Case Name: THE A. C. NELLIS COMPANY, Appellant, v. ARTHUR C. NELLIS, Respondent
Court: New York Supreme Court, General Term
Jurisdiction: New York
Decision Date: 1891-11
Citations: 69 N.Y. Sup. Ct. 63
Docket Number: 
Parties: THE A. C. NELLIS COMPANY, Appellant, v. ARTHUR C. NELLIS, Respondent.
Judges: 
Reporter: Supreme Court Reports (Hun)
Volume: 69
Pages: 63–74

Head Matter:
THE A. C. NELLIS COMPANY, Appellant, v. ARTHUR C. NELLIS, Respondent.
Estoppel■ — -loan, forbidden by statute, made by a corporation to a stockholder — sale of collaterals not an estoppel or ratification — not inconsistent with an action for conversion — Laws of 1848, chap. 40, sec. 14.
The president, who was a stockholder and practically controlled the management of a corporation, organized under chapter 40 of the Laws of 1818, induced the treasurer of the company to loan to him, upon liis notes secured by the pledge of his stock in that company as collateral thereto, moneys belonging to the corporation, in excess of the value of the stock so pledged. The treasurer of the corporation had been authorized by.the board of trustees thereof to loan its surplus moneys to its advantage, raking good and sufficient security for such loans.
By section 14 of the act of 1848 the corporation was forbidden to loan its money to a stockholder thereof; and subsequently to this loan having been made to the president, who was a stockholder of the company, the loan was called in and the stock pledged as collateral thereto was sold, the amount realized therefrom representing less than fifteen per cent of the amount of the loan.
In an action brought by the company against its president to recover the amount of such loans, less the amount obtained, by the sale of the stock, it was alleged in the complaint that he had illegally converted to his own use the moneys which had been so loaned to him:
Held, that the loan was illegal, being forbidden by the statute. '
That what the trustees could not lawfully do they could not subsequently ratify.
That their sale of the hypothecated stock, made to reduce their loss resulting from the defendant’s unlawful conversion of their property, was not a ratification of the loan and that it did not estop them from suing for such conversion.
That the trustees were not bound to restore the stock before action, for the defendant was, in any event, bound to return the money of the company whether he had obtained it in defiance of the statute or as an ordinary borrower.
That such sale of the stock had not injured the defendant or altered the position of the parties, and that the company had not thereby elected to adopt a remedy inconsistent with the present action. (Mayham, J., dissenting.)
Appeal by the plaintiff, tlie A. C. Nellis Company, from a judgment, entered in tlie office of tlie clerk of tlie comity of Montgomery on the 24th day of February, 1891, dismissing tlie complaint, witli costs, after a trial at tlie Montgomery Circuit before tlie court and a jury.
This action was prosecuted to recover ten thousand dollars ($10,000) for the alleged wrongful conversion by the defendant of certain moneys belonging to the plaintiff.
The complaint alleged the incorporation of the plaintiff, under the act authorizing the formation of corporations for manufacturing, mining, mechanical and chemical purposes, and that the defendant was a trustee and stockholder in such corporation, and charged that, in violation of his duty as such trustee and stockholder, and without lawful authority therefor, the defendant took, received, fraudulently misapplied and converted to his own use tlie money of the plaintiff, in the aggregate to tlie amount of $7,150.
Tlie answer admits the existence of tire corporation, and that defendant was a trustee and stockholder in the same, and alleges that the plaintiff loaned tlie money specified in the complaint to the defendant, took and held his notes for the same, with 1,200 shares of stock in the company belonging to the defendant as collateral to such loan, and that the defendant had paid the interest' and part of the principal on such loan, and that before the commencement of the action plaintiff had called such loan and advertised and sold the stock held as collateral to such, loan, and had received and retained the proceeds of the sums realized on such sale.
The evidence disclosed that the defendant had held a majority of all of the stock of the company, and was, at the time of the alleged taking of the money, the president of the company and a member of the board of trustees. That before the receipt of the money by the defendant the board of trustees, by resolution, authorized the treasurer to loan the moneys of the corporation held in bank on good security. This resolution was passed July 23, 1886, and the treasurer of the corporation thereafter, and on or prior to July 21, 1886, loaned to the defendant $6,000, taking his note, dated on that day, payable on demand, and on return of the collaterals, and at the same time received as collateral to such loan 1,000 shares of the capital stock of this company; and on the nineteenth day of August the treasurer, upon a like note and 200 shares of the capital stock as collateral thereto, made another loan to the defendant of $1,150. The money was drawn by the defendant on the check of the treasurer for the amount of these loans. For the conversion of the money represented by these transactions this action was brought. Upon these undisputed facts the trial judge dismissed the complaint.
Bacon, Leeds do Van Steenbior’gh, for the appellant.
Wilmot d¡ Gage, Z. 8. Wesibrooje and II V. Borst, for the respondent.

Opinion:
Learned, P. J.:
This is an appeal by plaintiff from a judgment dismissing the complaint before the conclusion of the plaintiff's testimony. The plaintiff is a corporation, under the act of 1818, for carrying on the seed business; capital, $50,000, divided into 2,000 shares, twenty-five dollars each. The defendant originally had 1,200 shares. The biddings were destroyed by fire in June, 1886, and about $23,000 was received in cash from the insurance thereon before the annual meeting in July, 1886.
There was evidence that prior to this meeting the defendant had agreed to make one ILowland and, one Dunning trustees, and to. make Howland treasurer at a salary of $7,000; that Howland was. to lend money to defendant, " and fix it in such a way that it would not be visible on the books and still appear to be all legal." At this meeting defendant stated that he liad been obliged to raise; money and had sold some stock to Howland and Dunning on condition tlTat they should be made trustees. This was done. The business was moved to New York, and from that time defendant was the active manager, or, as the trustees said, "he was the company in effect."- At a meeting of the trustees in New York, July 23,1886> defendant was present, and was elected president; Howland, treasurer. It was voted : " There being a larger cash balance in the bank than will be required to be used in the business for a long time, resolved, that the treasurer be authorized to loan such surplus as in .his judgment is to the advantage of the company, taking good and .sufficient collateral security for the amount so loaned." Howland, as treasurer, gave defendant checks of the company as follows : July twenty-fourth, $2,000; July twenty-eighth, $1,000; August fourth, •$3,000; August nineteenth, $1,150. These checks were drawn to order of cash. The stub was marked " on account of loan; " the name of the borrower not given. On the books the amounts are charged to cash for bills receivable, from whom is not stated. July 21, 1886, defendant made his note to plaintiff's order for $6,000, stating that there was deposited as collateral 1,000 shares of the stock of the company. August 19, 1886, he gave another similar note for $1,150, reciting the deposit as collateral of 200 shares of the same. This is all the stock defendant had ever held. 'There are other circumstances tending to characterize the transactions as fraudulent.' This pretended loan to defendant was plainly not authorized by the vote of the board. This was not a loan on good and sufficient security ; and defendant must have known this, as is evidenced by the concealment of the transaction- and other proof. In April, 1889, some of the stockholders having heard of these transactions had an interview with defendant, in which he admitted the transactions and produced the notes from an iron box in the safe, which was locked, and to which he only ' had a key. In June, 1889, a meeting of the trustees was held, at which defendant and Howland were present. It was, " liesolved, That the treasurer of this company be directed to call the loan made to A. C. Nellis, and solicit cash offers for the hypothecated stock and to report to the next meeting." Pursuant thereto the stock was sold at auction and brought about $520, which went into the treasury.
This action is brought to recover the money received by defendant on the ground that it was unlawfully converted. The learned justice dismissed the complaint on the ground that by foreclosing and selling the hypothecated stock the plaintiff had satisfied the loan and could not now claim that the transaction was illegal The 'defendant claims, as we understand, tliat if the plaintiff would recover against the defendant for the wrongful taking of its money, it must first surrender to him the security which lie gave for the money thus wrongfully taken; that when one, under the pretense of borrowing, obtains by fraud money from, another, and pledges security therefor, the lender cannot keep the security and enforce it and recover for the fraud.
"We do not know whether the defendant would insist that if no security had been given, and if he had afterwards made a payment on his note, the reception of the money so paid would have prevented a recovery for, the fraud. If a thief steals money, and afterwards returns a part, does the acceptance of that part prevent a suit for the conversion ? There can be little doubt that this money was wrongfully taken. The statute forbids a loan to a stockholder. (Laws of 1848, § 14, chap. 40.) The fact that there is, by that section, a special liability of the officers to creditors does not take away the prohibition. And the facts of this case are sufficient to satisfy a jury that the transaction was a fraudulent conversion. Indeed, this was not denied on the nonsuit.
It is not disputed that the trustees who voted at the meeting of June, 1889, knew then of the original .transaction, and knew that the stock was by defendant attached to his notes as collateral t'hereto; and the question is whether selling that stock estops the company from treating defendant's acts as a conversion. It is plain that a board of trustees cannot ratify an act which they could not lawfully do in the first instance. The statute says: "No loan of money shall be made by any such company to any stockholder therein." The principal object of that provision is to prevent a Reducing of the capital under cover of loans to stockholders. It is intended for the protection of creditors. Now, if Howland, the treasurer, was forbidden to make these loans to defendant, so were the trustees. But that which they are, by the statute, forbidden to do they cannot ratify after it has been done. If any authority is needed for this, see Peterson v. Mayor (17 N. Y., 449); Brady v. Mayor (20 id., 312).
"Whether, under the decision in Billings v. Trask (30 Hun, 315), this transaction with defendant was a loan, so that the officers would be liable to creditors, we need not inquire. In that case there was plainly no loan,. But the defendant urges that the plaintiff by selling the stock has ratified the contract in spite of the statutory prohibition. He cites the familiar doctrine stated, with numerous authorities, in Baird v. Mayor (96 N. Y., 599, etc.): " The law not only requires a disaffirmance of the contract at the earliest practical moment after the discovery of the cheat, but a return of all that has been received under it, and a restoration o,f the other party to the condition in which he stood before the contract was made. To retain any part of that which has been received under the contract is incompatible with its rescission." This doctrine was there applied to executory contracts for the sale of personal property ; and the question related to the rescission of the contract, not to a case where the transaction was the fraudulent obtaining of property from the plaintiff. The defendant here took plaintiff's money. 'Whether he took it lawfully or unlawfully, in either case it was his duty to repay it; and it was right for him to secure that repayment whether he was a mere borrower or a fraudulent converter of plaintiff's property. Perhaps the obligation was even stronger in the latter case. Why, then, should not the plaintiff avail itself of these securities whatever was the nature of the transaction? It is true, as held in Terry v. Munger (121 N. Y., 161), that where personal property has been converted, if the owner sues for the value on an implied contract to pay for the goods and recovers judg_ ment, lie treats the title as having passed to the defendants, and, therefore, he cannot in another action recover damages for the conversion. The taking of money is not entirely analogous with the taking of chattels. There was no specific money taken in this case, and no question could arise as to the title to specific property. Even if plaintiff had recovered on defendant's notes it could not be considered, as in the case referred to, " as having, in effect, sold this very property." That is to say, a recovery on the notes would not, in effect, be a sale of the money taken by defendant. It would be a decision that the money had been either borrowed or unlawfully taken. But whatever might be the effect of a judgment upon the notes, or even of a suit commenced thereon (Conrow v. Little, 115 N. Y., 387), neither exists in this case. The plaintiff has only enforced these securities in order to collect what the defendant ought to pay it: what he ought to pay the plaintiff if he legally borrowed the money, and what he ought to pay it if he unlawfully took it.
Let us suppose that defendant had taken an amount of cash in bills from the drawer of the company, and had left in place thereof certain securities, might not plaintiff have sold .those securities and then sued defendant in tort to recover the balance ? And might it not have done this if he had pinned his promissory note to such securities ?
We see no injustice in the view we have taken. The defendant has had the plaintiff's money and ought to, restore it, It seems to us that there was evidence on which it might be found that he took it unlawfully. The sale of his securities has in no way injured him, and has in no way affected his position towards the plaintiff. So far as the avails have gone his liability is reduced. His unlawful a'ct, however, remains, and for it he should answer. The remedy which the plaintiff took in selling this stock is not inconsistent with the position that he unlawfully and fraudulently took its money. There is no election of a remedy inconsistent with this action, unless it be held that one who takes money unlawfully cannot give security for its return.
The judgment should be reversed, new trial granted, costs to abide event.