the New York supreme court, 99 App. Div. ■ 377. I might dismiss the ease by saying that the point here involved was not before that court in that cause, and that a careful examination of the reasoning of the several judges tends to help the complainant herein, rather than the defendant. It was a suit brought by Stokes against the trust company to recover damages against it for not issuing to him at par his proportion of a new issue of stock, such damages to be measured by the difference-between the par value of $100 per share and the price at which the new stock was actually sold—$450 per share. At the time when the transaction occurred the book value of the stock was about $310. At that time the firm of Blair & Company proposed to buy five thousand shares of new stock at $450 per share, the result being a doubling of the amount of stock and increasing its book value considerably, and the market value was increased far beyond its book value. The plaintiff claimed the right to .a proportionate amount of the new stock at par on the day of its issue. He never demanded the right to take any part of it at the price paid by Blair & Company, or offered to do^ so. The trial judge sustained the plaintiff’s claim and directed judgment to be entered against the defendant for the difference between the par value of the complainant’s two hundred and twenty-one shares, namely, $22,100, and the actual market value, fixed by stipulation at $550 per share, which judgment amounted to $115,151.07. It seems to me that such a judgment could not stand the test of reason for a moment. The mere statement of the case shows its utter in-defensibility.

The leading opinion of the supreme court was written by Justice O’Brien. I-Te reviews all the cases in New York and expresses some doubt upon the soundness of much that has been written and decided upon the question, and then calls attention to the peculiar claim of the plaintiff to subscribe for the stock at par and his failure to offer to pay the same price as Blair & Company paid, and tiren proceeds as follows:

“Much might be said, and considerable force may be derived from the views of text-writers and from the expressions in opinions in support of the proposition that a stockholder, as against an outsider, has a primary or pre-emptive right to subscribe for any increase of stock made by the corporation. This primary or pre-emptive right, however, to subscribe at par for increased stock which is to be issued at par, or, where the value of the stock is greater than itá par value, and it is proposed to issue it at its greater price, to subscribe for it at such price, in preference to outsiders, is quite different and distinct from the right here claimed, which is that of a stockholder to have at par stock which is worth, or can be sold, in the interest and for the benefit of the corporation to others, for four and a half times its par value. We do not think, in the absence of any statute of the state conferring such right, or provision in the charter of the corporation, or in the resolution authorizing the increase, or of fraud or illegality in making the increase, that this contention as to the right of a stockholder which the plaintiff here asserts can be sustained either in law or in reason.”

In this opinion Justices VanBrunt and Hatch concurred; Justice Paterson concurred in the result, and Justice Laughlin gave his own reasons. Speaking of the power to issue stock where there is a minority against it, he uses this language, (which seems to me to express the rule accurately and tersely: V.“In that event I think the statute confers implied power upon the majority to determine whether the stock shall be issued at par or above par, at what may be deemed its actual value, in view of the value of the assets of the existing corporation, the right to -ultimately share in -which' the holders of the new issue of stock will thus acquire. The action must be ■ taken, however, in a manner that will secure to the existing stock- ¡ holders an opportunity of exercising their pre-emptive right of subscribing for a share of the increased capital stock in proportion to their holdings of the original. I think, for instance, that the sale of the new stock to the highest bidder, upon sealed proposals, would be a violation of this right. A stockholder prior to the increase has a'right to a voice in-the management and to a share of the assets of the corporation, on final dissolution, in the prqportion that his holdings bear to the entire outstanding capital. These rights are materially affected by an increase of the capital stock, and such increase must therefore be made in a manner to enable him to become the purchaser of such a proportion of the increased capital stock as will preserve his right to- the same proportion in the assets on final liquidation as he originally had, and also the same voice in the management of the corporation. Moreover, the immediate effect of an increase in the capital stock of a corporation, the value of which is abo-ve par, would be to depreciate the value of the original stock, unless the new capital is issued and sold at a valuation equal to that of the original issue. It is therefore manifest that if the holders of the original stock are not to purchase the entire new issue, it is to their interests that the increase of stock be issued, not at par, but at what will be its actual value, as near as the same may be ascertained.”

Eor the reasons above set forth, I am of the opinion that the last objection taken by the complainant to these proceedings is fatal, and, without expressing any opinion upon the other objections made, that an injunction must go until the time of the hearing.


source: Caselaw Access Project

license: Public Domain

text:
    The Driver-Harris Wire Company v. William B. Driver.
    [Argued and decided October 3d, 1905.]
    A contract for tbe purchase of defendant’s stock' in complainant corporation provided that defendant should not concern himself in the manufacture or sale of resistance or steel armature binding wire, &c., but might experiment in making such goods at his own expense, and, if the results of such experiments should meet complainant’s approval, the latter would manufacture the goods, pay for selling the same, “and the profits thereon, after paying for the raw material,” should be divided between the parties, &e. The contract also declared that such inventions and improvements subsequently made by defendant should belong to him, and, if complainant did not approve the same, defendant might make and sell the goods on his own account, paying ten per cent, of the selling price to complainant.—Held, that defendant, having invented a new wire, was not entitled to offer complainant as a compliance with the contract the material invented in a state ready to be drawn into wire, but was bound to disclose the formula and permit complainant to manufacture the same from raw materials.
    On exceptions to answer to supplemental bill.

      Mr. Edward A. Day, for the exceptant.

      Mr. Alfred F. Elevens, conlra.

   Pitney, Y. C.

I am asked to give my reasons, for the purposes of appeal, for sustaining the exceptions to the answer to the supplemental bill.

The object of the original bill, filed May 15th, 1905, was to ■enforce by preventing the breach by the defendant of a contract ■entered into between the parties hereto on the 16th of February, 1905, and consummated on or about the 5th of April, 1905.

The defendant was the president of the complainant corporation and largely interested in its 'capital stock, and by the agreement he conveyed to complainant all his stock, for the sum of $G0,000, payable in installments as specially provided in the agreement.

Then follows an agreement on the part of the defendant that he will not,

“for a period of fifteen years, from April 1st, 1905, engage, directly or indirectly, or concern himself in carrying on or conducting the business of making or selling resistance or steel armature binding wire, sheet or strip, or any brass or copper wire, sheet or strip, or so-called antique bronze wire, or bronze wire made, approximately, of seven (7) per cent, of tin and ninety-three (93) per cent, of copper, and imported from Germany, in competition with the business of the said company in”

certain of the states of the United States.

Then follows this further clause:

“But the party of the first part has the privilege of experimenting in the making of the above-mentioned goods, at his own expense, and, if the products and results resulting from such experiments shall meet the approval of the said company, then the said company shall furnish the machinery and labor for the manufacture of such goods, and the party of the first part shall pay the expense of selling the said goods, and the profits thereon, after paying for the raw material, shall be divided equally between the said wire company and the party of the first part, it being understood that the party of the first part shall have the right to fix and determine the selling prices for said goods; but if the said company does not approve the said goods, and is unwilling to manufacture them on the terms above stated, then the party of the first part may make and sell such goods on his own account, and agrees to pay ten (10) per cent, of the selling price to the said wire company, rendering a full and true account of all sales every six months to the said company; it being-understood that all inventions, discoveries, developments and improvements growing out of the experiments of the said party of the first part shall belong to him, and .that the said company shall not attempt to infringe the same; and that the wire company will not experiment or attempt improvements in alloys for resistance wire, sheet or strip, during the term of this agreement, unless the party of the first part shall have abandoned his experiments in the making of such alloys and- shall have so notified in writing the wire company.
“And the said wire company, in consideration of the sale of said stock as herein provided, and in consideration of the party of the first part refraining from competition as above provided, hereby agrees to pay to the said party of the first part the sum of twenty-five hundred ($2,500) dollars per annum for ten (10) years, from April 1st, 1905, in semimonthly installments, and the party of the first part agrees that he will do all in his power to assist the welfare of the said company by advice regarding .business methods and customers at any time that he is consulted by the wire company or its officers.”

The bill charged specific breaches of this agreement,, commencing almost immediately after the 5th of April, 1905.

An answer was filed on the 13th of June. Affidavits were annexed to each and arguments were had thereon.

The supplemental bill was filed September 11th, 1905, and the answer to it on September 20th.

Exceptions were immediately filed to this answer for insufficiency: were promptly brought to hearing, and sustained on the 3d of October.

The answer to the original bill, and statements and admissions by counsel at the argument, informed the court as to the meaning of the technical words used in the- contract.

The supplemental bill recites the original bill and the contract, and, after referring especially to the provision that the defendant might experiment as therein set forth, and alleging that by the true meaning and construction of the contract any inventions, discoveries, developments and improvements by the defendant must possess substantial novelty and must be useful and new to the trade, it proceeds to state that since the filing of the original bill defendant had offered to complainant certain formulas for the making of resistance wire, giving the composition of those, and then contains this clause, “and also a resistance material composed of copper, nickel and manganese, in proportions unknown to your orator,” which the said defendant claims gives a resistance of about four hundred and twenty-five ohms per mil-foot, or about forty times that of copper, and which will not rust, and has a higher resistance than any metal on the market which will not rust, which he claims to be improvements in resistance wires produced as the result of his experiments.

The supplemental bill then charges that the defendant claims that any change, in any of the articles which by the contract defendant is prohibited from selling, however unsubstantial, or un important, it may be, gives io the defendant the right, under the contract, to join with the complainant in its manufacture and sale.

The bill then alleges the continued breach by the defendant of the contract, and prays relief against the clause giving the defendant an annuity of $2,500; and claims the right, pending the litigation arising out of the pleadings, t& abstain from deciding whether to accept or decline the offers of defendant of new inventions.

In its prayer for answer the complainant asks as follows:

“And more especially that he shall set forth and discover the formula, alloy and ingredients in their relative proportions of the resistance material of copper, nickel and manganese which he claims gives a resistance of about four hundred and twenty-five ohms per mil-foot, or about forty times that of copper, and which will not rust, mentioned and set forth in the foregoing bill, and also mentioned in a letter from him to your orator bearing date on or about the twenty-eighth day of August, 1905.”

The defendant by his answer declines to answer this interrogatory in the following language:

“And this defendant denies the right of the complainant to insist upon the disclosure of the proportions of copper, nickel and manganese contained in the last product offered to it by this defendant, for the reason that the product, by the terms of the contract, is his, and if it differs in the results it accomplishes from the products of the complainant, so that it is demonstrated to be an improvement, he is entitled to offer the same, as he has done, in the shape of wire, to the complainant, which can be tested and found to accomplish what he has stated it will accomplish.”

The reason given by defendant in Ms answer, and at the argument, for declining to disclose the proportions of the composition of the alloy is that it is not necessary for the complainant, and it is under no obligation to furnish the raw product—whatever that may mean—required for the manufacture of defendant’s improved product, and if defendant provides such product there will be no necessity for complainant knowing its composition, and charges that complainant intends to disclose the secret of his goods and have them known to the public, and thereby the value of them will be lost to him.

In his argument he further alleged that the valué of his products could be determined by experiments in testing its power .of resistance.

.Before measuring the value of this argument, I shall state that an examination of the pleadings, together with the statement and admissions of counsel made at the argument (and without relying upon the knowledge derived by me from a reading of the numerous affidavits presented to the court before the hearing on the exceptions, including the oral examination of witnesses on a motion for a judgment of contempt against the defendant for a breach of the- injunction issued against him), shows that the meaning of the words in the contract “resistance or steel armature binding wire, sheet or strip, or any brass or copper wire, sheet or strip,” is some alloy of copper used in the manufacture of electrical apparatus which does not conduct electricity as freely as does pure copper, and hence is called a “resistance” wire, sheet or strip.

Copper is the best conductor of electricity and is used in the art as a standard of least resistance, and different alloys of it are made with varying degrees of resistance. -The different materials which produce these alloj^s are tin, zinc, steel, manganese, nickel, and I believe some others, and they may be mixed with almost infinite variety of relative proportions.

The complainant claims in argument that the words above quoted include substantially any and every alloy of copper, since unless it be in some manner alloyed it will not be properly termed a resistance wire, sheet or strip. I express no opinion on this claim at this time.

On the merits of the exception the complainant claims that it cannot judge of the value of any new alloy presented to it without knowing the proportions of its ingredients, and that if a sample be furnished, as it must necessarily be, it would have the clear right to analyze it to ascertain its component parts, and that it should not be subjected to that expense and trouble.

In answer to defendant’s argument that it is not necessary for the complainant to furnish or provide the “raw product,” since the defendant can do so ancl is willing to do so, the complainant says that the provision of the contract in question is that the complainant shall furnish the machinery and labor for the manufacture of such goods, and that that provision implies not only a duty on the part of the complainant to. manufacture, but a privilege on its part so to do, and thereby save all the profits that arise from the manufacture, which includes, of course, the mixing of the alloy and the putting it into the shape of thin billets or rods, ready to be drawn out into wire or sheets or strips, as may be demanded by the trade. Further, it argues that if it manufactures the goods it is responsible to the trade for their character and composition. To this the defendant answers in argument that the character and quality of the goods may be determined by complainant by actual test of its powers of resistance to the current of electricity.

I thought at the argument, and still think, that the contentions of the complainant in this behalf were sound and unanswerable.

The offer of the defendant—I so construe the answer—to furnish the “raw product,” by which I understand he means the billets or rods ready to be drawn into wire, sheets or strips, is clearly inadmissible, since it would put the complainant at the mercy of the defendant in the matter of price to be charged for it.

The clear spirit of the agreement is that the complainant has the liberty to go into the original market ■ and buy the raw material and combine it and manufacture it as cheaply as possible, and for that purpose it is quite clear that it is entitled to know what those raw materials are, and in what proportions they should be combined. And here certain language in the agreement is significant, namefy, “and the profits thereon, after paying for the ra/w material, shall be divided equally,” &c. Now, the words “raw material” there undoubtedly mean the several articles of which the alloy is to be composed, and cannot mean the billets and rods ready to be drawn into wire, which.I infer was intended by the words “raw product” used by the defendant. And over and above all complainant is entitled to know those proportions for the purpose of judging and determining whether they wish to. undertake the manufacture or not.

In short, the practical. result of adopting the construction claimed by the defendant would be to give him the opportunity to gradually enter into competition with the complainant in the manufacture of all sorts of “resistance wire, strips and sheets,” upon condition that he pay the complainant ten per cent, of the selling price thereof.


author: Pitkey, Y. C.

text:
    Edward S. Campbell, receiver, &c., of the Middlesex County Bank, v. The Perth Amboy Shipbuilding and Engineering Company, The Nautical Preparatory School, Sarah J. L. Ramsay, individually and as administratrix of Hugh Ramsay, deceased, Oliver W. Ramsay et ux. et al., heirs-at-law of Hugh Ramsay, deceased, et al.
    [Decided November 3d, 1905.]
    1. In a suit to foreclose certain mortgages given to a bank, evidence held insufficient to establish an agreement between the mortgagor and the hank that certain notes deposited as collateral for the secured debt should be taken by the bank and credited in payment thereof.
    2. Where a bank, prior to its failure, had taken steps to extend its ■corporate existence under 1 Gen. Stat. p. 972 § 302, authorizing the extension of the life of corporations, and had thereafter operated and been treated as a banking association legally organized, both by the public and the state government, a borrower was estopped, in an action by the bank’s receiver to foreclose certain mortgages securing certain loans, to allege that at the time the loans were made the bank had no legal corporate existence.
    3. Where certain mortgages given to a bank recited that the bank was about to loan certain sums of money to the mortgagor, in an amount not to exceed in the whole a specified sum, by discounting his notes payable in three months, such mortgages secured demand notes discounted by the bank for the mortgagor, which referred to the mortgage and were treated by both parties as secured thereby.
    4. Parol evidence is admissible to show the real object of a mortgage, and' that it was given for a purpose not disclosed in the condition.

      5. Where an administratrix sold certain mortgaged premises to pay the mortgage debt, and the purchasers paid nothing to the administratrix, but bought for the benefit of a corporation formed by them to operate the property, the administratrix had a vendor’s lien on the premises to the extent of the purchase price, to which the creditor for whose benefit the land was sold was entitled to be subrogated.
    On final hearing on bill, answer and cross-bill and answers.

      Mr. Sherrercl Depue, for the complainant.

      Mr. Alan II. Strong, for the defendant Sarah J. Ramsay, individually and as administratrix, and for the Nautical Preparatory School and for George Ii. Newhall, its receiver.

      Mr. Adrian Lyon> for the Perth Amboy Shipbuilding and Engineering Company and Willard P. Yoorhees, its receiver.

      Mr. Abel I. Smith, for the United States Wood Preserving Company.

      Mr. Joseph E. Strieker, for Orin Hooper & Sons.

      Mr. Charles C. Ilommann, for the city of Perth Amboy and for the Perth Amboy Trust Company. • , '
    ilir. George L. Record, for Oliver W. Ramsay.
   Pitkey, Y. C.

This is a bill to foreclose three mortgages, given by Hugh Ranisaj’, since deceased, and his wife, upon certain premises in the city of Perth Amboy, to the Middlesex County Bank, which, upon the insolvency of that institution, in 1899, came into the hands of the complainant, Edward S. Campbell, as its receiver.

Certain of the defendants, who have- various and conflicting interests among themselves, the nature and character of: which need not now be stated, join in disputing and defending the complainant's claim on three grounds.

First. That the whole transaction on which complainant’s right rests is void and unenforceable because in violation of an act of the legislature with regard to the conduct of the business of banking.

Second. That the mortgages produced by the complainant do not, by their terms, cover and secure the indebtedness relied upon by the complainant. In other words, that nothing is due on them.

Third. That a large' portion, quite one-half of the debt claimed, was paid by Hugh Ramsay in his lifetime, in the manner set out in the defendants’ answers.

The most important- of these defences is the last, viz., that relating to the amount of complainant’s claim, and will he first considered.

I say “most important” because Ramsay died seized of the premises covered, by the mortgages, besides other property, and almost his entire indebtedness was to the complainant, and his property was ample to pay all his debts, including the complainant’s claim at its full amount. ■

Letters of administration on his estate were taken out by his widow.

The complainant prepared and verified and presented to- the .administratrix a sworn claim for the amount he claimed to he due.

The administratrix did not dispute it, hut applied to the . orphans court of Middlesex county for leave to sell the real estate covered by complainant’s mortgages to pay that debt, and actually sold it to- the defendant the Shipbuilding and Engineering Company for a sum of money sufficient to pay the claim, upon conditions and under circumstances which will he more minutely referred to later on.

Complainant’s claim consists of the aggregate of nine several promissory notes, made by Hugh Ramsay to the hank, and upon which the undisputed evidence shows that the money was advanced to Ramsay at about their several dates, and upon which the interest was paid by Ramsay from time to time up to a short time before the failure of the bank and the appointment of the receiver, which occurred in July, 1899.

The several promissory notes are as follows, all payable on demand:

February 6th, 1S92 ........................■ $1,500 00
March 3d, 1892 ........................... 10,000 00
March 14th, 3892 ......................... 3,500 00
March 19th, 1892 ......................... 2,000 00
October 15 th, 1892 ........................ 2,500 00
February 6th, 1893 ........................ -3,000 00
December 31st, 1894 ....................... 4,000 00
June 29th, 1895 ........................... 3,500 00
September 18th, 1895 ...................... 19,600 00
$49,600 00

This last note is in form what is known as a stock collateral note, as follows:

“$19,600/00.
“Perth Amboy, N. J., Sept. 18, 1895.
g T T E O 11 N j, E § Y
“On demand- after date I promise to pay to the order of Middlesex County Bank, Perth Amboy, N. J., nineteen thousand six hundred 00/—■ dollars at said bank, with interest, for value received, I having deposited herewith as collateral the undernamed securities, which I authorize the holder of this note, upon the non-payment hereof at maturity, to sell either at the brokers’ board or at public or private sale without further notice and apply the proceeds, or as much thereof as may be necessary! to the payment of this note and all necessary expenses and charges, holding me responsible for any deficiency. Securities deposited herewith.
“Notes of the Mining, Dredging and Power Company for a like amount, due Sept. 1, 1896.
“Also included and secured in mortgage given by me to said bank.
“(Signed) Hush Ramsay.”

The collaterals mentioned in this note were six debt certificates or promissory notes of various sums, aggregating $19,500, made by a corporation known as the Mining and Dredging Power Companji-, dated in August, 1895, and payable on the first day of September, 1896, with interest, being part of a series of $45,000 secured by a mortgage executed by the Mining and Dredging Company to the State Trust Company of the city of Yew York, which covered a steam floating dredge, which had been built by Mr. Ramsay, who was a shipbuilder.

These debt certificates, with one other for $5,000, had been taken by Mr. Kamsay as part payment for the balance due him for the dredge.

The other $5,000 note, at some time, was pledged by Mr. Kamsay to the law firm of Sullivan & Cromwell, as security for a less amount due them, either for professional services or money loaned.

The dredging company was a failure and passed into the hands of a receiver, and the dredge in question was subjected to maritime liens, and under them came into the hands of the United States marshal of Hew Jersey, and early in 1897 was brought to a sale under foreclosure of the mortgage. It was also sold by the receiver in insolvency and by the United States marshal for Hew Jersey in enforcement of the maritime liens.

The allegation of the several defendants in support of the claim of part payment is that some time prior to the month of April, 1897, a verbal contract was entered into between Hugh Kamsay and the'bank, by which it was agreed that the six notes aggregating $19,600, held by the bank as collateral to Kamsay’s note of that amount, together with the $5,000 note of the dredging company held by Sullivan & Cromwell, aggregating $24,600, should be taken and accepted by the bank as an absolute payment of $25,000 (being $400 more than the face value, without counting interest), on account of Kamsay’s indebtedness to .the bank.

The avowed object of this transaction was to enable the bank to purchase the. dredge at public sale and use these notes in payment therefor, so far as the dividends declared thereon by the receiver would be sufficient therefor.

- At the time of this alleged agreement the six dredging notes held by the bank had been sent to Hew York, where they were payable, for collection, and had presumably been presented to the receiver for the purpose of the dividend thereon.

This verbal contract is attempted to be proven by the evidence of Mr. Valentine, the cashier of the bank, and by Oliver W; Kamsay, the son and clerk'of Hugh Kamsay.

. It is alleged to- have been made between Hugh Kamsay,.on the one part, and. U. 13. Watson, president of the bank, 'and Valentine, its cashier, on the other, at two or three interviews at the banking-house.

Watson denies the making of any such agreement. Each of the directors of the bank swears that he never heard of it.

The books of the bank show not the least trace of any such transaction. Neither the $19,600 note nor either of the smaller notes held by the bank were given up to Mr. Ramsay.

Interest on the whole $49,600 was charged to and paid by Ramsay on the first day of July, 1897, following the alleged contract, and again on the first day of January, 1898. After that date Valentine, without the knowledge or consent of the president, Watson, or of any director, reduced the interest charges against Ramsay by the amount accruing on $25,000.

Later on, and before the failure of the bank, Watson discovered that Ramsay was not paying interest on his whole indebtedness, and swears that he spoke to Ramsay about it, who answered that Valentine, who had become the owner of the dredge, had promised to pay one-half of the interest due by him to the bank. This answer by Hugh Ramsay to> Watson is of great importance, as will appear further on.

The complainant, shortly after ho was appointed receiver, finding among the valuable assets of the bank the nine notes of Ramsay above set forth, made up a statement of the amount due thereon and mailed it to Hugh Ramsay and urged payment, and had quite a voluminous correspondence with him about it, and one or more interviews with him, in which he urged payment of the whole or part of the indebtedness, and at no time did Ramsay dispute the amount due for principal, but did allege some errors in the amount of interest.

Ramsay died on the 15th day of April, 1900 (about nine months after the appointment of the receiver), intestate, and on the 4th of May following letters of administration were granted to his widow, the defendant Sarah J. L. Ramsay.

He left a family of eight children, one of whom is an infant.

The complainant made out a sworn claim against the estate, based on the nine promissory notes above mentioned, with interest thereon, amounting to $52,240.28, and duly served the same on the administratrix. • ■

Eo objection has ever been made to that claim by her, nor has complainant been called upon, under the statute, to bring an action at law.

Four of the heirs-at-law were sons, most, if not all, of whom lived in Perth Amboy, near or with their mother.

All the proceedings by the administratrix in settling the estate were taken by and with the advice of her sons and her and their counsel, Judge Lyon.

They were all fully aware of the alleged contract by which a credit of $25,000 should be made on complainant’s claim, but never made it known to the complainant—in fact, it was studiously concealed from him.

He was continually urging payment or arrangement of the claim and threatening foreclosure. The sons were as continually asking for time.

There seems to have been some undefined, supposed defect in the title to spme part of -the mortgaged premises, which they were taking measures to have removed or cured, and these measures were set up as a reason for delay in foreclosure.

The only debt of the estate besides the complainant’s was a large arrearage of taxes due the city of Perth Amboy.

Some part of the premises were under a lease to the defendant the Wood Preserving Company, which was bringing in rents, which wore applied, I believe, in the reduction of the taxes.

Finally, the adult sons whom I have mentioned, who, of course, with all the children, are parties defendant, conceived the idea of forming a corporation to conduct the business of shipbuilding on a part of the mortgaged premises, which were well adapted for that purpose and had been used for that purpose by Hugh Ramsay in his lifetime, and on the 12th of September, 1901, they incorporated a company by the name of the Standard Shipbuilding Company, which name afterwards, on February 24th, 1902, was changed to the Perth Amboy Engineering and Shipbuilding Company, one of the defendants herein.

On the 2d of March, 1901, Mrs. Ramsay presented to the orphans court of Middlesex county a petition prajdng for the aid of the court and for an order to sell lands.

The petition contains a list of all the real estate of which Ramsay died seized, including the mortgaged premises (the value of which latter is therein stated at $225,000), and is verified by her affidavit.

Annexed to it is a sworn statement of debts and personal assets, of the same date, the substance of which is as follows: The amount of the inventory, $25,359.18. The debts stated were taxes due, $7,982. Then follows “claim by Edward S.Campbcll, receiver of Middlesex County Bank, with interest to March 1st, 1901, $5-1,560.” Then follow several small items of money actually paid by the administratrix for expenses in care for the property.

On that petition the ordinary order to show cause was made on the 16th of April and duly published, and on the 18th of June a decree was made, which, after reciting that the order had been duly published, and that the court had determined, on full examination, that the personal estate was insufficient to pay the debts to the extent of $41,161.53, ordered that the administratrix should sell the whole of the lands of the decedent.

The report of assets and liabilities just mentioned shows conclusively that the deficiency of $41,161.53 found by the court could not have been arrived at without counting the complainant’s claim at its full face.

On the 25th of November, 1901, Mrs. Ramsay made a report to the court, under oath, that she had sold, at private sale, to the Standard Shipbuilding Company, the part of the mortgaged premises used for a shipbuilding plant, for the sum of $52,410.28 (which is the amount of the complainant’s sworn claim against the estate),

“upon the condition that the Standard Shipbuilding Company will assume and pay a mortgage held by Edward S. Campbell, receiver of the Middle-sex County Bank, upon the said above-described property, being all the land described as tract number one in said petition, upon which mortgage, with interest, there is claimed to be due by said receiver the sum of $52,410.28, which assumption and payment of said mortgage shall be considered as the payment of the consideration money for the said tract so sold as aforesaid to the Standard Shipbuilding Company.”

On that report the court, on the 29th of November, made an order confirming the sale, inserting in the order that part of the petition above quoted, and directed a deed to be made.

The administratrix made her deed, dated the 27th of November, 1901, to the Standard Shipbuilding Company, for that portion of the mortgaged premises, in consideration of $52,-410.28, which contained a clause of assumption precisely the same as that above quoted.

That deed was recorded on the same day, viz., November 29th, 1901, in the Middlesex county clerk’s office.

In February, 1902, the name of the Standard Shipbuilding Company was changed to the Perth Amboy Engineering and Shipbuilding Company, and on the 25th of February the administratrix made a deed to the Perth Amboy Engineering and Shipbuilding Company for all of the mortgaged premises except the shipyard plant, previously conveyed, the consideration named being $75,000, which deed purported to be based on the same order of the orphans court made on the 18th of June, 1901.

That deed was duly recorded on the 18th of March, in the Middlesex county clerk’s office. It is here to be observed that the previous sale of November 27 th more than paid all the deficiency shown by the statement of debts and credits contained in the administratrix’s application to the'orphans court, so that there was no occasion for this conveyance. Moreover, the administratrix valued the mortgaged premises, as we have seen, at $225,000, and yet she induced the orphans court to approve these two conveyances, which aggregated nearly $100,000 less than she valued the premises. The fact is that these eonvejrances were a part of a family arrangement, and the whole object of the proceedings was to cut oil the title of one of the heirs who was under age.

On the 14th of March, 1902, the administratrix executed another deed to the Perth Amboy Engineering and Shipbuilding Company, based on the same order of Juno 18th, in consideration of $52,410.28, for the same portion of the mortgaged premises conveyed by the deed of November 27th, 1901, and that deed (as'well as the other two deeds) contained an acknowledgment of the payment of the consideration money, and after the description contains this clause : “This conveyance is made subject to a mortgage held by Edward S. Campbell, receiver of the Middlesex County Bank, upon the above-described property, together with other tracts.”

In point of fact, not a dollar of cash was paid for any of these conveyances to the administratrix.

Shares of stock in the corporation were allotted to each of the heirs and to the widow, according to their several interests. Ho other stock was at any time issued to any other person.

It is proper here to state that the reason given by the defendants at the hearing why the deed of Hovember 21th, 1901, was, so to speak, abandoned, and ignored, was that a Hew York counsellor, who xvas advising the parties, objected to it. As no stock was issued outside of the family, and as the parties interested were attempting to float an issue of bonds, I can imagine that counsel who was consulted with regard to that issue may have raised some question as to whether the title, which was made to the original Standard Shipbuilding Company, would be vested in the same company after its name was changed to the Perth Amboy Engineering and Shipbuilding Company. I said that no stock was issued outside of the Ramsay family. There may have been some shares transferred, to other persons for corporate purposes.

There were, besides the mortgaged premises, quite a number of building lots, some of which were sold by virtue of the sáme order.

After the title was vested in the shipbuilding company, negotiations took place between the directors, who were the sons ■if the mortgagor, and the complainant, with a view to the issue of corporate bonds on the mortgaged premises and the satisfaction of the complainant’s mortgage by a portion of these bonds, but the complainant naturally declined and insisted upon the payment of his money, with -the result that this bill was filed Hovember 30th, 1903.

In answer thereto, this alleged, payment was for the first time set up.

How, without asserting that the failure by Hugh Ramsay and his sons for so long a time to set up- the defence in question, the tacit acknowledgment from time to time of the justieeof the complainant’s claim, the treating it as valid for its full amount in the proceedings in the orphans court, the insertion of its assumption at its full face in the first conveyance, work an estoppel against these defendants, especially the infant, yet the circumstances stated do- amount to an explicit admission on the part of the adult defendants, all of whom were thoroughly familiar with the facts and circumstances, that the whole amount of the complainant’s claim was due.

But let us return to the month of April, 1897, and trace the history of the transaction in connection with the dredge from that time.

It is quite clear, from the evidence of Oliver Ramsay (who is the only reliable witness on defendants’ part to- this contract), as well as that of Valentine, that nobody supposed that the notes of the dredging company were worth anything, unless the dredge itself could be either bought in cheaply at the sale or a purchaser hunted up for it, and in that way the notes looked after and protected. Oliver Ramsay swears that it cost over $100,000, and Valentine swears that he had found two gentlemen, whom he named—Messrs. Hussy and Fenton—who were willing to purchase it at $75,000, and the plan, which seems to have been devised between him and Hugh Ramsay, was that the dredge should be bought in as cheaply as possible, and as there-were some other assets in the hands of the receiver, that the dividends to be declared by the receiver on the $24,600 of notes owned by Ramsay, including those pledged to the bank, should be used, as far as possible, in paying for the dredge, and then that it should be sold to the two willing purchasers for the $75,000, or such other sum as would pay Ramsay in full and enable him to reduce Ms debt to the bank.

But, in order to carry out that plan, several thousand dollars in cash were necessary in order to pay off the marshal’s lien and other expenses.

To accomplish all this it was necessary to obtain the consent of the president of the bank (1) for the use of its collateral notes for that purpose, and (2) to induce it to advance the cash necessary to carry the transaction through. This was done. Hugh Ramsay and Ms son Oliver called on Watson and Valentino at the bank, and laid before Watson the plan which Ramsay and Valentine had devised, and obtained his consent thereto j and it is at the interview in which that consent was obtained th'at it is alleged that the contract set up by the defendants was agreed to and consummated.

Valentine, by the consent of Watson, took some $6,006 out of the bank, leaving a mere memorandum in its place, and subsequently certified his own check on his account in the bank for about as much more (which was one of his modes of embezzling money), and obtained title to the dredge.

This is all that Watson ever consented to, namely, to let Ramsay take away his collateral for the purposes just mentioned, and to allow Valentine to take the money out of the bank (which was really a loan to Ramsay) for temporary use in carrying through the project, and no doubt Watson did consent that the temporary title to the dredge should be taken in Valentine’s name.

In fact, in order to properly protect the bank’s interest in the collateral, and to secure the return of the $6,000 taken, as we have seen, by Valentine, it was entirely proper and simply good business that the title should have been taken in Valentine’s name until it could be realized on and the money returned. [Discussion of evidence omitted by direction of vice-chancellor.]

The conclusion I arrive at is that there never was any agreement that the notes should be then and there at once credited against Ramsay’s debt.. Such a contract was so extremely foolish as to render it on that account highly improbable. Mr. Watson knew the value of the real estate upon which the bank held mortgages. He felt perfectly safe as to Ramsay’s debt and there was no occasion for making such a bargain. Moreover, the collateral given up, as it really was, for the accommodation of Ramsay, was of so little value, in Watson’s judgment, that it appears that he was entirely indifferent about it, and was perfectly willing that Ramsay should have the use of 'it, and to assist him in realizing on the notes by lending some more money to enable Ramsay to carry the transaction through, provided the affair could be kept so far under the control of the bank as to make it reasonably secure.

Hot only was it highly improbable‘that Watson or any other officer of the bank, not secretly interested personally in the transaction, agreed to give an absolute credit for past-due promissory notes of little or no value, held by it as collateral merely, but it reaches the absurd to suppose that he or they would give an additional credit for $5,000 for a note of the same character, held by a third party as collateral for a sum of money which must be paid before the note could be obtained and used by the bank.

The -result of the transaction in equity was that at the time the title to the dredge was vested in Valentine, in April, 1897, he held it as mortgagee—first, to secure the amount of cash furnished by the bank, voluntarily and involuntarily, to perfect the title; and second, to secure the $19,600 of notes belonging to Ramsay but held by the bank as collateral, and as to the balance he held it in trust for Ramsay, and this is the view of the affair most favorable to the defendants.

But here comes in an element entirely unknown to Watson or to any director of the bank.

Valentine had other schemes in his mind, entirely unknown to anybody, unless it be Ramsay.

He swears that the two gentlenien’ above named who had agreed to purchase the dredge for $75,000 finally declined so to do. What the real truth of the situation was is not easily known, as I place little reliance on Valentine’s evidence; but it is quite clear that about this time he was informed that a contract was to be let by the United States government to do some dredging in the harbor of Portland, Maine, and he took measures and bid on that contract, and obtained it, and took Mr. Oliver Ramsay in with him as a partner, with the two other persons who had declined, as he swears, to buy the dredge for $75,000, and proceeded to execute the contract, and therein spent a great deal of money embezzled from the bank, and entirely failed in the job, and the dredge was sold to pay the debts.

■ The effort of the defendants was to show that this whole affair was the enterprise of the bank.

I cannot adopt that theory. In the first place, it was one which the bank had no power to engage in.

In the second place, the president and every officer of the bank absolutely deny having anything whatever to do with it, and are sustained by an absence of any documentary proof to the contrary. On the other hand, Oliver Ramsay had ah interest in the contract which he distinguishes from an interest in the dredge. His father must have known what was going on. In fact, his knowledge of it was not denied, and it may be that Valentine, somewhere -in the history of the affair, told the father that he should have credit on the debt to the bank, not only for the $19,600 of notes pledged to the bank, but also for the $5,000 which had been pledged with Sullivan & Cromwell, and in reliance upon that promise of Valentine’s, Ramsay may have tacitly consented to Valentine’s going on with the dredging enterprise in Portland harbor. Certainly, it seems to- me, under the circumstances of the case, that Ramsay must be held to- have consented to and acquiesced in Valentine’s dealing with the dredge.

It clearly appears from the evidence of President Watson that he understood that Valentine was to buy in the dredge as cheaply as possible and immediately sell it at an advance for the benefit of Ramsay, and that the bank advanced the necessary cash to finance the transaction as an accommodation to Ramsay (who, with his son, had presented the plan to Watson in plausible terms, as the evidence shows), with the full expectation that the dredge would be promptly resold at a large advance, out of which the bank would be promptly repaid the cash presently advanced and the additional profits would go to Ramsay, and enable him to make a payment on his debt to the bank.

Watson had not the least idea that the bank was farther complicated in the affair than the advance of the few thousand dollars necessary to finance the transaction, and he had no notice or suspicion that Valentine intended to retain the title to the dredge and put it to practical use.

And here comes in a matter much'relied upon by the defendants, namely, the reduction in the amount pf interest charged by the bank to Ramsay. The bank had printed blanks, on which statements of the amount of interest due from debtors having demand loans from the bank were made out and sent to the debtors, and several of these were put in evidence by the defendants.

One, dated June 14th, 1897, filled up in the handwriting of Valentine and addressed to H. Ramsay, states that the interest on his demand loan, amounting to $1,813, will be due July 1st, 1897, and prompt payment of the same was requested. Now, $1,813 was the amount for six months’ interest on the whole of Ramsay’s debt at that time, about $55,000, without giving any credit for the $25,000 which, according to defendants’ theory, should have been credited in April, 1897.

This paper is significant in that it is entirely inconsistent with Valentine’s evidence that there was a contract for the credit for $25,000 in or before April, 1897. But it is quite consistent with the theory which I have formed of the true facts of the case.

The amount of this notice was charged up against Ramsay’s account, and a like amount in January, 1898.

His son- swears that, although the notice was received by Ramsay and produced by defendants at the hearing, yet that Ramsay did not discover the overcharge of interest until his book was written up and his vouchers returned, some time in 1898, and the son further swears that Valentine was spoken to about it, and promised to have Ramsay’s account credited with the overcharge of interest, but in fact never did have it so credited.

But in January, 1898, Valentine commenced, and from thenceforward continued, to make out, the semi-annual statements of interest for a reduced amount, namely, $738, being’ the amount due for six notes on something less than $25,000 ($5,000 in cash had been paid by Ramsay in the meantime on his indebtedness to the bank).

One of these statements was produced, with the receipt for the amount, signed “paid,” by Watson.

Being examined on that subject, Watson stated that he had no personal recollection of that particular payment, but swore, in substance, that he might have signed it without knowing what it was for or what length of time the interest stated in it covered.

When examined especially on the question of his knowledge that the semi-annual interest charges were reduced, he swears that he did not know it until very late—meaning shortly before the bank failed—and then he spoke to Valentine about it, and he understood that the whole amount was to be collected.

He was then asked by counsel for the defendants if he ever said anything to Ramsay to the effect that the amount of interest he was paying was not right, and he said he did, some time before the failure. He said he met him on the street and said something to him to the effect that the interest was not paid on the right amount, and Ramsay said he had some agreement with Mr. Valentine about it, and he (Watson) said:

“A. We, the bank, had no agreement with Valentine.
“Q. What agreement did he [Ramsay] say he had with Valentine?
“A. Some agreement in regard to payment of half of it—something of that kind.”

Prom this evidence it appears clearly enough that Ramsay knew, both from the fact that after the alleged contract for credit interest was made out and charged up to him on the whole amount of his indebtedness, and from this conversation with Watson, that the bank held and claimed to hold all of his notes, without any credit on account of the dredging company’s notes, and in the face of that knowledge he refrained from making any demand or taking any other measures to enforce his claim for a credit.

Another circumstance is worthy of notice. The bank held a demand note against Ramsay for $7,500, dated March 30th, 1895. This note was paid by Ramsay on January 25th, 1898, after he had learned that interest was being demanded from him on over $50,000. If he at that time understood that he had paid, not only $19,600, but $25,000, on the account of his indebtedness, it seems to me that it was a ‘good opportunity to have had the payment actually applied and the note handed up to him. I think this defence wholly fails. ■

The next defence which I will notice is that the bank had no legislative right to act as a bank, and hence all its transactions as such were void, and no cause of action accrued to it by reason of the loans made to Ramsay or any other borrower.

The Middlesex County Bank was Incorporated by an act of the legislature, approved February 1st, 1872, with the privilege to continue as such for twenty years.

.It went immediately into business and performed all the functions of a bank until the time it failed, in July, 1899.

In January, 1892, it took proceedings to extend its corporate existence for fifty years, under the act of April 21st, 1876. 1 Gen. Stcd. p. 972 § 302. It is argued that the act cited does not apply to banks, and that proceedings for extension were void, and that the whole proceeding was in violation of section 57 of the Banking act, which forbids unincorporated persons from conducting a banking business.

I shall not consider or discuss these arguments in detail, because I am of the opinion that the defendants are estopped from setting up this defence.

It will be observed that section 57 of the Banking act does not declare contracts for the loan of money made by a banking company, acting without legal authority, to be void. It simply prescribes a penalty upon the bank’s officers.

In point of factj this bank, up to the time of its failure, was recognized by the -state government authorities as a lawful institution, and was periodically visited as such by the inspectors of the banking department.

Its right to exist and do business as a bank was never challenged by any state officer. No proceedings were ever instituted against it by the attorney-general.

It was kept open as a bank and received deposits from a great number of individuals, and thereby became indebted to them. It loaned those moneys out to a great number of other individuals, including Ramsay. The object of the present proceeding is to recover back from Ramsay that portion of those deposits which he borrowed and never repaid, for the purpose of distributing it, as far as it will go, among these creditors of the bank, and it is known to the court that there will be a deficiency for that object. In short, complainant is to be considered 'in equity as the official trustee and agent of the depositing creditors of the bank to recover the moneys which the bank, as a trustee for its creditors, loaned to its debtors.

The bank, as an entity, then, may be left out of view here.

In my view, it would be a reproach to the administration of justice if the illegality of the bank’s corporate existence could be set up in the defence of this action. I think it does not lie in the mouth of a man who borrows money from a de facto bank to set up in defence to an action to recover that money that the bank has no right to exist.

The authorities cited by the complainant fully sustain his position in that behalf. Silver Lake Bank v. North, 4 Johns. Ch. 370; Camden and Atlantic Railroad Co. v. Mays Landing and Egg Harbor City Railroad Co., 48 N. J. Law (19 Vr.) 530; Steam Navigation Co. v. Weed, 17 Barb. 378; Palmer v. Lawrence, 3 Sandf. 161; Chester Glass Co. v. Dewey, 16 Mass. 94, 102.

A large number of cases to the same effect are collected in the case in 17 Barbour, above cited.

The next point made is that the language of the mortgages is insufficient to cover these loans.

The consideration of that point necessitates an examination of those instruments and the location of the mortgaged premises.

The latter consist of two tracts of land, or, more accurately speaking, one tract of land bisected by a street. Taken as a whole, it may be described as being .about seven hundred and fifty feet in length by four hundred and sixty feet in width, facing, for that distance, on Staten Island sound, and lying between Fayette street and Commerce street, which run substantially at right angles with the line of the shore, and is bounded by High street, on the west. It is bisected by Rector street, which leaves about three-fifths of the whole lot between it and the sound, and about two-fifths between it and High street.

From the north corner of the whole tract is to be deducted a small portion belonging to Mrs. Ramsay, and another small portion belonging to St. Peter’s Church.

The first mortgage was given by Ramsay and wife, on the 3d of March, 1892, and covers the block between High and Rector streets, and secures a bond in the penal sum of $60,000, with this condition:

“Whereas, The Middlesex County Bank is about to loan certain sums of money to the said Hugh Ramsay, to an amount not to exceed in the whole the sum of $30,000, by discounting his promissory notes drawn to his order, payable in three months from the date thereof, respectively,”

with the usual verbiage that the mortgage was to be void if the notes were paid.

The condition provides, also, for securing any renewal of such notes.

The second mortgage was given on the 10th of June, 1895, and covers a parallelogram on the east side of Rector street, bounded on the ends by Liberty and Commerce streets, and on the east side by the remainder of the whole tract.

The condition of this, mortgage declares that it is given as additional security for the first mortgage.

The third mortgage is dated the 4th of December, 1895, and covers the whole tract, and refers to an accompanying bond, whose condition is as follows:

“Whereas, The Middlesex County Bank is about to loan certain sums of money to the said Hugh Rafusay, to an amount not to exceed in the whole the sum of seventy-five thousand dollars, by discounting his promissory notes drawn to his order, payable in three months from the date thereof, respectively,”

following precisely the language of the first mortgage, including the mention of renewals.

In fact, it is quite plain, by pencil memoranda found on the face of the first mortgage, that it was handed to the scrivener as a form for the third mortgage.

Now, the argument is that no notes at three months were ever discounted for Ramsay, but that all the loans were made on notes paj^able on demand, and hence were not secured by these mortgages.

I am unable to see the least force in this objection, under the circumstances of this ease.

In the first place, its enforcement would result in rendering' these instruments absolutely valueless, except as to the $19,600 note, in which, on its face, it is declared that it is secured by a mortgage.

In the next place, the evidence is overwhelming that these moneys were loaned on the strength of these mortgages, and Ramsajr must have so understood it. It is quite impossible to believe that he could have understood anything else. To have done so he must have supposed that the bank was calling on him, year after year, to give these mortgages, one after the other, and then was willing to loan him $50,000 or $60,000 without any security whatever.

That it is quite competent for the parties to use the mortgage for a security other than that mentioned in it, is entirely clear and authoritatively settled.

Our courts have gone so far as to hold that a mortgage given for money loaned, which loan has been repaid and the mortgage delivered up to- the mortgagor, may be redelivered for another and distinct loan and be entirely valid between the parties, and as against all other parties except intervening encumbrancers.

It is authoritatively settled, in this state, that it is competent to prove by parol what the real object of a mortgage is, and that it is given for a purpose not disclosed' in the condition.

Among the numerous cases cited- by counsel, I mention the folioAving: Bell v. Fleming, 12 N. J. Eq. (1 Beas.) 13; affirmed, Ib. 491; Robinson v. Urquhart, 12 N. J. Eq. (1 Beas.) 515; Flanagan v. Wesicott, 11 N. J. Eq. (3 Stock.) 264; Hoy v. Bramhall, 19 N. J. Eq. (4 C. E. Gr.) 563; Farnum v. Burnett, 21 N. J. Eq. (6 C. E. Gr.) 87; Gñffin v. New Jersey Oil Co., 11 N. J. Eq. (S Stock.) 49; Silvers v. Potter, 48 N. J. Eq. (3 Dick.) 539; Underhill v. Atwater, 22 N. J. Eq. (7 C. E. Gr.) 18, 599; Lanahan v. Lawton, 50 N. J. Eq. (5 Dick.) 276.

I venture the suggéstion, however, that under the circumstances of this ease the validity of the mortgages is of little consequence. They were of record and were notice to everybody. The debt of the mortgagor is thoroughly established and is valid and binding on his heirs-at-law. The land was sold by the administratrix to pay that debt, and all the parties defendant, who claim- under the conveyances of the administratrix, took, of course, with notice of the debt, and have never paid one cent to the administratrix.

She has a vendor’s lien on the premises which she can enforce, and, in my' judgment, the complainant, as a creditor, is subrogated to the right of the vendor’s lien so held by the administratrix, and a very slight amendment to his bill would enable him to- enforce that lien in this suit.

The action of the widow and the adult heirs-at-law in accepting shares of stock in place of .their several rights as dowress and heirs, would be binding o-n them for the purpose of enforcing the vendor’s lien, so that the widow’s dower, for that purpose, is out of the way. The infant heir is, of course, bound by the ■acts of his ancestor.

I will advise a decree in favor of the complainant for the whole amount of his claim, and that it is a first lien on the premises, with one exception.

In July, 1897, Ramsay made a lease for ten years to- the defendant the New York Wood Vulcanizing Company, for about one-half of the water front, at the yearly rent of $4,700, and it now claims that the bank waived its priority over that lease, as a condition to its being made. This claim is thoroughly established and frankly admitted by the counsel for the complainant. The arrangement, however, does not destroy the lien of the mortgage upon the rents as they accrue.

I will advise a decree in accordance with these views. The decree will also be subject to whatever rights the city of Perth Amboy may have with regards to the opening of the street through the premises, which it claims were reserved in the vacation of one which traversed the most valuable tract diagonally.

The contest between the defendants has not been argued and its consideration will be taken up hereafter.