text:
    Abraham Davis, Respondent, v. The Guardian Assurance Company, Appellant.

      Vire insurance policy — provision as to the determination of the loss by appraisers— effect of the fraud of an appraiser — discrepancy between the (amount claimed and the amount awarded as evidence of fraud by the insured— when Oj verdict will not be set side — submission to a jury of specific questions, discretionary— Code of Civil Procedure, § 1187.
    Upon the trial of an action brought upon a fire insurance policy to recover the damages caused to the insured property by fire, it was shown that after the fire, pursuant to the terms of the policy, two appraisers, one appointed by the insurer and one by the insured, and an umpire selected by them, commenced the appraisal of the loss. The appraiser selected by the insured testified that on the last day that he acted as appraiser, he and Hinrichs, the appraiser selected by the insurer, went to a saloon and drank together, and that “ Mr. Hinrichs said to me — -told me that we get through easy with this job — the adjuster has got places to appraise, some in the country, and we will go there, in Newton, and we will go there; I answered, I- will see how the time will be with me; if I can spare it, that is all.” Hinrichs denied that he made any such statement to the appraiser selected by the insured.
    The plaintiff testified that the fact that this conversation had occurred was brought to his knowledge, and that thereupon and for that reason, and because he was dissatisfied with the damages agreed upon for the articles appraised, he refused to allow the appraisers to continue the appraisal.
    The court instructed the jury that, if they found that such a proposition was made, it was a sufficient justification for the plaintiff to refuse to permit the appraisers to continue the appraisement.
    The policy of insurance contained, among others, the following clauses;
    “ In the event of disagreement as to the amount of loss the same shall, as above provided, bo ascertained by two competent and disinterested appraisers, the insured and this company each selecting one, and the two so chosen shall first select a competent and disinterested umpire; the appraisers together shall then estimate and appraise the loss, stating separately sound value and damage; and failing to agree, shall submit their differences to the umpire, and the award in writing of any two shall determine the amount of such loss. * * *
    “No suit or action on this policy for,the recovery of any claim shall be sustainable in any court of law or equity until after full compliance by the insured with all the foregoing requirements.”

      Held, that the instruction was proper; that the insured was under no obligation to permit his damages to be appraised by an appraiser who would make such a proposition or by one who would listen to it without disclosing the fact;
    That if the jury found that an improper proposal was made by the insurer’s appraiser and new appraisers were not appointed, the fact that no appraisement was made, pursuant to the requirements of the policy, was not a defense to the action brought thereon.

      In an action brought on a fire insurance policy to recover the amount of a loss, the fact that there exists a considerable discrepancy between the amount claimed in the proofs of loss to have been lost through the burning of property covered by a fire insurance policy and the amount awarded to the owner thereof, is evidence upon the question as to the fraudulent overvaluation of the loss upon the part of the insured, but it does not ordinarily amount to proof of a fraudulent overvaluation, and whether the difference between the amount claimed and the amount awarded is so great as to justify the court in setting-aside the verdict depends upon the facts in each case.
    Upon the trial of an action brought tc recover the amount of loss sustained by the burning of property covered by a fire insurance policy, the plaintiff asserted in his proofs of loss .that the damages caused by the fire amounted to $2,154.15, while the amount awarded by the jury was $1,000. The property lost and damaged consisted wholly of household furniture, clothing, stores and supplies.
    The insurance policy contained the following clause:
    “ This entire policy shall be void * * * in case of any fraud or false swearing by the insured touching any matter relating to this insurance or the subject thereof, whether before or after a loss.”

      Held, that the General Term would not be justified, as a matter of law, in setting aside the verdict and granting a new trial because the insured claimed that the damages sustained were a little more than twice the amount awarded to him by the jury.
    Whether a trial court will or will not submit specific questions to the jury pursuant to section 1187 of the Code of Civil Procedure rests in its sound discretion, and its determination will not be reviewed upon appeal unless it appears that its discretion has been abused.
    Appeal by the defendant, The Guardian Assurance Company, from a judgment of the Supreme- Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 18th day of December, 1893, upon the verdict of a jury rendered after a trial at the New York Circuit, and also from an order entered in said clerk’s office on the 20th day of December, 1893, denying the defendant’s motion for a new trial made upon the minutes.
    This action was begun March 4, 1892, to recover from an insurer damages caused by fire. The defendant by a written policy insured the plaintiff from June 27, 1891, to June 27, 1894, against loss or damage by fire, not exceeding $1,500, on his household furniture, clothing, stores and supplies situate at No. 141 First avenue in the city of New York, where the plaintiff and his family resided. Between six and ten o’clock in the evening of November 3, 1891, a fire occurred in the premises, damaging some and destroying some of the property insured. November 19, 1891, the plaintiff verified and delivered to the defendant proofs of loss in which he stated that the damage caused to his property by the fire amounted to $2,154.15. Annexed to and forming a part of the proofs was a schedule of the property lost and insured, which consisted of about 250 items. The policy contains the following provisions:
    “ This entire policy shall be void * * * in case of any fraud or false .swearing by the insured touching any matter relating to this insurance or the subject thereof, whether before or after a loss. * * *
    “ In the event of disagreement as to the amount of loss the same shall, as above provided, be ascertained by two competent and disinterested appraisers, the insured and this company each selecting one, and the two so chosen shall first select a competent and disinterested umpire; the appraisers together shall then estimate and appraise the loss, stating separately sound value and damage; and failing to agree, shall submit their differences to the umpire, and the award in writing of any two shall determine the amount of such loss; the parties thereto shall pay the appraiser respectively selected by them, and shall bear equally the expenses of the appraisal and umpire. * * *
    “No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity until after full compliance by the insured with all the foregoing requirements.”
    November 23,1891, the parties executed an agreement submitting to appraisers the question of the amount of damages caused by the fire to the plaintiff’s property. Marks Levy was selected by the plaintiff and Carl E. .L. Hinrichs by the defendant. November twenty-fifth the appraisers took and subscribed the usual oath and appointed, in writing, Louis Alexander as umpire. On Friday, November twenty-seventh, the appraisers met and began their work, and after appraising a number of articles they adjourned until Sunday, November twenty-ninth, when they again met and resumed work. The plaintiff on this occasion expressed dissatisfaction with the conduct of the appraisers, and Levy withdrew and refused to continue to. act as appraiser, and December seventh executed a written resignation addressed to the defendant. The appraiser selected by the defendant went on with the umpire against the plaintiff’s objection and completed the appraisement, assessing the dam ages at $420.70.

      Benno Loewy, for the appellant.

      Samuel Greenbaum, for the respondent,
   Follett, J.:

Only two defenses are set up in the answer: (1) That the plaintiff refused to permit the damages to be appraised, pursuant to the terms of the policy, and (2) that the plaintiff falsely and fraudulently overstated in his verified proofs of loss the value of the property destroyed and injured, and the damage to the property injured. On the trial, no objection being interposed that such a defense was not pleaded, the defendant gave evidence which, it insisted, required the jury to find that the plaintiff fraudulently set, or caused to be set, the fire which occasioned the damages.

On the trial, Marks Levy, the appraiser selected by the plaintiff, testified that on the last day that he acted as an appraiser he and Hinrichs went to a saloon and drank together, and that “ Mr. Hinrichs said to me — told me that we get through easy with this job — the adjuster has got places to appraise, some in the country, and we will go there, in Newton, and we will go there; I answered, I will see how the time will be with me ; if I can spare it, that is all.” Hinrichs denied that he made any such statement to Levy. The plaintiff testified that the fact that this conversation had occurred was brought to his knowledge, and that thereupon and for that reason, and because he was dissatisfied with the damages agreed upon for the articles appraised, he refused to allow the appraisers to continue. The court instructed the jury that, if they found that such a proposition was made, it was a sufficient justification for the plaintiff to refuse to permit the appraisers to continue the appraisement. That this instruction was proper is apparent, as the plaintiff was under no obligation to permit his damages to be appraised by an appraiser who would make such a proposition or by one who would listen to it without disclosing the fact. The plaintiff testified that after Levy resigned he called on Mr. Meserole, the defendant’s assistant manager, and told him that he was ready to appoint another appraiser. Meserole testified that the plaintiff called on him and wanted another appraisal, but did not think the plaintiff used the words “ that he was ready to appoint a new appraiser.” The jury having found that an improper proposal was made by the defendant’s appraiser and new appraisers not having been appointed, the fact that no appraisement was made, pursuant to the requirements of the policy, is not a defense to the action.

In respect to the second defense, it is insisted that the verdict of the jury assessing the damages at $1,000, the plaintiff having sworn in his verified proofs of loss that his damages were $2,154.15, is proof that the plaintiff falsely overestimated the damages to his goods, and that the court erred in not setting aside the verdict on this ground; that the verdict for $1,000 damages is inconsistent with the verdict that the plaintiff did not falsely overstate in his proofs of loss the damages done to his property. In support of this contention the defendant cites Sternfeld v. Park Fire Insurance Company (50 Hun, 262). In that case the insured, by his verified proofs of loss, stated his damages to be $23,342.47. The appraisers appraised the damages at $4,321.53, making an overestimate of $19,020.94. The jury, by their verdict, found that the damage to the property was $5,000, making an overestimate by the plaintiff of $18,342.47. In discussing the case the court. said that there was no evidence that “ tended to explain this difference on the ground of any mistake or misapprehension concerning either of the facts upon which the proofs were made and verified, and as there was no ground from which it could be inferred that the loss had been overstated in this manner by mistake, there was reason for assuming that it had been fraudulently made to defraud the insurance company out of the other half of the amount of the policy. Such an inference necessarily follows from so great a difference.” The amount of the loss sustained was found to be less than one-fourth of the amount claimed. In that case the judgment and the order denying a motion for a new trial were reversed upon the ground that it was clear, from the verdict of the jury, that the plaintiff had fraudulently overestimated the damages. In other words, that the verdict that the plaintiff had not falsely overestimated the damage to his property was inconsistent with the finding that the damage did not exceed $5,000.

In Furlong v. Agricultural Ins. Co. (45 N. Y. St. Repr. 856 ; 18 N. Y. Supp. 844 28 Abb. N. C. 444) tlie insured, in his verified proofs of loss, swore that the damages caused to his personal property were $1,161.60. The jury assessed the damages on the personal property at less than $80 — less than one-fourteenth of the claim — and -it was held that the jury’s valuation of the damages at $80 was inconsistent with the finding that the insured had not, in swearing they were $1,161.60, falsely overstated the damages in his proofs of loss, and the judgment and order were reversed.

In Unger v. The Peoples Fire Ins. Co. (4 Daly, 96) the insured, in his verified proofs of loss, claimed that the injury to his property amounted to $16,336.23. The case was referred and the referees found that the loss was $9,172.88. It was held, on an appeal from the judgment entered on the report, that the discrepancy between the amount of the claim and the amount awarded by the referees was not proof that the plaintiff had sworn falsely in his proofs of loss.

In Dolan v. Ætna Ins. Co. (22 Hun, 396) the insured, when the policy was obtained, represented that the building was worth from $3,500 to $4,000, and in his proofs of loss he stated that the injury to his building by the fire amounted to $1,017.64. The appraisers appraised the damages to the building at $694, which was held to be the amount of damages recoverable for its loss. The jury found that there was no fraudulent overvaluation of the damages in the proofs of loss, and the court held that the discrepancy between the amount claimed and the amount awarded did not require the court to hold, as a matter of law, that the plaintiff had fraudulently overstated his damages.

Many cases have arisen over like clauses in fire insurance policies, which are cited in 2 May on Insurance (3d ed. § 477) and 1 Biddle on Insurance (§ 446 et seq.). The cases cannot be harmonized, and an analysis of them will serve no useful purpose. The result of a majority of the decisions is that a considerable discrepancy between the amount claimed in proofs of loss and the amount awarded on the trial is evidence of a fraudulent overvaluation, but that it does not ordinarily amount to proof of a fraudulent overvaluation, and that a verdict or finding that the damages sustained by the insured are much less than those claimed in his proofs of loss is not necessarily inconsistent, and whether the difference between the amount claimed and the amount awarded is so great as to justify the court in setting aside the verdict depends upon the facts of each case.

In the case at bar the property lost and damaged consisted wholly of household furniture, clothing, stores and supplies. The plaintiff asserted in his proofs of loss that the damages caused by the fire amounted to $2,154.15, while the amount awarded by the jury was $1,000. There is no class of property in resjoect to the value of which persons will so widely differ as articles of household furniture and clothing. Such property always is deemed to be of greater value by its owner than by any other pei’son. • A carpet and articles of furniture possess more value to the owner than to a dealer who estimates their value at what they will sell for as second-hand articles. So in respect to jDersonal clothing. It has little or no market value, though unworn, while it may be worth to its owner substantially what it cost. Considering the nature of the property, we do not think that this court will be justified, as a matter of law, in setting aside the verdict and granting a new trial, because the plaintiff claimed the damages to be a little more than twice the amount, awarded. The evidence given on the trial, if believed, justifies the verdict which was returned, and might have justified a larger one, or, if the jury in its discretion had believed the evidence of the defendant’s witnesses, who evidently testified to the salable value of the articles as second-hand property, a verdict for a less sum would have been justified. The question of the extent of the plaintiff’s damages, and whether the plaintiff falsely overestimated his loss, were fairly submitted to the jury by the learned trial judge; and, while the case may be a close one, we think the verdict should not be overturned as against the weight of evidence.

The hour at which this fire occurred and the circumstances under which it occurred, were such that the jury was entirely justified in finding that it was not fraudulently set or caused by the plaintiff. At the close of the evidence the defendant asked the court to submit eight specific questions to the jury, pursuant to section 1187 of the Code of Civil Procedure. 'Whether the trial court will or will not submit specific questions to the jury, rests in its sound discretion, and its determination will not be reviewed unless it appear that its discretion lias been abused. It was not proper to aslc that eight questions be submitted to the jury in this case, there not being so many issues of fact, and no error was committed in declining to submit tlie questions proposed. After looking at the exceptions taken to the admission and exclusion of evidence and to those taken to the charge, we find none that seem to be erroneous or so close as to require discussion.

The judgment and order should be affirmed, with costs.

Van Brunt, P. J., and Parker, J., concurred.

Judgment and order affirmed, with costs.


source: Caselaw Access Project

author: Follett, J.:

license: Public Domain

text:
    Central Trust Company of New York, Respondent, v. New York Equipment Company, Appellant.

      Subrogation — notes secured by a common collateral — right to enforce an accounting for the collaterals — waiter of an objection to a defect of parties — no right of compensation for services between joint owners of personal property.

    An equipment company made a conditional sale of certain rolling stock to a railroad company under an agreement that if the railroad company defaulted in the payment of its notes, given for tlie purchase, price., the equipment company might seize the rolling stock, sell it and apply the avails to the payment of the notes, or if insufficient to pay them in full should apply the proceeds to their pro rata payment, or, in the alternative, it might rescind the agreement, take possession of the property and hold it as its own.
    The United States Rolling Stock Company furnished to the equipment company the cars required by the railroad company, received some of tlie notes of the railroad company in payment, and also a written agreement assigning to the United States Rolling Stock Company a two-fifths interest in all the railroad equipment, and in all lights and remedies enjoyed by the equipment company. The notes were not paid and the equipment company seized the rolling stock, sold it and applied the avails to tlie payment of the debt.
    The United States Rolling Stock Company assigned its notes to a trust company for value, and the latter brought an action to compel the equipment company to account for the rolling stock seized and sold by it.

      Meld, that upon the transfer of the notes, by the rolling stock company to the-trust company, the collateral rights and securities held by its transferror, the United States Rolling Stock Company, passed in equity by subrogation to the trust company and entitled the latter to demand an account of the equipment company;
    That fhe objection that the rolling stock company was a necessary party to the action, not having been taken by demurrer or answer, was waived;

      That, in. the absence of a contract that compensation shall be paid, joint owners of property, or persons jointly interested in property, cannot recover of each other compensation for services rendered in caring for it and converting it into money.
    Appeal by the defendant, the New York Equipment Company, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 13th day of November, 1894, upon the report of a referee, with notice of an intention to bring up for review upon the appeal an interlocutory judgment entered in said clerk’s office on the 26th day of February, 1894.
    This action was brought to compel the defendant > to account for two-fifths of the avails of certain property which it had taken, sold and converted into money.
    March 28, 1889, the defendant entered into a written contract with the San Diego and Eastern Terminal Railway Company, by which the former delivered to the latter two locomotives and sixteen railway cars. The' agreement is in form a lease in which the defendant is called “lessor” and the railway company “lessee,” but in effect it is a conditional contract of sale of the property. For this property the railway company agreed to pay $35,000, by thirty-five promissory notes executed by it March 28, 1889, for $1,000 each, numbered from one to thirty-five inclusive, the first to become due July 1, 1889, and the last May 1, 1892. The defendant delivered the locomotives and cai’s to the railway company and received from it thirty-five notes, all alike except the number and date of payment. The following is a copy of No. 2:
    “No. 2.
    “ $1,000. San Diego, California, March 28, ’89.
    “ On the first day of August, 1889, we promise to pay to the New York Equipment Company, or bearer, one thousand dollars, with interest thereon at 6 per cent per annum from May 1st, 1889, for rental of rolling stock under contract of lease of even date herewith, payable at the office of said New York Equipment Company in the city of New York.
    “SAN DIEGO & EASTERN TERMINAL RAILWAY CO.,
    “ By Wm. TI. Carlson,
    “ President?

      By the terms of the contract, upon the payment of all the notes and the further sum of five dollars, the title of the property was to vest absolutely in the railway company. The contract contains the following provisions:
    “ In case the said lessee shall make default in payment of any of the.notes aforesaid, or any part thereof, according to their tenor on the day when the same may be payable, or in case the lessee shall violate this agreement. in any respect whatsoever, this lease shall immediately cease and determine, and lessee shall and hereby agrees to deliver up the aforesaid equipment and rolling stock to the lessor as aforesaid, and the sums paid and payable upon all the aforesaid notes up to the date of such surrender and delivery shall be deemed an equivalent for the use of said property up to such date, and shall be retained as such by the lessor.

      “ Said lessee further agrees that in case of any such default, the lessor or its assigns may seize said equipment and rolling stock wherever the same may be found, and resume possession thereof, free from every legal and equitable claim of said lessee of, in or to said equipment or rolling stock, and said lessee agrees that it will hold said lessor or its assigns harmless from and pay any and all debts, demands or liabilities whatever which said lessor may incur by reason of any such seizure.

      “ In case said equipment and rolling stock shall be delivered up by said lessee to said lessor or its assigns as aforesaid by reason of such default, the said lessor or its assigns shall have the right to retain for its own use and benefit the said equipment and rolling stock so delivered up or seized, or, at its option, to sell the same on ten days’ notice to the lessee at public or private sale, and to apply the proceeds to the payment of any and all of said notes representing installments of rent of said equipment and rolling stock for the whole of said term of thirty-six months, whether said installments shall then have fallen due or not, including interest at six per cent; and notwithstanding that said rolling stock be so taken'possession of and removed and sold prior to the expiration of this lease.

      “ In case the proceeds of such sale shall not be sufficient to pay all of said notes-in full, such proceeds shall be applied to the pro rata pajnnent of all of said notes then outstanding and unpaid, without preference or priority and irrespective of the dates of their rnaturity, and said lessee shall be liable to pay the deficiency to the lessor or its assigns on demand until all said notes shall have been paid in full; but if the proceeds shall be more than sufficient to pay all such unpaid notes representing installments of rent, with interest and expenses, then the surplus shall be paid to the lessee.”
    The United States Rolling Stock Company furnished the sixteen cars delivered by the defendant to the railway company, and in payment thereof received from the defendant fourteen of said notes, to wit: No. 2, due August 1, 1889; No. 4, due October 1, 1889 ; No. 7, due January 1, 1890; No. 9, due March 1, 1890; No. 12, due June 1, 1890 ; No. 14, due August 1,1890 ; No. 17, due November 1, 1890 ; No. 19, due January 1, 1891; No. 22, due April 1, 1891; No. 24, due June 1, 1891; No. 27, due September 1, 1891; No. 29, due November 1, 1891; No. 32, due February 1,1892; No. 34, due April 1, 1892.
    These fourteen notes represented two-fifths of the contract price for the locomotives and cars. To secure the United States Rolling Stock Company the defendant, by a written instrument, dated June 14, 1S89, assigned to the rolling stock company and its assigns “ an undivided two-fifths interest of all its right, title and interest thereunder (the contract of March 28, 1889), and in and to the railroad equipment and rolling stock therein described, together with the rights, remedies and incidents thereunto belonging.”
    June 20, 1889, the United States Rolling Stock Company transferred said fourteen notes, all payable to bearer, to the plaintiff for a valuable consideration. The railway company made default in the payment of all the notes which fell due on and before January 1, 1891, and on or about January 9, 1891, the defendant, pursuant to the terms of the contract, took possession of the locomotives and cars and afterwards sold a portion of them and received the proceeds of the sale. Before this action was begun the railway company defaulted on the remainder of the notes falling due after January 1, 1891. The defendant refusing to account for the avails derived from the sale of the property, this action was begun January 17, 1893, to compel an accounting.
    The foregoing facts are alleged in the complaint, are not denied in the answer, and have been found by the referee. As a defense, it is alleged that the defendant, in taking possession and selling the property, acted with the consent pf the United States Rolling Stock Company, upon an agreement that the defendant should be reimbursed for all expenses incurred and paid out of the avails of the sale for its services in taking possession of and selling the property.
    By a stipulation the action was referred to a referee to hear and determine, and by the interlocutory judgment entered on his report it was adjudged that the defendant account for the property taken. By the final judgment the defendant was allowed all of its expenses in taking possession, caring for and selling the property, which, being deducted from the avails of the sale, left in its hands $6,283.95, two-fifths of which, $2,513.58, the defendant was adjudged to pay to the plaintiff, together with the costs of the action.

      Philip G. Bartlett, for the appellant.

      Henry W. Calhoun, for the respondent.
   Follett, J.:

The defendant alleges four grounds for the reversal of the judgments : (1) That the plaintiff failed to show that defendant was liable to account; (2) that the United States Rolling Stock Company is a necessary party to the action ; (3) that the referee erred in refusing to allow the defendant compensation for its services in taking possession of, caring for and selling the property ; (4) that the referee erred in admitting evidence on the accounting.

The contract was, in legal effect, a conditional sale of the property, by the terms of which the defendant, in case the railway company defaulted on any of the thirty five notes, had the right to seize the property, sell it, and apply the avails in payment of the notes, or it had the right to rescind the contract, take possession of the property and hold it as its own. The defendant did not resort to the second, but to the first alternative, and elected to affirm the contract, treating the property as security for the payment of the notes, and it is alleged in the answer that this was done by an agreement with the United States Rolling Stock Company. Had that company remained the owner of the fourteen notes which were transferred to it by the defendant, it would have had the right to compel the defendant to account and pay over two-fifths of the net avails of all sums realized on a sale of the locomotives and cars. That right was created and secured by the assignment by the defendant to the United States Rolling Stock Company of June 14, 1889. Upon the transfer of these notes to this plaintiff the securities held by the transferror as collateral for their payment passed in equity to the plaintiff, who became subrogated by operation of law to the rights of the transferror, and it has the same right to compel the defendant to account that the United States Rolling Stock Company would have had, had it not transferred the notes. It is argued in behalf of the defendant that it is not liable to account because, under the contract, it remained the absolute owner of the property. If the defendant, instead of affirming the sale, had elected to rescind it and take the property into its possession as its own, a different question would have arisen; but even in that case it is difficult to see how, under its assignment of June 14, 1889, it could have escaped liability to account for two-fifths of its value. Again, it is not alleged in the answer that the defendant elected to disaffirm the sale and take possession of the property and hold it as its own, and it is too late, after having substantially alleged the contrary, to take this position on appeal.

The question that the United States Rolling Stock Company is a necessary party to the action cannot be raised for the first time on appeal. This objection is waived, unless it is taken by demurrer or answer. (Code Civ. Proc. § 499.) The objection was not taken, by answer or demurrer, on the trial nor on the accounting before the referee, and it is too late to take it on appeal.' Had it appeared on the trial that it was necessary that other parties should be brought in, in order to determine the action, the court might, in its discretion, have ordered the case to stand over and the necessary parties, brought in. But there is no such necessity in this case. The United States Rolling Stock Company is not shown to have any interest in this action. It had transferred all of its interest in these notes to this plaintiff, which is subrogated to all the United States Rolling Stock Company’s rights in the contract, and it is not a necessary party to the action.

The defendant claims $3,000 for its services in taking possession of, .caring for and selling the property. The referee found that the plaintiff had not agreed to compensate the defendant for such services. In the absence of a contract that compensation for services shall be paid, joint owners of property, or persons jointly interested in property, cannot recover of each other compensation for services rendered in caring for it, and converting it into money. (Franklin v. Robinson, 1 Johns. Ch. 157; Trustees v. Greenough, 105 U. S. 527; Raun v. Reynolds, 18 Cal. 276 ; Freem. Coten. § 260.)

The case of Woodruff v. N. Y., L. E. & W. R. R. Co. (129 N. Y. 27) is cited as holding a contrary doctrine. It is expressly stated in that case that the plaintiff, who was compensated for liis services, was not acting in his own interest, but exclusively as a trustee for and in the interest of bondholders. (129 N. Y. 31, 32.) Again, on looking into the record we fail to And any evidence of the extent of the services performed by the defendant, or of their value, beyond the services performed by its employee, whose salary and expenses were allowed by the referee.

Four of the six exceptions taken to the admission of evidence are to the testimony of William C. Lane in respect to the value of services for selling railroad rolling stock. Having held that under the evidence the defendant is not entitled to compensation for such services, the testimony as to the value of like services becomes entirely immaterial, and no harm was done to the defendant by its admission. The other two exceptions are to the ruling of the referee that the plaintiff’s vice-president might testify that the plaintiff never assented to any payment or charges for services by the defendant. This was clearly competent.

We think that no error was committed by the learned referee, and that the judgments are right, and should be affirmed, with costs.

Van Brunt, P. J., and O’Brien, J., concurred.

Judgments affirmed, with costs.


text:
    Nicola Colelli, Respondent, v. New Jersey and Pennsylvania Concentrating Works, Appellant.

      Negligence — defective plan for a building — liability of the person furnishing the plan for injury caused by the fall of the building.

    In an action brought to recover damages resulting from personal injuries sustained, as alleged, because of the defendant’s negligence, it appeared that a contractor undertook to erect a building in accordance with plans furnished by the defendant, who also supplied the material and requisite machinery; that the contractor applied to the defendant for a gang of men to assist him, and that the defendant sent the plaintiff to the work under its own foreman; that the building when partly finished fell, without any apparent cause, and injured the plaintiff.
    On appeal from a judgment in favor of the plaintiff,
    Held, that the jury, in the absence of proof that the plan was negligently executed, was entitled to conclude that the accident resulted from a defective plan, and that a verdict in favor of the plaintiff would not be disturbed.
    Appeal by the defendant, the New Jersey and Pennsylvania Concentrating Works, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the comity of New York on the 30th day of October, 1894, upon the verdict of a jury rendered after a trial at the New York Circuit, and also from an order entered in said clerk’s office on the 13th day of November, 1894, denying its motion for a new trial made upon the minutes.

      Theodore B. Steele, for the appellant.

      John M. Gardiner and Henry M. Heymann, for the respondent.
   Follett, J.:

This action was begun October 8, 1892, to'recover damages for a personal injury sustained by the plaintiff, an employee of the defendant, occasioned by the alleged negligence of the defendant. The plaintiff is a stonemason, and, April J, 1892, began work for the defendant, a New Jersey corporation, and continued in its employ until August 12, 1892, when he was injured.

The case does not contain all of the evidence, and, therefore, no question of fact is before the court for its consideration. June 30, 1892, the defendant entered into a contract with Owen J. Conley, by which the latter agreed to erect, pursuant to plans furnished by tlie defendant, a frame building about 230 feet long, 90 feet wide, and upwards of 50 feet high, upon its property at Ogden, N. J., and known as stockhouse No. 3. Tlie defendant furnished the material for the building and the machinery and implements for erecting it. "When completed it was to consist of twenty-three bents set ten feet apart. When the bents were ready to be raised tlie contractor applied to tlie defendant for a gang of men to assist in raising the building. The plaintiff was at work under a foreman by the name of Smith, who was directed by the defendant’s officers to assist the contractor in the erection of the building. In obedience to Smith’s direction the plaintiff, with others, worked on the building.

On August 12,1892, while the seventeenth bent was being raised, all the bents fell to the ground, severely injuring the plaintiff, who was at the time engaged on the building as an employee of the defendant. There was no wind or apparent external cause for the accident, but the building fell, either because defectively designed, or because the design was defectively executed. The defendant’s mechanical engineer planned the building, and it is not asserted that the contractor who undertook to perform the mechanical labor, but not to furnish any materials or machinery, neglected to erect or stay the bents in accordance with the plans furnished. There was some evidence that the bents fell because the contractor’s employees negligently left a rope unfastened, but the court instructed the jury that the negligence of the contractor or of his employees furnished no ground for the recovery of damages by the plaintiff, and that to entitle him to recover the jury must find that the accident was caused by a defective plan or design negligently adopted. The mere fact that seventeen bents, forming a frame 170 feet long, 90 feet wide and 50 feet high, fell under the circumstances described, was evidence from which the jury was at liberty to infer that the plan was defective, unless it were shown to have been negligently executed. Builders testified that sufficient stays for holding the bents in position after they were erected were not prescribed by the plans, and in this respect .it was urged that the defendant was negligent. 'On the part of the defendant witnesses testified that the plan was a safe one; but in the face of the result it is not a matter of surprise that the jury found that it was not. The plaintiff did not recover upon the theory that the contractor or his employees were negligent, but upon the ground that the defendant negligently designed an unsafe building, upon which it directed the plaintiff to labor. It is not urged that the court erred in the reception or rejection of evidence, and the exceptions to the charge present no error, and are not of sufficient importance to require discussion. The liability of the defendant to its employees injured by this accident has already been affirmed in this court (Rook v. New Jersey & Pennsylvania Concentrating Works, 16 Hun, 54), and also by the Supreme Court of New Jersey in two cases.

The judgment and order should be affirmed, with costs.

Parker, J., concurred; Van Brunt, P. J., concurred in result.

Judgment and order affirmed, with costs.


author:
Follett, J.:
      O’Brien, J.

text:
    Franz Merz, Suing on Behalf of Himself and Other Stockholders of the Interior Conduit and Insulation Company Similarly Situated, etc., Appellant and Respondent, v. Interior Conduit and Insulation Company and Others, Respondents and Appellants.

      Corporation — issue of bonds to pay a scrip dividend, forbidden — bonds cannot be issued merely to reduce the capital stock — Laws of 1892, chap. 688, §§ 23, 42.
    Under section 23 of the Stock Corporation Law (Chap. 688 of the Laws of 1892), providing that the directors of a stock corporation shall not make dividends except from the surplus profits arising from the business of the corporation, nor divide, withdraw, or in any way pay to the stockholders, or any of them, any part of the capital of the corporation, or reduce its capital stock except as authorized by law, a corporation has no authority to make a scrip dividend in one year and in the succeeding year issue bonds to pay such dividend. Section 42 of the Stock Corporation Law forbids the issue of bonds by a corporation to reduce its capital stock or to pay scrip dividends.
    O’Brien, J., dissenting.
    Appeal by the plaintiff, Franz Merz, suing on behalf of himself and other stockholders of the Interior Conduit and Insulation Company similarly situated, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of New York on the 5th day of April, 1895, denying his motion for an order continuing an injunction heretofore granted, enjoining and restraining' the defendants during the pendency of the above-entitled , action from issuing certain so-called gold debenture bonds.
    Also an appeal by the defendants, the Interior Conduit and Insulation Company and others, from so much of the said order, entered in said clerk’s office on the 5th day of April, 1895, as orders and directs that the injunction heretofore granted in the above-entitled action be continued to the extent that the plaintiff shall not be called upon to surrender any part of Kis stock for retirement or to subscribe for the debenture bonds unless he so desires.

      A. J. Dittenhoefer and David Gerber, for plaintiff.

      Eugene H. Lewis, for defendants.
   Follett, J.:

Stripped of unnecessary words the scheme of the corporation is to issue $500,000 of its bonds, payable in gold coin April 1, 1,925, with interest at six per cent per annum, payable on the first days of April and October in each year, which are to be issued, not “for ■money, labor done or property actually received for the use and lawful purposes of such corporation,” but for the following purposes:

Twelve and one-half per cent of the bonds to be devoted to paying scrip................................. $62,500
Fifty per cent of bonds to reduction of stock of corporation......................................... 250,000
Thirty-seven and one-half per cent of bonds for cash.... 181,500
$500,000

In June, 1894, the directors of the corporation declared a scrip dividend of five per cent on its capital stock of $1,250,000, the total amount of which dividend was $62,500. At the same time it declared a scrip dividend of five per cent on $500,000 on capital stock not then issued, but which it is alleged ought to have been issued to the Johnson Standardizing Company. This scrip, amounting to $12,500, was" turned over to the latter company. The total amount of dividend scrip outstanding is $15,000, besides interest, $62,500 of which is to be paid by exchanging it for the bonds to be issued.

Section 23 of the Stock Corporation Law provides: The directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation; nor divide, withdraw or in any way pay to the stockholders, or any of them, any part of the capital of such corporation, or reduce its capital stock, except as authorized by law.” (Laws of 1892, chap. 688.)

There is no authority for making a scrip dividend in one year, and in the succeeding year issuing bonds to pay such dividend in whole or in ¡Dart. This seems to me to be a plain violation of the statute. If this is sanctioned the entire capital stock of a corporation can be wiped out by the declaration of dividends and subsequently issuing bonds wherewith to pay the dividends.

I fail to find any provision in the statute authorizing the capital stock of the corporation to be reduced by the substitution of bonds therefor. The 42d section of the Stock Corporation Law provides : “ No corporation shall issue either stock or bonds except for money, labor done, or property actually received for the use and lawful purposes of such corporation. No such stock shall be issued for less than its par value. No such bonds shall be issued for less than the fair market value thereof.” Under this section the corporation cannot issue bonds to pay scrip dividends or for the purpose of reducing its capital stock.

This is in no sense a scheme for the reduction of the capital stock of the corporation, and for a division among the shareholders of the property of the corporation in excess of the amount of the capital stock as reduced, and the cases sanctioning such reductions and distributions are not in point.

’Whether the proposed scheme will advance the interests of the corporation or not is a question with which we have nothing to do. The statute prescribes the purposes for which stock and bonds may be issued, and every stockholder has the right to compel the directors to observe the statute.

That part of the order which vacated the original injunction should be reversed and the original order restored, with costs to the plaintiff.

Van Brunt, P. J., concurred.

O’Brien, J.

(dissenting):

I do not concur with the views of the majority of the court for the following reasons:

The defendant, the Interior Conduit and Insulation Company, is a domestic manufacturing company, having as its president the-defendant Johnson, of which company the plaintiff is a stockholder, owning 100 shares of the par value of $10,000. The company had an authorized stock issue of $1,250,000. In February, 1895, a meeting of the stockholders was called for the purpose of increasing the capital stock to $1,575,000, the purpose of which increase was to retire outstanding scrip amounting to $75,000 by converting the same into stock, and to discharge an obligation due by the conduit company to a corporation known as the Johnson Standardizing Company, which latter company had transferred certain patent rights to the former in consideration of an agreement that it should receive $250,000 of the capital stock of the conduit company therefor. The meeting resulted in an authorized increase of the capital stock by the sum of $325,000, which was the requisite amount for the purposes aforesaid. About the same time the board of directors caused a plan to be formulated for submission to the stockholders, after the approval of the increase of the capital stock, for the creation of preferred stock of $500,000 of the then to be authorized capital stock of the company, and provided further that such preferred stock should be issued upon subscription to the stockholders of the company under a plan by which each stockholder of record was to be entitled to subscribe for the preferred stock to the extent of 40 per cent of his present holdings, paying therefor 50 per cent in common stock of the company, 12-J per cent in dividend scrip or cash, and 37& per cent in cash. To carry out this plan the directors negotiated with the standardizing company, in lieu of the $250,000 of stock due it from the conduit company and of the $12,500 of dividend scrip owned by it, to pay the gross sum of $87,500 in cash. If this plan had been carried out it would have resulted in a capital stock of $1,500,000, of which $1,000,000 would bo common and $500,000 preferred stock; and from the moneys received in payment for such preferred stock the obligations of the standardizing company would be discharged by the payment of $87,500, and there would be left in tlie treasury company of $100,000. Inasmuch as unanimous consent, which was necessary under the statute, was not obtained from the stockholders for the issue of such preferred stock — the holders of 300 out of the 12,500 shares having dissented from the plan, and 700 shares not having been voted oil — the plan was abandoned.

The conduit company increased capital of $1,575,000, which, though available if accepted to discharge the obligations to tlie holders of scrip dividends and the standardizing company, in mo way met the need that still existed of- supplying the conduit company with cash resources for tlie conduct of its business. The directors were, therefore, confronted with the necessity of presenting some other plan, and another meeting of the stockholders was called to reduce the stock to $1,000,000 from $1,575,000, to which it had been increased at the preceding meeting. This was done, and thereupon the directors issued a notice, that they had resolved to issue what they termed “gold debenture bonds” to the amount of $500,000, to be subscribed for by the stockholders in the same proportion as was contemplated in the event that the issue of preferred stock had been approved, viz., each stockholder was to be permitted to subscribe to the bonds to the extent of 40 per cent of his stock holdings, and pay therefor 50 per cent in stock at par, 12J per cent in dividend scrip at par or cash, and 37-J per cent in cash. In that way, it will be seen, it was intended to raise $187,500 out of which to pay the standardizing company $87,500, leaving $100,000 in the treasury as working capital. The question, however, presented itself to the directors as to what should be done in regard to stockholders who would not or could not subscribe for these bonds. Accordingly an alternative wa's presented by which stockholders not making such subscription were to surrender for retirement one-fifth of their holdings of stock and accept in lieu thereof certificates of interest in the company’s surplus, which recited that they entitled the holder “ to a fractional interest in the ¡surplus capital of the company. Such surplus capital is represented by the difference between the outstanding capital stock prior to the reduction of the authorized amount thereof and the amount to which the same was reduced; ” the stockholder “ to receive such fractional interest out of the proceeds of the sale and conversion of said surplus capital into cash at sucli time or times as tbe directors shall determine to make such sale and conversion.”

To prevent tlie issue and the circulation in the market of the, bonds and the compelling of the plaintiff to accept the certificate of interest as an alternative to subscribing, and in effect to prevent the carrying out of the plan of the board of directors, this action was brought, and a preliminary injunction having been obtained, it was, on motion for its discontinuance, vacated, excepting that the con-, duit comjjany was enjoined from calling upon the plaintiff to surrender any part of his stock for retirement, or to subscribe for the debenture bonds unless he so desired. From that order both plain-, tiff and defendants have appealed, the former upon the ground that the injunction should have enjoined the carrying out of the plan, and the latter upon the ground that it should have been wholly vacated.

With respect to the proceedings taken to increase the stock, and subsequently to reduce or decrease it, the statutory requirements having been fulfilled, these were legal and regular. The criticisms made on such proceedings are in respect to Mr. Johnson’s acts as director and stockholder.' lie was the president of the conduit company, and the principal stockholder in the standardizing company, and it is suggested that his participation in the deliberations of the directors and stockholders is in itself sufficient to taint with invalidity the entire dealings of the company not only with Johnson and the standardizing company, but with the plaintiff and other stockholders. It is not claimed that there was anything wrong in Mr. Johnson’s actions, but that liis positions as a stockholder and as creditor were inconsistent. The fact, however, that he had a claim against the company did not prevent his exercising the rights which as a stockholder he undoubtedly had, to participate in the stockholders’ meeting and vote, either on his own stock or as proxy of others, in favor of a proposition to increase or reduce the company’s capital stock. (Gamble v. Queens Co. Water Co., 123 Y. 91.)

The effect of the plan to issue the bonds is undoubtedly as claimed by the plaintiff, to place things in practically the same position as they would have been had the minority stockholders consented to the issue of the preferred stock; because the debenture bonds would take precedence of the common stock, and the bonds being distributable upon precisely same as been, the plaintiff is entitled to feel as much aggrieved by the plan as the other. The feelings of stockholders, however, are not subject of our consideration, our duty being to determine whether action of the directors in what they propose doing is either so unjust or illegal that it should be restrained by the court. In determining this question regard must be had to the situation of the company, its necessities, and the powers which the directors possess; so considered, if the contemplated action is neither ultra vires illegal, the court should not interfere, the rule being that the directors are entitled while acting within the scope of their authority and powers to do what they think best for the interests of the corporation, and it is only when the intended act is illegal, or the directors’ purpose is to exceed their powers, or evidence is presented that they are proceeding erroneously to the injury of the corporation, its creditors or stockholders, that the aid of' the court will be extended.

In March, 1895, the company standing capital stock of $1,250,000, being $250,000 in excess of its authorized capital, then reduced to $1,000,000. It was obligated to-retire $T5,000 of dividend scrip, which, by reason of the recent increase of capital had become immediately convertible into stock j owed the Johnson Standardizing Company either the sum of $81,500 in cash or $250,000 in stock; and it required some cash for working capital. In this situation the directors, in the interest of every one connected with the corporation, were compelled to take some action or adopt some plan that would relieve it from embarrassment and enable it to continue its operations. The fact that the issuing of preferred stock had been prevented by a minority of the stockholders, who, in the exercise of their legal right, had spoiled the success of that plan, by no means freed the directors from the necessity or responsibility of formulating and carrying out some other which would bring relief to the company. That its condition in March was as stated, and that some action was required on the part of those conducting its affairs, is not seriously disputed. The plaintiff speaks doubtingly in regard to the existence of the claim of the Johnson Standardizing Company, but the support which it receives from the statement of the manner in which it was created and its character, removes any doubt as to its justice and validity. The directors, therefore, were justified in adopting any fair and legal plan to meet the pressing exigencies of the company; and, with this conceded, the question is narrowed down to whether the contemplated bond issue was authorized and legal.

The plan of issuing the bonds and certificates of interest was one presented by the board of directors and not submitted to the stockholders, and this is one of the grounds assigned against the legality of the scheme. Section 2 of the Stock Corporation Law (Chap. 688, Laws of 1892) expressly authorizes any stock corporation “ to borrow money ” and to “ issue and dispose of its obligations for any amount so borrowed.” For this purpose full power is vested in the board of directors, and it is only when it is proposed to mortgage the corporate property and franchises to secure corporate obligations that the consent of the requisite proportion of stockholders is necessary. Here the obligations or certificates of indebtedness which it is proposed to issue under the designation of debenture bonds, are not to be secured by any mortgage upon the franchises or property •of the company; and, unless there is some other ground of illegality assigned, it was within the scope of the powers conferred upon the •directors to authorize the issue of such obligations without obtaining the consent of the stockholders. Several other grounds of illegality are assigned, however, and these will now be considered.

Section 42 of the Stock Corporation Law provides that “No corporation shall issue either stock or bonds except for money, labor •done or property actually received for the use and lawful purposes of such corporation. No such stock shall be issued for less than its par value. No such bonds shall be issued for less than the fair market value thereof.” It is insisted that this provision is violated in two particulars : First, that the bonds are not issued for money, labor done or property received for the use and lawful purposes of the company, and, second, that they are not to be issued for the fair market value thereof, but that what in effect is attempted to be done is, to convert the stock and scrip dividends into bonds, and this, it is insisted, is not the issuing of bonds for cash or for property necessary for the use and lawful purposes of the corporation.

As we have seen, if a corporation is in debt it has the power conferred by statute to issue its obligations therefor. A distinction is, therefore, I think, to be observed between indebtedness; which a board of directors may issue pursuant to section 2, and bonds secured by mortgage, which latter is a lien on property and requires the assent of stockholders and is controlled section. 42 of the Stock Corporation Law. The so-called debenture bonds ” are nothing more than obligation notes or promises to pay, and are not the “ bonds ” referred to in section 42,. which has undoubted reference to bonds secured by mortgage. If, however, section 42 is applicable, then the word “property,” as therein used, should be construed to mean anything of value. If so, it cannot be held that an outstanding indebtedness of a live solvent corporation can be regarded as other than a thing of value or property. The scrip dividends ” of this corporation, declared in the previous june, were an existing indebtedness. Their validity is not assailed, nor is it claimed that they were not lawfully and properly issued. It is true they were issued in June, 1894, and the bond scheme was presented in March, 189o. Hence, the inference is sought to be made that the corporation had no right to make such scrip dividends. This is not, however, justified, for it appears that the company had property, real estate and the plant of a going business, the value of which is not claimed to have been overestimated. Its difficulties seem to have arisen from an insufficiency of cash, not of property. In the development of its business it required, and now requires, more cash, aud, so far as appears, instead of depleting its treasury of cash, it divided its surplus property by means of scrip dividends, which it had a right to do. If it had been shown or claimed that the scrip ” had been issued unlawfully, or at a time when it had not surplus assets, then an entirely different question would be presented. I concede that a dividend in bonds could not be legally made, nor could a scrip dividend be lawfully declared for the purpose of afterwards issuing bonds to retire them. But where, as here, no charge of that kind is made, and it is assumed by all that a scrip dividend was lawfully made to represent actual surplus assets, then an inference which is lacking in foundation or proof should not be made to the contrary. It cannot, therefore, be assumed, because neither claimed nor proved, that this corporation made a scrip dividend except from surplus profits, pursuant to section 23 of the Stock Corporation Law. As the “scrip dividends” are not claimed to represent any other than an actual valid outstanding indebtedness of the corporation, bonds to pay the same or other obligations to discharge them could be issued, the same as could be done with respect to any other debts owing by the corporation.

In the way of dividends, what a board of directors may do has been so clearly and fully stated in the well-considered case of Williams v. The Western Union Telegraph Co. (93 N. Y. 162), that further elaboration is unnecessary, it being therein held, in construing a provision of the Revised Statutes similar to section 23 of the Stock Corporation Law, as follows (head note): “ The term ‘ capital stock ’ in the provision of the Revised Statutes (1 R. S. 601, § 2) prohibiting the directors of a corporation from making dividends except from the surplus profits of the corporation, or from dividing, withdrawing or in any way paying to the stockholders any part of the capital stock of such company,’ means the property of the corporation contributed by the stockholders or otherwise obtained to the extent required by its charter. The object of the provision was to prevent a withdrawal of the property, which would reduce the value of its assets below the sum limited for its capital in its charter or articles of association. When the property of the corporation exceeds that limit the excess is surplus, which may be divided among the stockholders either in money or property. Where also a corporation has accumulated such a surplus, and an increase of its share capital has been lawfully authorized, a dividend of shares is not prohibited by said provision; and where such a dividend does not exceed in amount the amount or value of the surplus, it is not in conflict with any principies of public policy.”

Having issued scrip dividends, and their validity not having been assailed, they became obligations of the company, and in receiving them in part payment of the bonds issued, the corporation obtained property.

In regard to accepting the stock in part payment, a similar line of argument may be pursued. It is true it appears that the stock of the company has a market value of but forty dollars a share, but it does not therefrom necessarily follow that that is its value. Whatever may be the value of the company’s stock upon the market, so long as the capital is unimpaired — which as to this company appears to be tlie case -— it may be assumed, for the purposes of purchase and retirement, to be of its full face value. This being so, it is shown that the bonds are to be issued for cash for dividend scrip which are obligations of the company, and the return of a certain proportion of the stock which it was not only lawful but necessary for the corporation to get possession of, to the end that it might be canceled and thus bring the stock down to the authorized amount.

It will be noticed that, by the section of the Law quoted (§ 42), while the stock shall not be issued for less than its “ par value,” bonds may be issued for their fair market value; ” and plaintiff does not make it appear that the debentures are to be sold at less than their fair market value, which it would be necessary for him to show if he desired to prevent their being sold. The company received par value for this stock, and when purchasing it for the purpose of retirement, no injustice is done by giving for it the same price that it received-, particularly as it is here shown, as before stated, that the capital of the company is unimpaired, and the stock is, presumably, intrinsically worth its par value.

Cook, in his work on Stock and Stockholders, says (§ 282): If a corporation has power to reduce its capital stock, it has been held that it may do so by purchasing and retiring a portion of its shares.” (City Bank of Columbus v. Bruce, 17 N. Y. 507; Seeley v. N. Y. Nat. Exch. Bank, 8 Daly, 400,405 ; affd., 78 N. Y. 608.) There is authority, therefore, for the position that where a reduction of a company’s capital stock is sought, it may be accomplished by the company’s buying its own stock for retirement or by requiring a pro rata surrender of the same by its stockholders. In the latter event the statute provides (Stock Oorp. Law, § 46): If the capital stock is reduced, the amount of capital over and above the amount of the reduced capital shall be returned to the stockholders pro rata at such times and in .such manner as the directors shall determine.” Upon the reduction of the capital stock, therefore, it became incumbent, under the .statute, to return to the stockholders the surplus, though the time and manner in which that should be done was committed to the directors. In distributing surplus assets, after diminishing the capital, reason and authority require that this shall be done equally and without any partiality or preference. As said in Jones v. Terre Haute & Richmond R. R. Co. (57 N. Y. 206): “ After a dividend is declared each stockholder lias a right in severalty to his particular proportion, and this right, cannot, I think, be abridged by any discrimination of the directors in any form whatever ; ” and it is only when the corporation has on hand actual capital sufficient to pay its debts, and in excess of the amount to which it has reduced its capital, that such excess may be distributed. (Strong v. Brooklyn Crosstown R. R. Co., 93 N. Y. 426.) A distribution of surplus capital, therefore, is like a distribution of surplus profit when a dividend is declared; it is intended as a distribution among the stockholders of something on hand above the liabilities of the corporation, without the impairment of the reduced capital stock, and there must be equality among the stockholders without any unfair discrimination. As said in Seeley v. N. Y. Nat. Exch. Bank (8 Daly, 403): “ If the retired capital be a liability of the corporation in favor of the shareholders who give up the stock that is called in, the payment of that debt cannot lie in any man’s discretion. Payment cannot be deferred, because the directors believe it for a creditor’s advantage to keep him out of his money.”

Applying these principles to the facts, as they appear with reference to the respective terms of the debenture bonds and the certificates of interest, we find that so far as the subscribers to the bonds may be affected, assuming there is an excess of capital, they receive obligations of the company entitling them to share in such excess. But what is the position of those who are compelled to surrender a portion of their stock and take in lieu thereof the “ certificates of interest in surplus capital ? ” That they do not obtain equal rights with the holders of the bonds is evident, it .appearing that the bondholders will be paid out of the entire assets a definite amount in gold, at a fixed time, with interest, while the holders of the certificates are to be paid out of the surplus assets, if any, without interest, at a time not fixed, such sum as may be realized when the surplus assets are sold and the amount determined. In addition the bond to the extent of fifty per cent thereof is issued for the amount, par value, of stock surrendered, while the holders of certificates are to receive only such percentage or proportion of the property as the surplus assets when converted into cash will justify. But back of these inequalities, the more serious question is presented, whether there will be any surplus capital to divide among those who surrender their stock. So far as the statement goes, it shows such a surplus; but when we undertake to analyze the character of the assets, and the condition of the company, it is difficult to determine what there will be for distribution.

When it was proposed to issue $500,000 of preferred stock, the company had an unsatisfied judgment against it of $3,800, and was-without sufficient money in its treasury to carry on operations, and the purpose of issuing it was to discharge obligations to a large amount which at that time were pressing. Its assets not being available to discharge such obligations, the plan for the issuance of the preferred stock was proposed. That having failed, the reduction of stock took place and the bond plan was resorted to to accomplish the same end, viz., to discharge existing obligations and debts, and to place the company in funds with which to carry on its business. The surplus in assets mainly consists of the value placed upon certain patent rights and inventions essential to the company’s business. These could not be sold or converted into cash without destroying or injuring the business, and it is difficult to see in what way there ever can be a distribution of surplus assets, because there is nothing in excess of the necessities of the company which for that purpose can be sold. If, as contended, these patents in their entirety are essential to the company’s business, how is it possible to take any portion and segregate it for the purpose of sale and distribution ? And yet, outside of the value attachedHo the plant, fixtures and patent rights, and the real estate and buildings used by the company in its business, the remaining assets consist of customers’ accounts and goods on hand and in process of manufacture. The main asset, however, is the plant, fixtures and patent rights, which are placed at over $1,000,000. This statement shows that the capital of the company is principally based upon the value of the patent rights and inventions held by it; and it could not for a moment be assumed that the company intended ever to sell or part with them, because they are essential to the carrying on of its operations.

As the certificates of interest in the surplus ” proposed to be given therefor impress no fixed obligation upon the company, and it is problematical whether the holder will ever receive any portion of the surplus capital that exists, and as the stockholders, who are-obliged to receive these, are not placed in an equally favorable position in respect to the distribution of such surplus with those who' may subscribe for the bonds, we think a case was made out for an injunction until such time as upon a full showing at the trial it could be made to appear that plaintiff and those who stood like him in the position of non-subscriber to the bonds would be equally, fairly and proportionately dealt with in the distribution. Upon this ground,, therefore, we think the plaintiff was entitled to an injunction pendente lite.

Considering the interests of the company and the conceded good faith of the directors and their honesty of purpose in presenting the bond plan, I have sought for some way to meet this last legal objection, so tliat they might, without interference by the court, carry it into successful operation. That nearly all the stockholders and those interested in the company desire it, and that it would be of advantage to the company, and that those who participate therein by subscribing for bonds would receive a just proportion of surplus assets, appears. The plaintiff, however, being either unwilling or unable to comply with the terms of the subscription, has the legal right to object to a plan by which, in lieu of stock surrendered, he is obliged to take the proposed “ certificates of interest in the surplus.” But upon all the facts, if an alternative can be found that will give full protection to the plaintiff, the court should accord that, instead of injuring the interests of all the others concerned by enjoining the carrying out of the bond plan. The defendants tendered in the court below a stipulation that if the plaintiff did not desire to subscribe for the debentures, he might retain his full holding of stock without surrendering any portion for retirement. Should plaintiff be unwilling to .accept such offer now, then in addition the defendants should enter into an undertaking to the effect that should the trial court decide in plaintiff’s favor, then, instead of certificates of interest, they would pay him the par value of his stock which they retired.

The order should be modified in accordance with the views expressed, and upon defendants complying with the’ conditions fixed, it should be without costs to either party on this' appeal; otherwise, with costs to plaintiff.

Order reversed in so far as it vacated the original injunction, and the original order restored, with costs to plaintiff.


author: Parker, J.:

text:
    Count Arthur Dillon, Appellant, v. The Commercial Cable Company and Others, Respondents.

      Promoters of a corporation — a secret agreement that they shall receive a certain portion of its ean'nings — issue of common for preferred stock.

    The promoters of a corporation secured an agreement with it by which 800 out of a total issue of 1,000 shares of preferred stock, which were to he entitled to fifteen per cent of the net profits of the corporation, were to he issued to them. Subsequently these shares were canceled by consent of the promoters, hut upon the express though secret promise of the main promoter that the promoters should still have the same rights and advantages as if no cancellation had taken place. After the cancellation the stock of the corporation was largely increased, ' and was sold to third persons. About six years later one of the promoters brought an action to compel the issue to him of his portion of the preferred stock, or, in the alternative, an amount of common stock which would represent the same value.

      Held, that the promise was the individual promise of the chief promoter;
    That if it were assumed that the main promoter could bind the coi'poration by such secret promise, the court would not enforce it to the injury of innocent purchasers of the capital stock as increased;
    That as the evidence disclosed no agreement to issue to the promoters any stock other than preferred, there was no basis for a claim that common stock should be issued equal in value to the preferred stock which had been voluntarily canceled at the request of the promoters.
    Appeal by the plaintiff, Oomit Arthur Dillon, from a judgment of the Supreme Court in favor of the defendants, entered in the office of the cleric of the county of New York on the 11th day of June, 1894, upon the report of a referee dismissing the complaint upon the merits.

      A. R. Dyett, for the appellant.

      Wm. G. Choate, for the respondents.
   Parker, J.:

The plaintiff and the defendants Mackay and Bennett in September, 1883, entered into an agreement which had for its ultimate design the creation of a corporation for the purpose of’constructing a sub-marine telegraph cable between the coasts of France, Great Britain and America. By it Mackay agreed to contribute the sum of $3,000,000, Bennett $1,250,000, and the plaintiff the sum of §50,000, to be expended in furthering the object which the parties had in view.

Pending the incorporation, the parties organized themselves into a committee to prosecute the work, with the agreement that as soon as-possible they should become the board of directors of the contemplated corporation. Preliminary work of an important and comprehensive character was at once undertaken hy the committee, which was immediately supplemented hy a submission to the committee of a formal article of association by the plaintiff, which provided for the formation of the Mackay-Bennett Cable Company, and, among other things, embraced a scheme for special compensation or profit to the promoters.

The details of it are unimportant, as it was not adopted, Mr, Bennett suggesting, as appears from the minutes, that although the scheme was a usual one in Europe, it was not in conformity with the laws of the State of New York under which it was proposed to incorporate the company.

December 12, 1883, the Commercial Cable Company was incorporated under the laws of this State, and on the second day of January following, the “ committee ” held a meeting in Paris at which all of the members were present. The provisions of the charter of the company were approved, and certain resolutions were adopted looking to the transfer to the company of all the contracts, rights and privileges which the committee had acquired from Prance, Great Britain and the United States, upon the repayment of their cash advances and compensation for their services as promoters. The steps taken on that day by the committee were supplemented at a meeting of the committee held on February first, resulting in the formation of a definite proposition for submission to the Commercial Cable Company.

Later, and on April 1, 1884, the first meeting of the board of directors of the cable company was held, at which the following resolution was adopted:

Resolved, That the proposition of the original organizers and promoters of this company, to transfer to this company all of the contracts made by them relating to ocean cables, and all their rights and privileges granted in France, Great Britain and the United States, with reference to the same, in consideration of the repayment of their cash advances and interest, and of the creation and issue to them of 1,000 shares of the par value of §100 each of the preferred stock of this company, such preferred stock to be entitled to receive by way of a dividend 15 per cent of the net annual earnings of this company, such net earnings to be set apart out of the gross earnings for each year after the payment of all expenses, and after the deduction from the gross earnings of all sums necessary for the maintenance, reparation and replacement of the cables and •other lines owned by this company and directly in connection therewith, and as a part of its ocean cable system, and, after carrying to the sinking fund such sum as may be deemed prudent and necessary, and such dividend of 15 per cent of such net earnings to be paid before or at the time of the declarations and payment of any dividend upon the common stock of this company, to be accepted by this company, subject, however, to this modification, viz., that only 800 shares of the said stock shall be paid to said original promoters and their associates, and that the remaining 200 shares shall be held in the treasury subject to the future action of this board, and that the said 800 shares of said stock shall be issued and delivered so soon as the requirements of the next following resolution are complied with.”

As the capital stock of the company had been fixed by its certificate of incorporation at $4,000,000, a resolution was adopted at the same meeting of the board of directors directing the counsel of the company to take such action as should be necessary for the creation of the 1,000 shares of preferred stock provided for by the resolution. The provision for the issue of the stock was the outcome of a plan which the committee contemplated at the outset, and which was suggested in the scheme submitted b/’tlie plaintiff to the committee shortly after the making of the first contract, to secure to themselves compensation for their services as promoters. The failure to fully execute and abide by this plan, to deliver 800 shares of the preferred stock to the promoters, furnishes the occasion for this controversy.

It so happened that the outcome of that which was done operated to deprive this plaintiff, and the other parties as well, from receiving any portion of the preferred stock or its equivalent, so that for their services as promoters no compensation has been received. By tliis action the plaintiff seeks to secure the rights and benefits assured by the contract witli the cable company. How it happens that by the judgment under review it is held that he has no rights against the corporation which he can enforce, will appear from a brief examination of the subsequent conduct of the promoters and the cable company. Immediately after the meeting of the directors above referred to, steps were taken to accomplish an increase of the capita!' stock to $4,100,000, by the addition of 1,000 preferred shares, but it was not completed until about the 10th of September, 1884.

In the interim however, and on July fourteenth, the directors, by resolution, directed the officers of the company to execute 800 of said preferred shares under the company’s seal, and deliver the same to Mackay and Bennett and the plaintiff, in accordance with the resolution of April first. Upon the transfer of the contracts mentioned in the resolution, the original stock of the company, being 40,000 shares of the par value of $4,000,000, was issued and delivered to Mackay, Bennett and the plaintiff in payment of their cash advances and interest. The preferred stock, however, was never issued as directed by the resolution of July fourteenth.

Instead, nearly two years thereafter, and on the 8th of May, 1880, the three promoters, Mackay, Bennett and this plaintiff, united in the execution of a request to their counsel to prepare a resolution to be agreed to and carried by the board of directors of the cable company, which should stipulate “ that the existing preference shares issued at the request and for the benefit of the said directoi’s, shall be canceled.”

June fourteenth following the directors of the cable company adopted a preamble and resolution founded upon this request.

The preamble recited the original proposition of the promoters to receive the preferred stock; the action of the board of directors directing the increase of capital stock of the company, in order to comply with its agreement with the promoters; the formal agreement under the hands of the promoters to release the company from such issue; and the request that the company annul and cancel the same. The resolution was as follows:

“Now, therefore, it is resolved that this company does accept .such surrender of said stock, and of all the claims of the aforesaid Messrs. Mackay, Bennett and Dillon thereto, and does hereby revoke and cancel the authority heretofore given for the issuance thereof, and that the counsel of this company be requested to cause such proceedings to be taken as may be necessary for the purpose of reducing the capital of this company to the original amount of $4,000,000 of common stock, and that the authority to create any preferred stock be put at end.”

The plaintiff was at once informed of the action of the directors, a copy of the minutes reaching him on the twenty-ninth of the same month. Such proceedings were thereafter had as reduced the capital of the company to $4,000,000.

In August following the plaintiff sent his certificate of stock to the company with a direction that it be canceled and replaced by a certificate of the new issue. This was done and the new certificates were accepted by him on the twenty-third of October.

This action was commenced in May, 1892, and prior thereto this plaintiff demanded of the cable company that it create 800 shares of preferred stock of the par value of $100 each, and issue 26G shares thereof to him, or issue 12,000 shares of the capital stock of the company of the par value of $100 each to Mackay, Bennett and himself, one-third thereof, or 4,000 shares, to be issued to him, or that- it pay him the value of the 4,000 shares, together with all dividends declared thereon since the organization of the company.

The plaintiff’s position is, that while it is true he surrendered for cancellation his preferred stock, he did not by so doing discharge or affect the liability of the cable company to pay over to the promoters eight-tenths of fifteen per cent of the annual profits of the company ; that the agreement of the company was to secure to the promoters such a proportion of the annual net earnings, and the issue of preferred stock was selected as a method by which that result could be legally accomplished, the surrender of his stock being intended by him merely as a giving up of the method and not as a surrender of his right to receive such a proportion of the annual profits of the company as he had contracted for. In other words, that the transaction was one of form, not of substance, the canceled stock being replaced by a secret understanding, which should secure to the promoters all the benefits and rights that the stock would have given bad it been retained. Tbe minutes of tbe directors and tbe records of tbe cable company show no such arrangement. If there was one it was impossible for tbe stockholders to ascertain tbe fact by inspection of tbe books and papers of the company or Otherwise-

Subsequent to tbe cancellation of tbe preferred stock tbe capital was increased from $4,000,000 to $6,000,000, and later to-$10,000,000. Each purchaser of tbe increased issue of stock bad a, right to assume that it was entitled to receive, by way of dividends,, all tbe net earnings of tbe company, and not that the promoters bad a secret right to eight tenths of fifteen per cent of tbe annual profits of tbe company. And if such an agreement existed between the. promoters and tbe company, the court, bad it tbe power to compel tbe company to create tbe stock for them, would not exercise it-after tbe rights of third partios bad intervened, by tbe purchase of tbe large amount of stock resulting from tbe increase of the capital from $4,000,000 to $10,000,000.

To enforce such a secret arrangement would constitute a most dangerous precedent, for it would in effect recognize tbe right of a corporation to create stock without certificates, to pay dividends’ without stock, to increase tbe capital stock without obeying the formalities prescribed by statute, and create a class of stockholders not recognized by tbe stock books and unknown to tbe stockholders’ of record Such a scheme tbe courts will not tolerate. Again, it seems to us that such an agreement between tbe company and tbe plaintiff lias not been proved. Tbe books of tbe company show no such arrangement or understanding, nor was there any writing to that effect executed.

Plaintiff’s contention is that be was induced to consent to tbe cancellation of tbe preferred stock by tbe promise of Mr. Mackay that he should lose nothing thereby, and that Mackay’s promise was tbe promise of tbe company. There is evidence that such a promise was made, and we credit it, otherwise it would be difficult to understand bow tbe plaintiff could have been induced to surrender his preferred stock.

But tbe question is, whether tbe promise was that of Mr. Mackay personally, or that of tbe company ?

It is conceded that Mackay was authorized to do wliat a board of directors might do, and tbe inquiry, therefore, is whether that which be did was a corporate act done in pursuance of the authority conferred on him, or his personal act ?

An examination of the letters and of the conversations testified to satisfies us that the promise was made by Mackay, and that the plaintiff so understood it.

Mackay was the dominating spirit of 'the enterprise, and not only in the letters written to the plaintiff respecting the cancellation of the preferred stock was it referred to as Mr. Mackay’s wish, but in the oral testimony of the plaintiff touching the conversations had’ between him and Jules de Castro, Mackay’s wishes, assurances and guarantees were constantly refen’ed to, but the cable company seems not to have been considered or discussed.

The act of Mackay, therefore, purported to be a personal, not a corporate, act.

We also agree with the learned referee that the act complained of was not fairly within the scope of authority which Mackay exercised, hut that subject has been discussed at such length, and so thoroughly .by the referee, that we refrain from its consideration.

So far we have said that the surrender and cancellation of the promoters’ stock was, so far as the cable company was concerned, the voluntary action of the promoters, for the company did not hold out any inducement or even proffer a request to bring about that Result.

And, further, that had the stock been surrendered by the plaintiff and the other promoters upon a secret agreement or understanding, that, nevertheless, the promoters should receive eight-tenths of fifteen per cent of the annual profits of the company, such an agreement wordd not be enforced, as the stock of the company has been purchased by third parties without notice of the secret arrangement.

This brings us to the consideration of the other position taken by plaintiff, that if it should be held that he is not entitled to stand in front of the shareholders to the extent of his proportion of eight-tenths of fifteen per cent of the annual profits as originally provided for, he is entitled to have such a proportion of the stock issued to him as will equal in value 266 shares of the preferred stock, which he estimates to be 4,000 shares.

The last demand is said to be not open to the objection that a purchaser of the shares for value will be in any wise injured, for their purchases have been made with full knowledge of the extent of the issue authorized.

If it be assumed that this demand is free from the difficulties which •deny to the plaintiff the right to receive the preferred stock prayed for, it is, nevertheless, confronted with objections equally effective.

In the first place, there is no proof of an agreement to give the plaintiff a part of the common stock. If it be said, that while this is true, yet the company agreed to pay the promoters eight-tenths of fifteen per cent of the annual net profits, for which the preferred stock was to be issued merely as a means of securing payment, and a court of equity should decree a substantial performance in the only way open to it by directing a proportionate issue of the common stock, we answer that such was not the agreement as we understand it.

The terms of transfer, as expressed in the resolution of April first, were stated to be repayment to the promoters “ of their cash advances and interest and of the creation and issue to them of 1,000-shares of the par value of $100 each of the preferred stock of this •company, such preferred stock to be entitled to receive by way of a dividend fifteen per cent of the net earnings of this company.”

There was no other agreement then or afterwards touching the compensation to be paid to the promoters. Specific performance of that contract might ■ have been enforced, but the voluntary surrender of the promoters’ right to receive that stock without an arrangement for other stock or compensation, affords no basis for' a decree that the company should turn over to the promoter stock of a different character as an equivalent of that surrendered and canceled at his request and without reservation.

A still further answer to plaintiff’s contention in such respect is, that there is no proof that there is any common stock unissued which might be distributed to him. The plaintiff was undoubtedly persuaded to so act as to injuriously affect his interests by the promises of Mackay, and it may well be that he has an adequate remedy against him, but if the views expressed be sound he cannot obtain relief as against the cable company.

The judgment should be affirmed, with costs.

Van Brunt, P. J., and O’Brien, J., concurred.

Judgment affirmed, with costs.