Opinion
05-17-1892
CONSOLIDATED ELECTRIC STORAGE CO. v. ATLANTIC TRUST CO.
Thomas N. McCarter, for application. Theodore Runyon, opposed.
(Syllabus by the Court.)
Suit by the Consolidated Electric Storage Company against the Atlantic Trust Company to recover certain shares of stock. Decree for complainant by default. On application by defendant to open the decree. Application granted.
Thomas N. McCarter, for application.
Theodore Runyon, opposed.
VAN FLEET, V. C. This is an application by the Atlantic Trust Company for an order opening a decree made against it on the 26th day of October, 1891. It asks that the decree may be opened, in order that it may show the complainant has no right to the relief which the decree gives. The decree adjudges that the Atlantic Trust Company has no beneficial interest in 60,000 shares of the complainant's capital stock, which were transferred to it in 1890, not by the complainant, but by other persons; that the complainant has a good present right to 30,000 of the 60,000 shares, and commands the trust company to deliver them to the complainant; and it also adjudges that the complainant is entitled to the other 30,000 shares, subject, however, to a lien which it is unnecessary, for the purposes of this discussion, to describe. The trust company is a foreign corporation, having been created by a law of the state of New York. No jurisdiction was acquired over it, as a defendant in this suit, except such as was obtained by service of the notice, prescribed by an order of publication, on one of its head officers at its office in the city of New York. But it is not disputed that the trust company had actual notice of the suit. Indeed, by its own proofs, it appears that, after being served with notice under the order of publication, it retained counsel in this state, more than a month before the time for answering had expired, for the purpose of being advised whether or not it should make defense; and that notwithstanding it was advised that, on the facts stated in the bill, no cause of action was shown against it, yet that it neither appeared to the suit nor defended it. A few days after the time limited by the order of publication, within which the defendant might appear and make defense, had expired, a decree pro confesso was entered against it, and subsequently, on proofs taken ex parte, the decree in question was made. The defendant insists that either one of the three following grounds entitles it to the order it asks: First, that the bill shows no cause of action in favor of the complainant in respect to the subject-matter of the suit; second, that surprise and merits have been shown; and, third, that an absent defendant, against whom a decree has been taken by default, has a right, by force of the twenty-first section of the chancery act, (Revision, 107,) at any time within three years from the making of such decree, if no notice in writing has been given to him of the decree, and, if it has. then at any time within six months from the service of such notice, to come in and make defense just as though no decree had been made, and that as against a decree thus obtained he is not required to show that he has a meritorious defense, or that the decree is, in any respect, erroneous or unjust.
No doubt, I suppose, can be entertained that if on an examination of the complainant's bill, and assuming every fact alleged in it to be true, it appears that no right of action against the defendant is shown, the decree should not only be opened, but vacated. If the complainant has no right of action, it has no right to a decree, and to allow the decree to stand, under such circumstances, would not be doing justice, but injustice. To allow this decree to stand, if it be true that it has no foundation in right, would constitute a flagrant abuse of judicial power; for the decree, as will have been observed, takes certain property from the defendant, and gives it to the complainant. No court whose duty it is to administer justice, and prevent and correct wrong, can allow such a decree to stand.
The power of this court to open a decree on the ground first urged here, even in a case where the defendant has been regularly brought into court by the service of process, but has failed to make defense, and has allowed the complainant to take a decree by default, is free from the least doubt. Prior to the enactment of what is now the twenty eighth section of the chancery act, (Revision, 109,) no decree, affecting the rights of a defendant, could be made until he had appeared and answered. If he was contumacious and refused to answer, he could be compelled to do so, and in certain cases the court might order an appearance to be entered for him; but until he had appeared to the suit, in the one mode or the other, no decree could be made affecting his rights. Brinkerhoff v. Franklin, 21 N. J. Eq. 334, 336. Now, however, by force or the statute just mentioned, if a defendant fails to appear and make defense, the chancellor may treat his failure as a confession of the truth of the facts stated in the complainant's bill, and may thereupon make such decree as shall, upon the facts stated in the bill, be deemed equitable and just; or he may order the complainant to take testimony to prove the allegations of his bill, or he may examine the complainant under oath to ascertain their truth, and then, in either case, make such decree as he shall think equitable and just upon the facts stated in the bill. But decrees so made are subject to be opened, for cause, at any subsequent time. This statute, by proviso, expressly declares "that, to prevent fraud or mistake, the chancellor may, at any time, upon notice and sufficient cause shown, grant a rule stating proceedings and to open such decree." Precisely similar power is given to the chancellor over an absent defendant, who, after being brought into court by notice pursuant to an order of publication, makes no defense, but allows a decree pro confesso to be taken against him. That is to say, the chancellor may, on the confessionarising out of the default of such a defendant, or on testimony, or on the complainant's oath, make such decree against him as shall be equitable and just upon the facts stated in the complainant's bill. Revision, p. 106, § 18.
It is thus seen that the power conferred by these statutes is subject to a highly important and most salutary limitation. The chancellor is only authorized to make such a decree against a defendant who makes default as shall be equitable and just upon the facts stated in the bill. When the facts stated in a bill do not show, assuming them all to be true, that the complainant has a cause of action against the defendant, which is the proper subject of relief in equity, it is obvious that the bill contains nothing which can be made the foundation of a decree, and consequently no decree can be founded on it which will be equitable and just; and, if a decree should be made on a bill thus fatally defective, it would, as it seems to me, stand, in point of legal efficacy, precisely where a decree stands which is founded on a cause of action not stated in the bill. The doctrine is firmly settled that such a decree, or any judgment which is entirely outside of the cause of action specified in the pleadings in the suit in which it is pronounced, is invalid, and will be treated, even in a collateral proceeding, as a nullity. Such a judicial sentence is absolutely void, and will be held to be a nullity everywhere. Munday v. Vail, 34 N.J Law, 418; Reynolds v. Stockton, 140 U. S. 254, 11 Sup. Ct. Rep. 773. In my judgment, no distinction, founded on either reason or justice, can be made between a decree founded on a bill which discloses no ground of action and a decree founded on a cause of action which is not averred in the bill. In each case it will be noticed that the fundamental defect is that there is nothing in the bill to support the decree, and hence each is, so far as the record shows, without the least foundation.
The important question, then, on this branch of the case, is, is it true that the bill shows no right of action in the complainant in respect to the subject-matter of the suit? The suit was brought to recover 60,000 shares of the complainant's own stock. Those shares constitute the subject-matter of the suit. The following are the material averments of the bill: On the 10th day of April, 1890, and prior to the complainant's organization as a corporation, William Bracken and H. R. Waite held an option for the purchase of an exclusive license to make and sell storage batteries under patents granted to Charles F. Brush. On the date just named Bracken & Waite made a contract with Robert L. Belknap, in which it was recited that certain parties, acting in the interest of Belknap, were about to organize the complainant as a corporation under the laws of this state, with a capital of $3,000,000, divided into 120,000 shares of $25 each, for the purpose of making and selling storage batteries; and by which contract Bracken & Waite agreed that, when such corporation was formed, they would convey their option to it, on condition that the complainant corporation would, in full consideration for such conveyance, issue and deliver to them all of its capital stock, amounting to $3,000,000. Bracken & Waite also agreed that, on the delivery to them of the 120,000 shares of the complainant's capital stock, they would deliver 110,000 shares thereof to the Atlantic Trust Company. Belknap, on his part, agreed that he would provide and furnish to the Atlantic Trust Company all the money and securities required by the terms of the option to be paid and furnished for the purchase of the Brush license, amounting together to $165,000; also, that he would provide a working capital for the complainant of at least $100,000, also at least $100,000 for the payment of the unfunded debts of the Julien Electric Traction Company; and also that he would provide for the payment, principal and interest, of 102 first mortgage bonds of the last-named corporation as the same fell due. It was also agreed that 60,000 of the 110,000 shares of stock delivered by Bracken & Waite to the Atlantic Trust Company should be delivered to Belknap when he had performed his part of the contract, and that in the mean time, so long as lie or his assigns complied with the terms of the contract, he or they should have the right to vote and draw dividends on the 60,000 shares of stock. The contract gave Belknap the right to assign it to any person or corporation that should be acceptable to Bracken & Waite, and on his doing so, and upon his assignee assuming Belknap's liabilities under the contract, it was agreed that his liabilities should cease. The bill then avers that the complainant was created a corporation, and that the terms of the contract which were to be performed by Bracken & Waite were by them duly performed; and then, in the words of the bill, it is said "that the capital stock of your orators, mentioned in said agreement, was created and issued in accordance with the terms and provisions of said agreement." The bill then shows that Belknap, with the assent of Bracken & Waite, assigned his contract to the United Electric Traction Company, and that that corporation assumed Belknap's liabilities under it. The bill also shows that, by virtue of such assignment, the traction company received the shares of stock which, by the contract, were to go to Belknap; and that of 60,000 shares, which had been delivered to the Atlantic Trust Company, 30,000 were to be held as collateral security for the payment of 102 bonds of the Julien Electric Traction Company, and the other 30,000 were to be held on the condition mentioned in the contract respecting the furnishing of working capital for the complainant. The bill then charges that the United Electric Traction Company has, notwithstanding repeated requests and very persistent urging, neglected and failed to perform that part of the contract which required it to furnish working capital for the complainant; and the complainant prays, in consequence, that it may be decreed that the traction company has no right to the 60,000 shares of stock, and that the Atlantic TrustCompany shall deliver 30,000 shares thereof to the complainant at once, and the remaining 30,000 shares when the lien thereon shall have been discharged.
Bracken & Waite are not parties to this suit. They, by the terms of the contract with Belknap, were to receive all of the complainant's capital stock as the consideration for the conveyance by them of their option to the complainant. The contract in this respect has been executed. The bill expressly says that Bracken & Waite conveyed their option to the complainant, and that the complainant's stock was issued to Bracken & Waite in accordance with the terms and provisions of their contract with Belknap. The bill thus expressly says, as plainly as words can say, that the whole of the complainant's stock was issued to Bracken & Waite in payment of the transfer by them to the complainant of their option to purchase a license under the Brush patents. By such issue they became the absolute owners of the stock. The stock thereby became their private and exclusive property. It is not claimed or pretended that the stock was issued to them for the benefit of the complainant, nor that they hold it in trust for the complainant. On the contrary, it is explicitly stated that it was issued to them as the consideration for the transfer of their option to the complainant. They subsequently, as the bill avers, pledged a part of the stock for the benefit of the complainant, and another part for the benefit of the Julien Electric Traction Company, but such pledge did not, either in equity or at law, change the title to the stock. The complainant thereby acquired no right whatever to the stock. The only right it acquired by force of such pledge was to take the fruits of the pledge. Bracken & Waite still remained the owners of the stock, subject to such lien as the pledgee might acquire by performing the terms of the contract of pledge. In this situation of affairs, it is plain, beyond question, that the refusal or failure of the pledgee to perform his contract gave the complainant no right or title to the stock pledged for its benefit. The only persons who can lawfully reclaim the stock, on the failure of the pledgee to perform his part of the contract, are the pledgors. They made the contract of pledge, the title to the stock is in them, and hence they are the only persons who, in case the contract is broken, can maintain an action for the recovery of the stock. The complainant is without the least shred of title to the stock, yet the decree under review attempts to give to it, not only the stock which was pledged for its benefit, but also that which was pledged for the benefit of the Julien Electric Traction Company. No court has power to make such a decree on the facts alleged in the bill in this case.
But had it been shown that the title to the stock in controversy had been put in Bracken & Waite for the benefit of the complainant, so that Bracken & Waite were simply trustees, and the complainant was the owner in equity of the stock, still, on the facts now before the court, I think the defendant would have been entitled to the order it asks. The bill admits that the complainant, before the commencement of its suit, had been informed that the defendant had advanced some money to the United Electric Traction Company on the stock in question, and claimed to have a lien on it for its advances. The United Electric Traction Company, it will be remembered, is the corporation that succeeded to Belknap's rights, and also to his liabilities, under the contract made by him with Bracken & Waite; and it is the same corporation which, the bill says, received, by virtue of the assignment of Belknap's contract to it, the stock that was, by that contract, to go to Belknap. One of the things that this contract required Belknap to do, in order to become entitled to the stock in controversy, was to provide the money and securities which, by the terms of the option granted to Bracken & Waite, were to be paid and furnished for the purchase of the Brush license. The United Electric Traction Company has performed this part of the contract. This is an undisputed fact in the case. This part of the contract was performed in this way: On the 4th day of June, 1890, the United Electric Traction Company made its note to the defendant, payable at six months, for $215,000, bearing interest from date at 6 per cent., and pledged the 60,000 shares of stock in controversy, together with other securities, for the payment of the note. The defendant, on the delivery of the note, credited the traction company on its book with $215,000, and subsequently, on the same day, issued a certificate of deposit to the traction company for that sum. The traction company then assigned the certificate of deposit to defendant for the purpose of placing in its hands the $215,000, to answer cash payments which the contract, under which the Brush license was granted, required to be made at once', or at a short day, and also to secure the payment of the minimum royalties which should subsequently accrue under that contract. The $215,000 were thus used for the purchase of the Brush license. It is also undisputed that the defendant on the 2d day of June, 1890,—two days prior to the date of the transactions just described,—entered into a contract with the complainant and the corporation which then held the Brush patents, by which it acknowledged that $215,000 in cash had been placed in its hands to pay for the Brush license, $65,000 of which it promised to pay to the licensor, and the other $150,000 it promised to pay either to the licensor or to the complainant; and it is also a fact, about which there is no dispute, that the defendant has already paid out of this fund to the licensor nearly $85,000, and it appears, by its contract just mentioned, that it stands irrevocably bound to pay the whole balance, either to the licensor or to the complainant. It thus appears that the defendant loaned the $215,000 in part on the security of the 60,000 shares of stock in controversy, and that it was by means of this loan that the complainant acquired the Brush license. To the extent, then, of $215,000, it is undeniablethat the consideration which Belknap agreed to pay for the 60,000 shares of stock has been paid. He agreed to pay about $467,000; $215,000 of that sum has been paid, and the complainant has had the whole benefit resulting from its payment. It acquired the Brush license by means of it. The bill makes no claim that the pledge of the stock to the defendant was unauthorized, or that such use of the stock constituted a fraudulent misappropriation of it. All it says which refers in the most distant way to the pledge of the stock is that the complainant has been informed that the defendant had advanced some money on the stock, and claimed a lien on it in consequence, and then denies that such lien exists. But none of the facts material to the validity of the pledge—as, for example, showing for what purpose the stock had been pledged, how much money had been raised by its pledge, and what disposition had been made of the money—are alleged in the bill or were proved on the ex parte hearing; and yet these constituted the vital and controlling facts of the case. They are so fundamental as to make it entirely clear that without knowledge of them the court could not make a decree in the case that would do justice and prevent wrong. The result is that the undisputed facts now before the court make it certain, in my judgment, that that part of the decree under examination, which adjudges that the defendant has no beneficial interest in the stock in controversy, is not just, nor right, nor true. A defense against the complainant's claim has been shown, which appears to me to be so strong in its justice and unquestionable in its trust as to make it the plain duty of the court, even if it had been shown that the complainant was the owner of the stock in question, to give the defendant the opportunity to be heard in its defense which is granted by the twenty-first section of the chancery act. That section, in substance, provides that in any case where a decree is made against an absent defendant who has not appeared to the suit, the chancellor may, on the petition of the defendant "touching the matter of the decree," presented within the prescribed period, and on the payment by the defendant of such costs as may be ordered, permit the defendant to appear and answer the complainant's bill; and then, in the words of the statute, "and thereupon such proceedings shall be had as if such absent defendant had appeared in due season and no decree had been made." It is unnecessary to discuss the question whether this statute gives a defendant the right to appear and answer merely because he desires to do so, and regardless of whether he has or has not any ground of defense which is the fit subject of judicial investigation. Here a strong, meritorious defense has been shown. There can be no doubt that such a case comes directly within both the letter and the spirit of the statute. My conclusion, therefore, is that, even if it had been shown that the complainant was the owner of the stock in question, the defendant would, nevertheless, on the facts now before the court, have been entitled to an order permitting him to appear and answer the complainant's bill. But more extensive relief must be given in this case. As the decree in question is founded on a bill which fails to show that the complainant has any cause of action against the defendant, it is plain that nothing short of an absolute vacation of the decree will answer the purposes of justice.
The decree will be set aside.