86 Vt. 76 | Vt. | 1912
Lead Opinion
In the fall of 1901, W. H. Hughes of Gran-ville, N. Y., a manufacturer of roofing slate operating quarries in Pawlet and Wells in this .State, became embarrassed financially, and applied to D. D. Woodard, President of the Granville National Bank, for a loan of $30,000. Negotiations followed which resulted in an arrangement between Woodard, W. H. Hughes, his mother, Sarah Hughes, a resident of Easton, Pa., and Robert J. Roberts and his wife Ann, residents of Pawlet, that AY. H. Hughes and his wife should execute notes for $30,000, that Sarah Hughes should indorse one-third of that amount and Roberts and his wife one-third, that W. IT. Hughes should give the indorsers security, and that Woodard should procure the money. There was a further agreement between W. IT. Hughes and Woodard, that Woodard should carry the remaining $10,000 without indorsers and continue the entire loan for two years, and that in consideration thereof Hughes should give Woodard twenty-four notes of $200 each. The notes so arranged for were delivered to Woodard on or about November 27, 1901, and those making up the $30,000 were discounted and the avails thereof paid to W. IT. Hughes. Nothing was paid upon these by the
On the same twenty-seventh day of November, W. IT. Hughes executed to Sarah Hughes, Robert J. Roberts and Ann Roberts, an assignment of a lease of certain quarry rights in Pawlet, and a mortgage of certain parcels of land in Pawlet and Wells, to secure them for their indorsements. At the time these papers were executed and delivered, Hughes suggested that they be left in the possession of Woodard for the benefit of the mortgagees, because the recording of them might injure his credit. No objection being made by Robert J. Roberts, the only one of the mortgagees present, Woodard took the papers and placed them in his safe, and they remained there until July 13, 1903, the day Hughes made his assignment as hereinafter stated, when Woodard handed them to Roberts, who took them to the clerk’s office for record. The assignment and the mortgage were recorded in Pawlet, July 14, 1903, and the mortgage was recorded in Wells, December 19, 1904.
In the fall of 1902 W. H. Hughes began to confer with John Gilroy, his counsel, the orator Robert J., who.was a foreman in his employ, and others, as to the advisability of forming a corporation to take his property and carry on the business; and on the second day of April, 1903, a certificate of incorporation of the W. IP Hughes Company was filed in the office of the Secretary of State at Albany. W. IP Hughes and Robert J. Roberts were two of the five persons named therein as directors for the first year. The capital stock was to consist of 2,500 shares of $100 each, 2,430 of which were subscribed' for by Hughes, 25 by Roberts, and the remainder by the three other directors. The officers of the corporation were elected at a meeting of the directors held- April sixth, W, IT. Hughes being chosen president. At a meeting of the stockholders held April ninth, Hughes offered his property for 2,430 shares of stock and $7,000 in cash, with possession from May first; and the president and treasurer were thereupon authorized to issue 2,430 shares of the capital stock to W. H. Hughes upon his delivering to the treasurer a deed and assignment of leases of his slate property.' The value of the property at this time is not found, but its value fifteen months later is put at $95,000. A warranty deed of the property was executed to the W. H. Hughes Company, April tenth, 1903, and was recorded in the clerk’s office of Pawlet, May second, 1903,
April 29, 1903, the W. H. Hughes Company authorized the execution of a mortgage of its entire property to the Security Trust Company of Troy, N. Y., to secure an issue of its bonds to the amount of $100,000; and the mortgage so authorized was executed May 1, 1903, and was recorded in Pawlet, May second. There was an early issue of $32,000 of bonds, as to which no question arises. There was a subsequent issue of bonds amounting, to $18,000, authorized as hereinafter stated, which were placed with the Adirondack Trust Company as security for funds obtained for the payment of employees; and this indebtedness and collateral are now held by the Farmers’ National'Bank.
The 2,430 shares of stock voted to Hughes were issued to him April 30, 1903. Twenty-five shares had already been issued to Roberts. The only others who held stock previous to May second were the remaining directors — IT. J. Stevens, the treasurer, W. C. Clark, the secretary, who was Hughes’ clerk, and E. C. Whittimore. There was an original issue of ten shares to Stevens, and one of five shares to Clark. The report states, in separate findings, that the only consideration for the Stevens issue was service rendered in the organization of the company, and that the only consideration for the Clark issue was service rendered to Hughes in the organization of the company. There was also an issue of 25 shares to Whittimore, of which ten shares and five shares were transferred to Stevens and Clark respectively on the- following day. In connection with this issuance and transfer, Whittimore credited Hughes $1,000 on an old note, and Stevens gave Hughes a check for $1,000. Nothing further appears regarding the matter of consideration.
The company went into business in Vermont, May second, 1903. The only person then holding stock, other than those above named, was D. D. Woodard, who received on that day a transfer from Hughes of fifty shares. From May fourth to July seventh Hughes made about fifty transfers of stock, covering nearly all his holding. Four hundred forty-seven shares went to about 35 different persons, in amounts ranging from one to fifty. Five hundred shares were transferred to Sarah Hughes, May sixth, and 760 shares July seventh. The Farmers’ National
W. H. Hughes made an assignment for the benefit of his creditors July 13, 1903; and C. C. Yan Kirk was appointed trustee.of his estate in bankruptcy in the following September. His assets and liabilities are not given, but it appears incidentally that his estate paid about sixteen cents on the dollar. Sarah Hughes was adjudged a bankrupt on her own’ petition September 10, 1903, and Frank Reeder was appointed trustee of her estate on the twentieth. Her estate paid her debts in full, including her $10,000 liability on the W. H. Hughes notes, and on receiving her discharge these notes were reassigned to her. Yan Kirk received as a part of the W. H. Hughes estate 1,645 shares of the capital stock of the W. H. Hughes Company, and sold them at auction June 21, 1904, for $33,900, to one who bid by the direction of Eugene R. Norton, in behalf of said Eugene, his brother James E. Norton and certain others, all of whom are still holders of the stock. The Sarah Hughes claim and the Roberts claim were each reduced by the sum of $1,650.80, received from the trustee of W. H. Hughes.
The day after Hughes made his assignment the directors of the W. H. Hughes Company took measures looking to the appointment of a receiver and a voluntary dissolution of the corporation, and their petition in that behalf was filed July 16, and Ellis Williams was appointed receiver on the 18th. Williams was subsequently appointed receiver in ancillary proceedings in this State, and January 9, 1904, he procured a certificate of authority for the corporation to do business in this State, none having been had before this. The dissolution proceedings and the receivership were closed soon after the Nortons obtained control of the corporation by their purchase of the Hughes stock.
The original bill was brought by Robert J. Roberts, Ann Roberts and the trustee in bankruptcy of Sarah Hughes, and was filed January 27, 1904. The defendants were Ellis Williams as receiver of the W. H. Hughes Company, C. C. Yan Kirk as trustee of W. H. Hughes, bankrupt, the administrators of W. H. Hughes then deceased, the Security Trust Company, the Farmers’ National Bank, and many others, holders of the bonds or stock of the W. H. Hughes Company. The W. H.
The orators contend that the defendant company cannot assert its title against their unrecorded conveyances because of its failure to procure a certificate of authority to do business in this State before taking its deed. Our statute provides that no foreign corporation, with certain exceptions, shall do business in this State without having first' proeurred from the secretary of state a certificate that it has complied with the requirements of law in that behalf, and that its business is such as a Vermont corporation, incorporated for a like business, may lawfully carry on; and which provides further that no such corporation shall “maintain any action in this State upon any contract made by it in this State, unless, prior to the making of such contract, it has procured such certificate.” P. S. 774, 776.
The W. H. Hughes Company is not here seeking to maintain an action, but is here as a defendant; and it is held that a foreign corporation which is prohibited from maintaining a suit may defend one brought against it. J. R. Alsing Co. v. New England Quartz etc. Co., 174 N. Y. 536, 66 N. E. 1110; Swift v. Platte, 68 Kan. 1, 72 Pac. 271, 74 Pac. 635. The orators’ brief treats the transaction between Hughes and the Company as an executed contract, as it evidently is; and it is held that a prohibition of this character will not prevent the corporation from maintaining or defending suits to protect its rights under a contract fully executed. 19 Cyc. 1303; Mobile Electric Lighting Co. v. Rust,
The orators claim that the corporation is chargeable with the knowledge that Hughes had of the existence of their unrecorded conveyances; and as the matters connected with the issuance of the stock had not occurred at the time the purchase of the Hughes’ property was voted and the deed to the company executed, we take up the question independently of its relation to the character of the incorporation. It may be stated as a general rule that notice to the president or other managing official of a corporation is notice to the corporation. This is upon the ground that the official is the agent of the corporation, and that it is his duty to communicate the knowledge to his principal. The rule has no application when the transaction is one in which the official is dealing with the corporation on his own account. He is not then a representative of the corporation, but a party contracting with the corporation as represented by others. His independent and adverse attitude is an essential and manifest feature of the transaction. In this case, it was necessarily understood that Hughes would continue to act for himself until he had executed and delivered the deed which the company was to receive. As he was not the agent to make the purchase, his knowledge was not the knowledge of the company. Note 6 Ann. Cas. 680; Wickersham v. Chicago Zinc Co., 18 Kan. 481, 26 Am. Rep. 784; Barnes v. Trenton Gas Light Co., 27 N. J. Eq. 33; Frenkel v. Hudson, 82 Ala. 158, 2 So. 758, 60 Am. Rep. 736. The fact that he was one of the officials authorized to issue the stock which constituted the main consideration did not affect his relation to the transaction itself.
But the orators contend that the defendant company, if not chargeable with Hughes’ knowledge, holds the property subject to their lien because not a purchaser for value. When a conveyance is without consideration, the grantee’s want of knowledge is immaterial, and creditors may avoid it for the fraud of the grantor alone. Note 14 Am. St. Rep. 748; See Wilson v. Spear, 68 Vt. 145, 34 Atl. 429; Fairhaven Marble etc. Co. v.
- It is true that a corporation is a legal entity which is entirely distinct from the individuals who compose it, and that the courts will ordinarily maintain this distinction, even when all the stock of the corporation is owned by one individual. But the courts will not permit this doctrine to become a shield for the contrivers of fraudulent schemes. It has even been said that in an appropriate case, and in furtherance of the ends of justice, a debtor corporation and the individual owning all its stock and assets will be treated as identical, independent of any question of fraud. Potts v. Schmucher, 84 Md. 535, 36 Atl. 592, 35 L. R. A. 392, 57 Am. St. Rep. 415. But cases of this class, in which the individual is held liable merely because he owns all the stock of the corporation, have been spoken of as of doubtful authority. Cook Cor. §664. However this may be, there is ample authority for saying that in cases of fraud the courts will look behind the corporation to the individuals composing it. The business of an individual or partnership is often continued through the formation of a corporation, and the transfer to it of the property of the individual or partnership in exchange for the stock of the corporation. A fraud upon creditors may be effected by this process as well as by a conveyance to an individual, and when the one who makes use of it is insolvent the corporation issuing the stock for the property will not be treated as a bona fide purchaser. Booth v. Bruce, 33 N. Y. 139, 88 Am. Dec. 372; Metcalf v. Arnold, 100 Ala. 180, 20 So. 301, 55 Am. St. Rep.
The fact that a small amount of the stock is held by persons •other than the debtor will not be permitted to stand in the way •of a creditor’s relief. The existence, of a certain number of •directors is necessary to the organization of a corporation, and this requires that a few shares of the stock be held by others. It bias been repeatedly said that the relief will be granted when the •debtor owns substantially all the stock. Cook on Cor., 6th Ed., §663; First National Bank v. Trebein, 59 O. St. 316, 52 N. E. 834; In re Rieger, 157 Fed. 609; Blair v. St. Louis etc. R. Co., 22 Fed. 36; Gormully etc. Co. v. Biltz, 64 Fed. 612; Hoffman Steam Coal Co. v. Cumberland Coal & Iron Co., 16 Md. 456, 77 Am. Dec. 311. In the case last cited, Sherman and Dean, the persons whose acts were in question, owned 4,996 shares out of ■5,000; the ownership of one of the other shares was shown to be unreal; and the court considered it no violent presumption that ■the ownership of the remaining shares was the same. Upon- this -statement, the court said the corporation was but a contrivance whereby the same property was held by the same párties under •a different name, and that in conveying to the corporation the grantors were but conveying to themselves. In Potts v. .Schmucker, above cited, the court reviewed this case, and said of it that the court looked through the disguise of a corporation in which Sherman and Dean had clothed themselves, and proceeded to deal with the ease precisely as though the title to the land had not been conveyed by Sherman and Dean to the corporation, but still stood in their names.
We have seen that two of the five stockholders and directors •of the defendant company, Hughes and Roberts, were parties to the unrecorded transfers. Of the remaining three, Clark is -found to have had knowledge of the transfers, but apparently •on certain hearsay evidence; while Stevens and Whittimore -are found to have had no knowledge of them. Twenty shares -went to Stevens and ten to Whittimore; and we have seen that “Whittimore credited Hughes $1,000 on an oid note. The only •cash shown to have been paid on account of stock was that paid by Stevens, who gave Hughes a check for $1,000. It does not -appear that the corporation received any benefit from this payment by way of entries on its books. The report says that the -ten shares issued to Stevens for his services in eonneetion with
But Hughes’ deed was effective to convey the property to the corporation subject to the orators’ lien, and this property is represented by the capital stock. It is not claimed but that the corporation was legally organized and the stock regularly issued. The stockholders, as owners of their several shares, are independent of the corporation and of each other, and their interests must be separately considered. All the stock held by contesting defendants was transferred from the original issues to W. H. Hughes. All transfers were regularly entered on the boobs of the corporation. It appears from the report that the holders of certain certificates, representing stock transferred directly from Hughes, and covering 357 shares, are not shown to have had knowledge of the orators’ mortgage and assignment. None of these parties are defending, and nothing appears as to any change in the ownership of their stock.
We have seen that 1,645 shares of stock were sold by the trustee of Hughes’ estate. At the time of the sale the orators’ papers had been on record in Pawlet over a year. Eugene R. Norton, by whose direction the stock was bid off, had been given all the details of the transaction by Roberts as early as September, 1903. The trustee made public announcement of the facts
Eugene R. Norton has, in addition to his stock purchased at the trustee’s sale, three certificates, covering fifteen shares, which were transferred to him in April and May and on June 14, 1904, by persons who received them before the orators’ mortgage and assignment were recorded, and who are -not shown to have had notice of them. As to these shares, Norton’s rights are those of a bona fide purchaser; for when a person with notice buys of one who was without notice, he succeeds to all the rights of the one from whom he takes the title. Pom. Eq. Jur. 754; Barber v. Richardson, 57 Vt. 408.
We have seen that a certificate for 250 shares and another for 100 shares are held by the Farmers’ National Bank as security. 'The master says he is unable to find that when these shares were taken any officer of the bank had notice of the existence of the orator’s mortgage and assignment. It is found, however, that the smaller certificate was taken to secure an overdraft, and we construe this to mean that it was taken to secure an existing indebtedness. One is a holder for value within the meaning of the rule only when he parts with value at the time of the transaction and on the faith of the purchase or transfer. 10 Cyc. 636, 637; Downs v. Belden, 46 Vt. 674. The report says that the larger certificate was taken as collateral security on certain notes indorsed by Hughes. We understand this to mean that it was taken at the time the notes were discounted. If the construction is open to doubt, the burden was on the orators to procure a more definite finding.
Fifty shares of the Hughes stock were transferred to D. D. Woodard, who had knowledge of the conveyances in question; and it is apparent from the facts reported that these were not included in the trustee’s sale. This would leave thirteen shares of the Hughes stock undisposed of, while according to the list of transfers the remainder should be thirty-eight shares. However the difference may be reconciled, it is clear that the remain
July 18, 1903, Williams, as receiver in New York, was authorized to issue receiver’s certificates to the amount of $10,000, to provide for the payment of the June wages of the company’s employees, and August 15, 1903, he was authorized to issue additional certificates to the amount of $4,000 to pay the wages of the receiver’s employees and the current expenses of the receivership. Both orders were made on notice to the Security Trust Company. Neither contained any provision purporting to give the certificates priority over existing liens. It appears from the report and the exhibits that the $14,000 obtained on these certificates was furnished by the Adirondack Trust Company, and was, either wholly or in part, the loan for which the $18,000 of bonds before referred to were placed with that company as collateral. The defendants claim that these bonds are a lien prior to the claim asserted by the orators.
The first question arises in connection with the issuance of the certificate for $10,000. It is not necessary to inquire as to the power of a court to give priority to a loan authorized for the payment of pre-existing labor claims in the case of a corporation of this character, nor as to the effect of an order which does not express an intention to give priority. No such question of priority can arise here. The lien which the orators are seeking to establish is confined to lands in this State, and no action of the New York court could impose a lien on lands lying outside its territorial jurisdiction. Story Con. Laws, §543; Bullock v. Bullock, 52 N. J. Eq. 561, 30 Atl. 676, 27 L. E. A. 213, 46 Am. St. Rep. 528. If the Farmers’ Bank has any right superior to that claimed by the orators, as regards the $10,000 loan, it must be through the bonds held as collateral, and not by force of the certificate.
When these bonds were negotiated the orators’ mortgage and assignment had been on record in Pawlet four days. If the .rule applicable to one who takes title by deed is applicable here, as the orators claim, both the Adirondack Trust Company and the Farmers’ National Bank took the bonds with constructive notice of the orators’ mortgage. But it is clear that the rule is not applicable. The relations of the bondholder to the trust deed are such that his rights are not dependent upon the condition of the record title at the time of his purchase. The trustee
So it is necessary to inquire whether there was a valid issue and authorized use of the bonds; and for the consideration of this question a further statement of facts is necessary. The assignment of W. IT. Hughes was announced at a special directors’ meeting held in the forenoon of July 14th, and it was thereupon voted that the board go to Saratoga to confer with Edgar T. •Brackett with the view of employing him as counsel for the company, and the board then adjourned to meet at Saratoga that evening. At this adjourned meeting it was voted to proceed for the appointment of a receiver, either in voluntary dissolution, or by a bill in equity, or such other method as would, effectively conserve the property and interests of the company, and that Edgar T. Brackett be employed as counsel to take such steps as were necessary to accomplish this result. The board then adjourned to meet July 16th at the office of the company, and at this meeting the treasurer reported that there were not sufficient funds on hand to meet the pay-roll due the 18th, and it was thereupon voted that W. C. Clark be authorized and instructed to sell the stock of slate on hand, or to obtain a loan of $10,000 to meet the pay-roll and give a mortgage on the slate and place as collateral to said mortgage as many bonds as were necessary to secure such loan. On this same day the directors’ application for a voluntary dissolution of the corporation — the same on which the receiver was afterwards appointed — was filed
The orators do not question the legality of the meeting at which the use of the bonds was authorized. The only objection made to the sufficiency of the vote is that it was taken when all the directors were aware of the orators’ claim. It is not necessary to consider this objection as regards either fact or law.
The order of appointment directed the corporation to transfer its property to the receiver, but contained no order enjoining, the exercise of its corporate functions. No such order was needed. The appointment of a receiver' over a corporation generally suspends all corporate action, and deprives its officers and agents of all authority over its property. High Rec. §290; Linville v. Hadden, 88 Md. 594, 41 Atl. 1097, 43 L. R. A. 222; Lenoir v. Linville Imp. Co., 126 N. C. 922, 51 L. R. A. 146, 36 S. B. 185 ;Treat v. Penn. etc. Co., 199 Pa. St. 326, 85 Am. St. Rep. 788, 49 Atl. 84. There would seem to be no question as to the application of this doctrine to dissolution proceedings had on petition of the directors. The origin and purpose of such proceedings are inconsistent with the recognition of any subsequent action of the directors affecting the status of the property.' But the taking of such action was in fact prohibited; for the order to transfer the property to the receiver forthwith was in
The fact that all the property covered by the trust deed is real estate in Yermont, or chattels located here which the deed provides shall be treated as real estate, does not restrict the effect of the order. It is true that neither the appointment of the receiver, the terms of the order making the appointment, nor any authority conferred upon th'e court or receiver by the New York statutes, could affect the title to this property. See Fall v. Eastin, 215 U. S. 1, 54 L. Ed. 65, 30 Sup. Ct. 3, 23 L. R. A. (N. S.) 924, 17 Ann. Cas. 853: But the New York court, by virtue of its jurisdiction over the corporation, and its directors, could have compelled the transfer of the title to the receiver. Having this power, the order it made must have been effective to prevent any corporate or official action which would have enlarged the incumbrance on the property. The want of power in the court to create a further lien upon the property does not imply an inability to prevent the corporation from doing it. The propriety of this view is apparent when we consider that the administration of the whole estate and the final marshalling and distribution of the assets is through the domiciliary receivership. See upon the general subject. Massie v. Watts, 6 Cranch 148, 3 L. Ed. 181; Burnley v. Stevenson, 24 O. St. 474, 15 Am. Rep. 621; Kimball v. St. Louis etc. Ry. Co., 157 Mass. 7, 34 Am. St. Rep. 250, 31 N. E. 697. There is no question here as to the protection of creditors of the corporation residing in this State. The appointment of the receiver having been operative as a restraining order, and there being no limitation of its effect by reason of the location of the incumbered property, it must be held that the bonds were improperly issued.
Our next inquiry is whether the bonds are held bona fide. The bonds were received and are held as collateral security for
We think the Farmers’ National Bank stands in no better position than the Adirondack Trust Company. It is true that the transferee of a bond is presumed, in the absence of evidence to the contrary, to be a bona fide holder for value, and that the only finding regarding the bank’s acquirement of the bonds is that they “were subsequently transferred” to it as collateral security for the $14,000. But the indebtedness secured was evidenced by receiver’s certificates, and the original creditor’s receipt of the bonds would have, in ordinary course, no earlier date than the certificates themselves. The bank was charged Avith knowledge of the order under which the certificates Avere .issued, and this precluded the supposition that the bonds were used by the receiver under an order of the court. The only natural inference left was that the bonds were pledged by the corporation whose debt was being provided for. So the bonds must be considered invalid in the hands of the Farmers’ National Bank. .As regards this branch of the ease, no separate consideration of the later certificate and the additional loan of $4,000 need be had.
We come now to the question of estoppel. The defendants contend that Roberts is estopped from asserting his claim against the W. II. Hughes Company by participating in the proceedings connected Avith the purchase of the Hughes property without mentioning his lien. This contention is disposed of by the vieAv we have taken of the character of the incorporation. It is certain that Roberts was not estopped from asserting his claim against Hughes. No more is he estopped from asserting it against the corporation which took Hughes ’ title without paying value.
The case presents the further question whether the orators or any of them are estopped from asserting the invalidity of the
It is not necessary to inquire as to the admissibility of the evidence on which the master finds that Roberts did not hear Gilroy’s statement that the property was unincumbered, and that if he did hear it he did not understand it. The question here is not whether he heard something said that required him to speak, but whether something was being done that required, him to speak. He knew that an examination of the records would not disclose the existence of his mortgage without hearing a report .to that effect. The rejection of this finding would not invalidate the other findings as to the part taken by Roberts in the business of that meeting.
It will be remembered that as the case stands a majority of the body in which Roberts was acting, although not bona fide holders of stock, were without knoAvledge of the orators’ lien. Knowing that he held this unrecorded mortgage, and having at least some reason to believe that three of his associates did not know it, Roberts took part without objection in all the proceedings by which the property of the company was mortgaged to secure its prospective creditors. In the course of these proceedings he joined with the other stockholders in executing a paper which declared that the mortgage then given was a first lien on all the real estate of the company. This was not only a material statement, but it was embodied in a writing which was an essen
"We have held that this issue of bonds was invalid, and that the purchaser and its transferee were charged with knowledge of the fact which made the issue invalid. The invalidity, however, was not due to any original want of power in the corporation, but to a suspension of its functions resulting from an order of the court. The prohibition of corporate action was not expressed in terms, but was a result which followed the order of appointment by force of law. So knowledge of the impeaching fact was not the same as knowledge of the invalidity. There is nothing here to justify the conclusion that the Adirondack Company was acting in bad faith. No question touching the moral quality of the act is involved. The transaction was not one expressly or impliedly prohibited by charter or statute. There was. no failure to comply with any requirement essential to its validity. The want of authority was due to a power which intervened between the inception and completion of the corporate action. The bonds were issued in disregard of an implied injunction, through the instrumentality of an officer or other agent
It is not necessary to enter into any general discussion of the law applicable to the unauthorized acts of private corporations. It is enough to say that the law recognizes in appropriate cases the equities of one who has provided money for the legitimate uses of a corporation, although under an arrangement which the corporation had no authority to make; and that when the nature of the case is such that remedies at law would be ineffectual, equity will afford such other relief as the case may require. If the pay-roll of the Hughes Company had been a secured claim, and the transaction with the corporation a loan • without security, the Adirondack Company would have been subrogated to the rights of the creditors whose claims had been thus satisfied. 3 Pom. Eq. Jur., §1300. Where the directors of a corporation had raised money for the legitimate purposes of. the company by an issue of certain bonds prohibited by the statute, it was held in dissolution proceedings that so far as the money raised on the bonds had been applied in paying off debts which would not otherwise have been paid, those who advanced the money should be reimbursed before anything was paid to the stockholders. Re Cork etc. Ry. Co., L. R. A. 4 Ch. 748. 760, 761, In this case the loan was to the receiver for the benefit of the corporation, and the transaction between the corporation and the lender was a mere pledging of bonds as collateral to the loan. So if relief is to be afforded here it must be through an enforcement of the pledge.
The pay-roll provided for by the money advanced on the faith of these bonds was the only general indebtedness of the Hughes Company existing at the time the orators’ papers were placed on record. If other persons became unsecured creditors during the four days which intervened before the appointment of the receiver, they are not here complaining. As against the stock, the pay-roll and the bonds stand the same. Neither the trustee of the bondholders nor any holder of the first issue is defending. Neither the corporation nor any minority stockholder is questioning the validity of the bonds. The corporation could not question their validity if it would. The case leaves these bonds outstanding in the hands of the Farmers’ National
This discussion has been had to aid us in determining whether Boberts is estopped from asserting the invalidity of the issue. When a director whose private interests are involved in the affairs of the corporation tabes part in the procurement of money for the corporation by a transaction which is invalid because of a suspension of the powers of the corporation, and the circumstances are such that the corporation is estopped from asserting the invalidity of the transaction, it is difficult to see how the director who is responsible for this position of the corporation can assert the invalidity for his own benefit. In Moss v. Averill, 10 N. Y. 449, the defendant had signed the contract and notes in question as president of the corporation, and the court held that he was estopped from denying the validity of the transaction; saying that his act amounted to an assertion that the corporation had a right to make the purchase and that the proper managing agents of the corporation had authorized it to be made, and that to hold otherwise would work great injustice to the other contracting party and enable the defendant to make a profit out of his own wrong. We think Boberts is estopped from saying that these bonds are not a lien on the mortgaged premises prior to his claim, as security for the $10,000 loan.
But we think the estoppel goes no further. The $4,000 loan was not obtained to provide for any liabilities incurred by the corporation. A loan to meet the receiver’s expenses' was not within the scope of the vote which directed the pledging of the bonds. There is nothing to show that the corporation, or
It is not necessary to consider Roberts ’ conduct as a director as bearing on the rights of the purchasers of the Hughes’ stock. We have seen that Eugene R. Norton holds fifteen shares as a dona fide purchaser, and that the holders of 357 shares, regularly transferred, are not shown to have had knowledge of the orators’ conveyances or to hold without paying value. These last are not defending, but the status of their shares will be determined by the holding regarding the fifteen shares of Norton. Kopper v. Dyer, 59 Vt. 447, 489, 9 Atl. 4, 59 Am. Rep. 742. The rights of the holders of this stock are superior to the equities of the orators, and as to them the defence of estoppel is unimportant. On the other hand, those who took their stock directly from Hughes’ estate with actual notice of the orators’ unrecorded conveyances are not in a position to say that they have been injured by Roberts’ conduct as a director, and so cannot avail themselves of this defence. With this stock must be classed the holdings of those who took their stock at the organization with knowledge of the orators’ lien or without paying value.
The conduct of Roberts cannot operate as an estoppel on Mrs. Roberts or Mrs. Hughes. The facts that they relied in part on Roberts to look after their interests in connection with the transaction in which their notes were given, and that Roberts consented that the conveyances taken as security might be left unrecorded, did not subject them to anything beyond the ordinary consequences of a failure to record.
The oratrix Ann Roberts claims a separate interest in the decree prayed for. Two thousand dollars of the note indorsed by Robert J. Roberts and his wife were paid from the avails of a bank note signed by both, and this note was paid out of the proceeds of the sale of certain real estate bought by the wife in May, 1903, upon which $1,050 had been paid out of $3,000 re^ ceived from a policy of insurance on the life, of the husband issued in 1888. One thousand five hundred dollars more of the insurance money was used in paying a mortgage of $8,000 on real estate of the husband, given for money used in taking up
We think the findings bring the case within the decision in Potter v. Potter, 64 Vt. 298, 23 Atl. 856. There the wife’s invalid father came to reside in the family on an understanding .between her and her husband that whatever was paid for his care and nursing should be hers; and it was held that when a husband allows his wife to earn property during coverture the right to reduce it to possession does not exist, and that the presentation and allowance of the claim in the name of the husband will not make it his property. The cases cited by the defendants are not authority to the contrary. In most of them there was no finding of an arrangement between the husband and wife. In considering questions touching the effect of possession and the rights of creditors, a distinction must be made between gifts of existing property and the rights which spring from a permission given the wife to earn for her benefit. The fund in question never belonged to the husband. It came into existence as the property of the wife.
The defendants insist that there can be no decree covering the interest claimed by Mrs. Hughes. They argue from the report that she had no knowledge of the existence of the mortgage and assignment until after the failure, and contend that there was no legitimate evidence of an agreement for the execu
It is also claimed that Mrs. Hughes’ estate received the purchase price of the shares transferred to her by W. IT. Hughes shortly before his assignment and afterwards sold by the trustee of his estate in bankruptcy, and that this should preclude her from asserting her claim against the purchasers of the stock. Exhibit 18, which is referred to in this connection, was received for a purpose not connected with this question, and is elsewhere claimed by the defendants not to have been admissible for any purpose, and without this exhibit there is nothing in the case that even tends to show that the facts were as stated.
The defendants insist that if Mrs. Hughes prevails the amount of her claim should be reduced by $4,800, the amount Hughes paid to Woodard on notes given him for his services and undertaking in connection with the loan. It is said that no consideration for these notes appears, and that Woodard did not carry out his contract regarding the loan, and that it was Mrs. Hughes’ duty to compel him to indorse the amount of his notes on the notes she was to pay. It appears that Woodwaid indorsed the $20,000 of notes indorsed by the orators, and procured the
The defendant excepted to certain findings based wholly or in part on the testimony of Robert J. Roberts and his appearance as noted by the master, on the ground that he was made an incompetent witness by the death of the other contracting party. The findings pointed out under this exception, other than one already considered, are in substance that Roberts and his wife were friendly to Hughes, had confidence in him, and were willing to do anything they could to assist him; that Roberts speaks broken English, and as a witness seemed somewhat troubled to understand; and that he did not hear the reason Hughes gave for not wanting the papers recorded. ’The court has made no use of any of these findings, and it may be said of all of them except the last, that they are not of a kind that could have influenced the master in reaching his ultimate and controlling conclusions. The finding that Roberts did not hear Hughes’ reason for not wanting the papers recorded might have been the basis of the finding that Roberts had no fraudulent intent in permitting them to remain unrecorded, but that possibility is negatived by the statement that no facts are found on the testimony of Roberts that are not specifically stated to have been so found.
Decree reversed and cause remanded with mandate that a decree be entered adjtidging that as against the W. H. Hughes Company the conveyances of W. H. Hughes to the orators are an incumbrance prior to his deed to said company; that eighteen hundred and sixty {1,860) shares of the stock of the W. H.. Hughes Company are held subject to the rights of the orators; that the trust deed of the W. H. Hughes Company and the bond issue of $32,000 are prior to the lien of the orators, but that as to the orators the bonds subsequently issued are invalid; that the orator Robert J. Roberts is estopped from asserting this invalidity as against the $10,000 loan; that the oratrix Ann
Watson and Powers, JJ., dissent from the holding that Robert J. Roberts is estopped.
Rehearing
Motions for Rehearing.
The majority opinion in this case was read at the opening of the October Term in 1911, and the opinion and accompanying mandate were thereupon handed to counsel without directing an entry, to afford an opportunity for any suggestions which counsel might desire to make. No one representing the defendants being in attendance, the case was held open until the close of the term and then entered with the court.
The orators Robert J. Roberts and Ann Roberts now move for a reconsideration and revision of the conclusions of the Court and the proposed mandate in three respects; one relating to the effect of a decree heretofore entered on default in the court of chancery against the defendants interested only as holders of stock transferred from Hughes; one as to the effect whiph should be given to the final decree as regards such holders, if treated as still in the case, in the absence of a finding that they were holders for value; one regarding the construction given by this Court to that part of the report which relates to the 250 shares taken by the Farmers’ Bank as collateral security on certain notes.
The defendants move for a rehearing, and an opportunity to make further showing if necessary, in respect to' three points; first, as to the construction given by the Court to the term “overdraft” as used by the master with reference to the 100 shares placed with the Farmers’ Bank as collateral; second, as to the holding of the Court that the receivership proceedings, and the order made therein for an immediate transfer of the property to the receiver, deprived the corporation of the'power to issue further bonds; third, as to the failure of the court to recognize the pay-roll as a preferred claim, which could have been established as a lien upon the property prior to the orators’ mortgage.
This Court was aware that a decree of the court of chancery had been taken against defendant stockholders who had not ap
We think the settled law applicable to pro confesso decrees against some of several defendants jointly charged justified us in treating these stockholders as we did. Our own case of Kopper v. Dyer, 59 Vt. 447, 9 Atl. 4, 59 Am. Rep. 742, was the only authority cited, but there are numerous decisions to the same effect. The nature, propriety and effect of such a decree are fully presented in Frow v. De La Vega, 15 Wall. 552, 21 L. Ed. 60. The final decree on the merits determines the rights of the defaulted defendants the same as if no decree pro confesso had been entered. The view of the ease taken in the opinion leaves no ground on which it can be said that the interest of E. R. Norton as holder of the 15 shares and the interests of the defaulted stockholders are distinct. Both are treated as holders for value without notice.
But the orators say there is. no evidence or finding that Norton as the holder of 15 shares, or any of the other owners of stock, were holders for value, and that it must be presumed in support of the decree for the orators that the chancellor inferred from the facts reported that they were not. The orators assume that the action of the Court is a reversal of an inference of fact drawn by the chancellor, but this is an error. The opinion proceeds upon the theory that the burden was on the orators to show that the stock was taken with notice or without paying value; and the orators having failed to meet this burden, the Court’s disposition of the matter was a conclusion of law and not an inference of fact.
The orators urge that the finding regarding the 250 shares should not be given, for the purpose of reversal, a construction different from that of the court below. The finding is that these
It appears from an affidavit of counsel accompanying the orators’ motion that in the trial of the case the orators relied upon the decree of the court of chancery as being in force, and as relieving them from the necessity of procuring any findings as to the good faith of the stockholders purchasing from Hughes. It appears further from the brief submitted by the orators that they tried the case upon the theory that the company had taken the property with notice, and that the defendant stockholders, as purchasers of the stock of a corporation charged with notice, had the burden of showing that they had suffered from the purchase; and that in consequence of this no attempt was made by the orators to secure and present the facts in relation to these defendants. Whether these misapprehensions should, in the circumstances, entitle the orators to some further opportunity may be left for later consideration.
It appears also from the orators’’brief that counsel construed the finding as to the 250 shares as a finding that the stock was pledged to secure an existing indebtedness, and so did not apply to the master for a more definite finding; and they therefore request that the report be recommitted to the master for a more definite statement of his finding upon the evidence already before him. The consideration of this request may also be deferred. But the orators’ brief concludes with a request that, if the case is returned to the master on any ground, the recommittal may cover all their points.
The first objection raised by the defendants relates to the holding regarding the 100 shares which are found to have been taken to secure an overdraft. No distinction was made in argument between the two blocks of stock. The orators treated both as having been taken to secure existing debts. The defendants
It is said that the question of the effect of the receivership proceedings upon the power of the corporation to issue its bonds as collateral to receiver’s certificates was not raised in the trial below nor in the argument made here; and that the briefs submitted nowhere raise or discuss any question touching the validity of the issue made. ¥e confine our consideration of this objection to what appears in the master’s report and the briefs; and the matters recited must be viewed in connection with the fact that no question was raised at any stage of the proceedings as to the validity of the $32,000 issue’. The master says: “I am requested by both parties to make certain findings relative to the Hughes Company bonding its property, ’ ’ and he thereupon refers to the records of the company as a correct statement of its doings, and reports the further facts set up in the majority opinion as to the manner in which the bonds were negotiated. The orators’ brief, after claiming that their lien is prior to any lien of the Farmers’ Bank represented by these bonds,’ and that the answer of the bank shows that it took them pending the litigation and therefore with notice, proceeds: “Moreover the bonds were issued as. collateral to certificates” to which the court did not attempt to give priority, “and were issued to the Adirondack Trust Company after the appointment of the receiver; * and later, but in the same connection, refers to the $32,000 issue as bonds against which no question is made. The presentation of the claim regarding the subsequent issue is meager, but accurate. The use of the word “moreover” characterizes the matters following as further grounds for questioning the validity ’ of the collateral security as plainly as if this were stated in so many words. The defendants evidently understood that the validity of these bonds was in question. Their argument upon the subject opens with the proposition that the mortgage bonds pledged to the Adirondack Trust Company to secure the advancement made by it to the Hughes Company, or its receiver, are valid and secured by the trust mortgage. In speaking of the author
It is agreed on all sides that no fact, claim or suggestion touching the status of the pay-roll appeared in the case as submitted to the Court. The defendants now refer in support of their motion to a section of the New York statutes, and offer to show that the wages of the employees was a preferred claim. If this were shown, it would not make the bonds valid if unlawfully issued, nor create a lien upon the mortgaged property. It might give the holders of the bonds an equity which would enable the court to work out a remedy on other lines. The claim of the defendants amounts to this — that they have a line of defence of which they did not avail themselves on the trial, because of their failure to anticipate the Court’s disposition of some of the questions involved in matters necessarily for consideration. Some of the reasons which lead courts to look with disfavor upon applications of this kind are indicated in Morgan v. Houston, 25 Vt. 570.
The orators do not make the Court’s treatment of the question of estoppel a basis of their motion, but they incidentally suggest the possibility that the Court' may now be able to agree upon the views announced by the minority. The majority would willingly treat this suggestion as an application and act accordingly, if satisfied that they were in error. But after a careful
The dissenting opinion stands upon the ground that the defendants neither pleaded nor claimed in argument the estop"pel found by the Court; and that the Court was bound to presume in support of the decree that the chancellor inferred that the bonds were pledged by the receiver. The defendants, for obvious reasons, sought to make Roberts’ conduct estop all the orators from asserting priority over Hughes’ deed to the defendant company. But the facts of Roberts’ conduct had another and very obvious bearing. The delivery and acceptance of the Hughes deed are assumed by the votes of April 29th, and nothing appears to give them an earlier date. So the completion of the purchase and the authorization of the trust deed and bonds were both transactions of the meeting which acted on Gilroy’s report that the title was clear. The entire records of the stockholders’ and directors’ meetings, which showed Roberts’ attendance and action and covered copies of the papers eon-nected with the trust deed, were referred to and found correct; but, not content with this, the defendants requested and procured an insertion in the report itself of the facts that Roberts was present at all the stockholders’ and directors’ meetings until the receivership, which included the directors’ meetings of July 16th and 17th; that he signed the consent to the mortgage, which declared that it would.be a first lien on all the real estate; and that he moved the form of the bond, which contained the statement that it was a first mortgage bond. The defendants’ brief, while attempting to make the estoppel sustain the priority of the defendant company’s title deed, argues this group of subsequent facts as bearing upon Roberts alone, in a way which could not fail to suggest their true relation to the case. And in a subsequent part of the brief, where the claims of the defendant bank are specially considered, it is said to make strongly against the orators’ claim of priority as regards these bonds, that the orator Robert J. Roberts was present at both of the meetings “at which the issue of these last named bonds was specially authorized.” The fact that the defendants claimed a
Nor can the majority yield the point regarding the issuance of the bonds. No question is made as to the fullness and exactness of our statement of the facts reported; and we cannot presume that the court below inferred from those facts that, the bonds were issued by the receiver without the semblance of an authorization from the court, and in violation of his official duty.
It is a common procedure in equity to permit amendments of the pleadings to correspond with the case as tried. Harrigan v. Bacon, 57 Vt. 644; Dwinell v. Bliss, 58 Vt. 353, 5 Atl. 317; Olmstead v. Abbott, 61 Vt. 281, 18 Atl. 315. The majority think this feature of the estoppel was within the issues of the case as tried, and an amendment of the answer in this respect may be had.
The manner in which the case is presented should be stated more fully. Both sides submit affidavits in support of their respective claims regarding the stock held by the Farmers ’ Bank. The defendants’ brief is accompanied by a transcript of the evidence taken by the master, for examination upon the points made. The orators attach to their brief in reply to the defendants an affidavit of counsel presenting statements made in the bi’ief submitted to the master by defendants, and certain requests for findings submitted by both parties; and further affidavits presenting, extracts from the petition for the discharge of the receiver and from the order made thereon. The defend.ants object to the consideration of the affidavits regarding the statements and requests of counsel, and ask that provision be made for a hearing on the question of fact if such affidavits are considered.
The questions regarding the stock held as collateral, and the question whether the validity of the bonds was raised and argued on the trial, have been disposed of without reference to the affidavits. The only matters covered by the opposing briefs which remain for disposition are those presenting the orators’ situation with regard to the 357 shares of stock as to which nd inquiry was made, and those relating to the claims of the defendants which depend upon proof of the laws of New York. If the report were to be recommitted for a further hearing on the claims of the defendants, it might be difficult to say why
Both motions domed.
Dissenting Opinion
dissenting. I cannot believe that Roberts is estopped, and I therefore dissent on that point.
1. It is the settled law of this State that an estoppel, to be available, must be pleaded, if, as here, the party relying upon it has an opportunity to plead it. Sawyer v. Hoyt, 2 Tyl. 288; Lord v. Bigelow, 8 Vt. 445; Brinsmaid v. Mayo, 9 Vt. 31; Isaacs v. Clark, 12 Vt. 692, 36 Am. Dec. 372. Every fact essential to the estoppel must be pleaded with accuracy. Gray v. Pingree, 17 Vt. 419, 44 Am. Dec. 345. If not pleaded, when the circumstances are such as to require it to be pleaded, the estoppel is waived. Brinsmaid v. Mayo; Isaacs v. Clark.
The defendants evidently had this rule in mind for they attempt to set up an estoppel in their answers. But the estoppel set up in the answers and the estoppel argued before us is not the one found and established by the majority opinion. That Roberts was estopped to assert the illegality of the issue of the $18,000 in bonds held as collateral to the receiver’s certificates by the Farmers’ National Bank had entirely escaped the vigilance of counsel. Indeed, these bonds were of so little consequence or importance in the estimation of the answering defendants that no mention of them is to be found in the answers until after the special master had filed his report. Then, for the first time, though it had filed what is called a “full answer” to the original and supplemental bills, the Farmers’ National Bank, in a supplemental answer, makes mention of these bonds.
It was said by this Court as recently as Conn. Valley Lumber Company v. Rowell, 84 Vt. 25, 77 Atl. 873, that “when parties go into special pleadings, they are confined strictly to the matters put in issue, for the Court tries only such issues as the parties make by their pleadings.” I submit that this rule is applicable though this is a suit in chancery.
The circumstances being such that the estoppel should have been pleaded, no advantage can be taken of it though it may have appeared from evidence introduced to establish the defence set forth in the answers. Poole v. Mass. Mut. Accident Asso., 75 Vt. 85, 53 Atl. 331.
So the majority has gone quite outside of the case made by the pleadings and argument to find that Roberts cannot be heard to say that these bonds were illegally issued and cannot be ahead of his mortgage, — and this for the sake of reversing a decree made upon consideration and not pro forma.
I say, then, that the defendants waived the estoppel established by the majority by not pleading it; and they waived it again by not briefing it. This Court, in chancery appeals, sits only as a court of error. Dietrich v. Hutchinson, 73 Vt. 134, 50 Atl. 810, 87 Am. St. Rep. 698. When reviewing this kind of a decree, it will make every reasonable presumption in favor of its correctness. It will decline to pass upon' questions not raised below and confine parties to the theories there advanced. Errors should not be sought for outside the record, nor questions settled which were not passed upon below. In this case, so far as estoppels are concerned, the questions raised below were correctly decided, and I should decline to consider any others. “The habit that has sometimes prevailed of ‘dragging’ a case in this
2. The decree below having been made upon consideration, it should be sustained by this Court if that result can be reasonably attained. To that end, if a fact essential to the correctness of the decree is omitted from the findings, and such fact can reasonably be inferred from those certified up, it is the duty of this Court to assume that the court made such inference. Russell v. Davis, 69 Vt. 275, 37 Atl. 746; Sowles v. St. Albans, 71 Vt. 418, 45 Atl. 1050; Davenport v. Crowell, 79 Vt. 419, 65 Atl. 557; VanDyke v. Cole, 81 Vt. 379, 70 Atl. 593; Perkins & Co. v. Perley, 82 Vt. 524, 74 Atl. 231; Whitehead v. Whitehead, 84 Vt. 325, 79 Atl. 516. But if the result will be a reversal, this Court should not assume that the court below drew any inference not affirmatively shown by the record, unless the same is a necessary inference from the facts found. Whitehead v. Whitehead, supra; Adams v. Ladeau, 84 Vt. 464, 79 Atl. 996; Plumley’s Admr. v. Plumley, 84 Vt. 290, 79 Atl. 45. In no event can this Court draw the inference. It is an inference of fact, and it is not for this Court to supply a fact, either for affirmance or reversal. “It is never the province of a court of errors to deduce inferences of fact from a case agreed, a special verdict, or a report of referees or auditors,” said this Court in Abbott v. Camp, 23 Vt. 650. And all along down through our cases runs the idea that if any inferences are to be drawn from the facts certified, they must be drawn by the trial court and not by this Court.
As pointed out in the majority opinion, the report is silent as to the particular circumstances under which these $18,000 in bonds were issued to the Adirondack Trust Company. By whom they were actually pledged is a fact not found. That they were pledged by either the receiver or the corporation is probably ei necessary inference. But that it is • so plain that they were' pledged by the corporation — the theory on which the majority opinion is based — that that conclusion is compelled by the facts
There may be circumstances of more or less significance indicating this, but it can not be said that they are sufficiently decisive to be determinative of the question. There is room for reasonable men to differ in their conclusions on this subject,— opposing inferences may be drawn from the facts reported,— and therefore this Court should assume that the court below drew the one which will support the decree. “We ought not, for the purpose of reversing a judgment, to read into the finding of facts something which is not there and which is not a necessary inference from the facts found.” Adams v. Ladeau, 84 Vt. 464. To my mind it is vastly more reasonable to infer from the facts found that the receiver, finding the bonds all prepared and ready for delivery, assuming to carry out the previous plan of the corporation, took them and pledged them as collateral to his certificate. If this view is even possible, under the rule referred to the decree should be affirmed; for no one suggests that Roberts could be estopped by what the receiver did. In passing upon the possibility of the conclusion suggested, keep in mind the situation: Here was a corporation shorn of its power to incur debts or pay them; its functions suspended, and its activities paralyzed by the receivership; its assets and affairs had been ordered by the court to be transferred; its corporate powers, so far as now involved, terminated by an implied injunction; and yet to reverse a decree, the majority assumes that the court of chancery, by force of necessity, inferred iu the very teeth of the court’s order and injunction, that the corporation assumed to issue $18,000 in bonds, thereby increasing its mortgage indebtedness by $14,000.
I ought to say, in passing, that if the bonds were issued by the receiver as I have suggested, they would be wholly invalid. A receiver has no authority to issue bonds of his own execution, and these were of no validity if executed by the corporation and issued by him. Woodford v. Darwin, 3 Vt. 82, 21 Am. Dec. 573, and Woodworth v. Downer, 13 Vt. 522, 27 Am. Dec. 611, involved the power of a partner to- issue promissory notes after dissolution of the partnership. In principle those cases are much, like this. After the corporation went into the hands of the receiver, corporate action was forbidden, and the
Believing as I do, that it is not only possible but reasonable to assume that the court of chancery inferred from the findings that the bonds were pledged by the receiver, I would so assume and affirm the decree.
3. I call attention to another assumption made by the majority which I regard as unwarranted: A copy of the bond is found in the corporate records. From this it appears that the bonds were not to be obligatory until duly certified by the trustee. Whether or not the bonds here in question bore this certificate does not appear from the report. Is it a necessary inference, from the finding made, that they do bear this certificate ? The finding, reads: “It appears from the testimony of Eugene E. Norton, and I so find the fact, that there are outstanding $18,000 more of said bonds, which $18,000 were negotiated with Senator Brackett for the Adirondack Trust Company, as security for funds obtained to meet the July pay-roll and some other obligations * I admit that the inference would be a natural one, but I deny that it would be a necessary one, unless it can be said as matter of law that bankers never make mistakes.
4. One who relies upon an estoppel for his protection must prove it. He takes the burden of establishing every fact essential to the estoppel. Robinson v. Morgan, 65 Vt. 37, 25 Atl. 899; Royce v. Carpenter, 80 Vt. 37, 66 Atl. 888; Spear v. Spear, (Me.), 54 Atl. 1106; Kroll v. Close, (Oh.), 92 N. E. 29, 16 Cyc. 811. One of these essential facts is, that he relied upon the act or conduct specified, and was thereby induced to change his position. 957 Vt. Dig. 38. The master has wholly failed to find this fact in the case in hand. The absence of this finding is recognized by the majority, for it is said in the opinion that “there is no need of a direct finding that the party taking the bonds had knowledge and relied upon any particular feature of Eoberts’ conduct,” and that “it is to be presumed that the holder was induced to purchase by the advantages of the opportunity as presented.” Eemembering that we are now dealing with necessary inferences only, can it be said that the question of a creditor’s reliance upon collateral security is never open to inquiry? If a perfectly solvent borrower deposits collateral as security for his note does the law conclusively presume that the
5. There is another fact essential to an estoppel: It must be made to appear that the party seeking to avail himself of it had altered his position to his prejudice, — has been misled to his injury. Woolen v. Edson, 35 Vt. 214; Earl v. Stevens, 57 Vt. 474; Goodell v. Brandon National Bank, 63 Vt. 303, 21 Atl. 956, 25 Am. St. Rep. 766. An estoppel is protective, only, and its whole office is to shield one from a loss which, but for it, he could not escape. Smith v. Powell, 98 Va. 431, 36 S. E. 522; Gerstadengen v. Hartzell, 9 N. Dak. 268, 83 N. W. 230, 81 Am. St. Rep. 575; Lindsay v. Cooper, 94 Ala. 170, 16 L. R. A. 813, 11 So. 325, 33 Am. St. Rep. 105; Atkins v. Payne, (Penn.) 50 Atl. 158; Schwab v. Edge, (Penn.) 64 Atl. 80; Stewart v. Parnell, (Penn.) 23 Atl. 838. It is plain enough to me that the Farmers’ National Bank is in no danger here. It cannot
lose a cent by this transaction. The corporation is behind their loan. Nobody claims that the corporation is insolvent, and if they did, it sufficiently appears otherwise by the record. In the first place, it is shown that the trustee in bankruptcy of Hughes came into possession of 1,645 shares of the stock of the corporation, which he sold at auction in June, 1904, — long after all these bonds and receiver’s certificates had been issued — to one who knew all about the liabilities of the corporation, including the Roberts debt, for $33,900.00. One cannot believe that the Nortons were paying more than $20.50 a share for the stock of an insolvent corporation, when they knew all about its assets and liabilities. Moreover, the master finds that the value of the property conveyed to the corporation by Hughes was, at the time the stock was bid off for the Nortons, $95,000, and the liabilities of the corporation then amounted to $72,000, to which should be added the notes here sought to be foreclosed. The margin of solvency thus established is not a very large one, I admit, but is apparently safe. Not only this; it appears that after the Nortons acquired their interest, the receivership was terminated and the corporation resumed control of its affairs. Does anybody believe that the Court relinquished its control without making any provision for the payment of the sums represented by the receiver’s certificates which had been issued by its authority ? Of course not. But we are not left to conjecture on this point. The corporation says in its answer that it “is
6. It is held by the majority that the Farmers’ National Bank took the bonds with notice of the illegality of their issue. How, then, can Roberts be estopped from asserting it? What has he ever said or done to mislead the bank or anybody else on that subject? Assuming that the corporation issued them, what did he have to do with it ? The legality of the issue of the bonds is a subject on which Roberts has never spoken, either expressly or by implication. But it is said by the majority that the corporation had the benefit of this loan, — that its avails went to pay its debt, — and therefore the corporation is estopped to deny the validity of the bonds pledged to secure It; and that Roberts being a director, is also estopped to deny it. I do not agree that the corporation is estopped. The Adirondack Trust Company and the Farmers’ National Bank knew all about it. ' They knew every single material fact. Their mistake, if there was any, arose from their ignorance of their legal rights, — just as Roberts did when he omitted to record the mortgages. They knew they were dealing with a receiver,. — that this corporation was in. the hands of the court. What fact did the corporation suppress, that it should now tie the hands of this honest creditor ? Knowing these facts, they were bound to know that the corporation could not make a legal issue of bonds, and that the receiver could not. Indeed, this is the view of the majority, and the very ground on which the invalidity of the bonds in the hands of the bank is put in the opinion.
One cannot be estopped when the other party knows the truth. Deception is of the very essence of estoppel; and this deception must be as to material facts, for one knowing the facts
It necessarily follows that Roberts’ representations about the condition of the title arising from his failure to record or give notice of his mortgage becomes entirely immaterial. For if the bonds are invalid in the hands of the bank, as the majority says, and Roberts is allowed to'say so, it is of no possible consequence whether they are- — or would be if legally issued — a first or second lien on the property. They are unenforceable, and Roberts’ implied representation that the title was clear was utterly harmless to the bank.
It requires no very careful study of this case to discover that the result reached by the majority not only does great injustice to Roberts, but accomplishes no benefit to the Farmers’ Bank in whose behalf the estoppel is established. The corporation and its owners reap the benefit, though they took with notice, and are now enabled, by shielding themselves behind an estoppel to which they are strangers, to avoid an encumbrance valid as to them, and thus escape the payment of the debt secured thereby. It cannot be that in foro conscientiae such a rank injustice should be tolerated.
I should affirm the decree.