Brooklyn Distilling Co. v. Standard Distilling & Distributing Co.

105 N.Y.S. 264 | N.Y. App. Div. | 1907

Lead Opinion

McLaughlin, J.:

On the 28th of June, 1898, the plaintiff leased to the defendant certain realestate on which was located a. distillery, not then - quite completed, for a term of.three years from 'July 1, 1898, with privilege of renewal for four years. The defendant went into possession of the premises leased and paid the rent — which was payable' in monthly installments— to and including the month of Rovember, 1899, It thereafter, refused to pary, though remaining in possession, and this action was brought to recover installments which had. become due, together with certain sums paid by the lessor for taxes and insurance. The only ■ defense relied lipón at the trial was the alleged, illegality of the lease — defendant contending that it'was illegal arid void inasmuch as it was made. 'in violation - of the statute which prohibits an arrangement or combination whereby a monopoly in the manufacture, production or sale in this State-of any article br commodity in common usé is dr may be created, or whereby competition in the supply or price of -such article or commodity is or may be-restrained or prevented. (Laws of 189-7, chap. 383.) The plaintiff had a judgment, from which defendant appeals to this court,, and it -contends here, as-it did a-t the trial, that the lease is void, having been-in violation .of the statute referred to, and the recovery being predicated'on the lease, is erroneous.

The execution of the lease is conceded,'as is-also the fact that the defendant went into possession of the distillery and paid the.rent' ¡stipulated to be paid to and including ¡November 1, 1899, and it is not denied tliat-it has since remained in. possession and wholly failed and neglected to make any further payments. The general rule is that a tenant- who has- gone into possession under a' lease must either pay the rent which is due or vacate the premises-; that he cannot keep both the rent and possession. (Douglas v. Chesebrough Building Co., 56 App. Div. 403.) But it is .said this rule, does not apply because the relation of landlord and -tenant was never created, inasmuch as the lease was void in its inception. -The assertion, that the lease is.void is predicated, upon the fact' that the defendant was incorporated for the purpose of creating a mpnoply in -the manufacture and- sale óf alcohol and spirituous liquors, and regulating-the pi-ice at wliich-.the same should be sold to the public, in violation . of the statute, and that the making- of the lease was- a part of and' to aid in the accomplishment of the. unlawful purpose,'of which thé • plaintiff had- full knowledge at the time the lease was executed. If at be assumed that the plaintiff had all the knowledge- which the (defendant had as to its-purpose in making, -the lease, I do not think that, in and of itself, made the lease void. There was no obligation ahsting upon the plaintiff to operate its distillery at all, -much less ¡at a loss; nor was there any obligation to let it lie idle; if it did not see fit to do either, it could sell or lease- it.. This naturally leads to the question of what its board- of' directors should have done when the proposition was made by the defendant to lease. The plaintiff then had invested -nearly $1,000,000 in the construction of the distillery, which was designed to produce alcohol and spirituous liquors from the refuse of sugar and molasses. It was then somewhat problematical whether or not this could be successfully done, it not having been theretofore demonstrated in a practical way. Not only this, but if successful in producing the alcohol and spirituous liquors in the way contemplated, it was threatened at the outset with very serious competition by the defendant. Should it then have operated the distillery at a possible loss, allowed it to remain idle or leased, for a term of years at a rental which would insure to its stockholders a good return on the capital invested? Good business judgment would seem to suggest the answer to the questions propounded, viz., to accept the certainty instead of the uncertainty.

The statute does not.prevent one selling or leasing property, nor does it prevent one buying or leasing property to prevent competition. (Diamond Match Co. v. Roeber, 106 N. Y. 473; Leslie v. Lorillard, 110 id. 519; Tode v. Gross, 127 id. 480.) It is designed to ‘prevent the. owners or controllers of- ■ property entering into a combination to regulate production and maintain prices for their mutual benefit according to their respective interests.

The court in Cummings v. Union Blue Stone Co. (164 N. Y. 401) clearly pointed out the purpose of the statute and the kind of a contract which, if made, would be void under it, but in doing so it took occasion to say : “ It may be conceded that the law, as now-understood, restrains no one from selling' his property, nor does it ' compel any one to continue a business which he can sell or finds it to his interest to abandon; much less to continue it for any time or in any particular manner or place. * * * Contracts between individuals to that effect are not in general restraint of' trade.” And substantially the samp statement was -made in Wood v. Whitehead Brothers Co. (165 N. Y. 545), which was cited with approval in New York Bank Note Co. v. Hamilton Bank Note Co. (180 id. 280).

The fact that the plaintiff knew the defendant’s motive in leasing the distillery did not render the lease invalid. The validity-of a contract under this statute cannot be made to depend upon the motive of one of the parties. This was held in the Diamond Match Co. Case (supra), where the court said : “ We .áre not aware of any rule of law which makes the-motive of the covenantee the" test of the validity of such a contract. On the contrary, we suppose a party may legally purchase the trade and business of another for the very purpose of preventing competition, and the validity of the contract, if supported by a consideration, will depend upon its reasonableness as between the" parties.' Combinations between producers to limit production and to enhance prices are, or may be, unlawful, but they"staud on a different footing.”

■ It must be borne ill mind that the plaintiff in making the lease did not in any way become a party to the illegal combination or participate to any extent in any scheme to avoid the statute by controlling the manufacture or sale of the-commodity referred to. The lease was the only contract which it made with the defendant.. It could, just as we,11 be contended, that a- contractor who had built the distillery for the" defendant, with knowledge of. its purpose, was not entitled to recover the contract price or that a farmer who had sold liis corn to the defendant, knowing its purpose in buying it, could not recover the price agreed to be paid, as it can that the plaintiff is not entitled to recover in this action. The plaintiff, as we have already seen, took no part in the illegal combination ; could ‘derive no benefit from it or from the incorporation of the defendant or the carrying out of its purpose; had nothing to do with regulating the quantity of alcohol- and spirituous liquors to be produced or' the price to be charged ; and, therefore, this contract is.clearly distin-"• guishable' from, those where premises are leased to be used for an 9 immoral purpose.

The'foregoing discussion has been upon the assumption "that the plaintiff knew the illegal purpose for which the defendant was formed and which induced it to make the lease in question. ■ But ' there is, in fact, no evidence which would justify a finding to. this effect. The-only evidence bearing on that subject is that Maftliiessen, its president (since deceased), had that knowledge,, and it is claimed that the knowledge which he had- is to be imputed to his principal. This is the general rule, but it does not apply where the agent is engaged in doing ‘ an act against liis principal’s interest. (Benedict v. Arnoux, 154 N. Y. 715.) It is undisputed/ that Matthiessen was largely interested in the defendant company. He was one of its promoters, directors and a member of its executive committee. Appellant insists that in the negotiations which resulted in the execution of the lease Matthiessen acted not in the interest of the defendant, but in the interest of the plaintiff and, therefore, his knowledge must be imputed to the plaintiff, and yet it is insisted that the lease procured by Matthiessen is void, for which reason defendant cannot be compelled to pay the rent stipulated. If the lease were illegal and void Matthiessen must have known it because he is presumed to have known the law, and if he induced the plaintiff to execute it, knowing it to be void and unenforeible against defendant— being himself personálly interested in the defendant — it cannot be said he was acting in the interest of the plaintiff. Either the lease is valid — in which casé it is immaterial for whom Matthiessen acted — or else it is invalid because made, for an illegal purpose. If the latter, it was made against the interest of the plaintiff, and the presumption is that Matthiessen did not impart to the plaintiff the knowledge which he had of the defendant’s illegal purpose. (Benedict v. Arnoux, supra.)

I am of the opinion that the judgment is right and should be affirmed, with costs.

Patterson, P. J., Laughlin and Houghton, JJ., concurred; Scott, J., dissented.

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Dissenting Opinion

Scott, J. (dissenting) :

In this action the plaintiff has recovered a judgment for rent of a distillery property leased to defendant on J une 28, 1898, for a term of three years from July 1, 1898, with the privilege of' renewal for four years longer. The defendant paid the rent up to November 1, 1899, but has refused to pay any further installments. The defense is in brief that the defendant was organized for an unlawful purpose, to wit, the creation' of a monopoly in the production and sale of alcohol and spirituous liquors; that the lease was entered into with knowledge on the part of plaintiff of said unlawful purpose and in furtherance of such purpose; that the lease is, therefore, void, and no action upon it can be maintained.

The statute in force at the time the- lease was made is known as chapter 383 of the Laws of 1897, the 1st section of. which reads as follows : “Every contract, agreement, arrangement or combination whereby a monopoly in the manufacture, production or sale in this State of any article or commodity of common use is or may be created,,established or maintained, or whereby competition in this State in the supply or price of any such article ór commodity is or may be restrained or prevented, or whereby, for the purpose of creating, establishing or maintaining a monopoly within this State" of the manufacture, production or sale of any such article dr commodity, the.free pursuit in. this State of any lawful business, trade or occupation is or may be.restricted or prevented, is hereby declared to be against public policy, illegal and void.”

The following facts appear to be established beyond dispute: First. That the purpose of the organization of the defend ah t was to establish and- maintain within the State of Dew York and throughout the United States a monopoly in' the manufacture and sale of .spirits and alcohol, commodities in common use. Second. That as a means of arriving at the result it was a .part of the scheme to obtain control, by purchase or lease, of practically all the existing distilleries or plants for distilling spirits and alcohol. Third. That the' lease herein sued upon was made in furtherance of such scheme to create a monopoly, and for ■ the purpose of preventing the' plaintiff’s plant from being used to produce spirits and alcohol in competition with the defendant. •

Dpon these facts it would appear prima facie that the lease was such an instrument as is, by the statute cpioted above, declared to be against public policy, illegal and void-.

It is, however, contended by the plaintiff that although the intent of the defendant and the object of its incorporation, and its purpose in acquiring the lease in'question may have been.such as has been described, yet that the plaintiff had no knowledge of such intent, object or purpose, and-, therefore, that so far as it. was concerned ■the lease was' as. innocent ’ a document as it appears to b,e upon its face, and not made in contravention of the statute: This view was accepted by the court below, and the question whether or not it is justified by the evidence is the real point in controversy upon this appeal.

The lease in question was executed in behalf of plaintiff by one F. O. Matthiessen, its president, who is now deceased. That he lcnew all about the organization of defendant and its purposes and objects is not disputed. He was one of the underwriters of the scheme, and upon its organization became a director of the defendant company.' If the plaintiff company possessed the knowledge that Matthiessen possessed, it is chargeable with full knowledge of the objects, for which defendant was organized, and of the illegal purpose for which the lease was procured to be executed. Matthiessen, as has • been said, is dead, and none of the directors of plaintiff who authorized.the execution of the lease on its behalf testified as to whether or not Matthiessen 'communicated to the directors his knowledge concerning the inducements which led to making the lease. We are, therefore, left to apply those rules ¿f presumption which are applicable in .such a case. Primarily it is to be presumed that the president of a.corporation who acts in its behalf and executes contracts in its name has communicated to his principal, the corpora-tion, whatever knowledge- he has acquired with reference to the transaction, and consequently his knowledge is, in general, attributable to the corporation. I do not .understand that the plaintiff dissents from this general proposition, but it does insist that the circumstances bring the case within the exception to the rule, under which a contrary presumption arises. That exception is well stated, in Benedict v. Arnoux (154 N. Y. 715) -wherein Judge Haight says: “ So long as the agent acts within the scope of his employment, in good faith-, for the interest of his principal, he is presumed to have disclosed to his principal all the facts that come to his knowledge as agent; but just as soon as the agent forms the purpose of dealing with his principal’s property for his own benefit and advantage, or for the benefit and advantage of other persons who are opposed in interest, he ceases- in fact, to be an agent acting in good faith for tlie interest of his principal, and his action thereafter based upon such purpose is deemed to be in fraud of the rights of his principal, and the presumption that he has disclosed all the facts that have come to his knowledge no longer prevails.”'

The learned justice at Trial Term was of the opinion that the facts disclosed by the proofs brought the case within the exception to the general rule, basing his conclusion apparently, as the plaintiff now bases the like contention, upon the fact that Matthiessen became a director of defendant and an underwriter of thfe scheme upon which it was engaged, and as such was a participant- in and expectant beneficiary of tile unlawful' scheme in the carrying out of which the lease in question ivas made-. Hence, it is argued that it' must be assumed that his interests were with the defendant rather-than with the plaintiff, and that in-bringing about, the execution of the lease he sought the advantage of- the defendant and not that of the plaintiff, and from these premises it is further argued that it is to be presumed that Matthiessen concealed from plaintiff, of which he was president, tlie knowledge which had .'come to him. The transaction itsélf does not indicate that the lease-was an improvident or. unfavorable one for plaintiff to have made. It had just completed a refinery'designed to' be used for distilling alcohol from black strap or sugar refuse. Its success in the enterprise was unproven and to some extent problematical. It had expended nearly $1,000;000 in the preparation of the plant. By' the lease it was to 'receive a net rental equal to five per cent upon $2,.000,000, the lessee paying all taxes, assessments, water rates, and insurance-premiums, thus insuring /to the lessor without any risk of losses a net return of something over ten per cent upon the money invested. This does not appear on its face'to have been an-unfavorable or improvident arrangement for the plaintiff. Would plaintiff have been likely to insist upon more favorable terms if Matthiessen had communicated to it the knowledge he had acquired concerning-the plans of those who were engaged in organizing the-defendant? If he had so communicated he would have -told plaintiff that a powerful organization was in process of formation with ' well-matured plans for controlling practically all the plants in the country engaged in producing spirits and alcohol. This would have meant that at the very commencement of its experiment in producing alcohol plaintiff would find itself confronted with the business' rivalry of a most powerful competitor, and it' requires little knowledge of affairs to realize that with such knowledge in its possession the plaintiff would be more eager to accept a safe and adequate return upon its investment byway of rental than it might ' have been if' it had believed .that its business would be met by no .-organized opposition. If any presumption is to- be indulged in from the fact that the plaintiff abandoned its. project of distilling alcohol and leased its plant, it would seem to be reasonable to presume that it had learned that it would have to meet more powerf ul opposition than had been expected. It is, moreover, by' no means clear that Matthiessen negotiated and arranged for the lease after he had become interested in the defendant’s scheme. It is true that the underwriting agreement is dated June 1,1898, and that the lease is dated on June 28,1898, and apparently not delivered until July 8,1898. The evidence shows, however, that it ivas Matthiessen who first' proposed that the plaintiff should be taken into the combination, and that this proposal or demand was made when Matthiessen .called at the Manhattan Trust Company to examine and discuss the terms of the underwriting agreement, and hence presumably before he signed the agreement. It further appears that he was very insistent that the plaintiff should be taken in, and that his proposal to that effect met with opposition from some of those interested in organizing defendant. ' I can see nothing in'the circumstance that Matthiessen ultimately became actively interested in defendant to justify the presumption that in negotiating the lease he acted in opposition or with indifference to the interests of the plaintiff, or that he had any motive to conceal from plaintiff the knowledge he possessed as to the objects and purposes of defendant.' On the contrary,-the evidence raises quite the contrary presumption in my mind, wliidh is strengthened by the circumstance, that none of the living directors of plaintiff appeared to testify that Matthiessen had not communicated his knowledge to them. I think, therefore, that plaintiff, by every rule of presumption, is to be charged with Matthiessen’s knowledge. If so, the question remains whether or not the lease was such an instrument as is condemned by statute as illegal and void. The statute above quoted reads in the disjunctive. A. contract is illegal if it tends to create a mon opoly, or tends to restrain competition in the supply or price, of any article of common use, or if it tends to restrict the free pursuit in the State of any lawful business, trade or occupation. It is not necessary, therefore, to show that the free pursuit of the business of distilling alcohol was restricted, if the contract is obnoxious to the clauses-of the statute. The statute in terms declares illegal and void “Every contract, agreement, arrangement or combination whereby a monopoly in the manufacture, production or sale in this State of any article or commodity of common use is or may be created, ■ established or. maintained, or whereby competition in this State in thesupply oi'price-of any such article or commodity is or may be restrained or prevented. • ■* *.”

There can be no doubt that the purpose of 'this Organization was that defendant was to obtain control "of, and thus, to 'monopolizé the manufacture,, production and sale' of alcohol,' and' the. method of achieving this purpose was to obtain by salé or lease all the'alcohol-producing plants. The contract's, whether of purchase or lease, by which this control was assured,- were certainly contracts whereby the monopoly was to be created and. established: The" distinction between such a casé as this, and those' réliéd-' upon for an affirmance of this judgment, was very clearly put by Judge Lan-dox in Cummings v. Union Blue Stone Co. (164 N. Y. 401, 404): “ The plaintiff cites the cases which permit the vendor to sell his business with or without his plant, and to agree with his vendee that he will not by competition or other acts do anything to injure whafhe sells. (Diamond Match Co. v. Roeber, 106 N. Y. 473; Leslie v. Lorillard, 110 N. Y. 519; Tode v. Gross, 127 N. Y. 480; Hodge v. Sloan, 107 N. Y. 244.) It may be conceded that the law,' as now understood, restrains no one from selling his property, nor does it compel any. one to continue a business which he.can sell or finds it .to his inter .est to abandon; much less to continue it for. any time or in any particular, manner or place. ■* * * Contracts between individ-' uals to that effect are not i,n general restraint of- trade.. But tlie case before us is of a different kind. ■ It is one'of such á combination among many dealers as threatened, a . monopoly,: with’ which the individual would be practically powerless to compete,, and the many consumers who would be severally ■ exposed and coerced would be either compelled to submit to its exactions or to forego the purchase of thecómmodity of customary use needful' to them, and but for this monopoly obtainable in the market at a reasonable price. The same evil principle pervades . both large and small combinations ; all are alike offenders differing' in degree,, but not in kind. And lienee it is that; contracts by which the parties to them combine 'for the purpose of creating a monopoly in restraint of trade, to prevent competition, to control and thus to limit production, to increase, prices .and'maintain them are contrary to sound public, policy and.are void,” In the present case I suppose that no one will contend that the agreement between the organizers of this defendant and to carry out which it was organized was not contrary to the statute against monopolies and illegal, but without this lease and other similar instruments, the mere agreement to create a monopoly would not have created it. The purpose to create a monopoly was carried out, and the monopoly actually created by the deeds' and leases whereby the defendant obtained control of nearly all the alcohol producing plants in the country. In a most exact sense, therefore, these deeds and leases, including the one under consideration, were the contracts and agreements wherebij the monopoly was created. It is idle to speculate as to what the effect would be of a similar taint of illegality upon contracts which have been fully executed before it is attempted to apply the statute to them. This lease, as to the rental now sued for, had not been fully executed. If, as I am forced to conclude, it was illegal and void, no action can be maintained upon it, but the parties will be left, in the position in which they Iiave placed themselves, for the law will not lend itself to the enforcement of an illegal contract, no matter how hard the refusal to act may appear to bear upon one of the parties.

In my opiniofi, therefore, the judgment should be reversed and a new trial granted, with costs to the appellant to abide the event.

Judgment affirmed, with costs.