Case Name: Republican Art Printery, Inc., Respondent, v. Sarah L. F. David, as Executrix, etc., of Charles F. David, Deceased, Appellant
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1916-06-30
Citations: 173 A.D. 726
Docket Number: 
Parties: Republican Art Printery, Inc., Respondent, v. Sarah L. F. David, as Executrix, etc., of Charles F. David, Deceased, Appellant.
Judges: 
Reporter: Appellate Division Reports
Volume: 173
Pages: 726–734

Head Matter:
Republican Art Printery, Inc., Respondent, v. Sarah L. F. David, as Executrix, etc., of Charles F. David, Deceased, Appellant.
Third Department,
June 30, 1916.
Corporations—execution of promissory notes and chattel mortgage without authority — rights of third person holding said notes and mortgage — when not bona fide purchaser for value —use of assets of corporation to pay individual debts of stockholder.
Where the owner of all the capital stock of a corporation transfers the same, the transferee partially paying therefor in cash and subsequently delivering the promissory notes of the corporation secured by a chattel mortgage executed by it in final payment, a third person who, becoming owner of the promissory notes and chattel mortgage and 'having sufficient knowledge of the situation to lead him to make inquiry, accepts the statement of the president of the corporation that the notes are valid, assumes the risk of the statement being true, and wheré it appears from the records of the corporation that there was never a legal meeting of the board of directors authorizing the notes and chattel mortgage, the holder of the notes is not a tona fide purchaser for value, and the corporation is entitled to have them set aside and the chattel mortgage canceled.
An individual has no right to make use of a corporation owned by himself to pay his individual debts. Such a disposition of the assetsof a corporation is not only ultra vires but forbidden by statute.
Kellogg, P. J., dissented, with opinion. •
Appeal by the defendant, Sarah L. F. David, as executrix, from a judgment of the'Supreme Court in favor of the plain tiff, entered in the office of the clerk of the county of Columbia on the 8th day of February, 1916, upon the decision of the court after a trial at the Columbia Trial Term before the court without a jury.
The defendant Charles F. David died after the appeal herein was taken, and Sarah L. F. David, as executrix, etc., was, by order of the court, substituted as defendant.
William B. Daley, for the appellant.
Ainsworth, Carlisle & Sullivan [John N. Carlisle of counsel], for the respondent.

Opinion:
Woodward, J.:
The plaintiff is a corporation organized and doing business under the laws of the State of New York, and brings this action to set aside and cancel of record a certain chattel mortgage, with certain promissory notes, on the ground that such chattel mortgage and notes were the result of fraud practiced upon the plaintiff. The transaction out of which this controversy grows was substantially this: One Arthur H. Labaree undertook to purchase substantially all of the stock of the plaintiff from James D. P. Wingate on or about the 11th day of September, 1914, paying partially for such property in cash and subsequently delivering to the said Wingate the promissory notes of the plaintiff for $4,000, secured by the chattel mortgage involved in this controversy, in final payment of the purchase price of the said stock. Labaree appears to have held a meeting of the stockholders of the corporation and to have adopted a resolution authorizing and directing the execution and delivery of the notes in question, together with the chattel mortgage. Later a third person, the defendant in this action, became the owner and holder of the said promissory notes and the chattel mortgage, and the plaintiff, a portion of whose stock is now owned by third persons, brings this action to set aside the notes remaining unpaid, and to be relieved from the chattel mortgage. The learned trial court has found the facts necessary to sustain the judgment in favor of the plaintiff, and the defendant appeals from the judgment.
There can be no question^ of course,, that there was no con sideration for the notes moving to the corporation; they were given to pay the individual debt of Arthur H. Labaree, and the mere fact that he was the owner of practically all of the stock of the corporation did not authorize the corporation to assume his indebtedness. The corporation could not purchase itself, and it could not assume the obligation of paying for the property which was to vest in Arthur H. Labaree. This does not appear to be questioned seriously, but it is contended in behalf of the appellant that the notes and the collateral,' having passed into the hands of a third person, the plaintiff has no right to the relief which has been granted. It is suggested, it is true, that the notes having been issued by authority of the corporation, and with the consent of all the stockholders, at the time they were issued, neither the stockholders nor the corporation are in a position to contest their validity, and Kent v. Quicksilver Mining Company (78 N. Y. 159) and Skinner v. Smith (134 id. 240) are cited as authority for the proposition. That there are cases in which the courts will not interfere is undoubtedly true but we fail to find any cases which recognize the right of an individual to make use of a corporation, owned by himself, to pay his individual debts. Indeed, such a disposition of the assets of the corporation is forbidden by statute. Section 10 of the General Corporation Law (Consol. Laws, chap. 23; Laws of 1909, chap. 28) provides specifically that "no corporation shall possess or exercise any corporate powers not given by law, or not necessary to the exercise of the powers so given," and we look in vain for any authority on the part of any corporation to use its money or credit in discharging the individual obligations of its stockholders. (See Stock Corp. Law [Consol. Laws, chap. 59; Laws of 1909, chap. 61], § 29.) An act forbidden by statute is void, and a void act is no act. (Village of Fort Edward v. Fish, 156 N. Y. 363, 374.) Neither party was bound by the act. It was not void simply as ultra vires, but as a forbidden act. The defendant was obliged, at his peril, to inquire into the authority of the board of directors to make the resolution of authorization and was bound to notice the limitation of their powers. (Village of Fort Edward v. Fish, supra, 371.) This distinction is clearly recognized in the case of Kent v. Quicksilver Mining Company (supra), cited by the defendant. An act forbidden by law is not merely ultra vires; it is void ab initio. (Village of Fort Edward v. Fish, supra, 373.) It has, in law, no existence, and the defendant in merely going to Chatham and ascertaining that a resolution in form had been adopted, did not place himself in the position of a bona fide holder of the note for value. It was said in Wilson v. M. E. R. Co. (120 N. Y. 145, 153) that "if the plaintiff had relied upon a statement by one of the officers, that a resolution had been passed, authorizing the issue of the notes, he would have assumed, necessarily, the risk of the statement being true. If true, it would protect him. Otherwise not. He stands in no different position because he did not first inquire. In either event, he would assume only the risk of proving the authorization by resolution," but this was said in relation to the facts as they appeared in that case, and not with reference to a resolution which was void in its very inception. In the Wilson Case {supra) one Kneeland had been the president of the company, and the board of directors had adopted a resolution to pay him a salary of $25,000 per year dating back to the time of his original election, although no duties were attached to the office, and no salary had been provided at the time of his election (M. E. R. Co. v. Kneeland, 120 N. Y. 134, 135), and subsequently a resolution was adopted that "the president be and he is authorized to use the credit of the company by issuing and negotiating its notes, or otherwise, for paying the salary of the said president " (M. E. R. Co. v. Kneeland, supra), and the court in Wilson v. M. E. R. Co. (supra) say that " that resolution recited the existence of an indebtedness to the president for salary, and expressly authorized the issue of notes in the amount thereof, 'to be signed by the president, and countersigned by the treasurer in the usual way and form.' It furnished information, therefore, that Kneeland was using the notes in the manner expressly authorized. It constituted an appearance of authority upon which a purchaser, for value, could safely rely. True, the resolution recited that the notes were to be issued to pay Kneeland, president, a salary, but it did nob pretend to give or fix a salary. It asserted an indebtedness for salary, and one dealing with a railroad corpo ration wMch has a right to pay its president a salary, and ordinarily does, is not hound to go behind such an assertion as was made by the defendant's directors, for the purpose of ascertaining whether the salary is legally payable. A different rule would be impracticable- and would substantially incapacitate third persons from taking the paper of, or contracting with corporations."
That decision, and the others upon which the appellant relies, were made at a time.when it was provided merely that "In addition to the powers herein enumerated, and those expressly given in the law under which it is or shall be incorporated, no corporation shall possess or exercise any corporate powers except such as shall be necessary to the exercise of the powers so enumerated and given " (1 R. S. 600, § 3, as revised by Gen. Oorp. Law [Gen. Laws, chap. 35; Laws of 1890, chap. 563], § 9), which obviously referred to implied powers, as shown by the subheading in the statute, and was not a positive inhibition upon the powers of corporations as at present found in the General Corporation Law (§ 10). Moreover, the meeting at which the resolution was adopted pretending to authorize this illegal disposition of the assets of the corporation (M. E. R. Co. v. Kneeland, supra, 143) was not a meeting of the board of directors, but was declared to be "a joint special meeting of the stockholders and directors of the Republican Art Printery, Inc.," and the records of this meeting show that there was "present Arthur H. Laharee, representing 148 shares of capital stock in the company and Henry J. Granee, representing one share of the stock of the company," while the third director was not present, and there is no evidence that she had any notice of this alleged joint special meeting of the stockholders and directors. It is true that the minutes in evidence assert that "Henry J. Crance presented a waiver of notice of the meeting signed by all the directors and stockholders of the company, which on motion duly seconded and carried was ordered spread upon the minutes of the meeting," but the evidence shows that the only waiver was for the meeting held at the office of the attorney on the 14th day of September, 1914, at one-thirty P. m., while the resolution of authorization was adopted at a meeting subsequently held at the same office at two p. M., and this alleged waiver was signed by James D. P. Wingate, who at the time of this later meeting was not a stockholder or director, or having any interest whatever in the corporation.
Section 34 of the General Corporation Law provides that " the affairs of every corporation shall be managed by its board of directors," and that "unless otherwise provided a majority of the board of directors of a corporation at a meeting duly assembled shall be necessary to constitute a quorum for the transaction of business and the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors," but it is necessary that the meeting shall be duly—lawfully — assembled, and this requires that each director shall have notice of the meeting, or shall duly waive such notice. The waiver presented by the record, as we have seen, was not of the meeting held at two o'clock, but of the meeting held at one-thirty of the same day, and it was not until after the holding of the first meeting at one-thirty of September 14, 1914, that M. IP. Labaree (the mother of Arthur H. Labaree) became a director. It likewise appears from the alleged waiver in evidence that the waiver was of notice to the stockholders, and not of the members of the board of directors, so that there is an entire absence of evidence to show that there was ever a legal meeting of the board of directors of the Republican Art Printery, Inc., and these facts would have appeared to any one making an examination of the records of the corporation. The defendant admits a situation which prompted him to make inquiries; he traveled from Boston to Chatham to find out whether the notes were good, and he accepted the statement of Arthur H. Labaree, the president of the corporation, that the notes were valid, but he assumed the risk of the statement being true, and the statement not being true, he is not protected. (Wilson v. M. E. R. Co., 120 N. Y. 145, 153.) Not only did the corporation have no right to pass the resolution giving away the property of the corporation to meet the individual obligations of the president (M. E. R. Co. v. Kneeland, 120 N. Y. 134, 143), but the evidence fails to show that a legal meeting of the board of directors was held on the day on which -the resolution purports to have been passed, and we are of the opinion that the defendant in this action is not a bona fide purchaser for value, and that he must be deemed to have taken the risk of the resolution of authorization having been duly adopted.
The judgment appealed from should be affirmed, with costs.
All concurred, except Kellogg, P. J., who dissented, in opinion.