First Nat. Bank of Ottawa v. Converse

200 U.S. 425, 26 S. Ct. 306, 50 L. Ed. 537, 1906 U.S. LEXIS 1488

• Court: Supreme Court of the United States
• Decided: February 19, 1906
• Docket: 176
• Status: Published

Opinions

Mr. Justice White,

after making the foregoing statement, delivered the opinion of the court.

The questions principally discussed at bar relate to the alleged repugnancy to the Constitution of the United States of the Minnesota law of 1899, by virtue of which the receiver asserted his power and authority to sue- in a coúrt of another jurisdiction than that’of Minnesota to enforce the assessment made by the court of -Minnesota on the stockholders of the thresher company. But antecedent to that question we must, consider and dispose of the propositions arising from the tenth ground of the demurrer, that is, that under the averments of the bill there was no liability on- the bank, as the facts alleged from which it is asserted, the liability arose showed that the act of the bank in subscribing to the stock was ultra vires and prohibited by the provisions of the national banking act. We say this is antecedent because,- if, from the averments of .the declaration, aside from the validity or invalidity of the act of 1899, there could be no liability on the' bank to pay the assessment, it will be unnecessary to consider whether the Minnesota statute added- such conditions to the obligation resulting from the stock subscription at the time it was made as to cause the statute to be repugnant to the contract or any other clause of the Constitution of the United States.

At the time the bank took the stock in the thresher company it was provided in section 3 of. article X of the constitution of Minnesota as follows: “'Each stockholder in any cor-' poration (except those organized for the purpose of-carrying on any kind of manufacturing or mechanical business) shall be hable to the amount of stock held or owned by him.”

If the thresher company was. organized solely for manufacturing purposes, it is of course apparent that under this provision of the Minnesota constitution the stockholders of the company would not be liable for its debts. Senour Mfg. Co. v. Church Paint & Mfg. Co., 81 Minnesota, 294. It has, however, been decided by the Supreme Court of Minnesota that unless it unquestionably appears that a Minnesota corporation claiming to be a manufacturing corporation was organized for the exclusive purpose of engaging in manufacturing and' such incidental business as might be reasonably necessary for effecting that purpose, the exception in the Minnesota constitution to which reference has been made would'not apply,' and the double liability would result. State v. Minnesota Thresher Co., 40 Minnesota, 213; Merchants’ Nat. Bank v. Thresher Mfg. Co., 90 Minnesota, 144. These cases, it is to be observed, referred to the very act of incorporation upon which the liability of the bank, if at all, must rest. It clearly appeal’s, from the comments of the Supreme Court of Minnesota upon the charter, that in the articles of association the thresher company was declared to be organized under the law of Minnesota relating to manufacturing corporations as a class exempt from double liability, and that .the motives of the incorporators were to obtain immunity from the double liability. The court, however, held i^hat the mere law under which the corporation was organized, and the motive therefor, would not suffice to bring the incorporators within the control • of the exemption accorded by the constitutional provision, if from the articles of association it did not clearly appear that the corporation was confined solely to a manufacturing business and its incidents. The doctrine of the court was thus clearly stated (90 Minnesota, 147):

“It is immaterial that the corporation was organized under the statute providing for organizing manufacturing corporations or what the actual intention of the incorporators was, or that the corporation in fact carried on only a manufacturing business, but its articles of incorporation are the sole criterion as to such intention and the purposes for which the corporation was organized; and, unless-it fairly appears therefrom that it was organized for the exclusive purpose of engaging in manufacturing and such incidental business as may be reasonably necessary for effectuating the purpose of its organization, its stockholders arc not within the exception to the general rule of constitutional liability of stockholders for the debts of their corporation.”

And further along in the opinion the declaration was reiterated (p. 148) that the intentionrof the corporators could not be ascertained by reference- to matters not appearing on the face of the articles of association, and that the articles were the sole criterion as to the purpose for which a corporation was formed, “that is, for'ascertaining the intention of tthe asso- ■ ciates.” Applying this rule to .the articles of association of the thresher company, the. court found that the acquisition of the stock, etc., of the car company was a business independently to be engaged in and was not incidental to that of manufacturing, and, hence, that the corporation was not within. ■ the exception embodied in the constitutional provision imposing a double liability upon stockholders.

Now, the exclusive and only ground upon which the Supreme Court of Minnesota, • in construing the articles of association'. of the .thresher .company, held that the articles embodied a distinct business from that of manufacturing, is plainly made manifest by the opinions, expressed by. the court in the two cases to which we have referred. In the earlier case the court said (40 Minnesota, 223):

. “It is clear, therefore, to our minds that, under the act of 1&73, a-corporation can only be organized for carrying on an' exclusively manufacturing or mechanical business, which, of course, includes anything that -is properly .incidental to or ■ necessarily connected with such business. A corporation organized to carry on manufacturing -.and also some other lawful, but ■ -independent, business, belongs to the class authorized by title 2, c: 34 (sections 109-119).

“With this construction of the law in mind, it is not- difficult, on-examination of respondent’s articles of association, to ' determine to what class it belongs.. One. of the declared objects of' its formation is to purchase the capital stock and evidences of indebtedness of the car company, a business in nowise, incident- to .or property connected with that of manufacturing. The contention , of- counsel to the contrary cannot be seriously entertained for a moment. If a manufacturing corporation desires to buy the plant of another corporation formerly engaged in the same business, that is legitimate; and if, in order to get it, it becomes necessary to buy with it some other property, riot needed for nor connected with the manufacturing business, this also would be permissible, if done as incidental to the main purpose'of securing the plant; but no such reason or excuse existed for buying the stock and indebtedness of the car company. Indeed, it would be difficult to imagine anything more foreign to or- inconsistent with a legitimate manufacturing business than for a corporation to invest all its capital in the stock and indebtedness of another and insolvent corporation. -Under title 2, a corporation can be organized to carry on any lawful business, and, if parties desire to deal in such speculative property, they can do so under that title; but not under the act of 1873, even-by connecting it with manufacturing. Our conclusion, therefore, is that, respondent is a corporation of the class authorized by title 2. That is what the corporators themselves have characterized it by their statement of the objects of its formation.”

In the latter case, after restating the rule that the face of the articles of association was the sole criterion as to the purpose for which the dorporation was formed, the court said (90 Minnesota, 148):

‘‘Now, taking the articles in question by the four corners, and reading them in the light of the rule we have stated, without resorting to technicalities, does it fairly appear therefrom that the corporation was organized for the exclusive purpose of engaging in manufacturing-and business incidental thereto and reasonably necessary for carrying into effect such purpose? We answer the question in the negative. There are two general purposes for which the corporation was organized as declared by the articles — one the purchase of the capital stock, evidence of indebtedness, and assets of an existing corporation; and the other the manufacture and sale of all articles, implements, and machinery made of wood and iron, or either of them, and the manufacture of the materials therein used. The first purpose does not appear to be a necessary incident to the second one. On the contrary, the corporation was authorized to buy and sell the stock, dioses in action, and assets of the Northwestern Manufacturing & Car Company mentioned in the articles, without'ever engaging in the business of . manufacturing. The first purpose appears to be independent of the second one, for the power to buy necessarily includes the. incidental power to Use, collect, deal with, or sell the stock and ■ assets -of the then existing corporation. Nor does it fairly' appear, ex- ■ ' pressly or by necessary implication, from the language of these articles, that such stock and assets were to be purchased only ■ as a necessary incident to the declared purpose of manufacturing all articles which are made of wood and iron,' or either of . them.” . . . d .

Accepting this construction given by the Supreme Court.of Minnesota to the articles of association by which alone the incorporators under those articles can be taken out of 'the-, exemption accorded by the constitution of Minnesota, it fol- ' lows that the thresher company was organized to embark in the purely, speculative business of buying and selling the stock and assets of an existing and insolvent corporation, with power, but without the obligation, to engage as an independent -enterprise in a manufacturing business, -

Now, the limitations, upon the powers of national banks were clearly pointed out in California National Bank v. Kennedy, 167 U. S. 362, where it was said (p. 366):

“It is settled that the United States statutes relative to national banks constitute the measure of the authority of such corporations, and that they cannot rightfully exercise any powers except those expressly .granted, or which are incidental to carrying on the business for which they are established. Logan County Bank v. Townsend, 139 U. S. 67, 73. No express power to acquire the stock of another corporation is conferred upon a national bank, but it has been held that, as incidental to the power to loan money on personal security, a bank may in the usual course of doing such business accept stock of another corporation as collateral, and by the enforcement of its rights as pledgee it may become the owner of the collateral and be subject to liability as other stockholders. National Bank v. Case, 99 U. S. 628. So, also, a national bank may be conceded to possess the incidental power of accepting in good faith, stock of another corporation as security for a previous indebtedness. It is clear, however, that a national bank does not. possess the power to deal in stocks. The prohibition is implied from the failure 'to grant the power. First National Bank v. National Exchange Bank, 92 U. S. 128.”

As no authority, express or implied, has ever been conferred by the statutes of tlib United States upon.a national bank .to engage in or promote a purely speculative, business or adventure, accepting the view of the articles of association by which the bank was denied the benefit of the exemption accorded by the constitution of Minnesota, it follow's that the bank had no power to engage in such business by taking stock or otherwise. . The power of a national bank to engage in the character of business which the articles of association of the thresher company manifested, as defined by the Supreme Court of Minnesota, cannot be inferred to have been possessed by the bank as an incident of securing a present loan of money or as a means of protecting itself from loss upon a preexisting indebtedness. Tp concede that a national bank has ordinarily the right to take stock in another corporation as collateral for a present- loan or as security for a preexisting debt, does not imply that because a national bank has lent money to a corporation it may become an organizer and take stock in a new and speculative venture; in other words, do the very thing which the previous decisions of this court have held cannot be done.

The speculative venture, therefore, which the bank undertook, as held by the Minnesota court, when it engaged, in' taking the stock in the thresher company being vltra vires,. it follows, under the settled rules hitherto applied by this court, that the bank, despite, the subscription, was entitled to plead its want of authority as a defense to the claim of the-réceiver. The doctrine on the subject was stated in De la Vergne Co. v. German Savings Inst., 175 U. S. 40, where it was said (p. 59):

“The doctrine that no recovery can-be had upon the contract is based upon thfe.theory that it is for the interest of the public that corporations should hot transcend the limits of-their charters; that the property of stockholders should not be put to the risk of engagements which they did not undertake; that if the contract be prohibited by statute every one dealing with the corporation is. bound to take notice of the restrictions in its charter, whether such charter be a private act or a general law under which corporations of this class are organized.”

And, moreover, the authorities cited in the case just referred to conclusively. establish that the principle which the case announced as to the power of a corporation to avail of the defense of ultra vires had been previously conclusively settled in this court. Indeed, the case arising on, the record presents an obvious dilemma, which is this: If the construction of the articles of association given by the Supreme Court of the State of Minnesota, by which alone the1- double liability can be enforced, is accepted,' then there was no liability because of ultra ■ vires. If, on the other hand, we were to disregard the construction given by the. Supreme Court of Minnesota to the articles of association we-should be constrained to the conclusion that those articles but endowed the incorporators of the thresher company with , the power to carry on a manufacturing business, and s,s a mere incident-ho acquire for the purposes of such business the property of the car company; and it would follow that there was no double liability, by force of the exception created in the constitution of Minnesota.

■The judgment must be reversed and the case remanded with directions to sustain the demurrer and enter judgment for the bank: