Fritze v. Equitable Building & Loan Society

57 N.E. 873, 186 Ill. 183

• Court: Illinois Supreme Court
• Decided: June 21, 1900
• Status: Published

Opinion

Mr. Justice Magruder

delivered the opinion of the court:

The first question, presented by the record in this case, relates to the validity-of the amendment to the bylaws, adopted on April 21, 1892, and quoted as section 6 of article 3 of the by-laws in the statement preceding this opinion. If this by-law was invalid, then the office of manager of agencies did not lawfully exist, and the appointment of the appellant, Fritze, as such manager of agencies, and the contract made with him on May 2, 1892, were equally invalid.

Section 1 of the act of July 1, 1879, relating to building and loan associations, provides for the filing in the office of the Secretary of State of a statement, setting forth the name of the proposed corporation, its capital stock, its location and its duration; and that the Secretary of State shall thereupon issue to the persons, making said statement, a license as commissioners, to open books for subscription to the capital stock of the corporation. Section 2 of the act provides, that, as soon as one hundred shares or more of the capital stock shall be subscribed, the commissioners, upon notice given as therein directed, shall convene a meeting of the subscribers “for the purpose of electing directors, adopting a charter and by-laws and the transaction of such other business as shall come before them.” Section 3 of the act provides as follows: “The commissioners shall make a full report of their proceedings, including therein a copy of the notice provided for in the foregoing section, a copy of the subscription list, a copy of the charter and by-laws adopted by the association and the names of the directors elected and their respective terms of office, which report shall be sworn to by at least a majority of the commissioners, and shall be filed in the office of the Secretary of State. The Secretary of State shall thereupon issue a certificate of the complete organization of the corporation, making a part thereof a copy of all papers filed in his office in and about the organization of the corporation and duly authenticated under his hand and seal of State;" and the same shall be recorded in the office of the recorder of deeds in the county in which the principal office of such company is located. Upon the recording of said copy, the corporation shall be deemed fully organized and may proceed to business,” etc. (1 Starr & Curt. Stat.—1st ed.— p. 630.)

It will be noticed, that the charter and by-laws of the corporation are required to be adopted at the meeting of subscribers provided for in section 2 of the act. A copy of the charter and by-laws, thus adopted by the association, is required to be included in the report of the proceedings to be sworn to, and filed in the office of the Secretary of State. The copy of the charter and by-laws, thus required to be reported and filed, is also required to be made a part of the certificate of organization of the corporation, which is issued by the Secretary of State. As the by-laws must thus be a part of the original certificate of organization, and must be recorded in the office of the recorder of deeds in the county in which the principal office is located, the company is necessarily without the power, under the act of July 1, 1879, to subsequently amend its by-laws. If all the by-laws were required to be a part of the original certificate of organization, there could be no by-laws that were not»a part of that certificate. The corporation was not to be deemed fully organized, and could not proceed to business, until a copy of the certificate of organization, containing the charter and by-laws, was recorded as directed by section 3 of the act. A subsequent amendment to the by-laws, passed after the certificate of organization had been issued and recorded, would be the adoption of a by-law not authorized or sanctioned by the act, because it could not be a part of the original certificate of organization.

The Equitable Building and Loan Society of Peoria was organized in March and April of 1890. Its original certificate of organization, with the charter and by-laws adopted by it at the meeting provided for in section 2 of the act, was issued by the Secretary of State on April 5, 1890. This certificate of organization, with a copy of the charter and by-laws attached, was filed with the recorder of deeds in Peoria county on April 7, 1890. By the documents on file in the office of the Secretary of State and on record in the office of the recorder of deeds of Peoria county, persons dealing with the corporation were notified that the by-laws were such as they were shown to be in the office of the Secretary of State and in the office of the recorder of deeds of Peoria county. The amendment to the by-laws, known as section 6 of article 3, which provided for the appointment of a manager of agencies, was not passed until April 21, 1892, long after the corporation had been organized and had proceeded to business under the by-laws adopted in March and April, 1890. It follows that the by-law of April 21,1892, giving the board of directors power to appoint a manager of agencies, such as is described in section 6, is invalid as being ultra vires and beyond and in excess of the charter powers of the corporation. The language of the act of July 1, 1879, excludes the idea, that corporations organized thereunder, could make amendments to their by-laws after their organization.

Nowhere in the act of 1879 is power given to associations, organized thereunder, to'make amendments to their by-laws. No express power for that purpose is conferred by the act, nor can it be said that there is any implied power, under the provisions of the act, to make such amendments. The implication of any such implied power is negatived by the requirement, that the by-laws must be made a part of the original certificate of organization, and filed and recorded in the manner prescribed by the act. The permission to pass such by-laws, as are thus embodied in the certificate of organization, and thus filed and recorded, is a prohibition of the right to adopt any other by-laws by amendment, or otherwise:

It is well settled that the powers of a corporation, organized under a legislative charter, are only such as the statute confers; and “the enumeration of these powers implies the exclusion of all others.” (Thomas v. Railroad Co. 101 U. S. 71). The rule of construction applicable to statutory provisions is, “that every power that is not clearly granted, is withheld, and that any ambiguity in the terms of the grants must operate against the corporations and in favor of the public.” (American Loan and Trust Co. v. Minnesota and Northwestern Railroad Co. 157 Ill. 641). If the power claimed is withheld, “it is regarded as a prohibition against the exercise of such a power.” (Ibid.) Here, the power to amend is not only not granted, but the right to exercise it is withheld by the requirement, that a copy of the by-laws shall be attached to the original certificate of organization. Corporations can only exercise such powers, as may be conferred by the legislative bodies creating them, either by express terms or by necessary implication. Implied powers are presumed to exist in order to enable such bodies to carry out the express powers granted and to accomplish the purpose of their creation. By an implied power is meant one that is directly and immediately appropriate to the execution of the specific power granted, and not one that has slight or remote relation -to it. (People v. Chicago Gas Trust Co. 130 Ill. 268; People v. Pullman Gar Co. 175 id. 125).

It makes no difference, in the application of the principles above stated to this case, that the original by-laws, as embodied in the certificate of organization, themselves provide that they may be amended, as such provision is embodied in section 1 of article 10 of the by-laws, as set forth in the statement preceding this opinion. “The charter of a corporation is the measure of its powers.” (Thomas v. Railroad Co. supra). There is no difference, in this regard, between a corporation organized under a general law, as was the case with appellee, and one created by a special statute. The same rule of construction applies to both, viz.: that “the powers specifically enumerated, and such other powers as are incidental or necessary to carry those powers into effect, but none others, may be exercised by the corporation.” (People v. Pullman Car Co. supra). If a power or purpose of organization is expressed in the certificate, issued by the Secretary of State, that is not authorized by the act, under which the corporation is formed, such additional power or authority is a nullity. Where a corporation is formed under the general law, the law itself, and not the declaration of incorporation, or the constitution and by-laws adopted for the corporate government, becomes the charter and enumerates the powers, which are to be exercised. (Grangers’ Life and Health Ins. Co. v. Kamper, 73 Ala. 325). The charter of a corporation, formed under such general law, does not consist of the articles of incorporation alone, but of said articles, taken in connection with the law under which the organization takes place. (People v. Chicago Gas Trust Co. supra). As was said by the Supreme Court of the United States in Oregon Railway Co. v. Oregonian Railway Co. 130 U. S. 1: “The manner, in which these powers shall be exercised, and their subjection to the restraints of the general laws of the State and its general principle of public policy, are not in any sense enlarged by inserting in the charter of association the authority to depart therefrom.”

The act of July 1, 1879, does not confer upon corporations, organized thereunder, the power to amend their by-laws, but, for the reasons above stated, expressly excludes the power to make such amendments; and, this being so, the incorporators cannot nullify the statute by embodying in the by-laws themselves the right at some future time to make amendments thereto. As the act provides the manner, in which the by-laws shall be made and the time at which they shall be adopted, the corporation, organized thereunder, cannot secure to itself the power to adopt by-laws in another manner or at another time by inserting a provision to that effect in its articles of association. If more be introduced into those articles than the statute authorizes, it is mere surplusage. (Grangers’ Life and Health Ins. Co. v. Kamper, supra.)

In view of what has been said, we are of the opinion that the contract of May 2, 1892, appointing appellant manager of agencies, being a contract made under an amendment to the by-laws which was not authorized by the law under which appellee was organized, is an ultra vires contract, that is to say, a contract made under an assumed power, which is beyond and in excess of the charter powers of the corporation.

By the act approved June 19, 1893, and which went into force July 1,1893, section 3 of the act of July 1,1879, was amended by providing that “any subsequent amendment or alterations of said by-laws shall be submitted to the Secretary of State, and be approved by the Attorney General, and be recorded in like manner as the original by-laws, before the same shall become operative; and only such by-laws as have been submitted, approved and recorded as herein provided shall be deemed operative.” (Sess. Laws of Ill. 1893, p. 84). But this act of 1893 has no application to the contract here under consideration, as that contract expired by its terms on May 1, 1893, and the services thereunder were all performed before May 1, 1893, prior to the time when 'the amendatory act of 1893 went into force.

But it is claimed by the appellant that, even though the contract in question may be regarded as one which is ultra vires, yet a corporation cannot avail itself of the defense of ultra vires when the contract has been in good faith performed by the other party, and the corporation has had the full benefit of such performance. In support of this claim various decisions, heretofore rendered by this court, are referred to and relied upon. (Bradley v. Ballard, 55 Ill. 413; Darst v. Gale, 83 id. 136; Benefit Ass. v. Blue, 120 id. 121; Kadish v. Garden City Loan and Building Ass. 151 id. 531; McNulta v. Corn Belt Bank, 164 id. 427). A new construction has recently been given to these decisions, which is materially variant from that heretofore put upon them, (National Home Building Ass. v. Bank, 181 Ill. 35,) but which must be regarded as the construction now held by this court. (Best Brewing Co. v. Klassen, 185 Ill. 37). The doctrine, however, that a corporation cannot avail itself of the defense of ultra vires when a contract has been in good faith performed by the other party and the corporation has had the full benefit of its performance, was never held to‘have any application where such contract is immoral or illegal or prohibited by statute or where its enforcement would be against public policy. That this is so may be seen by reference to the authorities last above referred to. (See also 2 Morawetz on Corp. secs. 689-691; 2 Beach on Private Corp. secs. 425, 426; 27 Am. & Eng. Ency. of Law, p. 364; Whitney Arms Co. v. Barlow, 63 N. Y. 62). Where such a contract is against public policy, or the policy of the law, the unexecuted portion of it will not be enforced. (Thomas v. Railroad Co. supra; McNulta v. Corn Belt Bank, supra).

Counsel apply the rule contended for to the facts of the present case by claiming that appellant performed services during the year from May 1,1892, to May 1,1893, as manager of agencies, for the appellee, and that, although appellee has paid him $3129.00 on account of such services, yet the balance of $1660.00, claimed to be due, should be paid by the appellee whether it had power to make the contract or not, because the appellee, as it is alleged, has received the benefit of such services. We stop not to. inquire whether the services were of benefit to appellee or not, but think that the contention of appellant cannot be sustained for the reason that the contract is not only an ultra vires contract'for the reason above stated but it is a contract prohibited by the statute, and whose enforcement would be against public policy.

Section 5 of the act of July 1,1879, provides that “the corporate powers shall be exercised by a board of directors: Provided, the number of directors shall not be increased or diminished, nor their term of office changed, without the consent of the owners of two-thirds of the shares of stock. The officers of the company shall consist of a president, vice-president, secretary and treasurer, to be elected at the annual meeting of the board of directors, as may be provided for in the charter and bylaws of the association: Provided, that the secretary only shall be entitled to compensation, and in such amount as may be provided for in the charter of such association.” (1 Starr & Curt. Ann. Stat.—1st ed.—p. 630). Section 5 thus provides that of the officers of the company the secretary only shall be entitled to compensation, and the compensation of the secretary shall be in such amount as may be provided for in the charter. By the statement that the secretary only shall be entitled to compensation, there is a plain prohibition against the payment of compensation to any of the other officers. The vice-president of the company, by the terms of section 5, was not entitled to compensation. Such offices, as are here mentioned, are • usually filled by the chief promoters of the corporation, and their interest in the stock, or other incidental advantage is supposed to be the motive for executing the duties of their office without compensation. (Kilpatrick v. Penrose, 49 Pa. St. 121).

In the case at bar, the appellant was not only one of the original directors elected at the first meeting of the stockholders, but he was shortly thereafter elected vice-president of the company. As vice-president, he was entitled to no compensation by the express terms of the statute. Notwithstanding the prohibition thus contained in the statute, he himself, while acting as director, and while holding the office of vice-president, offered an amendment to the by-laws, authorizing the board of directors to appoint a manager, who should appoint all the agents of the society wifh compensation to be paid out of the expense fund. As such manager, he was to control and manage the agency system of the society. A few days after the amendment to the by-laws proposed by the appellant was adopted, he was appointed manager of agencies in pursuance of the terms of the amendment proposed by himself at the salary and for the compensation named in the contract. As a member of the board of directors he voted for his own appointment, and also voted for the approval of a contract made with himself. He was one of the five directors of the society, and his term of office and compensation, as manager of agencies, were to be fixed by a written contract made by the board of directors, and such compensation was to be paid out of the expense fund, as shown by the terms of the amendment in question, being section 6 of article 3. As a member of the board of directors, therefore, appellant made a contract with himself and voted to approve the contract with himself. He thus effected indirectly what the statute expressly prohibits. Although he was entitled to no compensation as vice-president, he succeeded in obtaining" compensation by creating a new office and voting for his own appointment to it. It is against public policy to tolerate such conduct on the part of the officers of a corporation; and the rule, that the defense of ultra vires can not be set up because of benefits received by the corporation, has no application here for the reason—if there were no other reason—that the contract made by the plaintiff in error was prohibited by statute.

It is well settled that the directors of a corporation, who control its finances and property, are not entitled to compensation for the performance of their duties, unless such salary is fixed by the by-laws or by a resolution of the board before the services are performed. It must appear that a by-law or resolution has been adopted, authorizing and fixing the allowance, before the services are rendered. (Gridley v. Lafayette, Bloomington and Mississippi Railway Co. 71 Ill. 200; Ellis v. Ward, 137 id. 509). Here, the by-law was passed, providing for the appointment of a manager of agencies, before the services of appellant, as guch manager, were rendered; but, as has already been stated, the by-law was invalid as being ultra vires and beyond the power of the corporation to pass it. The rule, that before compensation can be received for the usual services of a corporate officer, such compensation must be allowed by a by-law, passed before the performance of the services, refers to and contemplates a legal by-law, or a by-law having such force of law as to authorize action under it. • Here, there was no such by-law before the performance of these services.

It is said, however, by the appellant that a director may deal fairly with a solvent corporation in which he is a director; and that, when a corporate officer performs services outside of his duties as such officer, he may recover compensation for said services. The claim here is, that the services rendered by the appellant were outside of the usual duties of a vice:president or director of the company. The third and fourth amended pleas aver, that the duties of the appellant as vice-president and director are the same as the duties and services provided for in the contract. The demurrers to these pleas admit the truth of this allegation. Nor can it be said, that the ' pleas are bad as answering only a part of the declaration. The pleas do not sajr, that a part of the services rendered in the contract were a part of appellant’s duties as an officer of the corporation, but they say that the services required by the contract were a part of appellant’s duties as an officer. The fourth amended plea says that he had a duty to perform in relation to the loan fund, as well as the expense fund, but his duties, considered as a whole, included such duties as he was to perform under the contract. Appellant was a director of the company, and section 4 of article 1 of the by-laws provides that the directors shall cause the expense fund to be used in the vigorous and competent prosecution and extension of the business of the association, so far as practicable. The amendment embodied in section 6 of article 3 required the performance by the board of directors of the same duty specified in section 4 of article 1. Counsel for appellant say in their brief: “And the by-laws made it the duty of the directors to use the expense fund in extending the business of the corporation.” The use of the expense fund was a duty of the board of directors, and, therefore, one of the duties which appellant was bound to perform without compensation. The amendment, embodied in section 6 of article 3 in connection with the contract of May 2, 1892, virtually provided for paying compensation to appellant for performing the same duties in the use of the expense fund, which he was under obligations to perform without compensation. Section 5 of the act of July 1, 1879, was amended in 1897 by providing that “unless the compensation of the secretary and treasurer shall be provided for in the by-laws, the directors shall annually fix and determine the same.” (Hurd’s Stat. of 1897, p. 430). This amendment, however, was passed long after the present contract had expired.

We concur in the following views expressed by the Appellate Court in their decision of this case: “If Fritze collects the judgment rendered below, he will have received for his year’s services (not including any traveling expenses) $4789.06. If the board of directors can do this for the vice-president, they can establish another office for the president and still another for the treasurer and pay each a fat salary. If the directors possess the power to thus evade the law at all, they will necessarily be tempted to evade it for the benefit of each other. The tendency will be to make the favors mutual. We think it self-evident that such a course will quickly absorb the contributions of the shareholders, and will ruin any building and loan association. We are of opinion that the contract made with Fritze was contrary to the spirit and purpose of the act, and not within the powers granted or implied to the association, and that it is contrary to public policy and good morals to permit the unexecuted part to be enforced. * * * Appellee argues that the book accounts of appellant which he put in evidence made a case for him under the common counts, regardless of the contract. We do not concur in this position. The ledger account in evidence showed all appellee’s credits thereon were for salary and commissions. * * * Appellee could not and did not submit his case upon the books alone, but put the contract in evidence. The contract was a necessary part of his case. (Walker v. Brown, 28 Ill. 378). In our judgment that contract was illegal and void. Complete execution of such a contract upon one side does not give a right of action under the common counts. (American Strawboard Co. v. Peoria Strawboard Co. 65 Ill.App. 502). * * * yy]ien the contract in this case was offered in evidence, appellant objected that it was without authority of law and void. The objection was' overruled, and appellant excepted. * * * We hold the court should not have admitted the contract, and that appellee could not recover without it; that the court should not have found for appellee, and should not have rendered judgment for appellee. * * * Our judgment is not based upon a determination of the facts different from the finding of the circuit court, but upon our legal conclusion that the contract was void.”

In addition to the error of the trial court in admitting the contract as stated by the Appellate Court, the trial court erred in refusing to hold as law the first and second propositions of law submitted to and refused by it, which said last named propositions are fully set forth in the statement preceding this opinion.

In the light of the views herein expressed, we are of the opinion that the judgment of the circuit court was erroneous, and that the judgment of the Appellate Court reversing the judgment of the circuit court without remanding the cause, is correct.

Accordingly, the judgment of the Appellate Court is affirmed.

Judgment affirmed.