Court Opinion

ID: 8755869
Source: CourtListenerOpinion
Date Created: 2022-11-26 11:45:53.365981+00
Date Added: 2024-06-11T17:01:14.960109
License: Public Domain

GILBERT, Circuit Judge (dissenting).
The appellee was a benevolent corporation, formed for the establishment and maintenance of a hospital.for the care and treatment of the sick and injured, and the maintenance of a school for educational purposes, with the powers necessary to carry out those purposes. It is not disputed that under the laws of the state of Washington a corporation is not permitted to subscribe for or hold stock in another corporation. This was first held in Denny Hotel Co. v. Schram, 6 Wash. 134, 32 Pac. 1002, 36 Am. St. Rep. 130. In Parsons v. Tacoma Smelting & Refining Co., 25 Wash. 492, 65 Pac. 765, it was held that such power did not exist under the statutes of that state, even where assumed in the articles of incorporation under a general law providing for the formation of private corporations and. per^mitting them to enumerate in their articles the powers to be exercised by them.
The appellant relies on cases such as Bowman & Poster v. Hardware Co. (C. C.) 94 Fed. 592, in which it is held that where.a contract made by a corporation in excess of its granted powers has been executed, and the corporation has received the benefit thereof, the law interposes an estoppel, and will not permit the validity of the contract to be questioned. And such may be said to be the doctrine of perhaps the majority of the state decisions. But in the Supreme Court of the United States it is not so held. In Central Transportation Co. v. Pullman Palace Car Co., 139 U. S. 59, 60, 11 Sup. Ct. 478, 488, 35 L. Ed. 55, the court said:
“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.”
The doctrine of this case is affirmed in McCormick v. National Bank, 165 U. S. 550, 17 Sup. Ct. 433, 41 L. Ed. 817, and California National Bank v. Kennedy, 167 U. S. 362, 17 Sup. Ct. 831, 42 L. Ed. 198. Nor does the Supreme Court, in so holding, distinguish between cases of quasi public corporations and private corporations. In De la Vergne v. German Savings Inst., 175 U. S. 58, 20 Sup. Ct. 25, 44 L. Ed. 62, the court said:
“Whatever doubts might have been once entertained as to the powers of corporations to set up the defense of ultra vires to defeat a recovery upon an executed contract, the rule is now well settled, at least in this court, that, ■where the action is brought upon the illegal contract, it is a good defense that the corporation was prohibited by statute from entering into such contract, although in an action upon a quantum meruit it may be compelled to respond for the benefit actually received.”
In Ward v. Joslin, 186 U. S. 142, 22 Sup. Ct. 807, 46 L. Ed. l093, the court applied the doctrine to a contract made by a private corporation, the Western Investment Loan & Trust Company of Kansas, and said:
*360“The rule In this court is that a contract made by a corporation beyond the scope of its powers, express or implied, cannot be enforced or rendered enforceable by the application of the principle of estoppel.”
The extent to which the Supreme Court has applied equitable relief in cases of ultra vires contracts made by corporations has been to require the specific return of property or money parted with on the faith thereof (Salt Lake City v. Hollister, 118 U. S. 263, 6 Sup. Ct. 1055, 30 L. Ed. 176), or to compel compensation for property not returned (Central Transportation Co. v. Pullman Palace Car Co., 139 U. S. 60, 11 Sup. Ct. 478, 35 L. Ed. 55; Pullman Palace Car Co. v. Transportation Co., 171 U. S. 156, 18 Sup. Ct. 808, 43 L. Ed. 108).
This established rule of the Supreme Court must control the decision in the present case, unless the Supreme Court of the state of Washington had, prior to the time when the contract in the present case was entered into, announced a different rule as to contracts ultra vires made by corporations of that state. In Dexter, Horton & Co. v. Long, 2 Wash. St. 435, 440, 27 Pac. 271, the court held that where money was obtained by a corporation upon its securities, which was ultra vires, but the money was applied for the benefit of the company with the knowledge and acquiescence of the shareholders, the company and the shareholders are estopped to deny the liability of the company to repay it. In Tootle v. First National Bank, 6 Wash. 181, 33 Pac. 345, the bank had received property of the value of more than $7,000, transferred to it by a bill of sale which it claimed was in payment of a debt due it of $2,000. The court found that the bill of sale was intended as a mortgage to secure the payment of $2,000, and, in answer to the plea of the bank that the transaction was beyond its powers, the court said:
“It is not necessary to determine whether the contract was ultra vires, for it was not immoral. It was fully performed by the other party, and the bank received and retained the benefits, and in such a case the plea of ultra vires is unavailing. * * * The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong.”
The consideration of the Washington decisions might properly end here, for the foregoing are all the decisions of the Supreme Court of that state on that subject prior to the execution of the contract in controversy. This court is not bound by the decisions of that court, after rights accrued under the contract, where such decisions conflict with the rule of the Supreme Court of the United States. Carroll County v. Smith, 111 U. S. 556, 4 Sup. Ct. 539, 28 L. Ed. 517. But it is not perceived that in any of such later decisions, when viewed in the light of the facts presented in each case, the doctrine of the decisions above noted has been departed from. In Allen v. Olympia Light & Power Co., 13 Wash. 307, 43 Pac. 55, the corporation had, for value received, executed its negotiable promissory note for $8,000, and the note had been indorsed to the plaintiff. The bank, when sued upon the note, made the defense of want of authority. The court said:
“The want of authority in the officers to make the note in suit will not serve the defendant when it appears, as it does from the pleadings in this *361ease, that it had the benefit of the money which it received by reason of the execution of the note. This court has often decided that corporations cannot escape their honest obligations by pleading want of authority to execute a contract, where, as a result of the contract, the corporation had received the benefit of the money obtained.”
In Spokane v. Amsterdamsch Trustees Kantoor, 22 Wash. 172, 60 Pac. 141, the suit was brought by a stockholder to set aside a conveyance by which the corporation had transferred all its property to another corporation, and the latter had borrowed from the respondent $300,000. The contention was that one corporation could not sell all of its property to another; that such a transaction was ultra vires. The court in that case approved the doctrine that the executed dealings of corporations must be allowed to stand for and against both parties when the plainest rules of good faith require it. It is true that in that case the court made use of these words:
“It seems that the rule stated in Parish v. Wheeler, 22 N. Y. 494, has been applied by this court, and, where a corporation has received benefits under a contract, it is estopped from saying it has no power to make it.”
What the court meant by this utterance is shown by its own prior decisions cited in support of it, and by the case of Parish v. Wheeler, the doctrine of which" it so expressly adopted. That was a case in which it was held that a corporation cannot defend itself against a claim for money paid at its request to one who advanced the price of a steamboat purchased for it, on the ground that the purchase was ultra vires. The court in that case said that the plea of ultra vires was not to be entertained, especially so long as the corporation “retains, and insists upon retaining, all the benefits of the contract”; and later in the opinion the court added:
“The executed dealings of corporations must be allowed to stand for and against both the parties when the plainest rules of good faith so require.”
Again, in Graton & Knight Mfg. Co. v. Redelsheimer, 28 Wash. 370, 377, 68 Pac. 879, 881, the court said:
“A corporation has sometimes been permitted to disavow an unexecuted contract which it has attempted to enter into, because beyond the scope of its charter powers. But the doctrine of ultra vires, so far as we are aware, has never been invoked successfully when the purpose was to recover money paid by it for the purchase of goods which it had received and appropriated to its own use.”
In each of these cases the plea of ultra vires was invoked to enable the corporation to retain the money of another without repaying it, or the property of another without paying for it. The controlling consideration in holding it estopped so to do was the gross wrong and injustice of permitting it thus to escape its assumed liability. Such is not the present case. The appellee does not retain from the appellant money which, ex aequo et bono, it ought to repay. It borrowed from the appellant $7,000, and mortgaged its property to secure payment thereof. It entered into the contract of loan on the representation of the appellant’s agent, fortified by the printed matter contained in a pamphlet which it published and circulated, and which, while it did not specifically *362so, promise,. stated that it- might safely be estimated that payment of 90 installments of the amount specified would be sufficient to extinguish all liabilities of the borrower, and illustrating the expected result by figures showing that 90 installments would amount in the aggregate to only a trifling sum in excess of the principal of the loan and simple interest thereon at the rate of 7 per cent, per annum. That the appellant’s expectations were not realized is owing to no act or default of the appellee, but solely to the appellant’s misfortunes or to mismanagement of its corporate business, a business in which the appellee, although nominally a stockholder, had no voice or part. The appellee, instead of paying 90, has paid 96 of such monthly payments, amounting in all to $11,263. These payments, applied on the loan, repay the principal- thereof and $4,263 interest. The amount so paid in gross would be--tantamount to a repayment of the $7,000 principal, and 7.61 per cent. per annum thereon, if the principal had been repaid at the end -of the 96 months. But when we come to consider that in fact the- loan and interest were repaid in installments of $119.35 per month, covering the entire period of 96 months, which install-' ments included monthly payments of principal as well as of, interest, it will be seen that the rate of interest actually-received was much greater than 7.61 per cent, per annum, and amounted to more than 15 per cent, per annum. The inquiry then suggests itself, what has the appellee received out of this extortionate, contract which in equity it ought to restore to the appellant? It retains none of -the money of the appellant, and none of its stock. The money has been paid back with a .very high rate of interest, and,the stock was assigned to the appellant at the time, when the' contract was made. In Thompson on Corporations, § 5999, it is said: '
“Wberp, as in the case of strictly private corporations, such as mining, manufacturing, insurance, and commercial companies, no question of public policy''is . involved, but the question is merely one concerning the rights-.of stockholders and creditors not to have the corporate funds dissipated by ultra' vires engagements, then there will be no right of rescission after a part performance by one of the parties'; but that, in the case of any species of corporation,'. Whether public or private in its nature and objects, where á principle of public policy is involved, and where a continued execution of the contract involves a continued violation of the law, then there will always be a right of rescission by either party to the contract, upon a restoration of what he has obtained under it.”
The contract in this instance being legal in part and in part illegal, the installments of money paid by the appellee are properly to be deemed payments only of its legal obligation. This leaves the whole of the appellant’s demand as it now stands — the demand for the further sum of $3,375 — to rest upon the illegal promise of the appellee to pay assessments on the stock. On what principle can it be, said that the appellee is now estopped to deny that obligation? An estoppel in pais is defined to be a preclusion of a person to deny a fact which he has by his act induced another to believe,and act upon to his prejudice. But wherein has the appellapi acted upon the contract in the present case to its prejudice ? *363It parted with a sum of money, but it has received it back with interest at 15 per cent, per annum? It has received more out of the transaction that it expected to receive, according to its own representations made at the time of making the loan. If there be an estoppel here it must rest not on the ground that the appellee retains benefits from the contract, but on the ground that it received and repaid with excessive interest the appellant’s money. The appellee, concerning its power to subscribe stock, made no representations on which the appellant relied. Its want of authority to subscribe stock did not consist in any restriction contained in its articles, unknown to the appellant, nor in the failure of its directors to authorize its act. It consisted in the law and public policy of the state under which the appellee had its existence. Of that law both parties were equally bound to take notice. I find nothing in the decisions of the Supreme Court of the state of Washington which requires the denial of the relief which the appellee prayed for — the cancellation of its mortgage upon the records — and nothing to sustain the decision of the majority of this court that in equity the appellee should be subjected to the further burden of paying the $3,375.40 which the appellant demands in satisfaction of its mortgage.