Source: https://supreme.justia.com/cases/federal/us/173/99/
Timestamp: 2019-04-24 20:17:23+00:00

Document:
Justia › US Law › US Case Law › US Supreme Court › Volume 173 › Sioux City Terminal R. & W. Co. v. Trust Co.
debts so contracted, this Court holds itself bound by those decisions, without determining whether, as an independent question, it would decide that the issue of stock by a corporation in excess of a statutory inhibition is not void, but merely voidable.
"grounds, franchises, liens, rights, privileges, lines of railway, side tracks, warehouses, storage houses, elevators, and other terminal facilities . . . within the corporate limits of the City of Sioux City,"
"has full power and authority, under the laws of the State of Iowa, to create this present issue of bonds and to secure the same by mortgage of all its property, leases, and franchises."
The bonds thus secured were negotiated to innocent purchasers for value, and the proceeds were applied to the credit of the company.
"The said party of the first part [that is, the mortgagor] hereby covenants that the said premises are free from all encumbrances, excepting a deed of trust made on the first day of January, A.D. 1890, by said party of the first part to the Trust Company of North America of Philadelphia, to secure the sum of one million two hundred and fifty thousand ($1,250,000) dollars of bonds, and the said party of the first part will warrant and defend the title unto the said party of the second part, its successors and assignees, against all persons whomsoever claiming the same, subject to the lien of the said prior deed of trust."
On the tenth day of October, 1893, in the United States Circuit Court for the Northern District of Iowa, a bill was filed by certain national banks, citizens of other states than the State of Iowa, against the Terminal Company, E. H. Hubbard, as assignee of the Union Loan and Trust Company, and others, having for its object the foreclosure of the second mortgage above referred to. Without fully recapitulating the averments of the bill, it suffices to say that it alleged that the notes which were secured by the second mortgage had been placed in the hands of the Union Loan and Trust Company in part for the benefit of certain claims against the Terminal Company held by the complainants; that the Union Loan and Trust Company had, in April, 1893, made an assignment to E. H. Hubbard for the benefit of all its creditors, and that Hubbard had succeeded to the rights and obligations of the company of which he was assignee, and in which capacity he held the notes secured by the second mortgage, and the benefit of which the complainants were entitled to invoke for the purpose of procuring the payment of their claims. A receiver was prayed for and was appointed.
of the title herein conveyed, or any interest claimed by virtue hereof."
"without prejudice to any rights or interests which the plaintiff (the Credits Commutation Company) may have as a holder of said notes in the said trust deed"
-- that is, the deed of trust to Hubbard, trustee for the benefit of the note holders, as already mentioned. On the day the suit was filed, the Terminal Company answered, admitting the correctness of the claim, and judgment was then entered for $692,096.95, with interest, the whole without prejudice to the rights of the parties under the deed of trust, as prayed for.
under the second mortgage or the conveyance, made for their benefit to Hubbard, trustee, were paramount to the claims of the Trust Company of North America or the bondholders under the first mortgage in favor of that company. The Credits Commutation Company intervened in the foreclosure proceedings, averring that the bonds secured by the deed in favor of the Trust Company of North America were void because the Terminal Company, at the time the bonds were executed, was without lawful power to issue them or to secure them by mortgage. It was also claimed that in virtue of the judgment rendered in the state court, the Credits Commutation Company was a creditor of the Terminal Company to the amount of the judgment, and was entitled to avail itself of the rights accruing to it from the deed of conveyance made by the Terminal Company to Hubbard, trustee, and therefore that the Credits Commutation Company was entitled to be paid from the proceeds of the property sought to be foreclosed before the holders of the bonds secured by the deed which had been made in favor of the Trust Company of North America.
The trial court decided in favor of the validity of the bonds issued to the Trust Company of North America and of the mortgage securing the same. 69 F. 441. On appeal to the Circuit Court of Appeals for the Eighth Circuit, the judgment of the trial court was affirmed. 82 F. 124. The case then, by the allowance of a writ of certiorari, was brought to this Court.
liens upon unencumbered real estate worth at least twice the amount loaned thereon."
". . . If the indebtedness of any corporation shall exceed the amount of indebtedness permitted by law, the directors and officers of such corporation knowingly consenting thereto shall be personally and individually liable to the creditors of such corporation for such excess."
"The highest amount of indebtedness to which this (Terminal) company shall at any time subject itself shall not exceed two-thirds of the paid-up capital stock of said company, aside from the indebtedness secured by mortgage upon the real estate of the company."
latter portions thereof? As the claim that the bonds were void is based on the statutory provisions above referred to, it follows that we are compelled to primarily ascertain the meaning and operation of the state law. In making this inquiry, we are constrained, in the first place, to inquire what construction has been placed upon the Iowa statute by the supreme court of that state; for it is an elementary principle that this Court, in interpreting a state statute, will construe and apply it as settled by the court of last resort of the state, and will hence only form an independent judgment as to the meaning of the state law when there was no binding construction of such state statute by the court of last resort of the state. Nobles v. Georgia, 168 U. S. 398; Aberdeen Bank v. Chehalis Co., 166 U. S. 440; Morley v. Railway County,@ 146 U. S. 166, and authorities there cited.
"Do the facts alleged in the answer, that the holders of the notes, as directors of the company, in the management of its affairs, contracted indebtedness beyond the limit prescribed by the articles of incorporation and caused the mortgage to be executed to secure the amount due them, defeat their security and give other creditors a right to share in the proceeds of the property mortgaged? We do not understand counsel for the defendants to claim that a debt of the corporation beyond the prescribed limits of its indebtedness is invalid, and, if held by a director of the corporation, cannot be enforced for that reason alone. It may be that a director would be answerable to stockholders or others for negligence or mismanagement of the affairs of a corporation whereby debts were contracted in excess of the limitation prescribed in the articles of incorporation, but it cannot be claimed that such a debt, for a consideration received by the corporation, cannot be enforced against it."
"It is averred that the directors unlawfully contracted indebtedness of the corporation in excess of the limit prescribed by its articles of incorporation. But this has nothing to do with the directors' claims in controversy. As we have before said, they may be liable to proper parties for their negligence or unlawful acts, but honest contracts made with them are not defeated thereby."
think, insisted upon, that the mortgage is ultra vires, because the articles of incorporation provide 'that it shall be competent to mortgage the property of the company to the amount of not exceeding one-half of the capital stock actually paid in.' This question was determined adversely to appellant in Garrett v. Plow Co., before cited."
It follows, then, that at the time of the issue of the bonds in favor of the Trust Company of North America, and of the execution of the deed of mortgage by which such bonds were secured, the Supreme Court of the State of Iowa had, in two cases, declared the law of that state to be that a debt contracted in excess of the maximum limitation stated in the charter, in virtue of the provisions of the statute requiring that such maximum limit should be fixed, was not void, although the consequence of contracting a debt beyond the limitation might be to entail upon the officers of the corporation a personal liability for the amount thereof.
"A distinction is to be taken between contracts like this and those which, independent of statute, are in violation of public policy. The creation of this indebtedness involved no moral turpitude. The making of the mortgage did not disable the corporation from performing its duties to the public. The Terminal Company had a right to incur a debt, and to execute a mortgage to secure it. The only ground of complaint is that it went further than the law permitted. Of this the state may complain, but the Terminal Company cannot, nor can any person whose rights are derived through the Terminal Company, and who acquired such rights with knowledge of the mortgage lien."
thereof when the transaction took place, and yet a right of recovery was allowed and the lien of the mortgage upheld."
"It is said further that the plea of estoppel can be urged only in favor of the innocent, and that the bondholders here are not of that class, for they are held to notice of the corporate power of the Terminal Company. This rule has been applied in cases where the act done was wholly void because of an absolute want of power to sustain it, and in cases where considerations of public policy intervened. Here, as repeatedly said, the act is voidable only. The statute does not even impose a penalty therefor."
respect of federal law, and therefore the decrees below were correctly rendered.
It is claimed, however, that this Court is not obliged to follow the Iowa decisions interpreting the statute of that state, because it is assumed that those decisions proceed alone upon the principle of estoppel. Estoppel, it is argued, is a matter of general, and not of local, law, upon which this Court must form an independent conclusion, even although in doing so it may disregard the rule established in the State of Iowa by the Supreme Court of that state. Whatever, it is argued, may be the rule in state courts, in this Court, it is settled that a corporation cannot be estopped from asserting that it is not bound by a corporate act which is absolutely void, citing, among other cases, Pullman's Palace Car Co. v. Central Transportation Co., 171 U. S. 138; California Bank v. Kennedy, 167 U. S. 362; McCormick v. Market National Bank, 165 U. S. 538; Central Transp. Co. v. Pullman's Palace Car Co., 139 U. S. 24.
the settled construction given to it by the Supreme Court of that state.

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