Court Opinion

ID: 8122069
Source: CourtListenerOpinion
Date Created: 2022-09-09 14:58:55.615975+00
Date Added: 2024-06-11T16:39:03.172249
License: Public Domain

Butler, D. J.,
concurring. I propose to consider one only of the several aspects in which this case has been presented. Are the contemplated acts charged in the bill ultra vires— in other words, have the defendants lawful authority to do what is proposed by the “deferred-bond scheme?” As described in the president’s “plan for financial re-organization,” in the directors’ and receivers’ petition to the court, of November, 1880, and in the prospectus subsequently issued, and as illustrated by the sample before us of certificate or bond to be delivered to subscribers, it proposes an issue of $34,300,000 irredeemable income bonds of $50 each, at the price of $15 per bond, with interest at the rate of 6 per cent, on the face value, payable annually out of such surplus earnings as may remain after defraying expenses and affording dividends of 6 per cent, to the common stockholders, with a right to share equally with such stockholders any balance that may remain after 6 per cent, is thus paid. In the language of the president’s London address, of December 23, 1880, it proposes to give—
“To every one who will pay §15 an obligation for the nominal value of §50, wbicli is never to mature—with no liability on the company’s part to pay the principal, and which shall entitle the holder, after the common shares have had a dividend of 6 per cent., to all that is earned up to 6 percent., and thereafter to a further dividend pari passu with the common shares.”
That the defendants have power to borrow money is not questioned, and could not be. The plaintiffs assert, however, that this is not a proposition to borrow money, but a scheme to sell stock. The defendants claim that it is strictly a proposition to borrow—conceding that, if it is not, but virtually *393is to sel] stock, they have no lawful authority to carry it out. Thus a vital issue of law is sharply defined and presented. It is one that neither requires nor admits of extended discussion. Every admissible definition of the term borrow or loan, as applied to money and commercial transactions, embraces an obligation to return the property borrowed. A loan of money is universally understood to be the delivery of a certain sum to another, on contract for its return, generally with interest, as compensation for its detention and use. To cal] the payment of money to another, who is to receive and permanently retain it as his own, in consideration for an annual benefit or profit, a loan, would seem to be a plain misuse of language.
There is no such thing known to commerce or transactions in money as an irredeemable loan in the sense here involved. Governments have issued obligations without provision or stipulation for repayment of the principal borrowed; but such obligations are redeemable at pleasure. Eunning, however, for an indefinite time, with no power in the holder to exact payment, they have come to be regarded as irredeemable, and an investment in them is, therefore, treated and described, not as a loan, but as the purchase of an annuity or stock. Aside, however, from the abstract considerations involved in defining the term borrow or loan, the corporate powers of the defendants to borrow money must be held to apply only to such methods of borrowing as fall within the ordinary sense of the term—as understood by the community, and illustrated in commercial transactions. Applying this test to the proposition here under consideration, it becomes plain that the transaction contemplated is not a loan. The certificate proposed to be issued would vest in the owner a joint interest with the common stockholder in the capital or property of the corporation, an interest purchased witii his money, the earnings of which would, be paid to him in dividends.
In every essential respect, therefore, he would be a stockholder. The circumstance that he could not vote for directors w'ould not change the character of his interest, or the *394nature of his relation to the company and its property. His situation would he similar to that of a silent partner in a commercial firm. The proposition, therefore, is for the sale of interests in the capital of the corporation—a sale of shares, shorn of the privilege of voting,-with the right to dividends regulated by contract. It would seem that the defendants contemplated, in the beginning, a sale of stock in the usual form, calling the transaction by its proper name. Testimony taken by the master tends to show this. The absence of power to make such sale, and the apparent impossibility of borrowing money at the usual rates, and by the usual methods, and the obstacles interposed by usury laws, doubtless led to the change of plan, which, however, is little, if anything, more than a change in name.
The original thought and purpose have so far remained in the minds of the projectors, that the annual payments contemplated are still called “dividends,” as appears by the “plan for re-organization,” the directors’ petition to court, the “prospectus, ” and the president’s London address, while the scheme itself is described by them as an “issue of stock,” and called such in the circular (known as Exhibit K,) wherein, it is said, this
“Issue of stock, with suck prospects at §30 per $100, ougkt to produce a large bonus to such shareholders as may desire to sell their allotments, as its prospect of dividends is much better than those of many existing stocks standing.at a higher price.”
The English precedents which appear to have suggested this scheme, were, so far as we have been referred to them, all sales of stock in the usual form. In his London address the president said:
“This scheme is not a new one. Other companies in England have adopted this plan before. Within the last five or six years, according to a statement furnished me, the London, Brighton & Southeast Railway issued £1,500,000 worth of ordinary stock at 45 per cent, of its par value. The Grand Trunk Railway of Canada issued £7,500,000 of ordinary stock at £22 8s. 1 am told that the Manchester, Sheffield & Lincolnshire Company has issued £1,100,000 of ordinary stock at 50 per cent., and therefore we are not the first company to adopt a new scheme, which has been kor- • aided by a good many pepple with a vast amount of ridicule.”
Thus it appears by the statements of the president not *395only that the English precedents were issues of ordinary stock, but also that ho regards this scheme as precisely the same. The unfortunate distinction, however, between it and the precedents is, that they wore authorized by statute, while it is not. Tlie 26tli and 27th Victoria, of July, 1863, known as “The Companies’ Clauses Act,” provides not only for tho issue of ordinary stock or shares at less than the par value, by railway companies chartered in pursuance of, or conformity with it, but also for an increase of the capital by an issue of what is called debenture stock. That the defendants have no authority to issue stock for the purposes involved in the scheme under consideration, is not only clear on examination of tho charter and subsequent statutes relating to the subject, hut is fully conceded by their counsel. The proposed mortgage for $150,000,000 being liable to tlie same objection, as respects a part of the bonds proposed to be secured thereby, no further reference to it is necessary.
"Note. As stated in tlie opinions in the foregoing ease, such a plan as that proposed ly the “deferred-bond” scheme is entirely new in this country. And 1 have been unable to find any English decisions that would shod much light on the particular question—an act of Parliament expressly authorizing such a scheme. But some of the “ preferred-stock” eases in this country present strong points of analogy. The power of the corporation to create and issue such stock has been sought to be maintained as falling within the borrowing power of tho corporation; tin; plan, in fact, being used for the purpose of raising money. In the case of Kent v. Quicksilver Min. Co., 78 N. Y. 159, the company being in need of funds, the stockholders adopted a by-law providing' that stockholders who should surrender their certificates and pay five dollars on each share of stock should be entitled to the same number of shares of preferred stock, which should bo entitled to 7 per cent, interest, to be paid out of the profits of the company, any surplus thereafter to be divided pro rata, among common and preferred stockholders. The court held that it did not fall within the power to borrow money, and was ultra vires. Folger, says: “ It was not a borrowing. The idea of borrowing is not filled out unless there is in the agreement therefor a promise or understanding; that what is borowed will be repaid or returned.” Page 177. In these transactions, it is not by what name it is called, but what, in fact, the transaction is, that the courts consider. Thus, in Ohio, “ preferred stockholders” have been held to be creditors of the corporation, the transar, tion really being a borrowing of money, rather than tho creation of an additional and preferred capital stock. Bart v. Battle, 31 Ohio St. 116. But in that case tho “stockholder” had not only not tho right of voting, *396but he was not interested in the earnings of the company bejmnd a certain fixed per centum, (the legal rate of interest in that state;) t.he principal was payable at a fixed time, and he was relieved of the liability to creditors prescribed by the constitution upon a stockholder.
PRIVATE CORPORATIONS.
I. Definition, Source, and Extent of Powers, etc. An act of a corporation is described as being ult/ra vires when it is beyond the chartered powers of the corporation. A corporation derives. all its power from its charter, and possesses only such powers as are thereby expressly or impliedly given. Many authorities hold that the charters of corporations are to be construed strictly against the corporation, and that consequently by implied powers are meant only such as are necessarily incident to those expressly granted. Huntington v. Savings Bank, 96 U. S. 388, 393: Bradley v. N. Y., etc.,R. Co. 21 Conn. 306; Pa. R. Co. v. Canal Com’rs, 21 Pa. St. 22; Field, Corps. § 248. For a full discussion of the subject, see Potter on Corps. § 31 et seq. Where the charter fixes the amount of the capital stock and the number of shares, the amount cannot be increased or the number changed except in the manner expressty authorized by the charter, subsequent law accepted by the stockholders, or articles of association. Railway Co. v. Allerton, 18 Wall. 233; N. Y., etc., R. Co. v. Schuyler, 34 N. Y. 30; Salem, etc., Corp. v. Ropes, 6 Pick. 23; Green’s Brice’s Ultra Vir. (2d Ed.) 158, note a. Contra, Belmont v. Erie R. Co. 52 Barb. (N. Y.) 637; but see this case criticised, Jones, Rail. Secur. § 97. Nor can the character of the stock be changed, as by creating a preferred stock, without express authority therefor. Kent v. Quicksilver Min. Co. 78 N. Y. 159; Green’s Brice’s Ultra Vires, (2d Ed.) 164, and note a. Yet, if all the stockholders assented to such change, it will be supported in favor of one who has acted thereon in good faith. Kent v. Quicksilver Min. Co., supra. But, to accomplish the purposes of its creation, the corporation, by implication, has, to a large extent, the powers that an individual would have in the same position. Thompson v. Lambert, 44 Iowa, 239, 244; Field, Corp. § 271. For example, the power to borrow money, and give the usual obligations therefor, is an acknowledged incident of a private corporation. Field, Corp. 249, 271; Green’s Brice’s Ultra Vires, (2d Ed.) 213. n. (a,) 223, note a, and cases cited.
II. Ille&ality Are contracts merely ultra vires illegal ? The earlier English cases certainly so held. East Anglian Ry. Co. v. Eastern Co.’s Ry. Co. 11 C. B. 775; McGregor v. Deal, etc., R. Co. 18 Q. B. 618; see, also, Leake, Contracts, 582 et seq.; 5 Am. Law Rev. 272, 282, article by O. W. Holmes, Jr.; Green’s Brice’s Ultra Yires, (2d Ed.) 39 et seq. In the view taken by these decisions, corporate charters were encroachments upon public right, and it was public policy to keep them strictly within the limits prescribed by the organic law; the law impliedly prohibiting acts beyond them. Consequently every act exceeding such limits violated such public policy and implied prohibition, and was illegal and void. As to such contracts, there could be no ratification or estoppel. Id.; Leake, •Contracts, 602. These views were at first accepted in this country, ana the earlier cases rest on that basis. In an article in the Central Law *397Journal for April 29, 1881, (12 Cent. L. J. 386,) I liave attempted to show that the reasons for sueli a doctrine have passed away, and that the more recent cases have repudiated it. The great increase in tlieir number, and the facility with which they are now organized under the general laws existing in most of the states, (taking the place of the former special act,) and many other matters that I have not space to mention, certainly indicate a most important change in the light in which corporations are viewed. And upon the weight of authority it is submitted that there is no implied prohibition of, nor is public policy violated by, corporate acts simply ultra vires, and, therefore, they are not illegal. Union Nat. Bank v. Matthews, 98 U. S. 621; Oil Creek, etc., R. Co. v. Pa. Transp. Co. 83 Pa. St. 160; Whitney Arms Co. v. Barlow, 63 N. Y. 62; State Bd. of Agric, v. Citizens St. R. Co. 47 Ind. 407; Hays v. Galion, etc., Co. 29 Ohio St. 330, 340; Darst v. Gale, 83 Ill. 136; and cases cited in Green’s Brice’s Ultra Vires, 2d Ed. 720, note, a, and 12 Cent. L. J. 389, note 29; but see Franklin Co. v. Lewiston Sav. Bank, 68 Me. 43.; Pa., etc, Co. v. Dandridge, 8 Gill. & J. 248. Another question arises as to quasi public corporations, such as railroads, etc. They are invested with important public and governmental functions, and any attempt to use the power of eminent domain unauthorizedly, or any contract that would conflict with the duties that are imposed as the price of their extraordinary privileges, would violate public policy and be illegal and void. Thomas v. R. Co. 101 U. S. 71, 83, 84; N. Y., etc., R. Co. v. Winans, 17 How. 30; Black v. Del, etc., Canal Co. 22 N. J. Eq. 130; A. & P. Tel. Co. v. U. P. R. Co. 1 Fed. Rep. 745, 747, 752; Bd. of Com'rs v. L., M. & B., etc., R. Co. 50 Ind. 85, 108, 109; Pollock, Contracts, (Wald’s Ed.) 95, 96; see Mahoney v. Spring Val ley, etc., Works, 52 Cal. 159. Contracts ultra vires, which are positively prohibited either by the charter or the general la w, or are against public policy, are illegal and void; and either party to the contract may make the defence. Morris, etc., R. Co. v. Sussex R. Co. 20 N. J. Eq. 542; N. Y., etc., Ins. Co. v. Ely, 2 Cow. 678; Utica Ins. Co. v. Scott, 19 John. 1; Rutland, etc., R. Co. v. Proctor, 29 Vt. 93, (Redfield, J.) But if the prohibition was intended simply as a rule for the government of the corporation, and the legislature did not intend to avoid the contract as against a party who has performed the contract, the plea of ultra vires cannot be made. Union Bank v. Matthews, 98 U. S. 621; Lake Bank v. North, 4 John. Oh. 370, (Kent, Ch.) Thus, one who has borrowed money from a national bank will not be permitted to defeat an action therefor, on the ground that the loan exceeded the sum it was permitted to lend. Gold Min. Co. v. Nat. Bank, 96 U. S. 640; O’Hare v. Nat. Bank, 77 Pa. St. 96. Contra, Crocker v. Whitney, 71 N. Y 161. Or that an insurance company had loaned money for a longer time than authorized. Germantown, etc., Ins. Co. v. Dhein, 43 Wis. 420.
III. Executory Contracts. As to ultra vires ‘contracts, which are wholly unexecuted, or those as to which the parties can he placed in statu quo, the plea of want of power is always available. The right of a stockholder, or, under certain circumstances, of a creditor, (as in the principal case,) to restrain the corporation or its officers from doing acts and entering into contracts ultra vires, is fully established. Dodge v. Woolsey, 18 How *398331, 341-5; Field, Corp. §§ 264, 271, 273. Tire courts will not enforce purely executory ultra vires contracts, or award damages for tlieir breach. Screven Hose Co. v. Philpot, 53 Ga. 625; Thomas v. Railroad Co. 101 U. S. 71; Field, Corp, § 264.
IV. Apparent Power. Where the question of authority depends, not merely upon the provision of law authorizing the contract, but also on extraneous facts, the corporation will be estopped to plead ultra, vires as against a person without notice that the exercise was for a purpose, with an intent, or under circumstances unauthorized. Miners’ Ditch Co. v. Zellerbach, 37 Cal. 543, 686-7, 595; Bigelow, Estoppel, 423; Potts, Corp. § 549; 2 Kent, 300, Holmes’ note; Ossipee etc., Co. v. Canney, 54 N. H. 295, 325-6. Thus, when a corporation has power under any circumstances to issue negotiable securities, the title of a bona fide holder of such paper is no more liable to he impeached than that of any other commercial paper. Gelpcke v. City of Dubuque, 1 Wall. 175; Town of Coloma v. Eaves, 92 U. S. 484; Monument Nat. Bank v. Globe Works, 101 Mass. 57; Mad., etc.,R Co. v. Norwich, 24 Ind. 457; Field, Corp. § 270; Jones, Rail. Secur. §§ 287'. 295.
V. Estoppel. As has been seen, a contract is not illegal simply because' it exceeds the powers of the corporation. Is the corporation, then, absolutely incapable of doing an act which transcends its powers? Theoretically, yes; practically, no. The well-settled liability for torts, and in cases of apparent power, is inconsistent with the idea that it is. See article on Ultra Vires by G. H. Wald, Esq., in 6 Cent. Law Jour. 2; Selden, J., in Bissell v. Railway Cos. 22 N. Y. 282-3. And it would seem to be established by the more recent decisions that, where a contract has in good faith been fully performed either' by the corporation or the other party, the one who has received the benefit will not be permitted to resist the enforcement of the contract by the plea of mere want of power. Oil Creek, etc., R. Co. v. Pa. Transp. Co. 83 Pa. St. 160; State Bd. of Agric, v. Citizens’ St. Ry. Co. 47 Ind. 407; Whitney Arms Co. v. Barlow, 63 N. Y. 62; Kent v. Quicksilver Min. Co. 78 N. Y. 159 ; Newburg Pet. Co. v. Weave, 27 Ohio St. 343, 353-4; Chester Glass Co. v. Dewey, 16 Mass. 94, 102; Gold Min. Co. v. Nat. Bank, 96 U. S. 640; Nat. Bank v. Matthews, 98 U. S. 621; Darst v. Gale, 83 Ill. 136; Lawrence, C. J., in Bradley v. Ballard, 55 Ill. 417; Cozart v. Ga. R. Co. 54 Ga. 379; A. & P. Tel. Co. v. Union, etc., Ry. Co. 1 Fed. Rep. 745; Field, Corp. § 273; Sedgwick, Stat. & Const. Law, (1st Ed.) 90; and cases cited in Green’s Brice’s Ultra Vires, (2d Ed.) 729, note a; and 12 Cent. Law Jour. 389. Contra, older cases—Hood v. N. Y., etc., R. Co. 22 Conn. 502; [but see Converse v. Norwich, etc., R. Co. 33 Conn. 166, 180;] Pa., etc., Co. v. Dandridge, 8 Gill & J. 248; Downing v. Mt. Wash., etc., Co. 42 N. H. 230; Bank of Chillicothe v. Swayne, 8 Ohio, 527; [but see 29 Ohio St. 330; Id. 341; 27 Ohio. St. 343.] As to what wili constitute assent and acquiescence on part of stockholders, see Jones, Rail. Secur. § 356; Cozart v. Ga. Ry. Co. 54 Ga. 379; Kent v. Quicksilver Min. Co. 78 N. Y. 159.
VI. Torts. Corporations are liable for their torts in the same manner and to the same extent that individuals are liable under like circumstances. Merchants’ Nat. v. State Bank, 10 Wall. 604; Nat. Bank v. *399Graham, 100 U. S. 609; Bissell v. Railway Cos. 22 N. Y. 258: 40 N. Y. 158; 50 N Y. 896; Green's Brice’s Ultra Vires, (1st Ed.) 263, note. And see, generally, upon the subject of Ultra Vires, 12 Cent. Law Jour. 386 et seq. Cincinnati, June, 1881. J. . Harper.