146 N.Y.S. 678 | N.Y. App. Div. | 1914
Plaintiff alleges that on October 27, 1909, he was the owner of 1,400 shares of stock of the American Sugar Refining Company; that at that time he loaned it to the Phenix Insurance Company (to whose obligations defendant has succeeded), to be returned on demand, and that on December 18, 1909, he demanded the return of said stock, which was refused. In an action for conversion he has recovered a verdict for $198,375, the value of said stock. From a judgment entered thereon and from an order denying a motion for a new trial" this appeal is taken.
The crucial question is to whom was this stock loaned ? Was it loaned to the insurance company to be used for its lawful purposes, or was the transaction a personal one between plain
On October 21, 1909, Sheldon was president of the Phenix Insurance Company and had been for twenty years. Plaintiff was one of its board of directors and had been for about twelve years, and was Sheldon’s intimate friend. Plaintiff was on the date named and for several years had been a member of the accounts committee, of the executive committee, and of the finance committee of said board. In January, 1908, Sheldon caused to be entered upon the books of the insurance company a list of stocks and bonds which he claimed to have bought on its account, of the value in the aggregate of $489,576.67. These were thereafter included in its statement of assets. As matter of fact, no such purchase had been made. There came a time when Sheldon must produce the securities or his fraud would be detected. Accordingly, in January, 1909, stocks and bonds of the character and value indicated by the entries in its books were purchased, but in the meantime these had advanced in price to $622,611.95, sp that to purchase the same required an additional expenditure, plus interest on the adjustment, of nearly $140,000. This amount Sheldon must in some way make good. To accomplish this he directed the brokerage firm of Fiske & Eobinson to sell for account of the company New York city three and one-half per cent bonds of the par value of $200,000. Such sale was made and the company given credit therefor in the sum of $180,000 upon a statement issued by said firm February 28, 1909. Although these bonds were taken from the box containing the company’s securities the sale thereof was never entered upon its books, but they were still included in the list of its assets.
In October, 1909, the representatives of the Insurance Department began an examination of the affairs of the company. It was inevitable that before the completion of this examination the loss of the New York city bonds would be detected, and it was again necessary for Sheldon to take some steps to conceal his fraudulent conduct. The account between Fiske & Eobinson and the company as it appeared upon their books and upon said statement of February 28, 1909, then sent to the company’s office, showed among other transactions the sale of the New
How did Sheldon obtain the money necessary to make this large payment of $138,542.23 ? On October 26, 1909, he went to the plaintiff and, after telling him that the insurance examiners were then at work, he falsely stated to him in substance that there was entered upon the books of the company a large item for reinsurance of the risks of another company. If that were allowed to remain, he added, “ I am afraid that our surplus might get down so we will have to drop out the twenty per cent dividend, but if I could get that reinsurance we took on out of the way, it will be all right.” The plan was to place this reinsurance with some other company and take the item from the Phenix books. To accomplish this it would seem to be necessary to pay the premium of such reinsurance. If this were done it would of course deplete the cash in the treasury of the Phenix Company by just that amount. Whether that would be sufficient to so reduce the surplus that a dividend of twenty per cent upon the stock, which for some time previously thereto had been paid (See Insurance Law [Consol. Laws, chap. 28; Laws of 1909, chap. 33, as amd. by Laws of 1909, chap. 301], §§ 22,118), would be no longer permissible under the law, does not clearly appear, but both parties seemed to be appre hensive of this. If the arrangement to retire this reinsurance was merely a temporary one, for a few days only, as Sheldon stated it would be, and accomplished by cash furnished elsewhere than from the insurance company’s treasury, and if this reinsurance was taken back as soon as the examiners had departed, the loss, if any, would be relatively small. Plaintiff asked Sheldon how much cash he would require for this purpose. He promised to let him know the next day. The next day Sheldon told him that he would require $145,000. Plaintiff told him that he did not have that much money, but he added: “ I can give you some securities, and you can borrow on them.” Therefore, on October twenty-seventh, he gave to Sheldon fourteen certificates, of 100 shares each, of the stock of the American Sugar Refining Company, indorsed for transfer, and Sheldon gave him a receipt in the following form:
“Received of Mr. Wm. J. Logan fourteen hundred (1400) shares of Am. Sugar Refining Oo. com. stock for acct. of Phenix Insurance Co., to he returned upon demand.
“GEORGE P. SHELDON, President.”
Sheldon took this stock, went to the office of Carter, Wilder & Co., another firm of brokers, hypothecated it with them, and obtained their check for $145,000. This check he deposited to the credit of his personal account in the Liberty National Bank. He was thus enabled upon the succeeding day, when the transactions above referred to with Fiske & Robinson were completed, to give them his certified personal check for $138,542.23, the balance due to them on the “remodeling” of the account with the insurance company. There still remained about $8,000 to Sheldon’s credit with the Liberty National Bank after payment of this check. A portion of this was drawn by him in his lifetime, and none of it, so far as appears, was ever received by defendant. Within a few days thereafter Sheldon was seized with a fatal illness, and on December 25, 1909, he died. The stock hypothecated with Carter, Wilder & Oo. was subsequently sold, and the surplus above the amount necessary to discharge the loan was paid to Sheldon’s estate. The fact that the receipt delivered to plaintiff at the time that the stock was delivered to Sheldon is in form a receipt by the insurance company is not conclusive as to the transaction. (Baker v. Union Mut. Life Ins. Co., 43 N. Y. 283.) Even if the corporate seal had been affixed thereto, it would at most only have been prima facie evidence that it was affixed by proper authority, and would have imposed upon the party objecting thereto the duty of showing that it was affixed surreptitiously or improperly. (Quackenboss v. Globe & R. F. Ins. Co., 177 N. Y. 71.) No authority by direct action of the board of directors of the insurance company to Sheldon, its president, to borrow either money or securities, was proved, if indeed under the circumstances here disclosed such action would have been sufficient to impose obligation upon the defendant.
Respondent seems to rely for express authority upon a by-law of the company defining the duties of its president, which, among other things, imposed upon him the duty “ to have a
Neither is there any evidence of implied authority to borrow, nor is the defendant estopped from denying, under the circumstances here disclosed, the existence of such authority. In this case we have a director dealing with his own corporation. He is chargeable with such knowledge as to its affairs as he actually possessed, or which in the discharge of his duties he should, have had. (Ward v. City Trust Co., 192 N.Y. 61; Syracuse Savings Bank v. Merrick, 182 id. 387.) Plaintiff admitted that he knew that it was his duty as a director “ to look after the assets of the company.” The duty imposed upon him by the by-laws as one of the committee of accounts was “to audit the books and accounts of the secretary, and examine the assets and securities of the company at least once in every six months, and report the condition thereof to the board of directors.” If that duty had been faithfully discharged during the year 1908, it is difficult to see how it could have escaped attention that entered upon the books of the company was a long list of bonds and stocks purporting to be its property, which an examination of its “assets and securities” would disclose had nothing corresponding thereto in the company’s strongbox. Although it was the duty of said committee, including plaintiff, to make such examination of assets and securities on the first of January and July in each year, this duty was entirely neglected in July, 1909. If it had been faithfully performed, plaintiff must have discovered that the $200,000 of New Yórk city bonds which was enumerated among the company’s assets, was not in fact in its possession. As it was the duty of the finance committee, of which he was also a member, “ to direct the sale and transfer of any stocks belonging to the company,” he was chargeable with knowledge that the sale of these securities had never been authorized. Accurately speaking, it is true that these were not “stocks,” but bonds. But inasmuch as the finance committee was “ to take charge of the
“A director * * * of any corporation * * * who * * * makes or concurs in making any false entry, or concurs in omitting to make any material entry in its books or accounts; * * * is guilty of a misdemeanor.” (Penal Law, § 665.) “ The Superintendent of Insurance shall, as often as he deems it expedient, examine into the affairs of any insurance corporation doing business in this State * * * and the officers and agents of such corporation shall facilitate such examination and aicl the examiners in making the same so far as it is in their power to do so.” (Insurance Law, supra, § 39.) The purpose of such examination is to obtain accurate information as to the affairs of the company in the interest of the stockholders, its policyholders and the public who might deal with it. Can a director be said to facilitate such examination and to aid the examiners who connives at the omission to make material entries in the books of said company as to its liabilities for the sake of creating a fictitious surplus ? “All contracts or agreements which have for their object anything which is repugnant to justice, or against the general policy of the common law, or contrary to the provisions of any statute are void.” (Bell v. Leggett, 7 N. Y. 176; Wheeler v. Russell, 17 Mass. 258, 281.) While it is true- that an agreement will be enforced even if it is incidentally connected with an illegal transaction, provided that it is supported by an independent consideration, and the plaintiff does not need the aid of the illegal transaction to make out his case (Gray v. Hook, 4 N. Y. 449; Woodworth v. Bennett, 43 id. 273; Dennehy v. McNulta, 86 Fed. Rep. 825; National Distilling Co. v. Cream City Importing Co., 86 Wis. 352; Minnesota Lumber Co. v.
In the case at bar the loaning agreement was not made with the express purpose of enabling defendant to repossess itself of its securities of which it had been defrauded by Sheldon. To prove his debt plaintiff had to show the improper transaction out of which the obligation to return the stock grew. It seems to us that even if the directors of the company had expressly authorized the making of the agreement which plaintiff asserts was made defendant could not, within the authorities above cited, be held thereon in conversion for a failure to return said stock. The respondent contends that because the proceeds of plaintiff’s securities were in fact used by Sheldon to buy back and restore to defendant property which he had purloined from it, defendant thereby became responsible for his agreement to return these securities on demand. TJie conclusion does not follow from this fact alone. The case of Atlantic Cotton Mills v. Indian Orchard Mills (147 Mass. 268), greatly relied upon by respondent, is clearly distinguishable from the case at bar. In that case one Gray was the treasurer of both corporations. He had embezzled money from the plaintiff. To cover this deficiency he took money from defendant’s treasury and paid it into plaintiff’s treasury, and it was held that plaintiff could not retain it. But the vital distinction is that in that case plaintiff came into possession of the money “ through the act of no person other than Gray himself.” In that case defendant did not voluntarily part with its funds for any purpose. In the case at bar plaintiff did. Whether his securities could be reached in an action in equity to trace assets to which all those connected with the transaction should be parties, we need not now determine. This is an action at law, and aside from the fact that Sheldon had no authority, express or implied, to borrow plaintiff’s stock for the purposes of the company, the contract of borrowing is so connected with and dependent upon an illegal transaction that the whole of it, including the promise to return, is unenforcible.
Jenks, P. J., Carr and Rich, JJ., concurred; Thomas, J., concurred upon the ground that the bonds were loaned for an illegal purpose, in which the plaintiff knowingly participated.
Judgment and order reversed and complaint dismissed, with costs of the action and of this appeal.