Court Opinion

ID: 5201644
Source: CourtListenerOpinion
Date Created: 2022-01-06 15:53:38.286549+00
Date Added: 2024-06-11T08:27:12.448112
License: Public Domain

Scott, J. (dissenting):
In the year 1901 Frank A. Umsted, a salesman in the employ of the Hartman Manufacturing Company, arranged to purchase the whole capita] stock of the company of the par value of $250,000, for the sum of $110,000. William L. Kiefer, a la-wyer, became to some- extent interested in the purchase.
In order to procure the money necessary to complete the purchase, Umsted and Kiefer, by the most extravagant overstatements as to the büsiness and condition of the-company,, the value of its assets, and the price which they had. agreed "to pay for- the stock, induced the City Trust Company of-Hew York to loan them $125,000. As security for this loan the whole capital stock of the Hartman Company was deposited with the trust company, and placed in the name of one of its officers, and for the further protection of the trust company it was agreed that Elverton It. Chapman, a director of the trust company and one John F. Plummer, who had been active and-interested financially in negotiating the loan, should be made directors of the’Hartman Company. It was thoroughly understood by the trust company and all those who interested themselves concerning "the loan, that it was a personal loan to Umsted and'Kiefer, and" was made' to them in order that they might personally acquire the capital stock of thé Hartman Company. Of the $125,000 loaned $110,000 was paid to the vendors of the stock, the balance being used in payment of. interest in advance, a bonus' of $5,000 to the trust company, and certain commissions. In due course Umsted,- Kiefer, Chapman; Plummer and Elton, an employee of the company, were elected directors of the Hartman Company* Umsted being made president* Plummer vice-president, and Kiefer secretary and treasurer.- The directors met and adopted resolutions. placing'the" property and "business in charge of the president, and authorizing him, or the secretary and treasurer, to-sign all notes, contracts, and other obliga*145tions of the company. After the adoption of these resolutions (to be considered more • in detail hereafter) the board of directors adjourned and held no further meeting until after the transaction which lies at the foundation of this action. Chapman went to Europe for a protracted visit, and Plummer apparently paid little attention-to the affairs and business of the company except to aid in the borrowing of large sums of money from banks in the city of New York. The loan by the City Trust Company to TJmsted and Kiefer had been made for six months and fell due September 21, 1901. TJmsted and Kiefer conceived the project of acquiring other manufacturing properties to be consolidated with the Hartman Company, and to this end they borrowed, with the assistance of Plum* mer, and, to some' extent, Chapman, considerable sums of money from New York banks. They also applied to the defendant trust company for an increase of its loan, but this was refused, the officers of the trust company being apparently, uneasy about the loan, and much more willing to have it paid off than to increase it. On August 1, 1901, the Hanover National Bank loaned to the Hartman Company $200,000. This loan was negotiated by Hmsted, Plummer being present, and was made upon Hmsted’s statement that he and Kiefer had borrowed for the Hartman Company $125,000 from the City Trust Company upon a promissory note secured by the pledge of the capital stock of the said Hartman Company. He accordingly received from the Hanover National Bank a check upon itself, signed by its vice-president, and drawn to the order of the Hartman Manufacturing Company of Elwood, Penn., for; the sum of $125,000. - '
This check Hmsted indorsed to the City Trust Company, signing the name of the Hartman Company by himself as president and general manager. The City Trust Company accepted this check in payment of its loan to Hmsted and Kiefer and surrendered to Hmsted the promissory note and the stock of the Hartman Company held as collateral thereto. Shortly thereafter the Hartman Company, by action of its board of directors, increased the capital stock from .$250,-000 to $2,500,000, and the entire issue of the new stock was delivered to Hmsted and Kiefer in substitution for the old stock held by them. On November 18,1901, the Hartman Company failed to meet its *146obligations, and one'of its notes went'to protest, and steps were, immediately taken by its creditors to secure' themselves so far as possible. The various steps taken to this end it is unnecessary to recapitulate. A reorganization. committee was appointed and a board of- directors was elected in the interest of the creditors. The claims'against, the company were assigned to the plaintiff, and all. the property of the Hartman Company, except the claim against "the City Trust Company in suit here, was. sold by, order of the directors and‘bouglit by plaintiff for the sum of $238,000, which was credited proportionately in reduction of the several claims of the creditors. There still remained due $371,140.29, for which plaintiff recovered judgment against the Hartman Company, upon which execution was issued and returned unsatisfied, whereupon the plaintiff brought this action t,o. recover the $125,000 loaned -to. the Hartman Company by the Hanover Hational Bank and diverted to the payment of the personal indebtedness of Hmsted and Kiefer to the City Trust Company. The plaintiff appeals from a judgment in favor of the defendant trust company entered upon the report of .a referee. -Three" important facts stand out prominently in the case. They are found by the referee and are not disputed by the respondent. They are, first, that, the loan to Hmsted 'and Kiefer was a personal loan ■to them, and was understood by and known to the. officers of "the ¡ '-City Trust Company to "be such; second, that the money with which the loan was paid off was -the money of the Hartman Manufacturing Company, loaned to it upon its credit; third, that the .form of the. check whereby the • loan of. the City Trust Company was .paid off constituted notice to the trust company that, the money represented thereby was the property of the Hartman Manufacturing Company. These" fundamental and admitted facts lie at the ■ very root of plaintiff’s claim. It. is thus made to appear that the City Trust Company knew that it was accepting the money of the Hartman Company in payment of the personal indebtedness of Hmsted and Kiefér, and was thus reaping the" fruits of an apparent diversion of the funds of the Hartman Company. - With this knowledge and notice it was at once put upon its inquiry, and if it chose to accept the money, as it- did," without any_ inquiry at all, it so accepted it at its peril, and-if this use of the furids of the Hartman. Company w.as in fact unauthorized, the trust company is liable to. *147refund the amount to the corporation or its creditors. (Rochester & C. T. R. Co. v. Paviour, 164 N. Y. 281.) From this general proposition we do not understand that there is dissent either by the learned referee or the respondent. It is urged, however, that there are reasons why this general rule is not' applicable to the case at bar. It is said that although the trust company should have inquired as to the authority of U msted aqd Kiefer, but did not do so, still the failure to make such inquiry will not prevent the respondent from now relying upon such facts as would have been disclosed if a reasonable and proper inquiry had been made. For this there is ample authority' ( Wilson v. Met. El. R. Co., 120 N. Y. 145), but the limitation of the rule must be strictly observed. Prima facie it is ’ unlawful for an officer of a corporation to use its funds in payment of his personal obligations, and the known fact that an officer is so using the corporation’s funds certainly raises no presumption that he is authorized to do so, but rather the contrary. The inquiry respecting his authority, therefore, is not whether there is anything forbidding such use, but whether either by some act of the company, or something in the relation between the officer and the company there is anything which justifies such use, and it is not sufficient that the inquiry is merely formal and perfunctory, or addressed to some one not presumptively cognizant of the facts, or who may have an interest in misstating them. When the officers of the trust company were offered the Hartman Company’s money in payment of the personal indebtedness of Hmsted and Kiefer, they were called upon to make a reasonably careful and intelligent inquiry as to the authority for such an apparent diversion of the company’s money. The place to look for such authority was the minutes of the board of directors, upon which the trust company had expressly stipulated that it should have two members to safeguard its interests. .
Such an inquiry would have disclosed the fact that such authority had never been given to the board unless it could be spelled out of the following resolution adopted at the first meeting after Umsted and Kiefer had obtained control of the company: “ Resolved, that the president (Umsted) at once take charge of all the property and business of the company, and that all officers and employees of the company report to him and receive orders from him.”
“ Resolved, that all of the property of whatever name and nature *148of this corporation be placed in charge of the president and general manager, and all checks, notes, contracts or other obligations of the corporation be made and signed by the president, or by the secretary and treasurer, and that the signature of one or the other be required .on all papers, contracts and -.other documents executed by the said corporation.’’. These resolutions, which are to. be .read together, certainly gave to ITmsted the most complete control over the business of the corporation and over its funds and property in 'connection with its business, but there is nothing whatever in the language of the resolutions, or in the intent so far as it can be derived from the. language, to justify-the conclusion that the directors had authorized Umsted and Kiefer to divert the company’s money to the payment of their- own personal obligations. Certainly there is no such apparent authority as was given to the president of the defendant in Bank of New York N. B. Assn. v. Am. Dock & Trust Co. (143 N. Y. 559) to sign warehouse receipts, or' to the defendant in Rankin v. Bush (93 App. Div. 181) to. certify cheeks.If then the trust company had made proper inquiry they wbuld have found-in the minutes of the board of directors no justification for the use of the Hartman Company’s money for the payment of the debts of Hinsted and Kiefer, and they could have' found no such authority anywhere; for the fact was that no such authority existed, and no amount or extent of inquiry cotild have disclosed any. We are, therefore, unable to find any foundation for the view expressed by the learned referee that the City Trust Company is to be considered as having received the money of the Hartman Company in what is knowu to the law as good faith. That its officers were guilty of actual, intentional fraud is not claimed, but it is clear that they were guilty’of a legal fraud upon the Hartman Company and its creditors, for it appear: that the payment of $125,000 to the trust company largely impaired the capital of the Hartman Company, which then owed Various banks upward of $386,000, and in effect rendered i't insolvent. Hnless there is something in the present cáse exempting it from the general rule, the" facts as. thus far stated required -a judgment for the plaintiffs (Rochester & C. T. R. Co. v. Paviour, supra ; Gerard v. McCormick, 130 N. Y. 261; Cohnfeld v. Tanenbaum, 176 id. 126.)
That the payment was made by what is known as a cashier’s *149check is of no significance except that, as already noted, its very form conveyed notice of the apparent diversion. It is argued that the act of Umsted and Kiefer was afterwards ratified by the Hartman Company. It seems to be more than doubtful whether or not, under the circumstances, the company could lawfully and effectually, as against its creditors, have ratified an act which impaired its capital. However this may be there is no evidence of ratification, for it does not appear that any director save Hmsted and Kiefer knew of the diversion. It is also strongly urged upon us that the Hartman Company was what is known as a “ one man corporation,” and that owing to this fact the trust company was justified in treating Hmsted and Kiefer, the owners of the whole capital .stock, as if they were" in fact the company, and was also justified in assuming that they had authority to deal with the funds and assets of the company as their own. Undoubtedly there are cases wherein the assent' of all the stockholders-of a corporation is to be taken as against them, as the assent of the corporation itself, for it would be manifestly unjust for the stockholders to repudiate in their corporate capacity, and for their own benefit, that which they assented to as individuals. But this principle is applicable only, and is applied only where there are no interests to be considered except those of assenting stockholders, and can have no application where the rights of non-assenting ■ creditors are concerned. In Little v. Garabrant, (90 Hun, 404; affd., 153 N. Y. 661), which was an action by a. receiver of a corporation, the court said: “In his capacity as trustee for the corporation he would. not be precluded from, a successful prosecution of the action, because of the assent of all of the stockholders to the use of its funds for purposes outside of the business of the corporation, provided it were the fact that the corporation was insolvent at the time such payments were made.” The referee has expressly found that the diversion of the $125,000 not only impaired the capital of the Hartman Company, but rendered it insolvent.
Ordinarily a corporation can act only through its directors, and it is only under special and unusual conditions that the assent of the individual stockholders may be taken in place of action by the' directors, and certainly, when the rights of creditors intervene, the individual stockholders cannot make a disposition of the corporate *150funds which the directors as such could not lawfully make. Primarily the capital of a corporation is held for the protection of its creditors and impressed with a trust in their behalf, and the directors cannot lawfully, nor can the stockholders, divert the funds of a. corporation to the individual use of its members, if. thereby the ■capital is'impaired and-the corporation rendered insolvent. (Hurd v. N. Y. & C. Steam Laundry Co., 167 N. Y. 89; Germania Safety Vault & Trust Co. v. Boynton, 71 Fed. Rep. 797; Matter of Prospect Worsted Mills, 126 id. 1011; National Trust Co. v. Miller, 33 N. J. Eq. 155.) It is no’ answer to say that the trust company had no knowledge or noticfe that the Hartman Company had other creditors, or- that the diversion of the $125,000 would impair its capital. It was bound to inquire. If it chose to treat Umsted and Kiefer as being in fact the corporation, and to rély, upon their authority to divert the company’s funds as a substitute for the authority, of the corporation, expressed in the usu'al and customary way, it acted at its peril, not perhaps as against the stockholders with Whom it was dealing, but as against existing creditors. It had carefully stipulated for representation in the board of directors, thereby securing a source frdm which it could gain information as to the affairs and condition of the company, and yet neglected:to resort to that source of information when an unusual and suspicious situation was presented. Because it willfully closed its eyes and refused to make any inquiry it cannot how escape liability because it did not know that which an inquiry would have made apparent.
For these reasons the judgment appealed from should be reversed and a new trial granted, with costs tó appellant to abide the event.
, McLaughlin, J., concurred. -