New York County NyArchives Court.....Cohen, Alfred Vs. John Ellis 1889
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Source: Reports Of Cases - New York
Written: 1889

First Department, March Term, 1889.

ALFRED A. COHEN, Appellant, v. JOHN W. ELLIS and Others, Respondents.

Rescission of a contract — the party seeking it must be prepared to return the 
property received by him under it.

Where a purchaser of mortgage bonds, owing to the insolvency of the company 
issuing them, and a foreclosure of the mortgage, given to secure them, by the 
trustee named in it,has been induced to exchange such bonds for new bonds issued 
to him at the rate of fifty cents for each dollar of the bonds so exchanged, he 
is not in a position to insist upon a rescission of the contract originally made 
for the purchase of the bonds so exchanged. Nor is he entitled, on tendering the 
bonds accepted in the place of those originally purchased, to recover of the 
party selling the latter to him the purchase-money paid therefor; 
notwithstanding the fact that the representations made by such seller, at the 
time of the purchase of the original bonds, were such as would entitle the 
purchaser thereof to rescind the original contract made for their purchase had 
he retained in his hands the original bonds, and although such new bonds are of 
much greater market-value than the original bonds for which they were exchanged 
would have been if they had been retained by the purchaser.

A party proposing to rescind a contract is not permitted to deal with or change 
the nature of the property received by him, and then insist upon his right to 
rescind by returning the new article which has in that manner come into his 
possession.

Appeal by the plaintiff from an interlocutory judgment, sustaining demurrers 
interposed to the complaint, rendered at the New York Special Term, and entered 
in the New York county clerk's office, July 8, 1887.

William G. Choate, for the appellant.

Joseph H. Choate, B. H. Bristol, Howard Mansfield, Hugh L. Cole, and William C. 
Gulliver, for the respondents.

Daniels, J.:

This action was before this court on a preceding appeal from a judgment 
overruling a demurrer to the original complaint. That judgment was considered to 
be erroneous for the reasons at the time assigned, and it was reversed with 
liberty to the plaintiff to amend the complaint and bring in another party. 
(Cohen v. Ellis, 4 N. Y. State Rep. 721.) It was then considered that the 
representations relied upon and set forth would entitle the plaintiff to rescind 
the contracts made for the purchase of the bonds. But as the defendants acted as 
agents for the construction company, that company, or its receiver, should be 
brought into the action in order to entitle the plaintiff to maintain it. Since 
that decision was made the complaint has been amended, and the North River 
Construction Company, the party at that time omitted, together with its 
receiver, have been added as defendants in the action. In this manner the 
objection which was then found to exist to the right of the plaintiff to 
maintain the action has been removed, but another and different objection is now 
presented to the ability of the plaintiff, or of his executrix, he having died 
since the judgment, to maintain this action.

The bonds, which were purchased by the plaintiff, were issued by the New York, 
West Shore and Buffalo Railway Company. After their purchase default was made by 
the company in the payment of its secured debts, and an action was commenced by 
the trustee named in the mortgage given to secure the bonds, to foreclose the 
mortgage and sell the mortgaged property. While this action was pending a scheme 
was set on foot through which the railway property should be sold for the 
benefit of the owners of the bonds, and a new company organized to take the 
property under the sale from the committee appointed to purchase it, and this 
new company should issue bonds not exceeding in amount $50,000,000, bearing 
interest at four per cent, and $10,000,000 of capital stock, and such bonds 
should be secured by a mortgage upon the property and guaranteed by the New York 
Central and Hudson River Railroad Company, which company should take a lease of 
the property sold for a long term of years. Under this arrangement or plan the 
railway property incumbered by the mortgage for the security of the bonds issued 
by the New York, West Shore and Buffalo Railway Company, was sold and purchased 
by the committee acting for the bondholders. And under their agreement and 
authority the West Shore Railroad Company was organized, the property conveyed 
to it, and the fifty millions of bonds issued by it. The lease agreed upon was 
also executed to the New York Central and Hudson River Railroad Company and that 
company guaranteed the bonds of the West Shore Railway Company. These bonds 
issued and guaranteed in this manner were, under the scheme which had been 
adopted and acted upon, to be exchanged at the rate of fifty cents on the dollar 
for the bonds of the New York West Shore and Buffalo Railway Company. And a time 
was prescribed within which the exchange should take place and after which it 
was not to be permitted.

This exchange was to be made by a deposit of the bonds of the old company with 
Drexel, Morgan & Co., and a sufficient number of bonds were so deposited to 
entitle the plan or scheme to be carried into execution. A circular was issued 
by this firm in July, 1885, informing the bondholders of the reorganization 
plan, and of the necessity for depositing their bonds to receive in exchange 
this percentage of the new bonds of the West Shore Railroad Company. After this 
circular was received and the plaintiff had obtained information concerning the 
terms which had been prescribed, he did deposit his 200 bonds of $1,000 each 
with Drexel, Morgan & Co., and received from them 100 bonds of $1,000 each, 
issued under the new organization and guaranteed by the New York Central and 
Hudson River Railroad Company. These newly-issued bonds are stated to be of the 
value of $103,000, while the 200 bonds issued by the New York, West Shore and 
Buffalo Railway Company would be of no greater value, in any event, than the sum 
of $46,000. And it is proposed, in order to entitle the plaintiff to maintain 
this action, that the new bonds shall be surrendered up and accepted by the 
defendants in place of the 200 old bonds received under the original contracts 
for their purchase, and those contracts shall be rescinded and the plaintiff 
permitted to recover the amount paid by him for the bonds and the stock 
delivered to him accompanying the bonds.

It will be seen, from this statement, that the bonds which the plaintiff was 
induced to purchase by the fraudulent representations made the subject of the 
complaint have been wholly surrendered and passed beyond his control under the 
arrangement made to complete the foreclosure and form and organize the new 
company to take and operate the railway, which was incumbered as security for 
those bonds. They are no longer in his hands or under his control, but have been 
retired and extinguished as existing demands. And the point, therefore, arises 
whether he may still insist upon the rescission of the two contracts made for 
the purchase of these bonds by returning the newly-issued bonds, and recover 
from the defendants the purchase-money paid for the old bonds. In answer to this 
position, which has been taken and maintained with great zeal and ability on the 
part of the plaintiff, the legal rule has been relied upon that, to entitle a 
party to rescind a contract because of the fact that he was induced to enter 
into it by means of false and fraudulent representations, he must first return, 
so far as he may not be prevented from doing so by the act of the defendant, 
whatever he has received through the performance of the contract. This rule has 
been repeatedly asserted and often acted upon in litigations of this description 
by courts of justice; and, with unexceptional unanimity in all well-considered 
cases, the courts have adhered to the rule that before an agreement which the 
party may be entitled in this manner to rescind can be rescinded, he or it must 
offer or tender, by way of return to the other party, all that has been received 
under or as fruits of the contract. (Cobb v. Hatfield, 46 N. Y., 533; Sharpley 
v. Louth, L. R., 2 Ch. Div., 663, 685; Grymes v. Sanders, 93 U. S., 55; Graham 
v. Meyer, 99 N. Y., 611; Neblett v. MacFarland, 92 U. S., 101; Gould v. Cayuga 
Bank, 86 N. Y., 75.)

The party proposing to rescind is not permitted to deal with or change the 
nature of the property received by him, and then insist upon the right to 
rescind by returning the article in that manner coming into his possession. This 
was considered in Sheffield Nickel etc., Co. v. Unwin (L. R., 2 Queen's Bench 
Div., 214), where the contract was not allowed to be rescinded, although it 
might have been done if the property to be returned had not been changed by the 
act of the plaintiff. The same rule was followed in McCrillis v. Carlton (37 
Vt., 139), when the defendant was not allowed to rescind a contract for the 
purchase of butter, after he had sold the article so purchased. In Scovil v. 
Wait (54 N. Y., 650) a quite similar decision was made in this State. And so it 
was in Snow v. Alley (144 Mass., 546). This last case underwent an elaborate 
examination, and the conclusion already mentioned was reached and sustained by 
the court. And in Francis v. New York and Brooklyn Elevated Railroad Company 
(108 N. Y., 93) the plaintiff had received shares of stock from the defendant, 
which he afterwards surrendered, and new certificates were issued at his request 
to each one of his three minor children. And it was held by the court that this 
prevented him from rescinding the transaction. And it was there said that "the 
theory of a rescission is that the party proceeded against shall be restored to 
his original position. The plaintiff cannot rescind if he retains in himself, or 
withholds through another, any fruit of the contract." (Id., 97.) It is no 
answer to the objection made that the bonds now offered to the defendants are 
more valuable than those held by the plaintiff at the time of the commencement 
of this action, for they are not the bonds received by him under his contracts 
of purchase, and the defendants have entered into no obligation whatever to 
accept the new bonds in the place and stead of those originally issued.

Allegations were made in the complaint to relieve the case of this disability. 
They consist of statements that it was at the instigation and request of the 
defendants Winslow, Lanier & Company and the construction company and the 
defendant Green, that the circular of Drexel, Morgan & Company was issued to him 
containing the information relative to the reorganization, and the surrender and 
change to be made in the bonds; and that he, believing that the defendants 
Winslow, Lanier & Company had advised the exchange, was induced to make it. But 
these allegations are inferential in their nature, not supported by any facts 
permitting them to be made. The facts, on the contrary, are, that the plaintiff 
wrote to these defendants, stating that he should deposit the old bonds received 
from them, unless, by the 20th of August, 1885, he was advised that a greater 
sum could be realized for them than by the acceptance of the new bonds. To this 
they did not reply, with the exception of one of the firm, and his answer was, 
that any deposit which should be made by the plaintiff of the 200 bonds would be 
entirely on his own responsibility, and without any authority or consent on the 
part of this member of the firm. Neither of the others answered the letter 
written to them by the plaintiff, and neither consented in any manner to the 
exchange in the bonds for the purpose of affecting the relation in which they 
stood to the plaintiff in this action. What was done, and all that appears to 
have been intimated, proceeded upon the fact that the plaintiff was the owner of 
the 200 bonds, and that it would be for his advantage, as such owner, and not as 
plaintiff in this action, to make the exchange and receive the new bonds. It 
appears from the complaint, that these defendants have throughout denied all 
liability and all accountability to the plaintiff, as well as his right to 
rescind the original purchases and in that manner entitle himself to the 
recovery of the money he had paid for the bonds. Their action, so far as he was 
to be affected, was the same as it was with reference to the other owners of 
bonds issued by the New York, West Shore and Buffalo Railway Company. They were 
all alike supplied with the same information for them to act upon in making the 
proposed exchange, presenting the advantages expected to arise from that 
exchange. Nothing whatever is shown to have transpired through what in this 
manner was done and accomplished, from which it can be assumed that these 
defendants consented that the new bonds might be taken under the reorganization 
and those new bonds presented to the defendants or used by the plaintiff for the 
purpose of bringing about a rescission of the original purchases. In this 
respect the case presented by the complaint appears to be radically defective, 
disabling the plaintiff, as the facts have been made to appear, from rescinding 
the original purchases in the manner in which it is proposed that shall be done, 
and entitling himself to a recovery of the moneys paid for the original bonds.

The judgment, accordingly, should be affirmed, with costs, but with leave to the 
executrix, who has now been made a party to the action, to amend the complaint 
within twenty days on payment of the costs of the demurrer and of this appeal.

Brady, J., concurred.

Judgment affirmed, with costs, but with leave to the executrix, who has now been 
made a party to this action, to amend the complaint within twenty days on 
payment of the costs of demurrer and of this appeal. 

Additional Comments:
Reports of Cases Heard and Determined in the Supreme Court of the State of New 
York. Marcus T. Hun, Reporter. Volume LIX, 1889, HUN 52. Banks & Company, 
Albany, NY. 1901.

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