
    National Gum and Mica Company and The A. Wilhelm Company, Appellants, v. William A. MacCormack and Century Paint and Wall Paper Company, Respondents, Impleaded with Darsa J. Densmore and N. Charles Barron, as Administrator, etc., of Ernest R. Barron, Deceased, Intestate, Defendants.
    First Department,
    March 6, 1908.
    Pleading — action for breach of contract — demurrer to several separate defenses sustained — allegations stating counterclaim for reformation of instrument. -
    Actiou to recover for breach of contract.
    The complaint alleged in substance that the plaintiffs sold to the. defendants the entire capital stock of a paper company for a certain sum and released said company from all claims for money loaned to it,' resei-ving, however; certain claims for merchandise specifically set forth. It was further alleged' that the defendants and' the corporation agreed to sell and dispose of the present merchandise owned by said company and collect the present bills and accounts receivable, including accounts receivable from said sale, and, after deducting ^ expenses, to pay the surplus to the plaintiffs; that after due performance by the plaintiffs the defendants violated the agreement in that they failed to sell said merchandise and had appropriated a large part thereof and had unreasonably refused to collect a large number of accounts, but had used them in promoting the business of the company; that the defendants had failed to account for the proceeds of some goods sold, retaining the same, and to conceal their wrongdoing had wrongfully charged the plaintiffs with sums for expenses in excess of those specified in the agreement; and that as the plaintiffs had no adequate remedy at law, the defendants be required to account.
    
      Held, that it was no answer to allege as a separate defense that at-the time of the execution of the agreement the defendants insisted that it was ambiguous and inserted certain words which upon the express statement of the plaintiffs that- • the agreement was not ambiguous were stricken out, and that the paper com- - pany had from time to time sold part of the merchandise and collected accounts, paying notes with the proceeds, which payments had' been accepted by the plaintiffs and the notes renewed, the discounts, with the consent of the plaintiffs, being repaid by the company out of their share of the surplus going to the-plaintiffs, and that the defendants have lived' up to the agreed construction of the contract, and that any other construction had not'been claimed by the plaintiffs;
    That it was' no answer to allege as a separate defense that a balance of the merchandise remained, unsold because of the refusal of the plaintiffs to allow1 it to be sold at the best figures obtainable; that some of the accounts had not. been collected with the consent of the. plaintiffs, and that under the terms of the agreement .the plaintiffs might have forced their collection at any time, but they had failed to do so; :
    That it was no answer to allege as a separate defense that one of the plaintiffs caused a'certain promissory note to be presented to the paper company as"a balance of the indebtedness to be paid out of the net proceeds of the sale of the merchandise and collection of claims, and that with the knowledge and consent of the paper company the same was paid although" there were not sufficient funds on hand applicable thereto, which payment was in violation of the agreement'-as acted Upon and understood by the parties;
    That it was no answer to allege as a defense and counterclaim that from time to time payments were made.to the plaintiffs in pursuance of the agreement out of the proceeds of the sale of merchandise and that the defendant company “ was caused ” to make payments, without its knowledge and consent, amounting to a certain sum in excess of the proceeds-received, etc. As no facts were alleged showing fraud or mistake by either party no defense or counterclaim was stated;
    That it was no answer to allege -as a separate defense and counterclaim that after entering upon the performance of the agreement the defendant company, at the request of the plaintiffs and on their promise to pay, advanced and paid a certaim sum on account of-a certain judgment-recovered against the defendant, which was a debt for which the plaintiffs were liable as an obligation of the old management of the company and that,no» part thereof had been repaid to the defendant.
    Allegations stated to be “ an affirmative cause of action herein,” examined and held, that tho.ugh improper as to form, they were sufficient to justify a court of equity in reforming the contract, although neither fraud nor .mutual mistake was specified, and, hence, the demurrer thereto should be overruled.
    Appeal by the plaintiffs, the National Gum and Mica Company and another, from so much of an interlocutory judgment of the Supreme Court in favor of certain of the defendants, entered in the office of the clerk of the county of New York on the 10th day of October, 1907, upon the decision of the court, rendered after a trial at the New York Special Term, as overrules the plaintiffs’ amended demurrer to certain defenses and counterclaims contained in the separate second amended answers of the Century Paint and Wall Paper Company and William A. MacCormack.
    
      Edward A. Alexander,,for the appellants.
    
      Henry G. H. Heath, for the respondents.
   MoLaughlin, J.:

This appeal is from so much of an interlocutory judgment as overrules demurrers to certain defenses and counterclaims set forth in the separate answers of the Century Paint and Wall Paper Company and William A. MacCormack. The complaint alleges, in substance, that on or about the -2d day of November, 1904, the plaintiffs and the defendants entered, into an agreement, a copy of which is annexed to and made a part of the complaint. In the 1st paragraph of this agreement the plaintiffs agreed to sell to the individual defendants (parties of the second part) 300 shares (the entire capital stock) of the Century Paint and Wall Paper Company for $2,587.75, and to release such company from all claims for $20,000 loaned to it, but reserving certain claims for merchandise which is specifically set forth as “ To the A. Wilhelm Company upon note, $8,180.36, and upon ojien account, $797.55; to the National Gum and Mica Company upon note, $2,901.84 and upon open account $689.17, which amounts are to be paid by the said company at maturity as hereinafter set forth.”

In the 2d paragrajih- the parties of the second part agreed to pay to the plaintiffs $2,587.75 upon delivery of the stock.

In the ■ 3d paragraph-they and the Century Paint and Walk Paper Company, party of the third part, agreed to sell and dispose of the present merchandise owned by said company and collect the present bills and accounts receivable and also bills and accounts receivable upon the sale of the aforesaid merchandise,” and after deducting expenses for packing and shipping, porter’s salary at fourteen dollars per week, and the bills owing for said merchandise, to pay over to the plaiutiffs any surplus remaining.

In the 4th paragraph it was agreed that such sales might be made upon the usual terms of the company to such persons as the parties of the second part saw fit so long as they acted in good faith for the benefit of the plaintiffs; that collection of the amount due on such sales was not guaranteed and actions for collection were to he brought by or at the expense of the plaintiffs.

In- the 5th paragraph the plaintiffs agreed to pay all taxes and arrears of taxes then due and owing by.the corporate company.

The complaint then alleged due performance of the agreement on the part of the plaintiffs, but til at the defendants had violated the agreement in that they had failed to sell. the merchandise referred to as provided in the agreement and had appropriated a large part thereof; that they had unreasonably refused to collect a large number of the accounts, but had used them in promoting the business of the company ;■ that they had sold some of the merchandise and collected some of the accounts as provided in the agreement, the proceeds of which, after making proper deductions, amounted to about $15,000, which defendants had failed and neglected to pay to the plaintiffs; although.requested to do so ; that there still remains in the possession of the defendants a part of the merchandise and certain bills receivable, unsold and uncollected, amounting in value to many thousands of dollars; that to conceal their wrongdoing the defendants had wrongfully charged to the plaintiffs, and retained for their own use, certain sums for expenses in excess of those specified in the agreement to the amount of about $2;200; that plaintiffs have no adequate remedy at law ; .that they have demanded that defendants account, which they have refused to do. The judgment demanded is that the defendants account and pay to the plaintiffs the amount found due, and that they retransfer to the plaintiffs the accounts and property acquired under the agreement and now in their possession.

The answers of the respondents to which the demurrers have been interposed are substantially the same. It seems to be conceded that paragraph 8 of the answer of the wall paper company should be con- . sidered as a separate and distinct defense, it being so pleaded in the answer of MaeCormácfc It may not be out of place to here call attention to the fact that in- neither of the answers are the separate defenses numbered as required by the Code, and. that this and other confusion results from the failure to properly number and designate them. '

■The first separate defense, which is contained in the 7th paragraph of both answers, alleges that at the time of the execution of the, agreement referred- to -in the complaint • defendants’ counsel insisted that it was ambiguous, and he had inserted at the end of the 1st paragraph the following words: “ To wit, out of the proceeds of sales. and collections as set forth in paragraph Third thereof; ” that upon the express representations and statements of plaintiffs and their counsel that the agreement was not ambiguous, but that the same clearly expressed the intention of the parties that the notes referred to should be paid out of the surplus moneys only, the words thus.inserted were stricken out of the agreement; that the paper .¡company has, from time to time, sold part of the merchandise and collected the accounts, and has.paid upon the notes, at different times, certain amounts out of the proceeds; that the amounts thus paid have been accepted by the plaintiffs and the notes renewed, the discount on such renewals being, with the consent of the plaintiffs, répaid "by the company out of their share of the surplus going to the respective plaintiffs; that the parties hereto have all lived up to the aforesaid, construction of this agree- > ment up to about the time of the commencement of this action and that any claim that "the agreement should be otherwise construed had not been claimed by the plaintiffs herein.” The demurrer to this defense should have been sustained. The facts pleaded do not constitute'a defense to the cause of action set but in the complaint. There is no direct allegation that the plaintiffs have asserted a construction of the agreement different from that claimed by the defendants and if there were, it would be of no. importance. So far as the cause of action stated in the complaint is concerned, it makes., no difference whether the notes were to he paid at maturity absolutely or only from the net proceeds of sale. If the words which the defendants claim were stricken out had been left in the agree-. ment, the complaint would not be changed in any respect and the same cause of action would still be stated. The allegation that “ the parties hereto have all lived tip to the aforesaid construction of this agreement ” does not state a fact constituting a defense to the cause of action alleged. It is at most a conclusion not based upon facts set forth. . ’

The second separate defense set out in the 8th paragraph of the answers alleges that a balance of the merchandise remains unsold because.of the refusal of the plaintiffs to allow it to. be sold at the best figures obtainable and some of the accounts have not been collected with the consent of' the plaintiffs ; that.under the terms of the agreement the plaintiffs might have enforced their collection at-any time but they, have failed to do so. There are technical objections to this defense, as there are to the others, in that reference must be had to other parts, of the answer for. additional facts not properly set forth in this defense. Disregarding these objections, however, the facts alleged do not constitute a defense.' Upon a dpmurrer to new matter contained in an answer all the allegations of the complaint and of the answer are to be taken as true in determining whether the matter set forth is a defense or not. (Fiss v. Van Schaick, 63 App. Div. 300; Douglas v. Coonley, 156 N. Y. 521.) Here, the facts alleged are only such as might be proved -under a denial, and conceding the allegations to be true, they do not bar the plaintiff’s right to the relief demanded or any part thereof. The demurrer to this defense, therefore, should have been sustained.

The fourth separate defense set out in the 10th paragraph of the ' answers alleges that on or about December 5, 1905, the plaintiff Wilhelm Company caused to be presented a certain promissory note of the- paper company for. $750- at the place of payment therein named, being a balance of the indebtedness to be paid only out of the net proceeds of the plaintiffs’ merchandise and collection of claims as before set forth; that without the knowledge and consent of the paper company, the same was paid, although there were not sufficient funds on hand applicable thereto, and such payment was in violation of the agreement as acted upon and -understood between the parties. How the plaintiffs violated the agreement by presenting a note for payment at the place where it was made payable, or how it was paid from the funds of the paper company without its knowledge and consent, does not appear, nor are any facts alleged to explain the transaction. Obviously no defense is stated and the demurrer should have been sustained.

The fifth separate defense set out in the 11th paragraph of the answers alleges in similar terms the presentation of a note for $600 by the plaintiff, the ¡National, Gum and Mica Company, and its payment. The demurrer as to this defense, for the reasons stated as to the fourth, should have been sustained.

The Century Paint and Wall Paper Company, for a further defense and counterclaim, alleges in the 12th and 13th paragraphs of its answer the execution of the agreement and that from time to time some of the merchandise as therein provided, was sold and out of the net proceeds certain payments made to the plaintiffs in pursuance of the agreement; “ that this defendant made payments and was caused to make further payments as specified in the foregoing defenses, paragraphs Tenth and Eleventh hereof, without its knowledge and consent, amounting up to February 15, 1905, to the sum of about $2,511.21: that the net proceeds of said sales of merchandise, and collections of accounts as aforesaid amounted to the sum of $1,612.05 only, the balance- of which amount, together with all and any further claims ” shown on the account, the defendant prays judgment for.. It will be noticed that here the two preceding defenses are -referred to and in this defense there is the same absence of any intelligible allegation's of fact. The allegation that the defendant “ was caused ” to make payments without its knowledge and consent, is, in the absence of any other facts, worthless as a pleading. It is possible that the jileader attempted to set forth the fact that the plaintiffs presented for payment the notes specified in the 1st paragraph of the agreement and that the paper company paid them, although the net proceeds were insufficient to pay them in full, and the paper company now seeks to counterclaim the balance paid from its own funds. But this is mere conjecture. There are no facts set forth showing that the payments were made by reason of any fraud of the plaintiffs or by reason Of - any mistake - of either óf the parties. Nor is it even alleged that there is or was, • . at. the commencement of the action, anything due. to -the defendants - by reason of these payments. The facts pleaded are insufficient to constitute- either a defense or counterclaim and for that reason the demurrer to this defense should have been sustained.

The same defendant, in the 14th and 15th paragraphs of fits answer, for a further separate defense and counterclaim, after refer-. ring to the agreement, and that its performance was entered upon, - . alleges: “ That on or about November 14th, 1905, this defendant, at the special instance and request and upon the promise to pay of the plaintiffs, advanced and paid out the sum of $520.71 for -and on , account of a certain judgment' theretofore recovered against this defendant, and which was a debt and obligation for which these plaintiffs were liable as an obligation of the old management of this coin- ’ pany; that no part thereof has been repaid to - this defendant-.” No relief is asked by reason of this payment, but that is immaterial - since the facts stated do not constitute a valid defense or; counterclaim. The only obligations of the paper company which4he plaim tiffs assumed under the agreement were for taxes due and in arrears ' and it is not alleged that this judgment was-recovered for taxes. The judgment was against the corporation and no facts are stated ■ showing any liability of the plaintiffs by reason of it. The demur- : rer to-this defense, therefore, should have been sustained. 1

In the'16th, 17th and 18th paragraphs of this answer, and in the. 12th, 13th and 14th paragraphs of the answer of MacCormackj it is alleged, “ for an affirmative cause of action herein,” that when the agreement was -executed the parties agreed that the - notes ■ referred to in the 1st paragraph thereof were to be paid not abso- ■ lately at maturity, but as provided in the 3d paragraph,' out of the - net proceeds and that the agreement was not ambiguous upon this point ; that the parties -followed this construction' and no other claim was made until about the time this action was commenced -; that since the commencement of this action the plaintiff Wilhelm ■ Company, as alleged assignor'of a note given- in renewal of the notes specified in the 1st paragraph of the agreement, in.an action against-the paper company brought' by one Kalbaeh, who was represented by the attorney for the Wilhelm Company, and who recovered judg-: ment by direction of the court, claimed that the agreement was not ambiguous and that the notes set forth in the 1st paragraph were payable absolutely at maturity; that up to that time no such claim had ever been made, but on the contrary the plaintiffs had always lived up to the construction of the agreement as consented to and agreed upon at the time the agreement was signed. Then follow allegations to the effect that the agreement should be reformed so as to express the true intent of the parties that the notes should be paid out of the surplus proceeds as provided in paragraph 3 of the agreement and not otherwise; and judgment was prayed for to this effect. The Code of Civil Procedure provides that an answer must contain a general or-specific denial and a statement of any new matter constituting a defense or counterclaim (§ 500) and that each defense or counterclaim must be separately stated and numbered (§ 507). Whether this new matter is alleged as a defense or as a counterclaim the defendants do not specify ;" it is designated as an affirmative cause of action herein ” — a form of pleading not-authorized by the Code of Civil Procedure. Facts are alleged, however, which, if established at the trial, might justify a court of equity in reforming the contract, though neither fraud nor mutual mistake is specified. The facts are set forth and affirmative judgment is prayed for. (Arlt v. Whitlock, 65 App. Div. 246.) The reformation of' a contract may be set up as a counterclaim.in an action based on the contract. (Madison v. Benedict, 73 App. Div. 112; Born v. Schrenkeisen, 110 N. Y. 55.) Inasmuch as. the facts are set forth and affirmative judgment prayed for asking a reformation of the contract, this part of the answer may be treated as a counterclaim. The fact that it is not in express terms defined as a counterclaim may be disregarded. (McCrea v. Hopper, 35 App. Div. 572; affd. on opinion below, 165 N. Y. 633; Metropolitan Trust Co. v. Tonawanda, etc., R. R. Co., 43 Hun, 521; 18 Abb. N. C. 368.) This is not a case where the defendant is demanding judgment for failure to reply to matter not specifically alleged as a counterclaim, or where the pleader has chosen to characterize such matter as a defense — a distinction referred to in Acer v. Hotchkiss (97 N. Y. 395). Here, the question arises upon demurrer and the allegations-should be construed liberally arid favorably to the pleader, and while, disapproving of the manner in which the new matter set forth is characterized, I think a .valid counterclaim is alleged and the demurrer thereto was properly overruled.

The interlocutory judgment, therefore, should be modified by sustaining plaintiffs’ demurrer to the separate defenses and counterclaims contained in the answer of the defendant Century Paint and Wall Paper Company in the 7th to the. 15th paragraphs inclusive, and plaintiffs’ demurrer to the separate defenses contained in the answer of the defendant William A. MacCormaek in the 7th to the 11th paragraphs inclusive, with leave to both defendants to serve amended answers on payment of the costs in tins court and in the court below, and with leave to plaintiffs to withdraw their "demurrers to that portion of the answers designated “ an affirmative cause of action,” and reply thereto, without costs in this court, but on payment of the costs- in the court below'.

Patterson, P. J., Laughlin, Houghton and Scott, J J., concurred.

Judgment modified as indicated in opinion, with leave to defendants to answer, and to plaintiffsto withdraw demurrers to the extent and on the terms stated in opinion. , Settle' ordér on notice. 
      
       See Code Civ. Proc. § 507.— [Rep.
     