Opinion
03-12-1908
STERNBERG v. L. STERNBERG & CO.
Frank Bradner, for petitioner. Mr. Hardin, Mr. Smith, and Adrian Biker, for respondents.
Application of Lazar Sternberg to have the receiver of L. Sternberg & Co. directed to sue alleged debtors of the corporation. Application denied.
Frank Bradner, for petitioner. Mr. Hardin, Mr. Smith, and Adrian Biker, for respondents.
EMERY, V. C. This is an application by the assignee of claims against an insolvent corporation for leave to sue in the receiver's name alleged debtors of the corporation, or for direction that the receiver himself bring such suit. The application is made after final settlement of the receiver's account and order for final distribution of the assets in receiver's hands. The original receiver died after this order, and another has been appointed to succeed him. The claim on which suit is proposed to be brought is, as I said at the hearing, substantially a claim to recover from the Essex County National Bank money of the insolvent corporation which in March, 1900 (and nearly four years before the decree of insolvency), was paid to the bank to satisfy mortgages of the corporation held at that time by the bank, and which it held as security for moneys advanced to the assignee of the mortgagee named in the mortgages. These mortgages are alleged by the petitioner to have beengiven without consideration to the company from the mortgagee, and for the purpose of paying an individual debt due from the mortgagee (Sternberg) to the respondent Wolff, the assignee of the mortgage. The money by which the corporation took up these mortgages was procured by new mortgages given by it some years later, one for $22,000 given to the respondent the Security Savings Bank, and one for $8,000 given to the respondent Eisele. This mortgage (or the benefit of it as security) was subsequently assigned by Eisele to the respondent National Newark Banking Company, and the mortgage was paid to it by the receiver out of the proceeds of the sale of the mortgaged property by him so far as the same extended. The validity of these later mortgages given to the savings bank and Eisele was questioned by the petition; but at the hearing it was admitted that the savings bank was a bona fide purchaser, and that the payment of its mortgages made by the receiver in the insolvency proceedings could not be questioned by the suit proposed. Eisele and the National Newark Banking Company were also bona fide purchasers or holders of the $8,000, and, in addition, the claim of the bank in reference to the right to retain the sum paid to it by the receiver on account of this mortgage would, in the absence of fraud, be concluded by the trial of its claim in the insolvency proceedings upon exceptions taken by the petitioner, or those to whose rights he succeeded. On this hearing, or trial, the claim of the bank was adjudicated and included an allowance of this payment. Petitioner's present claim was therefore at the hearing based solely on the supposed right to recover from or to sue the Essex County Bank as having received in payment of mortgages held by it, and now alleged to be invalid, the money of the company raised by the Security Savings Bank mortgage. This payment was made in March, 1900, and more than six years before the filing of the petition. I have considered all of the questions raised at the hearing or on the briefs; but without at this time undertaking to pass upon all of the questions raised, and reserving the filing of a fuller statement and opinion to be made hereafter, if thought advisable, I conclude that, for three reasons which go to the very basis of the supposed claim, the leave to sue in the receiver's name, or direction to sue by the receiver, cannot be granted.
First. Under the circumstances proved on the application, the defense that there was no consideration to the company for the original Wolff mortgages of $30,000, even if sufficiently proved, was not, as against the Essex County Bank, an equitable defense to the Wolff mortgages in their hands, and therefore a court of equity should not, where it has any discretion in the control over its proceedings, give any aid or assistance toward setting up such inequitable defense or making it effectual. Chancellor Runyon, in Third Ave. Savings Bank v. Dimock, 24 N J. Eq. 26 (1873), declined to allow a supplemental answer to be filed to set up the defense of ultra vires in a corporation mortgage, because such defense in that case was unconscionable. A fortiori, such original inequitable defense to a mortgage, if the defense ever existed, should not after payment of the mortgage equitably due be made effective by allowing the mortgage to be relieved against a supposed legal mistake in making such payment. It is not claimed that anything in the evidence casts any doubt on the bona fides of the Essex County Bank in taking the Wolff mortgages of $30,000 as valid securities of the corporation to secure the loans made by it to Wolff, and, as the officers of the corporation (out of the moneys raised by the mortgage to the savings bank, and the moneys received from the National Banking Company) paid these mortgages to the bank holding them as security for loans, it would be unconscionable for a court of equity, so far as it has any discretionary power, to give any aid to proceedings to recover back the money by directing suits or otherwise.
Second. The proofs in this case do not show that the mortgages in question were given without consideration to the company. They were given, it is true, by the company to Sternberg, and were assigned by Sternberg to Wolff, in carrying out an agreement between them for the purchase by or on behalf of Sternberg. of Wolff's stock in the corporation and claims against it, and the settlement of litigation between them relating to the management of the affairs of the corporation. Sternberg and Wolff, at the time of the mortgages, were substantially equal owners of the company's entire stock, and the mortgages were given on the transfer to Sternberg or his nominees of Wolff's one-half interest. The resolution authorizing the mortgages in question recited that the company was indebted to Sternberg in the amount of the mortgages ($30,000), and, as I understand the evidence, it has not been shown that this statement was not true. The truth of it depends manifestly on the status of the accounts between Sternberg and the corporation at the time of directing the mortgage, and it may well be that, when the entire facts at the time of the execution of the mortgages are disclosed, the mortgages would be held to be either given on full consideration, or to have been given under such circumstances that neither the company nor any of its stockholders could dispute their validity. The existence of this indebtedness was a matter relating to the internal affairs of the company, exclusively within the cognizance of its officers and stockholders, into the condition of which no stranger had the right to inquire, and, in the absence of facts putting the bank on inquiry, it was entitled to rely on the resolution of the directors admittingthe debt, as a proper basis for exercising its power to mortgage its property, to secure it. Hackensack Water Co. v. De Kay, 30 N. J. Eq. 548, 568 (Err. & App. 1883). In a suit for recovering back money paid to the bona fide holder of a mortgage so issued, the burden is on the petitioner and, as part of his right now to require or ask suit to be brought, he is bound to show by proof of the entire circumstances surrounding the execution of the mortgage, not only that there was no consideration, but that the payment was not made to a holder of the mortgage who was entitled to rely on this admission of indebtedness. A mere prima facie case of want of consideration in the original execution of the mortgage is not sufficient on an application of this kind. Sternberg, who owned substantially all of the stock at the time of the mortgages, is the principal witness for the petitioner, and on the whole status of the case at present there is ground for the contention that the proposed suit is practically for his benefit or in his interest. It has not been satisfactorily shown that the defense of want of consideration could have been in fact made by the company or any of its stockholders at the time to the Wolff mortgages, or to the recovery of the same by the bank as bona fide holders, nor has any case been shown which would justify the inference that a suit by the receiver, or in his name, for the recovery of the money, on the ground that the mortgage was without consideration, could be, or ought to be, successful.
Third. The only basis or theory upon which suit could be brought is that of recovering back from the Essex County Bank the money paid to it in satisfaction of mortgages of the corporation alleged to have been given without consideration to the company, and merely as accommodation to Sternberg. The claim in substance, therefore, is for the recovery back of money paid by mistake, either of law or fact, and is essentially a claim of a legal character, rather than purely equitable. The equitable jurisdiction, if it. exists at all, is the concurrent and not the exclusive jurisdiction, and therefore the statute of limitations must be held applicable in equity to the same extent as it would be at law. Smith v. Wood, 42 N. J. Eq. 563, 569, 7 Atl. 881 (Van Fleet, V. C. 1887), affirmed on appeal, 44 N. J. Eq. 603, 17 Atl. 1104 (1888).
There is no evidence to justify any conclusion, or even claim, that the Essex County Bank or its officers in receiving payment of the Wolff mortgages were acting in any fiduciary capacity toward the company, or could be held as trustees, either express or implied, and the cases limiting the application of the statute on these equitable considerations have no bearing. Mills v. Hendershot, 70 N. J. Eq. 258, 267, 268, 62 Atl. 542; Heinisch v. Pennington, 68 Atl. 233, 236 (Emery, V. C., 1907). Nor is it a case where the money can claim to have been received by a fraud which the company had no means of discovering, which might prevent the running of the statute until its discovery. The case, as I understand it, presents on this point the simple question whether the Essex County Bank, having received payment of mortgages of a company, and which mortgages were taken by it as valid and were supposed to be valid at the time of payment, can, after the time limited by statute, be called on for a return of the money, either in law or equity, because, as is now claimed, the mortgages were in fact accommodation mortgages. In the absence of any facts showing that the money of the company was received under circumstances that would impress it, in the hands of the bank, with a trust, and under circumstances preventing the running of the statute, I think that a court of equity, following the law, must hold the statute applicable, and decline to direct or authorize any suit for the return of the money paid by the company. A denial of the right to bring suit against the bank disposes of the application to bring suit against the respondents, the receiver, and others who were parties to the insolvency proceedings relating to or growing out of the same claim, and without regard to other special defenses set up in their behalf.
A decree denying the prayer of the petition, with costs, will be advised.