Case Name: S. Ormond Goldan, Respondent, v. Delaware and Eastern Railway Company and Others, Defendants, Impleaded with Jacob L. Greatsinger, Appellant
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1911-04-07
Citations: 144 A.D. 78
Docket Number: No. 1
Parties: S. Ormond Goldan, Respondent, v. Delaware and Eastern Railway Company and Others, Defendants, Impleaded with Jacob L. Greatsinger, Appellant.
Judges: 
Reporter: Appellate Division Reports
Volume: 144
Pages: 78–81

Head Matter:
S. Ormond Goldan, Respondent, v. Delaware and Eastern Railway Company and Others, Defendants, Impleaded with Jacob L. Greatsinger, Appellant.
(No. 1.)
First Department,
April 7, 1911.
Fraud — action against railroad company — representation that bonds are good — failure to obtain consent of Public Service Commission — ■ pleading—complaint — demurrer. .
A railroad corporation cannot plead its ultra vires act in issuing bonds in defiance of an order of the Public Service Commission as a defense to a suit on the bonds brought by one who had received them in good faith.
Where the complaint in. an action for fraud against a railroad company, its officers and directors, alleges that plaintiff’s assignor had a valid claim against the defendant for brokerage commissions on the sale of bonds; that plaintiff was induced to accept bonds ,ht par in payment of the claim upon the representation of the defendants that they were authorized to issue the bonds for that purpose and that the bonds were valid obligations, whereas they well knew that the Public Service Commission had prohibited the corporation from issuing bonds in payment of the brokerage; that had plaintiff refused the bonds he could have-exacted payment in cash and -that the company is now insolvent and iff the hands of a receiver, a demurrer on the ground that the facts, alleged do not constitute a cause of action will be sustained.
It seems, that plaintiff should have alleged that the bonds received were' payable more than twelve months from the date thereof, so as to show that the Public Service Commission had authority to decide whether they should be issued. ■ '
The statute does hot provide that bonds issued without the authority of ■ the commission shall be void in the hands .of bona fide holders.
That the plaintiff might have exacted payment of his claim in cash is immaterial. ■ ' ...
Appeal by the defendant, Jacob L. Greatsinger; from an interlocutory judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 10th day of January, 1911, upon the decision of the court, rendered after a trial at the New York Special Term, overruling the said defendant’s demurrer to the amended complaint.
Edward J. Welch, of counsel, for the appellant.
Julian B. Shope, for the respondent.

Opinion:
Miller, J.:
This is an action against the defendant railway company, its officers and directors, for fraud; It is alleged that the plain tiff's assignor'and one Enthoven on the 13th day of August, 1909, were employed by said defendant company to procure an issue of bonds of the par value of $3,500,000, to be underwritten under an agreement whereby each was to have a commission of two and one half per cent, amounting to $87,500;. that an underwriting agreement was procured which was accepted and approved by said company, but which provided that it 'should not become binding upon the underwriters until a receipt in full satisfaction of any claim of the. plaintiff's assignor and said Enthoven for brokerage was attached thereto; that the claim of said assignor was reduced to $85,500, and that the plaintiff was induced.to accept bonds of said defendant company to the par value of $85,500 upon the representation by the defendants that they were authorized by law "to issue and deliver the bonds for that purpose, and that the bonds so issued and delivered were good and valid obligations, whereas in fact the Public Service Commission had not only not authorized the issuance of said bonds, but had, by an order made on July 23, 1909, expressly prohibited the said defendant company from issuing bonds for the payment of said brokerage; that at the time said bonds were so accepted by the plaintiff the defendant company had sufficient available cash in its treasury to pay the plaintiff's claim, and that, by withholding the receipt which was necessary to give the underwriting agreement validity, the plaintiff could have exacted a payment in cash; that said defendant company has since become insolvent and a receiver of its property has been appointed, wherefore it is alleged that the plaintiff has been damaged in said sum of $85,500.'
Section 55 of the Public Service Commissions Law (Laws of 1907, chap. 429) provides: '£ A common carrier," railroad corporation or street railroad corporation organized or existing, or hereafter incorporated, under or by virtue of the laws of the State of New York, may issue stocks, bonds, notes or other evidence of indebtedness payable at periods of more than twelve months after the date thereof, when necessary for the acquisition of property, the construction, completion, extensión or improvement pf its facilities, or for the improvement or maintenance of
its service or for the discharge or lawful refunding of its obligations, provided and not otherwise that there shall have heen secured from the proper commission an order authorizing such issue and the amount thereof, and stating that, in the opinion of the commission, the use of the capital to be secured by the issue of such stock, bonds, notes orother evidence of indebtedness is reasonably'required for the said purposes of the corporation." Section 56 provides the. penalties for a violation of any of the provisions of the act or for the disobedience of any order, direction or requirement of the Commission. The statute' does hot provide that bonds in the hands of bona fide holders, issued without authority of the proper Commission, shall be void.
It is to be observed that the statute only applies- to stocks,' bonds, notes or other .evidence of indebtedness, payable at periods of more than twelve months after the date thereof. The complaint does not allege when the bonds in question were payable. But passing that question and assuming that the complaint is sufficient in other respects, I think that it is insufficient to show that the plaintiff has been damaged in the sum of $85,500 or in any sum whatever. Undoubtedly, the Public Service Commission had jurisdiction to pass on the issuance of the bonds, the amount thereof, and the purpose for which they could be used, and if bonds were issued in disobedience of. the order of the Commission, or without the authority of the Commission, the corporation and its officers subjected themselves to the penalties provided in the act. But that is far from saying that the corporation could plead its ultra vires act as a.defense to a suit on the bonds at the instance of one who received them in good faith. The basis of the plaintiff's claim is a valid. obligation against the defendant company, in payment of which he says he was induced to accept .bonds upon the representation that they were valid obligations of the company, but he fails to show that they were not valid obligations of the company.
In People ex rel. D. & H. Co. v. Stevens (197 N. Y. 1) it was held that the Public Service Commission was not justified in denying the application of the relator for an order to issue bonds in payment of valid obligations of the company. The question arose in that case on certiorari, and the indebtedness had been incurred when the application was made, whereas, in this case, the order of the Commission was made before the obligation was incurred. It may be that the defendant company had no right in defiance of the order to incur the obligation, but the plaintiff must stand upon the proposition that it was valid and enforcible. If so, the defendant corporation had the right to pay it. The plaintiff accepted a specialty for a simple contract debt. Unfortunately the corporation became insolvent, but there is no connection between that and the alleged misrepresentations. The plaintiff would be in no better position if the Public Service Commission had actually authorized the issuance of bonds to pay his claim for commissions. He has an. enforcible claim. His inability to collect it results from the insolvency of the company, not from the said representations. The fact that he might have exacted payment in cash does not affect the case.
The interlocutory judgment should be reversed, with costs, and the demurrer sustained, with costs, with the usual leave to the plaintiff to plead over on payment of costs.
Ingraham, P. J., Laughlin, Clarice and Scott, JJ., concurred.
Judgment reversed, with costs, and demurrer sustained, with costs, with leave to plaintiff to amend on payment of costs.
Since revised by Consol. Laws, chap. 48 (Laws of 1910, chap. 480), § 55, — [Rep.
Since revised by Consol. Laws, chap. 48 (Laws of 1910, chap. 480), § 56. — [Rep.