Case ID: ohio-st_41/html/0552-01.html
Source: Caselaw Access Project
Author: {"author": "Martin, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Bank v. Flour Company.
    1. In determining whether an act of a trading corporation is ultra vires, regard is to be had to its effect and the real object in view.
    2. Accordingly, although such corporation may not with its own means pay or secure a private debt of its president to a third person; yet, where he is its creditor, it may rightly pay or secure such private debt, when the real object and effect is to pay or secure the indebtedness of the company to him in the same amount.
    3. The doctrine of estoppel applies to a trading corporation the same as to a natural person in all transactions within its corporate authority.
    Error to the District Court of Meigs County.
    The original action in the common pleas of Meigs County was in the nature of a creditor’s bill brought by the Pomeroy Flour Company against the Marine Dock Company and Joseph H. Rogers. Both companies were incorporated under the act of April 8, 1858, (1 S. & C., 301) providing for the incorporation and control of manufacturing companies and the act supplementary thereto (S. & S., Í84). The object of the suit was to subject certain real estate in that county to the payment of a judgment which the plaintiff had recovered against the Dock Company. The real estate had on the 19th day of June, 1876 been conveyed by the Dock Company to Rogers, by deed absolute in form, though in fact a mortgage; and the petition averred that it had been redeemed or nearly so. In November, 1878, the Merchants National Bank of Cincinnati, plaintiff in error, by consent entered its appearance and filed a cross petition in which it set forth the circumstances of the execution of the deed to Rogers averring that it was made to him in trust and as a security to the bank to indemnify it on account of the then present and future obligations and indorsements of Hudson, the president of the Dock Company; and that, holding a large amount of such paper and also obligations of the company, it had required security and declined renewals and further discounts unless it were given. That on July 5th 1876, the board of directors of the company formally approved the execution of the deed after reciting that the company was indebted to Hudson in the sum of $40,000. That relying on the security, the bank made renewals from time to time, but his aggregate indebtedness was gradually reduced to $11,850.80 when Hudson and the company failed. It claimed first lien and asked for sale of the premises.
    Rogers filed an answer, the same in substance as the bank’s cross petition.
    Afterwards judgment Avas entered finding that the deed was in trust for the bank and ordering a sale of the property and reserving all questions of priorities of lien.
    Upon the judgment a sale was made and confirmed to the bank for the sum of $8,100.
    Afteiuvards subsequent judgment lien holders Avere made parties. One of them, Grant, by answer denied the allegations of the cross petition and averred that the deed to Rogers was made Avithout legal authority and is void, and that the company had no power to make or authorize the deed for the purposes set out in the cross petition.
    At the May Term 1880, judgment Avas given setting aside the deed as illegal and void, and ordering distribution. All the distributees Avere subsequent in time to the bank. In the district court, on appeal, the bank filed an additional pleading in the nature of an amendment to the cross petition and of a reply to the ansAvers of Grant and Giles.
    It averred therein that at the date of the deed to Rogers it held sundry collaterals from Hudson and that relying on the security of the deed it surrendered them in good faith and thereafter had no other security. It also alleged that all the paper aauis taken on the representation that it was the regular paper of the company and in faith of its liability thereon. The bank took an appeal.
    The district court gave similar judgment against the bank.
    A motion for a neAV trial Avas overruled and a bill of exceptions embodying the testimony was taken.
    The object of this proceeding is to reverse the judgment of the district court.
    
      It appears that Hudson was president and financial manager of the dock company and of several other Ohio corporations then in active operation; all of whom habitually issued to him their notes in blank for negotiation. In the spring of 1876 Hudson was indebted to the bank in a large sum, as indorser of such paper including notes of the Dock Company for about §8,000; and was required to pay or furnish security.
    He deposited some collaterals; but further security was demanded for continued accommodation. He stated that the Dock Company owed him forty thousand dollars, and that he would give them a lien on its real estate. He tendered the Rogers deed and the bank required further assurance of his authority. ' Thereupon the following resolutions were passed at a special meeting of the directors and duly certified and delivered to the bank.
    “ Office Marine Dock Co.,
    “Middleport, 0., July 5th, 1876.
    “Special meeting Board of Directors. Present — R. R. Hudson, S. A. M. Moore and Samuel Morton^
    “ On motion of S. A. M. Moore resolved that:
    “Whereas, This Company did, on the 22d day of January, 1876, authorize R. R. Hudson, as its President, to sell any of the property of the Company, and apply the proceeds toward extinguishing the debts of the Company ; and “Whereas, The said Company is indebted to the said R. R. Hudson to the amount of about forty thousand dollars, be the same more or less; therefore, be it
    “.Resolved, That the Company now authorize the said R. R. Hudson, its President, to sell, convey and hypothecate all of its property, both real and personal, to secure indebtedness, by indorsements or otherwise, of-R. R. Hudson individually ;. and we hereby ratify and confirm the acts of R. R. Hudson, as President, to secure indebtedness of R. R. Hudson individually as above named, on the paper of this Company in its own name, and also the paper of the Pomeroy Salt Transportation Company, The Ohio River Transport Company and the Riverside Salt Company, when the Riverside Salt Company paper is used for the benefit of this Company; also
    “ Resolved, That we hereby recognize the direct conveyance to Joseph H. Rogers by R. R. Hudson, President, dated the 19th day of June, 1876, as our act and deed, for the purposes above named.
    “ On motion, adjourned. Jas. M. Evans,
    Secretary.”
    “ I certify the above to be a true copy of the minutes of the record of the meeting of the Board of 'Directors of the Marine Dock Company.
    Jas. M. Evans,
    [m. d. c. seal.] Secretary and Treasurer.”
    The bank accepted the indemnity and continued its discounts and advances until his failure in 1878, when his indebtedness to the bank amounted to about $12,000. In the meantime the indebtedness existing at the date of the deed was discharged and the prior collaterals surrendered.
    At the directors’ meeting of July 5, 1876, three only of the five directors were present. The two absent members were frequently away from home for long periods, and had no recollection of having been notified of the meeting. They were not personally notified. One of them Daniel DeWolf was present at a special meeting in March, 1878, and on his motion a resolution was passed providing a second lien under the trust deed to Rogers for Glenn & Son, creditors of the company.
    
      John W. Herron and Russell & Russell, for plaintiff in error.
    1. The conveyance to Rogers was duly executed and with the authority of the corporation. Railroad Co. v. Harter, 26 Ohio St., 426; Sheehan v. Davis, 17 Id., 581; Lovett v. Steam Saw Mill Association, 6 Paige Chy., 54; Angell & Ames on Corp., § 224; Edgerly v. Emerson, 8 Foster, 555, 559; Sargent v. Webster, 13 Met., 497; Savings Bank v. Davis, 8 Conn., 192; Lane v. Brainard, 30 Id., 577.
    
      The doctrine of estpppel applies. Whitney Arms Co. v. Barlow, 63 N. Y., —; 4 Blatch., 1; Bradley v. Bullard, 55 Ill., 413; 83 Penn., 166; Morawetz on Corp., §§ 30, 31, 62; Beardsley v. Foot, 14 Ohio St., 414; Miller v. Sullivan, 26 Id., 639; Rosenthal v. Mayburgh, 33 Id., 155; Bigelow on Estoppel, 419.
    
      Plants & Lasley, for defendant in error.
    1. The deed in question created no lien because its execution was ultra vires. 1 Ohio St., 41; 5 Id., 61; Green’s Brice’s Ultra Vires, pp. 29 and note, 62 and note, 77, 79, 81, 84, 221, 476, 489, 658, 715, 716, 717, 718 and 720; Franklin Bank v. Commercial Bank, American Law Record, vol 9, p. 447; 1 Daniel on Notes and Bills, 308 ; McCollough v. Moss, 5 Denio, 567; Bissell v. Michigan Southern R. R. Co., 22 N. Y., 258, and White's Bank v. Toledo Insurance Co., 12 Ohio State, 605.
    The law is well settled, and especially in Ohio, that a corporation must keep well within the limits of the statute and certificate of incorporation in all its transactions; for if it steps beyond these bounds, its acts and contracts are null and void.
    2. Corporations have no power to enter into contracts of suretyship. Green’s Brice’s Ultra Vires, 252; 13 N. Y., 315; 10 Bevan, 1; 34 Vt., 144; 11 Ind., 104; 26 Barb., 568.
    3. Persons dealing with a corporation must take notice of its power. Green’s Brice’s Ultra Vires, 272, 472, 717; Pearce v. R. R. Co., 21 Howard U. S., 443. No ratification of what is not authorized. Green’s Brice’s Ultra Vires, 550 ; 17 N. Y., 449; 38 Cal., 300 ; 35 Mich., 22.
    3. Hudson was a trustee and could not pledge trust property for his debts. 18 Ohio St., 182; 25 N. Y., 294; 2 Black. U. S., 715; Green’s Brice’s Ultra Vires, 477, 483, 484 and note 4. No estoppel. Bates on Pl., 851; 8 Neb., 140; 13 Id., 395; 6 Oregon, 231; 37 Iowa, 229; 13 Ohio, 430; 37 Ohio St., 344.
   Martin, J.

.We are to inquire as to the validity of the deed, to Rogers. It was given in trust to operate as a mortgage for the benefit of the bank, and if valid is the first lien. The proceeds of the judicial sale are insufficient to pay either the bank, or the subsequent judgment lien holders; and the controversy, therefore, is one of distribution between them.

The deed is in due form, and, although the grantor is a corporation, carries with it a presumption of authority for its execution. It is prima facie valid. Cincinnati, Hamilton and Dayton Railroad Co. v. Harter, 26 Ohio St., 426. The onus of overthrowing it rests on those who assail it. It was given to secure Hudson’s individual indebtedness, present and future, to the bank; and was accepted by the bank on the representation made in the resolutions of the company’s directors that the company was indebted to him in the sum of forty thousand dollars. The only conflict in the testimony relates to the truthfulness of this representation ; and this issue is in some respects important.

If the representation was false, and especially if the arrangement was a device to incur a mere suretyship for Hudson, the company was under a personal disability, and the act is open to inquiry to such parties as have the right to avail themselves of the disability; and as to them the bank should be able to show its good faith and vigilance in accepting and relying on the security. The claim made on behalf of the judgment lien holders is, that the company had no power to give the security, because it was simply an engagement of suretyship, and because it was given by the president without authority from the board of directors.

The authorities cited in support of this position apply the doctrine of ultra vires to an act: 1st. Where it is not within the scope of corporate power under any circumstances or for any purpose. 2d., Where the corporation is not authorized to do it without the consent of interested third persons; and 3d. Where, though authorized, it is not done in the form prescribed in the charter.

Of course the act under consideration is not of the second or third class. The claim then is that the giving of this seeurity was not within the powers of the company under any circumstances. The Dock Company was a manufacturing corporation, and its objects as stated in the certificate of organization were, “for the purpose of building and working dry docks, saw and planing mills, and other machinery; of building, repairing and running steamboats, barges and flat boats, of building houses or factories, and the manufacture and sale of all kinds of furnishing goods.”

Whilst it is true that the incurring of suretyships is not one of its objects, yet the comprehensive character Of its business contemplated the incurring of large obligations, and the employment of the usual facilities and means adopted by business men in like pursuits. And whilst it is also true as a general proposition that a corporation has no power to contract a mere suretyship for a third person, unless authorized so to do by its charter, yet in determining whether a given act is tainted with such infirmity, or is otherwise ultra vires, regard is to be had to its effect, and the real object in view. Now in this case, assuming that the company was indebted to Hudson as represented, the scheme adopted simply provided a security out of its means for that indebtedness of its own, which, at the same time, and because it was such security, served to secure a debt of its president to a third person. In securing Hudson’s indebtedness to the bank, the company secured its own indebtedness to him. The security given to the bank, although the prime object with it, was regarded as incidental by the company, as shown by the controlling prominence given in the resolutions to the fact of its indebtedness to Hudson. If the company had furnished this indemnity directly to Hudson, he could have placed it as collateral and have attained the same end. We think the objection is one of form merely, plausible but not sound. In the next place it is claimed that the deed was delivered without authority, and is for that reason void. This claim assumes that the assent of the board of directors is essential; and that if it is given at a special meeting all the directors should be present or have had notice. Three only of the five directors were present and concurred in the ratifying resolutions. The two who were absent were not personally notified ; but for what reason we are not informed. One of them, Daniel DeWolf, was present at a subsequent meeting of a quorum when the Rogers deed was ratified by a resolution providing that it should extend as a second lien for another creditor. In these transactions there were no suspicious circumstances. Hudson and the other directors supposed that the arrangement was fairly and effectually made. The responsible and active managers under the board are of necessity clothed with authority to perform usual and appropriate acts within the scope of the corporate business. It is the duty of the company to pay its debts; and it holds its means in trust for that purpose; and it may give its creditor a security for his debt. No reason is apparent to us why such acts may not be sanctioned by a quorum of the directory. But an inadvertent stipulation of record requires us to hold that the representation that Hudson was then a creditor of the company was a mistake. The testimony on the subject is conflicting. At any rate it was not the bank’s mistake. On the faith of the representation it accepted the deed and made large advances. It acted with unusual care and in good faijbh. The representation was material, and its truth or falsity was known to the company, or else it was grossly careless. Thus there is present every element of estoppel. And the doctrine applies to a trading corporation in all transactions within its corporate authority the same as to a natural person. We think this position is well supported by the authorities cited in argument. And it especially commends itself to our favor in view of the great numbers of such corporations — mere ordinary co-partnerships in fact —which, under recent legislation, have assumed a corporate form, apparently for no other reason than to obtain the statutory immunity of stockholders.

It is objected, however, that the estoppel is not available because it was not specially pleaded. The cross-petition of the bank, containing a recital of the facts, is met by a general denial and a plea of ultra vires. The alleged falsity of the representation is first brought out in the testimony ; and there had been no opportunity for a special reply of estoppel. The evidence on the points out of which the estoppel arises was competent on the issues joined; and the trial court having accordingly admitted it, was bound to accept the estoppel as a conclusion of law concerning it. Bigelow on Estoppel, 584.

These views require a reversal of the judgments below.

Judgment reversed.