Court Opinion

ID: 8786310
Source: CourtListenerOpinion
Date Created: 2022-11-26 13:35:51.848586+00
Date Added: 2024-06-11T17:03:05.646887
License: Public Domain

HUMPHREY, District Judge
(dissenting). The second, third, and fourth pleas averred failure of consideration and notice of that fact to plaintiff.
No proof was offered under the second or fourth pleas, and demurrer was sustained as to third plea, as to .which ruling no error is relied on.
In this state of the record, the holders of the notes were bona fide holders, arid, to make a defense against such holders, the law requires proof not only that there was no consideration, but also that the purchaser at the time of purchase had knowledge of such want of consideration. This is statutory in Illinois and is in accord with all the authorities. Hurd’s Rev. Stat. 1909, c. 98, § 77; Mitchell v. Deeds, 49 Ill. 416, 95 Am. Dec. 621; National Bank of Am. v. Bank of Illinois, 164 Ill. 503, 45 N. E. 968.
Therefore the issues of want of consideration and bona fides are not in .the case.
The controverted questions are: First, are the notes in question the legal obligations of St. Vincent College, raised by the first and seventh pleas; and, second, did the trial court err in sustaining demurrers to the fifth and sixth pleas ?
Defendant in error contends, and plaintjff in error admits, that by *483the terms of its charter the corporation, St. Vincent College, had inherent power to borrow money and execute notes; so that the single question remaining here is this: The notes having been issued by Byrne, the president of the college, in its corporate name and having passed by purchase for value and before maturity and without notice of any infirmity into the hands of bona fide innocent holders, did they become legal obligations against 'St. Vincent College in favor of such holders ?
If we regard the question as one of general commercial law to be decided by rulings in state courts, then we should follow the Illinois rule because the Illinois court has decided the power given by the act under which these notes were made, and the courts of other states are hopelessly divided on the question. When we turn to the federal decisions, we find them in accord with the Illinois rule.
I think the decision of the United States Supreme Court in Louisville Ry. Co. v. Louisville Trust Co., 174 U. S. 552, 19 Sup. Ct. 817, 43 L. Ed. 1081, is controlling here. In that case the defendant railway company was a corporation organized under the Indiana law. The Indiana statute contained the following provisions:
“The board of directors of any railway company organized under and pursuant to tbe laws of the state c>f Indiana, whose line' of railway extends across the state in either direction, may, upon the petition of the holders of a majority of the stock of such railway company, direct the execution by such railway company of an endorsement guaranteeing the payment of the principal and interest of the bonds of any railway company organized under or pursuant to the laws of any adjoining state, the construction of whose line or lines of railway would be beneficial to the business or trafile of the railway so endorsing or guaranteeing such bonds.”
Without the authority or assent of the majority of the stockholders a negotiable guaranty was executed under the seal of the corporation by order of the directors at their meeting on October 9, 1889, and was signed by the president and secretary of the corporation. The court said, on page 569 of 174 U. S., page 824 of 19 Sup. Ct. (43 L. Ed. 1081), with regard to the facts:
“No petition of a majority of the stockholders for the execution of the guaranty was ever presented, as required by the statute; there was no evidence that the stockholders ever authorized or ratified the contract or the guaranty; and, at the next annual meeting of the stockholders, in March, 1890, it was voted to reject and disapprove both the contract and the guaranty, as having been made without legal authority or the approval of the stockholders.”
However, before the stockholders’ meeting had been held, at which this action of disapproval took place, 125 of the bonds on which the guaranty was made had been negotiated and) sold to bona fide purchasers. The court said, on pages 570 to 576 of 174 U. S., pages 824 and 825 of 19 Sup. Ct. (43 L. Ed. 1081):
“The controverted question is whether the bonds which the Louisville Trust ■Company and the Louisville Banking Company, respectively, purchased in good faith, and without notice of the want of the assent of the majority of the stockholders, are valid in the hands of these companies.
“The guaranty by the Louisville, New Albany & Chicago Railway Company of the bonds of the Beattyville Company was not ultra vires, in the sense of being outside the corporate powers of the former company; for the statute *484of 1883 expressly authorized such a company to execute such a guaranty, and its board of directors to direct its execution by the company. The statute, indeed, made it a prerequisite, to the action of the board of directors, that it should be upon the petition of a majority of the stockholders; but this was only a regulation of the mode and the agencies by which the corporation should exercise the power granted to it.
“The distinction between the doing by a corporation of an act beyond the scope of the powers granted to it by law, on the one side, and an irregularity in the exercise of the granted powers, on the other, is well established, and has been constantly recognized by this court.
“One who takes from a railroad or business corporation, in good faith, and without actual notice of any inherent defect, a negotiable obligation issued by order of the board of directors, signed by the president and secretary in the name and under the seal of the corporation, and disclosing upon its face no want of authority, has the right to assume its validity, if the corporation could, by any action of its officers or stockholders, or of both, have authorized the execution and issue of the obligation.
“In Merchants’ Bank v. State Bank, 10 Wall. 604, 19 L. Ed. 1008, this court stated, as an axiomatic principle in the law of corporations, this proposition: ‘Where a party deals with a corporation in good faith — the transaction is not ultra vires — and he is unaware of any defect of authority or other irregularity on the part of those acting for the corporation, and there is nothing to excite suspicion of such defect or irregularity, the corporation is bound by the contract, although such defect or irregularity in fact exists. If the contract can be valid under any circumstances, an innocent party in such a case has a right to presume their existence, and the corporation is estopped to deny them.’ ”
The decision is by a unanimous court, and the opinion is by Mr. Justice Gray. It decides, as I think, all the questions raised by the cases at bar. It discusses and settles the question that, where there is inherent power in a corporation to issue negotiable paper, irregularities in the manner of exercising its corporate powers will not defeat the paper in the handls of an innocent holder for value before maturity and without notice of the defect of power.
The opinion collects the English cases and those of our Supreme Court, and from a full analysis thereof arrives at the conclusion that, if the contract can be valid under any circumstances, an innocent party has the right to presume the existence of those circumstances, and the corporation is estopped to deny them.
The leading English case and one familiar to American courts is Bank v. Turquand, 6 El. & Bl. 327. This case has been adopted and followed by our Supreme Court.
The stockholders of the railroad company in the Louisville Case correspond) to the trustees of the college in this case. In both cases there was inherent corporate power to do the thing that was done. In both cases the executive officer or officers acted without the statutory authority of the body creating such officer or officers. In this case, as in that, the requirement of initiatory action by the larger body was a regulation of the internal management of the corporation for the benefit and protection of its members, and when the act is on its face within the power of the corporation, as in the issue of the notes in question, and such notes pass into the hands of bona fide purchasers, without notice, the corporation cannot escape liability because of failure to comply with some regulation upon which the power of those acting for the corporation is made by the law to depend. See *485opinion by Justice Brewer at circuit in Blair v. Railroad Co. (C. C.) 25 Fed. 684.
In Farmers’ National Bank v. Sutton Mfg. Co., 52 Fed. at page 195, 3 C. C. A. at page 21, 17 L. R. A. 595, Judge Taft said.
“Every one dealing with, a corporation is charged with notice of its corporate powers. If therefore a reference to the charter shows a seeming .act of the corporation to be beyond its powers, it is void, and cannot be made the basis of any claim of liability against the corporation. But there are acts that may or may not be within the charter powers; their lawful character being dependent on the existence of a fact which cannot be known from the act itself. If the extrinsic fact upon which depends the lawful character of the act is one peculiarly within the knowledge of the general agent of the corporation by whom the act is done, the act itself is an implied representation that the necessary fact exists, the truth of which the corporation is estopped to deny against any person who in dealing with the corporation' has parted with value on the faith of it. The principle has been frequently applied in cases of commercial paper issued in the name of the corporation by its officers having general authority to issue such paper.”
Judge Taft’s decisioirat circuit in the Louisville Case, 75 Fed. 433, 22 C. C. A. 378, is full of conclusive paragraphs.
“It is reasonable that the presumption of regularity should have more force in case^ of instruments designed to pass from hand to hand as ‘couriers without luggage’ than in the case of nonnegotiable contracts. Webb v. Commissioners, L. R. 5 Q. B. 642. The doctrine of Bank v. Turquand is that the resolutions at meetings of stockholders are part of ‘the indoor management’ of the corporation, as Lord Hatherly calls it in Mahony v. Mining Co., L. R. 7 H. L. 869. 894 (see similar expressions by the same judge in Fountaine v. Railway Co., L. R. 5 Eq. 316, 322, and in Re Athenaeum Life Assur. Soc., 4 Kay & J. 549), and that the public cannot be expected to inform themselves of that of which the proper evidence is to be found only in the boolss and. records of the company, to which they have no access,” 75 Fed. page 464. 22 C. C. A. 410.
“Thus, it appears that where, by law, any fact in the internal management of the company is required to be recorded in a public office, the presumption of regularity does not apply, and as to it the outsider dealing with the company must advise himself.” 75 Fed. page 465, 22 C. C. A. 411.
“In the case of private corporations, we do not understand that there is any necessity for recitals of due compliance on the face of their deeds, bonds, and notes. The fact of issue in proper form is an implied representation of the fulfillment of preliminary conditions. Lord Campbell referred to the issuance of the bond in the Turquand Case as a representation by the directors that the necessary meeting had been held. 5 El. & Bl. 248, 260.” 75 Fed. page 467. 22 C. C. A. 412.
“In Miller v. Insurance Co., 92 Tenn. 167, 21 S. W. 39 (20 L. R. A. 765], a company was organized to insure against accidents in traveling. By á subsequent act, such companies were given authority, if the amendment was accepted by a vote of the stockholders, to issue policies of insurance against accidents from any cause or from death by disease. Without action by the stockholders, policies were issued by the directors covering the additional risks. It was held by the Supreme Court of Tennessee, 'Chief Justice Lurton delivering the opinion, that, on the authority of Bank v. Turquand, the policy holder had the right to presume, from the act of the directors, that the new amendment had been accepted by the stockholders.” 75 Fed. page 467, 22 C. C. A. 413.
What diligence is required by the law of one about to purchase the commercial paper of a corporation? Clearly it is that such proposed purchaser shall compare the written evidence of the act of the corporation — the paper as it appears on its face — with the publicly *486recorded evidence of the powers of the corporation and the manner of exercise of such powers; and if the comparison shows nothing inconsistent the purchaser is not required to look farther. Louisville Trust Co. v. Louisville Railroad Co., 75 Fed. 456, 22 C. C. A. 378.
But it is contended that such prospective purchaser must go further; that, as he is informed by the terms of the statute that the corporation could borrow money only when the proper officer was authorized to do so by the vote of the majority of the members, it became his duty to inquire whether this had been done — to search the records of the corporation for this purpose. I cannot agree with this view. Corporation records are private — even quasi public records, as those of a railroad company, have been so held.
In Blair v. Railroad Co., supra, 25 Fed. at page 686, Judge Brewer said:
“Now I do not understand that a man, dealing with a private corporation, or even a quasi public corporation, like a railroad, is bound to take notice of what the records of that corporation show, for, if it be so, no man can deal with a corporation in safety without first having access to and- an examination of its books; and the converse of that would be true, that such a corporation is bound to show its records to whomsoever has dealings with it. In a certain sense, the books of a corporation, so far as persons dealing with it are concerned, are their own private records, and are not open to the inspection or knowledge of strangers, and persons are at liberty to deal with a corporation freely without danger of running against equities or claims unless they are disclosed by the public records, just the same as in dealing with an individual.” » •
In the application of this doctrine there is no distinction between a business corporation and a charitable corporation when the latter engages in an act of business.
In Illinois Conference v. Plagge, 177 Ill. 431, 53 N. E. 76, 69 Am. St. Rep. 252, the suit was on a note given by a religious body organized undler the same Illinois statute as St. Vincent College, and the court in answering the same defense here set up said:
“We do not construe the provisions of the statute hereinbefore set out to make it indispensable it should expressly appear from the record of the proceedings of the conference a majority of the members voted to authorize money to be borrowed or for measures or proceedings having the effect to ratify the act of the board of trustees in borrowing the money.”
To the same effect is National Home Building Association v. Bank, 181 Ill. 35, 54 N. E. 619, 64 L. R. A. 399, 72 Am. St. Rep. 245.
It is urged by plaintiff in error that there is such distinction, and that the Supreme Court so recognized it because in the Louisville Trust Company Case in the first line of the last paragraph but one on page 573 of 174 U. S., page 825 of 19 Sup. Ct. (43 L. Ed. 1081), the court used the words “a railroad or business corporation.” I think from the language of the entire opinion that the court intended no such distinction. Educational corporations must and do perform many acts of business, and) some of these transactions run into large sums of money. To make the distinction urged would be to destroy the negotiability of such commercial paper and say that the law merchant does not apply to negotiable instruments issued by educational institutions. There is no law declaring such immunity nor creating *487such exemption. In support of the rule contended for, many state cases are cited by plaintiff in error, and one federal decision. The latter is Palmer v. Wardens and Vestrymen of St. Stephen’s Church (C. C.) 16 Fed. 742, (Decided by Judge Blodgett in 1883, six years prior to the Louisville decision. I have carefully considered that case. Judge Blodgett found that the admission of the officers who signed the note in that case was the only evidence in the record that they were the duly appointed officers to execute commercial paper on behalf of the church, and he held that the liability of the church could) not be established in that way. In other words, he held that the note in question was not the obligation of St. Stephen’s church.
Another case relied upon as showing the distinction between the powers of religious corporations and those created for business purposes is People’s Bank v. St. Anthony’s Roman Catholic Church, 109 N. Y. 512, 17 N. E. 408. I do not think this case supports the contention of plaintiff in error. The corporation was organized under an act of New York for the special benefit of the Catholic Church, and in the case cited the court held that the members of the board of trustees, having acted separately and not jointly as a bodfy, had failed to bring the corporation within the terms of the act so as to make the note sued on the obligation of the church.
Many of the state cases cited by plaintiff in error were actions on the case, and the charitable institutions which had been made defendants on account of injuries suffered through negligence of their employés under,the doctrine of respondeat superior were held not liable. In nearly every instance the plaintiff had applied voluntarily for the benefits of the institution, and the negligent employés were in the performance of its charitable functions, and the courts held) that the doctrine of assumed risk would apply. The rule is wholly different in .cases ex contractu, for in such cases, if there be no distinction between a business and a charitable corporation when the latter is performing a business act, then clearly the rule is that when a corporation, business or charitable, by authority of law, and, as in this case, by its by-laws, holds out an officer as the proper person to execute notes in its name, the corporation cannot deny such paper in the hands of an innocent holder for value before maturity and without notice. Cromwell v. County of Sac, 96 U. S. 51, 24 L. Ed. 681; Credit Co. v. Howe Machine Co., 54 Conn. 387, 8 Atl. 472, 1 Am. St. Rep. 123; Matson v. Alley, 141 Ill. 284, 31 N. E. 419; Farmers’ Natl. Bank v. Sutton Mfg. Co., 52 Fed. 191, 3 C. C. A. 1, 17 L. R. A. 595; Murphy v. Arkansas (C. C.) 97 Fed. 723; Ex parte Estabrook, 2 Low. 547, Fed). Cas. No. 4,534; Tod v. Kentucky Union Land Co. (C. C.) 57 Fed. 47.
It is argued on behalf of plaintiff in error that these notes cannot be held to be the obligations of the corporation unless the law makes it an irrebuttable presumption that the president of an Illinois corporation, simply by virtue of his office, has power to bind the corporation by a note. That this is the law in Illinois there seems to be no doubt. Insurance Co. v. White, 106 Ill. 75; McDonald v. Chisholm, 131 Ill. 273, 23 N. E. 596; Atwater v. Bank, 152 Ill. 620, 38 *488N. E. 1017; Durkee v. People, 155 Ill. 363, 40 N. E. 626, 46. Am. St. Rep. 340; Lloyd & Co. v. Matthews, 223 Ill. 481, 79 N. E. 172, 7 L. R. A. (N. S.) 376, 114 Am. St. Rep. 346. To the same effect is Bank v. Pottery Co. (C. C.) 55 Fed. 265.
■The case of Bank v. Atkinson (C. C.) in 55 Fed. 465, which it is claimed reverses this rule, is not in point because in the latter case ■Woods, the president of the plaintiff bank, had knowledge of the irregularity when the note was made. In most of the states the rule is different,' as shown by the text-book writers: 3 Cook, Corporations (6th Ed;) § 716; 2 Thompson, Corporations (2d Ed.) § 1452.
However, I' do not think the case turns upon this single question. In the case at bar Byrne, the president, was designated as the person to sign notes for the corporation. This power was given to no other officer and it was given to him as one of his duties.
It is altogether aside to say that he could only sign after certain preliminary action by the trustees. The corporation, having inherent power to make notes and having designated its president as the person having power to sign them in its name, must become obedient to the ¡rule so carefully expounded by the courts that the bona fide holder has- a right to presume that all necessary preliminary steps have been taken and the corporation cannot escape the obligation.
Why should the rule of liability be modified in the case of a charitable or educational corporation where it engages in a business act? It is said in argument that it should have immunity because its officers are dealing with trust fundís. The officers of all corporations handle trust funds.. To give the immunity contended for would invite every variety of fraud and deception. The commercial world would distrust such institution because it would be practically impossible for the lender to know when the inquiry as to legal compliance had been pursued far enough. Charitable institutions officered by honest men would be embarrassed! in carrying out their corporate functions and to such the rule would work an actual hardship. Such corporations have it in their power to select, as their managing officers, persons who are neither weak nor dishonest. The commercial world has no .voice in this selection, and it is not only legal but equitable that the same rule should apply to both business and charitable corporations.
The Supreme Court of Illinois well expressed this idea in Y. M. C. A. v. Bank, 179 Ill. 599, 54 N. E. 297, 46 L. R. A. 753, 70 Am. St. Rep. 135, where it said:
“If a loss occurs •wherein one of two innocent persons must suffer, that one should sustain the loss who has most trusted the party through whom the loss came.”