Wormser v. Metropolitan Street Railway Co.

76 N.E. 1036, 184 N.Y. 83, 22 Bedell 83, 1906 N.Y. LEXIS 1338

• Court: New York Court of Appeals
• Decided: February 13, 1906
• Status: Published

Opinion

Willard Bartlett, J.

Where the objection to the acts of a corporation is that they are ultra vires, without being either mala prohibita or mala in se, a stockholder cannot maintain an action,in his own behalf based on such objection, where he himself, with knowledge of the character of the acts, has acquired and accepted pecuniary benefits thereunder. Whether his conduct in so doing constitutes an estoppel in the strict sense of that term, or a quasi-estoppel, as Mr. Bigelow puts it (Bigelow on Estoppel [4th ed.], chap. XIX), or be denominated merely an acquiescence or an election, or the assumption of a position inconsistent with an attack, makes no essential difference here. The point is, that the seeking and acceptance of a substantial benefit which would be unavailable to the stockholders except as a result of the acts which he would attack as ultra vires preclude him from assailing those acts on that ground. A litigant is not at liberty to deny the validity of a contract, which is neither prohibited by law nor evil in itself, after he has knowingly sought and obtained pecuniary advantages, pay or compensation, under and by virtue of such contract.

This doctrine applies to the present case and is conclusive against the maintenance of this action by' the plaintiff. He has sold the privilege attaching to 885 of his Metropolitan Railway Company shares to subscribe to the stock of the Metropolitan Securities Company for between $5,000 and $6,000. This privilege would have been absolutely non-existent, except for the plan and lease which he attacks in this suit. He was well aware of this and lie cannot avail himself of the privilege and at the same time prosecute the suit.

The officers of a corporation who are sued by stockholders for damages due to carrying on business not authorized by its charter may defend by showing the stockholders’ acquiescence in or assent to the business, express or implied. (Holmes v. Willard, 125 2ÑT. T. 75-, 82.) .

In Post v. Beacon Vacuum Pump & Electrical Co. (84 Fed. Rep. 371) the United States Circuit Court of Appeals in the First Circuit considered the sufficiency of a bill in equity filed by stockholders of the Beacon Vacuum Pump and Electrical Company to rescind a transfer of its property to the Beacon Lamp Company; and it was held that the complainants being minority stockholders who opposed the transfer were estopped from maintaining a suit for rescission on the ground of ultra vires, because they had subscribed for their proportion of the stock of the new corporation, although under protest, and had permitted such company to conduct the business for eighteen months. “It is clear,” said Putnam, C: J., “ that the complainants have not maintained that consistent position necessary to relieve them against an equitable estoppel. They admit that they have subscribed for their proportion of the 32,000 shares of stock in the new corporation. They do not state the date when they made the subscription. The transfer of the assets to this corporation was made in July, 1895, and the bill was not filed until the 12th day of January, 1897, so that, although at the outset they protested against the reorganization, yet their subscriptions, in the absence of any proper allegation otherwise, must be presumed to have been made at such time as justified the respondents in assuming that the lamp company was authorized, so far as the complainants were concerned, to receive the transfer of the property of the old corporation, and to commence and carry on its manufacturing business, thus involving itself in the liabilities and other complications inevitably arising therefrom. That this raised an estoppel i/n equity as against a bill fraying rescission is too clear to need discussion. It is true that complainants allege that this subscription was under protest, and only to preserve their rights; but the bill does not give the court any details which would enable it to perceive that, by any possibility, the effect of the subscription, which of itself would be an accomplished fact, could he overcome by any protest or other formal reservation which might accompany it.”

In Towers v. African Tug Company (L. R. [1 Ch. 1904], 558), which was a suit by two shareholders of the defendant to compel. the directors to repay to the company the amount of a dividend illegally, though honestly, declared and paid, the decision of the English Court of Appeal is accurately stated in the head note as follows: “ A shareholder in a limited company who has, with full notice or knowledge of the facts, himself received part of the proceeds of an ultra vires act committed by the directors — such as payment of a dividend out of capital — and who still retains the money, cannot, either individually or as suing on behalf of the general body of shareholders maintain an action against those directors.” Lord Justice Vaitg-hn-Williams, in the course of his opinion, says: “ If it be the fact, as I think it is, that these plaintiffs knew of all that had been done, received their dividends with knowledge of all the facts, and then brought this action with the money still in their pockets, ought they to be allowed to bring this action, -which, as I have pointed out, is, to my mind, an action such as they can bring in consequence of their pers'onal interest in -the matter ? I think not. I think that an action cannot be brought by an individual shareholder complaining of an act which is ultra vires if he himself has in his pocket at the time he brings the action some of the proceeds of that very ultra vires act. Nor, in my opinion, does it alter matters that he represents himself as suing on behalf of himself and others. I think that the reason which requires us to say he ought not to bring such an action equally requires us to say that he ought not to be the peg upon which such an action is to be hung for the benefit of others.” ■

The proposition that one may not deny the validity of a contract under which he has taken advantages was forcibly asserted.by the Supreme Court of the United States in the case of United States ex rel. International Contracting Co. v. Lamont (155 U. S. 303). There the relator applied for a writ of mandamus against the secretary of war to compel him to execute and deliver a contract under an advertisement for bids for dredging, "which contract the relator claimed to have entered into with the secretary, so as to render it enforceable. The Supreme Court refused to' consider any question as to whether the contract was to be regarded as complete or as to the authority of the secretary of war in the premises, because it appeared that at the time when the application for the mandamus was made the relator had voluntarily entered into a second contract to do the same work at a lower price and on different terms, and had already been paid on account thereof. “ Even if the writ of mandamus could be so perverted as to make it serve the purposes of an ordinary suit,” said Mr. Justice White, “the relator is in no position to avail himself of such relief. He entered of his own accord into the second contract, and lias acted under it and has taken advantages which resulted from his action under it, having received the compensation which was to be paid under its terms. Having done all this he is estopped from denying the validity of the contract. (Citing Oregonian R. Co. v. Oregon R. & N. Co., 10 Sawyer, 464.) Hor.does the fact that in making his second contract the relator protested that he had rights under the first better his position. If he had any such rights and desired to maintain them he should have abstained from putting himself in a position where he voluntarily took advantage of. the second opportunity to secure the work. A party cannot avoid the legal consequences of his acts by protesting at the time he does them that he does not intend to subject himself to such consequences.”

As was said by the Supreme Court of Alabama in Robinson v. Pebworth (71 Ala. 240), estoppel in a case of this character “ simply means that you shall not take the fruits of an illegal transaction and afterwards set the transaction aside as illegal.” In holding that the plaintiff here is precluded from attacking the plan and lease in question by reason of his sale of the privileges acquired by him thereunder as a stockholder in the Metropolitan Bailway Company, we do not pass upon the legality of the scheme, either to condemn or approve it; we simply decide that, even assuming it to be as unlawful as he alleges, he is in no position to assail it.

This defense is available to the respondents notwithstanding the fact that the plaintiff did not sell his privileges until after the beginning of the suit. Matters which arise between the bill and plea may be pleaded in equity. (Turner v. Robinson, Simons & Stuart, 3.) Under the old chancery system in this state there was no rule of equity pleading whereby a defendant was precluded from availing himself of matters arising between the filing of the bill and answer, by way of avoidance or defense. (Lyon v. Brooks, 2 Edw. Ch. 110.) Bor is there any such prohibition under the Code. (See Beebe v. Dowd, 22 Barb. 255, 259.) As was said by the late Mr. Justice Hardin in Mann v. City of Utica (44 How. Pr. 334, 339): “ It is a familiar rule in equity cases which permits courts to take into consideration subsequent events happening after the commencement of the action in equity and determining what relief shall be granted, especially where part of the relief asked for is an injunction from the court to restrain parties.”

For the reasons which have been stated, and without considering or deciding the other questions discussed by counsel, we conclude that this judgment should be affirmed, with costs.

Cullen, Ch. J., O’Bbien, Haight, Yann, Webneb and Hiscock, JJ., concur.

Judgment affirmed.