Opinion
Decided April 26, 1933.
Contracts — Consideration illegal in part — Purchaser from corporation assumed real estate mortgage and transferred stock to corporation — Purchaser liable to mortgagee on mortgage.
A purchaser of real estate from a corporation, who assumes a mortgage on the real estate, cannot avoid his liability to the mortgagee by showing that a part of the consideration for the conveyance was the transfer to the corporation of some of the corporation's own capital stock.
APPEAL: Court of Appeals for Scioto county.
Mr. S. Anselm Skelton, for cross-petitioner.
Messrs. Bannon Bannon, Mr. Howard P. York and Messrs. Miller, Searl Fitch, for defendants.
The General Electric Supply Company brought an action in the common pleas court to have a receiver appointed for the Youngman Electric Company, in order that the General Electric might realize on a judgment theretofore recovered by it. A receiver was appointed. Thereafter, upon application of the plaintiff, the Commercial Building Loan Company was made a party defendant. The building and loan company thereupon filed its cross-petition setting up a note owned by it, given by the Youngman Company, secured by mortgage on real estate. It further pleaded that said real estate had been sold by the Youngman Company to E.D. Stevens, and that Stevens had in the deed by which he took title assumed and agreed to pay as part consideration therefor the mortgage referred to, and that Stevens had later conveyed an undivided one-half interest in said property to George A. Youngman, who also assumed and agreed to pay the mortgage. The pleading further charged that both these grantees had subsequently conveyed the property back to the Youngman Electric Company after the receiver therefor had been appointed. The prayer of the cross-petition was that the mortgage be foreclosed and that the building and loan company recover personal judgment against Stevens and Youngman. Issue was joined on this cross-petition, and a decree for foreclosure was entered denying the building and loan company the personal judgment claimed against Stevens and Youngman. From this decree an appeal was taken to this court.
The defense made by the answer was that the conveyance made by the Youngman Company, in which Stevens assumed the mortgage, was void because the consideration therefor was the surrender and sale to the grantor of certain shares of its corporate stock then owned by Stevens, and that the receiver of the Youngman Company because of the invalidity of the transaction had caused Stevens and Youngman, under an order of the court administering the receivership, to reconvey the property to the corporation, and that the assumption sued upon was consequently without consideration. This answer is met by the denial of the building and loan company.
The Youngman Electric Company, by the action of its board of directors, ratified by its stockholders, authorized the deed by which Stevens assumed the mortgage. While the corporation was in the hands of the receiver the property was reconveyed to the corporation in accordance with an order improvidently entered in the common pleas, which order was subsequently set aside. Such reconveyance was therefore a nullity. The deed to Stevens is subject to attack only on the ground that the corporation received as part pay therefor certain shares of its corporate stock. The transaction occurred in February, 1929, on which date the statute provided that a corporation should not purchase its own shares except as provided by Section 8623-41, General Code, as it then read (112 Ohio Laws, 28).
Assuming that the acquisition of this stock by the corporation was not under such circumstances as entitled the corporation to acquire the stock, it immediately follows that the corporation never became the owner of the stock. It cannot be said, however, that any further conclusion must necessarily be drawn. Eliminating the element of the stock transfer, we have this situation: Stevens offered personally to pay $7,070.80 of the unsecured debts of the corporation, and also pay the mortgage in question on the corporation's real estate, in consideration of the corporation conveying to him that real estate and turning over to him certain accounts receivable of the face value of $7,203.56, but of uncertain worth in fact. This was a sound contract based on legal considerations on both sides, and cannot be avoided unless the additional consideration that Stevens should transfer to the corporation his shares in the corporation was of such illegal character as to vitiate the whole contract.
The rule generally, as laid down in 6 Ruling Case Law, 682, is that where the consideration is made up of several distinct parts, some of which are legal, the contract will be upheld notwithstanding the presence of an illegal consideration, unless the transaction as a whole is opposed to good morals, or unless a penalty is imposed by law upon the transaction. As we have pointed out, this contract has sufficient legal considerations without the sale of the stock. It is not immoral in any way, nor are the parties subject to any penalty for consummating the contract.
Unless the law of Ohio is to be distinguished from the general rule referred to the contract must be upheld. It is impossible to reconcile all that has been said in all the Ohio opinions, and we shall not undertake a discussion of them. It is important to observe that the enforcement of this contract will not accomplish the violation of any law either on the part of the promissor or any one else.
In Commissioners of Knox County v. Nichols, 14 Ohio St. 260, and State, ex rel. Laskey, v. Board of Education of Perrysburg Twp., 35 Ohio St. 519, it was held that a contract containing a provision that violated a statute would nevertheless be upheld to the extent that it was legal, where the legal promise was readily separable from the illegal. Widoe v. Webb, 20 Ohio St. 431, at page 435, 5 Am. Rep., 664, is sometimes referred to as establishing the contrary doctrine, but in that case the court says:
"When, however, for a legal consideration, a party undertakes to do one or more acts, and some of them are unlawful, the contract is good for so much as is lawful, and void for the residue."
Applying this principle to the case at bar, Stevens received two legal considerations, to wit, the bills receivable of the corporation and the conveyance of the real estate. In return he bound himself to assume the mortgage in question, and to pay the bills payable, both perfectly valid engagements. That he also undertook to transfer stock as a further consideration, and that this undertaking was unlawful, and consequently failed, did not release him from the performance of his legal obligations. This doctrine is unaffected by McQuade v. Rosecrans, 36 Ohio St. 442, and Kahn, Jr., v. Walton, 46 Ohio St. 195, 20 N.E. 203, and that line of cases that denies relief in equity to a suitor who comes with unclean hands, or to a claimant at law who is in pari delicto, because in the case at bar the cross-petitioner is not charged with any misconduct of any kind.
While it seems that these Ohio authorities are in line with the general rule laid down in Ruling Case Law, and that there is no technical difficulty in enforcing the agreement made by those who assumed the mortgage, the Supreme Court has indicated that the sanctity of contracts might require us to go farther, if necessary, to sustain the agreement sued upon. Illegal contracts are refused enforcement only as a matter of public policy, and not as a right of the party thereto. The contract for the sale of this real estate was not illegal, but, though it had been, public policy might be better served by requiring the parties thereto, who were alone derelict, to go on with the performance rather than strip innocent parties, not in any way involved in any illegality, of the rights flowing to them by the transaction. Judge Spear, in King v. King, Exr., 63 Ohio St. 363, 372, 59 N.E. 111, 52 L.R.A., 157, 81 Am. St. Rep., 635, says that even though the acts of the parties have been in violation of positive law their contract is sometimes enforced, and he quotes with approval:
"`Public policy, it must be borne in mind, lies at the basis of the law in regard to illegal contracts, and the rule is adopted not for the benefit of parties but of the public. It is evident, therefore, that cases may arise, even under contracts of this character, in which the public interests will be better promoted by granting than by denying relief, and in such the general rule must yield to this policy.'"
No reason has been shown why Stevens and Youngman should be released from their obligation, and a decree for the building and loan company may be entered as prayed for.
Decree for cross-petitioner.
BLOSSER, P.J., and MIDDLETON, J., concur.