Knowlton v. . Congress Empire Spring Co.

57 N.Y. 518

• Court: New York Court of Appeals
• Decided: September 5, 1874
• Status: Published

Opinions

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[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] The plaintiff does not, in his complaint, state the specific grounds on which he demands the relief sought by him. He alleges the increase of the capital stock of the defendant; that he paid the first installment of a subscription for and on account of such increase, by C. Sheehan, to the benefit of which he became entitled; and that the defendant thereafter declared the stock to be forfeited by reason of the non-payment of the subsequent installments called for. He does not make any allegation or claim that any of those proceedings were irregular or illegal, or that he made any statement or communication to the defendant why those installments were not paid. He, after making the statements above referred to, sets forth the resolution passed at a meeting of the stockholders for the reduction of the capital stock to its original amount, and conferring authority on the trustees to make an adjustment with the owners or holders of the increased stock, for retiring the same, on such terms and conditions as the trustees should deem for the interest of the company, and then states that provision was made for the issue of coupon bonds to discharge the outstanding receipts for payments made toward the increase of the capital. He does not make any allegation impeaching or questioning that action, but alleges that such bonds were never tendered to or demanded by him; that he had, before the commencement of this action, demanded repayment of the money paid by him on Sheehan's subscription, which it refused to make, and he thereupon demanded judgment therefor.

It is not alleged or indicated in the complaint that he had made any claim previous to the adoption of that resolution for such repayment, or that he at any time offered to surrender or cancel the subscription agreement, or to release or in any manner waive or relinquish his right to the stock subscribed for, or the benefit of such subscription, by Sheehan, or that he asked relief specifically on the ground that the said agreement, or any of the proceedings for the increase or the reduction of the capital of the defendant was illegal or unauthorized. His claim to relief, on the contrary, appears to be based on their validity.

The report of the referee, substantially, finds the facts to be as stated in the complaint, and also shows that the plaintiff actively participated as a stockholder and trustee in the proceedings for the increase of the capital, and prepared the subscription agreement to accomplish that object. He, upon those facts, reached the general conclusion that the plaintiff was entitled to recover, without any specification of the grounds for such recovery; and he does not find, as a fact, that there was a non-compliance with the requirements of the law, necessary to effect the increase or reduction of the capital stock of the defendant, or to authorize the forfeiture of the plaintiff's stock; nor is it indicated by any statement in his report that the relief is granted because the subscription agreement was fraudulent, illegal or invalid, for any cause whatever. It appears, however, from the opinion given by him, on the denial of a motion for the dismissal of the complaint, when the plaintiff rested his case, that he considered any plan or scheme by which the actual amount of the capital of a company, incorporated under the act passed February 17, 1848, entitled, "An act to authorize the formation of corporations for manufacturing, mining, mechanical or chemical purposes" (being the act as subsequently extended in its objects, under which the defendant was incorporated), is made less than the nominal amount thereof, whether as originally fixed or subsequently increased, violates the spirit and policy of the law, if not the express provisions thereof applicable to the subject, from its tendency, when carried out, to deceive the public and prejudice the stockholders not assenting to it; and he came to the conclusion, upon facts then disclosed in the case, that the scheme for the increase of the capital stock of the defendant was constructively fraudulent as to the public and as to all stockholders not assenting thereto, and therefore illegal. He then concluded that the plaintiff, virtually, receded from the contract, by refusing to pay calls; that it was then still executory, and that the plaintiff might repudiate it and maintain an action for the money paid under it. Those views were adopted by him in his opinion, given on rendering his final report and decision; and he therein further states that the evidence fails to establish an actual intent on the part of the defendant to defraud; and he also exonerates the plaintiff from intentional fraud in his action in the advancement of the scheme.

No opinion appears to have been given by the General Term on the affirmance of the judgment entered on the report of the referee. I will, therefore, assume that they adopted that of the referee; and will, in my consideration of the case, first examine it on the assumption that the scheme for the increase of the capital stock and the subscription agreement were, as correctly decided by the referee, illegal, for the reasons stated by him, and herein before referred to.

It is a well settled principle, that where money is paid by one of two parties to the other on an illegal contract, in a case where they may be considered as particeps criminis, and inpari delicto, an action cannot be maintained after the contract is executed to recover the money back again, for in pari delictopotior est conditio defendantis. This is conceded by the counsel of both parties, but it is claimed on behalf of the plaintiff that he was not in pari delicto with the defendant. I do not agree with him. It may be conceded that the parties were not equally chargeable with the violation of the law, or alike culpable; but the plaintiff was the most in fault. He was, until a short time before the forfeiture of his new stock, a trustee and vice-president of the defendant, and an active participant and agent in the origin and consummation of the unlawful scheme, in the preparation of the subscription agreement, and in procuring signatures thereto, and nothing appears to have been done for the purpose of carrying out those objects without his approbation and consent. The defendant is an artificial body, acting only as moved by its trustees or corporators and stockholders, having no will or capacity to act except through their action and instrumentality; and, although it is liable for all the legal consequences of its transactions, done under their direction and authority, it appears to be a perversion of every rule and principle in determining the relative culpability or fault of parties, to say that a corporation thus acting and impelled to such action is more culpable than a living, intelligent trustee, who was a party moving and active in causing the action to be had; and, in this connection, I will add, that the proposition or point of the plaintiff's counsel, that "the contract was ultra vires," and, therefore, the corporation was the more guilty party, is not sound. No living or artificial body is authorized to do an illegal act, and an individual is no less guilty in doing what is unlawful than an inanimate or artificial body deriving its existence from legislative action. The views above expressed show that there is no color for holding that the plaintiff, althoughparticeps criminis, was not subject to the operation and effect of the principle referred to, on the ground that he was not inpari delicto. The referee did not deem it necessary to consider that question, but he based the plaintiff's right to recover upon the ground (now relied on by his counsel) that, after the payment made by him, the illegal contract still remained executory. In support of that view, he stated that the provisions of the subscription agreement declared that a subscriber thereto was not entitled to a certificate, as if for full paid stock, until eighty dollars on each share subscribed for by him had been paid, when the stock should draw dividends, and that interest was to be paid by the defendant on all sums paid toward said stock up to February 1, 1867. He then added: "This shows, I think, that when the plaintiff virtually receded from the contract, by refusal to pay calls, the contract for the new stock was executory, and that much remained to be done to entitle the plaintiff to the stock, or a certificate for it, as provided by the agreement, and the scheme and agreement being illegal, while it remained executory, the plaintiff might repudiate it and maintain an action to recover back all money paid by him under them." This conclusion cannot be sustained. It assumes, as a fact, in addition to those referred to by him as above stated, that the plaintiff had refused to pay the installments subsequent to the first called for, because the said scheme and agreement were illegal, and his refusal was to be considered a repudiation of them. I find nothing to warrant that assumption. It does not appear, as I have before stated, that the plaintiff assigned any reason for such non-payment; and as he has never made any offer to return or surrender his receipt for what he had paid, which stated, in addition to the fact of the payment, that the stock was standing in his name on the books of the company, the inference is more reasonable and just to him that, losing faith and confidence in the speculation, he preferred to abandon it and lose what already had been invested, than run the risk of a greater loss by paying any more money on or under the subscription payable by him. Nor is it correct to say that the contract "remained executory," when there was a default in responding to the calls, by reason of which the stock was forfeited. It is true, that it had not been wholly executed, but it was not entirely executory, and there is no more reason for relieving a party from the consequence of a partial than there is of an entire performance of an illegal agreement, and there is no principle on which a distinction can be made. The illegality taints or affects the entire contract, and neither party can invoke the interference or aid of the court for relief from what he has done under it. It leaves both parties where it finds them.

This question was considered by the Supreme Court in Perkins v. Savage (15 Wend., 412). That was an action of assumpsit for the recovery from the defendant of $500 specified in a receipt given by him to the plaintiff, and for which it was claimed that the defendant should account to him. The case appears to be so similar to the present, in the material points involved and decided therein, that I deem it useful to make a particular reference to the statement of facts set forth in the report of it. After the introduction of the receipt in evidence, which, the circuit judge ruled, on a motion for a nonsuit, bound the defendant to account to the plaintiff for the said sum, the defendant, as the case states, "offered to prove that the $500 specified in the receipt was the balance of $3,000 received by him from the plaintiff for the purpose of enabling him to subscribe for stock of the Utica and Schenectady Railroad Company on the opening of books for subscription to the stock of the company, which subscriptions were to be made in the name of the defendant and in the names of such other persons as he should procure to subscribe, but for the benefit of the plaintiff to whom the stock, which should be apportioned by the commissioners to the defendant and to such persons as he should procure to subscribe, should be transferred immediately after such apportionment; and that, in pursuance of such agreement, various subscriptions were made, and procured to be made, by the defendant, and that the stock apportioned upon such subscription had been transferred to the plaintiff, leaving the $500 specified in the receipt unaccounted for by the defendant to the plaintiff. Part of the evidence offered consisted of letters from the plaintiff to the defendant."

The counsel for the plaintiff objected to the introduction of such evidence and the judge rejected it, "deciding that it was inadmissible, that the evidence would not show a transaction prohibited by law or a transaction so far illegal or improper as to preclude the plaintiff from recovering back the money advanced to the defendant."

The jury, thereupon, rendered a verdict in favor of the plaintiff. A new trial was granted by the Supreme Court, NELSON, J., giving the opinion. He concludes, after a reference to and examination of several authorities, with this remark: "The cases abundantly show the contract under consideration to be illegal, whether considered a violation of a positive provision of the statute or of the spirit and policy of it," and with the declaration that the action could not be sustained. The result of the opinion and decision is briefly stated in the head-note of the case in these terms: "Where a contract is entered into between two parties, the object of which is to violate the provisions or the spirit and policy of a public statute, and one pays money in furtherance of such contract and the contract is, in part, executed by the accomplishment, in part, of the original design, leaving, however, a portion of the money advanced unexpended, an action will not lie to recover back the unexpended balance." One of the cases cited by the learned judge was that ofBell ex parte (1 M. S., 751), in which Lord ELLENBOROUGH, after referring to the facts therein, said: "This is clearly an attempt to recover back money advanced for the furtherance and in the very execution of an illegal contract," and held that it was not recoverable. This principle is also declared by Lord KENYON, in Howson v. Hancock (8 Term, 575). He there says: "No case can be found where, when money has been actually paid by one of two parties to the other, upon an illegal contract, both being particeps criminis, an action has been maintained to recover it back again." And that language was adopted by Chief Justice SAVAGE in Burt v. Place (6 Cow., 431); and he added: "This doctrine has been since repeatedly recognized, and I know of no case containing a contrary doctrine."

The authorities relied on by the appellant to show that he, by his refusal to make further payments, was entitled, to recover where there has been a rescission of the contract, when still executory (supposing that under consideration to be such), on the principle that a party can avail himself of a locus penitentiae to retrace his steps and disaffirm the unlawful agreement, has no application to this case. The recovery in some of the cases cited was permitted on the ground that the contracts were wager or gambling contracts, or of that character where the benefit to be received by the party paying the money was dependent on a future contingent event, not under the control of the party to whom the payment was made, or capable of performance by his own act. And the claim to recover back the money paid, or the deposit, as it is termed in some of the cases, was made before the event contemplated had happened. In other cases, the parties stood in such a relation that one was considered to have paid his money under oppression or extortion, or some other circumstance, showing an inequality of position, by reason of which an improper influence or control was presumed to have been exercised over him by the other party; and the rest were cases where the illegality of the contract arose from a positive prohibition of law imposed on one of the parties to it. Such were the cases ofSchermerhorn v. Talman (14 N.Y., 93); Tracy v. Talmage (id., 162), and Curtis v. Leavitt (15 id., 9), and The Oneida Bank v. The Ontario Bank (21 id., 490, etc.), cited by the referee in one of his opinions. And such is the case of White v. Franklin Bank (22 Pickering, 189, etc.). The parties in those cases were not considered as in pari delicto. We have not been referred to any authority, nor have I found any, where money, paid in part performance and in furtherance of an illegal contract, has been recovered back, where both parties were particeps criminis and in pari delicto, and where its execution was in the control of the contracting parties themselves. There are, I concede, dicta and declarations, in some of the elementary works, where the contrary rule or principle is, apparently, laid down without limitation or restriction; but it will be found that the cases cited to support them are of the nature or character to which I have above referred, and do not sustain the proposition or principle that a party to an illegal contract, capable of execution by the acts of the parties and in which he is in pari delicto, can, after part performance and execution, on a refusal by him to fulfill and perform what remains to be done, revoke and nullify what has been actually performed, and from which he sought or expected to derive benefit and advantage, and in fact may have done so, and claim a restoration or compensation therefor from the other party, on the pretext or ground that he has become repentant of his conduct at the particular time, when he is required by the terms of his contract to do some further act which, most probably, his interest or want of means, or apprehension of loss from its further prosecution induces him to repudiate. A mere refusal or neglect to fulfill is not per see evidence of repentance, nor does it raise a presumption that an entire fulfillment of a contract in violation of a law or of public policy, deliberately entered into and partially executed, is withheld or refused by a respect and regard for law and the public welfare. The distinction to which I have referred, where parties are in pari delicto, and where they are not, and in the cases where a recovery has been allowed, is recognized in the opinion of LEONARD, C., in The Saratoga County Bank v. King (44 N.Y., 87, et seq.). And the rule distinguishing between executory and executed contracts is referred to by WAGNER, J., in Adams Express Company v. Reno (48 Mo., 267), cited by the appellant. He, after speaking of the contract which was the subject of discussion therein, but which was wholly unexecuted, as void against public policy and incapable of enforcement by the courts, says that, "where parties have been guilty of turpitude in entering into illegal agreements, or have performed acts which are stigmatized as against public policy, the courts of the country furnish them no redress; but, if propositions have been made contemplating such purposes, butnothing has been done to finally accomplish or consummate them, they stand in a very different attitude. The moral stain has not attached, and the guilt has not been carried out; and, although these remarks are followed by the general statement that the doctrine applies solely to executed contracts, his meaning, construed in connection with the context, shows that he intended it to apply to those partly as well as those entirely executed.

I will conclude the examination of the branch of the case now under consideration, by the citation of the principle applicable to contracts of a fraudulent or illegal character, declared by Chief Justice MELLEN, in a well reasoned opinion, in the case ofSmith v. Hubbs (1 Fairf. [10 Me.], at 76), which was approved by Chancellor WALWORTH in his opinion delivered in Nellis v.Clark (4 Hill, 429). It is in the following terms: "There is a marked and settled distinction between executory and executed contracts of a fraudulent or illegal character. Whatever the parties to an action have executed for fraudulent or illegal purposes, the law refuses to lend its aid to enable either party to disturb. Whatever the parties have fraudulently or illegally contracted to execute, the law refuses to compel the contractor to execute or pay damages for not executing, but in both cases, leaves the parties where it finds them. The object of the law in the latter case is, as far as possible, to prevent the contemplated wrong; and, in the former, to punish the wrong-doer by leaving him to the consequences of his own folly or misconduct." By the application of that principle to the present case, the plaintiff, on the one hand, is prohibited from recovering the sum he has paid, and the defendant could not have recovered the unpaid balance on the subscription payable by him.

I will now briefly consider the case, on the assumption that the contract was valid, as there seems some color for holding by the opinion of LEONARD, P.J., in Otter v. Brevoort PetroleumCompany (50 Barb., 255). Whatever rights the plaintiff acquired under it were lost by the forfeiture of his stock, on his failure and default in making the second and subsequent installments previously called for; and, by the terms of the subscription, the subscribers agreed to forfeit to the company all sums that they had paid on the stock subscribed for, and the act under which the defendant was organized also authorized such stock, and all previous payments made thereon, to be forfeited on a failure to pay any installment. There is no question as to the regularity or legality of the proceeding of the defendant in declaring such forfeiture. The plaintiff thereupon ceased to have any rights or interest in the company, and consequently could claim no benefit from the subsequent reduction of the capital, and the resolution authorizing an adjustment and settlement to be made with the owners or holders of the new stock for the cancelment thereof. If it were otherwise, he states in his complaint that he never made any demand for the coupon bonds, which were authorized to be issued and given for the purpose of such adjustment. It may be proper to add, that the reduction of the stock was not a rescission or revocation of the vote for its increase, nor of the subscription. The act of 1848, above referred to, expressly authorized a reduction of the capital by companies organized under it, on the terms and conditions therein specified; and that of the defendant was made under and in pursuance of such authority. The proceeding was based on the assumption and recognition of the validity of the previous increase, and gave no right or any claim for the repayment of the moneys paid toward such increase.

It follows, from these considerations, that the referee erred in deciding that the plaintiff was entitled to a recovery, and the judgment entered on his report, and that of the General Term in affirmance thereof, must both be reversed, and a new trial must be ordered, with costs to abide the event.