Source: https://www.law.cornell.edu/supremecourt/text/175/40
Timestamp: 2015-04-27 04:15:35
Document Index: 39085568

Matched Legal Cases: ['§ 709', '§ 537', '§ 4622', '§ 431', '§ 1102', '§ 8']

DE LA VERGNE REFRIGERATING MACHINE COMPANY, , v. GERMAN SAVINGS INSTITUTION | LII / Legal Information Institute
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175 U.S. 40 (20 S.Ct. 20, 44 L.Ed. 65)
DE LA VERGNE REFRIGERATING MACHINE COMPANY, Petitioner, v. GERMAN SAVINGS INSTITUTION et al.
Argued: April 7, 11, 1899.
Decided: October 30, 1899
[HTML] This is a consolidation of eight actions brought by the German Savings Institution and seven other plaintiffs, in the circuit court of the city of St. Louis, against the De la Vergne Refrigerating Company and John C. De la Vergne, its president and principal stockholder, personally, for a failure to deliver to plaintiffs certain stock in the Refrigerating Company.
Certain personal property was seized upon on attachment issued, a forthcoming bond given therefor, and the several actions were afterwards removed to the circuit court for the eastern district of Missouri upon the joint petition of the defendants. In that court the several actions were consolidated and submitted upon an agreed statement of facts upon which judgment was entered for the defendants.
Argument of Counsel from pages 41-48 intentionally omitted
The facts of the case are substantially as follows: The Consolidated Ice Machine Company (hereinafter referred to as the Consolidated Company) was a corporation organized under the laws of Illinois, and was engaged in the business of manufacturing and selling refrigerating and ice-making machines. The entire amount of issued stock of such corporation was $100,000, held in various proportions by the plaintiffs in this consolidated cause. Having become insolvent, the company, on October 14, 1890, made an assignment under the general laws of Illinois, for the benefit of creditors, to one Jenkins, who, at the date of the contract sued upon, was engaged in winding up its business. The assignment on its face purported to convey to Jenkins and his successors in trust the entire real and personal 'property and effects of every kind and description' belonging to the corporation, 'or in which it has any right or interest,' the same being fully and particularly enumerated and described in an inventory, which, however, does not appear in the record. Its assets consisted mainly of a plant for the manufacture of refrigerating and ice-making machines in Chicago; of patent rights, outstanding accounts, and the goodwill of its business, which appears to have been an extensive one.
It is asserted by the plaintiffs, who are stockholders in this company, that the assets exceeded in value the liabilities of the company, and that the company was not in reality insolvent, but had assumed contracts to such an extent that, with its limited capital, it was unable to carry them out.
By the fourth clause, the stockholders agreed within ten days from the date of the agreement to assign to De la Vergne, for the benefit of the Refrigerating Company, all stock of the insolvent company which had been issued, and which they guaranteed had been paid in full; and within sixty days thereafter the Refrigerating Company and its president agreed to issue and deliver to the stockholders of the Consolidated Company stock in the Refrigerating Company to the amount of $100,000.
By the fifth clause, the stockholders in the Consolidated Company covenanted to accept, in lieu of the stock of the Refrigerating Company, $100,000 in cash, at the option of De la Vergne, the president of the company.
In the following July demands were several times made by Mr. Rassieur for himself and his associates for the $100,000 in stock or money stipulated by the contract, but no response was received until September, when Mr. Fitch, acting for the Refrigerating Company, announced for the first time that the defendants declined to carry out their part of the contract. The reasons for the refusal do not seem to have been substantial ones. The letter contained an announcement that Mr. De la Vergne's counsel was ready to return the papers sent to him to whomsoever was legally entitled to their custody. There was no reconveyance to the Consolidated Company of whatever was covered by the contract, the covenant of its stockholders to refrain from transacting business for ten years was never released, and none of the certificates and assignments of stock were ever delivered back. It appeared, however, that in the meantime the Refrigerating Company had secured the former New York office of the Consolidated Company; had employed its agent in making contracts with former customers of that company, which contracts were taken in the name of such agent. He was, however, furnished with the means by which they were carried out, and assignments were taken from him, which practically secured the goodwill of the company, although the Chicago assets were allowed to go to sale by the assignee. At this sale Mr. De la Vergne was present and offered for the tangible assets the sum of $25,000.
In their answer as amended, defendant set up as justification for a refusal to perform the contract that no assets of the Consolidated Company ever came into the possession of the defendants, since all, including the goodwill, had been transferred to Jenkins, the assignee, for the benefit of its creditors, and remained in his possession and control until they were disposed of under the direction of the probate court for the benefit of creditors, and that they were insufficient to discharge the liabilities; that the contract sued upon purporting to be executed on behalf of the Refrigerating Company by De la Vergne, its president, was executed without authority; that no benefit of any kind ever accrued to the company under the contract; that the company never received any of the consideration moving to it under the contract; that it never received any of the assets of the Consolidated Company, nor any of the stock; that it never in any manner ratified or approved the contract, but, on the contrary, rejected the same, and that the plaintiffs well knew at the time of making the contract that De la Vergne had no power or authority to bind the Refrigerating Company; that the defendants notified the plaintiffs that they would not be bound by the contract, and that such rejection of the contract was acquiesced in by the plaintiffs, and that, relying upon such acquiescence, the defendants abandoned all interests in the Consolidated Company; that the contract was in reality for the stock of the Consolidated Company, and that the Refrigerating Company was not authorized by its charter, by the laws of New York or of Illinois, to purchase such stock, and that the agreement was ultra vires; and further, that the Refrigerating Company had no authority to stipulate for an increase in its capital stock, as was attempted under the contract, and that the contract was against public policy and wholly void.
As the general assignment to Jenkins, executed October 14, 1890, was most sweeping in its terms, and included all the real and personal property and effects of every kind and description belonging to the corporation, or in which it had any right or interest, it was doubtless sufficient to pass the goodwill of the business, which was an incident either to the premises, to the name of the corporation, or to the tangible property with which the business was carried on. Churton v. Douglas, Johns. V. C. (Eng.) 174, 188; Menendez v. Holt, 128 U. S. 514, 32 L. ed. 526, 9 Sup. Ct. Rep. 143; Metropolitan Bank v. St. Louis Dispatch Co. 149 U. S. 436, 37 L. ed. 799, 13 Sup. Ct. Rep. 944; Willett v. Blanford, 1 Hare, 253; Wedderburn v. Wedderburn, 22 Beav. 84; Bradbury v. Dickens, 27 Beav. 53; Williams v. Wilson, 4 Sandf. Ch. 379; Sheppard v. Boggs,
9 Neb. 257; Wallingford v. Burr,
17 Neb. 137.
This was evidently the view taken by the assignee, since he subsequently advertised the goodwill of the business for sale, and sold the same under an order of the court to Clarence A. Knight and Otto C. Butz, who afterward sold the same, including certain of the assets, to John Featherstone's Sons.
In addition to this, however, there was no corporate action taken authorizing any such conveyance by the corporation, and such conveyance would not, under the laws of Illinois which conform in this particular to the general law, be within the power of the stockholders, even though they all signed it without formal action at a meeting held for that purpose. Sellers v. Greer, 172 Ill. 549, 40 L. R. A. 589, 50 N. E. 246; Hopkins v. Roseclare Lead Co. 72 Ill. 373; Humphreys v. McKissock, 140 U. S. 304, 312, 35 L. ed. 473, 475, 11 Sup. Ct. Rep. 779; Allemong v. Simmons, 124 Ind. 199, 23 N. E. 768; Smith v. Hurd, 12 Met. 371, 385, 46 Am. Dec. 690; England v. Dearborn, 141 Mass. 590, 6 N. E. 837; Cook, Stockholders, § 709.
It is true that the president of the Consolidated Company assumed to sign the contract as president, and to bind the company, but it is scarcely necessary to say that the president of a corporation has no power as such to make a general conveyance of the assets of the corporation without at least the assent of the board of directors. England v. Dearborn, 141 Mass. 590, 6 N. E. 837; Titus v. Cairo & F. R. Co. 37 N. J. L. 98, 102; McCullough v. Moss, 5 Denio, 567; Fulton Bank v. New York & S. Canal Co. 4 Paige, 129, 134; Walworth County Bank v. Farmers' Loan & T. Co. 14 Wis. 325; Stokes v. New Jersey Pottery Co. 46 N. J. L. 237; Morawetz, Priv. Corp. § 537; 4 Thomp. Corp. § 4622.
But as the powers of corporations, created by legislative act, are limited to such as the act expressly confers, and the enumeration of these implies the exclusion of all others, it follows that unless express permission be given to do so, it is not within the general powers of a corporation to purchase the stock of other corporations for the purpose of controlling their management. First Nat, Bank v. National Exch. Bank, 92 U. S. 122, 128, 23 L. ed. 679, 681; Sumner v. Marcy,
3 Woodb. & M. 105; Morawetz, Priv. Corp. § 431; 1 Thomp. Corp. § 1102; People, Peabody, v. Chicago Gas Trust Co.,
130 Ill. 268, 8 L. R. A. 497; Milbank v. New York L. E. & W. R. Co. 64 How. Pr. 20; Mechanics' & W. M. Mut. Sav. Bank & Bldg. Asso. v. Meriden Agency Co. 24 Conn. 159.
Not only is this true as a general rule, but by the law of the state of New York, under which this corporation was organized, i. e., 'An Act to Authorize the Formation of Corporations for Manufacturing, Mining, Mechanical, or Chemical Purposes,' passed Feb. 17, 1848 (Laws 1848, chap. 40), it was declared in § 8 that 'it shall not be lawful for such company to use any of their funds in the purchase of any stock in any other corporation.' This language is clear and explicit, and evidently covers purchases of stock in other corporations, whether engaged in the same or different business.
In this connection, however, our attention is called to an act passed by the legislature of New York June 7, 1853 (Laws 1853, chap. 333), amendatory of the act of 1848, the 2d section of which enacts that 'the trustees of such company may purchase mines, manufactories, and other property necessary for their business, and issue stock to the amountof the value thereof in payment therefor.' The position of the plaintiffs in this connection is that, under the authority to purchase 'other property necessary for their business,' it was competent for manufacturing corporations to purchase the stock of other similar corporations. But we do not so read the act. Its evident object was to permit manufacturing corporations to purchase mines from which they could extract their own ore, or manufactories of raw material, such as pig iron or lumber, which could furnish to them material to be worked up into their own products; and in case such purchases involved a larger outlay than their present resources would justify, to issue new stock 'to the amount of the value thereof in payment therefor.' But there is nothing to indicate that the legislature intended to authorize them to purchase the stock of competing corporations, or corporations engaged in other business. It is only property necessary for their own current business they were authorized to purchase.
The object of this act was evidently much the same as that of the prior act of 1853, that is, to enable manufacturing corporations to produce their own ore and manufacture their own raw materials. To meet the exigencies of this statute it is necessary that the company whose stock is purchased should at the time of the purchase be engaged in the business of mining, manufacturing, or transporting such materials as are required in the prosecution of the business of the purchasing company; and the right is limited to such time as they shall furnish or transport such materials for the use of such company, and for two years thereafter. It clearly has no application to a case where a manufacturing company purchases the stock of an insolvent rival concern which has ceased to do business, and whose stock is bought for the evident purpose of preventing a reorganization, and of obtaining its patronage.
Had the former acts given the unlimited authority to purchase insisted upon by the plaintiffs this act would have been entirely unnecessary, and, instead of enlarging the power previously possessed, would have operated as a restriction upon it. That this act of 1890 does not assist the plaintiffs is evident not only from the fact that the act did not take effect until after the contract was made, but from the further fact that it merely authorizes corporations to invest their funds in the stocks, bonds, or securities of other corporations if dividends have been paid for three years before the loans are made, or if the interest on their securities is not in default, and such securities are worth 20 per cent greater than the amount loaned thereon. This act evidently refers to loans and not to purchases, since the section expressly provides that no corporation shall use its funds in the purchase of any stock, either of its own or any other corporation, unless by way of security for antecedent debts.
The earliest case in which this doctrine is distinctly laid down is that of Pearce v. Madison & I. R. Co. 21 How. 441, 16 L. ed. 184, in which it appears that two railroad companies, which had been consolidated, gave their promissory notes in payment for a steamboat to run in connection with the railroads. It was held that, as there was no authority in the railroad companies to engage in running steamboats, there could be no recovery on the notes, and that as the plaintiff was not the owner of the boat and had sued upon the notes as an indorsee, there could be no recovery. The same doctrine has been applied to leases ultra vires a corporation, and it has been uniformly held that there could be no recovery upon the lease itself, though there might be in an action for use and occupation of the property. Pittsburgh, C. & St. L. R. Co. v. Keokuk & H. Bridge Co. 131 U. S. 371, 384, 33 L. ed. 157, 161, 9 Sup. Ct. Rep. 770; Central Transp. Co. v. Pullman's Palace Car Co. 139 U. S. 24, 48, 35 L. ed. 55, 64, 11 Sup. Ct. Rep. 478; S. C. 171 U. S. 138, 43 L. ed. 108, 18 Sup. Ct. Rep. 808; McCormick v. Market Nat. Bank, 165 U. S. 538, 550, 41 L. ed. 817, 822, 17 Sup. Ct. Rep. 433; Thomas v. West Jersey R. Co. 101 U. S. 71, 25 L. ed. 950; California Nat. Bank v. Kennedy, 167 U. S. 362, 42 L. ed. 198, 17 Sup. Ct. Rep. 831; Buckeye Marble & Freestone Co. v. Harvey,
92 Tenn. 116, 18 L. R. A. 252; Union P. R. Co. v. Chicago, R. I. & P. R. Co. 163 U. S. 564, 41 L. ed. 265, 16 Sup. Ct. Rep. 1173.
The doctrine that no recovery can be had upon the contract is based upon the theory that it is for the interest of the public that corporations should not transcend the limits of their charters; that the property of stockholders should not be put to the risk of engagements which they did not undertake; that if the contract be prohibited by statute everyone dealing with the corporation is bound to take notice of the restrictions in its charter, whether such charter be a private act or a general law under which corporations of this class are organized. Zabriskie v. Cleveland, C. & C. R. Co. 23 How. 381, 398, 16 L. ed. 488, 497; Thomas v. West Jersey R. Co. 101 U. S. 71, 25 L. ed. 950; Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co. 118 U. S. 290, and 630, 30 L. ed. 83, and 284, 6 Sup. Ct. Rep. 1094, and 7 Sup. Ct. Rep. 24; Oregon R. & Nav. Co. v. Oregonian R. Co. 130 U. S. 1, 25, 32 L. ed. 837, 841, 9 Sup. Ct. Rep. 409; Pittsburgh C. & St. L. R. Co. v. Keokuk & H. Bridge Co. 131 U. S. 384, 33 L. ed. 161, 9 Sup. Ct. Rep. 770.
The difficulty with the position of the plaintiffs in this case is this: If the purchase of the stock was the main object of the contract the consideration was an illegal one, and the promise of the Refrigerating Company to furnish its own stock in payment was ultra vires. If, upon the other hand, the object of the contract was to obtain the assets and goodwill of the Consolidated Company upon payment of its debts, then the promise of the Refrigerating Company to pay the plaintiffs therefor was without consideration, since the assets were the property of the Consolidated Company and not of its stockholders, and anything realized by the sale of such assets belonged to the company or its assignee, and should be devoted first to the payment of its debts. If there were anything of value beyond the control of the stock which passed to the Refrigerating Company under the contract, the assignee could not be dispossessed of it until all the debts were paid or compromised, when it would revert to the corporation but not to the plaintiffs. Their title to sue must rest upon their ownership of the stock, and if the defense of ultra vires be sustained, we know of no theory upon which the plaintiffs can recover. It certainly cannot be true that the plaintiffs can take to themselves the $100,000 stipulated by this contract and leave creditors of the corporation unpaid to the extent of $150,000.
2 N. W. 370.
22 N. W. 350.
Fed. Cas. No. 13,609.
22 N. E. 798.
20 S. W. 427.