Case Name: The A. C. Nellis Co., App'lt, v. Arthur C. Nellis, Resp't
Court: New York Supreme Court, General Term
Jurisdiction: New York
Decision Date: 1891-11-30
Citations: 41 N.Y. St. Rep. 599
Docket Number: 
Parties: The A. C. Nellis Co., App’lt, v. Arthur C. Nellis, Resp’t.
Judges: 
Reporter: New York State Reporter
Volume: 41
Pages: 599–607

Head Matter:
The A. C. Nellis Co., App’lt, v. Arthur C. Nellis, Resp’t.
(Supreme Court, General Term, Third Department,
Filed November 30, 1891.)
Manufacturing companies—Loan to a stockholder.
" The General Manufacturing Act, Laws 1848, chap. 40, § 14, forbids a loan by a company to a stockholder. ' The defendant, who was president of a company organized under said act, through the connivance of its treasurer, borrowed money of his company upon stock as collateral to his notes. This was done under a resolution of the trustees authorizing the treasurer to loan its surplus upon good security. The stock was not such security. Subsequently the trustees called said loan and sold the stock which the defendant had pledged. In an action by them for conversion, Held, that the transaction was contrary to the statute.
2. Same—Ratification.
The sale of the stock was not a ratification by the trustees, since they could not ratify that which they could not perform in the first instance, and they were not by said sale estopped from suing for a conversion.
3. Same—Restoration of security.
The trustees were not bound to return to the defendant, before action, his stock. He was bound to return to the corporation its money in any event, whether he took it in defiance of the statute or as an ordinary borrower; and the effect of the sale of the hypothecated stock was only to return to the corporation its money pro tanto.
(Mayham, J., dissents.)
Appeal from j udgment dismissing the complaint
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 the money of the plaintiff in the aggregate to the amount of' $7,150.
The answer admits the existence of the corporation, and that, defendant was a trustee and stockholder in the same, and alleges that the plaintiff loaned the money specified in the complaint to the defendant, took and held his notes for the same, with twelve hundred 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 discloses that the defendant 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; after this, resolution, which was adopted July 23d,1886, the treasurer, on July 24, 1886, loaned to the defendant $6,000, taking his note, payable on demand, and on return of the collaterals, and at the same time received as collateral to such loan ten hundred shares of the capital stock of this company, and on the 19th day of August the treasurer, upon like note and two hundred shares of the capital stock, made another loan to the defendant of $2,150. The money was-drawn hy 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 & Van Steenburgh, for app’lt; Wilmot & Gage (Z. S. Westbrook and H. V. Borst, of counsel), for resp’t.

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 1848 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 buildings were destroyed by fire in June, 1886, and about $25,000 was received in cash from the insurance before the annual meeting in July, 1886.
There was evidence that prior to this meeting the deféndant had agreed to make one Howland 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 had been obliged to raise money, and had sold some stock to Howland and Dunning, on condition that 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 president 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 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 security for the amount loaned."
Howland, as treasurer, gave defendant checks of the company as follows: July 24, $2,000; July 28, $1,000; August 4, $3,000; August 19, $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 ; for whom is not stated.
July 24, 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 ishares 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 "Resolved, 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 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, that if the plaintiff would recover against the defendant for the wrongful taking of its money, it must first surrender to him the security which he gave for the money thus wrongfully taken ; that when one under the pretence 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. Section 14, chapter 40, Laws of 1848. 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. Ihdeed this was not denied in 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 thereto. 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 they could not lawfully do in the first instance. The statute says: " Ho 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. How 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., at 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 of 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 m the latter case. Why then should not the plaintiff avail itself of these securities, whatever was the nattire -of the transaction.
It is true, as held in Terry v. Munger, 121 N. Y., 161; 30 St. Rep., 746, that where personal property has been converted, if the owner sues for the value on an implied contract to pay for the goods and recover judgment, he 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; 26 St. Rep., 527, 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 nóte 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 act, 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.
Judgment reversed, new trial granted, costs to abide event