Court Opinion

ID: 8270582
Source: CourtListenerOpinion
Date Created: 2022-10-16 19:31:44.032698+00
Date Added: 2024-06-11T16:43:30.079760
License: Public Domain

Deptte, J.
(dissenting.) I agree with the opinion of Mr. Justice Van Syckel that the Camden and Atlantic Railroad Company had no power, at the time the lease was made, to construct the line of railroad in question under its charter, and that the acceptance of the lease by that company was ultra vires. But I dissent from the result that is reached.
The expression ultra vires is used in different senses—to express either that the act of the directors or officers is in excess of their authority as agents of the corporation, or that the act of the majority of the stockholders is in violation of the rights of the minority, or that the act has not been done in conformity with requirements of the charter, or that the act is one that the corporation itself has not the capacity to do, as being in excess of its corporate powers.
*575The indiscriminate use of this expression, with respect to eases different in their nature and principles, has led to considerable confusion, if not misapprehension. Where the act done by directors or officers is simply beyond the powers of the executive department of the corporation as the agency by which the corporation exercises its functions, and not of the corporation itself, it may be made valid and binding by the action of the board of directors, or by the approval of the stockholders. Where the act done by stockholders is not in excess of the powers of the corporation itself, but is simply an infringement upon the rights of other stockholders, it may be made binding upon the latter by ratification or by consent implied from acquiescence. Where the infirmity of the act does not consist in a want of corporate power to do it, but in the disregard of formalities prescribed, it may or may not be valid as to third persons dealing bona fide with the corporation, according to the nature of the formality not observed, or the consequences the legislature has imposed upon non-observance. These are all cases depending upon legal principles, not peculiarly applicable to corporations, and the use of the phrase ultra vires tends to confusion and misapprehension. In its legitimate use, the expression ultra vires should be applied only to such acts as are beyond the powers of the corporation itself. In this sense it is to be applied in this case.
In the discussion of this subject a distinction is sometimes taken between the acts of a corporation, which it is not expressly, or by necessary implication, empowered to do, and ■acts expressly forbidden to it, treating the latter as incapable of being endowed with any validity, and the former as susceptible -of ratification, and capable of obtaining validity from •equitable estoppel. The distinction, if well founded, is obliterated by the third section-of the General Corporation act, which provides that in addition to the powers enumerated in the first section of the act, (which are the usual powers of all •corporations,) and those expressly given by the charter, no corporation shall possess or exercise any corporate powers, except such as shall be necessary to the exercise of the powers *576so enumerated and given. Rev., p. 177. This court has held that this section is a prohibition of acts not within the scope of the powers granted, and that contracts in contravention of it are illegal. Moms and Essex R. R. Co. v. Sussex R. R. Co., 5 C. E. Green 542. The statutory prohibition and disability extend to stockholders as well as to the corporation. Except for the purposes of organization and action, the corporation consists of the body of its stockholders, and they cannot exercise or authorize any corporate powers which are denied to the corporation itself.
The suit is upon the covenant for payment of the rent reserved, for rent accruing after the defendant abandoned possession and gave notice of its renunciation of the lease. The cause of action, therefore, rests wholly upon the validity of the covenant in the lease.
The defendant, at the time the lease was taken, had powers appropriate to the construction and operation of its main line. It had no power to construct or operate a railroad on the route of the leased line. By force of the statute referred to, a leasing by the defendant of that line of railroad was prohibited, and the contract of leasing was illegal. The defendant’s charter was a public act, and expressed with precision the exact powers granted to it. The statute prohibiting the exercise, by any corporation, of any powers beyond those granted in its charter and the powers enumerated, was also a public statute. The lease was made by the plaintiff to the defendant, with full knowledge of the corporate powers of the latter, and of its incapacity to take the lease. Fraud or imposition is out of the question. The proposition for consideration is the legal principle by which a contract of leasing, which is under the ban of the statute, and illegal, may be made a legal and enforceable contract.
The lease could not acquire validity from the fact that the plaintiff was induced to construct its railroad by the defendant’s agreement to take a lease. The preliminary contract was also invalid. Nor could it obtain validity from the subsequent ratification, even though it was ratified by all the *577stockholders. The doctrine of validating a contract by subsequent ratification presupposes capacity to contract, and the defendant’s incapacity attached, as well to the contract, which should arise from ratification, as to the original contract. In Ashbury Railway Carriage and Iron Co. v. Riche, L. R., 9 Exch. 224, 262, Mr. Justice Blackburn, in the Court of Exchequer Chamber, expressed himself thus: “I do not entertain any doubt that if, on the true construction of a statute creating a corporation, it appears to be the intention of the legislature, expressed or implied, that the corporation shall not enter into a particular contract, every- court, whether of law or equity, is bound to treat a contract entered into contrary to the enactment as illegal, and therefore wholly void, and to hold that a contract wholly void cannot be ratified.” This language is quoted with approval in the same case in the House of Lords. Lord Chancellor Cairns declared that it summed up and exhausted the whole case. Lord Selborne said “that where there could be no mandate there cannot be any ratification, and that the assent of all the shareholders can make no difference when a stranger to the corporation is suing the company itself in its corporate name upon a contract under the common seal. No agreement of shareholders can make that a contract of the corporation which the law says cannot and shall not be so.” L. R., 7 Eng. & Ir. App. 653, 695.
The contention is that the lease, though invalid in its inception, was given validity by acquiescence, and that therefrom an estoppel arose, which concludes the defendant from setting up its invalidity. Kent v. Quicksilver Mining Co., 78 N. Y. 159, was mainly relied on. By its charter power was given to the company to issue certificates of stock representing the value of its property, in such form and subject to such regulations as it might by its by-laws prescribe, without any limitation upon its power to issue stock. By a by-law the company provided that certificates of stock amounting to $10,000,000 should represent the value of its property. Under this by-law certificates of stock were issued. The holders of these certificates were on an equality in participa*578tion in the profits of the business. Subsequently, the company feeing in need of money, a new by-law was adopted, authorizing the issue of preferred stock, on which a bonus of f 5 per share should be paid. The by-law provided that the preferred stock should be entitled to interest at the rate of seven per cent, per annum, to be paid annually out of the net earnings of the company, and that the surplus of the earnings, after payment of seven per cent, interest on the preferred stock, should be divided pro rata among the holders of preferred and common stock. It also provided that preferred stock should be issued only to holders of the common stock, and that on the issue of preferred stock common stock should be surrendered, share for share. Under this last by-law preferred stock was issued, but for each share of preferred stock a share of common stock was surrendered—the number of shares and the nominal value of each share being still the same. The controversy was between holders of common stock, issued under the original by-law, and the holders of preferred stock, and the proposition presented for decision, as appears by the opinion of the court on page 183 of the report, was the power of the corporate body, or of the majority of the stockholders, to provide for the creation of a preferred stock, so as to bind a minority of the stockholders not assenting thereto.
In the case just cited there was no overissue of stock. Uor was the power of the company to classify its stock and give one class of stockholders a preference over the other involved. The learned judge who delivered the opinion (page 178) declared that there was “ nothing in the constitution or the law that inhibits a corporation from beginning its corporate action by classifying the shares in its capital stock with peculiar privileges to one share over another, and thus offering its stock to the public for subscription thereto.” And (on page 187) he distinguished the case before the court from Ashbury Railway Co. v. Riche in the fact that in the latter case the act was expressly prohibited. The ground of decision was that the original by-law, which admitted the holders of stock to an *579•equality in rights, “ entered into the compact between the corporation and the taker of every share;” that the certificate of stock was “ a muniment of the stockholder’s title, and evidence of his right,” and expressed “the contract between the corporation and his co-stockholders and himself—a right as inviolable as' is any other right in property which could not be taken away or lessened against the will of the owner; ” and that the repeal of the by-law under which the stock was originally subscribed impaired the right acquired by the subscription. The act of the corporation in issuing preferred stock was not condemned as being in excess of its powers under its charter, and the doctrine of ultra vires in its proper sense was not presented by the case. Indeed, in its opinion the court carefully distinguishes between acts of a corporation which are .malum prohibitum—and every act in contravention of a statutory prohibition is malum prohibitum—and acts which, though unlawful, are merely injurious to the rights of others. The former the court declared that no assent of stockholders could validate; to the latter the doctrine of equitable estoppel by ■ acquiescence was applied, for the reason that such acts are unlawful only when done without the consent of the persons injuriously affected thereby. The doctrine of ultra vires did not arise except as it arises in the most comprehensive and indefinite sense in every ease where the right of a party to break his contract arises. The decision is distinguished from the ■case in hand in the fact that the act of the company was not one that was in excess of its corporate powers, whereas in this ■case the lease was undeniably beyond the corporate powers of the defendant, and is also distinguishable, as the court distinguished the Ashbury Railway case, in the fact that the act of the defendant in taking the control of the plaintiff’s road and exercising its franchises was expressly prohibited by the statute.
I have already referred to Ashbury Railway. Co. v. Riche, decided in the House of Lords and reported in L. R., 7 Eng. & Ir. App. 653. In that case the company was created a corporation by articles of association under the Companies act, (25 *580and 26 Vic., c. 89,) which defined the objects for which the company was established to be “ to make and sell or lend on hire railway carriages and wagons and all kinds of railway plant, fittings, machinery and rolling stock, to carry on the business of mechanical engineers and general contractors, to purchase and sell, as merchants, timber, coal, metals and other materials, and to buy and sell any such materials on commission or as agents.” The company purchased a concession for making a line of railway in Belgium, and gave a contract for its construction to Riche. Riche began, and for some time continued the work for the construction of the line, and for some time-the company paid to Riche the money earned by' the contract. In an unfinished condition of the work the company repudiated its contract with Riche, and the latter brought an action for damages. The House of Lords held that the action could not be maintained; that the contract, being in its inception void, as being beyond the provisions of the statute, could not be ratified, even by the whole body.
In the Ashbury Railway Company case the corporation was organized under a general act, which allowed the shareholders, by the memorandum of association, to determine the purposes for which the company should be organized, and there was plausibility in the argument that shareholders, having an option in determining the scope of the company’s power, a contract with an innocent third person, having the sanction of all the shareholders, should be binding, but the contract was nevertheless held to be void upon principles of public policy, for the reason, as was said by Lord Hatherly, that the legislature, in requiring the objects of the association .to be expressed in the memorandum filed, “ had in view distinctly the protection of outside dealers and contractors from the funds of the company being applied, or from a contract being entered into by the company, for any other object than those specified in the memorandum, which the legislature thought should remain forever unchanged.” Much more clearly does the principle apply to a corporation created by a special charter granted by the legislature, which has prescribed the *581corporate powers to be exercised without any volition on the part of the corporators. The latest cases on this subject in the House of Lords hold the principle to apply to corporations with special charters granted by act of parliament. Attorney-General v. Great Eastern Railway Co., 5 App. Cas. 473; Wenlock v. River Dee Co., 10 Id. 354. Still more clearly does the principle apply where the legislature has not left its policy to be ascertained by inference, but by a general statute applicable to all corporations has expressly enacted that no corporation shall exercise any corporate powers, except such as shall be necessary to the exercise of the powers enumerated and given.
Nor can this case be distinguished in the fact that in the Ashbury Eailway Company case the action was for damages. If the contract be a valid contract, the remedy for the breach <of it is determined by the circumstances of the particular case. Whether it be for unliquidated damages as compensation, or for debt upon a liquidated sum, cannot alter the validity of ■the agreement as a contract. The law furnishes the remedy upon contracts, and a contract cannot be made valid or invalid .-according as one form of remedy or another is resorted to. On that theory all of the covenants in the lease would be invalid, except those for the payment of rent, for all the other •covenants are such as that a breach would sound in damages.
Two cases in the United States Supreme Court are also in point. Thomas v. Railroad Co., 101 U. S. 71, and Pennsylvania R. R. Co. et al. v. St. Louis, Alton and Terre Haute R. R. Co., 118 Id. 290, 630; S. C., 24 Am. & Eng. R. R. Cas. 58. In the first of these cases a railroad company of this state had leased its road, franchises and property for a term of twenty years. The lease contained a covenant that the railroad company might, at any time, terminate the letting, and resume possession of its property, but that in that event it should pay the lessee the value of the lease for the unexpired term. The company exercised its option, and took possession of its road before the expiration of the term, and the lessee brought an action to recover on this covenant. In the second case the *582St. Louis, Alton and Terre Haute Railroad Company had? leased a portion of its railroad to the Indianapolis and St.. Louis Railway Company for a term of ninety-nine years, and the Pennsylvania Railroad Company and four other railroad companies had entered into a contract with the lessor to-guarantee the payment of the rent, and the performance by the lessee of the covenants in the lease. The suit was by bill in equity by the lessor against the lessee and the guarantors for the payment of the rent, and the specific performance of the covenants.
In the first case the lessee was a natural person, with no-disability to contract, but he was held to have no remedy on his contract because it was not binding on the other party for want of a similar power to contract. In the second case, the lessor had capacity, by legislative authority, to make the lease, and the incapacity was in the lessee to take the lease- and in the guarantors to make the guaranty. In both cases the incapacity was in the party setting up its want of power to make the contract. The defence was sustained in each case on the ground that the contract, being beyond the power of the corporation to make and forbidden by public policy, was void.
In the Thomas case, acquiescence and delay in rescinding the contract was relied on to support the action. In response-to the contention that the company, having entered into the-agreement, it was its duty to rescind or abandon it at the-earliest moment, Mr. Justice Miller said: “ Though they delayed its performance for several years, it was nevertheless a. rightful-act when it was done. Can this performance of a legal duty both to stockholders and to the public give to the-plaintiffs a right of action ? Can they found such a right on an agreement void for want of corporate authority and forbidden by the policy of the law ? To hold that they can is to-hold that any act performed in executing a void contract-makes all its parts valid, and that the more that is done under a contract forbidden by law the stronger is the claim to its enforcement by the courts.”
*583. In Pennsylvania R. R. Co. v. St. Louis, Alton and Terre Haute R. R. Co., equitable estoppel was a prominent feature. The defendants were railroad companies whose traffic was east of Indianapolis, and being desirous of having a connection for the purpose of reaching St. Louis with their business, agreed with the complainants that the Indianapolis and Terre. Haute Railroad Company should lease, for a term of ninety-nine years, a part of the complainant’s road between St. Louis and Indianapolis, and thus make a continuous line between St. Louis and Terre Haute; and that the defendants should guarantee the payment of the rent and the performance of the other obligations of the latter company; and that if the St. Louis and Terre Haute Company should refuse to execute this operating contract, the defendants might procure some other company to build the seventy miles of road from Indianapolis to Terre Haute, and that in like manner they would guarantee the performance of its obligations in the lease. The Terre Haute and Indianapolis Company having refused to execute the lease, another corporation, called the Indianapolis and St. Louis Company, was organized, under the influence and control of the guaranteeing companies, to build the road necessary to complete the desired connection. This company executed a lease with the complainant, and at the same time all the guaranteeing companies except the Pennsylvania Company executed a new guaranty as a substitute for the former—the liability of the Pennsylvania Company being rested upon the original contract of guaranty and the averment that the new company which executed the lease was in reality the creature of that company. The lessee took possession of the road, in 1867 and operated it for ten years. The bill charged that the lessee was in default in the payment of rent; that it was insolvent and had allowed the road and equipment to run down and be depreciated, and that the traffic over it had been largely diminished by the construction of a road by the lessee and the other defendants, nearly parallel to-the complainant’s road and not far from it, and that for these reasons the complainant’s contract with the defendants was more valuable than would *584be the resumption of the possession of the road in its depreciaated condition. The prayer for relief was that the lessee should specifically perform its obligations in all the respects mentioned, and that in default thereof the guaranteeing defendants be required to do so.
In the case cited the lessor had capacity to make the lease, but the lessee had no capacity to take the lease. The defence was that the lease and the contract of guaranty were ultra vires and void. In the facts, as well as in the relief prayed, this case is like the case now before the court; for the result of the affirmance of the judgment below will be to establish the liability of the defendant upon the lease for the full unexpired term—a judicial determination, in effect, that the defendants shall specifically perform the covenants in this lease continuously for the period for which it was made. The lease and the contract of guaranty were held to be void, and the bill was dismissed. The case presented impregnable grounds for upholding the contract, if a contract ultra vires and illegal could, under any circumstances, be validated by equitable estoppel. It was contended that though the contract of lease might be void so that no action could originally have been sustained upon it, there had been for ten years such performance of it, in the use, possession and control of plaintiff’s road and its franchises, by the defendants, that they could not now be permitted to repudiate or abandon it—that it now presented one of a class of cases which hold that where a void contract has been so far executed that property has passed under it, and rights have been acquired under it, the courts will not disturb the possession of such property, or compel restitution of money received under such a contract. The court disposed of this contention in these words : “ Undoubtedly there are such decisions of courts of high authority, and there is such a principle, very sound in its application to appropriate cases. But we understand the rule in such eases to stand upon the broad ground that the contract itself is void, and that neither what has been done under it, nor the action of the court, ,can infuse any vitality into it. Looking *585at the case as one where the parties have so far acted under such a contract that they cannot be restored to their original condition, the court inquires if relief can be given independently of the contract, or whether it will refuse to interfere as the matter stands. "We know of no well considered case where a corporation which is party to a continuing contract, which it had no power to make, seeks to retract and refuses to proceed further, it can be compelled to do so.” My examination of the cases confirms this statement. In Whitney Arms Co. v. Barlow, 63 N. Y. 62, the goods had been manufactured and delivered, and the suit was on notes given in payment. The court held that the defence of ultra vires was not maintainable, for the reason that the contract had been fully performed by the other party, and the corporation had the full benefit of the performance. In Woodruff v. Erie R. R. Co., 93 N. Y. 609, the suit was for rent. The lessee had used and occupied the railroad. The court held that the lessee was estopped from disputing the validity of the lease so far as it had been executed. In Parish v. Wheeler, 22 N. Y. 494; Rome Savings Bank v. Kramer, 32 Hun 270, and Bradley v. Ballard, 55 Ill. 417, the consideration had also been fully executed. It is with respect to this class of cases that the courts have said that the plea of ultra vires should not prevail where it would work a wrong. In Davis v. Old Colony R. R. Co., 131 Mass. 258, Chief Justice Gray discussed the whole subject in an opinion of consummate ability. He said that il a corporation may indeed be bound to refund to a person from whom it has received money or property for a purpose unauthorized by its charter, the value of which it has actually received ; for in such a case to maintain the action against the corporation is not to affirm, but to disaffirm the illegal contract.” In that case the suit was against a railroad corporation and a company incorporated for the manufacture of musical instruments, upon an agreement to guarantee the expenses of a musical festival, and it was held that no action could be maintained against either corporation, although the guaranty was made with the reasonable belief that the pro*586posed festival would be of great pecuniary benefit to the guarantors by increasing their business, and the expenses had been incurred in reliance upon the guaranty. Other illustrations of the application and limitation of this principle may be found. For instance, contracts invalid under the statute of frauds for want of writings are not validated by part performance, and the party is restricted to remedy upon them to the extent to which they have been executed, either upon a quantum meruit or for use and occupation. Smith v. Smith, 4 Dutcher 208; McElroy v. Ludlum, 5 Stew. Eq. 828. In the St. Louis and Alton case Justices Bradley and Harlan dissented, but the ground of their dissent does not impugn the-doctrine held by the court—that the contract of a corporation,. ultra vires to the extent that it was unexecuted, was void. It may also be remarked that Bissell v. M. S. & N. I. R. R. Cos., 22 N. Y. 258, is inapplicable. The action was for a tort, and it is settled that a corporation cannot defend in an action for a tort done by it on the ground that the business in the prosecution of which the tort was done was ultra vires. New York, Lake Erie and Western R. R. Co. v. Haring, 18 Vroom 137; Buffett v. T. & B. R. R. Co., 40 N. Y. 168; National Bank v. Graham, 100 U. S. 699; Salt Lake City v. Hollister, 118 Id. 256.
. The cases I have cited are decisions upon principles of the common law too often recognized and acted upon by the courts of this state to be now disregarded. They are in harmony with the decisions of most of our sister states. To some extent in this country the doctrine of ultra vires, as enforced in the English courts, has been modified; but the fundamental doctrine that the unexecuted contracts of a corporation which are outside of the powers granted are void, has, in the courts of this country, been generally, if not universally adopted, and I think I hazard little in asserting that in no well considered case has it been departed from, except to the extent of allowing a recovery to the extent of the consideration actually received. I do not stop to discuss the question whether a lease is an unexecuted contract in respect of the unexpired part of *587the term, for it seems to me to be perfectly obvious that such a contract is a continuing contract, as well with respect to the payment of rent as to the occupation of the premises. It is on this theory that eviction is a defence to the recovery of rent, and a rightful surrender before the expiration of the term absolves a party from further payment of rent. If any authority be required for so obvious a principle, it is furnished by the cases cited from the federal court.
But, independent of the illegality of this contract under the statutory prohibition, which of itself would interdict its enforcement, there is present in this case none of the elements of an equitable estoppel. The plaintiff is chargeable with knowledge of the incapacity of the defendant to enter into the lease, and of the statutory prohibition of such a contract. "With such knowledge it accepted the risk that the defendant might, in the future, repudiate the lease and abandon the premises. The doctrine of equitable estoppel is designed for the protection only of innocent parties who have been misled. By the repudiation of the lease, and the surrender of its railroad to the plaintiff, it has restored to it all that it gave as the consideration of the contract. The plaintiff has been paid the stipulated rent for the period during which the defendant had the benefit of the use of the railroad, and it is not even pretended that the road, when surrendered, was of less value than it was w'hen originally built. The entire loss to the plaintiff is the profit it expected to have made by an advantageous contract in the continuance of a lease, which is worth more to it than the possession of its railroad. In a court of law the doctrine of estoppel in pais is never applied, except to-the extent of preventing a party who has been misled from being defeated in a recovery of indemnification. Our courts rejeot the notion that it can be used to enable such a party to recover the profits, which would be the fruits of the transaction if it had been carried into effect. Campbell v. Nichols, 4 Vroom 81; Phillipsburgh Bank v. Fulmer, 2 Id. 52. For these reasons I think the judgment should be reversed. Mr. Justice Knapp desires me to say that he concurs in this opinion.
*588For affirmance—The Chancellor, Dixon, Magie, Reed, Souddee, Van Syckel, Brown, Clement, Cole, McGregor, Whitaker. 11.
For reversal—Depue, Knapp, Paterson. 3.