Buffalo Loan, Trust & Safe Deposit Co. v. Medina Gas & Electric Light Co.

12 A.D. 199

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: July 1, 1896
• Status: Published

Opinion

Green, J.

1. Contention is made hy appellants’ counsel that the mortgage in suit never having been personally delivered by Mr. Robertson, the president, and the bonds not having been negotiated by him, they never became binding obligations upon the mortgagor company;. that the bonds never had' a valid inception until they were negotiated in. the manner provided by the resolution authorizing their execution ;■ that the resolution required as condition precedent to the creation of any liability, that the president should negotiate the bonds upon the best possible terms; that the president must have ■been named for a purpose, i. e., the protection of the corporation, so that the future, as well as the present stockholders, should derive some consideration or benefit therefrom; that the president was, therefore, prevented from negotiating the bonds “ upon the best terms possible,” or upon any terms, and the bonds were never put into circulation through the agency of the corporation, but were practically stolen by the secretary, Stranahan, who received the manual possession thereof from the trust company after it had certi.fied the same; that Stranahan was not authorized to negotiate the bonds' at all, but Robertson alone was authorized.

This contention is clearly untenable. Stranahan- was practically the owner of the entire capital stock of the- company, and, if we ■are to believe the testimony of Curry, the superintendent, the other two directors took no active part in the management or control of its business affairs. , The strong inference from his testimony and . from the circumstances of the case is, that- they were “ figureheads. ” and nominal stockholders and directors, subject to the control of their creator, and the mere creatures of his will. Evidently it was a matter immaterial to them whether they should negotiate the bonds, 'of the -virtual owner of them and of the corporation-itself should do so; they knew, or must have known,- that Stranahan negotiated the bonds, and their acquiescence is evidenced by long lapse of time and circumstances presented. If they did not •actually know that Stranahan had the-mortgage, recorded and had ■ -disposed of the bonds, they did not cáre; it was none of their particular business, for they had but very little interest to protect. Stranahan and Curry managed the whole business. Robertson and Dayton could not presume to interfere and object to the acts of the owner of the company. During all these years Dayton and Robertson remained silent. Silence may give consent, and long acquiescence must, under such circumstances, be sufficient evidence of authority. This action has afforded them the opportunity to come forward and testify as to what they do not know in respect' to the. matters in controversy, but it appears that the defendants have not thought it advisable to produce any of the directors as witnesses to establish tffeir defense. Surely, when the trust company brought, the foreclosure suit in December, 1889, at the request of Stranahan and for the purpose, it would seem, of cutting off Alport’s judgment, these nominal dh'ectors must have known of the institution of that suit, and consequently the disposition of the bonds which-three years before they had authorized to be issued and negotiated. Let it be assumed that it was incumbent upon the trust company to make inquiry of the other directors as to whether they would permit Stranahan to negotiate the bonds, or insist that the act ■ be performed by the president, what would have been the answer? In view of all the circumstances and condition of things now disclosed, and, particularly the peculiar relationship existing between the subordinate directors and their superior, could it reasonably be inferred or presumed that the holders of the two shares of stock 'would refuse to authorize the owner of 298 shares to negotiate the bonds ?

■ The general doctrine is, that the purchaser of a negotiable instrument, who purchases under circumstances which throw upon him the duty of making inquiry as to its validity, assumes no greater , risk by his failure to inquire than the burden of proving that the facts which he could have discovered, had he inquired, would have protected him. (Wilson v. Met. Elev. Ry. Co., 120 N. Y. 145.)

“ Therefore, if the plaintiff, when charged with the duty of making inquiry, had actually done so, whatever its officers prosecuting the investigation would naturally have discovered, according to any permissible inference from the evidence, it can now invoke to establish the implied authority of Mr. Stone. What could the jury have found in this regard within the rules governing their powers* if the case had been submitted to them for decision % ” (Hanover Bank v. American Dock, etc., Co., 148 N. Y. 612, 622; 75 Hun, 55, and see Cheever v. Pittsburgh, etc., R. R. Co., 150 N. Y. 59.)

The conclusion is fully warranted by the evidence that Stranahan was lawfully in possession of the bonds, and with ample authority to dispose of them. The suggestion made, that the president was designated in the resolution as the officer to negotiate the bonds, so that the “ company ” might be protected from the loss to be expected and anticipated if they should be intrusted to Stranahan, is, in the light of the evidence presented, very suggestive, but nothing inore. Whether or not the compliment is justly deserved we are unable to say ; nor is there much weight in the suggestion that the secretary practically stole the bonds of which he was the virtual owner.

2. It is argued with some show of reason that Stranahan never negotiated nor pledged the bonds for or on behalf of the company, but rather on his individual behalf and credit, and for his own individual purposes; that the moneys were advanced to and received by him, not while acting for the company, but while acting in his individual capacity, and for the accomplishment of his own private objects; and .it .is insisted that this contention is strengthened by the circumstance that there is no evidence that any of these moneys so received, iwere ever used for, or applied to, the purpose of defraying the existing indebtedness of the company, or “ for its other lawful purposes,” or that the company ever received any advantage or benefit therefrom; but it is claimed that the. evidence indicates the ■ contrary.

The referee truly says that the trust company acted in a dual capacity; as trustee for the bondholders, it had certain duties to perform, and as a banking corporation, it had the right to loan money upon securities, and it made no practical difference whether it was named as trustee in the security, except so far as it was chargeable with notice of any diversion of such securities. If the plaintiff had never parted with these bonds, could it maintain this action in its own behalf as a bona fide purchaser or pledgee of the bonds % The referee says not; and the reasons given for his conclusions are, that when the bonds and the mortgage were presented to the plaintiff, it was apparent that they had never been negotiated by the president, as required by the resolution recited in the mortgage; that the plaintiff had not at that time accepted the trust, and the resolution itself required that the bonds should be certified by the plaintiff; that the instruments were, therefore, both incomplete when presented, and the plaintiff was chargeable with knowledge that they had never been negotiated in accordance with the terms of the resolution, and there was no presumption and no evidence before plaintiff’s officer that Stranahan had any authority'to pledge them, for his own individual debt; that the plaintiff, therefore, in its capacity of a banking corporation, was not a bona fide purchaser of the bonds, nor did it take any title to the same as against the mortgagor, for the transaction constituted a diversion of the bonds from the purposes’ for which they had been issued. .

The answer to this reasoning is that Stranahan did, in fact, possess authority from his co-directors and stockholders, who, with himself, constituted the corporation and owned all its assets, to negotiate the bonds; consequently, the matter must be judged as though the •secretary, instead of the president, were designated in the resolution for such purpose. ’ If the co-directors had been asked whether Stranahan,’who was the virtual owner of the bonds, was"authorized to receive advances upon them, what would have been the answer? What could they have answered ? During the period of four years the plaintiff held these bonds and made further advances upon them, and no one interested in the company as- stockholder ever questioned its title. That the nominal directors and stockholders must have known that Stranahan had disposed of the bonds and received the. money is clearly evident; they could not have been ignorant of the foreclosure suit in December, 1889; they knew the bonds and mortgage were outstanding and uncanceled. Perhaps, however, they knew nothing about it and cared less, as it was none of their concern. Stranahan was the corporation itself, and practically owned all its stock and property, and Avas, therefore, the very proper person to dispose of the bonds.

The case, then, is simply this: An officer of a corporation, with full power to raise money upon its negotiable bonds, presents them to a bank and asks for a loan of money upon the strength of them; the bank complies, and also takes from him his individual note and .other collateral, and the question is, whether ' the moneys were advanced to him in his individual character or as a representative of. the corporation.- Because of the acceptance of his personal promissory notes and other collateral must the transaction necessarily be characterized as an individual loan ? That the advances ‘were made to .some extent, and, it would seem, to a great extent^ on the strength of the bonds and mortgage, is a very reasonable presumption. The taking of individual security cannot impair the legal effect or consequence of that transaction. (See 65 Fed. Rep. 455, quoted post.)

■ Presumably the taking of the note and the other collateral may have been induced by the consideration that the president was the person' authorized by the resolution to negotiate the.bonds; and the plaintiff may have entertained. some doubts in respect to the validity of the transaction with the secretary, although being aware, no doubt,' that he Was the principal stockholder. -

Now, Since the advances were made upon the faith and strength-of the bond’s and mortgage, and that Stranahan was authorized to receive the money for the company^ payment to him ivas payment to the corporation itself. The corporation was then present at the ■ time of the transaction, and received the moneys through its representative,! and by means of the statement in its corporate obligations that the funds were desired for' corporate purposes.

In contemplation of law, therefore, the funds came into possession of the company, and, that being the case, the plaintiff was under no obligation to see to. it that the moneys were applied to the purposes for Which the obligations were issued, and, consequently, it is not responsible for their misapplication, and it is immaterial, therefore,, what Stranahan did-with the moneys of which he was, virtually the individual owner. Clearly the referee’s conclusion, . that the transaction amounted to a diversion of the securities,- is founded in error. ■

“ It -was not sufficient to allege that the books of the company did not show value received for the bonds, or that the president had not made- a return of the proceeds, to the company/ The bonds were in such form as to pass by delivery; a purchaser had simply to pay his money and take his bond; he was hot bound- to see to the application of tile money to the purposes of the corporation; he might ' presume that they had: sufficiently provided for their own safety in that matter. The allegation is not that the bonds were obtained.fraudulently and-without being paid for, nor that they were not in fact paid for to the proper officer or officers of the company, but only that the books do not show what had become of the proceeds. This was clearly insufficient.” (Phil., etc., R. R. Co. v. Lewis, 33 Penn. St. 33; and see Jones Corp. Bonds, §§ 186, 201.)

If it were a matter of any importance to determine whether the company received, directly or indirectly, any benefit from the-moneys loaned, the question would arise, upon whom is the burden of . proof ? The answer would be upon the defendants; and that obligation they have not performed, by reason of their not calling a person who -must be able to give material information on the subject. If there is .information which might have been but is not forthcoming, and which might have been very material, who ought to have produced it upon this trial ? The burden of producing it lies upon the parties who have to make out their case, and those parties in this instance are the defendants.

The plaintiff has the legal title and is entitled to keep it, unless it can be shown that there are equitable grounds upon which it should be deprived of it. In whatever position we might have been if better evidence could not have been produced, we must decline to draw inferences as to matters upon which evidence might have been brought before us. (Bentinck v. London Joint Stock Bank, 2 Ch. Div. [1893] 120, 136, 137.)

The testimony of Curry, the superintendent of the company, falls short of proving that the company could have received no benefit from the moneys. No excuse is shown why the directors or officers, and especially Stranahan, were not produced as witnesses.

“ ‘ All evidence * * * is to be weighed according to the proof which it was in the power of one side to have produced and in the power of the other side to have contradicted.’”- (See Kirby v. Tallmadge, 160 U. S. 379; McGuire v. Hartford Fire Ins. Co., 7 App. Div. 575, 589, 591.)

The finding of the referee, that there is no evidence that any of the moneys advanced to Stranahan were ever applied to corporate purposes, is based on the erroneous assumption that he had no power to negotiate the bonds and receive the moneys on behalf of the company; that the transaction was a personal one, and the pledge amounted to a wrongful diversion of the bonds ; and that, therefore, the burden was imposed upon the plaintiff to call Stranahan and establish, if it could, the application of the moneys to the benefit of the company.

The position taken by appellants appears to be that the company • could not have received any benefit from the funds, .because, forsooth, the superintendent of the company says they did not need them. And it is argued that in September, 1886, the company’s plant was entirely paid for; that it was entirely out of debt, and was in receipt of an income from its customers which was entirely sufficient to pay for all the improvements that were needed and that were contemplated. If that be true, then the resolution recited in the mortgage was a lie. Besides, as respondent’s counsel has .pointed out, the testimony of Curry shows that the income was insufficient for the necessities of the business. -

Conceding that the -plaintiff was bound to have made inquiry as to whether the secretary was authorized to receive the moneys, as the result of the inquiry would have shown that he possessed such authority, the plaintiff would be protected in making the advances; and the fact that it made no inquiry will not place it in any different position than it would have occupied had inquiry been made. (See Wilson v. Met. Elev. R. Co., and Hanover case, supra.)

In view of the fact that Stranahan was practically the owner of the entire capital stock, and the Corporation was virtually his private property, and in the light of all the circumstances disclosed in respect to his transactions, the court must not carry too far the legal conception that a corporation is to be regarded as a legal entity, existing separate and apart from the natural persons composing it.

“ The statement that a corporation is an artificial person or entity, apart from its members is merely a description in figurative language of a corporation viewed as a collective body; a corporation is really an association of persons, and no judicial dictum or legislative enactment- can alter this fact.” (Morawetz on Corp. § 227.)

So that the idea that a corporation may be a separate entity, in the sense that it can act independently of the natural persons composing it, or abstain from acting, where it is their will that- it shall, has no foundation in reason or authority, and is contrary to the fact. (State v. Standard Oil Co., 49 Ohio St. 137, 177; 15 Law Rep. Ann. 145.)

The further contention is made by appellant that this action being prosecuted on behalf of the German-American Bank, the legal owner of the bonds, the further question for determination is, whether the bank has acquired the title of a bona fide purchaser, though the trust company may not have stood in that position.

We do not regard the question of the good faith of the holders of these bonds of any account so long as it appears that they took them for value and paid for them in cash. The bonds in question were issued with the consent of all the stockholders at the time they were issued ; therefore, neither the stockholders nor the corporation are in a position to contest their validity. This doctrine is held in Kent v. Quicksilver Mining Co. (78 N. Y. 159) and in Skinner v. Smith (134 id. 240) in respect to manufacturing corporations — corporations which do not possess the right of eminent domain; which have no duty to perform to the public. The corporation in this case is one of that kind. There is no evidence that the issue of these $10,000 of .bonds would impair the power of this company to discharge its duty to the public. There is no member of the jmblic who makes any objection, or seeks to have these bonds set aside, and no stockholder or creditor seeks to have them set aside, and, as against everybody else, the plain tiff has the absolute right to recover.

Further discussion of the questions presented here is unnecessary, as it appears to us that the decisions bearing upon these questions clearly sustain the right to enforce the payment of the bonds in question.

In accordance with the decision in Williamsburgh Savings Bank v. Town of Solon (136 N. Y. 465) the allowance of interest upon the coupons must be deducted. The amount of interest so allowed is the sum of $1,293.04.

The judgment should be modified by deducting from the amount thereof the sum of $1,293.04, and as so modified the judgment .should be affirmed, without costs in this court to either party.

All concurred.

Judgment modified by deducting from the amount thereof the ■sum of $1,293.04 as of the date of the report of the referee herein, and as so modified affirmed, without costs of this appeal to either party.