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Drake v. New York Suburban Water Co.

Appellate Division of the Supreme Court of New York, Second Department
Mar 1, 1898
26 App. Div. 499 (N.Y. App. Div. 1898)

Opinion

March Term, 1898.

A.J. Dittenhoefer [ I.M. Dittenhoefer with him on the brief], for the appellant, the New York Suburban Water Company.

J. Langdon Ward, for the appellant, the Atlantic Trust Company.

Roger M. Sherman, for the respondent.



The judgment rendered in this action proceeds upon the theory that the issue of stock of the New York and Mount Vernon Water Company in fulfillment of the construction contract was in fraud of the rights of the stockholders of that company, in consequence of which such stock, so far as it participated in the vote for consolidation, is void as against the plaintiff in this action, and others similarly situated; that the creation of the New York City Suburban Water Company and the subsequent consolidation were in pursuance of a fraudulent scheme to obtain control of the property of the New York and Mount Vernon Water Company for little outlay in money, and subject it to the lien of a mortgage largely in excess of the value of the property, by reason of which fraud the whole transaction was vitiated, and that neither the parties who conceived the scheme nor the persons who thereafter became possessed of the stock and bonds of the consolidated company, by purchase, for value or otherwise, acquired any rights which entitle them to consideration in the judgment. It is quite evident that the judgment rendered is radical and sweeping in its character and effect. It sharply sets the time where the fraud began, and in the determination of property rights leaves no doubt upon which side stand the sheep and upon which side stand the goats.

As the questions to be determined are important and vitally affect the property rights of a large number of persons who are wholly cut off if the judgment is to stand, we have given it careful attention, and extended the discussion beyond ordinary limits. Is it true that the stock issued in payment for construction, which participated in the vote for consolidation, is void? There is no dispute of fact in connection with this matter. Inman Bros. appear to have fulfilled their contract to the letter. They constructed the works which they contracted to construct, and the company and the village of Mount Vernon accepted the same, and entered into the enjoyment of the property, and it and its successors have been in the enjoyment of the property since. This judgment wipes out the consideration in part which was paid for that work, and it sustains, in the hands of the plaintiff, a part of the same consideration which it wipes out when found in the hands of other parties. There can be no question but that the New York and Mount Vernon Water Company was competent to contract for the construction and extension of its plant, and to pay therefor in its stock and bonds. The statute under which it was created authorized it so to do. It was required to construct its works under the franchise granted by the village of Mount Vernon. Inman Bros. were under no legal disability to enter into such contract. There was no creditor in existence to complain or to charge that the property of the corporation was improvidently or fraudulently misapplied. There was no stockholder who could be wronged. The whole issue of stock was held by four persons. Inman Bros. had 1,997 shares; Smith and L'Huilier were respectively the president and secretary of the company, and held two of the three other shares. They executed the contract upon the part of the company with Inman Bros. They attested the certificate which represented the shares delivered to Inman Bros. Holt, who held the other share, interposed no objection, and does not now complain. His firm immediately bought from Inman Bros. a large number of the bonds, and received a large block of the stock, for which bonds and stock it paid cash. These were all the persons interested in the transaction. The company contracted, it obtained that for which it contracted, and no person or corporation then in existence, or which subsequently came into existence as an interested party, can be heard in complaint of a transaction by which no person was defrauded, and each obtained what it contracted to obtain. The legal principle is well settled which sustains such a transaction. ( Woodruff v. Erie Railway Co., 93 N.Y. 609.) But, farther, the company received the benefits of the contract in the added value to its plant, and they and their successors have enjoyed it since. The plaintiff in no wise offers to restore to Inman Bros., or their successors in interest, the value which they gave for the stock. It was expressly said by Judge FINCH, in speaking of a case involving this principle, "That kind of plunder which holds on to the property but pleads the doctrine of ultra vires against the obligation to pay for it, has no recognition or support in the law of this State." ( Seymour v. S.F.C. Assn., 144 N.Y. 341; Pocantico Water Works v. Low, 20 Misc. Rep. 484.) The last case is quite similar to the one we are presently discussing, and supplies all that is needful by way of discussion and reasoning upon this branch of the case. The judgment herein saves from condemnation 145 shares of stock, although all of such shares, except possibly three, came from the same source as the outlawed shares, and even these may not be saved if they are "owned or held by parties to this action" other than the plaintiff. It is somewhat difficult to grasp how the 145 shares purged themselves from the taint of fraud which attached to the whole. By the vote of 1,855 shares for consolidation, a consummation clearly lawful in itself, the penalty of death has been inflicted, while the 145 shares have become regenerated and arise from a new birth. We know of no legal principle from which such a result can be deduced. It is claimed by the plaintiff and found by the court that Huss rendered service to the company, and that the company issued the stock to him for such service. Such finding and claim are without support in the evidence. The ten shares of stock were transferred by Crow to Huss, and Crow received his shares from those issued to Inman Bros. by transfer from them. Huss testified that the service which he rendered was during the construction of the works. "Both Mr. Crow and Mr. Inman asked me to get these things for them if I could, for the use of the company. It was their business to acquire water rights for the company. I supposed they were under contract to do such for the company." It is true that he speaks of being requested by Smith to perform service when he was president. But such statement does not change the fact that the work which he did was of a character which Inman Bros. were to perform under the contract. He knew such was the fact, rendered the service and received the pay from the stock which passed through them. Huss, therefore, stood upon no other or different footing than the other holders. His transferee could acquire no other rights than he held. (Cook Stock Stockh. § 40, and cases cited in note.) If the stock issued to Inman Bros. was invalid, then it follows that the stock issued to Huss was also invalid and could not be made to furnish a basis for this action. We think, however, that this stock was valid at the time of its issue, and in its entirety it remains untainted with any vice. We must assume that the steps taken to effect the consolidation were in all respects valid and in accordance with law. This has been so decided in the action brought by Cameron and Huss to restrain the consolidation. ( Cameron v. N.Y. M.V.W. Co., 133 N.Y. 336.) This judgment was not pleaded in bar of the present action, and, consequently, it was not admissible in evidence as constituting a bar. It was, however, admissible as evidence, and as evidence it is conclusive as an adjudication of the same facts if in issue between the parties. ( Krekeler v. Ritter, 62 N.Y. 372.) It appears from the complaint in that action that, among its causes of action, was the claim that the trustees of the New York and Mount Vernon Water Company had caused to be organized the New York City Suburban Water Company, with a nominal capital of $1,500,000; that the latter company had no assets and was formed for the purpose of absorbing the other two companies. It further set up the making of a mortgage to the Atlantic Trust Company, and that it was proposed to make this mortgage a lien upon the property of the New York and Mount Vernon Water Company in pursuance of the agreement of consolidation which it was averred was made. The judgment entered in that action is, therefore, conclusive as evidence so far as the present complaint seeks to make available these acts upon the part of the consolidating companies as a ground of defeating the valid existence of the Suburban Company, the right to consolidate, and the effect of such consolidation. ( Williamsburgh Savings Bank v. Town of Solon, 136 N.Y. 465; House v. Lockwood, 137 id. 259.) Upon these questions the plaintiffs in that action contended for the same things in this respect that the plaintiff does in the present action, and upon these questions we think he is concluded by the former judgment, as he is a privy in interest with Huss. But aside from the question of the conclusiveness of this record upon this subject as a technical rule, we regard the decision in that case, embracing as it necessarily did the validity of the vote to consolidate, and the agreement of consolidation, as conclusive of the questions. The agreement of consolidation was before the court in that case, and the facts set out in the affidavits embraced all the matters and things leading up to the execution of that agreement. The court must have considered those questions in reaching the conclusion at which it arrived, as they were in the case and urged in the brief of counsel. Huss was fully aware of all the proceedings; he was served with a copy of the agreement of consolidation and notice of meeting of the stockholders to vote thereon. After the adjudication which dismissed his complaint in the former action, he took no part in the consummation of consolidation, interposed no objection thereto and gave no sign either of approval or disapproval, but he and his assignor slept upon whatever rights they possessed for five years after consolidation was effected, and for ten years after the issue of the stock to the Inmans. It became the duty of Huss, if he desired to assert any right, to act promptly, and, failing so to do, he became bound by acquiescence therein, and is estopped from asserting any right as against any person who has, in good faith, dealt with the corporation and received its securities. ( Kent v. Quicksilver Mining Co., 78 N.Y. 159; 2 Morawetz Corp. § 630.) And this is the rule, even though there be affirmative fraud in the transaction, where such fraud is known or is subsequently ascertained and no steps are taken either to arrest or correct it. ( Twin Lick Oil Co. v. Marbury, 91 U.S. 587; Barr v. N.Y., L.E. W.R.R. Co., 125 N.Y. 263.) No public interest was affected by this transaction. It is purely private in its character, extent and injury, and, therefore, consent, acquiescence or laches can validate the act. In these questions was also involved the validity of the 1,355 shares of stock which voted for consolidation. There has never been any pretense but that Coffin Stanton became possessed of these shares in a lawful manner by purchase, and thereby acquired the right to vote upon them, either in their own name or in the name of their transferee. Huss was as well acquainted with all of these facts at that time as he was at any subsequent time. It, therefore, follows that, so far as the proceedings which led up to the consolidation of these companies are concerned, there is no basis in law upon which they may now be interfered with, and the persons who acquired rights thereunder must be held to be protected in such rights as they acquired.

There exists strong ground for saying that the mortgage held by the Atlantic Trust Company became a lien upon all of the property held by the consolidated company. But we do not find it necessary in this action to determine or discuss this question. It is sufficient now to say that, whether such mortgage be valid or invalid, persons who have parted with their money or property upon the strength of it as a security are entitled to protection, and that the company and its stockholders are estopped from asserting its invalidity. ( Carpenter v. Black Hawk Gold Mining Co., 65 N.Y. 43.) It is evident that some of the bonds were issued for cash which the company received. It is certain that the payment of $195,000 upon the third mortgage of the New York and Mount Vernon Water Company arose out of the proceeds of the bonds, and the same is true so far as money was placed in the company to construct and extend its works, and pay the floating debts which had existence when the consolidation took effect. Money advanced for these purposes upon the faith of negotiable instruments issued by the company became debts of the company, whether the holder could look to any particular security for their payment or not. In view of this rule it is to be borne in mind that this action is brought by a stockholder seeking to enforce his right in the property of the company. But his rights, in this respect, are subordinate to the rights of the creditors of the company. We may assume that the mortgage to the Atlantic Trust Company was invalid; that its foreclosure was collusive and fraudulent; that the committee of reorganization had notice of all the facts, and that the reorganized company is honeycombed with fraud. But all this does not wipe out the fact that the New York City Suburban Water Company still exists as a corporation, and that it has creditors, and that those creditors who have taken its securities in good faith are entitled to be paid. No stockholder can institute his action and secure to himself a proportionate share of the property of the corporation, represented by his stock, without regard to the rights of creditors and in preference thereto. The court will not grant relief to such stockholder by ordering a sale of the whole property of the corporation, and distribute the proceeds among its stockholders without any provision for paying creditors. Sequestration of the property of corporations may not be had under such a proceeding and in such an action. It is opposed to the settled policy of the State in distributing the property of corporations. (Code Civ. Proc. § 1784 et seq.) This judgment makes no provision for any creditor except such as are secured by mortgage, and wipes out bonds and other obligations to the extent of nearly $1,500,000. It distributes the property of a corporation among a certain named class of stockholders. It gives to no creditor, aside from those parties to this action, an opportunity to be heard or prove his claim, and places beyond his reach the property which is his security. Whatever be the rights of the plaintiff under the action which he has brought, we may safely say that they do not embrace the judgment which he has secured, and can never embrace any right which leaves out of view the creditors of either corporation, for if we should treat the New York City Suburban Water Company as non-existent and revive the New York and Mount Vernon Water Company for the purpose of reaching its property, the claim of its technical dissolution by consolidation (a claim which seems to us absolutely inconsistent with the holding that the consolidation was invalid), would not prevent the court from the application of proper rules for the protection of its creditors and others in the distribution of its property. Whatever may have been the frauds of Coffin Stanton, it would be most unconscionable to permit the stockholders to avail themselves of the property which has been paid for by innocent creditors. Such a course would work a judicial fraud far worse than anything which has heretofore transpired respecting these corporations. In no view can this judgment be sustained.

It should, therefore, be reversed and a new trial granted, with costs to abide the final award of costs.

All concurred.

Judgment reversed and new trial granted, costs to abide the final award of costs.


Summaries of

Drake v. New York Suburban Water Co.

Appellate Division of the Supreme Court of New York, Second Department
Mar 1, 1898
26 App. Div. 499 (N.Y. App. Div. 1898)
Case details for

Drake v. New York Suburban Water Co.

Case Details

Full title:JOHN R. DRAKE, Respondent, v . THE NEW YORK SUBURBAN WATER COMPANY and THE…

Court:Appellate Division of the Supreme Court of New York, Second Department

Date published: Mar 1, 1898

Citations

26 App. Div. 499 (N.Y. App. Div. 1898)
50 N.Y.S. 826

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