
    (78 Hun, 7.)
    SHAW v. SARANAC HORSE-NAIL CO.
    (Supreme Court, General Term, Third Department.
    May 26, 1894.)
    Corporations—Mortgage Bonds—Rights op Trustees.
    A corporation organized under the full liability act (Laws 1875, c. Oil),, in order to pay its floating debt, issued mortgage bonds, on which, by said act, the stockholders would not be liable, and authorized W., the president, to sell them at par. W. sold bonds to various persons, and pledged the-balance to secure debts. Afterwards, it was discovered that the corporation was insolvent; whereupon W. and V., one of the trustees of the corporation, agreed to pay off the debts, and take assignments, to be held for the purpose of contribution from the other stockholders. Some of the bonds which had been sold by W. were repurchased by W. and V., and the greater part of the debts were paid under the agreement, but it was not carried out in full because of the insolvency of W. Held, that the mortgage bonds in V.’s hands would be postponed to those outstanding in the hands of a purchaser for value.
    Appeal from special term, Clinton, county.
    Action by James Shaw, as trustee, against the Saranac Horse-Nail Company. From an order modifying the report of a referee, and, as modified, confirming the same, defendant appeals.
    Affirmed.
    The opinion of Mr. Justice BUSSELL at special term is as follows:
    The point to be decided arises out of the claim of different bondholders to-the money arising upon the foreclosure of the mortgage upon which this action was brought. The method by which these proceeds were realized was practically a plan for marshaling of the remaining assets of the company for distribution to the proper persons. The administrators of S. E. Vilas, deceased, claim to hold bonds secured by the mortgage, amounting, with interest, to the sum of $23,558.23. Mrs. Foote and others, opponents of the Vilas claim, concededly hold bonds secured by the mortgage, amounting, with interest, to §8,496.25. The proceeds of sale amount +o $12,030.58, and the question to be decided is whether that sum shall be paid pro rata to ail of the persons claiming to be bondholders, after deducting the trustee’s costs of a previous litigation and his commissions. The Saranac Horse-Nail Company was a corporation organized under the full liability act (chapter 611, Laws 1875), by which it is provided that all the stockholders shall be severally individually liable to the creditors of the company for all debts and liabilities, and may be joined as defendants in any action against the company, but no execution shall be issued against a stockholder individually until after execution against the company has been returned unsatisfied. Section 34. Section 25 also provides that no stockholder shall be liable personally for debts not to be paid within two years from the time they are contracted. S. F. Vilas, deceased, and Andrew Williams, through whom the administrators of Vilas claim, were stockholders in the Saranac Horse-Nail Company, Williams being its president. The other bondholders were not stockholders in that company. The bonds were authorized in the year 1883-upon a resolution of the company as follows: “That the president and secretary be and they are hereby authorized to execute a mortgage on the property of company to George W. Watson, as trustee, to secure the sum of thirty thousand dollars, in coupon bonds of the company to be issued by them for the purpose of raising money to pay the floating debts of the company, &c. Resolved, that the Hon. Andrew Williams be authorized to negotiate the §30,000 bonds this day authorized to be issued, at a price not less than par and accrued interest.” The first of the bonds to mature was not payable until the year 1886, so that the stockholders were not liable upon the debt created by the issuing of these bonds, but were liable upon other outstanding obligations of the company, consisting of notes owing the two banks of which Vilas and Williams were presidents, and the Keeseville Bank. Mr. Williams sold of these bonds at once §6,500 to Mrs. Foote and the other claimants, and later to Mrs. Town §2,000, which last-mentioned bonds Mr. Vilas obtained from Mrs. Town. Later still, Williams sold §1,000 worth to William Farrell, which he afterwards took from Farrell, and subsequently transferred to the administrators of Vilas upon the arrangement hereinafter referred to. Williams afterwards sold to Stephen Moffitt §1,000 of the b.mds, which he also transferred to the administrators of Vilas upon the arrangement referred to, and, a year later, AVilliams sold Mrs. Ellis §3,000 worth, which the administrators of Vilas took from Mrs. Ellis upon the said arrangement. The remaining bonds, instead of being sold by AATlliams, were pledged by him to various banks, including two banks of which Williams and Vilas were presidents, as security for past-due or maturing notes of the company. About the 18th of May, 1886, it having been discovered that the Saranac Company was insolvent, an agreement was made between Williams and the Vilas administrators which recognized the insolvency of the company, the liability of the stockholders, and agreed to pay the debts of the company,—one-third by Williams, and the other two-thirds by Vilas’ administrators, the parties taking assignments of all evidences of debt for the purpose of contribution from the other stockholders. And it was also agreed that the mortgage should be foreclosed, and the proceeds, with all moneys realized from the personal property, applied to the satisfaction of the debts. It will thus be seen that this agreement provided that the remaining property of the company should be applied to the payment of the debts of the company, and that those debts which were paid by Williams and Atlas’ administrators were to be held only for the purpose of contribution, so that, impliedly, Williams and Vilas’ administrators did not intend to hold the evidences of debts collected by them for any other purpose than that of contribution from the other stockholders. The provision that, if Williams and Vilas’ administrators purchased the property, it was to be held by them in the proportion of one-third to Williams and two-thirds to the estate of Vilas, does not conflict with this presumption, for the agreement itself presupposes the entire debts of the company were to be paid, so that there would be no other claimants to that property except the two parties immediately interested. But that agreement was not carried out in full. About §10,000 of the debts of the company, including the bonds to Mrs. Foote and others, were not paid, owing to the insolvency of Williams, and his inability to complete the agreement.
    Under these circumstances, who has the superior equity to the proceeds realized from the foreclosure of the mortgage given to secure the bonds ? Mrs. Foote, and the other claimants who paid money on a direct and plain pm'chase, were confessedly holders for value, whose obligations would have been paid had the agreement between Williams and the administrators of Vilas been carried into effect. This is the case also with the other bonds sold by Williams, and not pledged to the banks, had they remained in the hands of the original holders. With the exception, however, of the bonds of Mrs. Town purchased by Vilas in his lifetime, the remaining bonds came Into the hands of Vilas’ administrators in carrying out the arrangements by which those bonds were to be retired, except as they might be held for the purpose of contribution by the other stockholders. A few of the bonds were paid by Williams, as he expresses it in his testimony, before the arrangement of May, 1886, because the holders wanted the money, and these bonds formed part of the number transferred to the Vilas administrators in execution of that arrangement of May, 1886. I am inclined to believe that, in executing the arrangement, it was impracticable for the Vilas administrators to turn then' payments of obligations into a purchase of an equity in the proceeds of funds realized by the foreclosure of the mortgage which was given to secure the bonds. The interest received by the administrators of Vilas from the transfer by Williams to them to secure his obligation for the sum of §3,300 were also in pursuance of this arrangement, and at the time, it appears to me, it was not intended that these bonds should be held as live obligations, coequal and coexisting with the bonds held by the outside parties. Williams and ATlas’ administrators, upon entering into the agreement ■of May 18, 1886, contemplated the entire payment of the $00,000 of obligations of the company, and, with that view, had no thought or intention of holding any securities as against the other bondholders, who had purchased bonds in good faith for value. Assuming that the evidence justifies the conclusion that at that time Williams and Vilas’ administrators held some bonds which had been issued to Mrs. Town and others for value, the agreement ■of May, 1886, spoke with reference to those bonds as well as the others,' and operated in its force upon them as a portion of those bonds taken up or to be taken up by the two contracting parties.
    There is another reason why the bonds not sold outright by Williams are not valid obligations in the hands of the Vilas administrators. The resolutions under which Williams acted were plainly for the purpose of raising money to pay the debts of the company, and his power to sell was limited to a sale at not less than par. The power conferred is to be judged by the intent of the resolution. The limit upon the price, and the provision that the bonds are for the purpose of paying the debts of the company, leave no room for argument. Hypothecation of bonds in such a case does not advance one step towards the payment of debts of the company, and does incur the risk of the passage of them at a price far less than par, for a sale upon pledge would be to the highest bidder without regard to the limit of the resolution, provided the original pledge was valid. Of corase, it may be that, independently of any resolution empowering Williams to sell, the possession ■of apparently fully executed bonds by the president of a company would give the implied power to bona fide purchasers for value to take them irrespective ■of the limitations upon that apparent power. But the banks parted with nothing of value, nor does it appear from the evidence, so far as 1 can discover, that the pledging of the bonds was simultaneous with the extension •of credit. However that may be, Williams and Vilas were arranging the placing of the bonds of the company in such a manner as to wholly or partly free themselves from the obligations upon which they were personally liable, and it was their duty to-see that those bonds were not diverted from the plain purpose for which.they were issued. They cannot, nor can either •of them, claim to be bona fide holders of bonds, which claim they could not successfully maintain had the bonds been issued directly to them, they having taken up the securities for which they were to be pledged; nor can they acquire a good title, because the bonds were originally diverted from their purpose into the hands of an innocent holder by their own action, and thereafter taking upon themselves the obligation for which those bonds were improperly pledged. I am satisfied from the evidence, and all of the inferences to be drawn from the acts of all the parties, that Williams and Vilas were familiar with the disposition of the bonds, and the purpose for which they were given, and that therefore they cannot, as to those bonds, by any series of circumstances stand as bona fide holders for value of that portion which was pledged for the payment of the antecedent debts on which Williams and Vilas were personally liable, even if the agreement of May, 1886, had not' made them voluntarily obligated to pay the debts of the company. These views, upon the effect of the stockholders’ liabilities, the agreement of May, 1886, and the effect of the resolution upon which the bonds were issued, lead to the subordination of the claims of the Vilas administrators to the proceeds as against Mrs. Foote and the other bona fide holders. I see no reason why Mr. Vilas, although a stockholder of the company, could not lawfully pur- ' chase and hold the bonds of the company if the purchase was uncomplicated with other modifying circumstances. The report will be modified by striking out the provisions for a pro rata disposition of the proceeds, and by inserting a direction that the bonds of Mrs. Foote, Miss Parker, Ryan, and Mrs. Purdy be first paid out of the proceeds. Otherwise the report is confirmed.
    • Argued Tbefore MAYHAM, P. J., and PUTNAM and HERRICK, JJ.
    Beckwith & Botsford (G. H. Beckwith, of counsel), for appellant.
    Weeds, Smith & Conway (T. F. Conway, of counsel), for respondent.
   PER CURIAM.

We have carefully examined the evidence in this appeal, the report of the referee, the opinion of the learned judge at special term, and the order made by the special term, and think the order should be affirmed oh the opinion of the Judge at special term. The order affirmed, with costs and printing disbursements. All concur.  