McVity v. E. D. Albro Co.

Ingraham, J.:

The defendant is a foreign corporation, organized under the laws of the State of Ohio. In April, 1899, and prior thereto the defendant was engaged in dealing in lumber in the city of Hew York. The material facts, which are not seriously disputed, are that in April, 1899, the plaintiff held the defendant’s note for $10,000 for money loaned which was payable on demand with interest at the rate of six per centum per annum; that the plaintiff wrote a letter to the defendant asking for payment of $5,000 on account of this note; that in answer to this demand the plaintiff received a letter from the defendant corporation, signed “E. D. Albro Co., W. H. Justice, Prest.,” which was as follows: “ * * * In your recent letter to Mr. Justice you stated you would like to have say, $5,000.00 in cash. Our stockholders all agreed on one point and that is that we much prefer to pay the note in full and, therefore, we repeat that it would give us pleasure to hand you check for $10,000.00 at once if you so desire' and we can arrange the interest due on our note for $10,000.00 by short time notes. As you mention, however, that $5,000.00 in cash is the sum you wish to get, we all join in the. suggestion and it is simply á suggestion and offer to you in the true spirit of good advice for your interest and not for ours that we can and will pay you at oncé cash $5,000.00 and are willing to sell you five shares of the company’s stock at the par value of $1,000.00 per share and guarantee you on same a six per cent dividend annually. Of course we expect to pay more dividend,, but we are willing to guarantee a six per cent dividend and will also agree, or Mr. McDougall and Mr. Justice will jointly agree, to buy the stock back from you say at the end of two or three years at the same price per share you having a guarantee of a six per cent dividend in the meanwhile. * *.. * Please understand that we are not anxious to sell Albro Company stock but are willing to sell you five shares if you desire to purchase it on the basis mentioned. Our preference you understand is to pay the note in full $10,000.00 at once * * *”

This letter was dated April 22, 1899, and about the 10th of May, 1899, Mr. Justice, the president of the company, called upon the plaintiff in Mew York city. Mr. Justice said that he had called to see the plaintiff in reference to the E. D. Albro Company’s demand note which the plaintiff held, and .referred to the letter of April twenty-second. He then told the plaintiff of the prosperity of the company and that they had ten years’ good business before them, and that the company expected to pay ten per cent if not more. He then offered to the plaintiff that'if the plaintiff would take the stock of the company.they would guarantee a dividend of six per cent per annum in exchange for the note. The plaintiff asked him if that would be preferred stock, to which Justice answered that it would be stock guaranteed by the Albro Company, which they had a right to do ; the plaintiff replied that he did not care about buying stock, as he was well advanced in years and wonld prefer- to have the note go on as it was on the hooks, and if they did not want to do that they could pay the note in full in cash. To that Justice said that it was not convenient for them to pay cash on the note at that time, and the plaintiff said that he- would think the matter over and would see him again. The plaintiff, having confidence in Justice and believing wliat he said, in a day or two afterwards called upon Justice at the office of the company in Hew York, when Justice asked the plaintiff what he had decided about taking stock. The plaintiff said, “no, I didn’t see where I was going to be benefitted by taking stock for my note, which was six per cent, per annum, and the stock wouldn’t pay any more.” Justice replied that this note was the only obligation of the kind that they had on their books, and they wanted to get it off their books as a liability. “ He then said that the Company would sell me eight shares of stock and guarantee me a dividend of six per cent, per annum, payable quarterly, and the balance, $2,000, they would pay in cash in exchange for my demand note,” and that, in addition, they would give the plaintiff an additional advantage and that was that the company would continue the interest on the note from that time, from the first of January to the first of July, and that the Albro Company had decided to pay dividends, to commence them on the 1st of July, 1899, and that if he would decide then and there to take stock, he would get a dividend in July. The plaintiff said that he would accept his offer,- that is, that he would accept eight shares of stock at par with their guaranty of six per cent per annum, payable quarterly, and the balance, $2,000, to be paid in cash in exchange for the note. • As a result of this conversation, early in June the plaintiff received from Justice eight shares of the capital stock of the defendant corporation at the par value of $l-,000 each, and with it the following letter:

“ Mew York, Moa/ 13, 1899.

“ Mr. Jas. S. MoYity

“Dear Sir.— You hold the note of The E, D. Albro Co. for $10,000.00 bearing Int. at 6%. If as proposed you will buy .8 shares' of The E. D. Albro Co. stock we will guarantee you a Qf0 dividend on same payable quarterly and the remaining $2,000.00 we can arrange as you may desire.

“ This is the arrangement proposed by Mr. McDougall, and he and Mr. Justice will agree to purchase back the stock at par within 2 to 3 years if yon wish to sell, and you are guaranteed a dividend of per annum in the meanwhile.

“ Yours truly,.

“THE E. D. ALBRO CO. ■ .

“W. H. Justice

“Prest.”

The certificate for eight shares of stock and the letter accompanying it were delivered to the plaintiff by the president of the company. At the time it was delivered Justice told the plaintiff that he would like to continue the $2,000 as an account until the 1st of January, 1900, and Justice, on behalf of the company, then borrowed an additional $1,000 in cash from the plaintiff as a loan and gave a note of the corporation for $3,000, which the plaintiff accepted and delivered the note for $10,000 to the defendant. Thereupon and down to December thirty-first the defendant paid dividends of six per cent upon the stock owned by the plaintiff and also made various payments on account of the note for $3,000, until at the time of the commencement of the action there was due upon the note for $3,000, $400, with interest from July 1,1902. • On December 3, 1901, the plaintiff received from the defendant the following letter dated Cincinnati, O., December 3, 1901:

“DeabSib.— * * * As to the dividends, some of our stockholders have entered a protest and this protest will have tó be heeded, because it is an ultra vires act and beyond the power of any officer of this Company to pay dividends when the Company is not earning them.”

In reply to this letter the plaintiff, on December 15, 1901, wrote a letter as follows:

“ The E. D. Albbo Company :

“ Gentlemen.— * * * L note what you say (and which' has been before intimated by you), that it was beyond the power of the Company to issue stock with guarantee of dividend. This transaction was entered into at the request of the Company, and it was supposed at the time that it was a good thing both for the Company and myself, and I supposed it was done oh the advice of the Com-party’s legal adviser. I had no idea at the time of.the transaction that it was unlawful, and of course I ought not to hold you to it if it was, and have no desire to do so. Will you kindly advise ine if it is the judgment of the Company and its present legal adviser — that it was hey on d the power of the Company to issue the- stock with the guarantee of dividend which I hold. I want my affairs with the Company adjusted as far as possible without friction, and if your Company holds that it was beyond its power to issue the stock, with the guarantee of dividends which I hold, I offer to return the stock to you, properly endorsed for surrender or transfer, together with1 the guarantee executed by the Company at the time of the issue of the stock, you to return me the Company note for $10,000, which I gave, up when. the stock and guarantee - was given me, on which you may endorse payment "of interest (which I received under the agreement as--dividends, to. October 1st, 1901, together with payment of Two Thousand Dollars on account of principal.

“Yours truly,

- ' “JAMES S. MoYITY.”

This letter does not seem to have "been answered by the defend- • t ant, when the plaintiff, on January 10, 1902, sent a copy of the letter to the defendant, with a request for an immediate reply. In answer to that, on January 16, 1902, the plaintiff received a letter -from the legal adviser of "the defendant, dated Cincinnati, January 16, 1902, which stated that in the opinion of the writer the alleged guaranty of dividend upon the stock referred -to, was made without the authority of the company itself; “ furthermore, even if the Company had authorized the guarantee, it would have been ultra vires, because a- corporation has no right to guarantee to an individuar stockholder the dividend upon his stock. This being the cáse, the Company as now. constituted cannot now undertake to be responsible for the unauthorized act of some former management of the Company, and it is -not in a position to receive from you the. stock, nor to give you its note for $10,000 as you request. You could have known, as a matter of law, at the time that the Company could not make such a stipulation. Having taken the stock, under the circumstances set forth, you are not entitled to return it to the Company and receive therefor the Company’s nóte.” .

The plaintiff testified that he did not at any time know that it was forbidden in Ohio to pay more than the company earned. For the defendant, Mr. Cassatt, a member of the bar of the State of Ohio, was called as a witness and testified that he was familiar with the law of Ohio relating to corporations; that there was no authority under the law of that State for a corporation to guarantee a dividend upon its capital stock; that by the law of Ohio dividends can be declared by the company upon only what are called the surplus profits' of the company; and certain statutes of the State of Ohio relating to the powers of corporations were introduced in evidence. By these statutes it was made unlawful for the directors of any corporation organized under the laws of that State to make dividends, except from the surplus profits arising from the business of the corporation. (See Laws of Ohio, vol. 85, p. 182, as amd. by vol. 86, p. 228.)

Both the plaintiff and the defendant then asked for the direction of a verdict, whereupon the court granted the motion of the plaintiff and directed a verdict in favor of the plaintiff for the amount due upon the note of $10,000, and from the judgment entered upon that verdict the defendant appeals.

Each of the parties asked for the direction of a verdict and, there being no application to submit any question to the jury, the question presented is whether upon these facts the plaintiff was entitled to a verdict. This corporation, being organized under, the laws of the State of Ohio, was subject to the law of that State and had such power as that State had granted to it. Whether or not it was authorized to issue stock with a guaranty of dividends, which would make it entitled to dividends in preference to other stock of the corporation, was a question to be determined by the laws of Ohio, and as to the law of that State the plaintiff,.a resident of Mew York, was not chargeable with knowledge. There is nothing that would restrict the power of the Legislature of the State of Ohio to confer upon a corporation organized under its authority, power to guarantee dividends upon the stock of the company, even though such dividends would be payable out of the capital of the company, as distinguished from its profits or surplus earnings. Motwithstanding the fact that the defendant had expressed to the plaintiff a great desire to pay this note in cash, it endeavored to induce the plaintiff to make some terms with the company by which a. payment- could be prevented; It accomplished that result by inducing the plaintiff to surrender the note in return for shares of the stock of the company on which the company would guarantee the payment of a dividend of six per cent and upon the representation by the defendant’s president that the defendant had a right to issue its stock and guarantee the payment of dividends.

The plaintiff testified and it was not disputed that “ I then asked him (the president) if that would be preferred stock. He answered me by Saying it would be stock guaranteed by the Albro Co., which they (Albro Co:) had a right to do.” Here was a distinct representation by the'president of the defendent to induce the plaintiff to accept the stock of' the corporation, that the defendant had a right to make such a guaranty, and that right depended upon the law of the State of Ohio, with knowledge of which the plaintiff was not chargeable. The plaintiff expressly swears that he relied upon this statement of the president and that he had no' knowledge of the fact that, such an arrangement was in violation of the laws- of Ohio. The defendant' thus accepted a surrender of the plaintiff’s note, based upon a delivery of the stock with the guaranty’of the defendant that it would pay dividend's upon the stock at the rate of six per cent per annum, and that guaranty was faithfully observed by the defendant down to the end of the year 1901, when, for the first time,'the defendant informed the plaintiff that the agreement of guaranty was invalid by the law of the State of Ohio and refused to comply with it; that the representations made by the defendant’s president, and-upon which it obtained the note of the defendant which was held by the plaintiff, were false ; that the guaranty was not'á legal obligation of the company for which he acted,- and' that the plaintiff, was not entitled to receive the dividends which the corporation had guaranteed, upon the basis of which guaranty the plaintiff had surrendered this obligation of the defendant:

' I think it clear that under this condition the plaintiff was entitled to rescind this purchase of the stock and to receive back the obligation of the compány upon the delivéry to the company of the stock that he had received: The plaintiff was not a lawyer. He’ had beén for some time in the employ of the defendant. He had loaned his money to the defendant, relying upon its obligation to repay it to him upon demand. He had been induced to surrender that obligation of the defendant upon the distinct representation by the defendant’s president that the stock that the defendant had offered to sell him was stock of the company, with a guaranty of a dividend of six per cent, and that the corporation had power to issue stock with such a guaranty, and relying upon this representation the plaintiff accepted the stock and delivered up the obligation of the company that he held. What the defendant offered to give to the plaintiff and what the plaintiff understood he was to receive from the defendant was stock of the defendant, dividends of which were guaranteed. The defendant delivered the stock and what purported tobe such a guaranty. The arrangement was for the benefit of the defendant) suggested by its president, and accepted by the plaintiff as the defendant’s offer.

It is opposed to established principles that the defendant should be allowed to repudiate its obligation upon the ground that the obligation that it assumed to the plaintiff was ultra vires, and at the same time retain the consideration that it had received for giving this void guaranty. This question is very satisfactorily treated in Pullmam’s Palace Car Co. v. Central Trans. Co. (171 U. S. 139), and it was there expressly held that upon disaffirmance by a corporation of an act which is ultra vires, the corporation must restore the other party to his former condition as far as possible upon the disaffirmance of a void contract, and return all property that it has received as a consideration for that contract or its valué. In Central Transp. Co. v. Pullman's Palace Car Co. (139 U. S. 60) Mr. Justice Gray, in delivering the opinion of the court, said: “ A contract ultra vires being unlawful and void, not because it is in itself immoral, but because the corporation, by the law of its creation, is. incapable .of making.it, the courts, while refusing to maintain any action upon the unlawful contract, have always striven to do justice between the parties, so far as could be done consistently with adherence to law, by permitting property or money parted with on the faith of the unlawful contract to be recovered back, or compensation to be made for it.” It has been settled in this State that a corporation cannot avail itself of the defense of ultra vires when the contract has been in good faith fully performed by the other party, and the corporation has had the benefit of the performance and of the contract; that “ when it (the contract) becomes executed by the other party, it (the corporation) is estopped from asserting its, own wrong and cannot be excused from payment upon the plea that the contract was beyond its power.” (Vought v. Eastern Building & Loan Assn., 172 N. Y. 508.) But when the corporation expressly repudiated its agreement upon which it had obtained this plaintiff’s property, and as a basis for such repudiation proved that the act was ultra vires and prohibited by the statutes of the State from which it had derived its right to exist, the other party to the contract certainly had the right to rescind the whole transaction, and the defendant was then bound to restore the plaintiff to the same condition that he was in when the void contract was executed.

There is no justification in the evidence for the statement that this guaranty of dividends was not the substantial inducement under which the plaintiff accepted these shares of stock in discharge of the defendant’s indebtedness to him; and .having acted upon the representations of the defendant’s president that he was acting for the corporation and that the corporation had the power to make such a guaranty, the defendant corporation cannot retain the benefit of the transaction and hold its obligation which it has' obtained from the plaintiff, and repudiate the authority of the president to make such a contract on behalf of the corporation. By accepting and retaining the note held by the plaintiff the corporation ratified the act of its president in making the contract with the- plaintiff, and but for the fact that the guaranty is prohibited by the laws of the State, of Ohio the guaranty would be a perfect, valid obligation of the defendant, which it, while retaining its benefits, could not repudiate upon the ground that the defendant’s president had no authority to make it. It is sound law, as well as sound morals, that a party to a contract cannot repudiate the contract and his obligations under it and at the same time retain the consideration that he has received for making the repudiated promise; and whether the promise is repudiated because it was made by an agent without authority or because it was ultra vires or. beyond the power of the party making it, or for any other reason, when the obligation upon one party is repudiated, the other party has the right to receive back the consideration which it has paid for the repudiated contract or repudiated obligation. This general rule applies with greater force where the innocent party who has paid his money or delivered his property based upon the inyalid promise, has been induced to part with money and accept the promise upon the distinct representation of the promisor that the obligation was valid and that the promisor was authorized to make it. All of these facts appear in this case. This defendant stands in a position of a corporation accepting from the plaintiff a discharge of its admitted obligation based upon a promise to pay six per cent dividends upon the stock transferred to the plaintiff in satisfaction of that obligation. It repudiates that obligation, and then seeks to retain its obligation which the plaintiff has delivered to it based upon that promise. Certainly no corporation or individual can retain the benefit received on account of a void obligation while repudiating the obligation.

I think that the judgment and order should be affirmed, with costs.

Patterson and Hatch, JJ., concurred; Van Brunt, P. J., and Laughlin, J., dissented.