Case ID: nys_25/html/0892-01.html
Source: Caselaw Access Project
Author: {"author": "PATTERSON, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

McLANAHAN v. MOTT et al.
    (Supreme Court, General Term, First Department.
    November 17, 1893.)
    1. Lotteries—Bonds.
    A scheme by which a corporation proposes to issue $100,000,000 of bonds secured on its property, maturing 450 years after date, with interest at 6 per cent, per annum, payable, 2 per cent, semiannually, the remaining 2 per cent, at maturity, with a provision that, at each semiannual payment of interest, $400,000 shall be used to' redeem bonds, to be designated by the trustee, at their maturity value,—that is, $1,000 for a $100 bond,—is a lottery.
    
      2. Same—Powers op United States Cobfobatioks.
    A corporation chartered by congress to do business in New York is not authorized to engage in a lottery, its powers being limited by Rev. St. U. S. § 3894, making it a misdemeanor to use the mails for lotteries, thereby condemning lotteries.
    Appeal from special term, New York county.
    Action by John King McLanahan against Jordan L. Mott, Malcolm Graham, and the North River Bridge Company for injunction. From a judgment sustaining a demurrer to the complaint, plaintiff appeals.
    Reversed.
    Argued before FOLLETT, P. J., and PARKER and PATTERSON, JJ.
    Root & Clarke, (Burton N. Harrison, of counsel,) for appellant.
    Turner, McClure & Rolston, (David McClure, of counsel,) for respondents.
   PATTERSON, J.

The appeal in this case is from a judgment directed at special term, sustaining a demurrer, and dismissing the complaint to which it was interposed. The .plaintiff is a stockholder in the North River Bridge Company, a corporation organized and existing under an act of the congress of the United States, (chapter 669, Acts 1890; 26 Stat. 268,) and authorized by its charter to construct a bridge and its approaches over the Hudson river, from New York city to New Jersey, and to issue bonds, and secure the same by mortgage on its property, rights, and franchise. It is alleged in the complaint that the corporation, assuming to act under the authority conferred upon it by the congress—

“Intends and threatens, and is about to issue its bonds, secured by a trust deed, to the amount, not exceeding in the aggregate, of one hundred million dollars; the principal to become due on the 1st day of July, A. D. 2343, and to bear interest at the rate of 6 per centum per annum, of which two per centum shall be payable on the first day of January, and two per centum on the first day of July, in each year, and the remaining two peleen turn shall be payable with the principal on July 1st, A. D. 2343; the payment of the principal and interest of said bonds to be secured by a first mortgage or deed of trust upon said company’s bridges, approaches, terminals, appurtenances, and works connected therewith, and on said company’s property and rights of property, of all kinds and descriptions, now held or that may hereafter be acquired, and upon its franchise to be a corporation, and said bonds to be gradually liquidated, and to that end to be gradually paid off and redeemed on interest days at their maturity value, according to the numbers called in and designated by the trustee, at least one month before each interest day; said bonds to be registered, and in denominations of one hundred dollars, and to be numbered from one to one million, inclusive,” etc.

The general outline of a plan for raising money by putting out a loan being thus stated, the pleader proceeds to set forth certain of its details, and that the corporation, by resolution, adopted the form of a bond which was also approved by a majority of the stockholders of the company; but that the company or its directors have modified the form of the bond as proposed and adopted, and, instead thereof, purpose and threaten to issue a bond containing the following provision, viz.:

“That this bond is subject to be redeemed before maturity, at its maturity value, in accordance with the provisions of the said mortgage or -deed of trust.”

It is then alleged in the complaint that the clause of the mortgage referred to respecting the redemption of bonds is as follows, viz.:

“Third. A sinking fund shall be created and maintained for the gradual payment or redemption of the bonds hereby seemed. It shall consist of, and be maintained by, a payment by the said company to the said trustee, before each interest day, of $400,000, together with an additional sum of money, equal to the semiannual interest at two per centum on the total number of bonds previously redeemed and canceled, as herein provided; and the said trustee shall, at least one month prior to each interest day, designate by lot as many bonds for redemption at their maturity value as the moneys in said sinking fund on such interest day will suffice to pay, and said bonds, so designated, shall on such interest day be redeemed and paid at their maturity value,” etc.

It is further stated in the complaint that the directors and stockholders of the corporation have declared a certain meaning to be attached to the words “at their maturity value,” used in the clause of the mortgage quoted, which meaning is that, for each bond of $100' designated by lot for redemption prior to maturity, there shall be paid the sum of $1,000; such fixed maturity value being arrived at by adding to the principal of $100 the items of annual interest at 2 per cent, from July 1,1893, for 450 years. It is also averred that the said directors, etc., of the company—

“Intend and threaten, if it should be necessary or expedient to facilitate the floating of said bonds, to make a supplemental agreement that such as has been stated is the meaning of the words ‘maturity value’ in the instruments above mentioned; that the plaintiff has remonstrated in vain against this scheme as unlawful, and he insists that it is contrary to public policy, an abuse of the corporate powers of the defendant company, and contrary to the statutes of the state of New York, in this, among other things: that it is in violation of the statutes prohibiting lotteries and lottery schemes.”

The relief prayed for is a perpetual injunction, restraining the execution of any deed of trust containing the provision referred to respecting the redemption of bonds “at their maturity value.”

The right of the plaintiff to maintain this action is not challenged. The demurrer proceeds on the ground only that the complaint does not state facts sufficient to constitute a cause of action, and, on the argument, the whole subject of the legality of the scheme devised by the corporation for raising money has been brought up for judicial consideration. The general inquiry is, does the scheme adopted come under the condemnation of any statute, principle of law, or well-grounded dictate of public policy? It does not require much analyzing to ascertain that the pla.n objected to by the plaintiff is one which seeks to unite in a very ingenious manner investment with what is wonderfully like gambling, if it is not gambling pure and simple. There is nothing unlawful in the long term the bonds have to run, although they would be practically irredeemable if all were not to mature until after the expiration of 450 years. But it is perfectly obvious that the redemption feature is the real and only attraction connected with the scheme, and that the inducement" offered to purchase the bonds is the chance of holding lucky numbers, and receiving, on a determination to be made by lot, $1,000 for $100, possibly in six months or a year, or in one of the earlier semiannual drawings to be made by the mortgage trustee; or, in other words, that the holder of one bond may by mere chance get in six months what would not be realized on another in 450 years. That this scheme is a lottery—that to the mere decision of chance is to be left what bonds shall be retired at the enormous increase contemplated— is as plain as if the loudest proclamation were made of it. It is not at all likely that the whole or any considerable part of an issue of one hundred millions of dollars of bonds, in the denomination of one hundred dollars each, bearing interest at 4 or at 6 per cent., and having nearly five centuries to run, and with no other prop- * erty or security behind it at the date of issue than a mere mortgage on a franchise, would be marketable without some special inducement to purchasers; and that has been provided here. The redemption feature, which holds out the hope to a purchaser of speedily obtaining tenfold for his outlay, and, as it were, by the turn of a wheel or the casting of lots, is the real attraction. It defines the whole plan, stamping it with the character of a lottery, all the real qualities of which it possesses. The element of selecting bonds for redemption is not of itself an objectionable feature. It is the chance of winning at an early drawing 10 times the face value of a bond that constitutes illegality, if there is any illegality in the scheme. There are various definitions of the word “lottery” given in the books, no one of which includes each and every known or conceivable scheme that properly may be designated by the term. It would serve no useful purpose to refer to them here. Let it suffice that we are satisfied that the scheme of redemption of the bonds adopted by this corporation constitutes a “lottery,” in the popular as well as in the technical sense of the term, and that it is apparent that on that feature reliance is placed for finding a market for the bonds.

There is no rigid rule of law independent of legislation, nor do we know of any requirement of a universal public policy, which absolutely condemns the plan of this particular corporation for raising money by the sale of bonds secured by mortgage, although that plan does involve a feature of redemption at enormous increase by chance. Lotteries were once not only tolerated, but were authorized and regulated by law, in many countries and in states of this Union, and they exist and have recognition in at least two of such states to-day. They have been used in times past by civil governments, by ecclesiastical authorities, by academic and charitable institutions, to raise money for many of the most laudable and beneficent objects known among men. But the evils arising from the vice of gambling, of which they are a species, have induced most states to place them under the ban of the law, and to attach heavy penalties to the violation of statutes interdicting them. Such laws exist in the state of New York, and thefre are on the statute books of the United States enactments directly affecting the subject. We think the legality of the scheme under consideration must be determined-by legislation affecting it, and the question therefore arises, what law is applicable,—that of the state of New York or of the United States? It is earnestly urged in argument that the legality of the device under consideration must be determined by the law of the state of New York, and that, as the statutes of the state relative to lotteries have been explained and interpreted by the courts, it is free from any taint of illegality. We suppose that the claimed application of the law of New York is based upon the circumstance that the company is regarded by the plaintiffs as a domestic corporation. Undoubtedly, being created by the congress for the purpose of carrying out an object respecting which it had the exclusive power to legislate, if it were located in the state of New York alone, it would be a domestic corporation. The Code of Civil Procedure declares it to be so. Section 3343, subd. 18. But this corporation is located in two states, and therefore, possibly, it may not come under the designation of a domestic corporation. We do not decide that point, but, even if it were a domestic corporation, it does not follow therefrom that it possesses the same powers that corporations of a like kind chartered or organized by state authority have, or that it is to be regulated or controlled by the laws applicable to them. It derives its powers and faculties from the sovereign creating it, and from no other source, and is bound by whatever limitations, and is subjected to whatever disabilities, grow out of the laws of that, sovereign. Indeed, it is a familiar precept that every rule of law of the sovereign creating a corporation, and affecting the corporate rights and acts and business, is just as much a part of its being as if written in its charter; hence, in this case, then' being legislation of the congress which, by necessary relation, applies to this scheme, we do not consider it would be either desirable or profitable to trace the history of or critically examine the adjudications relating to lotteries in this state. The validity of the provisions of the proposed mortgage is not to be tested by outlaw, but by the effect to be given to a certain statute of the United States, and by that statute this scheme must be pronounced unlawful. By section 3894, Bev. St. U. S., it is made a misdemeanor, punishable with fine and imprisonment, for any person to use the mails for the purpose of sending by them a lottery ticket, or of circulating any newspaper, pamphlet, circular, or other publication of any kind containing any advertisement of any lottery or gift, enterprise, or prize scheme depending upon chance; and, as this statute has been construed in the case hereafter cited, it is entirely immaterial whether the lottery, etc., is considered elsewhere legal or illegal. This emphatic denunciation of lotteries, it is true, has taken but the one particular form and direction, but it is perhaps the only way in which the congress, with its exclusive power to regulate post offices and the postal service, could effectively and within its competency legislate upon the subject at all. But the necessary result of such an enactment is to bring schemes like that of this corporation under the condemnation of the law. We do not consider it necessary to elaborate the subject. It has been treated at large in the opinion of the court by Mr. Justice Blatchford in the Austrian Bond 'Case, (Horner v. U. S., 147 U. S. 449, 13 Sup. Ct. Rep. 409.) The language quoted in that case from Judge Blodgett in U. S. v. Zeisler, 30 Fed. Rep. 493, has a singular appropriateness, mutatis mutandis, to the case at bar:

“If these drawings determined only the time when the bonds would be paid, I should say that the mere determining of that time by lot or drawing would not give them the characteristics of a lottery; but when a city or a government, in order to make an inducement for people to buy their bonds, holds out large prizes to be drawn by chance or determined by lot in the manner in which prizes are usually determined in even an honestly conducted lottery, it seems to me it coimes clearly and distinctly within the inhibiting clause of the statute; * * * and hence it seems to me that the purpose of the scheme was not only to determine by lot when the bonds were to be paid, but also to determine certain extraordinary chances to the holders of the fortunate numbers drawn.”

In the present case, one of the “extraordinary chances” is that of a fortunate holder getting 450 years’ interest, at 2 per cent, in six months.

The judgment at special term is reversed, and judgment directed overruling the demurrer, and for the relief demanded in the complaint, with costs. All concur.