Case ID: ohio-st_60/html/0096-01.html
Source: Caselaw Access Project
Author: {"author": "Williams, J. Spear, J.,", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

The Central Ohio Natural Gas and Fuel Co. v. The Capital City Dairy Co.
    
      Implied powers of a corporation — To carry out those granted by charter — Nature of ultra vires acts — Claim for damages regarded as saleable assets — Purchasing corporation may maintain action thereon.
    
    1. The implied powers which a corporation has in order to carry into effect those expressly granted and accomplish the purposes of its creation, are not limited to such as are indispensable for these purposes, but comprise all that are necessary. in the sense of appropriate, convenient and suitable, including the right of reasonable choice of means to be employed.
    2. Acts of a corporation which, if standing alone, or engaged in as a business, would be beyond its implied powers, are not necessarily ultra vires when they are incidental to, or form part of, an entire transaction that in its general scope is within the corporate purpose. The validity of such a transaction is to be determined from its general character considered as a whole, rather than by segregation into individual parts and each regarded as distinct from the others.
    3. Where a corporation formed for the purpose of manufacturing and dealing in a particular line of goods, instead of incurring the delay and expense incident to the construction' of a new manufacturing plant and building up of an independent business, in good faith, with a view of promoting the interests of the corporation, chooses to purchase of an existing partnership engaged in a like business its established plant and assets, including its outstanding claims among which is one for damages to the property caused by another’s negligence, the corporation acquires a valid title to the claim for damages, as against the party liable, and may maintain an action thereon.
    (Decided March 28, 1899.)
    Error to the Circuit Court of Franklin county.
    Action by a manufacturing corporation on a claim for unliquidated damages, purchased in connection with its manufacturing plant, from a co-partnership. Judgment for plaintiff affirmed.
    The case is stated in the opinion.
    
      Outhioaite <& Linn and A. L. Thurman, for plaintiff in error.
    On behalf of the plaintiff in error we contend—
    1. That at the time of the purchase of the property of The Capital City Dairy Company, a partnership, by The Capital City Dairy Company, a corporation, the right of action against this plaintiff in error was not taken into account as one of the assets of the said partnership, and was not purchased 'from it by the said, The Capital City Dairy Company, a corporation.
    2. That if the said right of action against this plaintiff in error was, at the time of the said sale and purchase, considered and taken into account as one of the assets of the said partnership, and purchased as such by the said corporation; that the latter, by such purchase, thereby exceeded the powers granted it by its'eharter, and that such sale was null and void, and that the corporation so purchasing it cannot maintain a right of action thereon against this plaintiff in error. 4 Thompson Comment. on Law of Corporations, section 5638; section 3239, Revised Statutes; Straus & Bro. v. The Eagle Ins. Co., 5 Ohio St., 59; Dartmouth College v. Woodward, 4 Wheaton, 518; Gallia County v. Holcomb, 7 Ohio, 232, part one; Bank of Chillicothe v. Town of Chillicothe, 7 Ohio, 31, part two; Bank of Chillicothe v. Swayne, 8 Ohio, 257; Bartholomew v. Bently, 1 Ohio St., 41; White's Bank of Buffalo v. The Toledo Fire & Marine Ins. Company, 12 Ohio St., 601; Bank v. Flour Company, 41 Ohio St., 552; Shewacla Lime Works v. Dismukes, 5 L. R. A., 100; Janes Bridge Co. v. Stoughton et al., 1 Wisconsin, 667; Beers v. Dalles City, 16 Oregon, 334; Mobile & Ohio R. R. Co. v. Franks, 41 Miss., 494; Commonwealth R. R. v. Erie & Northeastern R. R. Co., 27 Pa. St., 339; Eclesiastical Commissioners, etc., v. Northeastern R. R. Co., L. R., 4 Chancery Division, 845; Westinghouse Machine Co. v. Wilkinson, 79 Ala., 312; Somner v. Marcy, 3 Woodb. M. U. S., 105; Bowman Dairy Co. v. Mooney, 41 Mo. Ap., 665; Perrin v. Cheasapeake Canal Co., 9 How. U. S., 172; Beaty v. Knowler, 4 Peters, 152; Attorney Genera v. Oakland Co. Bank, Walker’s Chancery, Md., 9; Russel v. Topping, 5 McLean, U. S., 194; New Orleans Steamship Co. v. Ocean Dry Dock Co., 28 La. Ann., 173; Head v. Providence Insurance Co., 2 Cranch U. S., 127; Smith v. Eureka Flour Mills, 6 Cal., 1; Jacksonville v. McConnell, 12 Ill., 138; Mechanics' Saving Bank v. Meridian Agency Co., 24 Ct., 159; Central R. and Banking Co. v. Smith, 76 Ala., 572; Huntington v. Savings Bank, 96 U. S., 388; Davis v. The Colonial R. R. Co. and Davis v. 
      The Smith American Organ Co., 131 Mass., 259; The Niagara County Bank v. Wm. Baker et al., 15 Ohio St., 68; Simmons v. Troy Iron Works, 92 Ala., 427; Greety v. Barnes Milling Co., 40 Kan., 281.
    
      Thomas E. Steele, for defendant in error.
    Reduced to their last analysis, the only questions in this case are these:
    1. Can a partnership transform itself into a manufacturing corporation and convey all its assets to such corporation, and can such corporation then enforce a chose in action so assigned?
    2. Conceding that the acquisition of this chose in action was not warranted by the charter, can the plea of ultra vires be relied upon by a third person, not a party to the contract, against whom it is sought to enforce the right in action and who is not injuriously affected in any way by the transfer of title?
    It would seem that the second question which virtually disposes of this case, however the first may be answered, has been adjudicated in Ohio. Ehrman v. Insurance Company, 35 Ohio St., 324.
    The surviving partner is in law the owner of the chattel property as well as the choses in action. Bates on Partnership, section 18.
    After the death of an ostensible partner a surviving dormant partner may sue alone on a partnership contract. Beach v. Hayward, 10 Ohio, 455.
    A few general principles supported by eminent authority will we submit, resolve the question in our favor without causing any serious conflict with the wilderness of cases cited by the learned counsel for the plaintiff in error.
    1. “A corporation being a mere creature of law possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence.”
    2. Every corporation has by necessary implication the power to do whatever is necessary to carry into effect the purpose of its creation, unless the doing of the particular thing is prohibited by law or by its charter. Thomp. Corp., section 5641-5644; id., section 5840; Toledo, etc., v. Rodrigues, 47 Ill., 188; Lambrecht v. Kehrwicher et al., 40 Ohio St., 646; Ellerman v. Chicago Div. Ry., etc., et al. (N. J.) 23 Atl. Rep., 287.
    3. The authorities distinguish between the validity of a corporation acquiring as an employment or business certain personal property which it is not permitted by its charter to deal in, and a contract or transaction founded upon an isolated purchase of similar property.
    Though it might be highly improper or unlawful for the defendant in error to make a business of buying up' unliquidated damages, sounding in tort, it by no means follows that it could not acquire this particular chose in action, intertwined and intermixed as it was with, the other assets of the partnership and with the single transaction by which said partnership was transformed into the plaintiff in error. Thomp. Corp., section 5828. Graham et al. v. Hendricks, Sr., 22 La. An., 423; Lyndeborough Glass Co. v. Massachusetts Glass Co., Ill Mass., 315; State v. Woram, 6 Hill (N. Y.), 33.
    4. The law recognizing our modern tendency to transform partnerships into corporations has encouraged such transformations and the conveyances incidental thereto, by sanctioning transactions by the new corporation apparently beyond the usual limits of corporate power. Thomp. Corp., 5725; Waterman’s Appeal, 26 Conn., 96-108; Francklin v. Sprague, 121 U. S., 215.
    The new corporation, therefore, The Capital City Dairy Company, had a right, for example, to expressly assume the debts of Kelly and Sehilder as surviving partners. Waterman’s Appeal, 26 Conn., 96. It had the right to issue shares and thereby acquire the services of a valuable man as superintendent; it might have received notes-held by some one against the former partnership or its surviving partners and enforced their collection. Stoddard v. Shetucket, 34 Conn., 542.
    5. The defense of ultra vires can not be put forward to excuse a corporation from its liability for negligence. Thomp. Corp., 6353.
    6. Whether or not a certain corporate act is or is not ultra vires can only be inquired into by a direct proceeding on behalf of the state. National Bank v. Matthews, 98 U. S., 621.
    This doctrine has been upheld by the same court in a number of well considered cases: Smith v. Shelley, 12 Wall, 358; Swope v. Leffingwell, 105 U. S., 3; Fortier v. The Bank, 112 U. S., 439; Reynolds v. The Bank, 112 U. S., 405; Fritz v. Palmer, 132 U. S., 282; Cowell v. Springs Company, 100 U. S., 55.
    Certainly the decision in Ehrman v. Ins. Co., 35 Ohio St., 324, ought to govern the decision in this case. The Ehrman case so far from being criticised or disapproved, has been followed by this court in Bank v. McIntyre, 40 Ohio St., 528, and by the Supreme Court of the United States in Armstrong Amr. Ex. Bank, 133 U. S., 433.
    This ease qualifies the radical doctrine laid down in Strauss v. Eagle Ins. Co., 5 Ohio St., 60, and finds affinity with the basic principle which underlies the recent decision of this court in the case of Vought et al. v. Railway, 58 Ohio St., 123.
    It would certainly seem as though this court had disposed of the question for all time to come of the assignability of a chose in action. Reece v. Kyle, 49 Ohio St., 475.
   Williams, J.

In May, 1893, a co-partnership owning a plant, in the city of Columbus, equipped for the manufacture and sale of oleomargarine, was engaged in carrying hat business under the firm name of The Capital City Dairy Company, and then had an established trade. At that time, The Central Ohio Natural Gas and Fuel Company, a corporation organized under the laws of this state for’ the purpose of furnishing and selling natural gas to the inhabitants of the city, was prosecuting its business of supplying gas through pipes, some of which were laid in close proximity to the manufactory of the co-partnership. That property and its contents were damaged by an explosion of the gas, occasioned by the negligence of the corporation, for which it was liable to the co-partnership. Shortly afterward, in July,- 1893, the property and business of the co-partnership, with its accounts and bills receivable, including its demand for the damages resulting’ from the explosion, were sold and transferred to a corporation organized in this state by the members of the co-partnership and some other persons. This corporation was formed for the purpose of continuing the business of the co-partnership, adopted its name, and thereafter carried on the business at the same place; and, in September, 1893, it commenced the action below against the plaintiff in error to recover the damages resulting from the gas explosion, the demand for which, it was alleged had been sold and assigned to the plaintiff as already stated. Issue was joined by denial of the alleged transfer of the demand, as well as of the allegations of the defendant’s negligence; and the cause was submitted to the court upon the evidence and the .following-agreement of the parties: “It is stipulated and agreed by and between the parties hereto that the amount of damages caused by the explosion set out in plaintiff’s second amended petition herein was, as of the date of that explosion, the sum of $800.00; and that said damages were caused by the explosion of natural gas in the pipes of, and belonging to defendant, and was caused solely by defendant’s negligence. It is further stipulated and agreed by and between the parties that, as to all other questions in issue between the plaintiff and defendant, a jury may be, and it is hereby waived, and said issues may be tried by the Court. ’ ’

This agreement left no issue of fact for trial except that relating to the alleged transfer of the cause of action to the plaintiff, which the court found in favor of the plaintiff, and rendered judgment accordingly. The judgment was affirmed by the circuit court. The legal question to which our attention is directed concerns the corporate capacity of the plaintiff to acquire the demand sued on, and enforce it by action against the defendant. The plaintiff corporation was formed, as.declared in its articles of incorporation, “for the purpose of manufacturing, selling and dealing in oleomargarine and the materials and utensils employed in the manufacture, storage and transportation thereof, and all things incident thereto.” And the contention is, that the purchase of a chose in action, especially one founded on negligence or other tort, is so foreign to the objects of the incorporation of the plaintiff that it could acquire no title thereto, and, consequently, was without authority to prosecute the action below.

It is a general rule, as sound as it is well settled, that corporations, in addition to the powers expressly granted, have by necessary implication, the power to do whatever is needed to carry into effect those granted, and accomplish the purposes of its. creation, unless the particular act is forbidden by the law or charter. This is, in substance, the statutory rule of Ohio corporations. Revised Statutes, section 3239. And, it should be reasonably applied, with a view of promoting the legitimate objects of the corporation, rather than with a strictness that would so hedge it about as to obstruct the practical attainment of the corporate purposes, or embarrass the corporate business. These implied powers which a corporation has in order to carry into effect its legitimate purposes are not limited to suchas are indispensable to their accomplishment, but comprise all those powers that are necessary in the sense of appropriate, convenient and suitable, including a right of reasonable choice of means to be employed; and whether an act comes within those powers, must be determined in each case from all its facts and circumstances. Acts which, if standing alone, or when engaged in as a business, would be beyond the powers of the corporation, are not necessarily ultra vires, when they are merely incidental to, or form part of an entire transaction that, in its general scope, is within the corporate purpose. For instance, a railroad corporation has power to acquire and hold real property for its right of way, and other uses necessary in the operation of its road, but is without corporate power to purchase or hold such property for sale or rent; and yet, if, in locating its roadway, it should be deemed expedient to run it across an improved lot, the damages to which would be enhanced on account of buildings and other improvements upon it, and to avoid the expense and uncertainty of an assessment of damages by a jury the company should purchase the entire property, parts of which, including the buildings, would not be needed for any railroad purpose, it could hardly be claimed the corporation so exceeded its powers that it acquired no title to, or might not thereafter sell or lease that part of the premises not actually needed for corporate purposes. So, if a corporation formed for the purpose of manufacturing and dealing in a particular line of goods, in order to obtain from an existing partnership engaged in a similar business, an established and going concern with its good will, should in good faith buy out its whole plant, including some articles not pertaining to the objects of the corporation, instead of incurring the delay of constructing a new plant and the expenses that usually attend the building up of an independent trade, there would seem to be no good reason for declaring the purchase void, so as to deprive the corporation of the title to the property, even of those articles nob strictly necessary in its business. The corporate objects might be materially promoted by such transaction as an entirety, and the power to make a reasonable choice of means to accomplish that end, properly belongs to the corporate body. The transformation of partnerships into corporations by this method is not uncommon. In Thompson on Corporations, section 1645, that author says: ‘ The ordinary way of reorganizing a partnership in the form of a corporation is to organize the corporation in form, whereupon the partners make a formal deed of the partnership property to the corporation, in exchange for its shares, which are distributed among them according to their respective holdings in the partnership. That assets of the partnership of all kinds may be thus turned in to the corporation in payment of its shares, where the corporation is capable of engaging in the business of the partnership, and is not disabled from holding the property which the partners may own, is a proposition which has the sanction of everyday experience,to say the least.” And see Francklyn v. Sprague, 121 U. S., 215.

The validity of transactions like these is to be determined from their general character considered as a whole, rather than by seggregation into individual parts and each regarded as distinct from the others; though, undoubtedly, a corporation would not be sustained in uniting a legitimate corporate act with one forbidden or unauthorized, for the purpose merely of enabling it to accomplish the latter.

The proper application of the doctrine of ultra vires depends largely on the relation of the parties to the litigation. When the action of a corporation is challenged by the sovereignty which gave it existence, or by whose favor it is permitted to pursue its business, it may be required to show a clear warrant for the acts so called in question; while in suits between individuals and corporations, or between corporate bodies, where private rights only are involved, the rule is not inflexible, and yields to considerations of right and justice. In suits of that kind, it is maintained by the highest authority, that the title of a corporation to real or personal property cannot be assailed, nor its enjoyment defeated, on the ground that its acquisition was in excess of the corporate power, or in a mode not conformable thereto. This is held in Bank v. Matthews, 98 U. S., 621-628, where it is said by Mr. Justice Swayne that: “"Where a corporation is incompetent to take title to real estate, a conveyance to it is not void, but only voidable, and the sovereign alone can object. It is valid until assailed in a direct proceeding instituted for that purpose.” This principle is approved and applied in a number of cases subsequently decided by the same court, among them Cowell v. Springs Co., 100 U. S., 55; Reynolds v. Bank, 112 U. S., 405; Fortier v. Bank, ib., 439; Fritts v. Palmer, 132 U. S., 282. And the same principle was Recognized and enforced in Ehrman v. Ins. Co., 35 Ohio St., 324, as far as was necessary in the decision of that case. It was there held that the title of a corporation to a chose in action which it had purchased from another corporation could not be controverted by the debtor on the ground that the purchase was made in a mode or for a purpose not authorized; and a judgment in favor of the purchasing corporation against the debtor was sustained. The debtor, it was said, was a stranger to the transaction by which the chose in action was purchased, was not injured by the transfer, and had no right to question its validity.

In this case, the plaintiff virtually became the successor of the partnership by the purchase of all its assets and continuing the same business at the same place and in the same name. The primary object of the purchase was to obtain an equipped and going manufacturing establishment, and the transfer was completed under one entire contract in which was included the claim in suit for damages which the property had recently sustained. No party to that agreement questions the plaintiff’s title, and the defendant was neither injured by, nor interested in the transaction. On the trial the liability of the defendant was admitted, and the parties agreed on the amount of the damages. Either the plaintiff or the co-partnership is entitled to the money, and as the latter in no way disputes the right of the plaintiff to it, we see no good reason for disturbing the judgments which the courts below have rendered.

■Judgment affirmed.

Spear, J.,

dissents from the second and third paragraphs of the syllabus.