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the same may lawfully be done, among the holders of stock, by paying the preferred stockholders 120 per cent. of the par value, together with unpaid accumulated dividends and accrued dividends, and to the common stock the remainder of the assets, held not a preference so unreasonable and unjust as to be against public policy, in view of Stock Corporation Law, $ 19, relating to stock issues.

Appeal from Special Term, Albany County.

Proceeding for a peremptory writ of mandamus by the People, on the relation of the Recess Exporting & Importing Corporation, against Francis M. Hugo, as Secretary of State, to require him to file relator's certificate of reorganization. From an order denying the application, relator appeals. Reversed, and writ granted.

Argued before JOHN M. KELLOGG, P. J., and WOODWARD, COCHRANE, HENRY T. KELLOGG, and KILEY, JJ.

Hornblower, Miller, Garrison & Potter, of New York City (Sherwood E. Hall, of New York City, of counsel), for appellant.

Charles D. Newton, Atty. Gen. (Frank S. Sharp and C. T. Dawes, Deputy Attys. Gen., of counsel), for respondent.

JOHN M. KELLOGG, P. J. The certificate of reorganization changes the common stock to stock without any nominal or par value, and provides that upon the liquidation, distribution of capital assets, dissolution, or winding up of the corporation, that the assets and funds shall be distributed, so far as the same may lawfully be done, among the holders of the stock, by paying the preferred stockholders 120 per cent. of the par value thereof, together with all unpaid accumulated dividends and the accrued dividends thereon, and to the common stock the remainder of the assets. The secretary of state, considering the provision illegal, refused to file the certificate.

[1] In the absence of statutory provision to the contrary, the certificate of incorporation of a business corporation may make such preferences between stockholders as to its stock as seem best. 14 C. J. 410, 411. Section 61 of the Stock Corporation Law (Consol. Laws, c. 59) permits a stock corporation to issue preferred stock and common stock, and different classes of preferred stock, if its certificate of incorporation so provides, or if all stockholders consent in writing, or upon a two-thirds vote of a stockholders' meeting called for that purpose, but contains no requirement as to what either kind of such stocks shall be. Section 2, subdivision 3, of the Business Corporations Law (Consol. Laws, c. 4) requires the certificate to state the amount of the capital stock, "and if any portion be preferred stock, the preferences thereof.” These statutory provisions are in line with the general rule above stated.

Section 19 of the Stock Corporation Law was first brought into the statute in 1912. At the time of its enactment corporations were issuing various kinds of preferred stock; some stocks were preferred as to dividends, some as to principal, some as to both, and some had other preferences; and the statute must be construed with reference to the then existing conditions. Section 19 permits a corporation to issue stock

(182 N.Y.S.) "Other than preferred stock having a preference as to principal, without any nominal or par value, by stating in such certificate: (1) The number of shares that may be issued by the corporation, and if any of such shares be preferred stock, the preferences thereof. If such preferred stock or any part thereof shall have a preference as to principal, the certificate shall state the amount of such preferred stock having such preference, the particular character of such preferences, and the amount of each share thereof, which shall be five dollars or some multiple of five dollars, but not more than one hundred dollars."

It also provides :

"Each share of such stock without nominal or par value shall be equal to every other share of such stock, subject to the preferences given to the preferred stock if any authorized to be issued. Every certificate for such shares without nominal or par value shall have plainly written or printed upon its face the number of such shares which it represents and the number of such shares which the corporation is authorized to issue, and no such certificate shall express any nominal or par value of such shares. The certificates for preferred shares having a preference as to principal shall state briefly the amount which the holders of each of such preferred shares shall be entitled to receive on account of principal from the surplus assets of the corporation in preference to the holders of other shares, and shall state briefly any other rights or preferences given to the holders of such shares."

The object of this section, as is indicated by its caption, was to provide for the “issuance of shares of stock without nominal or par value.” While permitting such shares as to common stock, the right is denied as to stock preferred as to principal, which must be of the par value of $5, or multiples thereof, but not more than $100. There is no other limitation suggested as to the rights of the preferred stockholders. The certificate must state the number of shares of stock, and, if any of it is preferred, “the preferences thereof,” and the stock certificate, where there is a preference as to principal, must state the amount of stock having such preference and the particular character of the preference. Again, the section provides that certificates for preferred stock, having preference as to principal, shall briefly state the amount which the holders of each of such shares shall be entitled to receive on account of the principal from the surplus assets, in preference to the other shares, and any other rights or preferences given to the holders of such stock. These provisions show that the par value of the stock is not the precise amount which the holder may receive from the surplus assets upon dissolution, but that that matter may be controlled by the certificate of incorporation. The words "preference as to principal” are used in describing the stock, as distinguishing it from stock which is preferred as to dividends only. If the Legislature had intended to limit the preference to the par value of the stock, it would have used the words "par value," instead of speaking of “stock preferred as to principal.” The word “principal,” as used, is descriptive only, and not a limitation. The section does not purport to limit the preference, but only requires that it be made definite and certain.

[2] The question we are considering has no practical application to a going concern, but only becomes important when a corporation is retiring from business and after the creditors are paid. So far as

the public is concerned, at any time while the corporation is alive, the par value of the stock is important; but upon a final dissolution, and after all debts are paid, the manner in which the surplus shall be distributed among the stockholders of concern to them only, and may be a matter of agreement between them. Considering the fact that the common stockholders contribute a mere trifle to the business, perhaps $5 per share, while the preferred stockholders finance the corporation, the preferences are not unreasonable-clearly not so unjust as to be against public policy.

If it is urged that the provision for the redemption of the stock while the corporation is a going concern may prejudice the public, or creditors, a sufficient answer is that the Stock Corporation Law regulates the manner in which the capital stock of a corporation may be reduced, and safeguards the interests of the public and the creditors.

We therefore conclude that the certificate should be filed. The order appealed from should be reversed, with $10 costs and disbursements, and the writ granted, with $50 costs and disbursements. All concur.

(111 Misc. Rep. 654)

SCHWIMMER et al. v. ROTH et al. (Supreme Court, Special Term for Trials, Kings County. May 14, 1920.) 1. Vendor and purchaser Eww341 (5)—Purchaser can recover payments and

cost of search, when title fails.

The purchaser can recover, in case of the vendor's inability to make title, because of the existence of unknown mortgages, the amounts paid by

him on the contract, with interest, and the expenses of the search of title. 2. Vendor and purchaser Cw351 (8)—Innocent vendor not liable in damages

for failure of title.

Where vendor was unable to make title because of the existence of mortgages of which he had no knowledge, the purchaser cannot recover damages for the breach of the contract, in addition to the payments made, with interest, and the expenses of search, though he could recover such damages if defendant refused arbitrarily to perform, or knowingly con

tracted beyond his power, or was guilty of fraud or bad faith. 3. Vendor and purchaser E214 (1)-On failure of title assignee of purchaser

cannot recover from vendor money paid for assignment.

The assignee of a purchaser cannot recover from a vendor, who was unable to make title because of mortgages unknown to him, the amount paid the original purchaser for the assignment, since the original purchaser could not have recovered such amount from the vendor, and the

assignee has no greater rights. Action by Adolph Schwimmer and another against Rosa Roth and others, as executors under the last will and testament of Henry Roth, deceased, and another. Judgment directed for plaintiffs for the amount paid on account of the contract, with interest, and the expenses of the search of title.

Foster & Newman, of New York City (Nathan Ballin, of New York City, and Benjamin Arnest, of counsel), for plaintiffs. Oscar A. Lewis, of Brooklyn, for defendants. For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

(182 N.Y.S.) CROPSEY, J. The plaintiffs are assignees from the purchaser under a contract for the sale of real property made by the defendants. The defendants were unable to make title, for the reason that the property was incumbered by mortgages which were not known to the defendants to exist. A mortgage which the defendants had held on the property was foreclosed, and through the error of the title company its search failed to show that the mortgages in question were subject to the one being foreclosed. The attorney, relying upon the search, did not make the holders of those mortgages parties. After the defendants had made this contract to sell, and the existence of the mortgages was revealed, the foreclosure action was reopened, the holders of the mortgages made parties and the property resold. This time, however, it brought far more than the price for which the defendants had agreed to sell it, and it was bought in by a third party.

[1,2] As the plaintiffs cannot have specific performance, the only question in the case is as to the amount for which they should have a money judgment. That the plaintiffs are entitled to recover the amount paid to the defendants on account of the contract, with interest thereon, and the expenses of the search, is undisputed. Northridge v. Moore, 118 N. Y. 419, 23 N. E. 570; Walton v. Meeks, 120 N. Y. 79, 23 N. E. 1115; Matter of Strasburger, 132 N. Y. 128, 132, 30 N. E. 379. Whether a purchaser is also entitled to damages depends upon whether the seller acted in good faith and was not guilty of fraud. If he refused arbitrarily to perform, or knowingly. contracted beyond his power, or has been guilty of fraud or bad faith, the purchaser may recover his damages in addition. Pumpelly v. Phelps, 40 N. Y. 59, 66, 67, 100 Am. Dec. 463; Cockcroft v. N. Y. & H. R. R. Co., 69 N. Y. 201, 204; Marsh v. Johnston, 125 App. Div, 597, 109 N. Y: Supp. 1106. Upon the record in this case it must be found that the defendants acted in entire good faith, and that there was no fraud, and that their failure to perform was not due to any fault on their part. Hence the plaintiffs cannot recover any damages.

[3] But the plaintiffs paid to the original purchaser, as a consideration for the assignment of the contract, $500 more than the purchase price, and they claim they are entitled to recover this sum, even though damages be denied them. If the plaintiffs were entitled to damages, this sum would be a part of them, for the damages would be the difference between the contract price and the value of the property; and while this sum of $500 would not represent an actual profit to the plaintiffs, it would represent a part of the profit on the contract, if the value of the property exceeded the contract price by that or a greater sum. Had the original purchaser sued the defendants, of course, this sum could not have been recovered; and this would be true, even though he could have established that he could have sold his contract at a profit of $500. On what theory can the plaintiffs recover what their assignor could not? The defendants made no agreement with the plaintiffs. They are under no different liability to them than to the original purchaser. The contract by its terms does permit of its assignment, but it does not follow that the defendants are liable for any greater sụm because of this. There

is no agreement to that effect. There is nothing to show that it was within the "contemplation of the parties” that the sellers should be liable for any sum that might be paid upon a sale of the contract, and it is upon that ground that the expenses of the search are held to be recoverable. Northridge v. Moore, 118 N. Y. 419, 423, 23 N. E. 570.

The rule of damages in these cases of breach of contract to sell real property is an anomaly in the law. It differs from the general rule applicable to contracts for the sale of goods; and the rather arbitrary rule, already stated, is said in the leading case on this subject to be sustained upon the ground of an implied understanding of the parties. Flureau v. Thornhill, 2 Wm. Black. 1076. In this state the rule is the same as is the English rule. Here it is based upon the analogy between this class of cases and actions for breach of covenant of, warranty of title. Peters v. McKeon, 4 Denio, 546; Pumpelly v. Phelps, 40 N. Y. 59, 64, 100 Am. Dec. 463; Walton v. Meeks, 120 N. Y. 79, 83, 23 N. E. 1115. In an action for breach of warranty, the rule of damage is the value of the land when the warranty was made, and, since the action for mesne profits came into use, interest thereon, and the amount paid for the property conclusively established its value. Staats v. Ten Eyck, 3 Caines, 111 (f), 2 Am. Dec. 254; Jenks v. Quinn, 61 Hun, 427, 434_436, 16 N. Y. Supp. 240, affirmed 137 N. Y. 223, 33 N. E. 376; Jacobs v. Schulte, 153 App. Div. 693, 694, 138 N. Y. Supp. 768; Hunt v. Hay, 156 App. Div. 138, 141, 140 N. Y. Supp. 1070. So it has been held that a purchaser cannot recover for improvements made in reliance upon the contract being performed, nor for the fees of an architect for drawing plans for a building to be erected, in the absence of fraud or bad faith on the part of the seller. Walton v. Meeks, 120 N. Y. 79, 83, 23 N. E. 1115; Prentice v. Townsend, 143 App. Div. 151, 154, 127 N. Y. Supp. 1006. The same rule must apply to the assignee of a purchaser as would obtain in an action brought by the purchaser. Sweet v. Bradley, 24 Barb. 549; 3 Sedgwick on Damages (9th Ed.)

par. 961.

The plaintiffs are entitled to judgment for the amount paid to defendants on account of the contract, with interest, and the expenses of the search. No costs are allowed.

No costs are allowed. The findings and judginent should be settled on notice.

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