Court Opinion

ID: 8269103
Source: CourtListenerOpinion
Date Created: 2022-10-16 19:20:11.560349+00
Date Added: 2024-06-11T16:43:27.760294
License: Public Domain

The opinion of the court was delivered by
Swayze, J.
It is unnecessary to consider many questions that were ably argued at the bar as the case can be disposed of by the determh *187nation of the following: First. Were the certificates negotiable? ISecond. If not negotiable, were they illegal? Third,. Is the defence of illegality open to the receivers ?
First. It is conceded that the instrument in suit is anomalous in form. It is not exactly a promissory note nor a corporate bond, both of which are negotiable. The instrument partakes of the character both of a sealed note and of a corporate bond, but contains unusual provisions which we think deprived it of the protection with which the law surrounds negotiable instruments. By the Negotiable Instruments act of 1902, it is enacted, in section 5, that an instrument which contains an order or promise to do another act in addition to the payment of money is not negotiable, and then follow four exceptions which permit certain provisions to be inserted in the instrument without affecting its negotiability. These exceptions are—first, provisions authorizing the sale of collateral securities in case the instrument be not paid at maturity, or, second, authorizing a confession of judgment if the instrument be not paid at maturity, or, third, waiving the benefit of any law intended for the advantage or benefit of the obligor, or, fourth, giving the holder an election to require something to be done in lieu of the payment of money. Although this act was not passed until after the certificates in question were issued, it was in this respect intended as a codification of the common law. Whether this contract is governed by the law of New Jersey, where it purports to have been made, or by the law of Ohio, where it was to be performed, or by the law of New York, where it is said to have been delivered, is immaterial. The New York Negotiable Instruments act was passed in 1897 and contains the same provision. The Ohio act was passed in the same year (1902), and if the certificate is an Ohio contract the common law must prevail; there is nothing to show that the common law of Ohio differed from the law of New Jersey. In any event, therefore, the rule of law applicable is that set forth in the fifth section of the Negotiable Instruments act. None of the exceptions in that section covers the present case.
The certificates in form contain a statement of an agreement on the part of the National company that no contract for the *188purchase of exhaust steam and no improvements erected or to be erected by the United company for utilizing said steam shall be mortgaged, encumbered or in any way disposed of; that no money borrowed or advanced by the National company for extending, improving or operating any property of the United company shall be a charge upon or lien against the property or assets of the United company, and that the United company shall not dispose of its patents otherwise than by licenses and for a royalty of at least twenty-five cents per ton. This is not a statement of the transaction which gives rise to the instrument, and therefore permissible under section 3 of the act, but a promise to do an a'ct in addition to the payment of money, and therefore under section .5 makes the instrument not negotiable. While the certificates state the agreement in the past tense, there is no other written agreement to that effect and nothing more than a similar recital in the declaration of trust by the National company and the American Trust Company. We think the mere grammatical form in which the agreement is stated is not important, and that in effect the certificate contains an agreement for the protection of the assets of the United company against encumbrances and waste, for the purpose of maintaining the value of the stock of that company held as collateral for the certificates. The agreement is couched in negative terms as an agreement not to do certain things, but that is not decisive; the object of the provision of the Negotiable Instruments act was to provide against giving the extraordinary advantages of negotiability to all sorts of agreements other than for the payment of money; and although stated in the negative form the agreement is in substance a promise to do an act within the meaning of the statute in addition to the payment of money. It is in substance a promise to keep the security free from encumbrances and of the' same value as when it was pledged. Our view of the scope of the language of the statute is confirmed by the language in which the first exception in section 5 is couched. This exception is'of an agreement authorizing the sale of collateral securities in case the instrument be not paid at maturity. The agreement in the present case authorized a sale upon contingencies other than nom payment at maturity. The certificates refer to the declaration *189of trust for the terms upon which the stock pledged as collateral had been deposited, and the necessary effect is to import into the certificates those provisions of the declaration of trust. McClelland v. Norfolk and Southern Railroad Co., 110 N. Y. 469; 18 N. E. Rep. 237. This is so even if the only effect of the recital in the certificates is to give notice to the holder of the provisions of the declaration of trust; for if he has notice he takes the certificates subject to the terms thereof; and since the salt company and the trust company were bound by the express terms of the declaration of trust the obligor, the obligee and his transferee who of course takes with the same notice, and the trustee are all bound. One of the provisions of the declaration of trust authorizes the sale of the collateral if the salt company violates any of the agreements. A sale of the collateral for the violation of an agreement merely intended to preserve the value of the collateral is certainly not within the exception of an agreement authorizing a sale of collateral in case an instrument be not paid at maturity, since it authorizes the sale upon a condition other than that permitted by the statute. We reach this result with hesitation because the United States circuit court of appeals in the second circuit was of a different opinion. Ingraham v. Notional Salt Co., 143 Fed. Rep. 805. It is with reluctance that we differ from that tribunal and from the eminent judge who spoke for it. The force, however, of that opinion, is weakened by the fact that the same court at an earlier stage of the proceedings had reached an opposite result. National Salt Co. v. Ingraham, 122 Fed. Rep. 40. It was suggested in the argument that the later opinion of the circuit court of appeals had the endorsement of the supreme court of the United States which had refused to review the case by certiorari. We do not understand, however, that the United States supreme court, under the act of 1891, uses the writ of certiorari as a writ of error to review every ruling of the circuit court of appeals on questions of law. It was to avoid clogging business in the United States supreme court that the act of 1891 was passed, and the court has expressly declared that it will exercise the power to review by certiorari sparingly and only when the circumstances of the case satisfy it that the importance of the question involved, the necessity of *190avoiding conflict between two or more courts of appeal or between courts of appeal and the courts of the state, or some matter affecting the interest of the nation in its internal or external relations, demands such exercise. Forsyth v. Hammond, 166 U. S. 506. The refusal of the court to' grant the writ of certiorari determined only that the case was not of sufficient importance to justify its review, not that the decision of the court below was correct. We have dealt with the certificate in this respect in accordance with the common law as codified in the act of 1902, for the reason that this certificate was issued prior to that act. We are not to be understood, however, as holding that no instrument can hereafter acquire the elements of negotiability unless it answers the requirements of the statute. Mr. Machen, in his excellent work on Corporations, at section 1740a, calls attention to the danger of holding that the Negotiable Instruments act prevents a further development of the law merchant; but that question is not now before us.
Second. Since the certificate is not negotiable, it is open to the defence that it was illegal in its origin. We deem it unnecessary to pass upon the effect of the decree of the Ohio court that the contract between the National company and the United company, out of which this certificate arose, was illegal under the Ohio Anti-trust act. It is enough for us that it violates section 30 of our Corporation act, which, as it stood from 1896 to 1904, covering the period when the certificate was issued, provided that no corporation should make dividends except from the surplus or net profits arising from its business, nor divide, withdraw or in an}*- way pay to the stockholders, or any of them, any part of its capital stock or reduce its capital stock except according to, the act. We do not question the right of the National company to agree to pay in cash for the United stock a sum of money equal in amount to the dividends for a certain number of years, and if that were all that the case revealed, the most that could be said would be that the directors had made an improvident bargain, but not an illegal one. The case, however, shows a different situation, for it shows that the transaction was not in fact and in substance an exchange of one stock for another with a cash bonus. If it liad been that, the stockholders of the United *191company' would have been entitled to receive their stock in the National company and to take from time to time the dividends thereon for their own use. Instead of doing so, they were content with a title to the National stock shorn of the right to dividends for the five years which the certificates had to run, and they put the stock out of their possession and in the hands of the trust company for the purpose of securing the payment to themselves of tire amount of the certificate they themselves held. The same object would have been accomplished by providing in the certificates that any amount paid to the stockholders by way of dividends should be credited thereon, and the object of depositing the stock of the National company with the trust company must have been to give the certificates the appearance of a debt due for part of the purchase price of the United stock when in fact they were promises to pay the amount of dividends agreed upon whether earned or not. If an arrangement of this kind is legal, the thirtieth section of the Corporation act has no vital force, for to evade it, a corporation need only issue certificates of indebtedness covering the dividends which the parties may expect during the whole life of the corporation, and thus capitalize into a present debt-the hopes of future earnings. We think such a transaction is in contravention of our statute.
Third. It is said, however, that the National company got control of the corporate property of the United company and ought not now to escape from payment of the price. This does not fully state the' situation. In form, at least, the National company acquired only the stock of the United company'', and even this it immediately pledged as collateral, and its own stock, which it gave in exchange, also was immediately pledged as collateral by the stockholders of the United company. The exchange of stock was, therefore, still an executory agreement, and the National company was not to receive the TTnitecl stock, and the stockholders of the United company were not to receive the National stock until payment of the certificates. But, although in form, the transaction was still executory, it is fair to the appellants to concede that as a result of the transaction the National company got control of the corporate assets and property *192of the United company, and although in form the only change was in ownership of the stock of the United company, in substance, there was a change of control of that company’s assets. Under such circumstances, the appellants urge that the doctrine approved in this court, in Camden and Atlantic Railroad Co. v. Mays Landing and Egg Harbor Railroad Co., 48 N. J. Law (19 Vr.) 530, is applicable. We think this case is distinguishable. The doctrine of that case is applicable only to ultra vires contracts in the proper sense of the term-—that is to say, contracts that are beyond the statutory powers of the corporation. It is not applicable to contracts expressly prohibited by statute and contrary to the public policy of the legislature. The opinion of the court clearly recognizes the distinction, for in speaking, on page 564 of the case of Kent v. Quicksilver Mining Co., 78 N. Y. 159, Mr. Justice Van Syckel says: “The propositions maintained by the court Avere that acts of a corporation, which are not, per se, illegal, or malum prohibitum, or contrary to public policy, but which are ultra vires, affecting only the interests of stockholders, may be made good by the assent of shareholders, so that strangers to them, dealing in good faith with the corporation will be protected in reliance on those acts.” On page 568 he distinctly says: “Transactions which are immoral, illegal, forbidden by statute, or contrary to public policy, are not embraced in this discussion; they cannot furnish the basis for a legal cause of action.” The present case comes Avithin the class of transactions forbidden by statute, and therefore illegal and contrary to public policy, so that it is outside even of the liberal rule of the case just cited. The case of Chapman v. Iron Clad Rheostat Co., 62 N. J. Law (33 Vr.) 497, a decision of the supreme court, Avent upon the ground that under our act a corporation might purchase its own stock. The remark by Mr. Justice Dixon at the close of the opinion nmst be read in the light of what he had previously said. It is plainly no authority in case of an act forbidden by the express terms of the statute.
We think, therefore, without expressing an opinion as to the other matters dealt with in the opinion of the learned vice-chancellor, that his decree should be affirmed, with costs.
*193For affirmance—The Chief-Justice, Garrison, Swatze, Trenchard, Parker, Bergen, Vooritees, Kaltsgh, Bogert, Vredenburgi-i, Congdon, Wi-iite—12.
For reversal—None.