Case ID: ny-super-ct_38/html/0016-01.html
Source: Caselaw Access Project
Author: {"author": "By the Court.—Curtis, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

MARY C. ADAMS, Plaintiff and Appellant, v. JOHN W. MILLS, Defendant and Respondent.
    I. MARRIED WOMEN.
    1. Frauds and omission of her husband.
    1. She is affected and bound by the frauds and omissions of her husband in attending as her agent to her property intrusted by her to him.
    1. A married woman intrusted certain of her moneys to her husband, who was a trustee and the secretary of a company, with power to use the same as he might deem proper. The husband, although not authorized either as secretary or trustee to borrow money for the corporation and thereby create a debt binding on the corporation, unless expressly authorized so to do by a majority of the trustees, undertook to make an arrangement between himself as agent of his wife of the one part, and himself as secretary and one Brown as the treasurer of the company of the other part, whereby he as such agent assumed to loan to. and he as such secretary with said treasurer assumed to borrow for, said company, money of his said wife, on condition that it should be repaid on demand with twelve per cent, interest.
    Before Curtis and Sedgwick, J. J.
    
      Decided July 2, 1874.
    Held,
    that no debt was created under chap. 40, § 13, of laws of 1848.
    3. Omission by husband to pile bepobts.
    
      a. She can not derive any benefit from such omission.
    H. MANUFACTURING LAW. LAW OF 1848, CHAP. 40, § 13._
    1. What is not a debt within the meaning of such section (see above)..
    3. Who can not talce advantage of an omission to file reports (see above).
    Appeal by plaintiff from judgment in favor of defendant, entered on the report of a referee.
    This action was brought to recover from the defendant a debt, alleged to be due from the Hilliard & Adams Manufacturing Company to the plaintiff, for money loaned by plaintiff to it. The plaintiff claims that this company being a corporation, duly formed and organized under the general manufacturing act of this State, omitted to make the annual reports required by section 12 of that act, in the years 1870 and 1871, and that the defendant being a trustee of that corporation, consequently, became liable for the payment of ■its debts.
    The defendant insists that the alleged loan by plaintiff to the corporation, if ever made, was made without the knowledge or authority of the board of trustees, or a majority of them, and not in their usual course of business, but to one of the officers of the company, which the .plaintiff knew and had notice of, and on his personal credit and responsibility, and that it was collusively credited to the plaintiff on the books of the company. Various defenses were interposed to the action by the answer.
    The company was organized April 28, 1869. The trustees were Bobert B. Hilliard, Charles S. Adams {the husband of the plaintiff), Francis M. Brown, Bobert Cochran, and the defendant, John W. Mills. The corporators organized on May 3, 1869, and elected Bobert B. Hilliard, president, and Charles S. Adams, secretary. The former acted as president until his death, January 10, 1870, and the latter continued a trustee and secretary during the existence of the company, and was also temporary president after Mr. Hilliard’s decease, from January 18, 1870, until Mr. Cochran’s election to the presidency, February 18, 1870.
    On January 14, 1871, proceedings in bankruptcy were instituted, in the United States district court for the southern district of Hew York, against the company, and an injunction issued enjoining both the company and its officers from proceeding or inter-meddling with the business or assets of the company.
    The referee found that the plaintiff, having some money in her own name, intrusted it to her husband, Charles S. Adams, who was the secretary of the corporation during the entire period of its existence, with power to use the same in such way as he might deem proper. That the husband, thus having the funds of his wife under his control, and without any direction on her part, entered into an agreement between himself, as agent of his wife, of the one part, and himself, as the secretary of the corporation, of the other part, with the knowledge of Francis M. Brown, the treasurer of the corporation, by which he purported to lend three thousand eight hundred dollars, and some other amounts of the funds so intrusted to him by the plaintiff, his wife, to the corporation, on condition that it should be repaid on demand, with interest at twelve per cent., without any authority from the trustees of the corporation to make any such arrangement, and without their knowledge.
    The referee also found that Charles S. Adams, neither as the secretary of said corporation, nor in his capacity as trustee, had authority to make any such arrangement with any person, nor had he authority in any way to borrow money for the corporation, and by that means to create a debt binding the said corporation, unless expressly authorized so to do by a majority of the trustees.
    The referee also found that Charles S. Adams fraudulently concealed from his cotrustees the fact that any such arrangement had been made, and that his cotrustees were entirely ignorant of the existence of any such arrangement, until after the corporation had been declared bankrupt by said district court, and that the claim made by the plaintiff in her complaint was not a debt existing against the corporation at the time they failed to make the report as required by law, and that the defendant was not liable to pay the claim to the said plaintiff, but that the defendant was entitled to have the complaint dismissed, and judgment in his favor for costs.
    The referee, by the findings made on the settlement of the case after his report, found that “F. M. Brown, treasurer, • borrowed this money of plaintiff for the company, agreeing that the company should pay it, on demand, with interest at the rate of twelve per cent, per annum.” He also found “that the money was used by said treasurer to pay the debts of the corporation and also, that “the money was credited at the time in the books of the company to the plaintiff;” and also, “that the account was balanced in February,, 1870, and one hundred and twenty-one dollars and fifty-four cents, as interest, was credited.”
    Judgment, dismissing the complaint and adjudging costs against the plaintiff, was entered on the referee’s report.
    The plaintiff appeals from the judgment.
    
      William H. Dickenson, attorney, and of counsel for appellant,
    urged :—I. The evidence sustains the position that this was an express contract lawfully made by Brown, the treasurer, and a lawful obligation of the company. It is admitted that the treasurer made the contract as alleged, but it is claimed that he had no authority. We reply: The treasurer was the sole financial agent. He borrowed the money. He was in the habit of borrowing money. Every one of the five trustees knew that money was borrowed by the company, yet no objection to this practice was made by any trustee. The treasurer’s habit of borrowing, which it was defendant’s duty to know of (because the books would have proved it, and he should have known the contents of the books), which practice was not objected to by defendant or the other trustees, was a practice acquiesced in by all the trustees, and this constituted an authorization to the treasurer to borrow money for the use of the company (Merchants’ Bank v. State Bank, 10 Wall. 647; Angell & Ames on Corp. S 297). The referee suggests that the second by-law (which forbids the issue of promissory notes without a vote of a majority of the board of trustees) impliedly restricts the general right to borrow money without such vote of trustees, and that 0. S. Adams knew this, and that plaintiff must be held to know what her .agent knew. To this we reply : (a.) That the by-law is presumed to be repealed by implication, because it was constantly violated with the knowledge of the trustees, and without objection from them. Money was constantly borrowed, and notes were constantly issued without any vote of trustees (Angell & Ames on Corp. §§ 238, 252, 284, 329). (b.) The by-law should not be extended beyond its terms. It could not have been the intent to forbid the treasurer to borrow small sums temporarily, in an emergency, to meet payments. If the intent had been to cover all loans, the word loans would have been included in the by-law. (3.) If there was no valid express contract, there certainly was a valid implied contract on the part of the corporation to repay the plaintiff’s money. The referee finds that the treasurer used this money to pay debts of the corporation. The treasurer had authority to pay the corporate debts. There is no pretense that he had not. The use of plaintiff’s money for that purpose was an acceptance by the corporation of the plaintiff ’ s money for that purpose, and as the corporation can not use plaintiff’s money for such purpose, and be justified in refusing to return it, the law implies a contract to repay (Chitty on Cont. 6 Am. ed. 601). (4.) It makes no difference, in respect to this action, whether the contract was express or implied. (5.) As against the Hilliard & Adams Manufacturing Company, the plaintiff's claim is upon contract, either express or implied, and therefore the defendant is liable, under section 12 of the general manufacturing act of 1848. That section certainly provides for all contract debts of the corporation. The phrase in the section is, “all debts existing or contracted, &c.,” implying perhaps, as the referee suggests, that only contract debts are included, but clearly including all contract debts. (6.) The referee suggests that this claim is inequitable as between plaintiff and defendant, and that the claim against the corporation arises in equity (as an implied contract), and not in law (as an express contract), and therefore plaintiff must show equity against defendant, or fail. This would be sound reasoning if the action were against the corporation. If the claim against the corporation is not based on a valid express contract, but rests on an implied contract, and such claim is against equity, it ought not to be enforced against the corporation. The law does not imply contracts against equity, though it may enforce express contracts against equity, leaving the equity courts to furnish a remedy. (7.) There are no equities between plaintiff and defendant. The plaintiff is in no way responsible for the acts of Charles S. Adams, her husband, in his capacity of trustee. She was not a trustee, and is not responsible for the mistakes or omissions of the trustees of this corporation. She was simply a creditor. As such, as the referee suggests, she had notice through her agent, Charles S. Adams, of the second by-law, but in the same way she had notice that the company was borrowing money and issuing notes without any vote of trustees, and that defendant and Cochran (his partner) loaned money to the corporation without any vote of trustees, and she had a right to suppose that the second by-law was repealed, and to suppose that the treasurer had a right to borrow her money, and to fix the rate of interest.
    
      D. & T. McMahon, attorneys, and D. McMahon, of counsel for respondent,
    urged :—1. The referee found as a matter of fact, that S. C. Adams, neither in his character as secretary of the corporation, nor as a trustee, had authority to make an arrangement to place these funds of his wife in the hands of the said corporation on condition that it should be repaid on demand, v/ith interest at rate of twelve per cent, per annum. He also found as a matter of fact that Charles S„ Adams had no authority in any way to borrow money for the said corporation, and by that means to create a debt binding the said corporation, unless expressly authorized to do so by a majority of the trustees. The referee also found as a matter of fact that Charles S. Adams fraudulently concealed from his cotrustees the said arrangement, and the latter were entirely ignorant of the existence of any snch arrangement. The evidence given on the trial fully supported these findings. It is therefore apparent that the only claim, if any, Mrs. Adams had against the corporation in question was to get the moneys back that her husband mingled in the company’s bank account, on the equitable principle, that the same were ex aequo et bono the property of the plaintiff, and that the corporation were trustees of such funds, or bound to account to her for the same. Such aright always is of a purely equitable character (N. Y. Ins. Co. v. Roulet, 24 Wend. 505); The words of section 12 of the general manufacturing act are, ‘ ‘ All the debts of the company then existing and for all that shall be contracted before such report shall be made” (Laws of 1848, p. 57, ch. 40, § 12). The statute does not employ the words “liabilities.” nor does it use the words, “all debts, claims and demands.” It uses the words “debts” alone. The debt must be proven (Shaler Co. v. Bliss, 27 N. Y. 297). In using the words “ debts” the statute has been construed to mean “ debts in presentí,” not merely a claim maturing or a liability which may ultimately ripen into debts (Oviatt v. Hughes, 41 Barb. 541). A promissory note before maturity is not an existing debt (Nimmons v. Harrison, 2 Sweeny, 663).
    II. In this case the company, if liable at all, were only liable from the fact that the moneys in question might have gone into their bank account, and they might under some circumstances be liable therefor, which could only be ascertained in equity.
    III. The claim of liability of the respondent to the appellant is abhorrent to every notion of sound equity and morality, and the appellant should be held to be estopped from making such claim. The wife trusts her moneys to her husband as her agent to manage for her. Such agency is good (Owen v. Cawley, 36 N. Y. 600). That agent happens to be the secretary of the corporation in question. It is Ms duty by law to cause to be drawn up and furnished to the trustees of this body the annual reports. He deliberately neglects to do it, although Judge Cochbawe had taken the pains to-furnish him and the treasurer with a copy of the’ general manufacturing act and to direct their special attention to the necessity of complying with section 12. How the wife comes in and sues one of the innocent trustees (the respondent), who has been led to believe all along by the machinations of this womans agent and husband that the corporation was perfectly solvent, and thereby deluded into believing that there was no necessity to file such a report. The husband kncw what were his duties, and that the respondent relied upon his properly performing them, yet he deliberately omits to prepare and file this annual report. Under such a case as this it is evident that the appellant should establish to the mind of this court what she failed to-do before the referee that she had a bona fide claim,, which was a debt within section 13 of the act of 1848, and that she could take advantage of the neglects and omissions of her own husband and agent, to fasten a liability on innocent third parties (See Daly v. N. Y. Chemical Ins. Co., 2 Hall, 550).
   By the Court.—Curtis, J.

A careful examination of the evidence fails to show that the findings of the referee are unsustained by the evidence.

The defendant John W. Mills, and his cotrustee Robert Cochran, were from the commencement of the business of the corporation, made the victims of very specious and knavish delusions. The expenses of conducting the business were out of all proportion to its amount, or its capital. The books contained misstatements and errors of the most barefaced character, in order to give the false impression that the business was successful. A letter read in evidence from the treasurer, F. M. Brown, to the plaintiff’s husband, indicates very clearly that they were conniving to deceive the defendant and the two other trustees. Untrue statements were prepared and presented, purporting to show that the business was exceedingly prosperous, and during its short existence, two dividends of ten per cent, each were declared, for no object apparently, ■ but to increase the confidence of the defendant Mills and his co-trustee Cochran, and to procure very considerable loans from them. These dividends were not paid.

It will also be observed that Adams, as. president pro tern., and secretary of the corporation, had duties to perform, in respect to the annual report, which he entirely neglected.

It is no part of the policy of the law, while increasing the right of a married woman in the use and .disposition of her property, to place her in a position to take advantage of the neglects and frauds of her husband and agent. She can not intrust him with property, and hold him out to .the world as her agent in respect to it, and then profit by his frauds and omissions in attending to it, and fasten liabilities for his wrong doing, and neglects, on innocent third parties (Daly v. Chemical Bank, 2 Hall, 550; Lindner v. Sahler, 51 Barb. 322). As to these frauds and omissions of official duty, in which the plaintiff’s husband and agent is found by the referee to have been a participant, it must be held, that his knowledge was so far a notice to her, that she can not derive benefit from them, at the expense of the deluded victims whom she has enabled her agent, collusively and wrongfully, to place in an attitude of liability.

It could never have been the intention of the framers of section 12 of this act, that it should ever be successfully invoked, to carry through a fraudulent scheme. Where the element of fraud enters into an attempt to create and enforce an alleged liability under its provisions against a trustee, it ceases to be operative. The party seeking to make a trustee liable for a debt of the corporation, must be free from fraud and wrongful complicity in the creation and establishment of the demand, he thus attempts to enforce.

' In giving effect to this highly penal provision of the statute, the courts have not inclined to a very extended latitude of construction. It is but just and equitable, that as the money of the plaintiff in this circuitous way went into the bank account of the corporation, and was applied towards the payment of its debts, that there should be a resulting compensation to her from the corporation. But the right to this, is very far from being a debt, such as is contemplated by section 12 of the act, in its description of such debts of the corporation as the trustees shall be liable for. The plaintiff’s claim is of more extensive import, than the ordinary and legal signification of the term “ debt.” It is lack-' ing the incidents of directness and of contract, that enter into the legal definition of that term. It would ill accord with the reason and object of the statute to extend its meaning so as to embrace and define as an existing debt, for the purpose of enforcing the penalty against a trustee, a transaction such as is presented by the proofs in this case (3 Black. Com,. 154 ; In re Denny, &c., 2 Hill, 220; Nimmons v. Hennion, 2 Sweeny, 663 ; Obicht v. Hughes, 41 Barb. 541; Watervliet Turnpike Co. v. McKeon, 6 Hill, 620).

It was among other matters claimed by the corporation on the argument, that the death of the president, in January, 1870, exonerated it from the obligation to publish the annual statement, and that it was again exonerated in January, 1871, by the proceedings in bankruptcy. But I see no reason why surviving officers and trustees should not comply with the statutory provision as far as possible in case of the decease of the president, nor is it apparent how the pendency of a bankruptcy proceeding can operate to release them from this statutory obligation. But in the view taken, it becomes unnecessary to discuss these questions of exoneration from compliance with the statute.

There were many other exceptions than those here discussed taken by the plaintiff, and presented on the argument, but they are not of a character to affect the conclusion arrived at, that the judgment appealed from should be affirmed, with costs.

Sedgwick, J., concurred.