Court Opinion

ID: 7134120
Source: CourtListenerOpinion
Date Created: 2022-07-24 15:22:07.292024+00
Date Added: 2024-06-11T16:14:34.015652
License: Public Domain

DISSENTING OPINION BY
JUDGE PAYNTER.
The glass works company discounted at various times notes at the Kentucky National Bank, in the aggregate amounting to about $48,000. On November 20, 1885, it, having failed to pay its notes at maturity, executed a mortgage to the bank on certain real esate to secure the total of the indebtedness to the bank. Desiring to buy a Coliansey bottle grinder, and not having money to pay the full amount of the purchase price, it procured at the Kentucky National Bank an advance of $625 for that -purpose, and to secure which it gave the bank what the parties called a “warehouse receipt” on the machine. This was in 1887. Needing soda ash for use in the manufacture of glass, the Kentucky National Bank advanced to it $650 to pay for twenty-nine barrels of ash, and upon which was issued another warehouse receipt. The Kentucky National Bank, also, in 1887, advanced the glass works company $850, to secure which the company gave the bank a warehouse receipt on two hundred gross of quart jars. In-, 1887, the glass works company was indebted to Bridgeford & Co. Bridgeford & Co. brought suit upon their claim, and obtained an attachment against the property of the glass works company. Thereupon, under the advice of counsel, the glass works company made an assignment for the benefit of creditors. In the Bridgeford & Co. action, upon the hearing, the court discharged the attachment. In the meantime the assignee brought suit to settle the trust es*26tate, and appellants, creditors oí the glass company, filed their answers, in which certain defenses are interposed.
It is contended that the assignment was made to defraud creditors; that the glass company is a corporation organized under the General Statutes of Kentucky, with a capital stock of $12,000, with a provision in its articles of incorporation that the indebtedness to which the corporation was authorized to subject itself should not exceed $8,000; and that the debts of the bank, which exceeded $8,000, were not enforceable, because of the provision mentioned.
There is nothing in the statute which declares that, if the corporation incurs or creates an indebtedness in excess of that which is authorized, the contract is void. Neither is there anything in the articles of incorporation which so declares. The money was received by the corporation, and used in its business. Some of the assets which were assigned were acquired by the money which it obtained from the bank. There is no evidence that the bank knew that the authority of the glass works company was limited in the matter of contracting an indebtedness.
The record shows that the bank advanced money to the company in the utmost good faith. When a corporation enters into a contract in violation of its charter, either party is allowed to withdraw from it, so long as a rescission can be effected without injustice. When one party has performed the contract, public policy can be best conserved by compelling the other party to make compensation for a failure to perform the obligations imposed by the contract. When money has been borrowed, as in this case, common honesty demands that the borrower be adjudged to pay it. The corporation received the money borrowed; hence, the stockholders necessarily enjoyed the benefit of it. The corporation having received and retained the money, nei*27ther it nor its creditors can be heard to question its authority to borrow the money. It may be said here that the glass works company, or its shareholders, do not deny its liability to the bank for the sums borrowed. The complaint is from its creditors, most if not all of whose debts were contracted after the mortgage had been executed to the bank. If a debtor can not piead that the debt was contracted in violation of a law, and thus defeat its enforcement, the creditors of the debtor can not do so. If the debts due the bank are valid, then it follows that the mortgage executed to secure it should be enforced. To allow a corporation to borrow money and use it for its benefit, and to defeat an action to recover it on the ground that it exceeded its authority in borrowing it, is placing a premium upon dishonesty. Public policy will not justify such an injustice. Morawetz on Private Corporations (sec. 680 says, “That a provision in a charter prohibiting it from creating an indebtedness in excess of a certain amount does not render debts incurred in excess of that amount null and void, by force of the legislative act, unless this be the plain meaning of the provision.”
The same authority says in section 685: “It seems but reasonable that a contract which is forbidden by law, and which may subject the company making it to the penalty of dissolution, should not be held obligatory, except for strong reasons of equity. Either party should be allowed to withdraw, so long as a rescission can be effected without injustice. Accordingly it has been held that a contract entered into by a corporation in excess of its charter may be avoided by either party so long as it remains unexecuted by both parties.”
It is said in section 688: “A court of equity will even decree the specific performance of a contract entered into *28by a corporation in violation of its charter, if relief of that character is required in order to protect the rights of a party who dealt with the company in good faith and without notice.”
In section C89 of the same authority the following language is used: “If a contract is made by a corporation in excess of its chartered powers, either party to the contract may withdraw, so long as a rescission can be effected without injustice; but after a contract of this character has been performed by either of the parties, the requirements of public policy can best be satisfied by compelling the other party to make compensation for a failure to perform the agreement on his side.”
In section 695 this doctrine is announced: That, when mone'y is borrowed or loaned by the corporation in violation of an express prohibition in its charter, the contract may be enforced.
Sedgwick on Construction of Statutory and Constitutional Law (p. 73), says: “Where it is simply a question of regularity of orgánization, or of power conferred by the charter, a party who has had the benefit of the agreement can not be permitted, in an action founded on it, to question its validity. It would be in the highest degree inequitable and unjust to permit the defendant to repudiate a contract, the fruits of which he retains.”
In Auerbach v. Mill Co., 28 Minn., 291 [41 Am. Rep., 285, 9 N. W., 801], it was held “that when an unauthorized contract has been executed by a corporation, and it has reaped the benefit of it, public policy does not require the courts to refuse to administer justice between the parties in accordance with the plain principles of law. In such a case the remedy for the violation by the corporation of its charter power lies elsewhere.”
*29. We are here seeking to administer justice as between these contracting parties. If justice did not demand the application of other principles of law, the defense of ultra vires might be sufficient, but the doctrine of estoppel, as a principle of law, is as positive and well-recognized as is the law that a corporation may not exceed its corporate power; and, although the defendant exceeded its authority, it should be denied the right to assert the fact of its own wrong, when to allow its plea would work injustice and wrong to a party who has been misled by its acts performed within the general scope of its power.
In Manufacturing Co. v. Canney, 54 N. H., 295, it was said: “In this case the statute under which the corporation was organized, fqrbidding the corporation to contract debts or incur liabilities to exceed one-half of its capital stock actually paid in and unimpaired, and of its other property and assets, is directory. Debts contracted and liabilities incurred in excess of that amount are binding upon the corporation.” Garrett v. Plow Co., 70 Iowa, 697 [59 Am. Rep., 461, 29 N. W., 395], held that the debt of a corporation beyond the limit prescribed by its charter is not invalid, but enforceable.
In Steamboat Co. v. McCutcheon, 13 Pa. St., 13, a corporation had taken a lease of real 'estate without authority in its charter, and in an action for rent the court enforced the contract. The judge, in delivering his opinion, said: “Some things lie too deep in the common sense and common honesty of mankind to require either argument or authority to support them; and this, I think, is one of them.”
The court, in the case of Navigation Co. v. Wood, 17 Barb., 382, said: “When it is a simple question of capacity or authority to contract, arising either on a question of regularity or organization, -or of powers conferred *30by the charter, the party who has had the benefits of the contract can not be permitted to question its validity in an action upon it.”
In Whitney Arms Co. v. Barlow, 68 N. Y., 62 [20 Am. Rep., 504], it was said: “The plea of ultra vires should not, as a general rule, prevail, whether interposed for or against a corporation, where it would not advance justice, but, on the contrary, would accomplish a legal wrong.” In Sherman Center Town Co. v. Morris [19 Am. St. R., 134; 23 Pac., 569], the charter of a corporation provided, “The indebtedness of the company shall not exceed $500 at any one time,” and the suit was for an amount nearly four times in excess of the charter limit. The company received and used the merchandise, blit undertook to plead ultra vires against the payment of the excessive note, and also claimed that the president and secretary were unauthorized by the board of directors. The court said: “After a corporation has enjoyed the benefit of a contract or other arrangement made in good faith with any of its-regular agents, it is but fair that every reasonable presumption should be made in order to hold the transaction binding upon the company. Under these circumstances the acquiescence of the shareholders may often be presumed. . . . While an executory contract made by a corporation without authority can not be enforced, yet, where the contract has been executed, and the corporation has received the benefit of it, the law interposes an estoppel, and will not permit the validity of the contract to be questioned. . . . Where a contract results to the benefit of a corporation, very slight evidence of acquiescence or application will be sufficient to give it validity. ! ... We think that the limitation of $500 in the charter of the corporation can not be regarded of any *31more force than*a by-law. . . . Therefore the limitation of five hundred dollars is for the direction of the officers and agents of the corporation, and may be considered directory only. It does not annul the contract.” In Thompson on Corporations, sec. 5705, it is said: “There is an implied warranty upon the part of the corporation, through its officers, that the power has not been exhausted, and that the conditions do not exist which render it unlawful for the corporation to contract the debt; so that, to allow the corporation to avoid the repayment of the debt on this ground, where it has had and enjoyed the benefit of the contract, would be to allow it to make its own wtong the means of defrauding the innocent public. It. is immaterial on what ground the courts which hold the corporation can not be permitted to repudiate an honest debt upon such a plea place themselves — whether they say that the statute is directory merely or that the corporation, is es-topped from setting up the defense after having enjoyed the benefit of the contract — especially where the money borrowed has been used in conducting the legitimate corporate business, with the knowledge and consent of all its officers and stockholders. The judges are in all cases driven to the conclusion by the mere stress of justice.”
In Jones on Mortgages, sec. 127, it is said: “But even if the directors exceed their authority in borrowing money for the corporation, and executing a mortgage to secure the repayment of it, the corporation can not, after enjoying the benefit of the loan and acquiescing in the transaction, question their authority. The stockholders may restrain the directors or other officers in any attempt to transcend their powers; but if they remain silent, and permit them to make contracts or execute mortgages upon their prop*32erty, und receive the benefits of the loarf, they will be es-topped to say that the officers were not authorized to do these acts.”
In Allis v. Jones, et al., 45 Fed. Rep., 148, the court said: “The money was received by the companies, and used in conducting and carrying on their legitimate corporate business, with the knowledge and consent of all the officers and stockholders. On these facts the banks are entitled to be repaid their money, and the companies could execute a valid security for its payment. . . . Skeen can not be heard to urge this objection, because he is not a creditor of the milling companies; and Allis became such, if at all, after the debts to the banks had been created, and it would seem, therefore, that he is in no plight to raise the question. The written promise of the milling companies, executed by their secretary and treasurer, to pay the plaintiff’s debt, under all the circumstances of this case, made it the debt of the companies. But an application to the plaintiff’s case of the strict rules which he seeks to have applied to the bank’s claim and mortgages would undoubtedly undermine his own case, and leave him without any claim • against the companies.”
In Sioux City Terminal Railroad & Warehouse Co. v. Trust Co. of North America [27 C. C. A., 82], 82 Fed. Rep., 133, the court said “Can the mortgagor, under these circumstances, avail itself of its violation of the statute to defeat the mortgage upon which it has borrowed this money? If not, have its subsequent creditors any better standing to assail it? These are the crucial questions in this case. This is a suit in equity. The terminal company has received the full benefit of the proceeds of these bonds, and it 'Obtained this money upon the faith of this mortgage. The creation of the debt and mortgage was not without *33the general scope of its powers, but it was the result of the excessive exercise of one of those powers. . . . The statute, whose provisions the bonds and mortgage violate, prescribed no penalty for such a violation. It did not declare that bonds and mortgages issued to secure an indebtedness in excess of the limitation it fixed should be void. Since the Legislature imposed no such penalty, it is not the province of the, courts to do so. The remedy for the violation of this statute is not the destruction of the contracts which evidence it, but the ouster and dissolution of the corporation at the suit of the State. The State alone can complain of it, and the debtor can not usurp its functions. ... A man can not plead his own wrong to relieve himself from the obligations of an executed contract whose benefits he retains; nor is it any defense for a private corporation, against the enforcement of an executed contract whose benefits it holds, that, while its execution was within the general scope of its powers, it involved 'an excessive exercise of one of them. While it retains the benefits of such contract, it silently affirms, and may not be permitted to deny, its validity. . . . These decisions do not rest upon the principle of estoppel, nor depend upon the creditor’s ignorance of the excessive indebtedness. They stand upon the rule that he who seeks equity must do equity, and upon the principle that one may not at the same time accept the benefits and repudiate the burdens of his contracts.”
In Haldeman v. Ainslie, 82 Ky., 399, the corporation was limited by its articles to incur a liability of $15,000. It contracted an indebtedness of over $30,000. This indebtedness was largely to banks, and the court said: “In this case we think it clear that the banks could have recovered *34of the stockholders, for the reason that those conducting the business of the corporation had created this indebtedness for the benefit of the corporation.”
In German National Bank v. Louisville Butchers’ Hide & Tallow Co., 97 Ky., 34 [29 S. W., 882], the notes were discounted by the corporation at the German National Bank, and upon these notes suits were brought. It- was sought to defeat a recovery upon them upon the ground that the act of discounting notes was ultra vires. The corporation got the proceeds of the notes, and the court held that a corporation could not hold on to the money and repudiate the act by which it had got it. The court approved what Brice on Ultra Vires said (2d Eng. Ed., 769), to-wit.: liIn every case a corporation must account for benefits which it has received in an ultra vires transaction. This is a well-known equitable doctrine. It has been applied, not only to persons of full age, and under no disability, civil or mental, but also, to those who are under some incapacity — infants and lunatics. From these persons the principle has been extended to corporations.”
It is suggested the conclusion which I have reached is in conflict with the case of First Nat. Bank of Covington v. D. Kiefer Milling Co., 95 Ky., 104 [23 S. W., 676]. In that case it appeared that the corporation became-indebted to the bank in the sum of $77,000, in violation of its articles of incorporation, which only authorized it to incur an indebtedness not to exceed $30,000. The corporation was insolvent, and the court below adjudged that the bank should participate ratably in the distribution of the estate on $30,000 of its debt, and this court concurred in that view7. The court in that case did not decide what would have been the effect of the violation of the provision of the articles of incorporation if it had been simply a question between the bank and the corporation.
*35As the reason for sustaining the judgment of the court below, the court said: “But the enforcement of that provision is demanded by the assignee for the benefit of other creditors, who have been prejudiced by the unauthorized and illegal dealing of the bank with an unfaithful officer of the milling company, whereby its insolvency was precipitated, if not actually caused; and in such case a participant in the fraudulent transaction, not other innocent creditors, should suffer.”
It appears from the opinion chat the fraudulent conduct to which reference was made in the part of the opinion just quoted was that of George M. Kiefer, in discounting at the bank, and receiving the proceeds of, drafts purporting to have been signed by the corporation. If the bank was a participant in the fraudulent transaction of an officer of the corporation in discounting drafts purporting to have been drawn by the corporation, the court properly adjudged that innocent creditors should not suffer. Indeed, if the alleged indebtedness had been created by the bank participating in a fraudulent transaction with one of the officers of the corporation, it should not have been permitted, to any extent, to participate in the distribution of the estate.
If the Bank-Kiefer case be construed to mean that a creditor, who has not been guilty of participating in a fraudulent transaction by which his debt was created, can not enforce his debt, because the corporation debtor, in making it, exceeded the limit fixed by its articles of incorporation, it is in conflict with Haldeman v. Ainslie and German Nat. Bank v. Louisville Butchers’ Hide & Tallow Co. If it can be construed as holding that, although the creditor was not guilty of participating in a fraudulent transaction, its debt can not be enforced in the settlement of the *36estate of its insolvent debtor, then it is neither supported by reason or authority, and is in conflict with the legal deduction which logically flows from the Haldeman and German Nat. Bank cases.
The evidence in this case does not tend to show that the bank participated in any fraudulent transaction, or that any officer of the glass company was guilty of any fraudulent conduct, as all the money which was obtained from the bank by the officers of the corporation was used for its benefit. If the bank’s debt could have been enforced against the corporation before it became indebted to the other creditors, the mere fact that it so became indebted would not invalidate its claim; neither would the insolvency or subsequent assignment of the glass company’s property affect its validity.
If the rule enunciated in this case is to prevail, who should suffer in the settlement of the estates of insolvent corporations which have violated the provisions of the charters? Is it to be the creditor who has the largest debt, contracted before the debts of the other creditors? Why single out such a creditor, and say, because the indebtedness of the insolvent corporation to it is greater than the amount of indebtedness which it is authorized to contract, that such creditor shall participate in the distribution of the trust estate only to the extent of an amount equal to the liability which the corporation was authorized to incur, and then say to all creditors whose debts are contracted after the corporation has exceeded its limit of authorized indebtedness that, “as your several debts are less than the amount of the indebtedness which the corporation is' authorized to contract, you may participate in the distribution of its insolvent estate to the full amount of the debts which you hold?” If the court is *37to lay down a rule that tbe charter provision limiting the indebtedness is to be enforced, it reasonably'follows that the creditor whose debt was contracted within the limit of, and before the corporation exceeded, its authority, should alone participate in the distribution of the estate, because the debts of all other creditors were contracted at a time when the corporation was not authorized to do so, and would be unenforceable. If the large creditor is presumed to be acquainted with the articles of incorporation of its debtor, and to know whether or not it is exceeding its authority in incurring it, the subsequent and small creditor is bound by the same presumption.