
    Hamilton Trust Company, as Trustee, Respondent, v. G. Hector Clemes and Others, Appellants, Impleaded with The Horicon Improvement Company and Others.
    
      Omporations — rights as between mortgage bondholder’s and subsequent judgment creditors—consent to-the execution of a'mortgage by. original incorporators whose namps are not on. the stock book —• one retaining the proceeds of a mortgage may not dispute its validity—when those who are not stockholders may be directors de facto.
    Where a question as to the validity of a corporate mortgage arises" between "bondholders under the mortgage and junior judgment creditors of the corporation, the former, in case the bonds are valid securities as against the corporation, must, in the absence of fraud, prevail, as a creditor holds under and through his debtor, and, in the absence of' fraud, is concluded by all the valid acts and assurances of the debtor. ■ ■
    The statutory requisite that the written consent of the stockholders owning at. least two-tliirds of the capital stock must be given and filed before the mortgage is issued, and the further provision contained in section 29 of the statute, that no transfer of stock shall be valid as' against the corporation, its stock-'
    • holders .and creditors, until it 'has been entered in a stock book required to be kept by the corporation, are not to- be construed in such a manner as to require an .original subscriber to the stock to have his holding of stock entered in the stock book before his consent to the issue of the corporate mortgage .can be valid. . "
    A corporation is estopped, .as against its mortgagee, from raising this objection, so long as it holds the benefit of the property it .acquired under the.'mortgage,. and as its judgment creditors must claim under the mortgagor, they,, in the absence of fraud, are equally estopped.
    Persons who are not actual holders of the stock of a corporation, but are elected directors by .its original incorporators, and .soon afterwards become actual stockholders, are to be regarded as directors defacto if not de jure, and a mort- • gage issued under a resolution passed by a board of which they were members, must be deemed to be valid, especially where the stockholders subsequently ratify an issue of bonds secured by the mortgage.
    Appeal by the defendants, Gr. Hector Ciernes and others, from a judgment of the Supreme Court in favor of - the plaintiff, entered-in the office of the clerk- of the county of Warren on the 15 th day of September, 1896, upon the decision of the court rendered after a trial at the Warren Special Term.
    The defendant, the IToricon Improvement Company, the mortgagor, made no defense; the appellants are judgment creditors of the mortgagor, with judgments junior to the mortgage. Their defenses insisted upon here were : (1) That the IToricon Improvement Company never authorized the execution of the mortgage or the execution or delivery of its bonds; (2) that the mortgage exceeded the amount of the paid-up capital stock of the mortgagor company, and more than equaled two-thirds of the value of the corporate property of the company at the time the bonds secured by the mortgage were issued, thereby violating section 2 of the Stock Corporation Law (Chap. 688, Laws of 1892); (3) that the consent of stockholders owning at least two-thirds of the capital stock to the issue of the mortgage was never duly given in writing and filed and recorded; (4) that the persons claiming to act as directors of the mortgagor company in the giving of the mortgage and the issue of its bonds were not, in law, such directors; (5) that the mortgage and bonds were executed and delivered with the intent to cheat and defraud the appellants.
    The trial court found generally against the appellants upon all these defenses.
    The facts, as they appeared upon the evidence, were as follows:
    In January, 1895, Walter M. Peck was the owner of the Lake House property, worth about $30,000, at Lake George, and held a contract giving him the option of purchasing the Prospect Mountain property, worth about $4,000. He conceived the idea of constructing a railroad from the foot of the mountain to its summit, erecting a club house there and additional cottages upon the Lake House grounds. Peck and his brother, Harry N. Peck, and one Colvin,. January 7, 1895, made and executed the certificate of the corporation known as the Horicon Improvement Company, for the purpose oí “ the building and maintenance of hotels and cottages, and the establishing, building and maintaining of means of conveyance to and between the same by cable cars or otherwise.” These persons were named as directors for the first year. The capital stock was fixed at $150,000, divided into 1,500 shares, of which Walter M. Peck agreed to take 1,400 shares, his brother 15 shares,-and Colvin 25 shares. The., certificate "of incorporation was filed in the Warren county clerk’s office January 11, 1895. On January 9, 1895, these three persons met as the board of directors of the Horicon Improvement Company, and elected Walter M. "Peck president, and other officers. "They then adopted a resolution authorizing the president -to execute a Contract with the Otis' Engineering and Construction Company for the: construction . by the latter company of a Cable1 road ¡up Prospect .Mountain, and for a loan of $80,000 for other constructions and. improvements upon the property, the Horicon Company to pay the Otis Company therefor ; $50,000 in its stock and $150,000 of its first mortgage bonds, thereafter to be issued. On January 15, 1895, the. two companies entered into such" a contract in. writing, and thereupon the ..Otis. Company entered upon its execution and fully performed it on or before June 1,. 1895:, expending for the purpose, including .advances in money to the Horicon Improvement Company, nearly $200,000. On-February 16, 1895, at a meeting of the stockholders of the Horicon Company,, namely, the original incorporators, duly called for the purpose, a resolution- was adopted to increase- the number of directors: of the company to seven, and thereupon, by a vote of the ' 'stockholders holding"1,00.0 shares- of the stock, William D. Baldwin and three others, who were also shareholders in "the Otis Company,, were elected directors.
    April 24, 1895, the 500. shares of the capital stock of the Horicon Improvement Company, ¡called for by the. contract, "were issued to the Otis Company: The same day 1,000 shares of the stock were issued to Walter M. Peck in payment for the" Lake .House and" Prospect Mountain properties, including the rights of way, wharfage and riparian rights and all personal property upon' the premises, which Peck thereupon conveyed, or caused to be conveyed, to the Horicon Improvement Company. May -3, 1895, the consent in writing .of Walter M. Peck as.the holder of the 1,000 shares of the Horicon Improvement Company and of the Otis Engineering and Construction Company, as; the holder of .the. 500 other shares of the stock- was executed, and on May 6, 1895, was filed in the Warren county clerk’s office, Also, on May third, at a meeting of the enlarged board of directors of the Horicon Improvement Company, a resolution was adopted authorizing the issue of the bonds and mortgage in suit, and the same were issued, the mortgage being recorded June 12, 1895, and the bonds being delivered to the Otis Company July 18, 1895, after the full completion of its contract. They were delivered by the plaintiff upon the written direction of the Horicon Improvement Company, and the delivery was afterwards ratified in writing by all the stockholders of the Horicon Improvement Company.
    
      Charles II. Sturges, for the appellants.
    
      Edwin C. Low, for the respondent.
   Landon, J.:

The findings of the trial judge, in effect, negative the charge of fraud in the issue of the mortgage and the bonds. The evidence does not support the charge of fraud, but justifies the finding that, •as between mortgagor and mortgagee and the bondholders, the mortgage and bonds were honestly issued as security for the payment of honest obligations. It seems to be elementary justice that a contractor who has added his own property, money and labor, of more than $150,000 in amount, to the real estate of another under a contract with him that he should be secured by a mortgage upon such-real estate, ought to have the mortgage, and that it should be a good one. Whatever irregularities, if any, attended the authorization, execution and the issue of the mortgage and bonds, the solution of this appeal, which is, in effect, between the bondholders and junior judgment creditors, must depend upon the answer to the question whether, as against the mortgagor, the mortgage and bonds are valid securities, for, if they are valid between the parties to them, in the absence of .fraud, they are valid against subsequent lienors. The liens of the judgment creditors are subsequent in time, and not superior in equity, and in such case equity follows the law, and the prior in time is prior in right. ' A creditor holds under and through his debtor, and, in the absence of fraud, is concluded by all the valid acts and assurances -of the latter. (Candee v. Lord, 2 N. Y. 275; Carpenter v. Osborn, 102 id. 552.)

The defenses urged by the appellants rest upon alleged nonobservance of some of tlie statutory conditions, precedent--to the valid execution of a corporate mortgage.'' It. is obvious that these requirements were not prescribed in order to enable a corporation to acquire, money and- property upon the faith of its mortgage, and then repudiate the mortgage, but to protect the corporation, its stockholders, and, in proper cases, its creditors, against the. improvident and wrongful acts of the officers' of the corporation. (Market & Fulton National Bank v. Jones, 7 Misc. Rep. 207, 210; affd., 90 Hun, 605; Paulding v. Chrome Steel Co., 94 N. Y.334; Rochester Savings Bank v. Averell, 96 id. 467; Lord v. Yonkers Fuel Gas Co., 99 id. 547; Welch v. I. & T. N. Bank, 122 id. 177, 187; Greenpoint S. Co. v. Whitin, 69 id. 328; Beebe v. Richmond Light & P. Co., 3 App. Div. 334.)

If, however, the -instrument alleged, to be a mortgage is, from any defect, not the act of the Horicon Improvement Company, then the plaintiff has no case. The answer of the appellants admits the due incorporation .of the Horicon Improvement Company, and thus its capacity to make a mortgage within the statutory limitations, and by . observing the statutory .and legal requisites. - ..

One of. these requisites is, that the written-consent of the -stock-. holders owning two-thirds of. its capital stock shall first be given and filed; and the appellants allege that this was not done, because the stockholders who gave such ■ consent were not stockholders- of record upon such a stock'book , as section 29 of the Stock Corporation Law requires a corporation to kéep.. The corporation had -no such book. It simply had the original certificate of incorporation, or a copy of it, showing the original subscription to the stock, the minutes of its directors showing to- whom stock-had been directed to be issiied, and a certificate book with stubs showing the then existing stockholders.

Section 29 provides that: “ Ho transfer of stock shall be valid as against the corporation, its' stockholders mid creditors for any purpose- except to render the transferee liable for the debts of the corporation, according-to the-provisions of this chapter, until it shall have been entered in such book.” The words and creditors ” were .inserted in the revision in 1890.'

Without attempting. to anticipate the full--scope :of .these added words, it ■ seems clear that they do meaii that when the creditor is pursuing his remedies either against stockholder, director or corporation, he has the right to rely upon tlie evidence which this stock book affords as to the ownership of the stock, and perhaps if by other evidence he can establish such ownership, no transfer will prejudice him, unless it is entered therein. But they do not mean that the original subscriber must have his holding entered in this boob, for there must be an owner before there can be a transfer. (See Davidson v. Westchester Gas-Light Co., 99 N. Y. 558.)

Giving to the words their literal force, and granting that Walter H. Peck, as the original subscriber to 1,400 shares of stock, and at the time of giving the consent the owner of 1,000 shares, held just two-thirds of the capital stock which he had never transferred, his consent alone satisfied the requirements of the statute, even if the Otis Company was incapable of giving consent. ( Welch v. Importers & Traders' Nat. Bank, supra.) A more satisfactory answer to the objection is that the corporation is estopped from raising the objection against its mortgagee so long as it holds the benefit of the property it acquired under the mortgage, and these judgment creditors, in the absence of fraud, stand subsequent to the mortgage.

If the corporation wishes to' repudiate the mortgage, it should restore the benefits it has received under it. (Duncomb v. N Y., Housatonic & N. R. R. Co., 84 N. Y. 190.)

It is urged that the four persons who Were added as directors at the meeting held the 16th of February, 1895, were not stockholders, and, therefore, were ineligible as directors. These persons, when made directors, were not actual holders of stock, although the understanding which was soon after carried out, was that they should become stockholders'. They were, however, directors defacto if not dejure. They were not usurpers, but were chosen by the original incorporators, whose subscriptions to the stock were assets of the corporation, and who, in consequence, rightfully were feting as stockholders. (Wheeler v. Millar, 90 N. Y. 353.) The stockholders subsequently ratified the issue of the bonds secured by the mortgage, and thus ratified the acts of the directors in issuing it. (Welch v. Importers & Traders' Nat. Bank, 122 N. Y. 177.) Directors de facto, recognized by the corporation and stockholders, may issue a valid mortgage. (Hackensack Water Co. v. De Kay, 36 N. J. Eq. 548.)

As to the amount of' the mortgage, the evidence shows- that $150,000 did not more than equal two-thirds of the value of..the corporate property,. $225,000, at the time the . bonds were issued. The Otis Company had expended, or caused to be expended, about $200,000 upon the property, and the evidence: will justify the finding that the property at the time the bonds were issued,' apart from the improvement, was worth more than $25,000. Subsequent expe-" ' rience mayor may not justify the expectations of the' promoters of this enterprise. The mortgagor and mortgagee undoubtedly, at the time^ .believed the property to Ipe worth all that. it had cost and moré, and neither is in á condition to reproach the other with an overestimate of value, since both justified '.their judgment by embarking their capital upon it. ■

Our conclusion is that the evidence does not impeach the validity Of- the- -mortgage, against- -the bondholders, and, therefore, the plaintiff was entitled to judgment. There are no other objections that require mention. '

The judgment should be .affirmed, with costs.

, All concurred.

Judgment' affirmed,, with costs.  