1. A party to a contract the making of which, although
prohibited by law, is not
malum in se, may, while it
remains executory, rescind it and recover money by him advanced
thereon to the other party who had performed no part thereof.
2. The trustees of A., a corporation which was organized under
the Act of New York of Feb. 17, 1848, for the formation of
corporations for manufacturing purposes and acts amendatory
thereof, passed a resolution increasing its capital stock, which
was $1,000,000, by the addition of $200,000, allowing each
stockholder to take one share of the new stock for every five
shares of the original stock which he held, and providing that on
his paying in installments $80 on each share of $100, a certificate
as for full-paid stock should be issued to him by the company, and
on his failure to pay an installment of $20 per share on or before
a specified date his claim to the new stock should be forfeited,
and such forfeited shares divided ratably among the other
stockholders who had paid that installment. A subscription
agreement binding the subscribers thereto to take stock and pay $80
per share in installments as they should be called for by the
company, and, on failure to pay any installment, to submit to the
forfeiture of all sums
Page 103 U. S. 50
theretofore paid, was prepared and signed by B., who, being teen
a trustee of A. and its vice-president, was an active promoter of
the scheme for the increase of the stock. He paid but one
installment of twenty percent on his new stock, and the latter was,
by a resolution of the company, declared to be forfeited. The
capital stock of the company was afterwards reduced to its original
amount, and, to refund the payments made on the new stock
withdrawn, bonds were issued. None of them was tendered to or
demanded by B. On A.'s refusing to pay him the amount of that
installment, he brought suit therefor.
Held that he was
entitled to recover.
This suit was brought in 1869 by Dexter A. Knowlton, a citizen
of Illinois, against The Congress and Empire Spring Company in the
supreme court of the State of New York to recover the sum of
$13,980, with interest from Feb. 20, 1866. In 1876, he died, and
the suit was revived and continued by the administrators of his
estate. They are citizens of Illinois, and on their application,
the suit was, March 20, 1877, removed to the circuit court of the
United States. The parties, by written stipulation, waived a jury.
The court tried the case, and found the facts to be substantially
as follows:
The Congress and Empire Spring Company is a corporation
organized under the statute of the State of the State of New York
of Feb. 17, 1848, authorizing the formation of corporations for
manufacturing, mining, mechanical, or chemical purposes, and
subsequent acts amendatory thereof. Its capital stock was
$1,000,000, divided into ten thousand shares of $100 each, issued
in payment of property purchased by the trustees of the corporation
for its use.
The mode by which such a corporation might increase its capital
stock is prescribed by secs. 21 and 22 of chapter 40 of the laws of
1848.
Sec. 21 prescribes how the notice of a meeting of the
stockholders to consider the proposition to increase the capital
stock shall be given, and what vote of the stockholders shall be
necessary to carry the proposition.
Sec. 22 prescribes how the meeting of the stockholders, called
under sec. 21, shall be organized and declares that if a sufficient
number of votes has been given in favor of increasing the amount of
capital stock,
"a certificate of the proceedings,
Page 103 U. S. 51
showing a compliance with the provisions of this act, the amount
of capital actually paid in, . . . the whole amount of debts and
liabilities of the company, and the amount to which the capital
shall be increased, . . . shall be made out, signed, and verified
by the affidavit of the chairman and countersigned by the
secretary, and such certificate shall be acknowledged by the
chairman and filed, as required by the first section of this act;
and when so filed, the capital stock of such corporation shall be
increased . . . to the amount specified in such certificate, . . .
and the company shall be entitled to the privileges and provisions,
and subject to the liabilities, of this act, as the case may
be."
The corporation passed a resolution Jan. 11, 1866, to increase
its capital stock by the addition thereto of $200,000 for the
purpose of building a glass factory for the manufacture of bottles
and providing a working capital. It also resolved that the books of
the company should be opened for subscriptions to the additional
stock, and that each stockholder should be allowed to take one
share of the new for every five shares he held of the original
stock, and that when he had paid $80 on each share the company
should issue to him a certificate as for full-paid stock.
At a meeting of the board of trustees of the corporation held
Feb. 8, 1866, a dividend of four percent on the original stock was
declared, payable Feb. 20, and it was resolved that a call of
twenty percent on the new stock should be made, payable on the
latter date; that the books of the company should be at once opened
for subscriptions to the new stock; that each stockholder should
have the privilege of taking one share of the new for every five
shares of the old stock held by him, and that on failure of any
stockholder to pay, on or before that date, $20 on each share of
the new stock taken by him, all his claim to such new stock should
be forfeited and the same divided ratably among the stockholders
who had paid the installment of $20 per share.
In pursuance of the resolutions, the trustees immediately issued
a stock subscription agreement by which the subscribers stipulated
to take the number of shares set opposite their names and to pay
for each share $80, in installments, as called
Page 103 U. S. 52
for by the directors, and upon failure to pay the installments
within sixty days after call, that the money already paid on the
stock should be forfeited to the company. By the same agreement,
the company bound itself to pay interest up to Feb. 1, 1867, on all
sums paid on the new stock, and on Feb. 8, 1867, to issue for every
share of said new stock on which $80 had been paid a certificate to
the holder as for full-paid stock; and it was provided that the
holders of such stock should be entitled to vote thereon, and the
same should draw dividends and be treated in all respects as
full-paid stock.
This agreement was signed by one C. Sheehan, who subscribed for
six hundred and ninety shares of the new stock, he being the holder
of thirty-four hundred and ninety shares of the old stock.
Thereupon a contract was made between Sheehan and Knowlton
whereby the former agreed to lend the dividend on his old stock to
the latter, who agreed to assume the new stock subscribed for by
Sheehan and pay all future calls thereon. Sheehan's dividend on his
old stock amounted to $13,988. Knowlton, in consideration of the
transfer to him of this dividend, delivered his note to Sheehan for
$13,980, dated Feb. 20, 1866, payable in one year, and secured the
same by a pledge of one hundred and fifty shares of the stock of
the company. He paid the residue, to-wit $8 in cash.
Knowlton paid to the company, March 8, 1866, the call of twenty
percent on the new stock, subscribed by and sold to Sheehan as
aforesaid, by the application thereto of Sheehan's dividend on the
old stock, amounting to $13,980, for which the company gave
Knowlton a receipt.
About December, 1868, Knowlton paid in full his note to Sheehan
for $13,980.
Calls and personal demands were made both upon Sheehan and
Knowlton more than sixty days before Jan. 25, 1867, for the payment
of subsequent installments on the stock subscribed by Sheehan, and
both of them neglected and refused to pay the installments called
for, whereupon the trustees of the company passed a resolution by
which they declared that the new stock subscribed by Sheehan and
assumed by Knowlton should be and was forfeited.
Page 103 U. S. 53
From August, 1865, to August, 1866, Knowlton was a trustee and
vice-president of the company; he advised the increase of the
capital stock above mentioned, proposed the resolutions in relation
thereto, moved their adoption, drew up and signed the stock
subscription agreement, and advised others to sign it.
At a meeting of the stockholders of the company held Aug. 7,
1867, it was resolved that the capital stock of the company should
be reduced to the original sum of $1,000,000, and that the trustees
be authorized to arrange with the holders of the new stock for
retiring the same on such terms and conditions as they should deem
for the interest of the company.
On the same day, the board of trustees met and passed a
resolution whereby the executive committee of the board was
authorized to adjust, on the best terms for the company, the claims
of all persons holding receipts for payments on the new stock
ordered to be retired.
The executive committee passed a resolution March 27, 1868, that
the company issue five-year coupon bonds sufficient to refund the
payments made on the new stock of the company which had been
retired.
No tender of these bonds was ever made to Knowlton, nor was any
demand made for them by him, but he demanded repayment of the
amount paid by him on his new stock, and the company refused to
repay it or any part of it.
The majority of the holders of the original stock became
subscribers for the new stock, and all of them except Sheehan,
Knowlton, and one or two subscribers for small amounts, paid the
calls made on them in respect to the new stock. The first call of
twenty percent on the new stock was paid mainly by the dividend on
the old stock above mentioned, but about $3,000 were paid in cash.
All the stockholders who did not subscribe for new stock were paid
their part of the dividend in cash. About $86,500 of said five
percent bonds were issued by the company to retire the new
stock.
As a conclusion of law from these facts, the court held that the
plaintiffs, as such administrators, were entitled to judgment
against the Congress and Empire Spring Company for the sum of
$13,980, with interest from Feb. 20, 1866, and
Page 103 U. S. 54
rendered judgment accordingly. The company sued out this writ of
error.
It appears by a bill of exceptions that the defendant's counsel
requested the court below to decide that the proceedings of the
defendant in increasing its capital stock, and forfeiting the
amount paid by the plaintiffs' intestate, were in all respects
legal and valid. The court refused so to find, and ruled that the
plan devised by him and the other trustees of the company was
contrary to the provisions of the statute, against public policy,
and a fraud upon stockholders not consenting thereto and the
public.
It further appears that the defendant's counsel requested the
court to decide that inasmuch as the intestate devised, counseled,
and assisted in passing and adopting all the acts and resolutions
for an increase of stock by the company, the plaintiffs were not
entitled to recover. The court refused so to decide, and ruled that
the intestate had a right to abandon the illegal transaction to
which he was a party, and that by declining to pay further calls,
and demanding repayment of the payments made before the
consummation of the illegal scheme, he did abandon it, and his
representatives were entitled to recover. To these refusals and
rulings the defendant's counsel excepted.
The errors assigned here are that the court below erred in each
of its refusals and rulings, and in deciding that the plaintiffs
were entitled to recover.
Page 103 U. S. 56
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 percent 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 cannot 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
Page 103 U. S. 57
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 which 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 company, it was 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 not 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 agreement
by Knowlton to take certain shares of the new stock when issued,
and the payment by him of an installment of twenty percent 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
Page 103 U. S. 58
turpitude in such a contract, nor is it of itself fraudulent,
however 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 361 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 are
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 sec. 1412;
Chitty, Contracts 944; 2 Story, Contracts sec. 617; 2 Greenl. Evid.
sec. 111.
Page 103 U. S. 59
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 following
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
Page 103 U. S. 60
can be recovered back in an action founded on a disaffirmance,
and on the ground that it is void.
To the same effect are the 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, this Court cites with
approval the note of Mr. Frere to the case of
Smith v.
Bromley, 2 Doug. 696, to the effect that a recovery can be had
as for money had and received when the illegality consists in the
contract itself, and that contract is not executed; in such case,
there is a
locus poenitentiae; the
delictum is
incomplete; the contract may be rescinded by either party.
The rule is applied in the great majority of the cases, even
when the parties to the illegal contract are
in pari
delicto, the question which of the two parties is the more
blamable being often difficult of solution and quite immaterial. We
think, therefore, that the facts of this case present no obstacle
to a recovery by Knowlton's administrators of the sum paid by him
on the stock which had been subscribed for by Sheehan.
The law of New York does not in express terms forbid a
corporation from issuing certificates for full-paid stock when the
stock has not been fully paid. The illegality of such an issue is
deduced from several sections of the law under which the Congress
and Empire Spring Company was organized, namely, secs. 38, 40, 41,
and 49. We think it is fairly inferable from the record that the
trustees of the company, one of whom was Knowlton, did not know
that the plan adopted by them for the increase of the stock was
illegal, and that when they discovered that it was forbidden by the
law, and before any harm was done or could have been done, the
scheme was abandoned. Under such circumstances, the rule which
would prevent the recovery of the money paid to carry on the
illegal plan would be a very harsh one, not founded on any law or
public policy.
It is suggested by counsel for the plaintiff in error that the
Court of Appeals of the State of New York has in this identical
suit, upon the same state of facts, adjudicated the rights of
Page 103 U. S. 61
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.
MR. JUSTICE HARLAN, dissenting.
This action was commenced in the supreme court of the State of
New York. The present transcript is imperfect in that it does not
contain all the proceedings in the courts of the state up to the
removal of the case into the circuit court of the United States. It
is, however, conceded in the briefs of counsel that Knowlton
recovered in the supreme court a judgment which, upon a writ of
error from the Commission of Appeals, was reversed upon the grounds
stated in
Knowlton v. Congress & Empire Spring Co., 57
N.Y. 518. The learned district judge who tried the case commences
his opinion, which is incorporated in the transcript, with the
statement that
"This case comes here by removal from the state court, after a
decision adverse to the plaintiff by the Commission of Appeals,
reversing the judgment of the supreme court in favor of plaintiff,
and ordering a new trial. 57 N.Y. 518."
He then proceeds to determine it upon principles of law
different from those announced in that decision. Had it been again
tried in the supreme court, judgment must have been rendered
against these defendants in error, because the reversal was upon
such grounds as precluded any recovery whatever by them. That
decision should, in my opinion, have been accepted as the law of
this case, although the proceedings in the Commission of Appeals
are not set forth in the transcript. The reported case shows beyond
question that it is the identical case now before us; at any rate,
that it was between these parties and involved the same issues. We
know that the adjudication of that court was long prior to the
removal of this case, and
Page 103 U. S. 62
that the questions arising upon this record have been once
determined by a court of competent jurisdiction in a suit between
the same parties touching the subject matter now in controversy.
All this plainly appears by that decision, the legal effect of
which the defendants in error should not be permitted to escape by
removing the case into the circuit court.
Upon these grounds, and without expressing my own views upon the
propositions of law discussed in the opinion of the Court, I
dissent from the judgment just rendered.
