Source: https://supreme.justia.com/cases/federal/us/167/362/
Timestamp: 2019-04-25 18:03:36+00:00

Document:
This Court has jurisdiction to review a judgment of the highest court of a state holding a national bank liable, under a statute of the state, as a shareholder in a state savings bank when the answer sets up that the stock of the savings bank was issued to it without authority of law and the. motion for a new trial and the specifications of error which were the basis of appeal from the trial court to the supreme court of the state assert such want of power under the laws of the United States.
to the power to loan money on personal security, accept stock of another corporation as collateral, and thus become subject to liability as other stockholders. The want of such authority may be set up by a bank to defeat an attempt to enforce against it the liability of a stockholder.
This action was commenced in the Superior Court of the County of San Diego, State of California, against the California Savings Bank and other defendants, including the plaintiff in error. In each of five counts of an amended petition, a separate cause of action was stated seeking a judgment against the savings bank for the amount of a particular deposit of money alleged to have been made with it on a specified date, and a recovery was asked against the other defendants upon the ground that they were stockholders in the savings bank on the dates of the various deposits, and in consequence liable, under the laws of California, to pay the debts of the savings bank in proportion to the amount of stock held and owned by each stockholder. A demurrer to the amended complaint was overruled, and the California National Bank answered, denying that it was ever the owner of any stock in the savings bank and alleging that if any such stock was ever issued to it, it was issued without due authority from the bank in its corporate capacity and without authority of law. The answer also averred that the bank never acquired "in the usual course of business, or now has, as owner, any stock with the said defendant the California Savings Bank."
No issue was taken upon the truth of the averments in the amended complaint as to the amount and date of the respective deposits which plaintiff alleged he had made in the savings bank.
but Collier, Dare, and Collins were, respectively, President, vice-President, and cashier of the national bank, and were also, with Havermale, directors of the bank during the period when the alleged transfers of stock were made to the bank.
The certificates in the names of Collier and Norcross were never delivered, and, when subsequently cancelled, contained no endorsement. In the stead of those certificates, however, on September 10, 1890, three certificates, aggregating 990 shares, were issued in the name of J. W. Collins, cashier, and two certificates, each for five shares, were issued to Collier and Norcross, respectively. On January 2, 1891, the three certificates for 990 shares in the name of Collins, cashier, were surrendered, and a single certificate for that number of shares was issued in the name of the California National Bank.
In December, 1890, and January, 1891, five percent dividends were declared and paid on the stock of the savings bank. The amount of each dividend received by the California National Bank was $750. No direct evidence was introduced accounting for these payments having been made on the basis of an ownership of 1,500 shares, when the bank was sought to be held liable for, and appeared to be the holder of, but 990 shares, put in its name as above stated. Both the savings bank and the national bank became insolvent, the former suspending November 12, 1891, while the receiver of the national bank qualified December 29, 1891.
of the stock to the bank was void because not shown to have been acquired pursuant to authority of its board of directors, and because the stock was not taken in the ordinary course of the business of the bank as security for the payment of a debt or otherwise. In addition, by the first, second, and third specifications of errors of law occurring at the trial, it was specially stated that error had been committed in admitting the certificate in evidence and holding the national bank liable -- substantially the same language being employed in each specification -- because the national bank, a corporation under the banking laws of the United States, could "not in law become a stockholder or incorporator in any other corporation." The motion for a new trial was overruled and an appeal was taken to the supreme court of the state, by which court the judgment was affirmed. 101 Cal. 495. A writ of error was allowed, and the cause has been brought here for review.
"The California National Bank, one of the defendants, has appealed upon the ground that, by virtue of the statutes under which it is organized, it had no power to become a stockholder in another corporation, and that its act in becoming such stockholder is so farultra vires that it cannot be made liable for any portion of the indebtedness of the corporation."
The suggestion as to the want of jurisdiction is therefore without merit.
The federal questions which therefore arise on the record may be thus stated: (1) do the statutes of the United States, Rev.Stat. § 5136 et seq., relating to the organization and powers of national banks, prohibit them from purchasing or subscribing to the stock of another corporation, and (2) if a national bank does not possess such power, can the want of authority be urged by the bank to defeat an attempt to enforce against it the liability of a stockholder?
such business, accept stock of another corporation as collateral and, by the enforcement of its rights as pledgee, it may become the owner of the collateral and be subject to liability as other stockholders. National Bank v. Case, 99 U. S. 628. So also a national bank may be conceded to possess the incidental power of accepting in good faith stock of another corporation as security for a previous indebtedness. It is clear, however, that a national bank does not possess the power to deal in stocks. The prohibition is implied from the failure to grant the power. First National Bank v. National Exchange Bank, 92 U. S. 128.
On behalf of the plaintiff below, it was admitted at the trial that the stock of the savings bank was not "taken as security, or anything of the kind," and it is not disputed in the argument at bar that the transaction by which this stock was placed in the name of the bank was one not in the course of the business of banking, for which the bank was organized.
2. The transfer of the stock in question to the bank being unauthorized by law, does the fact that, under some circumstances, the bank might have legally acquired stock in the corporation estop the bank from setting up the illegality of the transaction?
"A contract of a corporation, which is ultra vires in the proper sense (that is to say, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers conferred upon it by the legislature) is not voidable only, but wholly void and of no legal effect. The objection to the contract is not merely that the corporation ought not to have made it, but that it could not make it. The contract cannot be ratified by either party, because it could not have been authorized by either. No performance on either side can give the unlawful contract any validity, or be the foundation of any right of action upon it."
This language was also cited and expressly approved in Jacksonville &c. Railway v. Hooper, 160 U. S. 514, 160 U. S. 524.
"The doctrine of ultra vires, by which a contract made by a corporation beyond the scope of its corporate powers is unlawful and void, and will not support an action, rests, as this Court has often recognized and affirmed, upon three distinct grounds: the obligation of anyone contracting with a corporation to take notice of the legal limits of its powers, the interest of the stockholders not to be subject to risks which they have never undertaken, and, above all, the interest of the public that the corporation shall not transcend the powers conferred upon it by law. Pearce v. Madison & Indianapolis Railroad, 21 How. 441; Pittsburgh, Chicago &c. Railway v. Keokuk & Hamilton Bridge Co., 131 U. S. 371, 131 U. S. 384; Central Transp. Co. v. Pullman's Palace Car Co., 139 U. S. 24, 139 U. S. 48."
The doctrine thus enunciated is likewise that which obtains in England. Ashbury Railway Carriage & Iron Co. v. Riche, L.R. 7 H.L. 653; Attorney General v. Great Eastern Railway Company, 5 App.Cas. 473; Baroness Wenlock v. The River Dee Company, 10 App.Cas. 354; Trevor v. Whitworth, 12 App.Cas. 409; Ooregum Gold Mining Co. v. Roper (1892), App.Cas. 125; Mann v. Edinburgh Northern Tramways (1893), App.Cas. 70.
Applying the principles of law thus settled to the case at bar, the result is free from doubt.
In Royal Bank of India's Case 4 Ch. 252 (1869), while it was held by the Court of Appeal that, as incidental to the power to advance money on a deposit of shares of stock, a corporation might do such acts as were reasonable and proper for making the security available, it was conceded that a purchase of stock of another company as a speculation would have been ultra vires, and, despite acts of ownership exercised by the company, the shares might be repudiated at any time.
"If it could have been shown that it was an act absolutely prohibited by their memorandum of articles of association, then, no doubt, a different question would have arisen. The act would have been ultra vires, and incapable of confirmation or ratification."
"I quite agree that the Royal Bank of India had no authority to speculate in shares, and that, if it had gone upon the stock exchange and bought shares as a speculation, such a proceeding would have been ultra vires, and all that has taken place would not have been enough to constitute the Royal Bank of India shareholders in this bank, or prevent them from repudiating these shares."
"No other person or body of persons could be prejudiced or benefited or affected by an instrument to which they were absolutely strangers, such instrument being void as between the parties to it."
The case before the court was declared to be not one of a person induced to become a shareholder, and who had become a shareholder by fraud, but that of a person who had never in fact become a shareholder.
"A contract made by a corporation beyond the scope of its powers, express or implied, on a proper construction of its charter cannot be enforced, or rendered enforceable, by the application of the doctrine of estoppel."

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