Cowles v. Gridley. never intended to be considered as a "valid promissory note," "in the hands of any person, or for any purpose whatever." On this statement of the defense, an inquiry naturally arises, for what purpose was the note given if, in every event, the promise or obligation was to be of no validity? The case shows that the defendant was one of the original twelve subscribers to the Eighth Avenue Bank; of which the capital was $100,000, and his proportion, as expressed in the articles of association, $10,000. He, too, with his eleven associates, were the first directors. As soon as $44,000 was paid up, the bank organized and commenced business. Their purchase of securities, to deposit with the banking department, to the amount of $100,000, must, to a great extent, therefore, have been directly or indirectly on credit-and of course, on the credit of supposed bona fide paid up or secured capital. Instead, however, of paying up, the original associates and directors gave their notes for the deficiency, each for $3650, dated January 1, 1854, payable in 6 months, with interest, to some other director, and "interchangeably indorsed by the payees." At the same time also a certificate of the corresponding number of shares of stock was filled up and signed by the president and cashier in favor of each director, although not actually cut out from the certificate book. The notes were not only delivered to the cashier, but formally discounted on the books of the bank, and the proceeds carried to the respective credit of the makers; who thereupon drew their checks which were received as cash in payment of the stock and carried into the stock ledger and transfer book, "showing that each of the directors held such shares." When these notes fell due, which was of course 6 months afterwards, they were renewed for another 6 months, by the directors, as a board, for themselves individually, "omitting the indorsers," but paying the six months' interest. In three months the bank exploded, a receiver was appointed, and suits were brought by him, of which the present is one, on the several notes so given. And the defense now is, not as against other stockholders merely, but as against bona fide. creditors, (for the receiver represents both) that, by an under Cowles v. Gridley. standing among the directors themselves, all this was to be mere form-more properly speaking mere sham-" that no rights should be acquired by the bank, in the notes, unless the directors should elect to pay their notes and take certificates of the stock;" and that the stock having become worthless, probably by the very acts of the directors themselves, they have a right to reject, or rather to return it, and with it to repudiate the written engagements of which it is said to have formed the consideration. Can such a defense either in law or morals, be listened to? Can a director, in other words, be permitted to say that he agreed with a board of trustees, (himself being one,) that if there should be a gain on the stock he and his colleagues should receive it, and if a loss, the creditors and general stockholders should bear it? It will be said, perhaps, that such was not the agreement. In words it was not; but what, I would ask, was the distinction, in substance? The whole board gave to each of its component members the right of "election" for 6 months, and then again for 6 months more, to take or not to take the stock and to pay or not to pay the notes. What moneyed man, with such an option, would choose a loss or refuse a gain? To illustrate the position more strongly, take the case of two guardians of the estate of a minor. They agree each on his own account, with both as trustees, to speculate in cotton with the funds of their ward, giving notes for the respective amounts, after the fashion of the arrangement alleged to have been made in this instance, purporting on their face to be for value received, but with a verbal understanding that if the speculation turned out a bad one they were to be allowed to "elect" not to pay. Would it be any answer, in a suit by the substituted successor of these faithless guardians, to say that they had "elected" to nullify their written obligation? Whatever may be the force of these analogies, one thing is clear, that there was a consideration for the note which the defendant gave. It effected a compliance with the law and enabled the defendant and his eleven associates officially to report under oath that the whole amount of their "certified stock was paid in or invested," (§ 8 of act of 1840,) and to take the chance of a profit on their Cowles v. Gridley. shares without the risk of loss. But this is not all: the printed case states that when the defendant Gridley paid the interest on the original note, at its maturity, he did so on the assurance of the cashier, "that it would come back to him, on the making of a dividend to the stockholders." Here, then, when the second note was given, was a determination, by that very act, of the defendant's election to take the stock and to become absolutely bound for the amount. The directors, it is further contended, had no right to discount their own notes in payment of their subscriptions. The answer is, that the provision referred to (1 R. S. 589) had no reference to the free banks, which were expressly authorized to commence business on securities instead of cash, and, unlike the old chartered institutions, were required before issuing or even obtaining any circulation, to protect the involuntary holders of their bills by a proper deposit with the bank department of the state, of public stocks or private mortgages. And even if the taking of the note had been prohibited, would it be a legitimate satisfaction to the law to deny a recovery upon it, and thus instead of punishing, to reward the wrongdoer, and that at the expense of the innocent and injured creditor? The true principle on this subject, is expressed in that section of the statute of moneyed "corporations," which, while prohibiting discounts to directors, beyond a certain amount, very properly adds the proviso, that "no securities, taken for any such loan or discount shall be held invalid." (1 R. S. 590.) Judgment for plaintiff affirmed with costs. [NEW YORK GENERAL TERM, June 6, 1857. Mitchell, Davies and Roosevelt, Justices.] MILLER VS. THE ILLINOIS CENTRAL RAIL ROAD COMPANY, ROBERT and GEO. L. SCHUYLER and others. On the 1st of October, 1851, R. & G. L. S. held, by assignment from L., the person named therein, a receipt or certificate in these words: "Office of Illinois Central R. R. Co., New York, May 1, 1851. Received of T. W. L. $7500 advanced to the Illinois Central Rail Road Company, and to be repaid to him or his order, with interest at the rate of six per cent per annum, on demand, or received in payment ten dollars on each share of the capital stock of said company, to be issued to him or his assigns, whenever the directors shall authorize the issue of the second million of the stock, under the provisions of a resolution of the board of directors, passed on the 17th day of April, 1851. M. K., Treas'r Ill. C. R. R. Co." This receipt was assigned to the plaintiff by R. & G. L. S., on the said 1st of October, by an indorsement thereon, "together with the right to take and receive to his own use and account 150 shares of the stock to be issued as set forth in the receipt," the assignors reserving the remainder of the stock for their own use and account. On the same day R. & G. L. S. made and delivered to the plaintiff their promissory note of that date, for $7000, payable in six months, with interest, which recited that the makers had deposited with the payee, with authority to collect, sell or assign the same, the receipt or certificate above mentioned. On the 3d of April, 1852, R. & G. L. S. executed and delivered to the plaintiff another note, of that date, for the same amount and of the same tenor as the first, reciting the delivery of the script for the same purpose, and with the same authority to the plaintiff to collect, sell or assign the same. They at the same time indorsed on the receipt or certificate, the following: "For value received, we hereby assign and transfer to W. S. M. the right to take a further 150 shares of the stock within mentioned, when the same is issued, making in all 300 shares which are to be delivered to him." On the 6th of October, 1852, R. & G. L. S. gave to the plaintiff another note for $7000, payable in ninety days, which recited that they had deposited the said certificate with the plaintiff as "collateral security," with authority to sell the same on the non-performance of said promise. The two latter notes were renewals or extensions of the loan of $7000 made at the date of the first, and at the time of the trial had been paid and were in the possession of the makers. The second million of stock was afterwards issued by the company, and the 750 shares were issued to R. S. on the receipt, and 300 shares were delivered to the plaintiff by him, and the certificate was surrendered to the company. On the 17th of November, 1852, the company resolved to issue 70,722 additional shares, and determined to whom they should be issued, and in what number to each person. No part of the new stock was allotted to the plaintiff, as owner of the 300 shares. If the 70,722 new shares had been distributed to the previous holders of stock in proportion to their shares, there would have fallen to the plaintiff, as holder of the 300 shares, 562 shares of the new. The plaintiff claimed that he was entitled to the 562 new shares as Miller v. Illinois Central Rail Road Company. an accretion upon the 300 old shares. He had no knowledge of the issue or allotment of the new stock, at the time, nor until after the receipt of his 300 shares, on the 23d of December 1852. R. S. was the president of the company, and controlled all its operations, and the plaintiff alleged that R. & G. L. S. intentionally kept him in ignorance of the allotment, and of his rights, and by that means, and their control over the company, secured to themselves the whole of the new stock allotted to the 300 shares so held by him, and caused the same to be issued to them, and claimed to hold it, which new stock was worth a premium of $35 per share. Held, 1. That the original receipt of the treasurer gave to the person named therein, or the holders, only the right to take the 750 shares at their option, and the holders of that receipt could not, by virtue of it, claim to be holders of the stock mentioned in it, or to have any right thereto, until they had elected and given notice of their intention to take it. That the plaintiff, therefore, until he had done this, had no right to the stock, either as between him and his assignors, or as between him and the company. 2. That the rights of the plaintiff must depend upon the state of things existing at the time the new stock was created and issued; and that, not being at that time, the owner of the 300 shares of stock, and not becoming such owner by electing to take the same, until more than a month afterwards, he had none of the rights of a stockholder, in respect to the new issue of stock. 3. That the ownership of the 300 shares did not necessarily, nor so far as the evidence showed, entitle the holder to the 562 shares of new stock, and a distribution of the same to him. 4. That if, as between the plaintiff and R. & G. L. S. the former had been entitled to the 562 shares of new stock, the company, not having any notice of his rights, were not bound by them. 5. That although certain information came to R. S. the president of the rail road company, casually, while acting as agent of R. & G. L. S., that that firm had contracted conditionally to sell to the plaintiff some stock of the company, if given, without any intimation that it was intended or designed to give notice to him, or the company, or that he, as president, or the company as his principal, should take notice of it or regard it, or the rights or claims of the plaintiff, such information, thus received, did not bind the company as notice. 6. That the surrender of the receipt or certificate, to the company, with the indorsements thereon, made after the new stock was created, and the mode of its distribution resolved upon and carried out by the company, was no notice to the company of the plaintiff's rights. ROOSEVELT, J., dissented. A PPEAL by the defendants, from a judgment rendered at a special term. On the 1st day of October, 1851, the defendants Schuyler, composing the firm of R. & G. L. Schuyler, VOL. XXIV. 40 |