Court Opinion

ID: 8821454
Source: CourtListenerOpinion
Date Created: 2022-11-26 15:34:35.632508+00
Date Added: 2024-06-11T17:04:38.970530
License: Public Domain

DONAHUE, Circuit Judge
(after stating the facts as above). [1] In the disposition of this motion it is unnecessary to refer to the assignments of error upon which the plaintiff in error relies for a reversal of this judgment. This plaintiff in error has assigned and transferred to the directors of the George Alexander & Co. State Bank whatever right he may have had in his official capacity as banking commissioner of the commonwealth of Kentucky to recover these collateral securities from the Fifth-Third National Bank of Cincinnati. He has no further personal or official interest in the prosecution of this proceeding in error, and if the judgment were reversed and the cause remanded, a recovery upon the cause of action stated in the petition would not inure to his benefit either in his personal or official capacity, or to the benefit of tlie creditors of this defunct bank.
It is insisted, however, that not only under the rule of the common law, but also under the express provisions of statutes both of Kentucky and Ohio, these bank directors, as assignees of “all other assets of the George Alexander & Co. State Bank,” are entitled to prosecute this action in the name of the assignor. That proposition is undoubtedly true, but, on the other hand, it is wholly immaterial in whose name this action is prosecuted. The substantial question is: For whose benefit is it prosecuted? That is to say, if the parties for whose benefit it is prosecuted could not maintain this suit in their own names and recover for their own benefit, then it follows as a corollary that they cannot prosecute it in the name of the assignor, who has no further personal or official interest therein.
If it were conceded that the banking commissioner of the commonwealth of Kentucky had the right and authority to transfer and assign to these directors of the George Alexander & Co. State Bank “all other assets” of that bank, not expended by him in the payment of creditors, beyond question he could not transfer to these assignees any part or parcel of his official character, or his right as such officer of the commonwealth of Kentucky to represent either the state of Kentucky or the creditors of this insolvent bank. This action is no longer in the interest of, nor for the benefit of, the creditors, and it must now be main*592tained, if at all, for the benefit of ,the directors of the insolvent bank that negotiated this loan from the defendant bank in excess of its charter powers to incur indebtedness.
The question is therefore fairly presented upon this motion whether the George Alexander & Co. State Bank, or these directors of that bank, as assignees of its property interest therein, can successfully maintain an action for the recovery of this collateral security without making restitution to the defendant bank of the money secured by the insolvent hank through and by this ultra vires contract. Upon the clearest principle of law and equity, the answer to this must be in the negative. By this transfer, assignment, and delivery of this colláteral security, the George Alexander & Co. State Bank obtained from the defendant bank $43,640.37 of the lawful money of the United States. The balance of this collateral security, over and above this sum of money, was returned by this defendant bank to the banking commissioner of Kentucky, so that for every dollar of these securities, not specifically returned to the banking commissioner, the George Alexander & Co. State Bank, of which these assignees were the directors, received a dollar in money, which money came into the possession and control of that bank and these directors, and was applied to its purposes, and presumably increased to that extent the assets available to creditors when the bank became insolvent and passed into the hands of the banking commissioners.
Section 598 of the Kentucky Statutes provides that:
“If any director or directors of any bank shall knowingly violate, or permit any officer or employs of the bank to violate any of the provisions of the laws relating to banks, the directors so offending shall be jointly and severally, individually liable to the creditors and stockholders for any loss or damage resulting from such violation.”
The law of Kentucky provides, among other things, that no corporations shall incur indebtedness or liability in excess of the amount named in its charter. It is averred in the answer, and not denied in the reply:
“That the board of directors, or a majority of them, by resolution formally adopted and furnished by said bank to defendant herein, authorized the several loaps and each of them thereafter made by defendant to said bank.”
.Regardless, however, of the averments and admissions in the pleading, the law imposed upon these directors the duties of directing the affairs of this bank, and their responsibility in that behalf could not be transferred to its president. The banking commissioner of the commonwealth of Kentucky brought two separate actions in the Kentucky state court against these directors to recover for the benefit of creditors. These suits were based upon the violation by these directors of the statute of Kentucky above cited, and also upon their gross failure, neglect, and violation of their duties as directors of said bank in other respects. In compromise of these suits, these directors paid to the banking commissioner of Kentucky the sum of $93,277.82 for the benefit of creditors other than this defendant bank, and now seek in this action to reimburse themselves for this loss from one of the victims of this same unlawful and careless course of conduct in the management of *593the affairs o£ the insolvent bank upon which their liability to its creditors was predicated, and in discharge of which liability they paid this large sum of money.
[Ü] The rule of ultra vires differs materially in its application to private corporations and its application to public or municipal corporations. Kellogg-Mackay Co. v. Havre Hotel Co. et al., 199 Fed. 727, 118 C. C. A. 165. The question here involved, however, is fully answered by the Supreme Court of the United States in the case of the Pullman Palace Car Co. v. Central Transportation Co., 171 U. S. 138, 18 Sup. Ct. 808, 43 L. Ed. 108. In that case the contract had previously been declared void by the United States Supreme Court in an action between the same parties (139 U. S. 24, 11 Sup. Ct. 478, 35 L. Ed. 55), because ultra vires the charter of the Central Transportation Company, and also because it involved an abandonment by that company of its duties to the public. The Transportation Company by cross-appeal in this later action asked for an accounting of profits which the Pullman Company had derived by its use of this property transferred to it under this void agreement, and that it should in the future from time to time account for the sums which should be due by reason of further operations under this contract, and also for the return of its property delivered by it under this void contract to the Pullman Company, and compensation for any part of that property which it was impossible to return. In the trial court judgment was entered in favor of the Transportation Company in the sum of $4,235,044. This judgment was reversed by the Supreme Court, because the recovery was too large, and the cause was remanded to the Circuit Court f or the Eastern District of Pennsylvania, with directions to enter a judgment for the Transportation Company in the sum of $727,846.50 and interest from Jaruiniy 5, 1885, which amount represented the value of the property transferred by that company to the Pullman Company under this ultra vires lease at the date of the repudiation of the lease, but refused any relief for the use of the property during the time both parties acted under its provisions, upon the theory that the rent paid compensated for that use. The Supreme Court in this case discussed at length the authorities applicable to the question here involved and concluded its consideration of these authorities with this statement:
“They are substantially unanimous in expi’ossing the view that in no wa.v and through no channels, directly or indirectly, will the courts allow an action to be maintained for the recovery of property delivered under an illegal contract where, in order to maintain such recovery, it is necessary to have recourse to that contract. The right of recovery must rest upon a disaffirmance o£ the contract, and it is permitted only because of the desire of courts to do justice as far as possible to the party who' has made payment or delivered property under a Void agreement, and which in justice he ought to recover.”
In this case it appears that the property transferred from the Central Company to the Pullman Company under this void contract had substantially disappeared and could not then be returned; but notwithstanding that fact it required the Pullman Company to compensate the Transportation Company for its value.
*594In the case of Kellogg-Mackay Co. v. Havre Hotel Co. et al., supra, it was held:
“The doctrine of ultra vires may not he invoked to defeat justice or work a legal wrong” — citing in support of this 3 Thompson on Corporations (2d Ed.) § 2778; Railway Co. v. McCarthy, 96 U. S. 258-267, 24 L. Ed. 693.
The court quotes at some .length from the opinion by Mr. Justice Swayne in Railway Co. v. McCarthy, supra, and concludes with this language:
“Perhaps the doctrine as announced by Mr. Justice Swayne, which is one really of estoppel, is not strictly applicable, unless in exceptional cases, where the corporations involved are of a public or quasi public character, but it would seem to be suited with strong reason and emphasis to the operation of merely private corporations, when such corporations have received the benefits of the obligations which they are seeking to repudiate, and has been so applied in a variety of cases.”
The court cites in support of this proposition a great many cases decided, not only by the federal courts, but by many state courts of last resort. The doctrine announced by the Supreme Court of the United States in Eastern Building & Loan Association v. Williamson, 189 U. S. 122-129, 23 Sup. Ct. 527, 47 L. Ed. 735, applies with peculiar force to the facts in this case. The court in its opinion (189 U. S. 129, 23 Sup. Ct. 530, 47 L. Ed. 735) quotes with approval from the New York Court of Appeals in the case of Yought v. Eastern Building & Loan Ass’n, 172 N. Y. 508, 65 N. E. 496, 92 Am. St. Rep. 761, the following :
“It is now well settled that a corporation cannot avail itself of the defense of ultra vires when -the contract has been, in good faith,- fully performed by the other party, and the corporation has had the benefit of the performance and of the contract. * * * While they have no right to violate their charters, yet they have capacity to ño so, and are bound by their acts where a repudiation of them would result in manifest wrong to innocent parties, and especially where the offender alleges its own wrong to avoid a just responsibility. * * * When it [the contract] becomes executed by the other party, it is estopped from asserting its own wrong and can not be excused from payment upon the plea that the contract was beyond its power.”
Following this quotation from the New York Court of Appeals, the Supreme Court of the United States adds :
“We deem it unnecessary to add any observations of our own to these satisfactory declarations of the law of New York.”
Undoubtedly a private corporation may defend against an action to enforce an executory contract upon the plea of ultra vires, where neither party has performed, or it may repudiate an ultra vires contract, upon making full restitution to the other contracting party, but the authorities are uniform that it can not keep the property of another obtained under and by the terms of such contract, and refuse performance on its part upon the theory that the contract is ultra vires its charter powers; otherwise, the plea of ultra vires would degenerate into a mere instrumentality of fraud, deceit, and dishonesty, by means of which a corporation might appropriate to its own use the private property of others, without fear of punishment or the necessity of making restitution.
*59513] The Kentucky Court of Appeals decided in the case of Bank v. Smith, 170 Ky. 512, 186 S. W. 482, Ann. Cas. 1918B, 959, that a contract by the George Alexander & Co. State Bank similar to the one now under consideration, incurring indebtedness in excess of its charter limitations, was ultra vires and void. This decision is based upon a construction of the statutes of that state, and to that extent is controlling upon this court. The rights and remedies of the parties to this ultra vires contract are questions of general jurisprudence, and therefore the decision in that respect is not controlling, but must be decided by this court upon the facts in this case. Insurance Co. v. Moore, 231 U. S. 543, 34 Sup. Ct. 186, 58 L. Ed. 356; Kuhn v. Coal Co., 215 U. S. 349, 30 Sup. Ct. 140, 54 L. Ed. 228. While we do not question the correctness of the judgment in that court in reference to the rights and remedies of the parties to that suit, yet that part of the judgment in the Kentucky case was predicated upon the rights of the banking commissioner of the commonwealth of Kentucky, who was not a party to the ultra vires contract, and who was prosecuting that suit in the public interest, to enforce the public policy of the state, as well as in the interest of the creditors of the insolvent bank.
[4] From the proofs submitted upon the hearing of this motion the banking commissioner, as heretofore stated, has no further official interest in this suit. He is no longer prosecuting this proceeding in error in the public interest, or in the interest of the creditors of the insolvent bank. The assignment by him of these securities did not convey or transfer to the assignees rights which the Kentucky statute vested in that officer for the protection of general creditors, but only the mere property interests of the George Alexander & Co. State Bank therein, just the same as if that bank had directly made the assignment to them, instead of through and by the hanking commissioner. Therefore the situation now presented in this case is not different than if the insolvent bank itself had originally brought this action against this defendant for the recovery of this collateral security, and this is further emphasized by the fact that these assignees are the directors of the insolvent bank who were responsible for this bank entering into these ultra vires contracts. Whether or not this suit be prosecuted to final judgment in the name of the assignor is a matter of mere form only, and not of substance. In such cases courts will not permit themselves to be blinded or deceived by mere forms of law, but, regardless of form, will deal with the substance of the transaction involved in identically the same manner as if the real parties in interest were substituted as parties plaintiff. Railway Co. v. Civic Ass’n, 247 U. S. 490, 38 Sup. Ct. 553, 62 L. Ed. 1229; Sudduth v. Coal Co. (C. C. A.) 268 Fed. 433.
Under these facts which have occurred subsequent to the decision of the Kentucky Court of Appeals in the case of Bank v. Smith, supra, this court is called upon to apply the seitled rule of general jurisprudence in reference to ultra vires contracts, which rule in the absence of restoration of status quo leaves the parties where it finds them. It follows, therefore, that if the George Alexander & Co. State Bank, or that bank’s assignees, cannot recover these securities from the defendant bank without first making full restitution to that bank, it would be an *596idle performance for this court to reverse the judgment in this case, for if the judgment were reversed and the cause remanded, it would be the duty of the trial court upon the facts established upon the hearing of this motion and the admissions of the pleadings, to render a like judgment.
For the reasons above stated, the motion of the defendant in error to dismiss this proceeding in error is sustained.

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