Cincinnati, H. & D. R. v. McKeen

64 F. 36, 12 C.C.A. 14, 1894 U.S. App. LEXIS 2472

• Court: Court of Appeals for the Seventh Circuit
• Decided: October 1, 1894
• Status: Published

Opinion

HARLAN, Circuit Justice

(after stating the facts as above reported).

The principal contention of the plaintiff is that the moneys paid to McKeen belonged to it, and, although paid by Ives for its benefit and by authority of its directors, were paid in part execution of a contract unauthorized by the plaintiffs charter or by the statutes of the state of which it was a corporation; and the same view as to want of corporate power was urged in relation to the agreement and note signed by Ives, trustee.

The defendant, among other things, insists that he did not contract with Ives as representing, nor receive the moneys in question as coming from, or as being paid for, the plaintiff; that the contract between him and Ives was fully executed before this suit was brought; and that, under the circumstances disclosed by the evidence, a court of equity will not give the relief asked, even if it were true — which, however, the defendant denies — that the plaintiff was incompetent under its charter, or forbidden by the law of its creation, to make or to apply its funds in discharge of the agreement and note sought to be canceled.

If it be true that the plaintiff was without corporate power, under its charter or the laws of Ohio, to use its funds in the purchase of shares of the stock of the Terre Haute & Indianapolis Kail-road Company or of the Terre Haute & Logansport Railroad Company, and if it be also true that McKeen, during his negotiation with Ives, knew or should be held to have known, that the latter in fact represented the Cincinnati, Hamilton & Dayton Railroad Company, and that the cash payments made by Ives -were with funds belonging to that corporation, — upon which matters wre express no opinion,— it does not follow that the plaintiff is entitled to the relief it now seeks.

It seems to the court that the cases of Thomas v. Railroad Co., 101 U. S. 71, 85, and of St. Louis, V. & T. H. R. Co. v. Terre Haute & I. R. Co., 145 U. S. 395, 400, 406, 12 Sup. Ct. 953, particularly the latter, are decisive of this case.

In Thomas v. Railroad Co. the court said:

“There can be no question that in many instances where an invalid contract, which the party to it might have avoided or refused to perform, has been fully performed on both sides, whereby money has been paid or property changed hands, the courts have refused to sustain an action for the recovery of the property or the money so transferred. In regard to corporations, tlio rule has been well laid down by Comstock, C. J., in Parish v. Wheeler, 22 N. Y. 494, that the executed dealings of corporations must be allowed to stand for and against both parties when the plainest rules of good faith require it.”

St. Louis, V. & T. H. R. Co. v. Terre Haute & I. R. Co. was a suit in equity by the St. Louis, Vandalia & Terre Haute Railroad Company, an Illinois corporation, against the Terre .Haute & Indianapolis Railroad Company, an Indiana corporation, to set aside and cancel a conveyance of the plaintiff’s railroad and franchise to the defendant for a term of 999 years. The principal ground upon which the plaintiff corporation sought that relief was that the lease was void for want of lawful authority in either party to enter into it. The court adjudged that the contract was clearly beyond the corporate powers of the defendant company, but deemed it unnecessary to express a definite opinion upon the question whether the contract between the parties was beyond the powers of the plaintiff, because “a contract beyond the corporate powers of either party is as invalid as if beyond the corporate powers of both.”

Assuming, as contended by the plaintiff in that case, that the contract was ultra vires of the defendant, and therefore not binding upon either party, nor capable of sustaining a s.uit upon it at law or in equity by either party against the other, the court said:

“It does not, however, follow7 that this suit to set aside and cancel the contract can be maintained. If it can, it is somevrliat remarkable that, in the repeated and full discussion which the doctrine of ultra vires has undergone in the English courts within the last fifty years, no attempt has hoen made to bring a suit like this.”

After showing that the English cases relied on were inapplicable to the case then under consideration, the court proceeded:

“The general rule in equity, as at law, is ‘In pari delicto potior est conditio defendentis;’ and therefore neither party to an illegal contract will be aided by the court, whether to enforce it or to set it aside. If the contract is illegal, affirmative relief against it will not be granted at law or in equity, unless the contract remains executory, or unless the parties are not in equal fault; as. where the law violated is intended for the coercion of the one party and the protection of the other, or where there has been fraud or oppression on the part of the defendant. Thomas v. Richmond, 12 Wall. 349, 355; Spring Co. v. Knowlton, 103 U. S. 49; Story, Eq. Jur. § 208. While an unlawful contract, the parties to which are in pari delicto, remains executory, its invalidity is a defense in a court of law, and a court of equity will order its cancellation only as an equitable mode of making that defense effectual, and when necessary for that purpose. Adams, Eq. Consequently, it is well settled at the present day that a court of equity will not entertain jurisdiction to order an instrument to be delivered up and canceled upon the ground of illegality appearing on its face, and when, therefore, Hiere is no danger that the lapse of time may deprive the party to be charged upon it of his means of defense. Story, Eq. ,Tur. § 700a, and cases cited; Simpson v. Howden, 3 Mylne & C. 97; Ayerst v. Jenkins, L. R. 16 Eq. 275, 282. When the parties are in pari delicto-, and the contract has been fully executed on tlie part of tlie plaintiff by the conveyance of property or by tlie payment of money, and has not been repudiated by the defendant, it is now equally well settled that neither a court of law nor a court of equity will assist tlie plaintiff to recover back the property conveyed or money paid under tlie contract. Thomas v. Richmond, above cited; Ayerst v. Jenkins, L. R. 16 Eq. 275, 284.”

In illustration of the rule just stated, the court further said:

“In the case at bar, the contract by which tlie- plaintiff conveyed its railroad and franchise to the defendant for a term of nine hundred and ninety-nine years was beyond Hie defendant’s corporate powers, and therefore unlawful and void, of which the plaintiff was bound to take notice. Tlie plaintiff stood in the position of alienating the powers which it had received from the state, and tlie duties which it owed to the public, to another corporation, which it knew had no lawful capacity to exercise those powers or to perform those duties. If, as the plaintiff contends, the contract was also beyond its own corporate powers, it is certainly in no better position. In either aspect of the ease the plaintiff was in pari delicto with the defendant. The invalidity of the contract, in view of the laws, of which both parties were bound to take notice, was apparent on its face. The contract has been fully executed on the part of the plaintiff by the actual transfer of its railroad and franchise to tlie defendant; and the defendant has held the property, and paid the stipulated compensation from time to time, for seventeen years, and has taken no steps to rescind or repudiate the contract.”

Has the contract which the appellant seeks to have rescinded been fully executed, or does it remain executory in any material respect?

McKeen ag'reed to sell and deliver to Ives 11,160 shares of the capital stock of the Terre Haute & Indianapolis Railroad Company and 4,446 shares of the capital stock of the Terre Haute & Logans-port Railroad Company, certificates for the latter shares and for 8,560 of the 11,160 shares to be delivered to Ives on the 4th of June, 1887, and certificates for the remaining 2,600 shares of the stock of the Terre Haute & Indianapolis Railroad Company to be delivered 30 days from that date. All these things were done by McKeen within the time limited by the written agreement.

In consideration of McKeen’s agreement to sell and deliver these shares of the stock of both the Indiana corporations, Ives, on June 1,1887, paid to McKeen $250,000 in cash, and agreed to pay to him on the 4th of June, 1887, the additional sum of $689,500, and to execute a note dated on that day for $669,150, payable six months after date, and bearing 6 per cent, interest, and providing for the sale and purchase of the above certificates of stock in the form, and upon the terms, usually adopted in cases of notes secured by collaterals, and to assign and transfer those certificates to McKeen as collateral security for the payment of the above note. All these things were done by Ives within the time limited by the contract.

It would seem, then, that, within the meaning of the general rule to which we have adverted, the contract between the parties was fully executed on the 4th day of June, 1887. In Sturges v. Crowninshield, 4 Wheat. 122, 197; Chief Justice Marshall said that “a contract is an agreement in which a party undertakes to do, or not to do, a particular thing.” And in Fletcher v. Peck, 6 Cranch, 87, 186, he said that “an executory contract is one in which a party binds himself to do, or not to do, a particular thingand “a contract executed is one in which the object of [the] contract is performed.” Each particular thing specified in the agreement of June 1, 1887, to be done by the-respective parties was done on the 4th day of June, 1887; so that a suit instituted after that day to compel its specific performance could have been dismissed upon the sole ground that nothing remained to be done which its provisions required at the hands of either party. If neither party could have maintained a suit of that character, it is not perceived upon what ground the contract between them could be characterized as execu-tory in respect to any of its provisions. It cannot be deemed to have been executory because of the nonpayment of the note for $669,150 prior to the commencement of this suit. The written agreement of June 1,1887, so far as it related to the balance of the price of the stock sold to Ives, after crediting the cash payments of $250,000 and $639,500, required only the execution and delivery of his note for a specified amount, containing certain provisions, and to be secured by the stock to be delivered to McKeen as collateral. Besides, under the law of the state in which the contract was made, anything may be regarded as payment which the creditor accepts as payment; and by the same law, if the note given in payment is negotiable according to the' commercial law, the presumption is that it was received as payment. Weston v. Wiley, 78 Ind. 54, 56; Warring v. Hill, 89 Ind. 497, 501; Nixon v. Beard, 111 Ind. 137, 12 N. E. 131; Louden v. Birt, 4 Ind. 566; Tilford v. Roberts, 8 Ind. 254. Interpreting the agreement of June 1, 1887, in the light of the circumstances attending its execution, it cannot be doubted that the note for $669,150, secured by the stock of the two Indiana corporations, was accepted by McKeen as payment. And Judge Jenkins well said, in the present case, that, “whatever might be the rights of one who is to receive money under a contract, it cannot be that the party who is to pay in a specific manner, and has so paid by obligations satisfactory to the payee, can repudiate the transaction, and claim the contract still to be an existing, unexecuted agree: ment.”

11', then, the original coni raet now sought to be rescinded was fully executed before this suit was brought, what principle will justify the interference of a court of equity in behalf of (he plaintiff? If the contract was illegal because beyond the corporate powers of the plaintiff, the parties were equal in fault, — the one for using its funds for purposes foreign to the objects of its creation, the other for accepting and appropriating such funds; both being bound to take notice of tire limitations which the statutes of Ohio put upon the authority of I he Cincinnati, Hamilton & Day Ion Bailroad Company. Nor can (he assistance of a court of equity he invoked upon any ground of oppression or fraud on the jiart of the defendant. Neither the bill nor the evidence suggests any fact showing oppression. Fraud in certain particulars is indeed charged by the bill, but the allegations to that effect are expressly denied, and the evidence does not overcome the answer on that point. The case, then, comes within the decisions of the supreme court of the United States above cited, so far as the hill seeks, in behalf of the railroad company, a decree adjudging the defendant to hold the moneys received from Ives in trust for it.

In respect to the prayer for the cancellation of the note given by Ives, there is no need for the interposition of equity, even assuming the contract, in all its parts, to have been illegal and void as beyond the corporate powers of the railroad company. If, at the time this suit was commenced, the company was liable to suit by McKeen, either at law or in equity, upon the noie itself, or for its amount as being the balance of the stipulated price for the shares purchased by Ives, trustee, the illegality of (hat contract would have been a complete defense. Upon the theory that the contract was ultra vires of the plaintiff, it may be that a suit in equity might have been maintained for the cancellation of the note, if one had been commenced before the note fell due, and while there wats danger of its being transferred to a bona fide holder for value', without notice from the note itself or otherwise of the illegality of the contract out of which it arose. lint this suit was not brought until after the maturity of the note, and therefore a transfer of if, after the institution of this suit, to a third person, would not have cut olf any defense that the railroad company could have made as against McKeen, the payee.

It may be staled as part of the history of this litigation that, a few days after the present suit was brought, —-that is, on the 27th of February, 1888, — ‘McKeen notified both. Ives, trustee, and the Cincinnati, Hamilton & Dayton Bailroad Company, that under authority conferred by the note itself he would, at a named hour and place, on the 8th of March, 1888, sell as an entirety the stock pledged as collateral security for its jjayment. It was sold at the time and place designated, McKeen becoming the purchaser at the price of $750,000. Of this purchase McKeen notified the president of the Cincinnati, Hamilton & Dayton Company, as well as of the amount of the surplus in his hands over and above the face of the note. Although the facts relating to this sale were fully set forth in the answer of MeKeen, we have considered the question of the cancellation of the 'note in the light of the situation as it was when the present suit was brought. This we have done because it is insisted that the jurisdiction of the court to decree the cancellation of the note given by Ives depends upon the facts as they existed when that jurisdiction was invoked.

It has been suggested that these principles should not be applied to the injury of the stockholders of a corporation which has misapplied its funds in violation of its charter, or for objects foreign to those for which it was created. Whatever force this suggestion would have had if suit in the name of the corporation had been brought before the contract sought to be rescinded was fully executed, or however strongly, under some circumstances, it would appeal to the chancellor in a suit brought by or for the benefit of stockholders even after the execution of the contract, it is not entitled to weight in the present case. Although the plaintiff seeks a decree declaring that MeKeen holds the $889,500, received from Ives, in trust for its stockholders as well as for itself, there is no allegation in the bill that the stockholders were not fully aware of the negotiations between Ives and MeKeen, or of the use by the plaintiff of its funds for the purchase of the stock of the two Indiana corporations. We are satisfied, from the undisputed facts. and from all the circumstances of the case, that the stockholders, with very few, if any, exceptions, were cognizant of Ives’ movements in the interest of the Cincinnati, Hamilton & Dayton Railroad and of himself. They could not have been ignorant oí the transactions of Ives and his associates, nor of the two suits instituted in the circuit court of the United States sitting in Indiana. While they remained inactive, Ives contrived to dissipate a very large amount of the assets of the Terre Haute & Indianapolis Railroad Company. So that, when this suit was brought, the stock of that company, obtained by him from MeKeen, had materially diminished in value. The restoration of the parties to their original position has become an impossibility; and, while that consideration alone might not justify the court in refusing to rescind an executory contract entered into by a quasi public corporation in violation of law, it is of great weight when the extraordinary power of equity to cancel an executed contract is invoked. Delaine Co. v. James, 94 U. S. 214; Union R. Co. v. Dull, 124 U. S. 182, 8 Sup. Ct. 433. We are of opinion that the corporation, so far as it may be considered as representing stockholders, is precluded from obtaining, at the hands of a court of equity, the relief asked in the bill. St. Louis, V. & T. H. R. Co. v. Terre Haute & I. R. Co., 145 U. S. 393, 408, 12 Sup. Ct. 953; Graham v. Railway, 2 Macn. & G. 146.

For the reasons stated, the decree below is affirmed.