Court Opinion

ID: 5501684
Source: CourtListenerOpinion
Date Created: 2022-01-10 03:00:39.24381+00
Date Added: 2024-06-11T08:33:57.147856
License: Public Domain

Mayham, J.
(dissenting.) If this action were prosecuted between individuals competent on both sides to contract, the transactions upon which this action was brought would not amount to a conversion of these funds; •and an action for conversion of the same would not be sustained, and a complaint sounding in tort would be properly dismissed. Allen v. Allen, (Sup.) 5 N. Y. Supp. 518; same ease affirmed, 26 N. E. Rep. 756. In that case it was held that in a complaint sounding in tort, the tortious act must be proved, to entitle the plaintiff to recover, and that proof of a breach of contract was not sufficient to justify a recovery; and the complaint was dismissed by the trial judge, and that determination was sustained on appeal. ' But it is insisted that the transaction in this case was tortious from the beginning; that the plaintiff, by its trustees, had no power through its treasurer to make such •contract as was made with the defendant; and that they were alike incapacitated from ratifying such a contract after it was made; and that the defendant is not, therefore, protected from the charge of a wrongful conversion by the contract, and by the giving of his note with the collaterals; and that the adoption of that act by the plaintiff, by receiving the interest paid, and the payments on the principal, and finally by the foreclosure of the lien on the stock pledged as collateral to this advancement to the defendant, did not estop or preclude them from treating the contract as absolutely void, and as if it had never been made, and holding the defendant liable as for a wrongful taking •and conversion of this money. This contention is based on the provisions of •section 14 of chapter 40 of the Laws of 1848, which provides as follows: “ N othing but money shall be considered as payment of any capital stock, and no loan shall be made by any such company to any stockholder therein; and if any such loan shall be made to a stockholder the officers who shall make it, or who shall assent thereto, shall be jointly and severally liable to the extent of such loan and interest for all debts of the company contracted before the repayment of the sum so loaned.” While the statute prohibits the stockholders and officers of this company, which was organized under the provisions of the chapter above referred to, from loaning its funds, it does not in express terms declare that such loan shall be void; but it imposes upon a stockholder or officer taking part in such unauthorized loan a liability for all of the debts •of the corporation contracted before such loan is paid. This is, in effect, a recognition of the validity of the loan, and imposing a penalty for the illegal •act upon the officer or stockholder making such loan. The act itself furnishes *550a remedy for its violation, by giving to the creditors a claim against the trustees and officers who loan the money in violation of its provisions. If the statute made the transaction void, then there could be no loan in fact or in law; and that part of section 14 which provides a remedy in case of loan in. violation of its provision would in all cases be wholly inoperative, because in no case could there be a loan to a stockholder, as the void act would not be a loan. In Billings v. Trask, 30 Hun, 314, it was held that the-provisions of this section applied only to cases where there was a loan, in-, law or in fact, in violation Of its provisions; and the court says: “It is-clear that to establish a right of action under the statute on behalf of creditors, it is necessary to show that the transaction out of which it is claimed to-have arisen was both in law and in fact ‘a loan of money;’ and what is-meant by those W'ords is an actual loan of money in such a form as to create an indebtedness to be at some time repaid, so that a liability for payment by the borrower is created.” This reasoning of the court clearly establishes the-legal proposition that a binding contract can be made between the company and the stockholder to whom a loan is made; and, if such a contract can be-made, then the borrower in this case got the money under a contract, and his-possession of it was not a conversion, and an action cannot be maintained against him for a wrongful conversion. It is quite true that this manner of loaning the plaintiff’s money is condemned by the statute, and the parties who participated in it are subject to the liabilities imposed by the statute, and become personally liable to the creditor; but there seems to be no authority for holding that the contract for the loan was so far void, as to the plaintiff,, that an action for the conversion of these funds may be maintained by it on. the ground that the loan conferred no title in the borrower, and at the same-time valid as a loan of money for the purpose of making the parties personally liable for all debts of the company contracted before the repayment of the-money loaned.
But it is insisted by the defendant that the plaintiff, by its present board' of trustees, ratified this act of its treasurer and the defendant, by accepting-the stock hypothecated as security, and foreclosing its lien upon the same, and retaining and appropriating to its own use the proceeds thereof. To this proposition the plaintiff makes answer that the trustees of a corporation can no-more ratify an illegal act of its officers than it can perform the original illegal act. The contention of both parties upon this subject may under certain conditions be sound in the abstract, but not when applied to the same state of facts. We have seen that the loan to a stockholder did not render the act absolutely void. It being in violation of law, it might have been voidable if the-company had moved promptly, and tendered back the collaterals and notes, and demanded the return of the money, but as no such course was pursued,, it is not necessary to determine that question here; but the plaintiff elected, to retain the notes and collaterals, and realize on the securities held as collaterals, after full knowledge of the illegal acts of the defendant and the treasurer of the plaintiff in making this loan; and we think that by that acquiescence, coupled with the benefits which they received and retained under this-contract, they are estopped from now claiming that the contract was void. ab initia, and from recovering against the defendant in an action for the-wrongful conversion of the money loaned. Herman, in his Law of Estoppel,, lays down the rule that corporations as well as individuals may be estopped by their acts. “A corporation may become bound and estopped otherwise-than under a corporate seal, and their undertakings and admissions may be evidenced otherwise than by records, resolutions, by-laws, ordinances, or other-written documents. Technical as well as equitable estoppels apply to corporations as well as to individuals. The ratification of a contract by a corporation may be inferred from facts attending the transactions; and where persons assuming to act as agents of a corporation, but without legal authority,. *551make a contract, and the corporation receive the benefit of it, and use the property acquired under it, such acts will ratify the contract, and render the corporation liable thereon.” Herm. Estop, p. 522, § 555. It is true that where the illegal act complained of affects third persons, not parties to the act, and who are injuriously affected thereby, a subsequent ratification of the parties to the original illegal act will not bind such third persons so injured. Brady v. Mayor, etc., 20 N. Y. 319. But this ease does not, we think, go to the extent of holding that a private corporation cannot, by adopting and appropriating to its own use the fruits of an illegal contract, with full knowledge of the facts, treat the contract as valid for the purpose of retaining the benefits to be derived from it, and at the same time repudiate it as to the other contracting party, so as to hold him responsible for the wrongful conversion of the property received by him under the contract, which the other contracting party seeks to affirm as to itself, and repudiate as to him. I have found no case where the directors or trustees of a private corporation have been permitted to affirm an illegal contract, so as to retain the benefits of it to the corporation, and at the same time repudiate it as to the other contracting party, and hold him liable for the conversion of the property received by him under it. If we would hold this transaction to be a contract between the plaintiff and defendant, the rule is elementary that, even if it may have been fraudulent, it cannot be rescinded, and the consideration recovered back by the party defrauded, until the party seeking to rescind restores, or offers to restore, all he received under it. In Cobb v. Halfield, 46 N. Y. 533, 537, the rule is very distinctly laid down that to retain any part of what has been received upon a contract is incompatible with its rescission, and to the same effect is Masson v. Bovet, 1 Denio, 69; and in Gould v. Bank, 86 N. Y. 75, 79, the court says: “One who seeks to rescind a compromise of a disputed claim upon the ground of fraud, must promptly, upon the discovery of the fraud, restore, or offer to restore, to the other party, whatever he has received by virtue of it, if any, in full. The tender must be without qualifications or conditions.” Within these cases, we think the plaintiff has not put itself in a position to treat this transaction as void from the beginning, and hold the defendant as guilty of a conversion of these funds.
We are referred by the plaintiff to Thomson v. Sanders, 118 N. Y. 252, 23 N. E. Rep. 374, as an authority that restoration was not necessary to entitle a plaintiff to recover. But that was an action for damages for fraud, and not an action for a wrongful conversion, and, as we think, stands upon a different principle. On the whole case, I think the learned trial judge was right in holding that this action, in the form in which it was prosecuted, cannot, under the facts proved on this trial, be maintained, and that the nonsuit was properly granted.