Case ID: ad_118/html/0490-01.html
Source: Caselaw Access Project
Author: {"author": "Sewell, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Charles W. Bostwick, as Receiver of the Albany and Hudson Railway and Power Company, Appellant, v. Alden M. Young and Others, Respondents.
    Third Department,
    March 28, 1907.
    Corporation-v-contract -to pay for railroad construction in bonds and stocks — such contract not stock subscription — pleading — when complaint of receiver insufficient — when receiver estopped by action of corporation.
    A contract by a railroad to pay a contractor.in bonds and full-paid non-assessable stock of the corporation for his work, labor and. materials in- constructing and equipping the road is not a stock subscription by the contractor, which makes him liable for the par value of the. stock. Such contract is not a purchase of the stock and bonds to he paid.for in work and property, but is a contract to accept full-paid stock and bonds as payment for the building of the road.
    
      The receiver appointed on the insolvency of such railroad is not entitled to recover from contractor the alleged value of the stocks and bonds received as compensation for the construction of the road, when it is not alleged that the cost of constructing the road and the value of the properties acquired from the contractor were of less value than the par value of the stock and bonds, delivered in payment.
    In any event, although the payment of the contractor in bonds and stocks were fraudulent, the receiver not being vested with rights personal to the creditors and merely standing in the place of the corporation, can maintain no action against the contractor to recover the alleged value of the stock and bonds, being, like the corporation, bound by an equitable estoppel.
    Appeal by the plaintiff, Charles W. Bostwick, as receiver, etc., from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of Columbia on the 27tli day of September, 1906, upon the decision of the court, rendered after a trial at the Columbia Special Term, sustaining separate demurrers interposed by the defendants to the plaintiff’s complaint.
    
      Samuel B. Coffin \J. Ricler Cady of counsel], for the appellant.
    
      F. B. Church, for the respondents.
   Sewell, J.:

The plaintiff, a receiver appointed in an action for the sequestration of the property of the Albany and Hudson Bailway and Power Company, seeks.to recover of the defendants the par value of certain stock of the company, alleged to have been fraudulently obtained by them from the company without consideration. It is somewhat difficult to determine from tlie mass of conclusions set out in the complaint what the issuable facts are that must be deemed admitted by the demurrer.

Divesting the complaint- of all the conclusions of law and of fact, the material facts alleged in the complaint are as follows:

The Albany and Hudson Bail way and Power Company was organized and incorporated for the purpose of building, maintaining and operating a railroad in pursuance of the Bailroad Law (Laws of 1890, chap. 565 as amd.). The capital stock was fixed at $2,500,000, and soon after the incorporation of the company the proper officers were authorized to execute, and did execute and issue 2,500 first-mortgage gold bonds oí the par value of $1,000 each. At a meeting of the board of directors it was unanimously resolved that the president and secretary be authorized and directed to execute a contract with one George G. Blakeslee for the construction and equipment of tlie_ road and the acquisition of the properties and rights mentioned in the contract. It was also unanimously resolved that the. officers of the company be authorized and directed to deliver to said Blakeslee, or his order, all the bonds, and 24,920 shares of the full-paid non-assessable capital stock of the company in accordance with the agreement, and at .a special meeting of the stockholders, at which all were present, the minutes of this meeting of the directors were consented to and approved.

It is also alleged that the contract was executed by the president and secretary of the company and by Blakeslee; that thereafter and from time to time.the board of directors authorized and directed the issuance and delivery to Blakeslee of certain of the bonds, and from time to time authorized and directed the officers of the company.to deliver “ certain shares of the alleged full-paid non-assessable capital stock of the said company,” which said bonds amounting to 2,500, and the shares of stock amounted in the aggregate to 24,920 shares.-

It is further alleged that Blakeslee was a mere dummy contractor and intermediary, and acted as such, at the solicitation and direction of the defendants; that they caused him to execute the contract and he signed the same at their direction ;. that Blakeslee never actually constructed said road in whole or in part, and never performed any of. the obligations of said contract; that the defendants caused all' the stock and bonds to be issued and delivered to Blakeslee; that he did not pay for the same in cash or in property and parted with no value therefor; that the stock and bonds were issued to defendants, through said dummy contractor, without the payment by said defendants of any sum therefor, and that the defendants did not, nor didlany of them, at that time or at any time thereafter, pay for said stock the par value thereof, or any sum whatever.

It appears by the contract which is made a part of the complaint that Blakeslee agreed to sell, or procure to be sold and delivered to the company, all the stock of the Greenbush and Niassan Electric Itailway Company, the stock' .of the Hudson Light and Power Company, certain real estate and water rights and other property, and to construct and equip the road in accordance with the' provisions of the contract, and that in consideration thereof the company agreed to issue. and deliver the stock and bonds to the contractor from time to time as the performance of his contract should progress, in such' amounts as the board of directors should determine to be in reasonable proportion to the progress of the work, and upon completion of the agreement to issue and deliver to him all of the remainder of the 2,500 bonds and 24,920 shares of stock.

It is stated in the complaint that the Gfreenbush and Nassau Electric Railway and the Hudson Light and Power Company were merged in the Albany and Hudson Railway and Power Company ; that the railroad was completed on or about the 22d day of November, 1900, and was thereafter operated by the company, and that Blakeslee resided in Westchester county during the whole time of the construction of said road and the acquisition of the properties mentioned in the contract.

The main grounds upon which the defendants rely to sustain their demurrers are: First. That the complaint does not allege an actual subscription or show that the defendants took upon themselves the obligations of Subscribers by wrongfully appropriating the stock without paying for it. Second. That if the defendants assumed the obligations of subscribers the complaint is defective in not setting forth a breach of the defendants’ promise or in failing to allege that the company did not receive full value for the stock and bonds by the construction and equipment of the road. Third. That the liability of the defendants, if airy, is to the creditors of the corporation and not to the corporation or its receiver.

Assuming all that can be claimed by the plaintiff from the allegations in regard to the liability of the defendants to pay the corporation or its receiver the par value of the stock held by them, the liability of the defendants, if any, rests upon contract. It depends upon a promise, express or implied. Without a promise to pay, a party cannot be charged in this class of cases. (Glenn v. Garth, 133 N. Y. 42.) It is not alleged in the complaint that any express promise was made by or in behalf of the defendants, except to build the road and perform the other conditions of the contract, for the stock and bonds therein agreed " to be delivered. Every fact and circumstance alleged show that there was no agreement to take stock and bonds otherwise than as a payment for work and property: The agreement, on the part of the contractor, was not to pay the par value of the stock in cash. It was not to purchase the stock and bonds and pay for them in work and property ; but it was to accept full-paid stock and bonds in payment for the building'of the road.

That was the only contract ever made by the defendants which has any bearing on the present issue. According to its language, the issue and delivery of the stock and bonds were made to depend upon the construction of the road, and the contractor had no claim to the stock, further than it was earned, and did not become a stockholder until it was earned and received in payment. If the signing of the contract imported that the contractor subscribed for the shares mentioned therein, .if this be the true construction of the act. of - the contractor in entering into the contract, no agreement can be made to build a railroad' by the transfer of stock and bonds to the contractor, without rendering him and the people.for whom he may act, liable for the par value thereof.

In Van Qott v. Van Brunt (82 1ST. Y. 535) the court said, such a rule would seriously interfere with the construction of enterprises of this description, and would prevent the building of many railroads. ' “We are unable to discover any reason why stock- and bonds may not be transferred to a contractor to pay for the building of a railroad, where the contract is made in good faith and' with no fraudulent intent.”

We think that this agreement does not fall within the cáse of an ordinary stock subscription, and that the action cannot be maintained unless it appears that the defendants assumed the obligations or liabilities of subscribers by wrongfully accepting and appropriating the stock without paying for it, so that an implied contract or promise is made out. .

The conclusion is stated in the complaint that the contract was the culmination of a fraudulent scheme or conspiracy on the part of the defendants to acquire the stock without paying therefor, but the allegations in that respect wholly fail to support the conclusion. It appears that the corporation was formed for a legal purpose; that the contract was one the company had power to make and that the stock was issued and delivered as full-paid stock with the approval and consent of all the directors and stockholders. There is no claim that the cost of constructing the road and the value of the properties acquired were less than the par value of the stock and bonds delivered, and for aught shown to the contrary, the company, by entering into the contract, put itself in position to get par value for the stock and the market value of its bonds.

There is no fact alleged showing or tending to show that the corporation did not actually receive all that was agreed to be done by the contractor in return for the stock and bonds or that a share of stock was issued otherwise than in payment for work or property. On the contrary, it is expressly stated in the complaint that the road was completed and the properties mentioned in the contract were acquired,, and that the directors authorized the issuance and delivery of the stock and bonds in accordance with the pretended agreement.” In view of these statements it is not enough, to show a right of action against the defendants, to allege that Blakeslee never actually constructed the road or performed the conditions of the contract, or that the defendants did not pay for the stock when it was delivered to them or at any time thereafter. The plaintiff is bound to go further and allege in unequivocal terms that the stock was not issued or delivered by the company in payment'for the construction of its road and the property acquired, or some other fact from which it may be inferred that the company did not receive the full or par'value for the stock delivered to the defendants. In the absence of a definite allegation to that effect the natural and necessary conclusion from the facts and circumstances alleged is, that the defendants built the road and took the stock and bonds in payment therefor and not that the stock and bonds were delivered in violation of the statute. (See Stock Corp. Law [Laws of 1892, chap. 688] § 42, which has been since amd. by Laws of 1901, chap. 354). This is a case when the failure to deny a fact furnishes satisfactory evidence of it. Acts done by a corporation, which presuppose the existence of other acts to make them legally operative, are presumptive proofs of the latter.” (Pringle v. Wool-worth, 90 hi. Y. 510; Nichols v. Mase, 94 id. 160; Lemings v. Supreme Lodge, IS. of P., 131 id. 522.) “‘Illegality is never presumed; on the contrary, everything must be presumed to have been legally done until the contrary is proved.’ ” (Nelson v. Eaton, 26 hi. Y. 415 ; Beardsley v. Johnson, 121 id. 22Í.) Upon the facts alleged it is very plain that there was no agreement, express or implied, on the part of the defendants to pay the par value of the stock in cash. Every fact and circumstance alleged' shows that such an agreement was contrary to the intention of the parties, and that a recovery herein would not be upon an existing contractual relation, but in hostility to an express agreement between the corporation and the defendants.

The only point remaining to be considered is whether the facts alleged constitute a cause of action in favor of the plaintiff.

There can be no doubt that the appointment of the receiver did not vest in him a right which was personal to the creditors, or enable him to recover under circumstances in which the corporation could not have maintained an action. It is equally clear that the corporation itself would have no standing to demand that the defendants should pay the par value of stock issued to them as full paid-up stock, pursuant to an agreement which, as between the corporation and the defendants, was valid and binding. (Thompson v. Knight, 74 App. Div. 317; Woodruff v. Erie R. Co., 93 FT. Y. 609; Christensen v. Eno, 106 id. 97.)

If we assume that thé contract- was voidable, because of a scheme to obtain the stock without paying for it; that there was fraud and collusion in promoting the company, in evading a direct contract and in causing the stock and bonds to be issued and delivered, neither the corporation nor its receiver is in position to complain or to assert any right against the defendants, for it clearly appears that it was all done with, the consent and co-operation of all the officers, directors and stockholders, and that no other persons were concerned or interested in the corporation. * (Little v. Gárabrant, 90 Hun, 404; Barr v. K. I7"., L. E. & W. R. R. Co., 125 FT. Y. 263 _; Seymour v. Spring Forest Gem. Assn., 144 id. 34Í.)

Fraud may furnish sufficient ground for rescinding a contract or for an action by a creditor, but it cannot be availed of -as a means of recovery by a party to the scheme. The doctrine of equitable estoppel applies. (Kent v. Quicksilver Miming Co., 78 FI. Y. 159; Bdden v. Burke, 147 id. 558 ; Bath Cas Light Co. v. Claffy, 151 id. 24.)

It follows that the judgment of the Special'Term should be affirmed, with costs.

All concurred; Cochrane, J., in result.

Judgment affirmed, with costs.