Philadelphia Workingmen's S. L. B. v. Wurzel , 355 Pa. 86 ( 1946 )

I find nothing in this record which warrants a court in stigmatizing the defendant, Maurice L. Wurzel, as a "fraud". There can be no fraud without bad faith in making a statement or doing an act and there must be an intent to deceive another to that other's damage. See Lamberton et al. v. Dunham, 165 Pa. 129,30 A. 716. As Chief Justice GIBSON said in Bokee Co. v.Walker, 14 Pa. 139, ". . . constructive deceit is a new thing under the sun, and actual deceit is exclusively for the jury. . . . In an action for deceit, the jury have to deal with a question of good faith . . . A man who believes what he says, is not chargeable with bad faith; and the state of his belief is a fact for the jury." It was held in Erie City Iron Works v.Barber and Co., 106 Pa. 125 that to establish a charge of fraud, a fraudulent purpose is essential. Duff v. Williams,85 Pa. 490 held that if an action is based on erroneous representations as to solvency, a man is not liable in an action of deceit for such representations if at the time he honestly believed them to be true. See Cox v. Highley, 100 Pa. 249. In the instant case the assignment and release offered in evidence by the defendant is challenged as fraudulent. Judge BOK, President Judge of the court below, correctly told the jury that: "The case is a pretty simply one . . . You are to decide whether or not the defendant was solvent or insolvent at the time this assignment was given, that is, in May of 1933. That is your job." That was the jury's duty and they discharged it by finding as a fact that Wurzel was insolvent on the date in question and that, therefore, the plaintiff association was not defrauded by the assignment and release which Wurzel offered in evidence as defense against the claim made against him in this action. Judge BOK in his charge further correctly stated: ". . . if this man is insolvent, this whole deal was perfectly clean and straight and there is nothing the matter with it. Rosen had a perfect right to do what he did."

Rosen's acting as Wurzel's agent in this transaction was in no way and in no degree an act of fraud on the part of either Rosen or Wurzel. No fraud can be predicated on the relationship of agent and principal existing between them. It is equally clear that co-obligors, such as Lipschutz and Margolin were, do not ipso facto become fiduciaries in their relations to other co-obligors. On this phase of the case the following instructions of Judge BOK were absolutely correct: ". . . neither Charles Lipschutz nor Maurice Margolin did, in fact or in law, profit or gain any advantage for either of themselves out of the fact that the plaintiff sold to Rosen its claim against Maurice L. Wurzel, excepting that their liability was reduced to the extent of the money which plaintiff received in consideration for the assignment, the latter of which was entirely legal and proper."

The failure to record this transaction on the books of the association thereby "concealing it from the stockholders", as alleged, does not make the transaction fraudulent. If Wurzel was insolvent at the time, as the jury found he was, and if the directors had taken steps to have the assignment in question annulled, that action even if successful would have brought no gain to the association. Since Wurzel was insolvent at the time, the association actually gained $500 by the transaction now called into question. Any party who profits by a transaction cannot successfully claim that he or it was defrauded by it. In every case of fraud there must be some undue advantage gained by the fraudulent actor or by parties acting in privity with him and there must be also some disadvantage sustained by the partydefrauded. In the instant case, Wurzel, if insolvent, gainednothing and the association lost nothing by this transaction. In every case of fraud there must be a victim. This record discloses no victim. The jury found as a fact that the association was not victimized out of a single dollar. 1 Story, Eq. Jurisprudence, Sec. 186 defines "fraud" as "the successful employment of any cunning deception or artifice to circumvent, cheat or deceive another." Bouvier's Law Dictionary defines "fraud" as "the misrepresentation by word or deed of material facts, by which one exercising reasonable discretion is misled to his injury".

I can find no support in this record for the conclusion of the majority "that the evidence presented to prove the defense shows that the transaction with the defendant, Wurzel, was fraudulent." If there were facts tending to support this conclusion they would have to be found by the jury. It is not the function of courts to decide controversial issues dependent upon oral testimony. See Nanty-Glo Boro. v. American SuretyCo., 309 Pa. 236, 163 A. 523.

The defense offered a written agreement duly executed by the proper officials of these associations. The defendants were protected in this agreement by the Act of May 12, 1925, P. L. 615, 15 P.S. Sec. 42 and 61, reenacted in the Business Corporation Law of 1933, and the Building and Loan Association Code of 1933. The corporation is bound by such agreements as the defense offered in this case. See Houghten v. RestlandMemorial Park, Inc., 343 Pa. 625, 23 A.2d 497. This case holds that under section 305 of the Act of May 5, 1933, P. L. 364, a corporation is liable on an obligation executed by the president or vice-president and the secretary or treasurer, unless at the time of the execution the holder of the obligation was chargeable with knowledge that it was not properly authorized. It also holds that a corporation may not avail itself even of ultra vires as a defense where a contract has been entered into and executed in good faith by the other party and the corporation has received the benefit of the performance.

On this phase of the case Judge BOK properly charged the jury: "We have a law which says that the seal of the corporation is attached, that everyone can take that as being a properly authorized contract. Just think a minute. Suppose you want to buy a new furnace for your house and you enter into a contract with the furnace company and you see that it is signed by the president and the secretary and the seal is attached to it. You can rely on the fact that that's a good contract with that company, that it was authorized to be done by those people. You don't have to go to the company's office and demand to see the minute book to see if a resolution was passed authorizing the company to sell you a furnace. The law says no, if you have that kind of contract you can rely upon its having been authorized and properly executed — unless there is fraud, or unless there is something that ought to put you on notice that there is something wrong about the situation." Judge BOK then explained to the jury that "if Wurzel were solvent and Rosen stepped forward to pay his debt for him by compromising it, as soon as Rosen saw that bond with those three names on it out of six, the two officers of the association and the defendant as director, he was put on notice that there might be something wrong." The trial judge then discussed the fact that "there was no authorization actually for this assignment" — that "there were only five directors at the meeting" on March 28. 1933, "the bylaws" call for seven, and there was no quorum", but the court then correctly states that this was important only if Wurzel was solvent. The court said: "If Wurzel is insolvent, this doesn't matter, because in that case Rosen was protected by the law which says that that assignment, if signed by the proper officers and is sealed, protects you. . . If Wurzel was insolvent, there was no way that these other men, Lipschutz and Margolin, could benefit by this transaction, no way at all. They were letting out an insolvent man because his friends were paying something for his obligation. But if Wurzel were solvent, then these officers, Lipschutz and Margolin, would be benefiting, and that means that they would be profiting at the expense of their own share-holders, and that's wrong, because they would be releasing one of their number, one of the six. They would have been letting his share of the obligation, the sixth of $30,000, go for $500, and that would mean that they themselves would no longer be liable for the whole $30,000 but only for five-sixths of it. Now, I say to you again, if Wurzel were insolvent, that wouldn't matter, because in that case you don't take a slice out of the obligation and reduce it to five-sixths." The court thereby made it crystal clear to the jury that the basic issue in this case was the insolvency of Wurzel. Under our law this was a jury question and since the jury found that Wurzel was insolvent and since the issue was submitted to the jury under a charge that was free from error, I can find no reason for reversing the judgment of the court below.

Counsel for the Philadelphia Workingmen's Saving Loan and Building Association and another loan association testified that he was acquainted with the mortgage and collateral bond on which Wurzel and five others were co-obligors, that in 1933 it was in default for several years and suits or judgments which were entered against one or more of the obligors brought the bond to counsel's attention. He made an investigation of the financial condition of the obligors, called some of them to his office, and from his investigations and conversations, he found that they were all hopelessly insolvent. About the same time he received an offer from Raymond Rosen for the Maurice L. Wurzel claim, of $500 for each of the Associations he was counsel for, and Rosen said he was making a similar offer to the John Marshall Association which was represented by other counsel. Rosen's negotiations were not carried on with the officers who executed the bond, but with the Association's counsel.

Proof of the disclosure to this counsel of all the facts proves that no one was guilty of misrepresentation. The record is barren both of any evidence of fraud and of any harm done to the plaintiff. If a debtor by revealing his insolvency and disclosing all the pertinent facts induced the executive officers of a bank to release him from his obligation by the payment of a sum less than the indebtedness, the bank could not later have the transaction set aside as fraudulent because it was not duly entered in the bank's records or because a quorum of the directors had not authorized it. The officers of the plaintiff association had a legal right to bind the association by the agreement first challenged ten years after it was executed.

The majority opinion states that "Defendant's insolvency was only one of a number of elements in the case and could not be controlling under the circumstances of this case". If the court erred in narrowing the issue solely to the defendant's alleged insolvency in May of 1933 that "error" does not warrant this court ordering judgment entered for the plaintiff; the most itwould warrant would be the granting of a new trial. Fraud is a question of fact and fact finding is a jury's function; certainly it is not the function of the Supreme Court ofPennsylvania. There is in this record no testimony of any kind which would support a finding by any one that Wurzel was guilty of fraud. On the question of Wurzel's insolvency the evidence was overwhelming that he was insolvent in 1933 and a jury so found. When the jury so found, this record was left without a single fact to sustain a charge of fraud.

The majority opinion says "there is no doubt that Rosen acted as Wurzel's agent". What of it? Wurzel had not been a director of the Association for nine years before this transaction was consummated and in all the negotiations for the settlement now questioned the plaintiff was represented by a solicitor of admitted professional ability and honorable standing at the Bar, and there is not even an allegation that he did not represent his client in this matter with fidelity and care.

The majority opinion says that "the transaction was concealed from the shareholders by failure to record it on the books except in such an inadequate way as in fact to have been misleading." The answer to that is that Wurzel did not have theslightest responsibility as to how the plaintiff associationkept its books. When the president and secretary signed the agreement with Wurzel, Wurzel was under no obligation to challenge their authority to do so. It has been repeatedly held that By-Laws of a corporation operate merely as regulations among the shareholders and do not affect dealings with other persons unless other persons have actual knowledge of the violation of the By-Laws. The question of whether or not Wurzel did know of any lack of authority on the part of the president or secretary to execute this agreement was a question of fact and being such it was a question to be passed upon by the juryand not to be passed upon by this court.

An agreement signed by the president and secretary of a corporation is prima facie valid and those who question the authority of such officers to execute the agreement must assume the burden of proving it. In the case of Integrity TrustCompany, to use, v. Nestor Building Loan Association, 340 Pa. 216, 14 A.2d 331, there was a suit to recover on a bond given by defendant Building and Loan Association as collateral security for the payment of a mortgage on property acquired by the Association in 1927 subject to the mortgage. The principal defense was that defendant had been unable to find that its officers had been authorized to execute the bond; it was agreed that minutes for the proper period were missing. This Court held that the lack of authority on the part of officers was no defense and we cited the case of Bennett v. Rittenhouse Building LoanAssociation, 313 Pa. 391, 169 A. 757, as controlling. That case held that the corporation is, under the Act of May 12, 1925, P. L. 615, bound by an agreement signed by the president and secretary of the association. We said: "If the authority was in fact wanting that is a matter between the corporation and its officer."

How can any concealment, intentional or unintentional, of this transaction by the association's officers be charged against Wurzel? If a debtor settles a bank's claim against him for even one cent on the dollar, and the bank's officers "conceal the transaction from the shareholders", how does that fact indicate fraud on the part of the settling debtor? If, for example, one who owed a debt to a grocery store settled that debt with the executive officers of the corporation which operates the store, by making a small payment, it is of no concern to the settling debtor whether or not the officers were formally authorized to make the settlement or whether the transaction was recorded on the corporation's books. A settling debtor can be characterized as "a fraud" only if he hadcommitted, procured, or, with deceitful intent participated in,a fraud. Securing one's release from a debt by paying a creditor a fraction of it is no fraud unless falserepresentations are made to accomplish it. The only representation made in behalf of Wurzel to induce the plaintiffs to release him from his debt was a representation of his insolvency. The jury found this representation to be true. This being so, the allegation as to Wurzel's fraud is without a single support. Mere conjecture and suspicion never sustain a charge of either guilt or fraud. As Mr. Justice LINN said, speaking for this Court, in Union Bank and Trust Company v. Girard TrustCompany, 307 Pa. 488, 500:

"Bad faith is not a matter of conjecture; it must be proved, and, like many other facts, may be proved by circumstantial evidence; but it is well settled that it is not sufficient to show suspicious circumstances (without now suggesting that there was ground for suspicion here) such as might lead a person, before taking a paper, to make inquiry, but material mala fides must be proved." (Citing four cases.)

Since this plaintiff Association profited to the extent of $500 by assigning its claim against Wurzel, an insolvent, to Rosen, and therefore lost nothing by the transaction, and since no fraud on the part of Wurzel was shown it follows that the judgment of the court below, based on the jury's finding ofno fraud, should be affirmed. As this record stands not even an order for a new trial would be justified, and I can find no fact or law or precedent which justifies this Court in entering judgment for the plaintiff.