Opinion
Argued June 9, 1890
Decided October 7, 1890
George Wadsworth for appellant.
A.R. Dyett for respondent.
The receiver, who is the appellant, asserts that the mortgage given August 22, 1879, by the corporation to Lauren C. Woodruff, is void for the following reasons: (1) Because there were but two shareholders when the assent to mortgage the property was signed; (2) Because but two of the three persons were shareholders, who, assuming to act as trustees, met and, by a resolution, authorized its execution; (3) Because Woodruff participated as shareholder, as trustee, and as president in its execution to himself; (4) Because it was not given for a debt owing by the mortgagor to the mortgagee; (5) Because the written assent of the shareholders was not filed with the county clerk until after the mortgage was executed.
In considering these objections it should be borne in mind that in addition to the other facts, it was found that Hulbert and the officers of the Importers and Traders' National Bank believed that the mortgage was given to secure a debt, and was legal; also "that at the time of the making of said bond and mortgage, dated August 22, 1879, the Niagara Falls Paper Manufacturing Company and the said Woodruff were solvent, and able to pay the amount thereof, and so remained until after Hulbert had advanced all the money and sold all the goods to Woodruff and the company as aforesaid; and until after the Importers and Traders' National Bank had extended payment of Woodruff's debt of $50,000 for over four years."
The third section of the Manufacturing Act provides: "The stock, property and concerns of such company shall be managed by not less than three, nor more than thirteen trustees, who shall respectively be stockholders in such company."
The second section of chapter 517 of the Laws of 1864, as amended by chapter 481 of the Laws of 1871, provides:
"§ 2. Any corporation formed under the said act, passed February seventeenth, eighteen hundred and forty-eight, or of the acts amending or extending the said act, may secure the payment of any debt heretofore contracted, or which may be contracted by it, in the business for which it was incorporated, by mortgaging all or any part of the real and personal estate of said corporation; and every mortgage so made shall be as valid to all intents and purposes, as if executed by an individual owning such real or personal estate, provided, that the written assent of the stockholders owning at least two-thirds of the capital stock of such corporation, shall first be filed in the office of the clerk of the county where the mortgaged property is situated." The only change made by the amendment of 1871 is the addition of the words "or personal" to the section as passed in 1864. The enabling part of this section was enacted to relieve corporations from the prohibition against mortgaging their property, contained in the second section of chapter 40 of the Laws of 1848 ( Lord v. Yonkers Fuel Gas Co., 99 N.Y. 547) and the proviso, in respect to the assent of shareholders, is for their protection. ( Greenpoint Sugar Co. v. Whitin, 69 N.Y. 328; Rochester Savings Bank v. Averell, 96 id. 467; Lord v. Yonkers Fuel Gas Co., supra.) All of the shareholders having assented to the execution of the mortgage, the proviso was literally complied with and its chief, if not its only, object attained. The security is not invalid, because there were but two shareholders when the assent was signed. It affirmatively appears that two of the three persons named in the certificate of incorporation as trustees for the first year, were shareholders, and it does not appear that the third was not, nor is it alleged that the corporation was not legally organized. However, this question seems to be set at rest by the judgment in Davidson v. Westchester Gas Light Co. ( 99 N.Y. 558), which arose under chapter 37 of the Laws of 1848, the provisions of which, in respect to the qualifications of directors for the first and ensuing years, are the same as those contained in chapter 40 of the laws of the same year. It was held in the case cited that the corporation could be legally organized, and its business carried on during the first year, though the persons named in the certificate of incorporation were not shareholders, and that a mortgage executed pursuant to a resolution of directors who were not shareholders, was not, for that reason, invalid. (Morawetz on Corp. [2d ed.] § 507.) It must be assumed that this corporation was legally organized, and, that for some years, its business was carried on by three trustees who were shareholders. When a corporation has been legally organized its existence may continue after an event which would be a sufficient cause for its dissolution by the court; and when dissolved for violating the laws under which it exists, the rights of the creditors, who have become such since the time when it had, by some act of commission or omission, forfeited its right to exist, cannot be ignored, and the assets, which have been seized by the court, must be distributed among the creditors (in the absence of statutory directions) according to the principles of equity. The receiver, who is the representative of creditors, whose claims have arisen since the execution of the mortgage, and when there were but two shareholders, does not insist, and is not in a situation to insist, that the corporation had not a de facto existence until it was dissolved by the judgment of the court. In Castle v. Lewis ( 78 N.Y. 131), a corporation, organized under the Manufacturing Act, had a board of three trustees, one of whom resigned. Afterwards the two remaining trustees sent some of the goods of the corporation to a firm for sale on commission, but soon after assigned those unsold and the proceeds of those sold as security for money borrowed by them for the corporation. Other creditors attached the goods and proceeds of goods sold in the hands of the commission house, and a litigation ensued which involved the validity of the transfer. The learned judge who delivered the opinion of the court, in stating the position of the attaching creditors, said: "The defendants claim that the sale made by the corporation was void for want of authority, inasmuch as the statute in regard to manufacturing corporations requires that there shall not be less than three trustees and three stockholders; and as there were only two the corporation could not pledge the property." It was urged that the powers of the corporation had become dormant and could not be exercised so long as it had less trustees than it was required by the statute to have. The contentions of the attaching creditors were not sustained, and the assignment by way of security made by the two trustees was held to be valid. ( Atlas Nat. Bk. v. F.B.G. Co., 8 Biss. 537; Russell v. M'Lellan, 14 Pick. 63; Morawetz on Corp. § 1002.) The mortgage was not invalid as to subsequent creditors by reason of there being but two persons legally qualified to act as trustees when its execution was directed.
It is a general rule that a director, trustee or an executive officer of a corporation is without power to bind it or its shareholders by a contract authorized by or entered into with himself and for his individual benefit. But if the contract so entered into is in all respects just as between the parties, and all of the shareholders and directors or trustees are competent to assent, and with full knowledge of the terms of the contract, do assent and direct that it be made, it is binding on the corporation and cannot be avoided by its shareholders or by persons who subsequently become its creditors.
Upon an examination of the account between Woodruff and the corporation, the referee found that at the date of the last mortgage the mortgagor owed the mortgagee $33,997.40, and that interest amounting to $13,268.13 had accumulated, making $47,265.53 due thereon at the date of his report. The Special Term held that there was due thereon $3,111.88 more than was found due by the referee, making a total of $50,377.41, which was affirmed by the General Term. These conclusions are drawn from evidence quite capable of sustaining different inferences, but there being some evidence to sustain the facts found, this court will not overturn them. It should be observed, however, that when the mortgage was assigned Woodruff certified in writing that it was given to secure the payment of a lawful indebtedness from the corporation to him for the full amount secured thereby which was contracted in the business of the corporation, and at the same time he, as president of the corporation, certified that the security was good and valid in all respects, and it was found by the referee and confirmed by the court that Hulbert believed these representations and advanced money on the faith of them. The state of accounts between the mortgagor and the mortgagee, created after the assignment of the security, can have no effect upon the rights of the respondents.
The written assent of all of the shareholders having been duly signed one day before the mortgage was executed, it was, as between the assignee of the mortgage and the receiver, a sufficient compliance with the statute to file the assent simultaneously with the filing of the mortgage for record. ( Rochester Savings Bank v. Averell, 96 N.Y. 467.)
The sum ($9,277.53) directed to be paid to Hulbert individually was in satisfaction of a debt incurred by Woodruff to H.C. Hulbert Co., but it is found that before it arose Hulbert guaranteed to his firm the payment of all sums for which Woodruff might thereafter become indebted to it; and that November 6, 1885, the firm's interest in the demand was assigned to Hulbert. The receiver insists that this demand is not embraced within those secured by the assignment dated August 27, 1879; but this contention cannot be sustained, for the mortgage was assigned as security for all claims "which he (Hulbert) now holds, or which he may hereafter acquire by any means."
Not finding that the part of the order appealed from violates any rule of law or equity applicable to the distribution of the award, it should be affirmed, with costs.
All concur except BRADLEY and HAIGHT, JJ., not sitting.
Order affirmed.