Munson v. Magee

22 A.D. 333

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: July 1, 1897
• Status: Published

Opinion

Landon, J.:

We think the contract of August 13, 1875, a valid one. Such was the intimation, although not the decision, of the court in Munson v. Syracuse, Geneva & Corning Railroad Company (103 N. Y. 58.) The intent of the contract was not to prevent competition in bidding upon the foreclosure sale, but to procure, through the foreclosure, a sale of the mortgaged property to a new railroad company for fifty per centum of the amount due upon the defaulted bonds of the insolvent company-—a price manifestly greater than could be obtained for it from any purchaser who could not be sure of obtaining the coal tonnage contracts, which, under this contract, Magee agreed to procure for th¿ proposed railroad company. Thus, the contract, which provided for the sale of the mortgaged property, provided for securing a price for it, enhanced, because of the coal tonnage clause of the contract. The price to be paid by plaintiff and his associates was immaterial, since the real selling price was a fixed one. Of course, there might be stockholders to complain of the price bid at the foreclosure sale. They are not here. Some of them have elsewhere had their day in court. (Harpending v. Munson, 91 N. Y. 650 ; Pratt v. Munson, 84 id. 582.) The plaintiff, Case, Gowen and the bondholders they represented had like interests, and it- was lawful for them to act as one man in protecting them, The rule which forbids parties having no, interests in common from -combining to prevent competition among themselves, and thus aiding the sacrifice of the property of another, does not apply.

The contract of August 13,1875, was executed step by step, substantially as the parties to it intended that it should be, until December 30, 1875, when the Syracuse, Geneva and Corning Railway Company resolved to abandon the line of the Sodus Bay, Corning and New York Railroad Company, and adopt a new and independent line. That was not a repudiation of further performance, but the precursor of it. The plaintiff and Magee had co-operated in forming the new railroad company, both were stockholders and directors in it, and the plaintiff was its president and a member of its executive committee. Magee had assigned the contract of August 13, 1875, to the new company, which assumed, so far as Magee was concerned, and apparently so far as the plaintiff was concerned, Magee’s obligations to the plaintiff under it, except as to the coal tonnage contracts, which, being for the benefit of the railroad company, Magee agreed to carry out, and did so. The assumption by the railroad company of Magee’s obligation to the plaintiff to “ deliver, or cause to be delivered,” its bonds to him and his associates, was contemplated by the contract of August 13, 1875, and both plaintiff and Magee promoted that assumption as a forward step in the execution of their contract. The plaintiff and his associates accepted the substitution by their contract with the railroad company of September 14, 1875, wherein it is recited “ The Syracuse, Geneva & Corning Railway Company taking the place of (Magee) and now being the party of the second part” in the contract of August 13, 1875. Plaintiff’s subsequent action against the railroad company and Magee also attests this. This was not a mere executory parol modification of a sealed contract, and because unexecuted invalid (McKenzie v. Harrison, 120 N. Y. 260); but such an executed novation of it by the substitution of the new railroad company, as the obligor in place of Magee, as the original contract itself contemplated. It was simply a new contract in the place of the old one, with a new obligor in the place of the old one. (Gibson v. Lenane, 94 N. Y. 183; First National Bank of Jersey City v. Leach, 52 id. 350; Southwick v. Sax, 9 Wend: 122.) This construction, apparent from the original contract itself, is clearer when that contract is viewed, as it should be, in the light of the circumstances then existing, and those which the contract was expected to bring into existence. If this substitution was valid, then Magee was thereby discharged. This is not contested, but the respondent’s position is that the railroad company was not bound by the contract of assumption, and that, therefore, theré was uo substitution, no novation and no release of Magee.

This is the main question here, and we think the only one. The contract of assumption of Magee’s obligation to plaintiff under the original contract was not adjudged invalid, because it was incomplete as a novation of Magee’s contract, although that ground, as the report shows, was taken in the Court of Appeals by counsel'; but it was held invalid because it “ is repugnant to the great rule of law which invalidates all contracts made by a trustee or fiduciary, in which he is personally interested, at the election of the party he represents.” (103 N. Y. 73.) The plaintiff “ stood in the attitude of selling as owner and purchasing as trustee,” and thus the railroad company could elect to repudiate its contract with him. It had received nothing from him. The contract of assumption between the plaintiff and the new railroad company was vitiated because of plaintiff’s vicious relation to it. But for his own fault it would have been unavoidable. He cannot take advantage of his own wrong. Even if Magee stood in pari delicto with the plaintiff, it would not aid the latter. (Unckles v. Colgate, 148 N. Y. 529 ; Saratoga County Bank v. King, 44 id. 87.)

But as to Magee the conditions were different. . In the original contract Magee had agreed that the new railroad company or himself should procure coal tonnage contracts sufficient to enable the railroad company to pay the interest upon its bonds and provide a sinking fund toward the payment of the principal. Such contracts would be, and doubtless proved to be, of great value to the railroad company. The trial judge no ’ doubt rested his finding that the company’s bonds were worth par in May, 1877, largely upon the credit these contracts gave to them. In the contract by which Magee assigned the original contract to the railroad company, Magee agreed with the railroad company to procure these contracts; and he afterwards did so, and the railroad company had the benefit of them. They formed the consideration between him and the railroad company for the assumption by the company of Magee’s obligation to the plaintiff, Case and Gowen. It is true that Magee was a director of the company, and the same rule applicable to its contract of assumption with the plaintiff would apply to its like contract with Magee if, unlike the plaintiff, Magee had not given to the company a valuable consideration which it has elected to retain, and thus-cannot repudiate the contract without restoring to Magee the consideration. (Duncomb v. N. Y., H. & N. R. R. Co., 84 N. Y. 190.) This, after nearly twenty years, is not to be presumed.

The case also falls within the rule stated in Munson v. Syracuse Geneva & Corning Railroad Compamy in respect to contracts made by the promoters of corporations: “ If adopted by the corporation, and they are within the corporate powers, and are not otherwise subject to objection, they may become the contracts of the corporation and enforceable as such.” Magee, by his tonnage contracts,, infused value into the railroad company’s property, while plaintiff’s contract with it aimed at procuring its bonds for property it might not want, and so plaintiff and Magee were not in pari delicto.

The railroad company’s contract of assumption with the plaintiff proved invalid because of the plaintiff’s disability to make an unavoidable contract with the company for his own benefit, and because the new company elected in May, lStY, when plaintiff tendered the deed to it, to avoid it. Magee could not remove plaintiff’s disability nor prevent the railroad company from taking advantage of it. Magee resigned from the directorship of the new company in September, 1816, when he became the contractor for the construction of the railroad and before the election by the company to avoid its contract with the plaintiff. Magee evidently intended the contract of assumption should be observed, for, in his proposals for construction, he provided that “ any materials now in line or in superstructure of the Corning & Sodus Bay R. R. Co. to bo turned over to me without charge.” At the same meeting to which Magee submitted these proposals the plaintiff, as president of the board of directors, pursuant to its resolution, appointed a committee to report to the executive committee, of which the plaintiff was one, “ in relation to the exchange of bonds with a committee appointed by the bondholders of the Sodus Bay, Corning & New York Rail Road Company,” thus showing that the idea of performing the contract with the plaintiff prevailed when Magee resigned as director.

Thus Magee, pursuant to the intention of the original contract of August 13, 1875, procured from the new railroad company, upon a valuable consideration from him, a contract valid between Magee and the company, by which the company assumed Magee’s obligations to the plaintiff, and, aided by the plaintiff, also procured for him the like contract of assumption from the railroad company, except that the latter was voidable. At that time it was probably supposed, since the railroad company’s engagement with Magee, August 31, 1875, to assume his.obligation to the plaintiff, Case and Gowen, under the contract of August 13, 1875, was based upon the important consideration of Magee’s agreement with the railroad company to procure the tonnage contracts, that that consideration, especially after Magee should have procured the tonnage contracts, would suffice, under the doctrine of Lawrence v. Fox (20 N. Y. 268), to vest the benefit of the assumption in the plaintiff without further contract from the railroad company to him, for the railroad company’s conti’act with the plaintiff of September 14, 1875, by its form of expression, seems to subordinate its assumption clause to the minor function of introducing further details into the contract of August 13, 1875, and thus further novating that contract and substituting the new one in its place.

While every one ought to know the law, it is not true that he does, and, therefore, not strange that it was not foreseen that the consideration which moved from Magee to the railroad company, for his and the plaintiff’s benefit, would become invisible, so far as the plaintiff was concerned, in the shadow of his fiduciary relations, and that the railroad company could continue to keep it without obligation to the plaintiff for the great advantage it gained by it.

But such was the plaintiff’s misfortune. He had a contract with the railroad company which would remain good unless and until it should be avoided. (Barr v. N. Y., L. E. & W. R. R. Co., 125 N. Y. 263; Harrington v. Erie Co. Savings Bank, 101 id. 257.) Plaintiff took it subject to no infirmity, except what proceeded from his attitude in relation to it. His position in the company, no doubt, afforded him some assurance that the contract would not be avoided. Subsequent transactions, notably the change of route, the delay of the plaintiff in tendering the deed of the Sodus Bay property, and the total expenditure of the first mortgage bonds in construction, and the acquisition of most of the capital stock of the new company in the interests of the New York Central Railroad Company, probably led to the election to avoid. The plaintiff assumed the hazard, and assumed it with full knowledge of the facts. He took a con-O tract subject to a contingency which might impair it. The contract was not void until the company elected to avoid it, May 10, 1877. Magee proceeded upon the assumption that the company’s contract with the plaintiff, as well as that with himself, was valid. He made file tonnage contracts with the company, and adjusted his relations with it upon that basis; he resigned as director and, with the consent of the plaintiff, entered into a large contract with the company, under which he was compelled to earn all the bonds he received. It certainly was never intended that he should deliver these bonds to the plaintiff. Nothing can be clearer than that the plaintiff .assented to these changed relations of Magee, because he had ceased to look to him for the bonds. The only rational conclusion from the whole transaction is that the plaintiff, with full knowledge of the facts as they successively took place, took the risk of the validity of his contract with the company, not knowing the law "which made it voidable, and not supposing, until he tendered the deed, that the company could or would elect to avoid it. As plaintiff’s contract with the railroad company was not void when Magee entered into his important contracts with it, plaintiff’s release of Magee was founded upon a good consideration. Magee did not guarantee it to be indefeasible. Moreover, the plaintiff is estopped from disputing the validity of the release because his long assumption of its validity led Magee into contracts and expenditures which make it unjust to reinstate the contract of August 13, 1875, and ■compel the plaintiff to deliver the bonds under it. (Veeder v. Mudgett, 95 N. Y. 310; Trustees, etc., v. Smith, 118 id. 634.)

It is true that the plaintiff did not change his position until the judgment in Munson v. Syracuse, Geneva & Corning Railroad Company (supra) taught him its invalidity, but as meantime his first position determined the action of Magee, he cannot by now ■changing it place Magee in the same position, as if he never held it, and thus compel Magee to bear the whole loss to result from such change: (Conrow v. Little, 115 N. Y. 389.) It is true Magee knew all the facts, but he could not know in advance that plaintiff would change his position.

These views lead to a reversal of the judgment, and to a direction of judgment for defendant, with costs of the appeal and below. If, however, the respondent prefers that a new trial be granted, the order may be so entered, costs to abide the event.

All concurred.

Judgment reversed and judgment directed for the defendant, with costs, unless plaintiff elects to take a new trial, in which event a new trial is granted, costs to abide the event.