
    THE LYCEUM, Appellant, v. JOHN S. ELLIS, Individually and as Trustee, et al., Respondents.
    
      Corporationunder Manufacturing Company Act o/1848, mortgage by—Written assent of a majority of the stockholders owning two-thirds of the capital stock required—Amount of capital stock actually issued to be considered.
    
    In the case at bar the appellant seeks to impeach the validity of the mortgage in-question, on the ground that the written consent of a majority of the stockholders owning two-thirds of the capital stock of the corporation had not been given to the execution of the mortgage. The capital stock consisted of 360 shares, of which only 245 shares had been issued by the company at the time the assent was given by stockholders owning 165 shares. Held, that the amount of capital stock actually issued by the company and owned by other persons at the time of such assent, must be regarded as the full amount of capital stock to which the statute applies when it provides for the written assent of a majority of the stockholders owning two-thirds of the capital took.
    In this case the capital stock actually issued was 245 shares. Stockholders owning 165 shares united in the written assent. Held to be a compliance with the statute, and that the assent was given.
    A question arises upon the validity of bonds issued by the plaintiff, some of which were sold to defendants, or some of them, at seventy-five per cent of their face value. Held, that the transaction in itself was not invalid. Assuming, however, that such of the defendants as were trustees of the company when they took the bonds and held such a relation to the company that the latter could avoid the transaction, the right to avoid was an equitable right. The transaction was not void but only voidable, and might be ratified. If the stockholders ratified the same expressly or by acquiescence after knowledge for a sufficient time, the plaintiff cannot avoid the transaction, and the facts in this case fully establishing such a ratification and acquiescence, the transaction cannot be avoided.
    Before Sedgwick, Oh. J., Fbeedmah and Ingeaham, JJ.
    
      Decided March 4, 1890.
    Appeal from judgment dismissing complaint, entered upon findings made at special term.
    
      John, H. Bird, attorney and of counsel for appellant, on the questions considered, argued :—
    I. The mortgage executed to defendant Ellis, is void, as it was not executed with the consent of a sufficient number of stockholders, and for the purposes authorized by law. The capital stock of the company consisting of 360 shares, the mortgage •required the consent of the holders of 240 legally issued shares. Laws 1848, chap. 40, §§ 2, 3 ; Laws 1864, chap. 517 ; Laws 1871, chap. 481 ; 2 Rev. Stat. 7th ed., p. 1741; Greenpoint Sugar Co. v. Whitin, 69 N. Y. 328; Vail v. Hamilton, 85 Ib. 453. The proof, however, is that the mortgage received the consent of only 125 legally issued and full paid shares. The language of the statute is that a company may mortgage its real and personal property, “ provided that the written assent of the stockholders, owning at least two-thirds of the capital stock of such corporation, shall first be filed in the office of the clerk of the county where the mortgaged property is situated.” The capital stock of the plaintiff was 360 shares, and although only 240 shares were issued at first, the 360 shares were all subscribed for, and it was the intention to issue them all from the inception of the enterprise; and, in fact, the law under which the plaintiff was organized requires that all capital stock shall be .issued and paid in, one-half within one year, the other half within two years from the time of its incorporation. Latos of 1848, chap. 40, § 10. This distinguishes the present case from the case of Greenpoint Sugar Co. v. Whitin, 69 N. Y. 328, supra. The proof is that the mortgage in question received the consent of only 125 legally issued and full paid shares. The written consent which was filed contained the alleged consent of 245 shares, but of these 80 shares were part of the stock dividend which was issued without consideration and in violation of the law which provided that stock shall all be paid in full either in cash or in property necessary, for the business of the company, and 40 shares, 20 belonging to Van Brunt and 20 to Pirsson, had only been paid for in part. These shares, therefore, cannot be counted for the purpose of making up the necessary two-thirds—to permit them to be so counted would defeat the purpose of the statute, the design of which clearly is to enable a corporation to mortgage its property to pay necessary debts upon the assent of the actual owners of two-thirds of full paid, legally issued stock, that is, those representing two-thirds of the interest and property which has been paid into or vested in the corporation. In this case, part of the assenting stock not being full paid, and a still larger part having been illegally issued, two-thirds of the interest and property, that is, the real assets of the corporation, were not represented by the assenting stockholders, but by the stockholders who had fully paid for their stock and by the creditors who had given their services and. materials to the corporation, and to permit the mortgage to stand upon such a consent would defeat the purposes of the statute and be a fraud upon the corporation and its honest stockholders and creditors. The mortgage was not issued in good faith for the purpose of liquidating the debts of the company. See Laws above cited ; Carpenter v. Black Hawk Gold Mining Co., 65 N. Y. 43 ; Denike v. N. Y. & Rosendale Lime & Cement Co., 80 Ib. 599 ; Leslie v. Lorillard, 110 Ib. 532. The statute says that a corporation “ may secure the payment of any debt heretofore contracted, or which may be contracted by it, in the business for which it was incorporated, by mortgaging all or any part of its real or personal estate,” and the above cases hold that a mortgage given to raise money to carry on its business is void. The proof in this case was that only $10,000 of the bonds were used for paying the debts of the company. The remaining $14,000 were used for giving the trustees and their friends a direct profit of $3,500, and indirectly a profit of 33¡ per cent, of the amount of stock held by them, by releasing themselves from the payment of what was due from them to the company on account of their proportion of the $12,000 stock dividend. If such a transaction as this can stand the whole purpose of the statute can be defeated.
    II. If the mortgage is valid in whole or in part, the defendants are still liable by reason of their improper acts as trustees of the plaintiff. As trustees of the plaintiff, they must account for all profits made by them out of their trust—those who bought the bonds at 75 per cent, must account for the 25 per cent, thereof wrongfully appropriated by them. Taylor on Corporation, § 612; Pomeroy’s Equity Juris., §§ 1049, 1075, 1076, 1088; Morawetz on Corporations, 2d ed., § 525; Perry on Trusts, § 428; Bolton v. Gardner, 3 Paige, 273; Butts v. Wood, 37 N. Y. 317; Barnes v. Brown, 80 Ib. 527; Wardell v. Railroad Co., 113 U. S. 651. The defendants attempt to defeat the application of this principle to this case by suggesting that efforts were made to sell the bonds at par without success, and that 75 per cent, was all that they were reasonably worth. It may be conceded that courts of equity will sustain a transaction between trustee and cestui que trust, provided the trustee (who has the burden of proof) is able “ to vindicate ” it “ from any shadow of suspicion, and to show that it was perfectly fair and reasonable in every respect.” (Perry on Trusts, § 428). It is scarcely necessary to say that the proof in this case falls far short-of this. On the contrary, it is conclusively proved that the transaction was not fair and reasonable by the following evidence : (1.) Ten thousand dollars of the $24,000 of bonds were placed at par with creditors of the company. (2.) Myers sold his bonds at par to an outsider. (3.) The defendants claim that the bonds were secured by property having a value three or four times greater than the entire amount of the bonds. (4.) The testimony of two witnesses is that with such a security the bonds could have readily been placed at par. (5.) The fact that they were not placed at par is because the directors,'and especially Ellis, wanted to get them at 75'per cent., and hence the remarkable resolution of March 5th, actually prohibiting the Bond Committee from disposing of the bonds to outsiders at any price, so long as the stockholders’ option to take them at 75 per cent, continued, and extending that option to May 15, 1885. (6.) The bonds are dated March 2, 1885, and defendant Ellis, partly for himself, and, as he now claims, partly also for his wife, took one-half of the entire issue, the first 24 bonds (Nos.T to 24), on or before March 9,1885, that is, either before or shortly after they were issued. It is preposterous to claim that the transaction can stand as to these twenty-four bonds, especially in view of the fact that about the same time twenty of the bonds were placed with creditors at par.
    
      ITT, Assuming for the present that all the stockholders of the plaintiff may have acquiesced in the wrongful acts of the trustees, that is not a defence to this action. It is clearly not a defence to the action so far as this action is based upon the principles stated, and seeks to invalidate the mortgage as executed in direct violation of the law. Morawetz on Corporations, § 623; Kent v. Quick Silver Co., 78 N. F 185 ; Thomas v. Railroad Co., 101 U. S. 71. Nor is the assent of the" stockholders a defence to this action, so far as it is based upon the principles stated : First—With respect to the corporate funds the directors are trustees to the corporation only, and are charged with the exclusive duty and responsibility of managing its funds. Pomeroy's Eq. Jur., § 1090 ; Conn v. Iron Co., 12 Barb. 27 ; Dabney v. Stevens, 40 How. 341; McCullough v. Moss, 5 Den. 567, 575 ; Bank U. S. v. Dandridge, 12 Wheat. 64, 113. Second—The rules governing the liability of directors to the corporation with respect to the corporate funds are founded upon public policy and the interests of the corporation, and not upon the interests of the stockholders. Taylor on Corporations, § 269 ; Morawetz on Corporations, § 623; Barton v. Plank Road Co., 17 Barb. 397 ; Kent v. Mining Co., 78 N. Y. 185; Wood v. Dummen, 3 Mason, 311; Burke v. Smith, 16 Wall, 390 ; Thomas v. R. R. Co., 101 U. S. 71 ; Bagshaw v. East Union R. R. Co., 7 Hare, 130; Phosphate Co. v. Erl anger, L. R., 5 Ch. Div. 114; Society v. Abbott, 2 Beav. 560.
    
      Hubbard Hendrickson arid Lemuel Skidmore, attorneys and of counsel, for respondents, on the questions considered, argued:—
    I. It appeared sufficiently on the trial that the requisite number of stockholders owning more than two-thirds of the stock had consented in writing to the execution of the mortgage ; that the only stock issued during the year 1884 was 240 shares issued to fourteen stockholders, and that no other stock was issued until February 10, 1885, when it was issued ratably to the same stockholders and the consent of the mortgage, was signed January 30, 1885, by eleven stockholders (more than a majority) owning 165 shares, which was more than two-thirds of the whole number, 240, then issued, the remainder of the stock remaining the property of the corporation plaintiff. In the case of Greenpoint Sugar Co. v. Whitin, 69 N. Y. 339, the court say: “For the purposes of this act, we think that the amount actually issued and owned should be regarded as the amount of the capital stock. The design was to confer this power of assent upon those who represented two-thirds of the actual stock. They represented two-thirds of the pecuniary interest and property of the corporation. Otherwise it might happen that .there would not be a sufficient ownership of stock to enable the company to execute a mortgage at all.” In the same case it was held (page 335) that where the consent is sufficient in form to show the intention of the stockholders to give their assent to a mortgage, and when construed with the mortgage on record gives all necessary information, that then such consent is sufficient. In order to invalidate the consent for defect of form, the court say (page 336): “We think the defects must be so radical that an intention to consent cannot be inferred,” and “if the papers themselves are defective, it was competent by parol evidence to connect the instrument with the subject matter.” In Rochester Savings Bank v. Averell, 96 N. Y. 475, the court say : “ Compliance with the condition of the statute involves the performance of two separate and successive acts, namely, the procuring of the assent of the requisite number of stockholders, and the filing.of such assent in the proper clerk’s office. The first involves an application to the stockholders, and on their part consideration, judgment and final determination, and on the part of the assenting stockholders a written expression of their conclusion. The second is the merely formal act of depositing for record the evidence that the requisite assent has been obtained. The statute does not in terms impose upon the corporation the duty of filing the assent. * * * * The purpose of the statute.in requiring the assent to be filed seems to have been to perpetuate the evidence of the fact, and to free titles acquired under mortgages by corporations from the uncertainty which would attend them if the extrinsic fact of assent was not made a matter of public record. The consent of stockholders is the important and essential thing. The filing is formal and subsidiary. The jurisdiction of equity to supply the formalities to carry out the intention of parties has been frequently exerted. Can it be doubted that a corporation having in its possession the assent of stockholders to an existing mortgage not filed could be compelled, at the instance of the mortgagee, to file the assent, and thereby complete the record of the transaction ? Would the corporation be heard to allege as a defence to the mortgage, that, although assented to, the evidence of the assent was not recorded? We think not. To permit the defendant to profit by the neglect of the corporation to file the assent, would be, under the circumstances, most inequitable. Even if the filing of the assent was essential to complete the plaintiff’s right, that may now be done as of the time the assent was given.”
    II. Some question was made as to the stock issued to T. C. Van Brunt and James W. Pirsson, because these gentlemen had not fully paid for their stock when it was issued to them. But there is nothing at all in the manufacturing corporation act to prevent the company from issuing stock subscribed for before the subscriptions are fully paid. On the contrary, the law implies at least the power to do so. 3 Rev. Stat., 8th ed., p. 1956, § 8 ; p. 1960, § 25; Billings v. Robinson, 28 Hun, 123 ; Wheeler v. Miller, 90 N. Y. 253.
    III. The sale of the 26 bonds by the Lyceum at 75 per cent, of their face value was not ultra vires. This was expressly held by Mr. Justice Andrews of the Supreme • Court in this District, in a case at special term, reported in the Daily Register of October 14, 1884, Vol. 26, No. 90, entitled Graham v. The Atlanta Hill Gold Mining & Melting Co. - He said : There is nothing in the statutes of this state which prohibits a manufacturing corporation from sellings its bonds at less than par, and sales at much less than par are declared lawful in the Central Gold Mining Co. v. Platt, 3 Daly, 263. It is utterly impossible for the court to say whether sales at 75 per cent, on the dollar would be fraudulent or ill-advised. So long as corporations are authorized by law to incur debts and mortgage their property to secure them, stockholders must protect their interests by electing directors who are faithful and competent, and not expect that courts of equity will assume the management of the corporate business, because the officers may not perform their duties in the most satisfactory manner.” See also-Ellsworth v. St. L., A. & T. H. R. R, Co., 98 N. Y. 559.
    IV. Under the authority given by the laws of 1864, chapter 517 and laws of 1878, chapter 163, manufacturing corporations have general authority conferred on them to mortgage their real or personal property for the payment of any debt, subject only to the condition of filing the requisite consent of stockholders. This statute was construed in the following cases : Carpenter v. Black Hawk Gold Mining Co., 65 N. Y. 53; Greenpoint Sugar Co. v. 
      Whitin, 69 Ib. 328 ; Martin v. Niagara Falls Paper Manfg. Co., 44 Hun, 134; Lord v. Yonkers Fuel Gras Co., 99 N. Y. 554. In the last cited case, at page 554, the court say : “ Where a bond secured by a mortgage is given to the lender for money advanced at the time, the borrower becomes immediately indebted, and it would seem to be immaterial whether the money is applied by the borrower to the payment of some antecedent debt or to other purposes for which he was legitimately entitled to borrow the money.” It appeared by the testimony of P. Gr. Hubert, Andrew Gr. Myers and V. Spader, that the officers of the company endeavored in good faith to dispose of the 28 bonds not taken by the contractors at par to persons outside of the company, and at prices less than par and down as low as 75 per cent, of their face value, but could not succeed in disposing of them at all to outsiders ; and thereupon the resolution was taken to give the stockholders the option of buying them proportionately with their holdings of stock, but most of the stockholders declined to take them at 75 per cent, and at last they were taken at that price by Messrs. Ellis, Myers and Hyslop, who were trustees of the company, and Mr. Howard, who was not a trustee. It sufficiently appears by the whole case that what was done in this respect was in good faith, and for what was considered to be the interest of the company, and not from any selfish motive on the part of the trustees, or any of them, and it was so found by the court.
    Y. This decision of the court below was right because the facts constitute a plain ratification by all the stockholders of the company of the scheme for the disposal of the bonds, and preclude the company, or any new stockholder, from questioning such disposal at this late day. Parsons v. Hayes, 14 Abb. N. C. 419 ; Kent v. Quicksilver Mining Co., 78 N. Y. 
      158 ; Otter v. Brevoort Petroleum Co., 50 Barb. 256; Knowlton v. Congress Spring Co., 57 N. Y. 578; Hotel Co. v. Wade, 97 U. S. 23 ; Martin v. Niagara Falls Paper Co., 44 Hun, 139 ; Ffooks v. South, etc., Railway Co., 1 Sim. & G. 142; Graham v. Birkenhead, 2 Mac. & G. 156 ; In re Magdalena Co., 16 Jurist N. S. 975 ; Royal Bank of Liverpool v. Grand Junction R. R. Co., 125 Mass. 495 ; Reed v. Hayt, 51 N. Y. Superior Ct., 121; Morawetz Private Corporations, Second Edition, Art. 623, 625, 626 and 631 ; In re Syracuse R. R. Co., 91 N. Y. 1.
   By the Court.—Sedgwick, Ch. J.

The plaintiff is a corporation formed under the act of this state for the formation of manufacturing and other kinds of corporations. It contests in this action the validity of a mortgage upon the real estate of the corporation made to secure the payment of bonds of some of which the defendants are the holders. The ground taken to impeach the validity is, that “the written assent of the stockholders owning at least two-thirds of the capital stock ” of the corporation was not given. There was a written assent. The plaintiff’s- claim as to this is, that eighty shares represented in the assent had never been lawfully issued, and that the remaining shares represented were not two-thirds of the capital. The learned judge below, in effect, found that if the eighty shares . were excluded, there were still represented in the assent two-thirds of the capital stock.

In this he was correct, under the case of Greenpoint Sugar Co. v. Whitin, 69 N. Y. 328. That case decided that “ for the purposes of this act, * * * the amount actually issued and owned, should be regarded as the amount of the capital stock. The design was to confer this power' of assent upon those who represented two-thirds of the actual stock. They represented two-thirds of the pecuniary interest and property of the corpora* tion.

The learned counsel for the plaintiff argues that the case cited makes a limitation of the general principle announced, by saying in reference to what it held to be the amount of the capital stock or the 2,000 shares, “and -for aught that appears no more was intended to be issued.” The meaning of this I take to be, that an assent to a mortgage made by two-thirds of the then capital stock, will not be sufficient if, also, then there is a definite intention of increasing the actual stock by future issuing of shares in a manner that will increase the actual stock. The intention referred to is not a general intention, that is presumed as to all shares not transferred. It would be an attempt to evade the statute, that a mortgage should be made upon the assent of two-thirds of the actual capital, when that was accompanied by the beginning of an arrangement to increase the capital, or even by an intention forthwith to make such an arrangement. That method would be fraudulent as to those who might afterwards become the owners of shares.

In the present case the fact is, that if there were an intention to issue the shares, 120 in number, of which the eighty was represented in the assent, the result would be that those 120 shares must be considered part of the actual capital, and then the “ persons to whom the issue was made would be considered the owners of the shares. In such case there was an assent of two-thirds of the capital stock upon the position taken by the plaintiff.

There was further objection taken on the ground that 40 shares represented in the assent had not been paid for in full, but had been paid for only to the extent of the nominal value of 12 shares. It is held in Wheeler v. Millar, 90 N. Y. 359, that neither the issuing of a certificate for shares, nor payment for the shares, is indispensable to a subscriber being .an owner of shares in capital stock “ whatever maybe said of a case where no fact is present as the foundation of an inference that title has passed, except the bare fact of a subscription, it is entirely reasonable that where, in addition, the corporation has explicitly recognized the alleged stockholder as such, and the latter has acted in that capacity, such facts should be deemed sufficient to justify a conclusion of ownership and make the subscriber a stockholder. ” In the present case, the facts justified the inference made by the judge below, that the persons who claimed in the assent to be the owners of the 40 shares, were, in fact, stockholders and owners of capital stock to that amount.

It is not necessary to determine that the 120 shares were or were not legally issued. They were issued to the other stockholders without any consideration received by the corporation. Whether they were legally issued or not, the result in -this case would be the same. The findings show that the judge below acted upon this view.

The plaintiff further complains of the issuing of bonds of the company to the defendants, or some of them, upon the consideration of the payment to the company of 75 per cent, of the face of the bonds. The transaction in itself is not invalid. If the obligation were given by a natural person, there might be a valid objection that they were void for usury. A corporation cannot avoid its obligations for such a reason.

Assuming, however, that such of the defendants as were trustees of the company when they took the bonds from the company, held such a relation to the company that the company could avoid the transaction, that right to avoid was an equitable right. The transaction was not void, and might be ratified. And if the stockholders ratified, expressly or by acquiescence, after knowledge for a sufficient time, the plaintiff cannot avoid. The finding below, that there was such a ratification or acquiescence by all the stockholders, was supported by direct and circumstantial evidence.

The case does not disclose any error, and the judgment should be affirmed with costs.

Freedman, J., concurred.

Ingraham, J. (dissenting).

I am unable to concur with my associates. The plaintiff was authorized by statute to execute a mortgage upon its property to secure existing debts. It has been held that when a bond of a corporation is issued, it is a debt, and that a mortgage to secure such a bond is valid, but the bond as between the obligor and the obligee, where such obligee is one of the trustees of the corporation, is only an obligation for the amount paid thereon. When, therefore, the corporation issued to its trustees bonds for which they paid seventy-five cents on the dollar, the obligee could only have recovered from the plaintiff the amount that he had advanced to the company, and the bond was a valid debt of the company to that extent only. The mortgage was valid to secure the payment of the valid debt, but was not valid to secure what never was a debt of the company.

I do not think that the evidence justified the court in finding that all the stockholders ratified the acts of the trustees in giving to themselves obligations of the company at seventy-five cents on the dollar. There was no formal act of ratification. At most it was a failure of the stockholders to take the bonds at that price when offered to them, and subsequently, after the transaction was completed, a failure to take proceedings in disaffirmance thereof. But the corporation was under the control of the same trustees who had authorized the issue of the bonds, and it does not appear that it was able to repay to the trustees to whom the bonds had been issued the amount that they had actually paid to the corporation. I think the stockholders had a right to wait until the obligations became due or the obligees attempted to enforce the obligation, and then tender the amount actually due. The delay of the stockholders has not changed the position of the parties, and there is nothing to show that either the corporation or its stockholders are estopped from asserting that the corporation is only liable to repay what it had actually received.

, It is clear that Ellis purchased the bonds for himself, paid for them with his own money, and took them in the name of Julia E. Ellis. It is not necessary to determine whether there can be any relief as against these bonds issued to Ellis in this action without making Julia E. Ellis a party.

I think that plaintiff was entitled to a judgment declaring that the bonds issued to its trustees, and now held by them, are valid only to the extent of seventy-five per cent, and allowing it to discharge such obligation on a payment of that amount and interest.

I think, therefore, the judgment should be reversed and a new trial ordered.  