Spring Co. v. Knowlton , 26 L. Ed. 347 ( 1881 )

Mr. Justice Woods,

after stating the case, delivered the opinion of the court.

The plaintiff in error claims that the plan adopted by it to increase its capital stock, by which certificates as for full-paid stock were to be issued on the payment of eighty per cent thereof, was against the law and public policy of the State of New York, and was, therefore, void; that Knowlton, having been an active party in devising this scheme, and having paid his money in part execution of it, his legal representatives eannot recover the sum so paid.

It is conceded by the defendants in error that the plan adopted by the company to increase its stock was in violation of the law of New York, and therefore void. It has been so held, in'effect, by the Court of Appeals of the State of New York, in the case of Knowlton v. Congress & Empire Spring Co., 57 N. Y. 518.

We are, then, to consider, whether, upon the hypothesis that the plan for the increase of the.- stock, was illegal, there can be* a recovery upon the facts of the case as found by the Circuit Court.

. We think it clear that there, was only a part performance of ' the illegal contract between the company and' Knowlton in reference- to the new; stock, for which Sheehan subscribed and jwhich he agreed to transfer to Knowlton.

The company, in fact, created no new' stock It only proposed to do so. To increase the stock of the'cómpany-itwas, not only necessary that the meeting of the stockholders should . be called, as prescribed by the law,.and a vote of' two-thirds' of all the shares of stock should be cast at' the meeting in favor of the increase, but that there should be' a certificate of the proceedings,, showing, among other things, a compliance with, the provisions of the law, and. the amount of the increase of the. stock, signed and verified by the affidavit of. the chairman of. the meeting at which the increase was voted, and. countersigned by the- secretary, and such certificate should be acknowledged by the chairman and filed, as. required by the first; section of the- act. And the law declared that “ when so filed the capital stock of such corporation shall' be increased to the amount' specified in such certificate.”

‘ It does riot appear from the .findings of the Circuit Court that any such certificate was ever made or filed'. Consequently it does not appear that, the steps necessary, under the law, to an increase of the stock were ever taken. Neither does it appear that any scrip: or certificates were ever issued to the subscribers to the new stock. So that all that was done, amounted only to' a . proposition by the company, on the one hand, to Increase its stock, and an agreenient by Knowlton to take certain shares of the new stock when issued, and the payment by him of an Instalment of twenty per cent thereon. There was no performance of the contract whatever by the company, and only a part performance by Knowlton.

It is to be observed that the making of the illegal contract was malum prohibitum, and not malum in se. There is no moral turpitude in sucb a contract, nor-is it of itself fraudulent,-how-, ever much it may afford facilities for fraud.

- '■ The question presented is, therefore, whether, conceding the contract to be illegal, money paid' by one of the parties to' it in part performance can be recovered, the other party not having performed the contract' or any part of it, and both parties having abandoned the illegal agreement before it was consummated.

We think the authorities sustain the affirmative of this proposition.

Their result is fairly stated in 2 Comyn on Contracts, 861, as follows: —

“Where money has been paid upon an-illegal contract,-it is a general rule that if the contract be executed and both parties are in pari delicto, neither of them can recover from the other the money so paid, but if the contract continues executory and the party paying the money be desirous of rescinding it, he may do so and recover back by action of indebitatus assumpsit for money had ' and received. And this distinction ' is - taken in the books that where the action is in affirmance of an illegal contract, the object of which is to Enforce the performance of an engagement prohibited by law, clearly such an action can in no case be maintained, but where the action proceeds in disaffirmance of such a contract, and instead of endeavoring to enforce it presumes it to be void and seeks to prevent the defendant from retaining the benefit which he derived from an unlawful act, then it is consonant to the spirit and policy of the law that the plaintiff should recover.” -

Mr. Parsons, in his work on Contracts, vol. ii. p. ,746 says:—

“All contracts which-provide that-anything shall be done which is distinctly prohibited by_ law, or morality, or public policy, ar.e void, so he who advances money in consideration of a-promise or undertaking to do such a thing, may at any time before it is done rescind the contract and prevent the thing from being done and recover back his money.”

To the same effect see 2 Addison, Contracts, sect. 1412; Chitty, Contracts, 944 ; 2 Story, Contracts, sect. 617; 2 Greenl. Evid., sect. 111.

The views of the text-writers are sustained by a vast array of authorities, both English and American.

A few will be cited. Taylor v. Bowers (1 Q. B. D. 291) was an action to recover property assigned for the purpose of defrauding creditors. A verdict was rendered for the plaintiff, with leave to move to enter a verdict for the defendant. A rule was obtained on the ground that the plaintiff could not by the allegation of his own fraud get back the goods from the defendant. The Queen’s Bench sustained the verdict, the Chief Justice, Cockburn, delivering the opinion. The defendant then appealed to the Court of Appeals, where the judgment was affirmed. Both courts agreed that an illegal contract partially performed might be repudiated and the money paid upon, it recovered.

Lord Justice Mellish, in the Court of Appeals, said: “ If the illegal transaction had been carried out, the plaintiff himself, in my judgment, could not afterwards have recovered the' goods. But the illegal transaction was not carried out; it came wholly to an end. To hold that the plaintiff is entitled to recover does not carry out the illegal transaction, but the effect is to put everybody in the same situation as they were before the illegal transaction was determined upon, and before the parties took any steps to carry it out. That, I apprehend, is the true distinction in point of law. If money is paid or goods delivered for an illegal purpose, the person who had so paid the money or delivered the goods may recover them back before the illegal purpose is carried out; but if he waits till the • illegal purpose is carried out, or if he seeks to enforce the illegal transaction, in neither can he maintain an action; the law will not allow that to be done:”

The same rule substantially is laid down in the follow ing English cases: Lowry v. Bourdieu, 2 Doug. 452; Tappenden v. Randall, 2 Bos. & Pul. 467; Hastelow v. Jackson, 8 Barn. & Cress. 221; Bone v. Ekless, 5 H. & N. 925; Lacaussade v. White, 7 T. R. 531; Cotton v. Thurland, 5 id. 405; Mount v. Stokes, 4 id. 561; Smith v. Bickmore, 4 Taunt. 474.

In Morgan v. Groff (4 Barb. (N. Y.) 524), it was held that money paid on an illegal contract, which remains 'executory, can be- recovered back in an action founded on a disaffirmance, and on tbe ground tbat it is void;

To tbe same effect, are tbe following cases.: Utica Insurance Co. v. Kip, 8 Cow. (N. Y.) 20; Merritt v. Millard, 4 Keyes (N. Y.), 208; White v. Franklin Bank, 22 Pick. (Mass.) 181; Lowell v. Boston & Lowell Railroad Corporation, 23 id. 24.

In Thomas v. City of Richmond (12 Wall. 349) tbis court cites witb approval tbe note of Mr. Frere to tbe case of Smith v. Bromley (2. Doug. 696), to tbe effect tbat a recovery can be bad as for money bad and received wben tbe illegality consists in tbe contract itself, and tbat contract is not executedin, sücb case tbere is a locus penitentice; the delictum is incomplete ; the contract may be rescinded by either party.

The rule is applied in the great majority of tbe cases, even wben tbe parties to tbe illegal contract are in pari delicto, tbe question wbicb of tbe two parties is tbe 'more blamable? being often difficult of solution and quite immaterial. We think, therefore, tbat tbe facts of tbis case present no obstacle to a recovery by Knowltnn’s administrators of tbe sum paid by him on tbe stock which bad been subscribed for by Sheehan.

Tbe law of New York does not in express terms forbid a corporation from issuing certificates for ■ full-paid stock wben tbe stock has not been fully paid. Tbe illegality of such an issue is deduced- from several sections of the law under wbicb tbe Congress and Empire Spring Company was organized,, namely, sects. 38, 40, 41, and 49. We think it is fairly infer-able from tbe record tbat tbe trustees of tbe company,, one of whom was Kn'owlton, did not know tbat tbe plan adopted by them for the increase of the stock was illegal, and that when they discovered tbat it was forbidden by the* law, and before any barm was done or could have been done, tbe scheme was-abandoned. Under such.circumstances, the rule which would prevent tbe recovery of tbe money paid to carry on tbe illegal plan would be a very harsh one, not founded on any law or public ■ policy.

It is suggested by counsel for tbe plaintiff in error tbat tbe Court of Appeals of tbe State of New York has in this-identical suit, upon tbe same state of facts, adjudicated the rights of the parties, and that this court ought to consider the questions raised in this case as res judicata.

. The reply to this, suggestion is. that it nowhere appears in the record that this'case was ever before the Court of Appeals, or that it was ever decided by any court except the United States Circuit Court for the Northern District of New York, from which it has been brought to this court on error. We cannot consider facts not brought to our notice by the record.

Judgment affirmed.