Gilbert v. Seatco Mfg. Co.

98 F. 208

• Court: U.S. Circuit Court for the District of Washington
• Decided: December 11, 1899
• Status: Published

Opinion

HANFORD, District Judge

(after stating tbe facts). In order to decide the questions raised by the arguments which have been made, it is necessary to consider the rights of the parties under the law as they existed at the time of each of the principal transactions. It is insisted that the defendant corporation is hound to the same extent as it would be if the evidence showed that Garland and Rotch had acted for' and in the name of the company, with full authority lawfully conferred, because they, being owners of all the stock, assumed to act for the company, and did continue to exercise full control and 'management of its affairs for such a length of time that the knowledge; and assent of all the stockholders must be presumed; or, expressed in other words, that, in their dealings with the plaintiff, Garland and Rotch Avere the company. Eul, when the loan of $13,000 was made, the plaintiff knew very well that Garland and Rotch were unable to raise money by pledging the stock of the company, because the stock had not then been transferred to (liem, and it was already held as collateral security for the unpaid installments of the purchase money. The $13,000 was loaned for the express purpose of enabling them to fulfill the conditions of their contract by which they were to acquire the title to ihe stock. The physical property which the corporation owned was at that time under their control and management, ’but the corporation itself was not. They were not even qualified to become directors. They could not: at that time bind the corporation to pay their debt for the money loaned to pay for their stock, without devesting the vendors of the security which they stipulated for, because the crea-(ion of such a debt would certainly impair the value of the stock. Tin; situation was practically the same in October, 1889, when tin; loan of $17,500 was made. The plaintiff then knew that the slock had not been paid for, and (hat Garland and Rotch had no right to borrow money for their own purposes upon the credit of the corporation. The money did not go into the treasury of the corporation, and it was not loaned for the use or benefit of the corporation. Therefore, in giving the company’s note, Garland and Rotch Avert; not acting within the scope of the ordinary powers of officers or agents of the corporation, nor transacting business for it pursuant to any custom or practice Avhich may be presumed to have been knoAvn to the persons avIio then held the company’s stock. If the giving of the company's note for $17,500 may be considered as an act of the corporation, or a contract which the corporation assumed to make, it must be regarded as an assumption of liability for tin; mere accommodation of Garland and Rotch, to whom the money Avas advanced, and who applied it in payment of their individual indebtedness, to relieve themselves from personal liability to the vendors of the stock. Such contracts, when made with all the formalities required for the due execution of corporate poAvers, are ultra vires and void. Green’s Brice, Ultra Vires, p. 252; 7 Am. & Eng. Enc. Law (2d Ed.) p. 793. Against this it is argued that a new doctrine has grown up in the law of corporations, and that now a corporation may assume obligations for the accommodation of its members, if done Avith the consent of all the stockholders, provided there are no creditors of the corporation to be prejudiced. This doctrine, hoAvever, cannot avail the plaintiff. We are uoav considering his rights as they were fixed at the time of making (in; loan, and at that time Garland and Rotch were not the only stockholders. On the contrary, they were hound by a contract, an essential condition of which was that they should malte final payment of the stock before they could have it, and such payment had not been made at the time referred to. I deny, however, that any such proposition can be maintained as law in this state, so long as existing statutes continue in force. For many years we have had a statute forbidding corporations to pay dividends, except from net profits, or to divide, withdraw, or in any way pay to stockholders, or any of them, any part of the capital stock of the company. ' 1 Ballinger’s Ann. Codes & St. Wash. § 4265. It would be just as much, a violation of this statute to pay the individual debt of a stockholder out of corporate funds, when there are no surplus profits on hand, as to pay the money to a stockholder directly. Hence any unconditional promise by a corporation to pay the debt of a stockholder is a promise to violate the organic law under which corporations of this state are created.

Another argument in behalf of the plaintiff is that-he is entitled to hold the corporation liable as his debtor for the money which he advanced, for the reason that the corporation was benefited by the loan, because the money, when paid by Garland and Botch to the vendors of the stock, was used by the latter to pay the debts of the corporation existing prior to September 1, 1888; and it was said in the argument that, if the loan had not been made, the corporation would have remained obligated for its old debts. I can find nothing in the testimony to justify such a conclusion. The vendors of the stock by their contract with Garland and Botch bound themselves absolutely to pay the company’s debts, and it was for their interest to do so, in order to keep the value of their security unimpaired. If they had neglected, to pay the debts, the property of the corporation might have been levied upon under writs of attachment or executions, the business of the corporation would have been interrupted thereby, and the stock which they held as security rendered worthless. There is no evidence that they were insolvent, nor is there any reason to suppose that, if they had not received the money due from Garland and Botch, they would have failed to fulfill the obligation which they assumed by their contract. At any rate, the money was loaned to Garland and Botch, and they used it to pay their individual debts before any of it was available in the hands of the vendors of the stock to pay debts of the corporation.

Passing now to a view of the situation, as disclosed by the evidence, in the fall of 1894, when it- is claimed that the defendant corporation, in consideration of the new loans then made to it by the plaintiff, assumed liability for the loans theretofore made to Garland and Botch, I cannot find any such change in the apparent or real position of either of the parties as would affect the rights of any one with respect to the validity of the assumption by the. corporation of said debts. 'The new loans were made in November and December, 1894. At that time Mr. Garland was dead, and Mr! Botch was the sole actor assuming to represent the defendant corporation. Whether Mr. Garland’s stock had been sold or transferred, or was held by his personal representatives or heirs, does not appear from any testimony in the case. Neither does it appear that any authority was given to Mr. Rotch, in a regular or irregular manner, by a vote of the directors of the corporation or the stockholders at any corporate meeting, or that he was ever elected to the office of president, in which capacity he assumed to act, or that the powers which he exercised were conferred in any manner, except by his own assumption. Therefore, if we consider only stockholders, the evidence fails to bring the case within the rule invoked, that a corporation may, with the consent of all its stockholders, become liable for debts of others. It is said that the evidence does not show that there were any creditors to become prejudiced: but I consider that it is a necessary inference from the facts shown in the evidence that the company at that time must have had creditors other than the plaintiff. The corporation was carrying on a manufacturing establishment, with a large amount of current expenses for wages and other necessary Incidentals; and that it was struggling with financial difficulties is shown by the correspondence introduced in evidence, and by the fact that the plaintiff at that time yielded to the impori uni ties of Mr. Rotch so far as to loan the company money In amounts ranging from $50 to §4,000, and Mr. Rotch was at that time endeavoring to raise money for the relief of the corporation by a large issue of bonds. The corporation certainly became insolvent and was placed in the hands of a receiver prior to the commencement of this action; and, in the absence of proof other than as above mentioned, the court certainly cannot presume that there were no creditors, or that any creditors consented to the assumption of debts amounting to over §30,000, with accrued interest thereon, in consideration of a new loan amounting to only $0,200. The transaction is so extraordinary that the court will not indulge in any presumption in regard to it. I hold that the burden rests upon the parties affirming that such a contract was made to prove it. and to prove all the facts necessary to establish its validity. In so far as the authority of Mr. Rotch to hind the corporation depends upon the consent of the stockholders or creditors, the case must fail, in the absence of a showing as to who were at that time all the stockholders, and all the creditors, and their consent to the action, or knowledge and acquiescence on their part.

The decision of the circuit court of appeals for the Ninth circuit in the case of G. V. B. Min. Co. v. First Nat. Bank of Hailey, 36 C. C. A. 633, 95 Fed. 23, cited: by counsel for the plaintiff, does not, in my opinion, sustain the position which he has taken in this case. Judge Hawley was careful to say, in the opinion of the court in that case, that the general expressions in the opinion should be interpreted in the light of the peculiar facts which the court had to consider in deciding the case; and, when the important differences in the facts which distinguish this case from that are taken into account, the decision might well he laid aside without further comment than to say that the case is not in point. I can say, however, after an examination of the opinion, that the circuit court of appeals has not attempted to make any radical decision uprooting the settled principles of the law of corporations, but, on the contrary, the number of authorities cited in the opinion shows that the court intended to keep in line with the rules recognized by the courts of this country generally. It was not pretended in that case that the debt which the corporation defendant was endeavoring to repudiate was a debt of any person other than the corporation itself. The case referred to was a suit to foreclose a mortgage upon mining property owned by a'corporation, which mortgage was given to secure a loan made to, and received by, the corporation. In the opinion, Judge Hawley lays particular emphasis upon the fact that:

“The corporation for several years had the benefit of money drawn from the bank, and upon divers notes which were renewed by the notes which the mortgage was given to secure.”

And again, in the opinion, he makes the following strong declaration:

“The corporation, as we have already shown, had the unquestioned authority and power, under the law, to execute the notes and mortgage in question.”

⅛ The case in hand is widely different. The plaintiff at the time of making the loans did not rely upon the credit of the corporation. The corporation did not receive his money, and it had no authority under the law to assume an obligation for the individual debts of Garland and Botch. The following paragraph found in the opinion is applicable here:

"A contract of a corporation which is ultra vires is something outside the object of its creation, as defined in the law of its organization, and therefore beyond the powers conferred upon it by the legislature. Such a contract is not voidable only, but wholly void, and of no legal effect. The objection to the contract is, not merely that the corporation ought not to have made it, but that it could not make it. The contract cannot be ratified by either party, because it could not have been authorized by either. No performance on either side cóuld give the unlawful contract any validity, or be the foundation of any right of action upon it. But, when a corporation is acting within the general scope of the powers conferred upon it by the legislature, the corporation, as well as persons contracting with it, may be estopped to deny that it has complied with the legal formalities which are prerequisites to its existence or to its action, because such requisites might in fact have been complied with. The doctrine of ultra vires'has been often said to rest upon three distinct grounds: (1) The obligation of persons dealing with a corporation to take notice of the legal limits of its powers; (2) the interest of the stockholders not to be subjected to risks which they have never undertaken; and (3) the interest of the public that the corporation shall not transcend the powers conferred upon it by law. The authorities bearing upon these general principles are well settled, and are clearly stated in Central Transp. Co. v. Pullman’s Palace-Car Co., 139 U. S. 24—59, 11 Sup. Ct. 478, 35 L. Ed. 55, and Bank v. Kennedy, 167 U. S. 862-368, 17 Sup. Ct. 831, 42 L. Ed. 198, and in the numerous authorities there cited.”

Independently of the question whether Garland and Botch were authorized by the corporation to act as they did in signing the name of the corporation to the note for $17,500, and whether Botch was authorized by the corporation to execute in its name the two notes given for accrued interest, or to make a verbal promise in behalf of the corporation to pay the indebtedness upon any of said notes, I consider that the plaintiff must fail in this case for the reason that the corporation itself had not the power at any time to bind itself to pay said notes, or either of them. I direct that findings shall be prepared, for my signature, in accordance with tliis opinion, and a judgment be entered thereon that the plaintiff take nothing, and that the defendants recover costs.