author: Vann, J.

text:
    James S. Rogers et al., App’lts, v. The New York & Texas Land Co. et al., Resp’ts.

      (Court of Appeals, Second Division,

      Filed October 1, 1892.)

    Corporations—Trust.
    A Texas railroad, company owned over five million acres of land previously donated to other roads by that state and other property, hut had outstanding second mortgage bonds amounting to about the value of the land, and in 1879 conveyed the lands, etc., to trustees for the bondholders in full of their claims against the company. The bondholders then appointed a committee to handle the lands, and by their direction it organized the defendant corporation which distributed land scrip or certificates to the amount of $6,000,000 among its stockholders pro rata, to be “ receivable in payment of seventy-five per cent of the price of the land at its regular selling rates, with an option to the company to retire the scrip from time to time by the payment of its par value, and liberty to purchase it out of the company’s surplus funds under public notice and sealed proposals at the lowest price at which, it may be offered.” The company, in 1887, purchased and cancelled about half of the land scrip, and purchased a fifth more which it did not cancel. By the laws of Texas, unless within fifteen years from the donation by the state of such lands at least one-half had been "conveyed to si.me grantee other than a corporation,” it would be forfeited.' So it was resolved that two blocks of stock purchased by the-Land Company should be distributed by dividend to the stockholders, with which they could purchase land so as to divest the company of the-same and vest it in the stockholders. Defendant also divided up $450,000-received for land among the stockholders. _ Plaintiffs refused to accept their share of the certificates, and bring this action against the directors to-require them to account, etc. Held, that the Land Company was a trustee of the scripholders. and that it was a breach of trust to reissue the cancelled ' stock, as was also the gift thereof to the stockholders, and the gift of three-fourths of the $450,000 in money received upon the sale of the land.
    Appeal from a judgment of the general term of the supreme-court, in the first judicial department, affirming a judgment entered upon the decision of the court after a trial at special term.
    This was an action by the plaintiffs, as holders of certain scrip issued by the New York & Texas Land Company, Limited, in behalf of themselves and all other scripholders similarly situated,, to recover from the directors of that corporation, in its name, the sum of eleven hundred thousand dollars, and to compel the application thereof to the retirement of outstanding scrip and for other relief.
    In 1879 the International & Great Northern Railroad Company, which was created by the consolidation of two other Texas railroad companies, known as the Houston & Great Northern and the International, owned 4,754,173 acres of land situated in said state, together with 5,907 town lots and certain instruments entitling it to more land, which, upon the trial, were treated as land. At the same time there was outstanding certain second mortgage bonds, due and unpaid, issued by the consolidated company, amounting, with interest, to over seven millions of dollars, which was about the value of said lands and land interests, according to the rate at which the state of Texas was selling similar lands. On the 1st of November, 1879, the International & Great Northern Railroad Company conveyed said lands and interests to John S. Kennedy, Samuel Thorn and William Walter Phelps, as trustees for the second mortgage bondholders, in full satisfaction of their claims against each and all of said railroad companies. After the bondholders thus, through their trustees, became the owners of the land, they appointed a committee from their own number, consisting of Moses Taylor, William Walter Phelps, John S. Kennedy,.Samuel Thorn and John Seeley, who were known as the purchasing committee, to act for them in handling said lands. They directed said committee “ to prepare and report to them a plan by which they could, if possible, realize in money the par value of their said bonds” out of said lands. They also directed the committee “to prepare and report to them a plan for organizing a corporation, to which said lands should be. conveyed, * * * in which corporation, in consideration of said conveyance and transfer, said bondholders should become individually possessed of interests, which should represent and ultimately, if possible, realize in money the par value of their said bonds.” Accordingly the purchasing committee “ sought to contrive some method by which the said lands should be so managed and disposed of as to secure to said bondholders, ultimately, the par value of ” their bonds, “ and. to that end contrived a scheme for a corporation.”
    On the 19th of January, 1880, they reported to a meeting of the bondholders in substance as follows: They first refer to their appointment “ under the plan of reorganization of the stock and bondholders of the International & Great Northern Railroad Company,” by which it was agreed to accept in satisfaction of the claims of the second mortgage bondholders a conveyance of the lands and land interests in question, and state that such conveyance has been made to three trustees, “ who now hold the lands, * * * subject to the directions of the bondholders interested.” After thus stating what there was on hand to manage and dispose of, they proceeded to the method by recommending it as expedient for the bondholders to organize a corporation, with limited liability, under the laws of the state of New York, and added that the committee had taken the preliminary steps for that purpose. They proposed that the corporation be organized under the name of “ The New York & Texas Land Company, Limited,” with a capital of $1,500,000, to be represented by 30,000 shares, cf the par value of fifty dollars each, ten per cent, to be paid in cash, and the remainder by conveyance to the company of lands * * „ * to that amount.” The report continues: “ But as the property of the new company will in fact greatly exceed in value the amount of nominal capital, it has been deemed advisable that the corporation thus formed should issue scrip to its stockholders, pro rata, entitling them to an amount of lands corresponding to the difference between the capital and the probable ultimate value of the lands when they shall be opened for settlement.” After ■estimating the value of the lands, and stating the facts upon which the estimate was based, they further say: “ Upon this basis the land should ultimately be worth the entire amount of the outstanding bonds and matured coupons. The committee therefore recommend that the new corporation should issue scrip to the .amount of $6,000,000, to be divided, pro rata, among its stockholders, and to be receivable in payment of seventy-five per cent, cf the price of its lands at its regular selling rates, with an option to the company to retire the scrip, from time to time, by the payment of its par value, and liberty to purchase it out of the ■company’s surplus funds under public notice and sealed proposals at the lowest price at which it may be offered.”
    Then follows a statement, showing “ the general result of the proposed agreement,” in which the second mortgage liabilities are put down at $7,240,140, the value of the land at $7,219,866, the ■capital of the company at $1,500,000 and the amount of the scrip to be issued at $6,000)000. The committee further reported “ that in view of the low estimate which they have placed upon some of the lands in the foregoing statement and the advantages of putting both capital and issuable scrip in round numbers, it is best to fix the total issue at $7,500,000, instead of reducing it to the precise amount due upon the bonds and coupons. Each holder cf a bond with all coupons attached will, therefore, be entitled to receive therefor six shares of stock, representing a par value of. $300 and scrip for $1,200, payable in land, making a .total o£ $1,500, or about the same as the par value of the bonds and coupons. As there are about 4,750,000 acres of land to come to the new corporation, every holder of an outstanding bond with all coupons-attached would be entitled to scrip, under which he could take-directly in his own -name 760 acres of land on paying cash for one-fourth of the price and would virtually retain by his ownership of stock the title to 190 acres more, in addition to his interest -in the revenue from cash receipts on other sales to other scrip-holders. The value of each share even after the distribution of scrip would be much greater than the value of 190 ordinary acres of land, because the lands include a very large amount of town lots and lands near depots in settled counties of the state. The-holders of scrip would also have an option to take more than 760 acres of wild lands, or less than that number of more available tracts, as the price of each class of lands would be determined by the company upon a fair basis with reference to their market value- and with a view to making the entire -sales satisfactory to all parties interested and sufficient to make the stock ultimately worth par.” Mention was made of the fact that much of the land was-exempt from taxation for the period of twenty-five years frojn the date of the certificates, whether it was in the hands of purchasers or not. Allusion was made to the policy of the new company in surveying, selling and leasing lands, and the committee add that “ it is expected that by these means sufficient funds can be obtained to make the stock a regularly dividend-paying investment at an early day.” As the statute under which the proposed corporation was to be formed “ makes all stockholders liable for its debts until the capital stock is fully paid up,” the committee stated that it was' “ necessary to convey the entire property at once to the corporation and to organize it from among persons who will pay ten per cent in cash immediately upon their subscription. The committee, therefore, propose to organize the corporation upon the subscription of a few persons only instead of waiting for the subscription of every individual bondholder; the subscribers paying all the capital-stock in full and agreeing to transfer to each bondholder the proper amount of stock upon the delivery of his bonds, or of the receipts given by this committee for such bonds. Bondholders will thus receive their stock free and clear from any liability whatever; the capital stock being fully paid up before any certificates are issued to them.”
    When said report was made the bondholders, by formal resolutions, unanimously adopted and ratified the same “ in each and every particular,” directed the trustees to convey the lands and land interests to the land company “and authorized said purchasing committee in their behalf to complete the organization of the defendant, The Hew York & Texas Land Company, .Limited, upon the terms and for the purposes set forth in said report.” * * * “ They also requested the land company to issue scrip-to the stockholders in accordance with the plan reported by the committee, except that the liberty to buy in the same under sealed proposals was restricted to puchases at a rate not exceeding its par value.”
    The defendant corporation was organized accordingly and all the land and land interests were conveyed and transferred to it, pursuant to a formal offer, one-fifth in payment of the balance due upon subscriptions to stock and four-fifths in consideration of the land scrip to be issued to the bondholders in accordance with said report. The stock and scrip were issued to the bondholders about the month of March, 1880. The land scrip, as finally issued," was in the form of a certificate of ownership of such' scrip to the amount of $1,000 par value, transferable by assignment, or by delivery merely,when certified to the bearer.
    The whole amount issued was $6,000,000, and each certificate contained the following statement: “ This certificate will be received by the company in payment of seventy-five per centum of the price of the company’s land, at the regular selling rates to be by it fixed from time to time. It is redeemable at the option of. the company at any time by the payment of its par value in cash to the holder.” It is alleged in the complaint, and not denied in the answérs, that the certificates first issued did not contain the foregoing statement, but they were soon exchanged for others in the form already described. Thus each holder of a bond, amounting with interest to $1,500, became the owner of stock of the Land Company to the amount of $300, and of scrip, to the amount of $1,200, while the company itself became the owner of 4,754,173 acres of land, and 5,907 town lots, together worth about $7,500,000.
    The plaintiff, Rogers, as one of the bondholders, received scrip to the amount of $114,000, which he has held ever since, and in July, 1886, the plaintiff, Denny, became the owner by purchase of scrip to the amount of $100,000, which he still holds. Mr. Tod, originally a plaintiff, is no longer a party to the action. Since August 11, 1885, the individual defendants, except Mr. Phelps, have been directors of the Land Company, and composed a majority of the board. Mr. Phelps was a director from the same date until April 27, 1887, when he resigned.
    The Land Company at various times received land scrip in part payment for lands sold, and forthwith physically cancelled the .same, and never attempted to re-issue any part thereof. “ On April 27, 1883, the said Land Company issued a circular inviting proposals for the sale of land scrip to it, for the purpose of cancellation, and in accordance with such circular accepted proposals for the sale of $2,486,300 par value of such scrip, at about fifty per centum of its par value, all of which land scrip was physically cancelled and retired by the said company, and has never been re-issued. On or about December 1,1883, the said company again invited proposals for the sale of its land scrip to it by means of a circular, in which nothing was said concerning cancellation, and under this circular received and accepted proposals for the sale to it of about $584,000 in par value of its land scrip, at the price of about fifty per centum of its par value, and purchased and received its land scrip to that amount For the purpose of purchasing other land scrip, the said company borrowed from the National City Bank of New York the sum of $240,000, and purchased therewith in the market and not under any circular, or upon any bids made in pursuance thereof, its land scrip to the par value of $524,800, which loan continued for some time after the said land scrip had been acquired, but which was eventually paid off, in part from the proceeds of land sales and in part from the collection of rents on leased lands.” By the 13th of April, 1887, land scrip'amounting to over $3,000,000 par value had been purchased by the land company, or received as part payment of land sold, and formally cancelled, and at the same date the company had purchased other scrip out of the proceeds received from its lands to the amount in all of $1,125,000, par value; which it did not formally cancel.
    Early in April, 1887, the directors were advised by counsel, and in good faith believed, that a considerable portion of the land belonging to the company would be forfeited to the state of Texas under its laws, unless it was “ speedily sold and conveyed to some grantee other than a corporation.” At a meeting of the directors, held April 13, 1887, all of the individual defendants, constituting the entire board and controlling a majority of the stock, being present, it was resolved that the two blocks of scrip, so purchased as aforesaid, of the par value of $584,000 and $524,800, respectively, should be distributed by dividend to the stockholders in the.proportion of $37.50 of scrip to each fifty dollars of stock; that a circular should be mailed to each stockholder, notifying him of the distribution and urging him to use the’scrip immediately in the purchase of such lands as would be first forfeited unless sold ; that a circular should also be mailed to all other holders of scrip, notifying them that their scrip should be used in exchange for land within a reasonable time, in order to avoid risk of loss through forfeiture of the land under the laws, of Texas. On the same clay a circular embodying the substance of the resolutions was mailed to each known stockholder and scripholder, and a copy thereof was received by the plaintiffs. Land scrip to the amount of $1,088,140 was immediately distributed in dividends pursuant to said resolutions, but to the amount, of $36,860 was not accepted by the plaintiffs and a few other-stockholders. April 30, 1887, the land company sold and conveyed, pursuant to the plan set forth in said circular, 1,087,953-acres of its land to the defendant Phelps, who was not then a director, but had resigned only three days before, for $554,006.98-in cash and $1,631,900 in land scrip.
    The company did not keep separate its reissued scrip, which* was in the same form as the original, to the amount of $1,125,000, from its valid and legally outstanding scrip. Out of said payment of $1,631,900 in land scrip, $826,800 was reissued scrip, but. it was impossible to ascertain whether any further amount of such reissued’ scrip was included in said payment, or to ascertain the number of cthe certificates of any of the reissued scrip for the purpose of identifying it. Out of the cash payment made a$ aforesaid to the Land Company on the 30th of April, 1887, it forthwith declared and has since paid to its stockholders a dividend of fifteen dollars per share, or $450,000 in all, but took the precaution to require a bond of indemnity. The total amount of the dividends in scrip and cash paid within thirty days was-$52.50 for each fifty dollars in stock.
    The amount of land scrip now outstanding is $980,300, or less-than three-fourths of the amount of said dividends of $1,125,000' in reissued scrip, and $450,000 in cash. Said sale of land was-made in good faith to avoid the danger of forfeiture and the same-was subsequently ratified at a general meeting of the stockholders, by a vote of 18,142 shares in favor thereof to 981 shares against, it. After such sale had been made there still remained lands-belonging to the company, as good in quality as that sold, to the amount of 2,287,496 acres, worth nearly $3,000,000, which it offered and still offers for sale at the established prices.
    The plaintiffs never offered their scrip in purchase of lands, although the company has always been ready and willing to receive any outstanding scrip in payment for lands in accordance with the terms of the certificates. After finding the foregoing facts, in substance, the trial court also found as a fact that the plaintiffs, as-such scripholders, had sustained no actual in j ury by reason of the premises and dismissed the complaint on that theory, although it determined and adjudged that the company had no right or power to reissue said scrip to the amount of $1,125,000, and that the same was cancelled and extinguished by the purchase thereof. The judgment of affirmance by the general term proceeded on the same lines, but the presiding justice dissented.

      Julien T. Davies and James C. Carter, for app’lts; Thomas G. Shearman and Noah Davis, for resp’ts.

       Reversing 31 St. Rep., 873.

   Vann, J.

The plaintiffs claim that the Land Company is the trustee of the scripholders to the extent of three-fourths of the-•lands and its proceeds, and that it was a breach of trust to make-the scrip dividend of $1,125,000 to the stockholders, as it in effect gave away more than five hundred thousand acres of land through, the purchasing power of the scrip thus wrongfully divided. They further claim that the cash dividend of $450,000 was also a breach of the trust, as it amounted to a donation to the stockholders of $337,500 in money that equitably belonged to the scripholders.

The defendants deny that any part of the land was held in trust- and claim that the rights of the scripholders are confined to the-privilege of using scrip to purchase land, and that as neither the-plaintiffs nor any of the scripholders have been denied that right, they have no cause of action against the company or its directors. In taking this position the defendants rely on the scrip certificates-as the origin and boundary of the rights of the scripholders, while the plaintiffs, in support of their position, contend that the report of the purchasing committee, setting forth a general plan of operations, including, as a part thereof, the issue of scrip, is the foundation of the scripholders’ rights.

In order to determine whether the certificates created and defined all the rights of their holders, it is necessary to look into the acts which brought them into existence and to ascertain the -objects for which they were issued. The fundamental fact is the debt of the bondholders against the railroad company. They lent their money to that corporation and took its second mortgage bonds as security. The bonds became due and were not paid, and the road, being unable to pay them in money, conveyed land in payment, which was accepted in the place of money because nothing better could be had. Although their claim against the railroad was thus satisfied, their debt was not collected, but was converted into land with the expectation of turning the land into money, and in that manner collecting the debt. The best method tó accomplish this was a serious problem. Several hundred bondholders, who did not want land but wanted money, had suddenly and through necessity become the owners of vast tracts of land, amounting to millions of acres, mainly unproductive and even unsurveyed, spread over fifty counties in a distant state. Partition was impracticable for many reasons, but chiefly because they did ■not want the land, divided or undivided, but wanted all the money that the land would bring when sold to the best advantage. An immediate sale was out of the question, because such an immense body of land could not be thrown upon the market all at once without depressing prices and causing serious loss. Good management required that competition between owners in selling should be avoided, and that the common interest should be continued. It was necessary to make surveys, plat maps, establish local agencies and proceed by a general and comprehensive plan to dispose of the land gradually, without forcing the market. A ■central agency was needed so organized as to avoid conflict of interests and to possess supreme and irrevocable power to manage and sell. As the bondholders could not, with convenience or advantage, sell their interests or raise money on them, situated as they were, it was desirable that some means should be devised to represent, proportionately, each bondholder’s rights in the common property, and enable him to sell, mortgage or pledge it without -expense or sacrifice on his part and without injury to his associates by the sale of land in competition with them.

Such was the situation and the needs of the bondholders when they met to take action with reference to the land, and in the light of which that action must be considered. What did they do ? They first gave general directions to the purchasing committee to prepare and report a plan by which they could, if possible, realize m money the par value of their bonds and coupons out of the land. Thus they treated their debt as still existing, and as the basis of all action, and their primary purpose, .as thus declared, was to collect that debt out of the land, the only means then left. 'They next gave specific directions to the committee to prepare and report a plan for, organizing a corporation to which the land should be conveyed, and in which, in consideration of such conveyance, they should, individually, have interests that should represent aiid, ultimately, if possible, realize in money the par value of their bonds.

These brief instructions show an intelligent comprehension of the situation, artel an ingenious adaptation of means to the single-end in view, which was to collect their debt by converting the-land into money to the best advantage, and thereby to “realize" in money the amount of their bonds.

The committee, acting within the lines of their instructions, “ sought to contrive some method by which the lands should be so managed and disposed of as to secure to said bondholders, ultimately, the par value of their bonds and coupons, and * * *" to that end contrived a scheme for a corporation.” The collection, of the debt was uppermost in their minds also, and the formation of the corporation to act as land agent, with the powers and on the grand scale required, was regarded as the best available-method of accomplishing that object. Accordingly their report-embraced the creation of a corporation to take title to the land, with a capital of $1,500,000, ten per cent to be paid in cash, because the law required it, and the remainder in land “ to that amount,” meaning in land worth the amount unpaid upon the stock. It provided for the issue of scrip to the extent of $6,000,-000, entitling the stockholders to “ an amount of lands ” corresponding to the difference between the capital and the ultimate value of all the land, estimated at $7,500,000, on the basis of the selling rate fixed by the state of Texas for its land of similar character. Bach holder of a bond with all coupons attached, amounting to $1,500, was to receive $300 in stock and $1,200 in scrip.

Upon this basis, as the committee reported, the land would ultimately be worth the entire amount of the outstanding bonds- and coupons, thus proceeding on the theory, for the purpose of the proposed arrangement, that the bonds were still in existence- and unpaid and that every effort should 'be in the direction of collecting the debt they represented out of the land. The scrip was “ to be receivable in payment of seventy-five per cent, of the price of the land at the regular selling rates, with an option to the company to retire the scrip from time to time by the payment of its par value and liberty to purchase it out of the company’s surplus funds under public notice and sealed- proposals at the lowest prices at which it may be offered.” The bondholders unanimously adopted the report, which thus became their plan for the management arid disposition of the land. The defendant corporation was accordingly organized having as one of its expressed objects the purchase and sale of land in the state of Texas, and one-fifth of all the land was conveyed to it in consideration of the capital stock and four-fifths in consideration of the land scrip. The scrip, as issued, did not contain the provision mentioned in the report that the company should be at liberty to purchase it. out of its surplus funds under public notice and sealed proposals.

Thus the land, which was regarded by all concerned as standing for the debt of the bondholders against the railroad company, became the basis of the capital, the business and the obligations-of the corporation to which it was conveyed. That corporation was charged by the knowledge of its directors, the source of its title and the consideration paid for the land, with notice of the proceedings of the bondholders which led to its existence, as well as their object in causing it to be organized. King v. Barnes, 109 N.Y., 267, 288 ; 15 St. Rep., 52; Bommer v. American Spiral, etc., Co., 81 N. Y., 468, 473 ; Coddington v. Davis, 1 id., 186 ; Rogers v. N. Y. & Texas Land Co., 17 St. Rep., 131. The directions given to the purchasing committee, the report of that committee, the resolutions adopting it and the separate conveyances of the land are to be read in connection with the certificates and form a part thereof as much as if embodied in or endorsed upon them. Boardman v. Lake Shore & M. S. R. Co., 84 N. Y., 157-172 ; Wilson v. Randall, 67 id., 338; Rogers v. Smith, 47 id., 324; Hathavday v. Payne, 34 id., 92, 100; Wright v. Douglass, 7 id., 564, 573 ; Stow v. Tifft, 15 Johns., 457 ; Bailey v. Railroad Co., 84 U. S., 96, 106 ; .1 Greenl. Ev., §§ 277, 283, 286; 2 Parsons on Con., 66, 68.

The certificates were mere instruments of convenience to aid in •carrying out the-prior contract made 'by the bondholders with ■each other. That contract was made by adopting the report of the purchasing committee, and it constituted the only authority that the trustees had to convey the land to the corporation defendant. As it contained nothing inconsistent with the statute under which the corporation was organized, the contract became binding upon .it, because, with complete notice of all the facts, it took title under it. All the provisions relating to that part of the land conveyed for the scrip became its own obligations, which ft could not lawfully evade or violate. Edwards v. The Grand Junction Ry. Co., 1 Mylne & Cr., 650, 672; Stanley v. Chester & Birkenhead R. Co., 9 Sim. Ch., 264; Wood v. Whelen, 93 Ill., 153; Low v. Conn., etc., R. R. Co., 46 N. H., 284; Stanton v. N. Y. & E. Ry. Co., 59 Conn., 272 ; Whitney v. Wyman, 101 U. S., 392; Angell and Ames Corp., § 304 ; Green’s Brice Ultra Vires, 462.

The bondholders were the promoters of the land company. "Being about to form a corporation for an authorized purpose, they made an agreement upon the subject in which they j rovided for benefits to be conferred upon it and burdens to be assumed by it, after its organization. While it could have refused, when it came into existence, to accept the one or to be bound by the other, it ■could not accept the advantages and then refuse to assume the obligations. By accepting title to the land, it adopted and ratified the agreement entered into by all its stockholders and thereby voluntarily made itself a party thereto and became bound thereby. 'The adoption by the Land Company of the contract between the bondholders was a reasonable means of carrying into effect its authorized objects and after knowingly receiving the benefit of ■the arrangement “ it cannot be permitted to deny that it agreed to assume, the corresponding burdens.” Morawetz on Corporations, § 548, and cases cited. There can be little doubt as to the intention of the promoters that the corporation, when formed, was not only to become a party to the agreement, but was to be the ■chief actor to carry .it into effect. They created it exclusively as executive agent to effect their purpose, and when that purpose is completely accomplished by the sale of all the land and the proper .-application of the proceeds, the object of the corporation will have been fully attained.

The Land Company was not in the position of a Iona fide purchaser as to the land represented by the scrip, because it paid nothing therefor, although it assumed certain duties with reference thereto. By independent conveyances one-fifth of the land was conveyed to make up its capital, and four-fifths for scrip, which was treated as representing a debt to be collected, or at the rate of a dollar of scrip for a dollar of debt. This correspondence in amount was not accidental, but was the result of the carefully matured plan embraced in the bondholders' contract. Express provision was made to convey land enough to pay up the subscriptions for stock and implied provision for the conveyance of the remainder as the basis upon which scrip was to be issued. This indicates that one-fifth of the land belonged to the corporation absolutely, because it had paid for it, and that four-fifths did not belong to it absolutely, or at least not beneficially, because it had not paid for it, but held the legal title for the benefit of the scrip-holders, to dispose of it and collect, if possible, so much of the debt as the scrip represented. In order, however, to provide for expenses, and perhaps for dividends also, the certificates limited the beneficial interest of the holders to three-fourths, instead of four-fifths. There was also the further limitation in aid of dividends than when their scrip was paid without interest their claim upon the land, as scripholders, absolutely ceased. Unless it was the intention to devote this proportion of the land to the benefit of the scripholders, until they were paid, why was not all the land conveyed in payment for stock, as scrip could then have been issued with all the attributes that the defendants claim the scrip in question possessed? No increase in the amount of stock would have been necessary, and the absolute ownership of so much land would have extended the credit of the company proportionately. There was no reason for making the stock the consideration for one-fifth and the scrip the consideration for four-fifths of the land, unless it was intended to make the obligations assumed by the company in issuing the scrip a charge upon the proceeds of the land. Nor was there, otherwise, any reason for giving to the company the liberty in advance, as part of the general scheme, to buy in scrip out of its surplus funds. This right is conceded to exist, although it is not so stated in the certificates.

What is meant by the expression surplus funds ” as thus used ? All funds were to come out of the land, and, except the slight income from leases, from the sale of land. When land was sold, one-fourth of the purchase price had to be paid in cash. That represented the stockholders’ interest, and belonged to the corporation absolutely to use in payment of expenses or dividends, or for any lawful purpose. The remainder of the purchase price could be p.aid either in scrip or cash. When payment thereof was made in scrip, it was ipso facto cancelled, and a proportionate part of the bondholders’ debt was discharged. When payment of the balance was made in money, if it belonged to the company absolutely with no charge thereon, there would have been no necessity of providing that the might use it to buy in scrip, for it would have had that right anyway. City Bank of Columbus v. Bruce, 17 N. Y., 507; Hubbell v. Blakeslee, 71 id., 63 ; Vail v. Hamilton, 85 id., 453, 457; Barry v. Missouri, etc., Ry. Co., 34 Fed. Rep., 829, 833.

If, however, there was a charge upon it for the benefit of the scripholding interest, express permission would be required in order to lawfully use it for that purpose. From the fact that the company did not need permission to use what belonged to it, but did need permission to use what did not belong to it, the inference is permitted that the words “surplus funds” have reference to money that was regarded as belonging to others, or to what was left after deducting from the proceeds of cash sales the one-fourth belonging to the company. No other meaning as reasonable or satisfactory has been assigned to this expression, when the circumstances under which it was used are taken into account. Rogers v. N. Y. & Texas Land Co., 17 St. Rep., 131, 136.

The assent, obtained when the scheme was adopted, that the company might use a certain fund as its own, necessarily implies that the fund was not to be its own, but was to belong to the scripholders. It would have been strange if the bondholders, led as they were by men of the clearest insight, in adopting a plan of operations that obviously contemplated a separation in the ownership of stock and scrip, had provided for consent in advance by the scripholders that three-fourths of the proceeds of cash sales could be used for a special purpose unless that consent was considered necessary.

It could not have been considered necessary unless the money that the consent referred to was intended to be held for the benefit of the scripholders. If it was to be so held it constituted a trust fund, and if a trust existed as to three-fourths of the proceeds of cash sales, it existed as to three-fourths of the proceeds of all sales. It is true that no trust was created eo nomine, but it is not necessary to use the word “ trust ” in order to create one. Fisher v. Fields, 10 Johns., 493, 505; Hathaway v. Hathaway, 37 Hun,. 265, 267; 1 Lewin on Trusts, 109 ; Hill on Trustees, 101; Perry on Trusts, § 82.

.The nature of the relation of the land company to the scrip-holders, as set forth in the contract between the bondholders, their object in making the contract, the peculiar circumstances surrounding the parties when it was made, the separate conveyances of the land and the consideration of each, determine whether there was a trust or not. When land of great value is conveyed for no substantial consideration, and yet with no intention of making a gift, the probabilities favor the existence of reserved rights in the nature of a trust, and slight evidence as to the intent of the parties will suffice to establish one. In this case land worth millions, was conveyed to a grantee created at the time by the grantors expressly for the purpose of taking the title in their interest, and yet it is alleged that it was an absolute sale, and that the consideration was the privilege of buying back three-fourths of the four-fifths so transferred, at a rate to be fixed by the grantee. But the mind at once rejects such a transaction as incomplete, and asks, " What else was there to it? What was the object ? What were the circumstances? What did the parties do and say .beforehand ? What led up to the conveyance of the land? ” When these questions are fully answered, it appears that the grantee was charged in advance with the performance of active and substantial duties with respect to the management and disposition of the land for the benefit of the bondholders, who were virtually the grantors. The trust sprang out of the situation, the contract, the transfers and the general purpose.

The Land Company was to act as a land agent, holding the title for convenience in transfer and control. The bondholders organized it for this purpose. They created it as a servant, not as a master. They did not want it as a means of investing money at a profit, but as a means of collecting an investment previously made. They conformed to the statute by giving, it capital, paying money and conveying a given quantity of land for that purpose. By another deed they conveyed much more land to it. For what purpose ? Was it for the privilege of buying back a part by giving all that they received for the whole ? Was it merely for the privileges set forth in the certificate ? Do reasonable men part with property on such conditions?

We think their purpose is clearly indicated by what they said and did, interpreted in the light of the circumstances surrounding them at the time. They intended that the land company should hold one-fourth of the land as its own, and three-fourths in trust, to sell for the benefit of the scripholders until they were paid the face value of their scrip, without interest, when the remainder was to belong absolutely to the company. They thus made adequate provision for the protection of both stockholders and scrip-holders, whose interests, although identical at first, were to become separated and relatively unequal as soon as stock and scrip were held in amounts differing from the basis of issue. This they had in contemplation, and to"facilitate it made the scrip so that it could become negotiable by manual “delivery. There was no conflict of interest between the stockholders and scripholders, because each class received its due proportion of the proceeds of any sale of land, whether large or small. One-fourth, always in money, went to the corporation for the benefit of its stockholders, while three-fourths, either in money or surrendered scrip, went to the corporation for the benefit of the scripholders, the scrip to be cancelled and the money to be held or used in their interest. Without competition between those interested, there was every inducement to sell as rapidly and for as high a price as possible, for in this way the corporation would make the most money for itself and the scripholders would be benefited proportionately. Moreover, after the scripholders were paid the face value of their scrip, all that was left of land, or. proceeds of land, would go to the stockholding interest, which would then become sole and. supreme, because the trust obligation would have been discharged. Ample provision was made to get rid of the scrip by buying it in for cancellation at such prices as might be agreed upon, as well as by redeeming it for cash at par, and yet the corporation was not burdened with the obligation to redeem, except by applying the fund devoted to that purpose' derived from sales of land wholly for cash. The two interests were so nicely adjusted to each other that prosperity or adversity came .alike to each.

There was no inducement to sell at a sacrifice, for the loss fell upon the company in the same proportion that it did on the scrip-holders. There was no opportunity for favoritism or for discrimination in favor of one interest against the other, because what helped.or hurt one, was reciprocal as to the other. Whether land was paid for in cash or scrip was equally immaterial to either interest, as each was benefited in the proper proportion. As thus interpreted, the scheme was simple, safe, and admirably adapted. to work out the great object that the bondholders had in view 'from the outset, which was to collect their debt out of the land. As we read the words of the contracting parties, and look upon their acts, no other construction is reasonable or natural.

On the other hand, singular results follow the interpretation contended for by the defendants. It makes inevitable a conflict, between the stockholding and scripholding interests, by holding out a constant inducement to the former to sacrifice the latter. It subordinates three-fourths to one-fourth. It furnishes no adequate protection to the scripholder, and is inconsistent with the object, predominant from the outset, of collecting the entire debt of the bondholders out of the land. It breaks up the common interest, and introduces discord where there should be harmony. More significant than all, it permits the corporation, which was formed to serve the interests of both stockholders and scripholders, to sell all of the land in bulk for cash, and to pay out the proceeds in dividends to its stockholders. Conceding that the scripholders might have a remedy for such an act, as against the corporation it would be worthless, and as against the directors it might be. Considering the object that the bondholders had in view, is it probable that they devised such a plan or made such a contract ?

The purchasing committee expressed the expectation in their report that the stock would pay regular dividends at an early day, and that the stock would ultimately be worth par. Why did they not use “ certainty,” instead of “ expectation,” if the proceeds of all the cash sales, the three-fourths as well as the one-fourth, could lawfully be used in payment of dividends? On that theory could there have been any doubt as to liberal dividends from the start?' But, it is said, the scripholders could protect themselves at any time by taking land for their scrip. That is true, and it is the only absolute right conceded to them by the defendants, but what was it worth to men who went into the scheme to collect a debt, not to buy land? What would it be worth when all the land was-gone? What would it be worth after the scrip had been diluted by repeated reissues until there was not land enough to satisfy its-requirements ? It was doubtless one object of the arrangement to-encourage scripholders to accept land for scrip, but it was not intended to compel them to do so, although that would be the natural result of the construction contended for, and the policy pursued by the stockholding interest.

It is argued that the existence of a trust • would have defeated the whole scheme by spreading a lien over all the lands and making them unsaleable, but a trust to sell and distribute, which was the object of the trust in question, has no such effect. It enables the trustee to give a perfect title to the land and fastens a lien upon its proceeds. “ It is a universal rule,” says Mr. Pomeroy, “ that the trustee’s estate and power over the, subject matter are? commensurate with the duties which the trust devolves upon him; and are sufficient to enable him to perform all those duties.”' Pom. Eq. Jur., § 991. “In all instances,” he continues in. the) next section, “ where the trust is to sell the corpus of the property and to distribute the proceeds * * * the beneficiaries plainly acquire no proper estate in the original trust fund prior to its sale; their right and interest attach to the proceeds of this fund, which are to be paid to or distributed among them." Thus the land company could convey the land freed from the trust, confer an unimpeachable title upon the purchaser and hold one-fourth of the proceeds for its stockholders, unaffected by the trust, and three-fourths in trust for the scripholders. In so doing it. would not exceed its corporate powers, because it was authorized by its charter, which conformed to the statute (Laws 1875, chap. 611, § 1), to purchase and sell lands and it purchased one-fourth of the lands absolutely and three-fourths subject to the performance of a trust, and after the trust was performed and the scrip was out of the way all that remained of the three-fourths was to be its absolute property. It was a purchase by assuming a trust obligation as the method of payment. It was a profitable purchase, for while the outstanding scrip amounts to less than one million of dollars, the value of the land unsold is nearly three millions. This does not take into account the unauthorized dividend in-stock and scrip, amounting to more’ than the face value of the stock. In 1886, when one of the plaintiffs- bought his scrip at. fifty-eight, stock was selling at 187. „

The threatened danger of loss by forfeiture of a part of the lands-under the statutes of the state where they were situated, did not enlarge the powers of the directors of the land company, although-it should be taken into account in considering their motives. The rights of the scripholders were fixed by contract and they could' not be changed or destroyed even by acts done with an intention, to save the beneficiaries of the trust from loss. Possibly the-forfeiture could have been prevented in some other way, as by-reducing the selling rates of the land in danger, so as to stimulate; immediate sales, or by some method other than that pursued,, which, as it benefited the stockholders to the same extent that, it injured the scripholders, may have affected the judgment of those whose personal interests were identified with the former rather than the latter.

The suggestion that what the scripholders lost, as such, they gained as stockholders would be trac if all held stock and scrip in the same proportion that it- was first issued, but such is not the-case. While it may be true as to one of the plaintiffs, he properly refused to accept the unauthorized dividend, because he had no right to it as long as there were some scripholders who owned no stock and others. who owned a relative excess of scrip. It cannot be claimed that he has sustained no injury because he re-' jected an offer made in violation of law.

The complaint is properly criticised as insufficient in some respects, but as an answer was served, a trial had and every essential fact not only proved but found by the court, the plaintiffs were entitled to any relief consistent with the case made by their complaint and embraced within the issues. Code Civ. Pro., § 1207; Hemmingway v. Poucher, 98 N.Y., 281; Wetmore v. Thomas, 92 id., 76; Murtha v. Curley, 90 id., 872; Andrew v. New Jersey Steamboat Co., 11 Hun, 490. While the complaint is not as full as it should be, still the plaintiffs were entitled to relief upon the facts alleged, •and if it had been amended so as to conform to the proof, all deficiencies would have been supplied. There was a prayer for general relief, and after an answer has been interposed any judgment may be awarded that is warranted by the facts proved and consistent with the facts alleged, even if it does not precisely conform to the pleader’s theory of the action, provided it is not hostile thereto. It is claimed that the plaintiffs by consenting that ■a temporary injunction procured by them in another action brought against the land company as sole defendant, restraining it from reissuing the scrip, Rogers v. New York & Texas Land Company, supra, should be vacated, they in effect consented to the acts now complained of. The order vacating the injunction was made without prejudice to either party, so that the defendant corporation is in no position to take advantage of it. Creighton v. Kerr, 87 U. S., 8 As it does not appear that the directors were misled or prejudiced by the action of the plaintiffs, or that they relied upon it in their subsequent proceedings, it is difficult to see how they can take advantage of it. The action was not discontinued, but was kept alive as a continued assertion of the right to a permanent injunction, and there is neither finding nor evidence that the plaintiffs’ consent was given to induce action by the company or its directors, or for any purpose, except to avoid the risk of liability on the undertaking. In thus consenting they did not abandon their right to a permanent injunction after a trial of the action on the merits.

Having decided that a trust existed in favor of the scripholders, we regard our duty upon this appeal as discharged, for it is obvious that the trust was violated by the re-issue of the cancelled scrip, and the gift thereof to the stockholders, as well as by the gift to them of three-fourths of the $450,000 in money received ■upon the sale of land. It was an unauthorized appropriation of -that which had been dedicated to the use of the scripholders, and ■entitled them to relief, but it is unnecessary to now decide as to its nature or extent, as a new trial will-be necessary,'and additional facts may then appear that will have a bearing upon the subject

The judgment should be reversed, and a new trial granted, with costs to abide event

All concur.


source: Caselaw Access Project

author: Brown, J.

license: Public Domain

text:
    In the Matter of Lewis H. Clark v. Andrew F. Sheldon, County Treasurer.

      (Court of Appeals, Second Division,

      Filed October 1, 1892.)
    1. Town bonds—Redemption fund—Laws 1869, chap. 907, § 4.
    If at the commencement of proceedings by a taxpayer to compel © county treasurer to execute the provisions of § 4, chap. 907, Laws 1869,. by investing certain taxes received as a sinking fund to pay town bonds,, such taxes are in the hands of the county treasurer, no power exists-to relieve him from the performance of the duty devolved upon him, except; in the legislature of the state, and it is no defense for him to say that he; has paid the taxes over to any officer of the town, or that the town has; had the benefit of it in its application to town purposes. In the treasurer's hands it is a trust fund, upon which the law has impressed a distinct purpose, and any action that diverts it from that purpose is illegal.
    2. Same.
    Neither the town or the county within which it lies, nor any officer or citizen thereof, have any power or authority over the disposition, of the taxes mentioned in the act that come into the treasurer’s hands.
    3. Same—Interest.
    Where a county treasurer refuses to execute, the law on the ground that the taxes “were appropriated for specific purposes,” of which the sinking fund was not one, his action is without legal excuse, and must be regarded as wilful, and he is chargeable with interest on the fund.
    Appeal from an order of ■ the general term of the supreme court in the fifth judicial department, reversing in part and affirming in part an order of the county judge of Wayne county.
    This was a special proceeding instituted by a taxpayer of the; town of Sodus, Wayne county, to compel the county treasurer of said county to execute the provisions of § 4 of chap. 907, Laws, of 1869, as amended by chap. 283, Laws of 1871, by investing the amount of taxes (other than school and road taxes) received! by him for the year 1881, collected on the assessed valuation of two railroads in said town, to aid in the construction of which the town had issued bonds.
    The petition stated the amount of taxes received by the county treasurer applicable to the purposes contemplated by the acts of the legislature to be $427.69, and prayed for an order that such-sum be set apart by the treasurer as a sinking fund to pay the* bonds of the town issued in aid of the construction of said railroads.
    Upon the hearing before the county judge an order was made; adjudging the amount of taxes other than school and road taxes received by the county treasurer from said two railroads to be $2,426.85, and directing him to apply that sum, with interest, from February 13, 1882, to the purchase of the bonds of the town,, or, in case said bonds could not be purchased, to otherwise invest" said, sum as required by the statute to constitute a sinking fund for the payment of said bonds, and awarded the petitioner $152.35 costs of the proceeding before the county judge.
    Upon appeal to the general term that court modified the order of the county judge by striking out the provision aforesaid as to interest and costs, and reduced the amount directed to be applied to the purchase of bonds to the sum of $427.74, and as so modi-' tied affirmed the order. From the order of the general term both parties appealed to this court. Further material facts appear in the opinion.

      J. Welling, for petitioner; Camp & Dunwell, for county treasurer.

       Reversing 33 St. Rep., 1036.

   Brown, J.

Upon the first hearing of this proceeding before the .county judge it was dismissed upon the ground that the statutes pursuant to which it was instituted" were unconstitutional. The .general .term refused to pass upon that question, but affirmed the ■order of the Óounty judge on the ground; (1) that the duty of .ascertaining the amount of taxes paid by the railroad companies -over and above school and road taxes and the portion .thereof applicable to the purposes designated .by the statute did not devolve upon the county treasurer, and until that duty was periormed by someone clothed with authority to decide those matters the proceedings were premature; (2) that the sinking fund provision in’ the law under which the proceedings were taken applied ■only ’to bonds issued under that act and therefore had no application to .the Lake Ontario Southern road, which was organized under van other .act.

Upon appeal to this court none of these rulings were sustained and it was decided, 106 N.Y., 104; 8 St Rep., 537, pi) that the act was not in violation of any provision of the constitution, (2) that it was applicable to any municipality having bonds outstanding issued under any statute in aid of the construction of any railroad within its bounds, (3) that the scheme of the act was practicable ■and if the amount of taxes paid by the railroad company applicable to a sinking fund had not Been ascertained and separated from the road and school taxes before payment to the county treasurer it was his duty to make the separation and invest the proper amount as directed by the statute, (4) that the county judge had power to ascertain the amount of all the taxes which were to be devoted to a sinking fund and to compel the county treasurer to invest such sum notwithstanding the petitioners’ prayer for an insufficient amount.

The case, therefore, was remitted to the county judge for a rehearing and thereupon he decided, what is not now disputed, that the amount of taxes exclusive of road and school taxes paid by the two railroad companies in the year 1881 to the county treasurer upon the assessed valuation of the property in the town of Sodus was two thousand four hundred and twenty-six 85-100 dollars, and he directed such sum with interest from February 10,1882, {the’ date of the receipt by the treasurer of the last tax paid) tv be invested as directed by the statute.

This sum represented the amount raised in said town to pay the state, county and town taxes. The general term modified the order of the county judge by striking out the allowance of interest, and by reducing the amount directed to be invested to four hundred and twenty-seven 94-100 dollars, the difference between the two sums representing the amount of the town tax which it was claimed was paid by the county treasurer to the officers of the town entitled to receive and apply the same to the purposes designated in the collector’s warrant.

The decision of the general term rests upon the assumption that this proceeding is analogous to an action between the town of Sodus and the county of Wayne, and the conclusion therefrom that the county could not be held liable beyond the amount of money which it has actually received and appropriated. And as the money raised to pay charges of the town had been turned over to the town officers and applied by them to the benefit of the town, it had received that which had gone into the sinking fund, and was estopped from claiming repayment of the town tax. If this-proceeding can be decided upon principles applicable to an action between the town and county, the decision of the general term could probably be upheld, but that view, I think, proceeds from a misconception of the purposes and provisions of the statute, and the assumed analogy cannot be sustained.

The statute provides that all taxes, except school and road taxes, collected in any town on the assessed valuation of any railroad for which said town has issued or shall issue bonds, shall be paid over to the treasurer of the county in which said town lies. And it is made the duty of the treasurer with such taxes to purchase the bonds of said town, or to otherwise invest the same, and hold the investment as a sinking fund for the ultimate redemption! and payment of said bonds. In case any county treasurer shallj unreasonably refuse or neglect to comply with the provisions of the act, any taxpayer of the town is authorized to apply by petition to the county judge for an order compelling said treasurer to execute the law, and it is made the duty of the county judge, in a proper case, to grant such an order. It is plain that neither the town or the county within which it lies, nor any officer or citizen thereof, have any power or authority over the disposition of the taxes mentioned in the act that come into the treasurer’s hands. The county treasurer, in his relation to these taxes, is not the agent of the county or the town. The supervisors have no jurisdiction over the fund, and cannot legislate concerning it, nor direct or control the action of the county treasurer • with reference to it. Neither can the town through its officers or its town meeting change the direction of the fund, or cause it to be applied to any purpose except that named in the law, and any taxpayer has^ a right, as against the town and all other taxpayers therein, to have the fund applied to> the purposes stated and to institute proceedings to that end. If, at the commencement of such proceedings, such taxes are in the hands of the county treasurer, no power exists to relieve him from the performance of the duty devdlved- upon him except in the legislature of the state, and consequfently it cannot be a defense for him to say that he has paid the taxes over to any officer of the town, or that the town has had the benefit of it in its application to town purposes.

In the treasurer’s hands it is a trust fund upon which the law has impressed a distinct purpose, and any action that diverts it from that purpose is illegal. There is no authority in the state that holds otherwise. The cases that have been referred to in the opinion of the general term and the brief of the respondent were actions by towns against the counties to compel the application to the sinking fund of state and county taxes which the county had misappropriated by directing the county treasurer to apply to purposes other than the sinking fund.

They proceeded upon the doctrine of money had and received by the county which the law had appropriated to the payment of a corporate obligation of the town, and of course in such an action the town taxes were not involved as they never came into the possession or under the control of the county, and consequently no question of estoppel or waiver was presented. But all the cases recognize the trust character of the fund in the hands of the county treasurer and his duty in reference thereto.

In this case, on the former appeal, it was said by Judge Bari, p. 110: “ The authorities of towns, villages, cities and counties have no right to divert or appropriate these taxes for other purposes. They never come into the hands of the county treasurer for any other purpose than that mentioned in the section, and they are devoted by law to the benefit of the municipality in which they are collected, and must be held and invested in the mode directed for its benefit.” Again, p. 113: “He” (the county treasurer) “has no right to use the money produced by these taxes to discharge any of these obligations. The law has appropriated it for a specific purpose, and it is his duty to apply it to that purpose.” See, also, Strough v. Supervisors, 119 N. Y., 212; 28 St. Rep., 967; Crowninshield v. Supervisors, 124 N. Y., 583; 37 St. Rep., 96.

It follows that it would not be a defense to a proceeding of this character that the taxes had been paid over to the town officer to be applied to other purposes, unless it could be shown that the petitioner had some way waived the right that the statute confers upon taxpayers of the town to apply to the county judge for the enforcement of the law. There was no such claim in this case. Demand was made upon the respondent on January 19, 1882, that he comply with the law. On January 20th he refused on the ground that all the taxes were appropriated to other purposes. On February 10th this proceeding was commenced. He then had in his possession the tax paid by the Rome, Watertown & Ogdensburgh Road, and three days after he received the tax paid by the Lake Ontario Southern Road. He held these taxes until March 28th, when he settled yith the town collector, and then accepted, in lieu of cash, the receipts of the town officers for the money paid to them bv the town collector. In that way he claims to "have paid over the town taxes to the town officers. In substance, that was the effect of his settlement with the collector. But he had no right to thus divert any part of the taxes paid by the railroad, and his action in that respect was not only illegal and in disregard of the law, but it was in defiance of the legal proceedings then pending against him. It needs no argument or citation of authority to show that no act upon the part of a trustee subsequent to the commencement of proceedings against him to enforce the trust can defeat the right to a judgment in such proceedings. The operation and effect of judgments and orders of the court and judicial officers cannot be nullified in that way. In contemplation of law the fund is still in the respondent’s possession and under his control, and the rights of the petitioner are to be determined by the facts as they existed at the filing of the petition.

Our attention is called to the language of the statute, viz. : that proceedings can be instituted against the county treasurer only when he- “ unreasonably ” refuses to comply with the law, and it is argued that the respondent’s refusal in this case was not unreasonable, inasmuch as he believed it was not his duty to separate the school and road from the other taxes or to determine how much was necessary to go into the sinking fund. We consider that this question was disposed of on the former appeal, and no exception presents it now.

But the respondent did not place his refusal on the grounds stated. He declined to execute the law for the reason that the taxes “ were appropriated for specific purposes ” of which the sinking fund was not one. It is alsti ‘claimed that the first order of the county judge operated as a prohibition against the investment of the tax as directed by the statute and a justification of, the respondent’s action. Inasmuch as the settlement with thej town collector was on March 28, and the order dismissing the proceedings was not made until May 10th, the force of this argument is not apparent.

We think that the respondent’s action in refusing to execute the law was without legal excuse and must be regarded as wilful, and that he is chargeable with interest on the fund. The town has been deprived of interest which the fund would otherwise have earned and it must be paid as damages for a wrongful act.

So much of the order of the general term as was appealed from by the petitioner must be reversed, and the order of the county judge, as modified by the general term, affirmed, with costs to the petitioner in this court and at general term.

All concur.


author: Parker, J.

text:
    First National Bank of Union Mills, App’lt, v. Judson H. Clark, Resp’t.

      (Court of Appeals, Second Division,

      Filed October 1, 1892.)

    1. Banking.
    S., of the firm of S. & W., on December 5, 1883, gave defendant' a deposit slip as follows: “ Deposited by S. & W., with Judson H. Clark, Scio, N Y., December 5,1883; disco nt $3,413.50. F. M. Babcock.” Babcock was defendant’s cashier. At the same time S. gave a firm check on defendant, payable December 15, to plaintiff, for the amount of t’’e deposit, and drew that amount of money out. Plaintiff sent slip and check to defendant, who returned it on the 15th, advising “ no funds.” In this' action it was shown that on December 5th defendant discounted a nota for $3,500, made by If. Bros., and endorsed by S. & W., but with the understanding that the deposit should not be drawn against until the 15th. and that the slip given to 8. represented the amount of the note less the discount. Held, that the giving of the check by 8. & W. to plaintiff for the full amount of the deposit did not operate as an assignment of the debt, as the evidence was that the bank did not so accept it, nor did the delivery of the deposit slip.
    3. Same—Deposit slip.
    A deposit slip is a receipt and nothing more. It is not proof of liability and will not support an action against a bank.
    8. Same—Evidence.
    Plaintiff called as a witness a lawyer who asked to see the books of the bank, and testified that the cashier had said that he had rather “have Mr. Clark assent before he showed it to me. He did not let me see the books, and I did not see them." Held, after such testimony as this it was proper that defendant should be allowed to destroy the effect of the testimony by ■the introduction of the books themselves.
    Appeal from a judgment of the general term of the supreme court, fifth department, entered on an order affirming a judgment in favor of the defendant entered on the verdict of a jury.

      Hudson Ansley, for app’lt; Rufus Scott, for resp’t.

       Affirming 30 St. Rep., 1031.

   Parker, J.

John Sliney, of the firm of Sliney & Whelan, on December 5, 1882, gave to the plaintiff a deposit slip of which the following is a copy:

“ Deposited by Sliney & Whelan with Judson H. Clark, Banker, Scio, N. Y., December 5,1882.
“ Discount, $3,412.50.
“ F. M. Babcock.”

Babcock was in the employ of Judson H. Clark and acted as Ms cashier.

At the same time Sliney made and endorsed in the firm name and delivered to the plaintiff a check, which reads as follows :

“ Scio, N. Y., December 5, 1882.
“ Judson H. Clark, Banker, ten days after date pay to the order of Sliney & Whelan, three thousand, four hundred and twelve and fifty one-hundredths dollars.
“ $3,412.50. Sliney & Whelan.”

• The plaintiff thereupon paid to Sliney the amount called for By the check, less thirteen days interest thereon and exchange.

December 7, the plaintiff put the deposit slip and check together and sent them by mail to the defendant, who on or immediately after December 15, the day on which the check was made payable, returned the same to the plaintiff with a letter advising^ that there were no funds to meet the check. Subsequently plaintiff •demanded payment of the defendant, which was refused and this action was thereupon begun.

The defendant’s denial of liability was placed on two grounds: (1) That Sliney & Whelan did not have on deposit with him on December 5th, or at any time following, any sum of money whatever ; (2) That Sliney & Whelan’s pretended claim against the defendant was not assigned to the plaintiff. •

On the trial testimony on the part of the plaintiff was presented tending to show that on December 5th the defendant discounted a note for $3,500 made by Knox Brothers, and endorsed by Sliney & Whelan, but with the understanding that the deposit should not be drawn against for ten days, and the deposit slip given to Sliney represented the amount of the note less the discount agreed upon.

Defendant testified that he told Sliney that he was not in a situation to discount the note then, and Babcock, his cashier, testified that Sliney informed him that defendant Clark said he should leave the note there, as he might be able to discount it in the future, and to figure “ the discount, and put it on a deposit slip,” which was done.

But we need not discuss the evidence in that regard, as the ■court was not asked to direct a verdict in favor of the defendant, and the jury were instructed to determine whether the fact was as claimed by the plaintiff or as asserted by the defendant To such submission no exception was taken, and necessarily it cannot now be urged that the jury should not have passed on the question.

The court instructed the jury that if they should find that the defendant did not discount or agree to discount the note for Sliney & Whelan, then their verdict should be for the defendant; but should they find for the plaintiff on that proposition, then they should go further, and consider whether that which took place between the plaintiff and Sliney amounted to an assignment of Sliney & Whelan’s claim against the defendant, for if it did not, the plaintiff could not recover. The plaintiff excepted to the charge in such respect, and also to the refusal of the court to charge the following request: “ That there was no dispute as to what took place between Sliney & Whelan and the plaintiff at plaintiff’s bank at the time of the delivery of the papers, and that what took place there amounted to an assignment to the plaintiff.”

As the verdict may have been put on the ground that there was no assignment to the plaintiff, we are required to consider whether the exceptions to which reference has been made were well taken. We are thus conducted to an inquiry embracing all the details of the transaction which resulted in plaintiff’s paying over to Sliney & Whelan the face of the check less interest and exchange.

We will first consider whether the giving of the check by Sliney & Whelan to the plaintiff for the full amount of the deposit operated as an assignment of the debt.

Assuming that Sliney & Whelan were depositors with the defendant, the money after deposit made belonged to the defendant -Sliney & Whelan’s right was a chose in action.

The implied engagement on the part of a banker to pay the checks of his depositor does not inure to the benefit of a holder of a check so as to enable him to enforce payment thereon against the bank prior to its acceptance. In the absence of assent by the depositary, the giving of a check by the depositor does not operate as a transfer or assignment of the debt created by making a deposit. Harris v. Clark, 3 N. Y., 93 ; Chapman v. White, 6 id., 412; Ætna National Bank v. Fourth National Bank, 46 id., 87; Duncan v. Berlin, 60 id., 151; Risley v. Phenix Bank, 83 id., 318.

Here there was not an acceptance by the banker. On the contrary he refused to accept it, and it follows that the check did not operate to transfer the debt. Heither did the delivery of the deposit slip have that effect. The appellant calls it a “certificate of deposit,” but such designation is not accurate. It is in fact what the witnesses for both plaintiff and defendant assert it to be, a deposit slip or deposit check. The use of the deposit slip is well understood. It constitutes an acknowledgment that the amount of money named therein has been received. It is a receipt and nothing more. Ho promise is made to pay the sum named on return of the paper, nor is it expected, either by the depositor or depositary, that it will ever be presented to the bank again unless a dispute should arise as to the amount of deposit, in which event it would become important as evidence. It is not intended to furnish evidence that there remains money in the -bank to the credit of a depositor, but to furnish evidence as between depositor and depositary that on a given date there was deposited the sum named. It may all, or nearly all, be checked out at the moment of making the deposit slip, but the depositor will not be refused it on that account, for long established usage has fixed its status in banking as a mere receipt, an acknowledgment that the depositor placed the amount named therein on deposit. It is not proof of liability, and it will not support an action against the bank. Hotchkiss v. Mosher, 48 N. Y., 482; 2 Daniel Neg. Insts., § 1704.

Should a suit be brought on the debt, however, it would furnish evidence as to time of deposit and amount; but it has no other use unless it be to assist in the settlement of a dispute out of court. The delivery of the deposit slip, therefore, did not operate to assign the debt There was no writing made.or delivered to the plaintiff other than the check and deposit slip, both of which we have already considered. An assignment of a debt due may, of course, be made by oral agreement, and if founded on a valuable consideration vests in the assignee a right to proceed in his own name to collect it. Risley v. Phenix Bank, 83 N. Y., 318. And the delivery by a creditor of a check upon his debtor for the whole or a part of a debt does not preclude the payee from showing a paroi contract, aside from the check, to transfer the debt itself. Throop Grain Cleaner Co. v. Smith, 110 N. Y., 83-88; 16 St. Rep., 831.

But in the conversation had between Sliney and the plaintiff’s cashier the debt was not in terms alluded to as intended to be assigned or transferred. The cashier testified, in part, that Sliney “ produced the deposit check and told me he had that much money in Clark’s bank'; that it would not be available for ten days, as he had agreed to wait, and he wanted to use the money that day. He drew a check on Clark’s bank and wished to have us discount those papers and let him have the money, which we did, and paid him the money.”

To assume that all of the evidence on that subject, considered together, would support a finding of fact that Sliney & Whelan intended to transfer, and the plaintiff intended to acquire the debt, is to adopt a view of the evidence as favorable to the plaintiff as is authorized That is precisely what the trial court did in “submitting the question to the jury for their determination. The plaintiff, therefore, cannot complain of the action of the court in that regard.

The defendant produced in court the books of the bank in use at the time of the alleged discount, including the book of “ bills discounted,” and was permitted to show that it did not contain an entry of discount of the note in question. Objection was made by the plaintiff, and an exception taken to the adverse ruling of the court. But we shall not pass on the abstract question presented because we do not deem the objection available to the plaintiff in view of certain testimony presented by it earlier in the trial.

The plaintiff called as a witness a lawyer whom it sent to the defendant to make a demand for payment, who related conversations had on that occasion with the defendant and his cashier Babcock. Among other things, he testified that while in the bank, “ I spoke to Babcock about seeing the books. Babcock invited me in and we had a general conversation in regard to Sliney & Whelan, and I asked him if they had any objections to my seeing them; he said no; b.ut I better see Mr. Clark; he would rather have Mr. Clark assent before he showed it to me. He did not let me see the books, and I did not see them.”

This testimony had no direct bearing on the questions in issue .and we can perceive no other object for its introduction than the expectation that the refusal to allow plaintiff’s attorney to examine the books would leave upon the minds of the jury the impression that they contained entries tending to support plaintiff’s contention that the note was in fact discounted on December 5tli. Nor could the plaintiff’s counsel have been prevented thereafter from insisting in his argument before the jury that the conduct of Babcock in such respect was a significant fact which should receive due consideration by them in determining whether Sliney, or Clark and Babcock, gave the true version of the transaction. Thereafter it was proper for the defendant to destroy the effect of this testimony by the introduction of the books from which it appeared that had the plaintiff’s attorney been permitted to examine them he would not have discovered any evidence bearing against the defendant’s contentions. There are no other exceptions requiring consideration. The judgment should be affirmed.

Judgment affirmed, with costs.

All concur, except Bradley and Haight, JJ., not sitting.


author: Ingraham, J.

text:
    The People ex rel. Thomas W. Barron v. James J. Martin et al., Police Com’rs.

      (Supreme Court, Chambers, New York County,

      Filed November 4, 1892.)

    Elections—New York city—Inspectors.
    Under the provisions of the consolidation act, as amended by chap. 400, Laws 1892, a majority of the board of inspectors of election of each election district of the city of New York has power to act as a board of inspectors.
    Application for a writ of prohibition.

      James W. Hawes, for relator; David J. Dean and Theodore Connoly, for resp’ts.
   Ingraham, J.

The question that I am here asked to determine is one that is not free from doubt, and as a prompt decision is required, I have time merely to state the conclusion to which I have arrivéd.

The chapter providing for the conduct of elections in the city of New York, contained in the consolidation act, in force prior to the amendment of 1892, provided a consistent scheme for the registration of voters and the casting of votes on election day, based upon the fact that in each election district four inspectors of election were provided, who should determine the various questions presented as to the registry of voters and the voting of such persons as should be registered on election day.

Section 1876 expressly requires that all acts of the board of inspectors should be by the concurrence or assent of a majority of all the inspectors of election in any election district. Thus, any duty devolving upon the inspectors as a board could only be performed by three inspectors.

Both §§ 1858 and 1866, in requiring the concurrence of three inspectors, expressly recognize that in each election district there are more than three inspectors of election. Thus, in § 1858, the question as to the qualification of the person presenting himself for registration is to be determined by “at least three of the board of inspectors of election,” and § 1866 provided that if the vote of a person presenting himself to vote is received, “ at least three of the inspectors ” shall write, in the appropriate column bearing the heading “ voted,” and opposite the name and residence of such person, the word “yes.” And the section also provides that the chairman of such inspectors in each election district shall, if present, and, if absent, then one of the other inspector's shall, upon any person offering to vote, announce, in a loud, clear and distinct manner, the name of such person, showing that the provisions of this section were based upon the fact that there were more than three inspectors of election.

Section 1877 also emphasizes the intention of the legislature.. It is there provided that it should be the duty of said inspectors of election, or a majority of said inspectors, to be in constant attendance during the hours and times fixed for the discharge of their official duties.

Reading the whole chapter, the one clearly expressed intent was that a majority of the inspectors should be required to assent, to each act of the board, and that it was not the intention to require that all of the inspectors should be present when the board was to act as a board ; where there were' four inspectors, that at least three should be present, and three should determine the? questions that the board, as a board, had to determine.

The object of this provision is clear, for the consequences of stopping the whole business of receiving votes on election day,, because of the absence or inability to act of one inspector,’would be that many persons would be in effect disfranchised, and the whole machinery of election thrown into confusion.

By the amendment to § 1850 provided for by chapter 400 of the Laws of 1892, p. 823, the provisions of this chapter of the consolidation act were changed so as to provide for but three inspectors of election instead of four in each election district Then-two instead of three became a majority of the inspectors in each district. By § 1877 two were required to be present at the times-fixed for the discharge of their several duties, and the assent of two was required before the board could act.

I think it clear that the language used in §§ 1858 and 1866' must give way to this obvious intent of the legislature. The language used in those sections would be inapplicable to a board of three inspectors.

In the construction of statutes, and considering the effect of such an amendment as the one now under consideration, it is the duty of the court to ascertain and carry out, as far as possible, the-intention of the legislature as expressed in the acts themselves,, and. where that intention is clear, it is the duty of the court to» disregard any terms used which would in effect defeat such intentian; and to hold that the presence of all the inspectors was necessary before the board, as a board, could act would expressly defeat the intention of the legislature, as shown through all the provisions-of the act, that the presence of a majority of the board, was sufficient to authorize the board to perform the duties imposed upon, it, and this conclusion is greatly strengthened by the system-adopted by the legislature for other portions of the state, where: three inspectors of election are provided for, and where a majority of such officers are authorized to perform the duties required of the board, and that at the same session of the legislature at which the act of 1892 was passed, by § 19 of chapter 677, known as the- “ Statutory Construction Law,” it is provided that whenever three, or more public officers are given any power or authority, or three or more persons are charged with any public duties to be' performed or exercised by them jointly, or as a board, a majority of all such persons or officers, at a meeting duly held at a time fixed by law, may perform and exercise such powers or duty.

I agree with counsel for the relator that if the law is clear, the court has nothing to do with the consequences of enforcing i t, but-that the law as written must be enforced. But where the question of constructive repeal or modification of the provisions of law is to be determined, the object sought to be obtained is always to be considered, and it is the duty of the court where such object is -clearly expressed to give force to the intention of the legislature, ■and so far as possible to carry such intention into effect.

This principle has been many times applied by the courts in ■construing acts of the legislature. In L. S. & M. S. R. Co. v. Roach, 80 N. Y., 844, Earl, J., says: “ The lawmakers cannot always .foresee all the possible applications of the general language they -use, and it frequently becomes the duty of the courts, in construing .statutes, to limit their operation so that they shall not produce absurd, unjust or inconvenient results not contemplated or intended. A case may be within the letter of the law and yet not within the intent of the lawmakers, and in such a case a limitation or exception must be implied.”

See, also, Matter of Rochester Water Commissioners, 66 N.Y., 418, where it was held that when, from the language of a statute and., an amendment a different intent from that which would undoubtedly apply from the language used is apparent, such effect will not be given it, and where other acts of the legislature passed at or about the same time corroborate the evidence of intent, as gathered from the statutes under review, the duty of the court is to give effect to the intent rather than to the literal terms of the act, and Chase v. Lord, 77 N. Y., 18.

My conclusion, therefore, is that under the statutes as they now -exist, a majority of the inspectors of election of each district has ' power to act as a board of inspectors, and that the relator was not justified in refusing to act because of the absence of one inspector.

I have not considered, and do not intend to decide, that in this «ose a writ of prohibition is the proper remedy. As I have come to the conclusion before stated, it is not necessary to pass upon that question.

The application for a writ must, therefore, be denied.


author: O’Brien, J.

text:
    Richard E. Simmons, Adm’r, Respt., v. Edward C. Hazard et al., App’lts.

      (Supreme Court, General Term, First Department,

      Filed October 20, 1892.)

    1. Depositions—Examination- before tbial—Affidavit.
    The affidavit for an order to examine an adverse party before trial should be made by the party himself, or by one who has personal knowledge of the facts, or, in the absence of such knowledge, where he moves upon statements made upon information and belief, the sources of the information should be given. If, however, the original party dies pendente lite, and the action is revived by his representatives, an affidavit verified by the attorney will be sufficient, provided he states that he knew the facts of his own knowledge, and the circumstances under which said personal knowledge was acquired.

      3. Same.
    An affidavit, verified by an attorney, is insufficient when his knowledge is derived merely from allegations of a complaint made upon information and belief.
    3. Same.
    An allegation in the affidavit, merely, that the moving party intends to use the deposition upon the trial, is not a sufficient assignment of reason for the necessity of taking the examination of a party before instead of .at trial.

      4. Same.
    The requirement of the Code, that the residences of all the parties to the action shall he stated in the affidavit, is not sufficiently complied with, by a bare statement that the residences of certain parties are unknown' to the affiant, without some evidence being furnished that inquiry has been, made, coupled with some fact showing that there is difficulty in learning such residences.
    5. Same.
    Where more than one party is sought to be examined, what is expected to be proved specifically by each witness should be stated in the affidavit.
    Appeal from order denying motion to vacate order for examination of defendants Hazard and Osborn, as adverse parties, under § 873 of the Code.

      Charles C. Leeds, for app’lts; Morse & Wensley, for resp’t.
   O’Brien, J.

The plaintiff was substituted for Celia B. Simmons, who originally appeared in this action for herself and others who might elect to join therein against the defendants (except the receiver), as directors and officers of the Co-operative Life & Accident Association of the United States, to recover damages, on the ground of alleged fraud in the management of the affairs of that company, misapplication and misappropriation of its funds, and unlawful disposition of its property.

Certain objections to the sufficiency of the order for the examination of these defendants were presented to the court and are relied on, which may be briefly referred to. It is insisted-that the present affidavit is not in any material respect better or stronger than the one already judicially declared insufficient, as pointed out in the opinion of the presiding justice upon the former appeal. Simmons v. Hazard, 33 St. Rep., 838. He therein says that the order “should have been vacated, if for no other reason, because the affidavit upon which it was granted was verified by the attorney for the plaintiff without any sufficient reason being given therefor.” The present affidavit is again verified by the attorney, but from it it appears that the original plaintiff has since died, and that the present plaintiff is ignorant of the facts going to constitute the cause of action, and the present attorney swears that the facts are within his personal knowledge. If, however, we examine the affidavit, in view of this positive statement of the attorney, and its reference to the complaint, which is upon information and belief, it is subject to the criticism that the attorney’s knowledge is derived from the statements contained in the complaint, and that the facts are known to the attorney to be stated in the complaint; but the attorney nowhere asserts that he has now or ever had any personal^ knowledge of the facts thus alleged.

As said in the opinion upon the former appeal: “ These affidavits should be made by the party, he or she being the only one who can asseverate as to his or her own knowledge or information-, material allegations. There is nothing in the affidavit under consideration to show that the attorney had any peculiar knowledge as to any of the facts necessary to be established.”

We do not think, therefore, where an affidavit to support ans order of this kind makes reference to a complaint which is made upon information and belief, that a statement by such attorney "that he has knowledge of such allegations in the complaint is .-sufficient. What is required is that the person applying for the order should have personal knowledge of the facts upon which the right to such order depends, or, in the absence of such knowledge, where he moves upon statements made upon information ana belief, the sources of the information should be given. Had "the attorney here stated that he knew the facts of his own knowledge and the circumstances under which such personal knowledge was acquired, we think it would have been sufficient. But where, as here, such knowledge consists of the allegations of a complaint made upon information and belief, it is clearly insufficient. It may be that the attorney intended to asseverate his personal knowledge -of the facts; but as this is not entirely clear, the doubt arising from the attorney’s formulation of the affidavit is not to be resolved in his favor.

Apart from this, however, there are other and more serious -defects shown upon the papers. Ho reason is assigned showing "the necessity or importance of the examination before, rather than ••at the trial, or for supposing that the defendants could not be had ns witnesses at the trial. The only attempt to comply with this requirement is the bare naked statement, which is clearly insufficient, “ that the plaintiff intends to use the deposition taken pursuant to the order sought herein upon the trial of this action.”

Another defective statement is that the place of residence of the defendants Mersereau and Osborn is unknown. With respect to both of these it was shown that their names and residences appeared in the Hew York city directory, that of the defendant 'Osborn having regularly and correctly appeared for more than thirty years past. The section requires that the names and residences of all the parties to the action should be stated ; and this «cannot be held to have been complied with by a bare statement ■that they are unknown to the affiant, without some evidence being furnished that inquiry has been made to ascertain them, coupled with some fact showing that there is difficulty in learning them.

We think, too, that where, as here, more than one defendant is sought to be examined, what is expected to be proved by each •witness should be stated. The affiant states “ that it is material ••and necessary for plaintiff to prove the number of members of said insurance company at the time of the death of plaintiff’s insured, also the sending out and collecting of an assessment for the purpose of paying plaintiff’s claim, which assessment was sent .out and collected, as deponent believes, from a card containing the •same, which is in deponent’s possession, all of which facts are within the knowledge of said Hazard and Osborn.”

Assuming such facts to be material and necessary, if either of •these witnesses can furnish the testimony, then no reason exists for the examination of the other; and if only a part of such information rests with one and another portion with the other of the •witnesses named, then the information which is desired from each should be stated. We think, however, there is grave doubt as to •whether such evidence is at all material and necessary, or as to whether or not it is within the issues framed by the pleadings,

The action itself is to recover damages resulting to plaintiff -from the dishonest management of the corporation and for the unlawful appropriation of some $46,000 to the use of certain of the defendants named, and the destruction of a valuable business worth $500,000. The relevancy and materiality to such a cause ■of action of testimony in regard to the number of policy holders, •and as to whether or not there was issued a notice for the collection of an assessment, or an assessment collected for the purpose of paying plaintiff’s claim, are not apparent. It is true that great liberality is allowed With respect to the examination of parties, where, by reason of their peculiar relations of trust or confidence to the plaintiff, the latter necessarily relied upon the good faith and honesty of such persons. In these cases, in the absence of personal knowledge, and upon a showing that the plaintiff has ground to suspect the good faith of persons holding to him either the relation of trustee or agent, an opportunity to examine such persons should be afforded. The principle of those cases, however, is easily distinguishable from, the present Here the plaintiff ■charges the defendants with the dishonest appropriation to their own use of moneys of a corporation in which his intestate was a policy holder. It is but fair that such charges should be made upon the personal knowledge of those in possession of the facts, •or that such information and the sources thereof should be stated .as to furnish a reasonable ground for concluding that the charges •thus made were in good faith honestly entertained, and that the information sought to be elicited was necessary and material and such as should be furnished to the plaintiff now rather than compel him to await the trial of the action.

It should be remembered that these orders are not to be granted as of course, but are to be allowed upon compliance with the statutory requirements and in the-exercisé of a sound discretion. If we may disregard any, we may disregard all of the statutory requirements, because it is not easy to determine, if any can Ire dispensed with, which ones are essential. It would have been proper for the legislature, had that been the policy, to have allowed examinations of parties and witnesses before trial as of course, and without making the same depend upon compliance with certain requirements of the Code. In what respect these have been violated we have again, as upon the former appeal, endeavored to point out. And to the end that the plaintiff may have another opportunity of complying therewith, we have concluded that the order appealed from should be reversed, and that, upon payment of the costs and disbursements of this appeal, the plaintiff should be allowed to renew the application upon new papers.

Van Brunt, P. J., and Lawrence, J., concur.