Court Opinion

ID: 3608389
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:53:14.156754+00
Date Added: 2024-06-11T14:23:47.397484
License: Public Domain

This action was brought to recover damages for the alleged conversion of ten bonds, which were by their terms made negotiable, of the par value of $1,000 each, issued by the Medina Gas Light Company on the 15th day of September, 1886, together with the coupons accrued thereon. These bonds were made payable at the Buffalo Loan, Trust and Safe Deposit Company's office in the city of Buffalo and their payment was secured by a mortgage executed by the Medina Gas Light Company upon all of its property, real and personal, to the defendant as trustee, bearing the same date as that of the bonds. Thereafter and on the 21st day of September, 1886, Stranahan, the secretary and treasurer of the company, pledged these bonds to the defendant as security for personal loans made to him, and for an additional loan then made of $6,000, with full knowledge on the part of the defendant that the bonds were authorized only for corporate purposes and were to be negotiated only by the president of the Medina Gas Light Company.
The Medina Gas Light Company was incorporated and had issued three hundred shares of stock of the par value of $100 each, and at the time of this transaction Stranahan was the owner of two hundred and ninety-eight shares, James Robertson, the president of the company, was the owner of one share, and Hosea B. Dayton was the owner of the other share. *Page 108 
In 1890 the German-American Bank of Buffalo brought an action against Stranahan to recover a judgment for loans theretofore made by it to him and caused an attachment to be issued and levied upon the ten bonds in question, then in possession of the defendant. The German-American Bank then paid to the defendant the amount for which it held the bonds as collateral security, took the bonds from the defendant and on the same day arranged with Stranahan to give him additional time to pay the loan, and discontinued the action. Subsequently at the request of the German-American Bank the defendant, as trustee, brought an action to foreclose the trust mortgage, and under a judgment entered in that action the property covered by the mortgage belonging to the Medina Gas Light Company was sold and the proceeds applied upon the indebtedness of Stranahan to the German-American Bank.
On the 26th day of August, 1895, the Medina Gas  Electric Light Company, a new corporation which had acquired all of the rights, franchises and interests of the Medina Gas Light Company, demanded of the defendant the bonds and coupons in question, or their equivalent in cash, but the defendant refused to comply with such demand.
This action was brought by the receiver of the new corporation on the 14th day of September, 1895. Among the defenses interposed by the defendant's answer was the claim that the cause of action herein alleged passed to the purchaser upon the foreclosure sale, who for a valuable consideration had executed to the defendant a release of all claims against the defendant growing out of the transaction in question, and that more than six years had elapsed after the alleged wrongful conversion of the bonds before the commencement of this action.
Upon the trial the plaintiff affirmatively proved that at the time the mortgage was executed and the bonds issued by the Medina Gas Light Company it was free from debt and had no creditors. The contention is made on behalf of the defendant that Stranahan was the owner of all of the stock of *Page 109 
the company, and that he had merely given one share to Robertson and one to Dayton, persons in his employ, to qualify them to act as directors, but that he remained the equitable owner of those two shares. Upon this theory the suggestion is made that Stranahan, being the owner of all the stock, acted with the consent of the other two directors who were controlled by him, and there being no creditors of the corporation to protect, he could dispose of the assets and obligations of the corporation as he saw fit. But the difficulty with this suggestion is that the trial court has not found that Stranahan was the owner of the two shares of stock held by Robertson and Dayton, and no exception appears in the record which brings up this question for review.
The trial court reached the conclusion that a conversion of the bonds by the defendant took place when it refused to comply with the demand made upon it in September, 1895, and thereupon awarded judgment for the amount of the face value of the bonds and coupons. None of the judges sitting in the Appellate Division concurred in the view of the trial court upon this question, but a majority were of the opinion that a conversion of the bonds took place by the defendant in 1890, at the time they were delivered to the German-American Bank. This was upon the theory that the defendant up to that time held the bonds as trustee under the mortgage, and that when it delivered the bonds to the German-American Bank, thus parting with them, as trustee, it constituted a conversion.
In determining the questions herein presented it becomes necessary to examine the facts more in detail. The first question which arises is as to whether the bonds were converted by the defendant in 1890, at the time they were taken by the German-American Bank. The finding of the trial court upon that question is as follows: "On or about the 27th day of December, 1890, the said Robert A. Stranahan was individually indebted to the German-American Bank, a banking corporation doing business in the city of Buffalo, in the sum of $8,000, and interest from April 1, 1889. On that day the *Page 110 
said bank commenced an action by attachment and publication of the summons against the said Stranahan, and caused the said warrant of attachment to be levied upon the interest of the said Stranahan in the shares of the Tonawanda Gas Light Company, and upon said $10,000 of bonds of the Medina Gas Light Company then in the possession of the defendant. Thereafter and on the same day, the said bank discontinued said action and withdrew its attachment, and paid to the defendant the sum of $14,650, the amount for which the said Stranahan was then indebted to it, and for which the defendant held said shares of stock and bonds as collateral security, and the defendant delivered to the said German-American Bank the said stock and the said bonds, with the notes of the said Stranahan representing such indebtedness." It will be observed that under this finding, the levying of the attachment by the German-American Bank upon the bonds in question, the payment to the defendant of the sum of $14,650, the amount for which it held the bonds in pledge, the discontinuing of the action and the withdrawal of the attachment all occurred on the same day. The order in which these transactions took place is not set forth. It does not clearly appear whether the attachment was withdrawn before or after the money had been paid to the defendant and the bonds surrendered. If the attachment had been withdrawn and the action discontinued before the claim of the defendant had been paid, and the payment was thereafter made and the bonds delivered to the German-American Bank, then there would be some ground for the conclusion reached by the Appellate Division. If, however, the attachment was levied upon the bonds and then the amount of the claim of the defendant for which it held the bonds as collateral security was paid, thus discharging any further right of the defendant to hold possession of the bonds, the sheriff, acting for the German-American Bank, would then become the legal custodian of the bonds, for, they being negotiable, levy could only be made by taking them into actual possession by the sheriff. (Code Civil Procedure sec. 649, sub. 2; Von *Page 111 Hesse v. Mackaye, 55 Hun, 365; affd., 121 N.Y. 694, on opinion below.) If the defendant surrendered its possession under such circumstances and thereafter, although it may have been during the same hour the German-American Bank arranged with Stranahan to give him additional time to pay, and discontinued the action and withdrew the levy, a very different conclusion would follow with reference to there being a conversion by the defendant, for then it would clearly appear that they had been taken from the defendant under a legal process of the law. Inasmuch as the finding is obscure upon this branch of the case, it becomes the duty of the court to examine the evidence upon which the finding was based, and determine if possible the construction that should be given to the finding. The evidence upon the subject is somewhat meager. The circumstances were given by Henry W. Burt, the cashier of the German-American Bank. He testified as to the commencement of the action, the procuring of the attachment and the levying upon the bonds in question. He then said: "In order to secure this equity which we supposed was in this collateral held by the trust company we took up the loan and paid them $14,650. At that time Stranahan owed the German-American Bank about $9,000. These collaterals were ten Medina Gas Light Company bonds and three hundred and five shares of Tonawanda Gas Light Company's stock. * * * Mr. Stranahan said he had these bonds and this collateral there, this company's stock, and there was some equity in it which by taking up the loan we would acquire and it would become the property of the bank; and in order to save that equity we did so; that made his indebtedness to us in the neighborhood of twenty-three or four thousand dollars, for which we held the stock as collateral, and these bonds, the Tonawanda Gas stock and the Medina Gas bonds." He further testified that afterwards the German-American Bank made an additional loan to Stranahan of about $15,000. Upon his cross-examination he said: "We had the transactions with Stranahan before we had anything to do with these Medina bonds. He owed us about $9,000. I think it was *Page 112 
in that neighborhood. Then we brought this action in which we attached three hundred and five shares of Tonawanda stock and the ten Medina bonds. And on the same day that we attached them we took up the paper which was held by the trust company and took securities which we had attached, and Mr. Stranahan after that time, from time to time, made various payments to our bank on account of the claims which we held against him." It will be noted that he said nothing about discontinuing the action or withdrawing the attachment before taking up the paper; and it is quite apparent that they did not, for the cashier of the German-American Bank had had a talk with Stranahan about these bonds and stock of the Tonawanda Gas Light Company which were held by the defendant as collateral security for loans made, and learned that there was an equity which could be obtained by taking up the loans and obtaining the bonds and stock. It was, therefore, for this purpose that the attachment was levied and the loan taken up. It consequently is apparent that these bonds were taken from the possession of the defendant under this process of the court, issued upon the application of the German-American Bank, and that the defendant had no power to resist the same unless it was a trustee or bailee of the bonds of the Medina Gas Light Company.
It may be conceded that the practice has prevailed to some extent on the part of corporations in issuing bonds to make the trustee under the mortgage the custodian of the bonds and its selling agent so that the bonds would be negotiated by the trustee, and by the trustee delivered to the purchaser. But the record fails to disclose any such arrangement in this case. The resolutions of the board of directors of the Medina Gas Light Company, authorizing the loan, are recited in full in the mortgage that was executed to the Buffalo Loan, Trust and Safe Deposit Company. These resolutions provided for the borrowing of the sum of $10,000, and for that purpose the making of ten negotiable bonds of $1,000 each, bearing date the 15th of September, 1886, payable at the office of the Buffalo Loan, Trust and Safe Deposit Company in the city of *Page 113 
Buffalo, at the expiration of twenty years, with interest at six per cent per annum payable semi-annually, pursuant to coupons annexed to such bonds; and for the purpose of securing the payment of such bonds, that the company execute and deliver to the trust company mentioned, a mortgage bearing even date with the bonds upon its property, real and personal, specifically describing the same, and then provided: "Resolved, that the president cause such bonds and mortgage to be prepared in such form and containing such conditions as he shall deem proper, and that when prepared he cause the corporate seal to be affixed thereto and execute the same under his hand, attested by the signature of the secretary, and that when the same be so prepared and executed he make delivery of such mortgage and negotiate the said bonds upon the best terms possible." It will be observed that the president was here authorized to deliver the mortgage. It does not state to whom it shall be delivered, but inasmuch as it ran to the trust company, the fair interpretation of the resolution is that it was to be delivered to the trust company, whom it had made the trustee under the mortgage to pay the coupons and bonds as they matured and became due and payable. But it further will be observed that the president was not by this resolution authorized to deliver the bonds to the trustee. The bonds he was to negotiate himself upon the best possible terms. He thereby became the custodian of the bonds and the person who was authorized to negotiate them. There were provisions made in the mortgage under which the bonds were to be identified. The trustee was required to certify upon the back of each bond that this was one of the bonds included in and covered by the mortgage. But this was all. No custody or control of the bonds was given to the trustee, and it had no powers or duties devolved upon it further than to make such certificate and then to pay the coupons and bonds as they matured and became due, as provided by the terms of the mortgage. It is, therefore, apparent that the defendant as trustee under the mortgage was not given any jurisdiction or power to control the disposition of the bonds, *Page 114 
their custody or negotiation, and it consequently follows that it had no power or authority to resist the attachment which had been levied upon the bonds.
There is no pretense or claim that the bonds had been placed in the custody of the trustee for safekeeping, or that it became a bailee. Consequently the relation of bailor and bailee is not involved and need not be now considered. What is claimed and found as a fact is that at the time the bonds were brought to the defendant to be certified for identification they were then delivered to the defendant by Stranahan as collateral security for the payment of certain notes of his, upon which he had made previous loans and upon which he had that day borrowed an additional sum of $6,000. The defendant thereupon took the bonds into its custody, not as trustee, but as pledgee, holding them as collateral security for the payment of the loans made by Stranahan.
The question now arises as to when the bonds were converted and by whom. The old rule that a party is bound by the allegation of his pleading is still recognized as binding, and the time has not yet arrived in which the courts should overrule it or regard it as obsolete. The plaintiff in his complaint, by the ninth paragraph, thereby alleges: "That on or about the 21st day of September, 1886, the said Stranahan, without the knowledge and consent of said Medina Gas Light Company, and without authority from it, and for his own individual purposes, diverted the aforesaid bonds and the coupons thereto attached, the property of the said Medina Gas Light Company, and to the immediate possession of which it was entitled, from the purpose for which they were executed as aforesaid, and which was authorized by said Medina Gas Light Company, and pledged the said bonds and the coupons thereto attached with the defendant as security for various loans, some of which had been theretofore made, and some of which were then and others thereafter made to him by the said defendant, which at the time of the pledging of said securities with it as aforesaid, and at all times thereafter, had full knowledge of all the matters hereinbefore set forth, and *Page 115 
especially of the terms of the resolution authorizing the issuing of said bonds, and also well knew that said bonds had never come into possession of said Medina Gas Light Company after being certified by the defendant as aforesaid." The trial court by its tenth and eleventh findings of fact has followed the allegations of the complaint, finding each and every fact therein alleged and adding thereto that the diversion was wrongful. We thus have it alleged in the complaint that on the 21st day of September, 1886, Stranahan, as secretary and treasurer of the company, diverted these bonds to his own personal use and pledged them to the defendant for personal loans which he had made and for an additional loan then made to him of $6,000, and that the defendant took them upon such pledge with full knowledge that the bonds were authorized and issued for corporate purposes only and were to be negotiated only by the president of the Medina Gas Light Company, and that the diversion was wrongful. Again this identical question was reviewed in this court in the case ofBuffalo Loan, Trust and Safe Deposit Company v. Medina Gas Electric Light Company (162 N.Y. 67). That was the action brought to foreclose the mortgage. The referee in that case had found the facts with reference to the pledging of the bonds on September 21st, 1886, the same as they have been found by the trial court in this case. As a conclusion of law the referee found that this transfer of the bonds "was an unauthorized diversion from the purposes for which they were issued, and did not give the plaintiff title to the same as against the Medina Gas Light Company." The Appellate Division in its opinion reviewing the conclusion of the referee held that the referee erred in holding that the transaction amounted to a diversion of the securities. This court affirmed the judgment in that case upon the ground that the German-American Bank was a bona fide
purchaser and had no knowledge that the bonds had been previously diverted. But E.T. BARTLETT, J., in delivering the opinion of the court, calls attention to the reasoning of the Appellate Division upon which it differed with *Page 116 
the referee, and then says that in affirming the judgment the court dissents from the reasoning of the Appellate Division as to that question, thereby sustaining the conclusion of the referee. We thus have the allegation of the complaint, the finding of the trial court and the decision of this court in the foreclosure action, all to the effect that these bonds were wrongfully diverted by Stranahan on the 21st day of September, 1886, and used for his own purpose. This constituted a conversion, and he thereby immediately became liable to respond in damages to the gas light company. It further follows that the defendant having taken these bonds as pledgee of Stranahan as security for loans made, with full knowledge of all the facts, to which attention has been called, and that these bonds had then been wrongfully diverted by Stranahan, itself became chargeable as for conversion and thereby became liable to respond in damages to the gas light company. It further appearing, as we have seen, that the defendant from that time on held these bonds as collateral security for its protection and not as trustee for the gas light company, and it also appearing that it having no jurisdiction or right to control the disposition or the custody of the bonds as trustee, and that its possession was wrongful, no demand was necessary to be made by the gas light company before the cause of action accrued; but the Statute of Limitations commenced running from the time that the defendant wrongfully diverted these bonds by taking them from Stranahan for its own use and purpose. (Comstock v. Hier, 73 N.Y. 269; Murray v. Burling, 10 Johns. 172; Ganley v. Troy City Nat. Bank, 98 N.Y. 487;Saratoga Gas  El. L. Co. v. Hazard, 55 Hun, 251; affd.,121 N.Y. 677; Pease v. Smith, 61 N.Y. 477; Laverty v.Snethen, 68 N.Y. 522; Birdsall v. Davenport, 43 Hun, 552.)
The mortgage included all the real estate and personal property which the gas light company possessed, and that which should thereafter be acquired, including bills receivable, debts, demands and choses in action. After the property was sold in the foreclosure judgment the defendant, for a valuable *Page 117 
consideration, procured from the purchaser under that sale a release from the claim here presented. And the claim is now made that this right of action passed to the purchaser under that sale, the claim then being a chose in action. I have not, however, considered this defense, preferring to rest the decision upon the question of the Statute of Limitations.
Upon the trial, at the conclusion of the plaintiff's case, the defendant moved for a dismissal of the plaintiff's complaint upon the ground that the cause of action, if any, was barred by the Statute of Limitations. At the conclusion of the evidence the defendant again moved for dismissal of the complaint upon the former grounds stated including others, and the motion was denied and an exception taken. Inasmuch as the facts upon which my conclusions rest are chiefly alleged in the complaint and are undisputed, I think the judgment should be reversed and the complaint dismissed, with costs in all courts.
GRAY, VANN and CHASE, JJ., concur with WERNER, J., and CULLEN, Ch. J.; WILLARD BARTLETT, J., concurs with HAIGHT, J.
Judgment affirmed.