Case Name: Hapgoods, Appellant, v. R. Moffat Lusch, Respondent
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1907-12-06
Citations: 123 A.D. 23
Docket Number: No. 1
Parties: Hapgoods, Appellant, v. R. Moffat Lusch, Respondent.
Judges: 
Reporter: Appellate Division Reports
Volume: 123
Pages: 23–26

Head Matter:
Hapgoods, Appellant, v. R. Moffat Lusch, Respondent.
(No. 1.)
Second Department,
December 6, 1907.
Corporation — payment of stock subscription by promissory note — consideration illegal — entire contract — effect of illegality of part- of consideration.
The giving of a promissory note for the purchase price of an original issue of stock is not equivalent to the cash payment of ten per cent required by section 41 of the Stock Corporation Law, and. in an action by the corporation to recover against the maker on his failure to pay, a verdict for the defendant should be directed.
A failure to pay ten per cent cash upon an original stock subscription, as required by section 41 of the Stock Corporation Law, makes the subscription invalid and not binding upon the subscriber, for in this State the statute governs such contract, not common-law principles.
When a contract is entire an illegality as to part of the consideration renders the whole void. Hence, although a contract, in consideration of which the defendant gave his promissory note in payment for an original issue of preferred stock, also provided for the employment of the defendant at a salary and a percentage of profits and entitled him to a bonus of a hundred per cent of the common stock, there.can be no recovery on the note, such contract being entire and part of the consideration illegal.
Discretion of trial court in granting extra allowance affirmed.
Hooker, J., dissented as to extra allowance.
Appeal by the plaintiff, Hapgoods, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of Kings on the 4th day of December, 1906, upon the verdict of a jury rendered by direction of the court, and also from an order entered in said clerk’s office on the lltli day of December, 1906, denying the plaintiff’s motion for a new trial made upon the minutes and granting the defendant an extra allowance.
W. C. Reddy [H. B. Bradbury with him on the brief], for the appellant.
Theophilus Parsons, for the respondent.

Opinion:
Jenks, J.:
The appeal is by the plaintiff. The action is upon defendant's promissory note, which reads :
" $2,500. New York, Oct. 'Ylth, 1904.
" On Not. 1st, after date, I promise to pay to the order of Hap-goods, Ine., Twenty-five hundred dollars at their- office, for 25 shares Hapgoods, Inc., stock. Yalue received.
" R M. LUSOPI."
When it appeared on the trial that the note was given in payment of an original issue of stock in the plaintiff corporation, made to the defendant after the corporation was formed, and that the defendant had not paid in ten per cent cash, the court directed a verdict for the defendant. (See Stock Corp. Law, .§ 41. )
In this State statutes, not common-law principles, regulate contracts for shareholding in corporations. (General Electric Co. v. Wightman, 3 App. Div. 118, 123.) In this State it is settled that the omission to obey a statutory requirement of a payment in cash upon a subscription makes the subscription invalid and hot binding upon the subscriber. (New York & Oswego M. R. R. Co. v. Van Horn, 57 N. Y. 473; Cook Corp. [5th ed.] § 174; South Buffalo Natural Gas Co. v. Bain, 9 Misc. Rep. 425, citing authorities.) The giving, of the note was not the equivalént, of a- cash payment of ten per cent. In Excelsior Grain Binder Co. v. Stayner (25 Hun, 91) and in Durant v. Abendroth (69 N. Y. 148) the reasoning which, rejected checks as equivalent to cash is applicable to- notes as well. Such á transaction is not a payment, but á promise. It is contended by the learned counsel for the appellant that Ogdensburgh, etc., R. R. Co. v. Wolley (1 Keyes, 118; S. C., 3 Abb. Ct. App. Dec. 398) is authority which renders it " doubtful whether or not the note would have-been void." That case was cited to the Commission of Appeals by the appellant in New York & Oswego M. R. R. Co. v. Van Horn (supra). It was to recover upon installments due upon a stock subscription. Originally the defendant had given, his note for the ten per cent cash requirement. Afterwards the defendant gave two notes for a sum including the ten per cent, and the original note was surrendered. The notes were negotiated "and then put in judgment, which was Satisfied. The defense to the action on the installments was the non-paynient of the ten per.cent in cash. The. court held that as the corporation had actually received the ten per cent in cash, and as the defendant thereupon became a stockholder, he could not repudiate that relation and his consequent liability for the balance due upon his stock when action was brought subsequent to the realization upon the notes. But that judgment is not an authority upon the proposition that such a subscriber who does not pay ten per cent cash is nevertheless liable upon his subscription.
It was admitted that the note was made " pursuant to the terms of •the agreement executed by the plaintiff and defendant on September 27,1904. The agreement recited that whereas the plaintiff desired the defendant to work for it, and the defendant desired to, work for it, in consideration of the premises and in further consideration hereinafter mentioned, it was mutually agreed, etc. The plaintiff agreed to give such employment and to pay the defendant $125 a month, and the additional sum of ten per cent of the net profits of the New York office. The agreement also provided : " It is further agreed by the party of the first part that in consideration of and in part payment for the services rendered by the party of the second part that the stock purchased as above by the party of the second part shall entitle said party of the second part to a bonus of 100 per cent of common stock to be delivered by Herbert J. Hapgood, of which 50 per cent shall be delivered at the time the preferred stock is paid for in cash, and 50 per cent one year from date of this contract, providing the party of the second part is employed with Hapgoods at that time." The appellant urges that inasmuch as pursuant to the agreement the stock was to be delivered by Herbert J. Hap-good, not the plaintiff, which stock had been already issued, " this alone was sufficient to prevent the note from being void." But the stock for which the note was given is referred to in the undertaking of defendant in that contract which reads as follows: " To subscribe for and pay for 50 shares of the preferred stock of Hapgoods at $100 per share, par value; 25 shares to be paid for by his certain promissory note given this day and due November 1, 1904. The balance of the 25 shares to be paid for on or before December 31, 1904." It was admitted that the note was made pursuant to -the contract. It appears then that the stock which was to be delivered by Herbert Hapgood was a bonus .of common stock, not the stock in question, and moreover that it was " in consideration of and in part payment for the services." The stock, in question is that referred to in the undertaking of the defendant quoted supra, and the express terms of its sale are that twenty-five shares thereof are " to be paid for by his (the defendant's) certain promissory note given this day and due HoVember 1,1904." And the note expressly reads that it is given for such stock. The transaction between the parties then was this: The plaintiff employed the defendant for a term at a fixed salary and a percentage: The defendant purchased certain preferred stock to be paid for by the note in question. Plaintiff agreed, in consideration and in part payment of services, that the preferred stock so purchased should entitle the defendant to a bonus of 100 per cent of the common stock to be delivered by Herbert J. Hapgood, who the record shows was its president. I fail to see how that bonus changes- the character of the sale and purchase of the preferred stock, which admittedly was to- be paid for by the note in suit. But assuming that the -agreement for the bonus and for employment did constitute part bf the consideration for the note in suit, yét the contract being entire, another part of such consideration is'the issuance of twenty-five shares of the-preferred stock. How it is enough to defeat the plaintiff if part of the consideration ivas illegal and void. (Crawford v. Morrell, 8 Johns. 253; Saratoga County Bank v. King, 44 N. Y. 87; Barton v. Port Jackson & Union Falls Plank Road Co., 17 Barb. 397, 406, 407; Joyce Def. Com. Paper, 367, note.)
The question of the additional allowance was largely to he determined by the trial court, and J cannot say that the exercise of its discretion was 'sb unwise as to justify any-interference on our part.
The judgment should be affirmed, with costs.
Woodward and Miller, JJ., concurred; Hooker, J., voted to modify -the order by striking out the provision granting extra allowance; Hirsohberg-, P. J., not voting.
Judgment and order affirmed, with costs. r
See Laws of 1892, chap. 688, $ 41.— [Rep.