Case 60 — Action fob Receiver and to Discover Assets of Defendant

May 10.

#### Farmers’ Bank of Ky. v. Ohio River Line Steamboat Co. Same v. Barret & Others.

APPEAL FROM HENDERSON CIRCUIT COURT.

Both Parties Appeal from the Judgment of the Lower Court..

Judgment Reversed.

Corporations — Power to Execute Mortgage — Pledges of Stock— Stockholders Bound by Judgments Against Corporation — Doctrine of Ultra Yires.

Held: 1. Where a steamboat company was organized for the purpose of acquiring and operating certain boats, the assumption by the corporation of a debt which the seller of the boats had contracted in the construction of the boats, and the execution of a mortgage to secure the debt, were within the powers of the corporation — especially when done with the approval of all of the stockholders.

2. Pledgees of the stock of a corporation to secure a debt of the stockholder are stockholders, and not creditors, of the corporation, and are bound by a judgment for debt against the corporation until it is reversed or set aside in a direct action instituted for that purpose.

3. It is a well recognized rule in courts of equity that the doctrine of *ultra vires*should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong, and certainly it should not be invoked in a- case like this to defeat the effect of an agreement which is clearly within the scope of the powers of a corporation of this character.

*448CLAY *&*CLAY and M. C. *&*G. D. GIVENS, ATTORNEYS BOB appellant.

1. The judgment of the Farmers’ Bank of Kentucky v. the Ohio River Steamboat Company, rendered by the Henderson Circuit Court in 1896, is conclusive of the matters involved in this case. Freeman of Judgments, secs. 177-178; Black on Judgments, sec. 583; Van Fleet’s Former Adjudication, pages 995 to 998; Thompson on Corporations, secs. 3392-3; Beech on Private Corporations, 726; Morawetz on Private Corporations, see. 865; Herman on Estoppel, page 164; Nichols v. Stephens, 25 S. W. R., 578; Hawkins v. Glenn, 131 U. S., 319.

2, The plaintiffs have no right to sue in this form without alleging insolvency on the part of Perkins. Barton v. Barton, 80 Ky., 212; Maekeys v. Pfeifer, 80 Ky., 000; Kyle v. O’Neil, 88 Ky., 127.

8. That the consideration was ample to uphold the mortgage and notes. Nat. Bank of Cynthiana v. Mattingly, 18 Ky. Law Rep., 425.

4. The contract of insurance is, and was, valid, and not *ultra vires.*The bank had an insurable interest in the steamer Royal. May on Insurance, secs. 6 and 90.

5. A co-surety may buy in a note and preserve all the rights and liabilities of a payee, and it does not stop the running of the statute of limitations on the original contract. Smith v. Lati-mer, 15 B. M., 75; Keller v. Williams, 10 Bush, 216; Veach v. Vickershan, 11 Bush, 261.

S. B. & R. D. VANCE, Attorneys foe appellees.

1. Evidence of consideration of the notes in the pleadings mentioned shows that the note for $23,100 was given for money loaned to C. G. Perkins, while only that for $4,900 was for money borrowed by the steamboat company. And that there was no other consideration for the transfer of the property of the steamboat company to the said bank.

2. The uncontroverted averments of the petition and the evidence show:

(a) That the certificate No. 6 for fortyshares of the capital stock of said steamboat company held by Barret & Witt was transferred to them by Perkins to indemnify them as his co-sureties for payment of his agreed and settled proportion of the note to Campbell.

(b) That the certificate No. 7 held by Market Nat. Bank of Boston, for 100 shares of said stock, was pledged by said Perkins as collateral security for his note, on which its judgment was rendered; and both before the transactions with the bank in the pleading mentioned.

3. It having been agreed between Perkins and Barret & Witt that Perkins was to pay 5-13 of the said note, it was not necessary that his co-sureties, having paid his agreed *pro rata,*should, in their action to recover it of him, aver the insolvency of the principal in the note.

4. Barret *&*Witt having, as his co-sureties, paid Perkins the agreed *pro rata*of said debt, their right of action is on his implied assumpsit as co-surety, and would not be barred until five *449years after the payment. The mere assignment of a note by the payee to a surety does not substitute the latter to the rights of the formr on the note. Lansdale v. Cox, 7 Mon., 401; Brandt’s Suretyship and Guaranty, sec. 220; Joyce v. Joyce’s Admr., 1 Bush, 474; Bridges v. Reid, 9 Bush, 329.

5. The property of the steamboat company having been transferred by its directors without authority and without consideration, the plaintiffs, pledgees of its stock, have the right to sue for its recovery without a return of “no property found” as to the pledgor; nor are they estopped by judgment in favor of the bank against the corporation, and such directors in an action wherein they alone represent the company. 2 Cook on Stockholders, secs. 645, 735, page 1137, N (5) secs. 741, 737, 663, 743; Do., vol. 1, sec. 432; Baldwin v. Campbell, 26 Minn., 43; Campbell v. Amr. M. Co., 122 N. Y., 455; 1 Morawetz, secs. 242, 245, 249, 256, 258; Rupell v. Wakefield Water' Works Co., cited 1 Morawetz, sec. 155; Ibid, secs. 284, 285, 411, 412; Prather v. Wissiger, 10 Bush, 117; Railroad Co. v. Bowles’ Heirs, 9 Bush, 468.

6. Pledged stock need not be transferred on books of the company. Thurber v. Crump, 86 Ky., 408.

7. The insurance by the company of its property, though payable to the bank, is available to it only to the extent of the company’s debt. May on Ins. (3d ed.), vol. 2, see. 452 “C”; 15 Am. *&*Eng., page 818.

Opinion op the court bx

JUDGE BURNAM

Reversing.

The plaintiffs (appellees here), John H. Barret, B. G. Witt, and the Market National Bank of Boston, were creditors of the defendant, C. G. Perkins. By assignment from Perkins, Barret and Witt held certificate No. 6, for forty shares of the capital stock of the Ohio River Line Steamboat Company, as collateral security to indemnify them against loss as co-securities with Perkins upon a note due by the Henderson Buggy Company to one G. W. Campbell, for $3,333.33, dated.April 25, 1899, and due in one year after date, while the Market National Bank held a similar certificate for 100 shares of the' capital stock of the same corporation, which was pledged by Perkins as • collateral security to secure the payment of a judgment rendered against him in favor of plaintiff in the circuit court of the United States for the district *450of Kentucky on the 28th day of January, 1895, for the sum of $10,000, with'interest from March 26, 1894; and on the 25th day of August, 1897, this suit was instituted, seeking to subject the interest of Perkins; represented by these certificates of stock in the steamboat company, to the payment of their respective demands. They allege in substance, that at the time of the transfer to them of these certificates of stock the steamboat company was the owner and in possession of two steamboats' (one named “Royal,” and the other “Jewell”); that subsequently thereto, on the 4th day of February, 1895, Perkins and J. B. Thompson, who were- the president and secretary of the Steamboat company, and a majority of its directors, and who owned the most of its stock and had absolute control of its affairs, executed and delivered to the defendant the Farmers’ Bank of Kentucky a mortgage on these steamboats, their furniture, outfit, and accoutrements, to secure two promissory notes (one for $23,100, and the other for $4,900), due and payable in four months after date; that the steamer Royal was destroyed by fire, and was insured for $15,000, which was paid to the Farmers’ Bank, and credited upon the $23,100 obligation; and that Perkins and Thompson had sold and delivered the steamer Jewell to the said Farmers’ Bank, to be credited upon these obligations. They further allege that the debt for which the mortgage was executed to the Farmers’ Bank was not a debt of the steamboat company, and that there was no consideration given or paid to it for the execution ■of the mortgage; that the steamboats were the only property owned by the steamboat company; that it was insolvent; and that the defendant, the Farmers’ Bank of Kentucky, holds the steamboat Jewell, and the proceeds *451of the insurance paid to it, as trustee for the creditors and holders of the stock of the company. The articles of incorporation of the steamboat company are set forth in the petition, and show that the capital stock of the company was $50,000, divided up in 1,000 shares, of $50 each; that C. G-. Perkins owned 599 shares, his wife, Annie T. Perkins, 200 shares; J. B. Thompson, 200 shares, and Robert D. Vance, one share. They charge that the execution of the mortgage, and the payment of the insurance money, and delivery of the steamboat Jewell to the bank were in violation of their rights as holders of the stock under the assignment from Perkins, and that they are entitled to receive their *pro rata*of thes,e assets of the company, and ask that a receiver be appointed to take charge of the property of the steamboat company, and for a reference to the commissioner to ascertain their share of such assets according to the stock held by them.

The defendant, Perkins, for answer to the petition of Barret and Witt, says that he was only a surety on the note to Campbell; that the note was due on the 25th day of April, 1899, and that Campbell’s cause of action accrued on that day; that more than seven years had elapsed from the maturity of that note to the filing of this suit; and he pleads and relies upon the statute of limitation as a defense thereto.

’The Farmers’ Bank of Kentucky in its answer controverts the material allegations of the petition which are inconsistent with its right to subject the property, and avers that on the 4th day of February, 1895, the defendant, the' Ohio River Line Steamboat Gompany, for value received, executed and delivered to it its two promissory note's (one for $28,100, and the other for $4,900), due four *452mbnths after date; that to secure the payment thereof the steamboat company executed and delivered to it a mortgage upon its two boats; that there was paid thereon, out of the insurance money arising from the destruction of the Royal, the sum of $13,577.75, leaving due and owing to it a balance of $14,422.25; that on the 22d day of April, 1896, it instituted suit for the collection of this balance, and the enforcement of the mortgage lien upon the Jewell, and on the 26th day of June, 1896, a judgment was rendered for the amount of such balance, and for an enforcement of its lien by a sale of the steamboat, Jewell, to satisfy such balance, which was had, and the proceeds of such sale applied' as a credit upon the judgment; that this judgment has never been' appealed from, vacated, or modified, andi is conclusive against the holders' of the stock in the steamboat corporation, and of all the matters involved in this case. ■

The pleadings being made up, on final trial the chancellor set aside the judgment of the Farmers’ Bank against the steamboat company,1 but confirmed the sale of the steamer Jewell thereunder, and decided that the bank was liable as trustee for the money arising from the insurance on the Royal and sale of the Jewell, subject to credits of $2,700 and $4,900, amounting in the aggregate to $7,600, which were found to be the debts of the Ohio River Line Steamboat Company; held that the balance of the $23,100 note was the individual debt of C. G-. Perkins, and to that extent the note' and mortgage were void as against the steamboat company; and directed that the overplus of the proceeds arising from the insurance policy and the sale of the Jewell should be paid to the receiver, for the benefit of the stockholders of the steam*453boat company. Exception's were taken to this judgment both by plaintiffs and defendants, and both have appealed to this' court.

The facts out of which this controversy arose, as shown by the bill of exceptions, are as follows: Perkins testifies that he built the steamboat Royal in 1892, and was the sole owner thereof; that subsequently, in 1898, he and J. B. Thompson built the steamboat Jewell in partnership, he being the owner of two-thirds, and Thompson of one-thirdt; that the whole sum of the note for $23,100 was for money borrowed and used by him in the construction of the two boats, except $6,250, which'was borrowed by him for another purpose upon his individual credit; that the whole of the $4,900 note was borrowed for the use of the steamboat company -after its organization; that at the time the money was borrowed from the bank for the construction of the boats the bank knew for what purpose it was being obtained, and looked to the boats, through him, for the repayment thereof; that the steamboat company w-as organized on the 2d day of December, 1893, with a capital stock of $50,000, but that no money was paid therefor by the stockholders; that the two steamboats, by agreement between himself and Thompson, were turned over to the company in payment of the entire stock, and constituted its sole assets; that certificates were issued to himself and wife for 799 shares, to Thompson for 200 shares, and Vanee for one share; that it was understood and agreed by the stockholders at the time of the organization of the company that the indebtedness which had been incurred by him to the bank should be assumed as an indebtedness of the steamboat company, and be paid by it, as this indebtedness was, in the *454main, created to raise m'oney with which to construct the boats. Mr. Starling, the cashier of the bank, testifies that the several notes which were consolidated into the note for $23,100 were given by Perkins for the construction and running expenses of Ms two boats, Jewell and Royal, and that it was his understanding that these two notes were bound for the payment of the money so furnished; that the old notes were given up on the 4th day of February, 1895, and the note for $23,100 executed in lieu thereof, in accordance with this agreement; that previous to this date Perkin's had been trying to sell the Royal in order to take up this note; that the note for $23,100 included one for $1,200 borrowed on the 29th day of December, 1893, and also an item of $2,700, which was loaned direct to the steamboat company on the same date; and that on the day this note was executed' the steamboat company borrowed an additional sum of $4,900, and executed mortgages to secure both notes, the mortgage being signed by Perkins, as president, and Thompson, as secretary, of the company, and the notes in the name of the company, with Perkins and Thompson as securities; that on the 12th day of July, 1895, insurance was taken out on both boats, and the policies made payable to the bank, it having furnished the money with which to pay the premium. The interest of R. D. Vance in the company was only a nominal one, as he only held one share of stock, which was given to him for his services in writing out the articles of incorporation, and he himself testifies that he abandoned all claim to this share soon after the organization of the company.

It seems to us, from the testimony, the attendant facts which surrounded the organization of the steamboat com*455'pany, and the transfer to it of the boats without any money being paid therefor, it is impossible to escape the conclusion that it was a part of the scheme that the new organization should assume the payment of the outstanding liabilities of Perkins to the bank, which had, in the main, been created to construct these very boats. Perkins at that time had very little estate, outside of his interest in the boats and the business in which they were engaged. Both were clearly liable to the bank for the amount of its claims against him, and they were practically the only security it had for the large sums of money which had been advanced to Perkins; and it had the right to demand that this security should be preserved in the transfer to the new company, which had no money, and paid nothing ■for the boats.

The execution of the notes and mortgage by Thompson furnishes very satisfactory evidence that his understanding of the conditions on which the company acquired this property from Perkins was identical with that testified to by Perkins and Starling; and the first question to be determined, therefore, is, did the steamboat company have the right to acquire the interest of Perkins in the boats, 'subject to the condition that it should assume payment of certain definite and specific indebtedness due and owing by him at the time to the bank, and could it execute the mortgage on the boats to secure the payment of such indebtedness?

The common-law powers of private trading corporations of this character are ordinarily the same as those possessed by individuals, and may be employed in the same manner, and, unless restricted by their charters or some positive or clearly implied prohibition of law, *456have the power to mortgage their property to secure the payment of borrowed money or debts necessarily contracted in the course of their business to enable them to carry on the•purposes of the corporation.

The assumption by the steamboat company of the indebtedness of Perkins, ;who owned three-fourths of its capital stock, to the bank, was in effect a borrowing of that much money from the bank to enable it to consummate the purpose of its creation, which was to acquire and operate the boats in question. And the fact that the bank continued to furnish the new organization the necessary funds to enable it to discharge its outstanding obligations to others and to pay its 'operating expenses is certainly very strong evidence of the existence of the alleged agreement. We think the assumption of this indebtedness was within the powers of the new corporation, especially when it was done with the knowledge and approval of all of its stockholders

It is a well-recognized rule in courts of equity that the doctrine of *ultra vires*should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong, and certainly it should not be invoked in a case of this sort to defeat the effect of an agreement which is clearly within the scope of the powers of a corporation of this character. It therefore follows that the notes executed to the bank by the steamboat company, and the mortgage made to secure them, are valid and enforceable obligation's in the hands of the bank, and should have been so adjudged.

The judgment is also erroneous on another ground. Ap-pellees are not creditors of the corporation. They only stand, with respect to it, in the attitude of stockholders; *457and as such they were privies to the litigation in which the bank 'obtained a judgment for the balance due on their debt against .the steamboat company, which is binding upon them until reversed, modified, or set aside in a direct action instituted for that purpose. See Freem. Judgm. sec. 177; Black. Judgm., sec. 583; Van Fleet, Former Adj., p. 995; Thomp. Corp., secs. 3392, 3393; Beach, Priv. Corp., sec. 726; Mor. Priv. Corp., 865; Herm. Estop., p. 164.

A number of other errors are suggested, but, in view of the conclusions which we have reached on the points discussed, it will be unnecessary to consider them. For the reasons indicated, the judgment is reversed, with instructions to the lower court to enter a judgment dismissing the petition.