Case Name: PITTSBURG CARBON CO. v. McMILLIN
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1890-01
Citations: 24 Abb. N. Cas. 96
Docket Number: 
Parties: PITTSBURG CARBON CO. v. McMILLIN.
Judges: 
Reporter: Abbott's New Cases
Volume: 24
Pages: 96–104

Head Matter:
PITTSBURG CARBON CO. v. McMILLIN.
N. Y. Court of Appeals ;
January, 1890.
[Affirming 23 Abb. N. C. 298.]
rl. Receiver ; right to maintain an action upon an illegal contract of an insolvent corporation or individual.] While the general rule is. well established that a receiver takes the title of the corporation or individual whose receiver he is, and that any defence which would have been good against the former may be asserted' against the latter, yet, where there are innocent creditors, a receiver may, on their behalf, maintain an action upon an illegal contract of the corporation or individual, as the case may be, although the latter is precluded from maintaining the same by reason of standing in pari delicto.
2. Corporations; illegal combination; receiver enforcing contracts of member. ] Where several corporations combined under a trust agreement, the business thereafter being carried on by a trustee, and the net profits distributed among the several members of the-combination in a ratio fixed by contract, a receiver of such combination was permitted to maintain an action upon a contract entered into by one of the members and assumed by the trust, although such corporation, by reason of the illegal combination, would not itself be permitted to enforce such contract.
3. Estoppel; corporation, when not permitted to set up its own illegal agreement.] A member of such illegal combination, who carries-on business under it with third persons, is estopped from claiming that the receiver cannot enforce debts when due to the combination, because of its being illegal.
Appeal from a judgment entered upon a decision of the General Term affirming a judgment in favor of the defendant entered upon a decision.
In. March, 1887, the Pittsburg Carbon Co., and eight other carbon companies and makers, united in an agreement appointing one Hawks, the trustee, lessee and exclusive manager of all their works, and Hawks was succeeded in that position by one Dangler.
Before this combination, known as The United Carbon Companies, was formed, the Pittsburg Carbon Company had a contract to supply the Brush Electric Light Company of Buffalo with carbon. After the combination was formed, the Pittsburg Company, under the management of the trustee, continued to carry out the supply contract, and the trustee, at their request, made out bills for the supplies in terms payable to himself as trustee or agent. It afterward withdrew from the combination and sent bills for subsequent supplies in its own name.
Two of the companies in the combination thereafter brought suit in Ohio against the others, and a receiver appointed of all the property, etc., growing out of the contracts made by the companies with their manager and trustee, and of all the assets of the trusteeship.
The receiver, and the Pittsburg Company each sued the Brush Company for the price of the supplies, and the Brush Company was allowed to pay the sum into court, and be discharged, leaving the receiver of the trust and the Pittsburg Company to interplead.
The defendant succeeded upon the trial, and the judgment entered was affirmed by the General Term. From the judg ment of affirmance, this appeal is now taken by plaintiff.
G. 8. Grosser, for the appellant.
I. The trust contract was null and void and could not in any way be ratified. Nor can it be the foundation of a valid contract. There was no contract at all; only a conspiracy for wrong-doing, which is not enforceable, since the law cannot be invoked to defeat itself. This claim never in any legal sense became an asset of the trust or trustees (Bishop on Contracts, 469, 471, 473; Thorne v. Travelers’ Ins. Co., 80 Pa. St. 15 ; Shisler v. Vandike, 92 Pa. 447; Saratoga County Bank v. King, 44 N. Y. 87; Arnot v. Pittston Coal Co., 68 Id. 558 ; Stanton v. Allen, 5 Denio, 434).
II. The unlawful character of the trust agreement i& stamped upon the fact of it. But the appellant is not in pari delicto / its early withdrawal broke up the trust.
III. . There can be no estoppel against asserting the invalidity of the trust contract (Wheeler v. Wheeler, 5 Lans. 355; Langan v. Sankey, 55 Id. 52; Snyder v. Wyley, 33 Mich. 483; Stevens v. Wood, 127 Mass. 123; Bredin’s Appeal, 92 Pa. 241).
IV. The facts do not invoke the extraordinary remedy of estoppel. The essential elements of estoppel arc not found (Edmundson v. Thompson, 31 L. J. Ex. 207; Merrill v. Tobin, 30 Fed. Rep. 728, 743 ; Hamlin v. Sears, 82 N. Y. 333; Andrews v. Ætna Life Ins. Co., 85 Id. 334).
V. The receiver represents the trust combination with no better title to his claim than that of a voluntary assignee. His title is derived solely from the trust combination, with all previous equities and inequities attached thereto (Curtiss v. Leavitt, 15 N. Y. 9, 46, 254, 296; Cutting v. Damarel, 88 Id. 410, 418; Honegger v. Wettstein, 94 Id. 252, 260, Williams v. Babcock, 25 Barb. 100; McHarg v. Donelly, 27 Id. 100; Bell v. Shibley, 33 Id. 610; Receivers v. Paterson Gaslight Co., 3 Zab. 283, 292; Symes v. Hughes, L. R., 9 Eq. 474).
VI. The respondent’s position is not strengthened by urging the claims of the creditors, and by relying on their innocence. The burden was on these creditors of ascertaining the nature of the trust (Swan v. Produce Bank, 24 Hun, 577). The respondent by his pleading has elected to stand upon the validity of the trust contract. If this contention had been sustained it would not have given these creditors,as such, any claim against the plaintiff, or lien upon the trust estate. The trust agreement did not create a co-partnership relationship. The creditors dealt directly with, and extended credit to the trustee as principals (Smith v. Anderson, L. R., 15 Chan. Div. 247; Cary v. Gregory, 38 N. Y. Super. Ct. 126 ; Austin v. Munroe, 47 N. Y. 360 ; New v. Nicholl, 73 Id. 130 ; Storrs v. Flint, 46 Super. Ct. 498).
VII. The appellant’s right to recover this fund antedates the trust contract, and is clear of all its taint. The respondent to succeed must plant himself squarely upon the trust contract and secure the aid of the court to enforce the same. This is, beside, the purpose of equity (Keene v. Kent, 4 N. Y. St. R. 429; Steers v. Lashly, 6 Term Rep. 61; Thompson v. Thompson, 7 Vesey, 470 ; Morris Run Coal Co. v. Barclay Coal Co. 68 Pa. 173, 188).
Ansley Wilcox, for the respondent.
I. The appellant cannot set up the illegality of its own contract as against the receiver who represents, not only itself and the other parties to the contract, but bona fide creditors. The receiver represents primarily the creditors of an insolvent. For this reason he is allowed to disaffirm the illegal contracts of the insolvent, and recover its assets wherever its creditors might ■do so. This is expressly provided in chapter 314 of the Laws of 1858, and the practice is regulated by rules 78 and 79 of the General Rules of Practice (Attorney-General v. Guardian Mutual Life Ins. Co., 77 N. Y. 272; Talmage v. Pell, 7 Id. 328; Farmer’s & Mechanic’s Bank v. Jenks, 7 Metc. 592; Honegger v. Wettstein, 47 Super. Ct. [J. & S.] 125 ; Alexander v. Rolfe, 74 Mo. 516). The plaintiff cannot take advantage of the illegality of its own acts to defeat the rights of creditors, whether in a suit brought directly by them, or by a receiver as their representative. “No man can take advantage of his own wrong ” (Litchfield Bank v. Church, 29 Conn. 150). This combination bears a resemblance to a partnership. It is obvious that members of a partnership cannot set up as against a bona fide creditor the fact that the partnership was formed for an illegal purpose (Adams v. Creditors, 14 La. 461; Kinsman v. Parkhurst, 18 How. U. S. 293). A corporation cannot set up illegality in its incorporation to defeat the claim of creditors (Morawetz on Corp. § 750 et seq.). Even in cases between the parties themselves to the illegal agreement, where new rights have sprung up which do not involve the enforcement of the unlawful agreement itself, courts have refused to allow the parties to defeat such rights by going back to the unlawful agreement (Keene v. Kent, 7 St. Rep. 229 ; Brooks v. Martin, 2 Wall, 70; Marsh v. Russell, 66 N. Y. 288, 294 Cent. Trust Co. v. Ohio Cent. R. R. Co., 23 Fed. Rep. 306).
II. In general, a receiver takes merely the rights of the corporation, and on that basis only can he litigate for the-benefit of stockholders or creditors. This doctrine applies solely to litigations between the receiver of a corporation and third persons, in which he attempts to assert rights-growing out of equities inherent in stockholders or creditors. But here the receiver is not asserting rights against third persons on such a gi'ound ; but he is asserting against one of the very parties to the combination contract, the equitable-rights of the creditors of the combination to have its assets collected and administered for their benefit, notwithstanding-the unlawfulness of the combination.

Opinion:
Andrews, J.
The finding that the contract of March 1, 1887, between the plaintiff and Edward C. Hawks as-trustee for the plaintiff, and other carbon companies, was made for unlawful purposes and was illegal, was not excepted to and is to be taken an incontrovertable fact on this appeal. The ground of illegality is not expressly stated, but it is clearly to be inferred from the other findings- and the opinion of the trial court that the contract was held' to be illegal for the reason that it was entered into in furtherance of an unlawful combination between the plaintiff and other carbon companies in restraint of trade. The scheme-of the parties to the combination was to vest in a common-trustee the management and control of the business of manufacturing and selling carbons for electric lighting theretofore carried on separately by the companies forming the-combination. To this end the. several companies were to lease to the trustee their respective factories and to operate-them under the direction of the trustee, who was to designate the kind of goods to be manufactured, fix the prices at which and the persons to whom they should be sold, purchase all materials and supplies, collect the bills, and pay out of the common fund the cost of production, and divide the net proceeds and profits of the business between the several parties to the combination in a ratio fixed by the contracts of the respective companies with the trustee.
The plaintiff, when the contract of March 1, 1887, was made, had an outstanding" contract to furnish carbons to the Brush Electric Light Company from time to time, and in its contract with the trustee the plaintiff assigned to him all existing contracts, and the trustee assumed their performance.
The sum in controversy in this action has been paid into court by the Brush Electric Light Company, being the purchase price of carbons manufactured and delivered to that company in April, May and June, 1887. These carbons were manufactured at the plaintiff's factory, but were billed in the name of the trustee, and delivered in performance of the contract between the plaintiff and the Brush Electric Light Company, which the trustee had assumed. In or about July, 1887, the plaintiff refused to continue any longer in the combination. Thereupon an action was commenced in the court of common pleas for Cuyahoga county, in the state of Ohio, the headquarters of the combination, by some of the members of the combination, against the plaintiff and other members thereof, to dissolve and wind up its affairs, and the proceedings resulted in the appointment of the present defendant as receiver of the property and assets of the trusteeship, with power, among other things, to take possession thereof, to collect the assets and pay and adjust claims arising out of the business. Ho question is made on this appeal as to the jurisdiction of the Ohio court to entertain the proceeding, and make the order appointing the receiver, and it is found that the receiver duly qualified and entered upon the discharge of his duties. It is also found that at the time of the appointment of the receiver the trust was insolvent and that all the assets of the trust business, including the claim against the Brush Electric Light Company, are insufficient to pay its creditors.
The plaintiff stands in the attitude of a party to an illegal contract, claiming a fund which if the contract was valid would clearly belong to the trust combination, and not to the plaintiff as one of its members. The plaintiff has no standing to claim the fund in opposition to the clear import of the trust agreement, unless its repudiation of the contract in July, 1887, made the plaintiff the vendor of the carbons delivered to the Brush Electric Light Company, during the time the plaintiff remained a party to- the combination. The carbons it is true were delivered in performance of the plaintiff's agreement made before the combination was formed. But the trustee assumed performance by contract with the plaintiff, and the Brush Electric Light Company accepted performance by him. To permit the plaintiff to treat the debt as a debt owing to it, and not to the trustee, would be permitting the plaintiff to escape from the operation of the rule which denies relief to a party to an illegal transaction. The plaintiff had a right to repudiate the contract of March 1, 1887. Its stipulations could not have been enforced against the plaintiff. The plaintiff, notwithstanding the contract, could have sold its carbons to the Brush Electric Light Company on its own account, and received pay for them. But it did not do so. The agreement of March 1, 1887, was carried out in part. The carbons were manufactured by and for the trustee representing the combination, and were delivered to the purchaser as the property of the trust, by the consent, of the plaintiff, and the purchaser became the debtor of the trust, and not of the plaintiff. The repudiation of the trust agreement by the plaintiff after this transaction did not purge its previous participation in the illegal scheme. If the Brush Company had not voluntarily paid the fund into court, it would be a grave-question whether the plaintiff could have enforced a recovery against that company, although there was no adverse claim ant (See DeWitt v. Brisbane, 16 N. Y. 340 ; Johnson v. Bush, 3 Barb. Ch. 207; Talmadge v. Pell, 8 N. Y. [3 Seld.] 328). But as between the plaintiff and the receiver of the trust combination, the latter is we think clearly entitled to the fund. It is claimed that no action could have been maintained by the trustee representing the trust combination against the Brush Electric Light Company, to recover the purchase price of the carbons, for the reason that the illegality of the combination would have constituted a good defense. Assuming this predicate, it is then asserted that the receiver stands in the same position, and his title is subject to the same infirmity as that of the combination which he represents. Without considering the assumption upon which this proposition is based, it is a sufficient answer to the proposition asserted that the receiver unites in himself not only the right of the trust combination, but the right of the creditors, and that he may assert a claim as representing creditors, which he might be unable to assert as a representative of the combination merely. The general rule is well established that a receiver takes the title of the corporation or individual whose receiver he is, and that any defense which would have been good against the former, maf be asserted against the latter. But there is a well recognized exception which permits a receiver of an insolvent individual or corporation, in the interest of creditors, to disaffirm dealings of the debtor in fraud of their rights (Gillet v. Moody, 3 N. Y. 479 ; Porter v. Williams, 9 Id. 142; Curtis v. Leavitt, 15 Id. 9,108). Assuming that the trustee could not have recovered of the Brush Electric Light Company for the reasons suggested, it would be a very strange application of the doctrine that no right of action can spring from an illegal transaction, which should deny to innocent creditors of the combination, or to the receiver who represents them, the right to have the debt collected and applied in satisfaction of their claim. The just rule of 'the common law, that the courts will not lend their aid to enforce illegal transactions at the instance of a party to the illegality, would be misapplied if permitted to be used to prevent the recovery and application of the fruits of the transaction for the payment of honest creditors.
We think the judgment is right, and it should therefore be affirmed.
• All the judges concurred.