Hyperlawhypertext legal database Cheever v. Gilbert Elevated Railway Co. 43 N.Y. Super. Ct. 478

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Cheever v. Gilbert Elevated Railway Co.

43 N.Y. Super. Ct. 478 11 Jones & S. 478 Court N.Y. Super. Ct. Decision date 1878-03-04 English

Delivered by Br the Court.—Freedman, J.

Contents

Majority

p. 478
JOHN H. CHEEVER, Plaintiff and Appellant, v. THE GILBERT ELEVATED RAILWAY COMPANY, Defendant and Respondent.

Headnote

L Corporation.
1. LOANING MONEY ; AUTHORITY TO SO DO.
(a) Has authority to loan money to aid in a work auxiliary to its main business.
p. 479
1. Misappropriation by borrower, effect of.
(a) Jf loaned for such purpose, the lender is not responsible for misappropriation.
3. WANT OF AUTHORITY IN CORPORATION.
(a) Who may not take advantage of.
1. One who has had the benefit of the act done without authority, cannot.
3. INNOCENCE, PRESUMPTION OF, APPLIES TO CORPORATIONS.
(a) Corporations are entitled to the benefit of the rule which imputes innocence rather than wrong to the conduct of man.
4. OFFICERS OR AGENTS, ACTS OF.
(a) Corporation bound by, when done in the ordinary discharge of their official duty, though not authorized or executed under its corporate seal.
Held, upon above propositions, that a treasurer who, with the assent of the president and vice-president, but without the authority of a by-law, resolution of the board of directors, or other assent of the governing body, loaned money of the corporation to aid in a work auxiliary to its main business, the loaning of money being in the ordinary discharge of the official duty of those officers, was not liable to the company for the money loaned, in the event of the borrower not repaying it.
5. REVISED STATUTES, PART 1, TITLE 4, § 4.
(a) Prohibition against assigning property or choses in action to an officer or stockholder for the payment of a debt.
1. What falls within prohibition.
(a) Charging to the debit of an officer and assigning to Mm an apparently lost debt due to the corporation (his credit side of the account being greater than the debt) for which he, by reason of want of authority to do, or neglect of duty in doing, the act, or transaction, out of which the debt arose, is liable to the corporation as well as the debtor, so falls.
Subrogation.—Such a transaction does not operate to subrogate the officer to the company’s rights .against its debtor.
Agency.—Such a transaction will not put the officer in the position of an agent who can sue for money or property of his principal, paid or transferred under such circumstances as that it is recoverable back, and appropriate the proceeds of the suit to Ms own use.
p. 480
Decided March 4, 1878.
Before Curtis, Ch. J., Sedgwick and Freedmah, JJ.
Appeal from judgment dismissing the complaint entered upon a referee’s report.
This is an action brought by John H. Cheever against the Gilbert Elevated Bailway Company, to recover the sum of $10,816.77, with interest from the day of May, 1873. The complaint alleges that, on or about March 13, 1873, and on divers dates thereafter, to and including August 2, 1873, the New York, Boston and Montreal Bailway Company, a corporation organized under the laws of the State of New York, loaned and advanced to the defendant and to its officers and agents, at its request and for its use, and paid, laid out and expended to and for the defendant’s use and at its request, divers sums of money, amounting to $10,816.77, which the defendant promised to repay to the said New York, Boston and Montreal Bailway Company, on demand, with interest from the respective dates at which the moneys were so loaned ; that the indebtedness of the defendant to the said New York, Boston and Montreal Company, has been duly assigned to and is vested in the plaintiff; that the defendant has not paid the same or any part thereof, although often requested so to do, and that the whole sum as above expressed is now justly due and owing to the plaintiff from the defendant. Judgment is demanded accordingly. Issue is taken upon these allegations. The New York, Boston and Montreal Company was a railway company, having its southern terminus at the Harlem river, near High Bridge. The defendant was also a railway company, intending to build a-road from the Battery to the Harlem river, to connect with the New York, Boston and Montreal
p. 481
Railroad. George W. Brown was president, John Q. Hoyt, vice-president, and Andrew McKinney, treasurer of the Hew York, Boston and Montreal Company. William Foster, Jr., was president, John Q. Hoyt, vice-president, and Andrew McKinney, treasurer of the defendant. The defendant needed money to carry on its work, and applied, through its president, Mr. Foster, to the officers of the Hew York, Boston ‘and Montreal Company above named, for a loan of about $10,000, as it should be required from time to time. These officers refused to loan the money individually, but said that they would consider whether the Hew York, Boston and Montreal Company might not loan it. The two roads, when completed, were to operate together, hence it was regarded for the interest of the Hew York, Boston and Montreal Company to aid the defendant and make the desired loan. Mr. McKinney laid the application before Mr. Brown and Mr. Hoyt. They authorized him to advance the money to the defendant. Accordingly the Hew York, Boston and Montreal Company, through Mr. McKinney, treasurer, paid out for and advanced to the defendant moneys, in divers sums at various times amounting to $10,816.77.
The Hew York, Boston and Montreal Railway Company had a claim against the defendant 'for the amounts above stated. This claim was unpaid on September 30, 1874. At that time it was charged on the books of the company against Mr. McKinney. Mr. Cassell, an agent of Messrs. Bischoffsheim & Goldsmith, of London, who were stockholders of the Hew York, Boston and Montreal Railway Company, examined the books of the company in the summer of 1874, and expressed some dissatisfaction with the loan to the defendant, whereupon Mr. McKinney proposed to assume it himself. Mr. Brown advised him to do it; whereupon the claim against the defendant was
p. 482
charged against Mr. McKinney’s account, the company owing to him a sum exceeding this amount for services as treasurer and for money loaned. The transfer was made on the books by order of Mr. Hoyt, vice-president. At the time of the transfer, the defendant had refused payment of the said loans ; was unable to pay them ; had abandoned its enterprise, and was without means or credit; and said claim against it was, at that time, apparently of no pecuniary value. The object and purpose of all the parties to the said transfer were to carry out thereby the proposal which McKinney had made to the agent of Bischoffsheim & Goldsmith, to assume to himself the said claims against the defendant, and to have the same charged to his account, and that said McKinney should thereby pay to the Hew York, Boston and Montreal Railway Company the loans made to the defendant. Mr. McKinney would not have bought this claim, and paid cash for it. He took the claim as an assignment on account of his debt. Upon examination he said :
Q. And that the assignment was made to you in payment of that indebtedness, or part payment ?
A. Yes, sir.
Q. And that you accepted it as such ? '
Prior to September 30, 1874, the Hew York, Boston and Montreal Railway Company had neglected to pay some of the coupons upon its bonds, also some notes which had gone to protest. Judgments were recovered against it, which were not paid. The judgment which formed the basis for the appointment of a receiver had been obtained and remained unsatisfied. These obligations were not paid, on account of the want of funds to pay them.
Mr. Brown, Mr. Hoyt and Mr. McKinney said, when the loan was made, that they would return the money to the company if the defendant did not pay it.
p. 483
There seems to have been no disapproval of the loan by the company. No disapproval of the loan was expressed by any one except Mr. Cassell, who was not an officer in the company.
The claim which Mr. McKinney had, if he had any, against the defendant, was assigned to the plaintiff.
The defendant’s counsel moved at the close of the testimony for a dismissal of the complaint:
1. On the ground that the plaintiff had not proved the cause of action stated in the complaint.
2. On the ground that no cause of action was shown against the defendant.
The motion was granted, the referee delivering the following opinion:
Jacob F. Miller, Referee.—The complaint alleges that the loan was made by the New York, Boston and Montreal Railroad Company to the defendant. This allegation is sustained by the proof. The moneys paid were the moneys of the New York, Boston and Montreal company. Their checks were delivered to the defendants, or to some other persons by their order. The moneys were loaned at the request of Wm. Foster, Jr., the president of the defendant. He said it was wanted to aid in engineering projects connected with the road to be built by the defendant. Whether it ■was so used in fact is unimportant. The lender, under such circumstances, is not responsible for a misappropriation of the funds.
The act of loaning money to the defendant to aid in a work auxiliary to its main business would not be prohibited. In Brown v. Winnisummit Company, 11 Allen, 334 , the court said :
“We know of no rule or principle by which an act creating a corporation for certain specific objects, or to carry on a particular trade or business, is to be strictly construed as prohibitory of all other dealings or trans
p. 484
■actions, not coming within the exact scope of those designated. Undoubtedly, the main business of a corporation is to be confined to that class of operations which properly appertain to the general purposes for which its charter was granted. But it may also enter into contracts, and engage in transactions which are ' incidental or auxiliary to its main business, or which may become necessary, expedient or profitable in the • care and management of the property which it is authorized to hold under the act by which it was created.”
But even if the New York, Boston and Montreal Railway Company had no authority to make the loan, '"'still the defendant, having had the benefit of the contract of loan, cannot be permitted to avail itself of the defense that the New York, Boston and Montreal company had no authority, express or implied by the terms - of its charter, to make the loan ( 4 Johns. Ch. 370 ; 6 Hill, 37 ; 5 Id. 139, 490, 491 ; 16 Mass. 102 ; 13 Pa. 13 ; 5 Sandf. 170 ; 11 Barb. 213 ; 17 Id. 378; 19 Id. 568; Parish v. Wheeler, 22 N. Y. 494 ; Bissell v. Michigan S. & N. I. R. R. Co., Id. 269).
The act of the New York, Boston and Montreal company must be presumed valid until the contrary is "shown. The dealings of a corporation which, on their face or according to their apparent import, are within its charter, are not to be regarded as illegal or unau- . thorized without some evidence to show that they are of such a character. In the absence of proof, there is no legal presumption that the law has been violated. On the contrary, these artificial bodies, like natural persons, are entitled to the benefit of the rule which imputes innocence rather than wrong to the conduct of men (Chautauqua County Bank v. Risley, 19 N. Y. 369 ; 2 Cow. 664 ; 24 Barb. 25 ; Farmers’ Loan and Trust Co. Clowes, 3 N. Y. 470 ; De Goff v. American Linen Thread Co., 21 Id. 124; 12 Wheat. 64 ).
p. 485
In the Bank of the U. S. v. Dandridge, 12 Wheat. 70 , the supreme court said :
“It (the law) presumes that every man in his private and official character does his duty until the contrary is proved ; it will presume that all things are rightly done, unless the circumstances of the case overturn this presumption. . . The same presumptions are, we think, applicable to corporations. Persons acting publicly as officers of the corporation are to be presumed rightfully in office; acts done by the corporation, which presuppose the existence of their acts to make them legally operative, are presumptive proofs of the latter. Grants and proceedings beneficial to the corporation are presumed to be accepted, and slight acts on their part, which can be reasonably accounted for only upon the supposition of such acceptance, are admitted as presumptions of the fact. If officers of the corporation "openly exercise a power which presupposes a delegated authority for the purpose, and other corporate acts show that the corporation must have contemplated thp legal existence of such authority, the acts of such officers will be deemed rightful, and the delegated authority will be presumed. . . In short, we think that the acts of artificial persons afford the same presumptions as the acts of natural persons. Bach afford presumptions from acts done of what must have preceded them as matters of right, or matters of duty.”
In the same ease, the court says:
“In reason and justice, there does not seem any solid ground why a corporation may not, in case of the omission of its officers to preserve a written record, give such proofs to support its rights as would be admissible in suits against it to support adverse rights.”
And in the Farmers’ Loan & Trust Co. v. Clowes ( 3 N. Y. 470 ), it was held that where a loan by such a corporation was contested by the borrower on the
p. 486
ground of a want of power to make it, it rested on him to show affirmatively that the loan was not made in the proper exercise of the powers expressly granted.”
And in Elwell v. Dodge ( 33 Barb. 340 ), it was held that: “So long as the corporation, or any one claiming under it, or as a creditor having a claim against it at the time of the transfer who might be injured- by it, do not repudiate the transaction, and seek to reclaim or reach the note, the debtor cannot attack the title of the holder under this statute. The transfer is not void, but simply voidable at the suit of the corporation or other party in interest.” The statute referred to is 1 R. S. 4th ed. 1115, § 60.
The defendant, therefore, cannot take advantage of the point that the loan was unauthorized. The plaintiff lias alleged that the loan was made by the New York, Boston and Montreal Bailway company, and cannot introduce evidence to contradict it.
In Elwell v. Dodge (supra), it was decided that “it is to be presumed that acts which an officer of a corporation usually and continually performs in its behalf are authorized by its directors.”,
And in 18 Ind. 327 , it was held that “a debtor cannot avoid payment of his obligations to a bank on the ground that the discounts were not made by a quorum of directors, as required by the charter. Such provisions-are directory merely.”
“ A corporation is bound by the express or implied contracts of its agents or officers made in the ordinary discharge of their official duty, though not authorized or executed under its corporate seal ” ( 7 Cranch, 299 ; 5 Wheat. 338 ; 8 Id. 338 ; 14 Pet. 19 ; 16 How. Pr. 521 ).
And as to the performance by the officers of an act which the corporation had no power to perform being ' the act of the corporation, and not a mere act of the officers, see 7 Wend. 31 ; 22 N. Y. 258 ; 33 Cal. 134 .
I conclude that the acts-of Messrs-.- Brown, Hoyt,
p. 487
and McKinney were valid acts, and the defendant became liable to the Hew York, Boston and Montreal company, and that Mr. McKinney was not so liable. I could not conclude, without evidence to show it, that Mr. McKinney had embezzled the funds of the company. As no proceedings were taken against him to recover the money, it is reasonable to presume that the company whose money was taken did not think so.
On September 30, 1874, when the claim against the defendants was charged against McKinney, the company had ceased to pay its obligations. It could not make an assignment of any of its property or choses in action to him, directly or indirectly, for the payment of any debt, he being the treasurer of the company.
“ Whenever any incorporated company shall have refused the payment of any of its notes or other evidences of debt, in specie, or lawful money of the United States, it shall not be lawful for such company, or any of its officers, to assign or transfer" any of the property or choses in action of such company, to any officer or stockholder of such company, directly or indirectly, for the payment of any debt .... and every such transfer and assignment to such officer, stockholder or other person, or in trust for them or their benefit, shall be utterly void,” &c. (1 R. S. 603, § 4).
In Harris v. Thompson ( 15 Barb. 62 ), the supreme court said:
“ Two classes of transfers or assignments by corporations are prohibited by this section upon its most obvious reading. By the first clause, assignments and transfers to stockholders or directors, directly or indirectly, for the payment of any debt, after the corporation shall have refused payment of its notes or evidences of debt, are forbidden, whether the company is solvent or insolvent. The object of this provision is evidently to prevent an undue preference of directors
p. 488
and stockholders in the payment of their debts over the creditors at large, without putting the latter to the proof of actual or contemplated insolvency, and making the-refusal to pay debts of a specified character sufficient to defeat such assignment ” (See also 30 Barb. 645 ).
And in Diven v. Phelps ( 34 Barb. 229 ), the supreme court, at general term, says :
“ The statute expressly provides that every person receiving, by means of assignment or payment, any of .the effects of such corporation” (an insolvent corp'ora.tion) “ shall be bound to account therefor to its creditors .or stockholders or their trustees.” .
And in Brouwer v. Harbeck ( 9 N. Y. 594 ), the court of appeals said :
“A corporation, like an individual, is insolvent when it is not able to pay its debts. Insolvency means .a general inability to answer, in the course of business,. the liabilities existing and capable of being enforced ” (See also 21 N. Y. 406 ; 35 Id. 96).
. I conclude that the assignment to Mr. McKinney, being made in consideration of the debt due him for services and loans, was void; that if he had received the money from the defendant upon the claim, he would be compelled to account for it to the company, or, after his appointment, to the receiver. ■
As it was necessary to show a valid assignment of the company’s claim to Mr. McKinney to enable the plaintiff to maintain his action, the motion to dismiss the complaint will have to be granted.
But it is urged by the plaintiff’s counsel that Mr. McKinney had no authority to make the loan on behalf of the company, and that therefore he became personally liable to the company for a misappropriation of its funds. He, in turn, had an action against the defendant for the money loaned. This claim he could assign to the plaintiff. Charging the debt to himself on the books of the company, which owed him a larger amount,
p. 489
was paying the company, and he therefore became sub--rogated to the right of the company to the claim in question. While I cannot assume, in the absence of proof,' that Mr. McKinney embezzled or misappropriated the funds of the New York, Boston and Mon-" treal Railroad Company, suppose it be admitted. Does ■ the conclusion follow that Mr. McKinney had a claim . that he could assign ? It will not be'disputed that the New York, Boston and Montreal Railroad Company - had a claim for the moneys, because they had a right-' to follow their property into whosoever’s hands it'might come. If the agent misappropriates the funds ■ of his principal, he too may have an action against the receiver of the principal’s money, but not for himself.-' He brings the action to recover on behalf of his principal, for whom he is trustee. He has, therefore, no claim of his own ; he has a claim for the benefit of his - principal, who can appropriate it or the proceeds of it. If Mr. McKinney had brought an action against the-' defendant and sustained it on the ground of his misappropriation of the funds of the New York, Boston and Montreal Railroad Company, he would have done so for their benefit and as trustee for them. What right had ■ he to assign the claim to any other person %
In Story on Agency, section' 398, it is said that-“an agent selling goods under a del credere commission, is entitled to sue for the price of the goods sold' by him. Indeed, as between himself and the vendee, he is generally treated as the owner of the goods, and, of course, he is entitled to the general rights of an owner ; but still he is so subject to the superior rights of principal, not incompatible with his own.”
Again: “ So if an agent'has transferred the money or property of his principal, under circumstances which • gave him a right to recover it back, he may do só in his'' own name, notwithstanding his principal may maintain a like suit therefor; the agent (as was said by Lord
p. 490
Mansfield) may maintain the suit from the authority of the principal, and the principal may maintain it as proving it paid by the agent” (Same section).
“But perhaps, strictly speaking, the agent acquires such right because of his responsibility for the money or property to his principal and the interest which he has in indemnifying himself.” Yes, if he pays it (Ib.).
In Holt v. Ely, 1 Ellis & Blackburn, 795, it was held that where L. placed in plaintiff’s hands a fund out of which plaintiff was directed to satisfy certain acceptances, defendant falsely represented to plaintiff that he held one such acceptance, and thereby induced plaintiff to pay him the amount of the alleged acceptánce out of the fund. Held, that plaintiff might maintain an action for money had and received against defendant. Also held that L. might have maintained the action.'
In Stevenson v. Mortimer, Cowper, 806, Lord Mansfield said:
“Where a man pays money by his agent which ought not to have been paid, either the agent or principal may bring an action ■ to recover it back. The agent may from the authority of the principal, and the principal may as proving it to have been paid by Ms agent.”
How, it is obvious that though an action might be maintained by both principal and agent, there is but one claim : the principal has this. The agent’s claim is for the benefit of his principal.
In Taylor v. Plumer, 3 Maule & Selwyn, 565 the defendant, Plumer, delivered moneys to one. Walsh, a broker, to purchase exchequer bills ; but he (Walsh), instead of obeying instructions, used the money to buy American securities, intending to abscond with them ;. while absconding, he was overtaken by defendant’s attorney and a police officer. He gave up the securities to the attorney of defendant. Walsh
p. 491
then went into bankruptcy. His assignee brought suit to recover the value of the securities. Held, that he could not máintain the action. Held, also, that the principal was entitled to withhold the proceeds from the assignees of the broker, "who became bankrupt on the day on which he so received and misapplied the money. Lord Bllenborough said:
“The plaintiff [assignee of the agent] in this case is not entitled to recover if. the defendant has succeeded in maintaining these propositions in point of law, viz: that the property of a principal entrusted by him to his factor for any special purpose belongs to the prin.cipal, notwithstanding any change which that property may have undergone in point of form, so long as such property is capable of being identified and distinguished from all other property. And secondly, that all property thus circumstanced is equally recoverable from the assignees of the factor, in the event of his becoming a bankrupt, as it was from the factor himself before his bankruptcy. And, indeed, upon a view of the authorities and consideration of the. argument, it should seem that if the property in its original state and form was covered with a trust in favor of the principal, no change of that state and form can divest it of such trust, or give the factor, or those who represent him in right, any other more valid claim in respect to it than, they respectively had before such change. An abuse of trust can confer no rights on the party abusing it, nor on those who claim privity with him. The argument which has been advanced in favor of the plaintiffs,—that the property of the-principal continues only so long as the authority of the principal is pursued in respect to the order and disposition of it, and that it ceases when the property is tortiously converted into another form for the uses-of the factor himself,—is mischievous-in practice, and supported by no authority of law.”
p. 492
In Birdenbecker v. Lowell, 32 Barb. 18 , the supreme court said, speaking of the act of a cashier of a-bank:
“The bank was advised of what had been done,: and, within a very few days and as early as October, 1856, received a part of the fruits of the arrangement, and,has never repudiated the transaction or reclaimed the notes. If it did not intend to abide by the acts of Etheridge in the premises, it- should have dissented and given notice within a reasonable time; and not ■having done so, an assent to or ratification of the acts will be presumed. When the principals received a letter from their agent in July, informing them of what he had done, and they were silent until October, and then for the first time complained, they were considered to have waived any right of action they might have had (Cairnes v. Bleecker, 12 Johns. 300 ; 2 Kent Com. 316; Benedict v. Smith, 10 Paige, 127). It follows that the bank must abide by the acts of Etheridge in accepting the transfer of property and surrendering the notes to Gates to be canceled. It is true that conveyances were to Etheridge directly and not to the bank; but by the transfer a trust was created for the payment of a debt due to the bank, and the fund provided belonged to the bank and might be controlled by it; first, as having been taken by the agent in his own name, the- agent in such case taking as trustee and not in his own right.”
This case is important as showing that the New York, Boston and Montreal Company must be presumed to have ratified Mr. McKinney’s act, if unlawful, and secondly, as showing that the right of action against the defendant, if he had any, for misappropriated funds was still as trustee for the New York, Boston and Montreal company, until they chose to assign it to him.
p. 493
In Wolfe v. Brouwer, 5 Robt. 603, where an agent had misappropriated certain drafts, the court said :
“Of course, whatever such agent received on the misapplication of such drafts he received from the plaintiffs, and as their agents in a fiduciary capacity, and was bound to transfer them, and for not delivering ■ it over might be held to bail.”
If, therefore, McKinney had a right of action against the defendant for moneys which he had misappropriated as their treasurer, he had such right in en-, tire subordination to the rights of the New York, Boston and Montreal company, and as their trustee. He could not assign the claim to anybody else, without their authority. ;
But it is urged that Mr. McKinney became subrogated to the rights of the New York, Boston and Montreal company, and had, therefore, a right to sue or assign. He could become subrogated to their rights only by paying them. He did not pay them. He did not part with a dollar. He could not pay the company with his services, except by receiving the payment of his own debt, which the statute prohibits. Had he bought the claim and paid cash for.it, the assignment would have been valid, for the company is not prohibited from selling its claims, even it had stopped payment. But by charging the claim against the debt. to Mr. McKinney, it tried to deprive itself of some of its assets, and received nothing in return except a cancellation of its debt, which it was by law prohibited from paying directly or indirectly (See Story Eq. Jut. §§ 494, 499, 499 d, 500, 501; Lewis v. Palmer, 28 N. Y. 271 ).
In this latter case, the court of appeals said:
“The case, therefore, was that of a surety who pays a debt for his principal, and who was entitled to be subrogated to the rights of the creditor against the principal debtor. It is a well-settled principle that a
p. 494
surety who pays a debt for his principal is entitled to be put in the place of the creditor, and to all the means which the creditor possessed to enforce payment against the principal debtor (Clason v. Morris, 10 Johns. 584 ; Wilkes v. Harper, 2 Barb. Ch. 338 ; Mathews v. Aiken, 1 Comst. 595; Hodgson v. Shaw, 3 Mylne & K. 183).” In Hayes v. Ward ( 4 Johns. Ch. 130 ), Chancellor Kent said : “ The doctrine does not belong merely to the civil law system. It is .equally a well settled principle in English chancery that a surety will be entitled to every remedy which the creditor has against the principal debtor, to enforce every security and to stand in the place of the creditor, and have his securities transferred to him, and to avail himself of those securities against the debtor.”
Had Mr. McKinney paid for the claim, he might have enforced it. If the company had. been solvent, or had not refused to pay its obligations, the cancellation of his indebtedness for services might have been a good consideration for the transfer. But after the company refused to pay its obligations, it was prohibited from making any transfer to its officers in payment of any debt. If the cancellation of Mr. McKinney’s indebtedness be a payment, then the company after payment had $10,000 and upwards less to give to its creditors.' A payment to a company which abstracts its funds can scarcely be considered a payment. ■
It is also urged that in a suit by the company against Mr. McKinney for misappropriating its funds, he could set off his services ; and I am referred to 4 Barb. 389 , and 8 Cow. 392 , 394. These cases arose under an entirely different statute. In 1 R. L. 247, it is declared that in the event of a dissolution the stockholders at the time “shall be liable to the extent of their respective shares of stock held in such company, and no further.” And in Tallmadge v. Fishkill Iron
p. 495
Co. ( 4 Barb. 388 ), directors were held liable in a sum equal to the amount of their stock. The statute declares that when debts exceeding three times the amount of the capital stock shall have been contracted, the directors shall be liable to a sum equal to the amount of their stock to make it up. The amount of the excess becomes at once a debt due from the directors, who are declared to be liable to the corporation.
Also held that the directors sued might have set off any sum-which they had already advanced on account of the company.
Same effect, Biggs v. Peniman ( 8 Cow. 392 ). These were cases arising under special statutes defining the limits of a stockholder’s or director’s liability. When he has paid that amount he ought to pay no more. These statutes apply to those officers or persons and do not change the general law relating to counterclaims.
As I have reached the conclusion that the making of the loan was not an illegal act, this question of set-off is unimportant. The company had no claim against Mr. McKinney, and hence there was nothing to set off against Mr. McKinney’s claim if he brought the action, or against the company’s claim if it brought the action. But if the contention of plaintiff’s counsel be true that Mr. McKinney misappropriated the funds of the company and thereby became liable to damages therefor, would the right of set-off or counter-claim existí If plaintiff’s counsel be correct, Mr. McKinney converted the funds of the Mew York, Boston and Montreal Railway Company, for which he might be arrested. The action against him would be found in tort. Could he counter-claim or set off his demand for services 1 Section 150 of the code determines the cases in which counter-claims may be allowed, as follows :
“ 1. A cause of action arising out of the contract or
p. 496
•transaction set forth in the complaint as the foundation of the plaintiff’s claim or connected with the subject of ■the action.
“2. In an action arising on a contract, any other cause of action arising also on contract and existing at ;the commencement- of the action.”
In Pattison v. Richards ( 22 Barb. 145 ), the action was brought to recover damages against the defendant for diverting waters of a stream to his injury, the defendant sought to counter-claim on an agreement between the plaintiff and himself by which, for the purpose of draining a marsh on the lands of both plaintiff and defendant, each was to dig ditches at certain specified places. Defendant alleged that plaintiff had not performed his contract. Held, that .such a claim could not be allowed, “it having no connection with the tortious act of the defendant of which the plaintiff complains. No principle of equity will justify the court in receiving it, either as a full or a partial defense to the plaintiff’s cause of action. If the agreement is a valid agreement under the statute of frauds, and the plaintiff has violated his part of it, and the defendant has a remedy against him for such violation, he must seek that remedy in a separate suit. It cannot be accorded to him in this action” (See also Edgerton v. Page, 20 N. Y. 285 ; Piser v. Stearns, 1 Hilt. 86; Chambers v. Lewis, 2 Id. 595).
It is true that the New York, Boston and Montreal Railroad Company might waive the tort and sue in contract; but till it chose to waive its rights and in some way manifested it, the presumption should be indulged that they reserved alVtheir rights. The company did not manifest its willingness to transfer its claim until it was too late to avail Mr. McKinney. - Mr. Cheever, his" assignee, takes the claim subject to all the defenses against it in the hands of Mr. McKinney.
The complaint must be dismissed.
p. 497
North, Ward & Wagstaff, attorneys, and Thomas M. North, of counsel, for appellant, in substance urged :
—I. This case does not fall within" the statute, (a.) The effect of the transaction was not a transfer of the company’s property for the payment of a debt due to McKinney. It was a mere offset of debts. 1. McKinney, if not legally, was morally bound for the indebtedness of defendant. His assumption of that indebtedness was in pursuance of the duty which morally rested on him. 2. The loan to the defendant was made without proper authority of the company whose money was loaned. This made, the treasurer McKinney liable for any loss arising therefrom (Robinson v. Smith, 3 Paige, 231; Story on Agency, 217-223; Angell & Ames on Corp. § 312; Austin v. Daniels, 4 Den. 299 ; Franklin Ins. Co. v. Jenkins, 3 Wend. 133 ; Butts v. Wood, 37 N. Y. 317 ; affi’g S. C., 38 Barb. 181 ; Robinson v . Smith, 3 Paige, 222; Cunningham v. Pell, 5 Id. 612; Wood v. Draper, 24 Barb. 187 ; Gaffney v. Colville, 6 Hill, 567 ). Brown and Hoyt being liable, would be no defense to McKinney. In an action against McKinney to enforce this liability, the amount due for advances and salary would have to be allowed. The amicable arrangement by which McKinney, upon complaint made by a heavy stockholder, placed the company in the same position as it would have occupied if he had driven the company to litigation, can only operate as an offset of mutual claims, (b.) The referee seems to have arrived at his conclusion, partly upon principles, which although correct in the abstract, have no application, and partly on propositions unsound in themselves. 1. He considered quite fully the question as to the authority of the company to make the loan, and as to the effect, both of want of authority in the company itself, and of want of authority from the company (itself having authority), to the officers to make loans, on the borrower, and from his de
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cisión that the company had authority, and even if it had not, the borrower could not dispute, and that, as between the company and the borrower, the acts of its officers were binding, concluded that the transfer in question was a payment on a debt. The principles thus decided, which led to this conclusion, have no application to the case. The question here is whether the officers of a company, as between themselves and the company, were authorized of their own motion, without by-laws, resolution of directors, or other express assent of the governing body. 2. The fact that no officer of the company disapproved of the loan also influenced him. Neither approval nor disapproval by any or all of the officers, could affect the case. McKinney would still be liable to the company, or any stockholder or creditor thereof (See cases cited above). 4. The referee’s correct conclusion that defendant was liable to the company, seems to have led him to the conclusion that McKinney was not, and this seems to have affected the ultimate conclusion. This was erroneous. Both were liable. The company having obtained satisfaction from McKinney, he was subrogated to their right against defendant. 5. The referee held that McKinney would not be liable unless he had embezzled the company’s money, and this affected the final result. This was erroneous. Officers are liable for loans and defalcations “occasioned by their neglect, as well as by their positive misconduct” (Cases above cited). . 6. The referee held that if the company had a claim against McKinney, it could not be subject to set-off or counter-claim, being in tort, unless the company manifested its intention to treat it as a contract debt, by suit. This also was error (See above cases). The various errors led' to the erroneous conclusion that the case fell within the statute, (c.) The assignment by the company, and the entry on the books, were simply means of consummating the amicable agreement for an
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offset-, and also to perfect in law wliat equity had already done, viz: subrogation ; and therefore does not fall within the purview of the act. (d.) Where an agent pays money or transfers property of his principal under circumstances which give him a right to recover it back, he may do so in his own name notwithstanding his principal may maintain a like suit therefor (Stevens v. Mortimer, Cowper, 806; Story on Agency, § 398). The referee, admitting this general proposition, holds that it does not control this case, and arrives at that conclusion upon two propositions, both of which are erroneous as applied to this case. 1. He says the action in such case is not for the agent, but for the principal, who can appropriate its proceeds. True, if the agent has not paid or indemnified tho principal ; but if he has done either, then the control and proceeds of the suit will be the agent’s own. Here he has paid his principal by the offsetting above mentioned. 2. He also says that if McKinney had received the money on this claim from the defendant, he would foe compelled to account for it to the company. On said accounting, however, he would have to be allowed, as an offset, his salary and advances, which would leave the parties in precisely the position in which this amicable arrangement of offset has placed them. (a.) If the complaint did not sufficiently allege a cause of action arising out of this right of McKinney’s, the pleadings should have been conformed to the facts proved.
Porter, Lowrey, Soren & Stone, attorneys, and Burton N. Harrison, attorney and of counsel, for respondent, among other things, urged :
—I. The claim, as stated in the complaint, the testimony of plaintiff’s witnesses, and the facts as found by the referee, brought the case squarely within the prohibition of 1 Rev. Stats. 603, § 4; Rev. Stats. part 1, chap. XVIII.,
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tit. 4, § 4. .There was no alternative; the complaint was necessarily dismissed. But to escape, if possible, the plaintiff’s counsel argued before the referee these two points : 1st. That the transaction of September 30, 1874, was not an assignment to McKinney, but was something else; and, 2nd. That, if an assignment it was not an assignment for the payment of a debt, but was an offset of two debts. It is difficult to perceive any substantial distinction made in the facts, by this jugglery of words—or how the plaintiff’s case is improved, if the names counsel tries to give to things are allowed. But, 1st. If there was not shown to have been an assignment from the New York, Boston & Montreal Railway Company to McKinney, then the cause of action alleged in the complaint was not proved, and the complaint was properly dismissed. The complaint alleges nothing else but an indebtedness from the defendant to the New York, Boston and Montreal Railway Company, and that it “ has been duly assigned to and is now vested in the plaintiff”—that is the whole cause of action set up. The fact, however, is that the transaction was an assignment and transfer from the company to McKinney—in the sense in which those words are commonly used, and in the sense in which they are used in the statute, (a.) The complaint alleges an assignment. (b.) The two instruments of assignment and transfer are in evidence, one of which is, and professes to be, a formal assignment, while the other is a formal order to the book-keeper to transfer the account on it set forth to McKinney and to charge McKinney’s account with the amount of it. (c.) McKinney’s evidence is that each of those papers was an “assignment,” and that the book-keeper obeyed the directions given, by actually transferring the accounts and charging McKinney with them. He says: “I accepted these assignments, and my account was charged with them accordingly. I regarded .it as an assignment
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—nob a purchase. I would not have been willing to buy it and pay cash for it.” (d.) The instrument of assignment made by McKinney to Cheever, speaks of the subject matter it related to as “ the indebtedness of the Gilbert Elevated Railway Company which was assigned to me by the New York, Boston and Montreal Railway Company by assignment dated September 30, 1874, amounting at the date of said assignment to the principal sum of, &c.” And all the facts show, and Mr. McKinney, the witness, in terms explicitly states more than once, that the assignment was for the payment of the then indebtedness of the New York, Boston and Montreal Railway Company to him. (a.) He testified: “Q. In your direct examination, I understood you to state that . . . the New York, Boston and Montreal Railway Company was indebted to you ? A. Yes, sir. Q. In an amount in excess of the amount of the assignment? A. Yes, sir. Q. And that the assignment was made to you in payment of that indebtedness, or part payment? A. Yes, sir. Q. And that you accepted it as such ? A. Yes, sir.” (b.) And, after there had been discussion in the presence of the witness as to the effect of that testimony upon the very point now under discussion, and when the witness was fully aware of the tendency of what he was saying, and after he had heard the statute (1 A. S. 603, § 4) read, and after he had been talked to on the subject—after all that, he again testified, in reply to a question by the referee, as follows: “Q. I understand that the company was owing you, and you took this on account? A. Yes, sir; as far as it went.” Language cannot be more explicit than that, and there is no possible room for doubt or hesitation in finding as the referee did upon the explicit and uncontradicted statement of the witness, that the assignment was “for the payment of a debt.” (c.) How could it be for anything else? By
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“taking the debt” he certainly doesn’t mean to say that he took it without giving some sort of consideration for it. He had no right to do that. The moneys of the company had been advanced and he undertook to make them up—to make the company good for the amounts. The only way he could do it was first, either actually to repay the moneys into the treasury of the company as in purchase of the assignment, or second, to attempt to make np the amount to the company—to reimburse the company by crediting the company with the amounts, on his own account against the company on which a larger sum was due him by the company. He didn’t do the first and he did do the last. If he had stopped there—if he had merely reimbursed the company by crediting the company with the amount in his own account against the company, and had left the company’s claim against this defendant outstanding to be enforced whenever convenient, he might have been all right—the company could have collected the amounts from the defendant, and McKinney might then have been entitled to receive the collections as having been made for his benefit. But he didn’t stop there. To make himself good for the credits he gave to the Hew York, Boston and Montreal Railway Company, he got from it assignments and transfers to himself, of that company’s claim against this defendant. And that latter is the very thing which, under those circumstances, is expressly prohibited by the statute (1 R. S. 603, § 4).
II. Counsel for plaintiff next argued before the referee that the assignment to McKinney was not for the payment of an equal amount of indebtedness of the company to him, but that it was for an offset of one debt against the other ; and he got the witness to say that one charge merely “extinguished” the other. But that is only another way of stating the same thing. The two claims—that of the Hew York, Boston and
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Montreal Railway Company against the Gilbert Elevated Railway Company, arid that of McKinney against the New York, Boston and Montreal Railway Company —were choses in action. The only way in which one chose in action can possibly be used for the payment of another, is by making them offset and extinguish each other ; arid, when one chose in action is used for an offset of another, or to extinguish it, what happens is simply this, that the one is used for the payment of the other.
III. Plaintiff contended in effect that the advances from the company’s treasury were wrongfully made by McKinney, and so were not advances by the company at all, but by McKinney himself, which McKinney could have sued for and recovered in his own name ; and that it is that claim of McKinney which is prosecuted here, and not the claim of the New York, Boston and Montreal Railway Company. For the defendant it was replied: 1. That new claim is not proved, the assignment to Cheever (which is in evidence) being an assignment, not of any original claim of McKinney against defendants, but an assignment of a claim of the New York, Boston and Montreal Railway Company against defendants, which the exhibit itself states to have been assigned by that company to McKinney September 30, 1874 ; and that is the transaction alleged in the complaint, and denied in the answer, and to which all the testimony was directed. 2. If McKinney has assigned to Cheever any other claim which was originally his own claim against the defendants, it must be prosecuted in. a separate action and will be met by other defenses. Counsel then moved that the complaint be conformed to the facts as proved. That motion was opposed on the grounds that: 1. The referee had no power to grant the motion on any facts proved in this case. For if the complaint were so amended on the trial as to allege a cause of action not depending on any
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assignment from the New York, Boston and Montreal Railway Company (which is the only thing alleged in the complaint and denied in the answer), it would “change substantially” both the claim and defense, and so would be in direct conflict with the provisions of section 173 of the old code, then in force—new code, section 723. 2. The denials of the answer were so explicitly directed to the single claim of the complaint that plaintiff was given his opportunity to amend the complaint under the provisions of the old code, section 172 ; and not having done so, it was too late to attempt on the trial any such amendment as could help plaintiff in the face of the facts proved by his own witness. Upon that objection the referee excluded the evidence ; and, upon the whole case, the exception then taken by plaintiff is unavailing. The court had and has no power to amend the complaint as requested, and the judgment should not be reversed because of the exclusion of that immaterial evidence, the sole object of which was to lay a foundation for the motion to amend. The new allegation is not “material to the case,” and it “changes substantially the claims” and “the defense,” on which issue was joined (Old Code, § 173; New Code, § 723). In so ruling, the referee was right.
IV. As to the suggestion that McKinney had no authority from the board of directors, and so must be charged with the advances as having been made by him individually and not by or for the company, it was insisted before the referee by defendants that: 1. It is proved that this was only one of a great many such cases where advances were made by those officers without direction of the board of directors, and which the board had nothing to do with. It was the usual course of business of the directors to allow the president, vice-president and treasurer to manage the funds as they saw fit. 2. The three officers in question were the three chief officers of the company ; and they
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all united in authorizing the advances. 3rd. All the transactions were entered on the books of the company at the time (April and May, 1873), and were acquiesced in by the board of directors from that time to this—it being only in the summer of 1874, that even the agent of one of the stockholders raised any objection. And even his objection was not to the power or authority to make the advances, but to the wisdom or advisability of them. Nobody else has ever objected. 4th. On those facts, it cannot be objected by the plaintiff in this case that there was a want of authority in the officers who acted for the company in the matter. “The president, treasurer and secretary were the principal officers, and in their respective spheres, the agents of the company. The acts of these several officers . had never been disclaimed or questioned by the directors of the company. They had proceeded so long and to so great an extent that ignorance on the part of the company could not be asserted, and silence and acquiescence had ripened, into indisputable authority.....We are convinced that the company could never have set aside this transaction on any pretense of want of authority in these their three principal officers. The facts we have stated would be-perfectly conclusive against any such attempt on the part of the company. The implied authority, from the course of business and from similar acts done without challenge or disaffirmance, is as potent as an express resolution of the board of directors..... Proving a power implied from acts would be as effective as the most positive authority in writing” (Lohman v. New York and Erie R. R. Co., 2 Sandf. 52 ). “A corporation may, like an individual, ratify the acts of its agents done in excess of their authority ; and such ratification may, in many cases, be inferred from an informal acquiescence in and approval of those acts ” (Hoyt v. Thomson, 19 N. Y. 218 ).
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The referee found that the act of the president, vice-president and treasurer, in making the advances, was the valid act of the company. He declined to find on the evidence that the treasurer was an embezzler of the company’s moneys. The plaintiff’s exception to that ruling cannot avail him here ; it affords no reason for reversing the judgement.

—The facts found by the referee are fully sustained by the evidence, and upon them the merits of the case would be wholly with the plaintiff, if the statute (1 Rev. Stat. 603, § 4) did not apply. A careful examination of the reasons. assigned, and authorities cited by the referee in support of the disposition he made of the case, has satisfied me, however, that he was correct in the construction which he placed upon the statute, and in the conclusions at which he thereupon arrived. Being unable to discover any error in the findings of fact or of law, or the refusals to find as requested, I am of the opinion that the judgment appealed from should be affirmed with costs.

Curtis, Ch. J., and Sedgwick, J., concurred.

Cases cited

Statutes and regulations cited