Mason v. . Henry , 152 N.Y. 529 ( 1897 )

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.]

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] The reversal of the judgment by the General Term was upon the ground that the action was barred by the Statute of Limitations, which was in operation at the time of its commencement, and upon this appeal the only question, argued or presented, is the correctness of that proposition.

As the action was commenced in April, 1879, it came under subdivision 3 of section 414 of chapter 4 of the Code of Civil Procedure, which excepts from its provisions the case of an action commenced before the expiration of two years after the act took effect; which was on September 1st, 1877. Section 91 of the former Code is alone applicable to this case. That section prescribed a limitation of six years for "an action upon a contract, obligation, or liability, express or implied, etc." (Subdiv. 1); or for "an action for relief on the ground of fraud, in cases which heretofore were solely cognizable by the Court of Chancery; the cause of action in such cases not to be deemed to have accrued, until the discovery by the aggrieved party of the facts constituting the fraud" (Subdiv. 6). The larger limitation of ten years, prescribed by section 97 of the former Code, does not apply; inasmuch as that was for the case of "an action for relief, not hereinbefore provided for." The claim, which the receiver has sought to enforce in the present action, is comprehended within the provisions of subdivision 1 of section 91; for it rests upon the liability of the defendant Henry to make good the loss occasioned to the "Widows and Orphans'" company by the wrongful and illegal doings of himself and his associates while in the direction of its affairs. Upon the facts stated in the complaint the receiver, as the representative of the corporation, might have sued the defendant in the form of an action at law for the damages resulting from his misconduct; or in the present form, which he has adopted, of an equitable action to compel an accounting as to the property wasted and lost. It was said, in the case of O'Brien v. Fitzgerald (143 N.Y. 377), that, "the facts as pleaded show a perfect cause of action at law in favor of the receivers as representatives of the bank against the directors for misconduct resulting in loss. The actual and real relation between them and the corporation is that of agents acting for their principal, (Hun v. Cary, 82 N.Y. 65), and the directors may be sued at law for any damages caused by their culpable misfeasance or non-feasance." Under the old systems of law and equity, the two courts had concurrent jurisdiction over such a cause of action and if the bar of the statute operated at law, it was equally effective in equity. It was held in Butler v.Johnson (111 N.Y. 204), with reference to the limitation of time for the commencement of actions before the adoption of the present Code, that the words "obligation, or liability, express or implied" meant to include an action which might formerly have been prosecuted in either court, upon or by reason of such obligation, and where the remedy would have been adequate in either. "If the form of the remedy chosen," as it was there said, "were such as would formerly have been cognizable in chancery, yet the limitation applicable to the remedy at law would apply." The Brinckerhoff Cases (99 N.Y. 185), which are referred to by the appellant, do not apply to the present case; because they came under the operation of the present Code of Civil Procedure, which uses very different language in prescribing the limitation of time for the commencement of actions. In section 382 of the present Code the language of subdivision one is so changed as to refer to "an action upon a contract obligation or liability, express or implied;" that is to say, where the previous statute had reference to an action upon either a contract, or an obligation, or a liability, the present statute refers to an action upon an obligation or liability founded upon contract. The effect of the changes made by the present Code would clearly seem to be to bring an equitable action, which seeks a judgment for an accounting as against directors or trustees, who have been unfaithful to, or neglectful of, their duties as such, and compelling them to make good, personally, the losses sustained to the corporation, within the provisions of section 388; where the limitation of time, for an action not especially prescribed, is ten years.

The jurisdiction of the courts of law and of chancery having been concurrent, with respect to this plaintiff's cause of action, the lapse of six years, between the time when the misappropriation of the funds and the acts complained of took place and the commencement of the action, was a complete bar to its maintenance. The plaintiff's case cannot be helped out by the provision in subdivision 6 of section 91 of the former Code, that the cause of action should not be deemed to have accrued until the discovery of the fraud; inasmuch as that provision had reference to cases "solely cognizable by the court of chancery." The case of Foot v. Farrington, (41 N.Y. 164), was an action by one partner against another to require the defendant to account with reference to his dealings and transactions in respect to the partnership; where it was charged that a fraud had been perpetrated upon the plaintiff through misrepresentations and concealments. The effect of subdivision one of section 91 of the former Code was carefully considered and the action was held to have been barred, because not "commenced within six years from the time when the cause of it actually arose." It was held that the cause of action arose out of a liability, express or implied, within the meaning of those terms as they were made use of in the subdivision of the section. It was said by Judge DANIELS, delivering one of the opinions of the court, that "the right to bring the suit in the form which was given to it, accrued when the fraud was perpetrated; for the damages resulting from it were all sustained at that time. And for that reason, the statute, prescribing the time within which the action for that purpose should be brought, then became applicable to the cause of action that had then accrued, within the plain meaning of the law, even though it was not known to the person entitled to enforce it against the defendant." It was also held in that case that the action was not one for relief, within the meaning of section 97; as that section was only applicable to such cases of that nature as had not been previously provided for.

It is argued, however, by the appellant that the policyholders, to the extent of the reserve, were the equitable owners of all the assets of the "Widows and Orphans'" company and that, upon the dissolution of the company, they had the right to enforce their equitable interests in the reserve and that right the receiver represented. The cause of action, it is said, is purely equitable in its character and the receiver represents the policyholders and their interests in prosecuting it. That proposition, however, is not altogether correct. The receiver of an insolvent corporation represents the corporation, which was the custodian of the property and assets for the benefit of the stockholders and creditors, and he, also, represents those creditors and stockholders. In the case of an insolvent life insurance company, he is the trustee of, and represents, the creditors and all interested in the fund, including policyholders. (People ex rel. Atty.-Gen. v. Security LifeIns. Co., 71 N.Y. 222; 77 N.Y. 272.) Primarily, the receiver stands in the place of the corporation; placed there by the court, in order to preserve its assets and property and to do with them as he may be directed. What rights the corporation possessed and might enforce against its directors or trustees, for misfeasance or non-feasance in office, the receiver possesses. The position of a stockholder or policyholder, in proceeding against the directors or trustees of a corporation, would be quite different with respect to the form of remedy. He could not sue at law, but must sue in equity. His right of action is purely of an equitable character. Where directors or trustees, who are the corporate agents in the transaction of the corporate business, have committed the wrongful or illegal acts from which injury will accrue, or has accrued, to the corporate property and assets, a court of equity will entertain jurisdiction of a suit by a stockholder, or policy-holder, in his own name, to obtain that relief which the corporation might have sued for itself. But the argument made use of by the appellant in this respect cannot be of any avail, in any light. Because, if it were possible to regard this action as one brought by the receiver exclusively in the character of a trustee for and representing the policyholders, it would still be subject to the six years' limitation prescribed by the statute in force at the time of its commencement. There would be no room for the argument that the cause of action accrued only upon the appointment of the receiver. The complaint alleges that the "Widows and Orphans'" company was "completely wrecked and ruined" on the first day of January, 1872, by reason of the fraudulent and illegal acts, which had been done by the defendant and his associate trustees, in November, 1871; whereby the assets and property of the company had been wasted and misapplied in the ways alleged and which, according to the findings in the case, consisted in the payments of moneys from the reserve of the company, in execution of the fraudulent scheme described, to the amount of $282,122.72, for the purchase of the "Widows and Orphans'" stock; for the repayment of moneys borrowed to purchase the stock; for the negotiation of the sale of the stock; for commissions for negotiating reinsurance contracts; for account of current expenses of the Mutual Protection Company and as dividends on the "Widows and Orphans'" stock, the company being insolvent. It is obvious that the injury, which the plaintiff complains of as accruing to the policyholders, was the misapplication of the reserve moneys to the purposes specified; whereby, upon the appointment of the receiver, the assets of the company were insufficient to meet its liabilities to its policyholders, to the extent of the sum for which judgment was ordered in this case. This case is not at all like the one ofMason v. Cronk (125 N.Y. 496); which was an action upon a guaranty, made by the president of the Mutual Protection Company and others to protect the contract obligations entered into by the "Widows and Orphans'" company with its policyholders. That guaranty, upon the insolvency of the "Widows and Orphans'" company and the appointment of a receiver of its property, became an asset in the latter's hands; altogether a different claim from the one in the present action.

The only other point, which it is necessary to notice upon this appeal, is that which is made by the appellant, that there is no finding of fact, or of law, upon which the claim that this action is barred by the six years' Statute of Limitations can be supported. The appellant argues that the burden was upon the defendants, who interposed the defense of the statute, to show that the action was not commenced within six years after the cause of action accrued and, as it would not accrue until the discovery of the fraud, a finding was necessary, to help out the defense that such a discovery was made prior to the appointment of the receiver in March, 1877. The provision of the former Code, that the cause of action should not be deemed to have accrued until the discovery of the fraud, was, however, only applicable to cases theretofore solely cognizable in Chancery. But the answer to the point made by the appellant is that, as the answer sets up the Statute of Limitations, the burden was thereby cast upon the plaintiff of proving that the fraud was not discovered, until within six years of the commencement of the action. If this were not so, the defendant would have to prove a knowledge in the plaintiff, which, in most cases, would be impossible. The burden of showing that the running of the statute had been arrested ought to be upon the plaintiff; as was the rule in equity. A carefully considered opinion in Baldwin v. Martin, (14 Abb. [N.S.] 9), discusses this question quite thoroughly. In the complaint in the present case, it appears upon its face that more than six years had elapsed since the misapplication of the funds of the "Widows and Orphans" reserve occurred. When the answer made the special plea of the Statute of Limitations, it became incumbent upon the plaintiff to repel the presumption of the action being barred, by showing matter in avoidance. The burden was upon the plaintiff to show in what way the running of the statute had been suspended.

The views expressed lead to the conclusion that the order appealed from should be affirmed and that judgment absolute should be ordered against the plaintiff pursuant to his stipulation.

All concur.

Order affirmed and judgment accordingly.