Court Opinion

ID: 9446971
Source: CourtListenerOpinion
Date Created: 2023-08-03 22:22:44.459802+00
Date Added: 2024-06-11T17:30:51.510079
License: Public Domain

L. HAND, Circuit Judge
(dissenting).
The Keta shares had been validly issued, but they were never transferred to Doeskin Products Inc. Birrell, who was throughout the deus ex machina of the whole fraud, was not even president of the debtor, which was the registered shareholder of the shares. A majority of the debtor’s directors had never agreed to their sale. The change on the face of the Keta certificate did not affect the debtor’s rights in any way whatever; any subsequent transaction under the name of “Gas Development Company” was of as little legal significance as though it had been in the debtor’s own name. Therefore I agree with my brothers that Doeskin Products Inc. never became as-signee of the Keta shares; it was not even a bona fide holder of the certificates. Nevertheless a certificate was issued for the shares in favor of Doeskin Products Inc., and I agree that the debtor is entitled to a cancellation of that certificate and to a new certificate which will be evidence of its right.
However, the transaction was in the form of an exchange and certificates were issued for 700,000 new shares of Doe*101skin Products Inc. in favor of “Gas Development Company” and these certificates were delivered to Callahan, the president of “Gas Development Company.” The issue of these new shares was also unauthorized and invalid, just as the transfer of the Keta shares to Doeskin Products Inc. The question therefore arises whether the debtor’s claim can be enforced except as a rescission of the exchange by restoring Doeskin Products Inc. to its former position. It is the law of New York that after such an exchange restoration by either party presupposes a return by the claimant of the consideration received; and this is true, not only when the transfer was unauthorized by the corporation’s officials, as here, but when it was idtra vires. Vought v. Eastern Building & Loan Association, 172 N.Y. 508, 517, 518, 65 N.E. 496; Appleton v. Citizens Central National Bank, 190 N.Y. 417, 83 N.E. 470; 216 U.S. 196, 30 S.Ct. 364; Losie v. Ken-Vic, 43 N.Y.S.2d 914, 916, affirmed 266 App.Div. 1045, 44 N.Y.S.2d 473. This has also been the Federal doctrine, as appears in the often cited decision of the Supreme Court, Central Transportation Co. v. Pullman’s Palace Car Co., 139 U.S. 24, 60, 11 S.Ct. 478, 488, 35 L.Ed. 55. Mr. Justice Gray there said of an ultra vires contract, “(i)n such case, however, the action is not maintained upon the unlawful contract, nor according to its terms; but on an implied contract of the defendant to return, or, failing to do that, to make compensation for, property or money which it has no right to retain. To maintain such an action is not to affirm, but to disaffirm the unlawful contract.” For this reason the debtor may disaffirm the exchange and reclaim the Keta shares only on condition that it restores Doeskin Products Inc. to the equivalent of its position before the transfer.
The Doeskin certificates were delivered to Callahan, the president of “Gas Development” and it was by means of them, endorsed by Callahan that Birrell procured the certificates that he sold to third persons and embezzled the purchase money. Again it appears that under the law of New York the buyers got a good title to the shares in spite of the invalidity of their issuance. Fifth Avenue Bank of New York v. Forty-Second Street and Grand Street Ferry Co., 137 N.Y. 231, 33 N.E. 378, 19 L.R.A. 331; Jarvis v. Manhattan Beach Co., 148 N.Y. 652, 43 N.E. 68, 31 L.R.A. 776, cited with approval in Benenson v. National Surety Co., 260 N.Y. 299, at pages 303-304, 183 N.E. 505, at page 506, 85 A.L.R. 79.
The debtor replies that all these steps were a part of Birrell’s fraudulent scheme and that of course is true.
The only issue between my brothers and me, so far as I can see, is whether the Doeskin shares were delivered to the debtor or to Birrell, for if they were delivered to Callahan it makes no difference that Birrell “dominated” him. Concededly the certificates for the 700,000 shares were delivered to Callahan, and, although it was in the name of the “Gas Development” company, that was the same as though it had been in the debtor’s name. Indeed, Callahan was himself vice-president of the debtor at the end of 1956 when the delivery took place. I cannot therefore agree that the delivery, which was intended to be in conformity with the contract, was to Birrell, whatever were his purposes. For that reason it seems to me that the case at bar falls within the decisions I have cited which hold that the injured party may not reclaim property unlawfully procured from him unless he restores any consideration he may have received.
My brothers rely upon the decision of the New York Court of Appeals in Credit Alliance Corp. v. Sheridan Theatre Co., 241 N.Y. 216, 149 N.E. 837, as showing that the debtor never became so possessed of the Doeskin shares as to make their restitution a condition upon its recovery of the Keta shares. In the decision they cite the defendant corporation had by resolution provided that it should not borrow money except when authorized by the signatures of its president, Spiegel, and its treasurer, Rafferty. Spiegel drew up five notes which he signed as president *102and to which he forged Rafferty’s name; hence they were not in fact obligations of the defendant at all. These five notes Spiegel then transferred to the plaintiff together with a certificate for 100 shares of the defendant’s stock. In exchange the plaintiff gave “to Spiegel or some one representing him a check * * * payable to the order of the defendant corporation. This check Spiegel had certified and then he deposited it in a bank to the credit of the defendant. Almost immediately thereafter he drew a check of the defendant payable to his own order for the amount deposited, again forging the name of Rafferty. This check he deposited in a bank to his own credit.” The Court of Appeals dismissed the plaintiff’s complaint for “money had and received” for the following reasons among others. “The money, having been immediately withdrawn by Spiegel and converted to his own use without the corporation’s knowledge of the transaction or that the funds had ever been placed to its credit, it enjoyed no benefit and exercised no dominion over the same.”
In the case at bar both the transfer of the Keta shares to Doeskin and the issue of Doeskin shares to the debtor, sub nomine, “Gas Development,” were invalid, not being executed by the only persons authorized by either corporation to make them. The only difference between the two is that Doeskin kept the Keta shares, and the debtor disposed of the Doeskin shares. If the debtor had not done so, the debtor would certainly have been obliged to restore the Doeskin shares as a condition upon the recovery of the Keta shares since the transaction was an exchange, and a party seeking to rescind an exchange must restore the consideration or its equivalent. It is true that the Doeskin shares were sold and the proceeds were apparently embezzled by Bir-rell; but that cannot disguise the fact that they were issued to the debtor with the active connivance of other of the debtor’s officials, and had become as much a part of its assets as the Keta shares are part of Doeskin’s assets. Hence it follows that the proceeds of those shares are as much the property of the debtor as the unsold Keta shares are property of Doeskin. Credit Alliance Corp. v. Sheridan Theatre Co., supra (241 N.Y. 216, 149 N.E. 837) depends, I think, upon the fact that Spiegel’s transactions were not to be imputed to the defendant because no official of the defendant was privy to them at any stage. We should, I think, impose upon the debtor as a condition of any recovery the nearest possible equivalent of a cancellation of the newly issued Doeskin shares. As my view is not to prevail I shall not attempt to consider what should be deemed such an equivalent and indeed the parties have not discussed this aspect of the case. Therefore, although I would affirm the order so far as it directed a retransfer to the debtor of the Keta shares, I would make it conditional upon what the district court finds to be the nearest equivalent to cancellation of the Doeskin shares.