
    George R. Sherman et al., Resp’ts, v. John D. Slayback et al., App’lts.
    
      (Supreme Court, General Term, Third Department,
    
    
      Filed November 28, 1890.)
    
    1. Chattel mortgage—Purchase by mortgagee on foreclosure.
    A partnership, of which plaintiffs are survivors, leased a furnace to certain persons who intended to form a corporation and operate the furnace. This was done in 1885, and the lease was assigned to the corporation. On August 13, 1886, the corporation executed an instrument in writing in which it acknowledged itself as indebted to the lessors and in consideration of an extension of time it surrendered possession of the furnace and all property therein and it was stated in the instrument that the lessors had taken possession. There was a provision that the corporation might regain possession by doing certain acts by January 1, 1887. On August 24,- 1886, the corporation executed a chattel mortgage to the lessors for an indebtedness of $17,000; and upon failure to pay before January 1, 1887, the lessors were authorized to take possession and sell at public or private sale. The corporation made default. On January 12,1887, the corporation property was sold under the mortgage and the plaintiffs (lessors) bid it off at $1,000. It was then worth more than $17,000. In an action to charge the directors with the deficiency, because of failure to file annual reports, Held, that plaintiffs could not recover. The sale must be regarded as one to perfect plaintiffs’ legal title in order the better to dispose of the security for the benefit of both debtor and creditor, and hence plaintiffs should account to the corporation for all they have realized upon the security.
    2. Sake.
    A sale of personal property, under a chattel mortgage, where at the time of sale some of the property is not within sight of the bidders, is not valid.
    Appeal from judgment in favor of plaintiff, entered on report of referee.
    
      Bacon & Merritt, for app’lts; Waldo & McLaughlin, for resp’ts.
   Matham, J.

This is an appeal from a judgment in favor of the plaintiff, entered upon the report of a referee for $19,689.44 recovery and costs.

The action was brought to charge the defendants, as directors of the Port Henry Steel & Iron Company, Limited, with .a debt alleged to be due to the plaintiff from that company, under provisions of chapter 611 of the Laws of 1875, under which the company was organized, on the grounds: First, that the defendants, as directors, had failed to file the annual reports required by that act for the years 1886 and 1887; and secondly, for making an alleged false certificate that the capital stock of the company had been actually paid in in cash before the making of such certificate.

The referee found that the certificate that the capital stock had been paid' in full was true and disposed of that question in favor of the defendant, so that the only real question in controversy on this appeal is as to whether or not these defendants are liable for not filing their annual report required to be filed under the provisions of chapter 611 of Laws of 1875 within twenty days after the first (1st) day of January, 1886 and 1887.

On the 23rd of April, 1885, the copartnership known as the firm of Witherbees, Sherman & Co., consisting of' Silas H. Witherbee, George E. Sherman, Frank S. Witherbee, George D. Sherman and Walter C. Witherbee, leased to John D. Slay back, Charles E. Eaymond, Frank B. Eobinson, Andrew Dickey and Thomas F. Witherbee their blast furnace, known as the “Cedar Point Furnace,’.’ at Port Henry, Essex county, FT. Y., lease to run from the 15th day of June, 1885, for five years, for the rent and royalty of one dollar per ton of pig iron which the lessees shall make, the lessees covenanting that it shall amount to not less than $1,200 in any one year.

The lease also provides for the time and manner of payment The lease also ¡novides that the lessees might at any time before the 1st of June, 1885, form a corporation under the general manufacturing laws of the state of New York, with a capital of not less than $100,000, and in that case the lessees had the right to transfer the lease to such corporation.

On the 21st day of May the lessees filed in the secretary of state’s office articles of incorporation as provided in said lease, and the pleadings admit that the defendants are the directors and officers of such corporation, and had been such directors and officers and continued to act in that capacity from the time of its organisation until June 7, 1887.

The name of the corporation was the Port Henry Steel & Iron Company, Limited. Immediately after the incorporation the lessees assigned to it the lease, and the corporation took possession, and in June, 1885, commenced operations under this lease.

The referee finds, and the case shows, that no annual report was made by the directors and officers of this corporation within twenty days after the 1st of January, 1886, as required by § 18 of chap. 611 of the Laws of 1875.

The referee also found, upon the request of the defendants, that on the 24th day of August, 1886, this corporation was indebted to the plaintiff in the sum of $17,086.86, and that on that day it mortgaged its property to secure such indebtedness and surrendered its plant to the plaintiffs who took possession, and thereupon the company ceased to manufacture and never resumed, and that the company was then bankrupt.

The referee also found that the indebtedness has never been paid or satisfied except one thousand dollars ($1,000) and that there remains due $16,496, to which finding the defendants duly excepted.

On the 13th of August, 1886, the corporation, by its treasurer, executed and delivered to the plaintiff an instrument in writing in which it acknowledged itself indebted to the plaintiff, and in consideration of an extension of time of payment and other considerations it released and surrendered to the plaintiffs said furnace, adjacent premises and property and all its interest in the property, and reciting that the plaintiffs have taken possession thereof at six o’clock on that day.

The instrument also provided for the return of the property to the company on the 1st day of January, 1887, provided the company perform certain stipulations mentioned in the writing, on demand of the company. No rent to accrue while the plaintiffs held possession, and if not demanded before that time the right of the company under the lease and to all of the property is surrendered and the same was to be regarded as the property of the plaintiffs.

It also provided that the corporation was to have the use of the yard and grounds on which their iron and steel was piled until the 1st of January, 1887.

This instrument was acknowledged on the 24th day of August, 1886, and on that day a bill of sale or chattel mortgage was executed by this corporation by its treasurer to secure an indebtedness of the company to the plaintiffs of $17,086.84 on all the property of the company in the “ Cedar Point Furnace,” and all scraps or scrap iron, conditioned for the payment of that sum on or before the 1st of January, 1887, and also all other indebtedness of the company to the plaintiff, and in case of non-payment at that time plaintiffs were authorized to take possession and sell the same at public or private sale for the satisfaction of such indebtedness.

On tire 12th of January, the company having failed to pay such indebtedness, the plaintiffs gave notice of a sale to take place on the 18th of that month.

On that day the plaintiffs, by an auctioneer, at the door of one of the mills and not in sight of all the property, offered it for sale-in bulk and not in parcels, and the same was struck off and sold to one of the plaintiffs for $1,000, no one, except the secretary of the company, being present, and no one, as is claimed, authorized to represent the company on such sale.

This action was commenced on the 13th day of, June, 1887. As the same is in the nature of a penal action as to these defendants personally, and ex delicto in its character, it is incumbent on the plaintiff to prove a state of facts clearly bringing the case within the statutory provisions which give the right of action. Carr v. Rischer, 119 N. Y., 117 ; 28 N. Y. State Rep., 260.

The first point made by the appellant is, that the plaintiff failed to prove an indebtedness of the corporation at the time of the commencement of the action, or at any time before the trial.

If this contention be true in fact, then the plaintiff could not recover.

The rule is well settled upon authority, and it would seem to-be well founded in principle, that unless the corporation were indebted so that an action was maintainable against it at the time of the commencement of the action against the trustee, no action would be maintainable against him.

In The Rector, etc., of the Trinity Church v. Vanderbilt, 98 N. Y., 174, “If there be no obligation giving a present right of action against the company, there is no debt which can be demanded as a penalty against the trustee.”

We must, therefore, first determine whether at the time of the commencement of this action, June 13, 1887, there was a debt due the plaintiff from the company on which a present right of action existed.

When the parties plaintiff and the,company entered into the contract of August 13, 1886, it is quite apparent that the corporation was indebted to the plaintiff; but in what amount does not. appear. t *

* By that contract the corporation obtained an extension until January 1, 1887, and by that extension the plaintiff postponed, any right of action that might then have existed against the corporation and consequently no claim could, during that period, be enforced against the defendants as trustees.

In Jones v. Barlow, 62 N. Y., 202, it was held that trustees are only liable to an action for debts actually due and for which a present right of action exists against the corporation.

But, it was also held that an extension of the time of payment by the creditor to the corporation did not operate to discharge the trustee if the corporation failed to pay at the end of the extension, ■as the act of extension is to be regarded as a transaction between them and the creditor.

It follows, therefore, that if after expiration of the extension the debt still exists, and if it has not in some way been discharged the trustee or director in default in making the report required by law will still be liable for the debt.

The extension in this case, either by the contract of August 13, or the mortgage of August 14, 1886, did not defer payment beyond January 1, 1887, and in the meantime the corporation did not pay the debt unless the acceptance of the property under the contract of August 13, or the possession of the same under the chattel mortgage of August 24, operated as a payment of the same.

The defendant insists that taking possession of property largely in excess in value of the amount of the debt, and holding it after default, vested the title in the plaintiff and operated as payment of the debt and was tantamount to a satisfaction of the same, and after the first of January when the company defaulted in the payment after maturity of the mortgage.

■ If this position can be successfully maintained, then the plaintiff at the time of the commencement of the action, June 13, 1887, which was after default in the mortgage, had no claim, and the corporation at that time owed them no debt, and the defendant would, consequently, be exonerated from any forfeiture or liability.

In this state the law seems well settled that after default in a chattel mortgage the title vests in the mortgagee, and he may, if not in possession, reduce the property to his possession, and is not required to sell, and in such case, if the property is equal in value to the amount of the debt, taking possession amounts to a satisfaction of the debt.

In Morgan v. Plumb, 9 Wend., 292, Savage, Ch. J., in delivering the opinion of the court, says: “When the defendant in this case took possession under mortgage the property was worth the debt, and according to the decisions referred to in Massachusetts and in this state the debt was paid.”

In Case v. Boughton, 11 Wend., 109, the court says: “If the mortgagee simply re-enters but does not sell, and the property is of sufficient value to satisfy the debt, the debt is paid.”

The title after default under chattel mortgage in the chattel mortgaged is absolute in the mortgagee. Thomas on Mortgages, 445, 446.

Unquestionably the mortgagee after default may sell the mortgaged chattel under the power of sale, and must do so or he waives his claim for deficiency, but in order to fix the amount of the deficiency and foreclose the rights of the mortgagor, and prevent him from redeeming in equity, he must make a fair and bona fide sale under the power contained in the mortgage, or have recourse to actual foreclosure of the equity by judicial proceedings. Porter v. Parmly, 43 How., 445.

But the plaintiff in this case made a sale under the power of sale in the mortgage, and if that sale was a fair and just and bona fide sale for a reasonably fair price, which was fairly applied, upon the debt, then the defendants cannot complain and would be bound by it, and hence we are brought to a consideration of the circumstances of that sale. On the 8th and 10th of January, 1887, plaintiffs caused to be posted in three or more public places at Port Henry written or printed notice of sale of all the right and interest of the Port Henry Steel & Iron Company in and to the buildings, machinery, erections, tools, fixtures and appliances, also hoisting machines or engines, all machinery or apparatus connected therewith, placed by it upon the premises, and also all scraps and scrap iron owned by it on said premises; the property includes the buildings, machinery and fixtures on the south side of the furnace erected for use in making steel and other purposes by said company.

The notice also recited that it was by virtue of the chattel mortgage, and was to be sold at public auction on the 18th of January, at 1 o’clock p. M., at the Cedar Point furnace.

The case shows that the sale took place at the time fixed in the notice, and was made under an archway between the furnaces.

The notice was read by the auctioneer and all the property offered for sale together, and not in parcels. There were but two or three persons there, except the members of the plaintiff’s firm.

There .was but one bid made and was for $1,000 and the property was sold on that bid to Thomas Witherbee, one of plaintiffs’ firm; some of the property sold was not in view at the time of the sale.

The referee finds that the property exceeded in value the amount of plaintiffs’ debt or claim at the time of the sale and the undisputed evidence shows it to be largely in excess of such indebtedness.

Had there been no sale, as we have seen, the possession and retention of the property by the. mortgagee would in law have operated as payment and satisfaction of the plaintiffs.’ claim. Morgan v. Plumb, 9 Wend., 292, supra; Case v. Boughton, 11 Wend., supra. Did this sale to the mortgagee, one of the plaintiffs for a grossly inadequate consideration under the circumstances of this case change the situation of the plaintiffs as mortgagees in possession of mortgaged property after default sufficient to satisfy their debt?

I think not. It is true that a mortgagee of chattels may purchase at the mortgage sale and that circumstance alone does not render the sale void. Casserly v. Witherbee, 119 N. Y., 522 ; 30 N. Y. State Rep., 92. But it maybe seriously questioned whether a mortgagee in possession who sells the mortgaged property under the power of sale and becomes himself the purchaser does not still occupy the position of a mortgagee in possession with his mortgage debt paid by reason of the value of the property exceeding the amount of the mortgage debt.

In the Buffalo Steam Engine Works v. The Sun Mutual Insurance Company, 17 N. Y., 403, it was held that a sale of a chattel under a mortgage by a mortgagee in possession to himself by virtue of the power of sale in the mortgage did not divest the equity of redemption of the mortgagor, and the court says: “ He (the mortgagor) still held the equity of redemption. Of this he was not absolutely divested even after forfeiture of the condition of the second mortgage.

“The pretended foreclosure and sale could have no effect to divest him of that interest. It was not a judicial sale but simply an attempt to sell by virtue of the power of sale in the mortgage.

“ The mortgagee therefore becoming himself the purchaser, acquired no additional title by the sale but remained mortgagee still As owner of the property bv virtue of the mortgage he could not sell to himself and as grantee of a power although coupled with an interest he would be equally unable to sell to himself without some statutory aid.”

Applying this rule to the case at bar the plaintiff would still be mortgagee in possession of the mortgaged property after default and the property exceeding in value the amount of the plaintiff’s claim against the corporation, there would be no debt due the plaintiff from the corporation upon which forfeiture by the defendants could be predicated.

The referee found that this sale was fairly conducted and was a valid sale, and that the $1,000 bid should be deducted from the plaintiffs’ claim and ordered judgment against the defendants for the balance.

To these findings and conclusions the defendants except.

We think the exceptions well taken.

We cannot agree with the learned referee that in this action as against these defendants upon the testimony, as it stands in this case, the sale should be upheld.

It is quite apparent that the object of this sale was to cut off the defendants’ right to redeem in equity, and to effect that purpose we have seen that the sale must, in all respects, be regular, fair and Iona fide, and one that would be upheld as a valid sale at common law.

In Shimer v. Moshier, 39 Hun, 155, the court says: “It is a rule of the common law that where personal property is sold at public sale, either judicial or statutory, the same should be in view of the bidders, and should be sold in such separate parcels as is best calculated to bring the highest price.

“In Stief v. Hart, 1 N. Y., 20, it was said that a sale of personal property without having it within the view of the bidders for the purpose of ascertaining and estimating its value was an abuse of the process of the court, and was condemned by the common law without the aid of the statute as to the manner of conducting the sale.” See cases cited ; Linnendoll v. Doe, 14 Johns., 222; Sheldon v. Soper, id., 352; Cresson v. Stout, 17 id., 116.

These cases are quoted with approbation in Shimer v. Moshier, supra, and the court adds:

• “ This rule has been uniformly enforced by the courts and had its foundation in the plainest pirecepts of fairness and public policy.”

We think it has been disregarded in this case, and as it is a case highly penal in its character we think that the safeguards and guarantees furnished by law and ordinarily available for the protection of parties and for the due administration of the law should be applied.

The judgment is reversed, the referee discharged and a new trial ordered, costs to abide the event.

Learned, P. J.

I think that the decision in Casserly v. Witherbee, 119 N. Y., 522; 30 N. Y. State Rep., 92, is practically decisive of this case, and therefore concur in the result.

Landon, J.

It was held in Casserly v. Witherbee, 119 N. Y., 522, 526; 30 N. Y. State Rep., 92, an action in which the mortgage sale here in question was involved, that the fact that' the mortgagees bought the property at the sale under their chattel mortgage does not of itself render the sale void. It was alleged in the complaint in that case that the property bought by the mortgagees under their mortgage for $1,000 was worth $60,000, and similar allegations were made in that complaint as to the sale of the property in bulk, while invisible to the persons attending the sale, as are here shown by the evidence to be true. The court held that such a sale was invalid. The referee in this action finds that after the mortgage sale the plaintiffs sold and disposed of some of the property and applied other portions thereof to their own use, and the value of the portion applied to their own use added to the amounts received by them upon sales of other portions are in excess of the indebtedness of the company to the plaintiffs, namely, $17,086.86. The case cited came up on demurrer to the cornplaint. The sale of property worth to exceed $17,086.86 for $1,000 offends the sense of justice in the same manner, but to a less degree, than the sale of $60,000 worth of property for $1,000. It is still violent injustice, and we cannot but believe that it was suffered to take place under a misapprehension by the company of the purpose for which the plaintiffs made it. Looking for the causes of this misapprehension, we find that the chattel mortgage was given August 24, 1886, but that on the 13th of August, 1886, the Steel & Iron Company delivered to the plaintiffs an agreement under which the latter took possession of the leased property and the plant and appliances of the company thereon and extended payment of the company’s indebtedness to them until January 1, 1887. This agreement was intended to suspend the lease and rent while the company was out of possession and to permit the plaintiffs to operate the works. The company was to be restored to possession at its election upon the performance of certain specified conditions, but in case it should not demand it on or before January 1, 1887, then “ all right of said Steel & Iron Company under said lease and to all said property is surrendered, and the same is to be regarded as the property of Witherbees, Sherman & Co.”

Thus when the chattel mortgage was given, the plaintiffs were in possession of the property under the agreement. The company did not demand re-possession of the property on or before January 1, 1887, and therefore when the plaintiffs subsequently sold it under the chattel mortgage they sold what was regarded under the agreement as their own property. If under the agreement they had the legal title, they had it for the purpose of realizing the amount due them. Between the agreement and the chattel mortgage they have so managed their security as to realize from it more than the amount due them. Why should they not credit the company with it? The foreclosure of the chattel mortgage could hardly be regarded by the company as a hostile proceeding at the date it was made. If the agreement had not conferred full title, the company naturally would not object to the plaintiffs making it as complete as possible, in order the better to realize upon the security. The company certainly could not have understood that the plaintiffs thereby intended to deprive the company of nineteen out of every twenty dollars to be realized from the security. The plaintiffs would have disclaimed any such intention.

I think that sale should be regarded as merely perfecting the plaintiff’s legal title in order the better to dispose of the security for the benefit of both debtor and creditor, and hence that the plaintiffs should account to the company for all they have realized upon the security.

Again, though the plaintiffs might be buyers as well as sellers at their mortgage sale, yet the sale to themselves should be above just suspicion as to its propriety and fairness; the result here shows that this sale was unjust whether there was any wrong intended or not; and as in this action no third persons are to be injured by setting it aside, it should be set aside unless treated as vesting the title in the plaintiffs in trust to apply the proceeds of the property to the benefit of the company.

I, therefore, concur in the result reached by Justice Mayham.  