Olcott v. Chandler , 1 N.Y. City Ct. Rep. 30 ( 1883 )

McAdam, J.

Although the trial judge found as a matter of fact that the defendant had been defrauded, and that the fraud would have furnished him with a good defense if the action had been brought by thé corporation guilty of the fraud, he nevertheless found against the defendant upon the ground that the plaintiff, as receiver, had higher rights than the company which he represents, and this upon the theory that the plaintiff, as receiver, represents, not only the corporation, but its creditors, and that the capital stock of the corporation is a trust fund for the payment of creditors, and that where the rights of innocent third parties are concerned, the fraud of the corporation ceases to be a defense to the person subscribing to the capital stock, upon the familiar principal that where one or two innocent persons must suffer by the fraud of a third person, the loss must fall upon him who first gave the credit.

• The theory is founded on well-settled legal grounds, and the only question that need be considered is whether the present case comes within the rule stated. I think it does not, for the reason that the defendant was not an organizer of the corporation and had no voice in its formation. He was not a subscriber to the capital stock within the sense in which that term is employed by the authorities.

The corporation was formed and in legal existence when the defendant became connected with it, and his contract was one of purchase only. He contracted to buy and the corporation contracted to sell to him so many shares of its capital stock. The distinction between an original subscriber and a purchaser like the defendant is well defined (St. Paul, Stillwater & T. F. R. Co. V. Robbins, 23 Minn. 439 ; Minneapolis Harvester Works v. Libby, 24 Id. 327 ; Carlisle v. Saginaw Valley & St. Louis R. R. Co., 27 Mich, at p. 319). Under these authorities the corporation was bound to tender the stock to the purchaser before he could be sued for the purchase price.

The corporation delivered to the defendant in this case 166 shares of its capital-stock, but never tendered or. delivered the remaining 834 shares. The amount paid by the defendant exceeded the agreed price of the 166 shares received by him. The fraud practiced upon the defendant furnished him with a good legal excuse for not proceeding and paying the balance of the purchase price, even if the 834 shares had been tendered to him. Fraud, accompanied by damage, is a good ground of action or defense, and in this instance the damages arising from the fraud were conceded, to be more than the unpaid purchase money-claimed to be due.

The defendant was not bound to rescind the contract of purchase unless he intended to make such rescission the basis of a claim for the return of the money paid, and the fact that he made an ineffectual attempt to rescind, does not deprive him of the legal right to insist that by reason of the fraud he should not be required to pay more than the actual value of the thing he purchased.

The right to recoup exists independently of the right of counterclaim, and courts have gone so far as to hold that even under a general denial the defendant may prove that the work sued for was unskillfully done, and thus diminish the amount of the plaintiff’s recovery (Raymond v. Richardson, 4 E. D. Smith, 171; Id. 512 ; 31 Barb. 534; approved in 41 N. Y. 113, 116).

The defendant has already paid more than the agreed price of the stock he received, and more than the actual value of the stock he agreed to purchase, and I know of no principle of justice that requires that he should be compelled to submit to be further defrauded unless he comes within the rule of law which enables a receiver as the representative of the creditors of the corporation to shut out all the equities which exist in favor of the defrauded party, to the end that the creditors may, as far as possible, realize their respective demands from the assets of the insolvent corporation.

Upon this branch of the case I have already endeavored to show that the rule invoked by the receiver has no application to a case like the present, and the distinction I have pointed out is well illustrated by two cases decided by the courts of Connecticut.

In Litchfield Bank v. Church (29 Conn. 137), the rule invoked by the receiver was properly applied. In Litchfield Bank v. Peck (29 Conn. 384), a case very ' much like the present, the exception to the general rule was clearly defined and enforced, and must control the disposition to be made of this appeal. Under the exception stated, the receiver succeeds to the rights of the corporation against the defendant, subject to whatever equities exist in his favor (see also Bell v. Shibley, 33 Barb. 610; Davendorf v. Beardsley, 23 Id. 656 ; Bedell v. North American Life Ins. Co., 7 Daly, 278; Cutting v. Dameral, 88 N. Y. 410).

The fact that the defendant acted as a director in the corporation, and endeavored to resuscitate the company and save the money he had invested in its stock, should not detract from his rights. The company was, at and prior to that time, insolvent, and the effort which he made did not injure the creditors, nor was it calculated to injure them. If, as a director, he has incurred a liability to the creditors, for misconduct or otherwise, the remedy of the receiver will be found in an action on the case or under the statute, and the damages recoverable may, perhaps, exceed the price which the defendant agreed to pay for his stock, and it may even extend to its full par value ($10,000); but the fact that the defendant may possibly have incurred a penalty recoverable in some other form of action does not assist the plaintiff in an action of assumpsit to enforce a contract of purchase tainted with fraud.

For the reasons stated, the judgment appealed from should be reversed and a new trial ordered, with costs to the appellant to abide the event.