Hight v. Richmond Park Improvement Co.

47 App. D.C. 518, 1918 U.S. App. LEXIS 2452

• Court: Court of Appeals for the D.C. Circuit
• Decided: April 1, 1918
• Docket: Nos. 3085 and 3089
• Status: Published

Opinion

Air. Justice Van Orsdkl

delivered the opinion of the Court:

Coming to the grounds advanced by the defendant in his motion to dismiss the bill, it is first urged that the option contract and all the contracts set forth in the hill to which the improvement company is directly a party “are and were at all times beyond the power of the plaintiff corporation to make, are ultra vires, unlawful, against public policy, void and unenforceable.” Section 605 of the District Code [31 Stat. at L. 1284, chap. 854, as amended by 32 Stat. at L. 533, chap. 1329 | provides that “any three or more persons who desire to form a company for the purpose of carrying on any enterprise or business which, may be lawfully conducted by an individual, excepting banks of circulation or discount, railroads, and such other enterprise or business as may be otherwise specially provided for in this Code, may make, sign, and acknowledge, before some officer competent to take the acknowledgment of deeds, and file in the office of tlio recorder of deeds, a certificate in writing: 'Provided, That nothing herein contained shall he held to authorize the organization of corporations to buy, sell, or deal in real estate, except corporations to transact tbc business ordinarily carried on by real estate agents or brokers.”

Tbo improvement company is a Virginia corporation, with its principal office in that State. Among the charter powers granted is the right “to buy, sell, exchange, and generally deal in real properties improved and unimproved, * * * 'to build, construct, operate, maintain, lease, and sell dwelling houses, * " * to maintain a general real estate agency and broker’s business to act as agent, broker, or attorney in fact for any person or corporation; to make and obtain loans upon real estate, improved or unimproved, and to supervise, manage, and protect such property and loans, and all interests and claims affecting the same; * * to improve, manage, operate, sell, mortgage, lease, oy otherwise dispose of any property, real or personal, wherever located; and to take mortgages and assignments of mortgages upon the same.”

The Statutes of Virginia, sec. 1105a, authorize the formation of corporations “for the transaction of any lawful business, or to promote or conduct any legitimate object or purpose-,, (except a railroad company, a telegraph company, a telephone company, a canal company, a turnpike company, or other company which shall need to possess the right of eminent domain for tin-purpose of taking and condemning lands within this State.” It is also provided in sec. 1105c that corporations shall have power, among other things, “to contract and ho contracted with, to purchase, hold, and grant such real and personal (-state a.s the purposes of the corporation shall require-, and all other real estate which shall have/been bona fide convoyed or mortgaged to the said corporation, or for its hem-fit, by way of security, or in satisfaction of debts, - * * and to mortgage or [hedge, or convey by way of deed of trust, or otherwise cucumber any suck real or personal estate as is mentioned in this subsection.”

With the above restrictions of the District Code, the charter powers of tlie improvement company and tlio provisions of the Virginia statutes under which it was incorporated before us, the objection of defendant may be disposed of without difficulty. So long as the improvement company, in making the contracts in question (the option sale contract, the deed to Valentine, and the acceptance of the deed' of trust), acted within the powers conferred upon it by its charter, and its charter rights were authorized by the laws of the State in which it was created, they cannot be said to be ultra vires. Bouvier’s Law Diet. Dawie’s dd Derision, defines ultra vires as “the modern technical designation, in the law of corporations, of acts beyond the scope of their powers as defined by their charters or acts of incorporation. A term used to express the action of a corporation which is beyond the powers conferred upon it by its charter, or the statutes under which it was instituted.”

It will be observed that the improvement company, in entering into'the contracts, was not only acting well within the limitations of its charter, but that the powers conferred by its charter are expressly sanctioned by the Jaws' of Virginia. Acts performed within these limitations cannot be said to be ultra vires. But the acts performed by a corporation must not only be authorized by the express or implied terms of its charter, but by the laws of the State which created it. In Chicago, R. I. & P. R. Co. v. Union P. R. Co. 47 Fed. 15, .Mr. Justice Brewer said: “Two propositions arc settled. One is that a contract by which a corporation disables itself from performing the functions and duties undertaken and imposed by its charter is, unless the, State which created it consents, ultra, vires. * * The other is that the powers of a corporation arc such, and such only, as the charter confers; and an act beyond the measure of those powers, as either expressly stated or fairly implied, is ultra vires. * * * These two propositions embrace the whole doctrine of ultra vires.”

This brings us to the second ground advanced for the dismissal of the bill, — that the contracts are, void as being against public policy. This objection is based upon the provision of see. (505, supra, which forbids the organization of local “corporations to buy, sell, or deal in real estate, except corporations -to transact the business ordinarily carried on by real estate agents or brokers.” But this provision neither declares contracts made in violation of its terms void as against public policy, nor does it expressly apply this restriction to foreign corporations doing business in this District. Assuming for the purposes of the present case that the improvement company conies within the restrictions of the law and is subject to an action by the government to restrain it from engaging in a business declared to be against the public policy of the District of Columbia, what has that to do with the legality of the contracts between the improvement company and Higlit or his straw man Valentine? The contracts are neither inherently illegal, nor against public policy. The legality or illegality of this corporation’s presence in the District of Columbia is entirely collateral to the transaction in question. In Groo v. Norman & Robinson, 42 App. D. C. 387, 389, where the statute in question was under consideration, this court said: “The language of this proviso is susceptible of but one interpretation; namely, that no domestic corporation is authorized to hold real estate except as an incident to its business. It clearly is not authorized to hold it for the purpose of selling or dealing in it. Congress having declared a public policy for this District, in this affirmative way, it goes without saying that a foreign corporation will not be accorded greater rights than are enjoyed by domestic corporations. Metropolitan L. Ins. Co. v. Hawkins, 31 App. D. C. 493, 498, 14 Ann. Cas. 1092; Orient Ins. Co. v. Daggs, 172 U. S. 557, 566, 43 L. ed. 552, 555, 19 Sup. Ct. Rep. 281; Cable v. United States L. Ins. Co. 191 U. S. 288, 307, 48 L. ed. 188, 193, 24 Sup. Ct. Rep. 74. But it by no means follows, from what we have said, that the Loan & Trust Company may not convey a good title to the defendant. The statute in question does not declare a conveyance of real estate to a corporation for an unauthorized purpose void. If Congress had intended this result it would not have left the matter in doubt, but would have expressed its intent in unmistakable lo'ins. Union Nat. Bank v. Matthews, 98 U. S. 621, 627, 25 L. ed. 188, 189.”

In Cowell v. Colorado Springs Co. 100 U. S. 55, 59, 25 L. ed. 547, 549, a piiteiit(!C conveyed lands in tbe then Territory of Colorado to a Pennsylvania corporation, which, like the present corporation, was vested by its charter and the laws of Pennsylvania with broad powers to buy, hold, sell, and deal generally in real estate. It was contended .that by reason of a law then in force in the Territories of tbe United States prohibiting the granting of private charters and permitting the creation by general law only of corporations for mining, manufacturing, and other industrial pursuits, the Pennsylvania corporation had not the capacity to hold and convoy real property in the Territory of Colorado. The court, disposing of this contention, said: “The answer to this position is found in the general comity which, in the absence of positive direction to tbe contrary, obtains through the States and Territories of the United States, by which corporations created in one State or Territory are permitted to carry on any lawful business in another, State and Territory, and to acquire, hold, and transfer property there equally as individuals. If the policy of the State or Territory does not permit tbe business of the foreign corporation in its limits, or allow the corporation to acquire or hold real property, it, must be expressed in some affirmative way; it cannot be inferred from tbe fact that its legislature has made no provision for the formation of similar corporations, or allows corporations to be formed only b,y general law. Telegraph companies did business in several State's before tlieir legislatures had created or authorized the creation of similar corporations; and numerous corporations existing by special .charter in one State are now engaged, without question, in business in States where the creation of corporations by special enactment is forbidden.”

The volume of authority on this point is so great that it forbids a review of the cases. The rule is settled that want of capacity in a domestic or foreign corporation to own and dispose of real ('state can only be asserted by the State. It is unnecessary, therefore, to decide whether or not the business done by the improvement company is against the public policy of the District of Columbia, since in no event is Might in position to avail himself of this defense, the question being one only which concerns the District of Columbia. Neither are we considering cases cited where the corporation is seeking' to enforce a contract made in excess of the powers granted it by law or by the express or implied terms of its charter, nor the cases where the contract is inherently illegal and against public policy. Here the improvement company is acting within, the express terms of its charter, and exercising powers lawful in the State of its creation, and the contract is a lawful contract. If the business conducted is against public poliey in this District, that is a question for the government, and Eight is not in a position to take advantage of it.

This brings us to the final ground advanced for dismissal of the bill, that “it is apparent upon the face of the bill that the plaintiff, if entitled to any remedy against the defendant, or any of the defendants, has an adequate remedy at law,” and that “(he bill fails to show any equities existing in the plaintiff.”

The bill bristles with averments of fraud, which arc admitted by the motion to dismiss. It is averred that Eight intentionally misrepresented the cost of the houses as shown by the plans and specifications which he produced; that it was through these false representations that the improvement company was induced to part with the title to its property; that in furtherance of this scheme to defraud the impi’ovoment company Eight had almost completed ten of the houses at a cost of $3,550 each, and had started the erection of the remaining two houses, which would cost $3,550 each, when the improvement company discovered from an investigation that Eight was not complying with the terms of his contract; that Eight was about to receive from the casualty company the balance of the building loan remaining unexpended, and that Eight is insolvent. The statements of Eight, which, it is averred, induced the improvement company to enter into the contract and deed its property to Valentine, were more than mere expressions of opinion as to values; they amounted to fraudulent misrepresentations within the ride that where one promises to do a certain thing, having at the time no intention of keeping his'agreement, it is a fraudulent misrepresentation of a fact, and actionable .as such.

With these averments of the bill before us, an interpretation of the contract which induced the improvement company to part with its property is essential to (¡('termine its right to invoke equitable relief. It is dear that, if it were merely a contract for the erection of houses, its remedy would be at law for damages arising from a breach of the contract; but this contract is more than a mere agreement to erect twelve houses according’ to plans and specifications, submitted to and approved by the improvement company, at a cost of not less than $5,000 each. It was in the nature of a joint agreement by which, in consideration of the improvement company parting with its title, Bight was permitted to create a building fund by placing a first trust of $1,000 on each lot. To this building fund flight was to add $1,000 per house, and to build houses to cost not less than $5,000 each. A second trust of about $2,000 per lot, for the payment of which he was relieved of all personal liability, was placed upon the lots to secure the payment of the notes executed by Valentine to the improvement company in payment of the land. The houses were then to be sold, and out of the proceeds the improvement company was to have its second trust satisfied, either in cash or the notes of the purchasers secured by a second trust.

The fund thus created was for a specific purpose, — the building of the houses, — and for no other. It was in the nature of a trust fund; and any misapplication -of the fund or diversion thereof by Ilight from the purpose for which it had been established by the joint agreement of the parties amounted to a fraud; and, as between Tlight and the improvement company, Bight became in equity a trustee ex maleficio for the improvement company. “One who by fraudulent misrepresentation obtains a conveyance from the owner of any interest in properly, real or personal, Is in equity a trustee ex -maleficio for the person defrauded.” Jones v. Van Doren, 130 U. S. 684, 691, 30 L. ed. 1077, 1079, 9 Sup. Ct. Rep. 685. To this end it is immaterial -whether the fraud be actual or constructive, if the fraudulent acts of the trustee be such that they result iu defeating or preventing the consummation of the object to bo attained under tlie agreement by which the trust arose or was created. “Fraud, indeed, in the sense of a court of equity, properly includes all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust, or confidence, justly reposed, and are injurious to another, or by which an undue and unconsoientious advantage is taken of another. And courts of equity will not only interfere in cases of fraud to set aside acts done, but they will also, if acts have by fraud been prevented from being done by, the parties, interfere and treat the case exactly as if the acts had been done.” 1 Story, Eq. ,Tnr. sec. 187, quoted with approval in Moore v. Crawford, 130 U. S. 122, 128, 32 L. ed. 878, 880, 9 Sup. Ct. Rep. 447.

We are not favored with a transcript- of the evidence. This case is before 71s upon the bill, motion to dismiss, and decree. The court below found that no actual fraud had been .shown; but, in the absence of the testimony, we are relegated to the averments of the bill, since the usual presumption in such cases that the evidence supports the finding of the court is not available to prop up the contentions of the appealing party. An appellant cannot omit a' transcript of the evidence in an equity cause, or a bill of exceptions in a law case, and take advantage of favorable findings based upon the. evidence, which are inconsistent with the record upon which the appeal is based. Neither can the appellee be forced to perfect appellant’s record. We must, therefore, try the question of fraud, actual or constructive, as shown by the averments of the bill.

Fraud is not an infallible ground for the interposition of equity. It may constitute a cause of action at law where the law furnishes an adequate and complete remedy. Nor is the accounting here sought sufficient to invoke equitable jurisdiction, for the balance of the fund in the hands of the casualty company could have been ascertained by the testimony of a single witness. But where, as here, a trust has been created as part of the consideration entering into the contract, and one of the parties to whom its execution has been intrusted is fraudulently dissipating the fund expressly created to secure the faithful performance of the contract, the other party may invoke relief in equity to prevent the continuation of the fraud; and where equity thus takes jurisdiction it has jurisdiction for all purposes.

There is no error in the decree between Hig'ht and the improvoment company; but wo como now to the consideration of the appeal of the intervening defendants. Their answer sets up a claim for labor and materials purchased in building those houses. .It is affirmatively averred in the answer “that the building loan of $4,000 per house, referred to in said bill, was negotiated by the defendant Ilight for the specific and sole purpose of paying for the building of the houses to he erected by him on the lots purchased by him from the plaintiff, which is to say, that said money was borrowed by the said Ilight to pay for the material and labor used iu building said houses; that these defendants and each of them knew of the loan contract between the defendants Harry E. Karr and Charles A. Valentine, before supplying their aforesaid material and labor, and wore informed and promised by tin1 defendant Ilight, on behalf of himself as well as on behalf of the Ilight Company, that the said loan was to be used for the purpose aforesaid; and they relied upon this representation and promise as the basis of the credit- they extended to the Ilight Company, and not upon the individual responsibility of the Ilight Company.”

They then set ont the paragraph of the hill where the improvement company avers: “The said defendant New Amsterdam Casualty Company agreed to write such a bond conditioned upon the completion of the said houses free of all such liens, provided the said $48,000 [to] be paid by the defendant 'Maryland Title Company when d' ’minting said notes of the defendant Valentine payable to the rder of said defendant Karr, should be disbursed by it, and the whole amount of the said $48,000 paid to it, the said defendant the New Amsterdam Casualty Company, in order that it might be assured that the whole of said building loan might he available for the bills of labor and materialmen in constructing said-dwellings.” It is then averred “that, up to the present time, the proceeds from said loan have been so applied and the balance due these defendants have not been paid them on account of the inability of the Ilight Company to collect the balance of said loan, owing to the injunction issued in this canse,.”

It is further averred “that, independently of the truth or falsity of the charges of fraud, misrepresentation, and breach of contract made by tbc plaintiff in its bill against tlic defendant 1 light, these defendants arc entitled to have paid out of said balance the respective amounts due them for materials and labor furnished in said buildings, before any portion of said balance should be applied to compensate, the plaintiff for its alleged damage, and that in the circumstances said balance is a trust fund in favor of your defendants.” They pray that the balance of the fund he declared a trust fund in favor of these defendants, and for such other and further relief as the nature of the case may require.

The ground upon which the improvement company is entitled to invoke equitable relief against flight opens the door to the interveners. The, improvement company’s right to equitable relief rests upon the creation of this fund for the specific purpose of erecting the buildings as part of the consideration for the conveyance of the lots, flight was required not only to secure the fund, but to apply it to tlio use for which it was created, flight, in carrying out the trust, agreed that it should.he held by the casualty company for the express purpose of paying for the labor and materials which went into the houses, fly the averments of the answer the interveners were, paid out of this fund, and, but for the action of the improvement company, they would have been paid in full from the balance in the hands of the casualty company. The creation of this fund for the purpose indicated being part of tlio contract between flight and the improvement company, it logically follows that the improvement company can, with respect to these interveners, rise no higher Ilian flight, flight’s agreement to set aside this fund for the satisfaction of the interveners’ claims was well within the scope of the authority vested in him by the terms of the contract with the- improvement company. Hence, the improvement company cannot assert a claim to the fund prior and superior to the interveners.

The basis of the improvement company’s cause of action is that, by reason of the fraud committed by flight, the property, with the cheap houses constructed thereon, would not sell for sufficient to. satisfy the trusts against it. This averment fixes the futility of requiring the interveners to resort to the legal remedy of mechanics’ liens. Besides, with the fund created under their contract with I light, they were not required to resort to the legal remedy, since the improvement company was dearly not in position to deprive them of their right to be paid from the fund.

The liability of the improvement company and Hight being equal in this transaction, and I Eight’s conduct being the action of both, the case of Anglo-American Sav. & L. Asso. v. Campbell, 13 App. D. C. 581, 600, 43 L.R.A. 622, is strongly in point, in that case Lea (as here Hight) borrowed from the association $46,000 with which to erect buildings. On completion of the buildings, there remained undisbursed $3,000 in the possession of the association. This fund Campbell, the material-man, claimed was impressed with an equitable trust in his favor. The material had been furnished on the promise of Lea that the building loan should be used to pay for the labor and materials entering into the construction of the buildings, just as a similar promise was here made by Hight. Keeping in mind the facts in the present case, the following language of Mr. Justice Shepard, in the Anglo-American Case, is decisive here: “The written contract with Campbell shows the times of his payments corresponding with those of the advances to be made to Lea. They knew the details of the loan contract and say that they relied upon it as the basis of the credit extended to Lea. That they did so, and did not rely upon the individual capacity of Lea, or their right to a last lien upon the premises, is supported by every reasonable inference deducible from the surrounding circumstances. Lea was engaged in building upon land for which he had not paid, and that was under mortgages to secure at least two thirds of the purchase money. The existence of these mortgages emphasized the incapacity of Lea to build without a prearranged loan, that was attested by tbe contract with the association for the express purpose of building. It appears, moreover, that the loan could not he obtained without giving the mortgage for its security priority over the second purchase-money mortgage. It requires very little testimony, therefore, to produce the conclusion that, without confidence in the payment to Lea of the full amount of the loan contracted for, the appellees would not have extended him credit for their labor and materials.”

We think that the improvement company, by the terms of its contract with Sight.and the authority reposed in Hight to carry the agreement into effect, is estopped to claim an equitable right to this fund prior and superior to that of the intervening defendants.

The decree in the case of the intervening appellants against the improvement company (appeal No. 3089) is reversed, with costs, and the'cause is remanded with directions to reinstate the answer and proceed with the trial of the cause. The decree, in the case of the improvement company against flight (appeal No. 3085) is affirmed, with costs, and the cause is remanded with directions to the court to modify the decree, if so advised, to conform with the final decree entered in cause No. 3089.

Appeal No. 3085 affirmed and remanded.

Appeal No. 3089 reversed and remanded.

A petition for the allowance of an appeal to the Supreme Court of the United States in No. 3085 was denied April 5, 1918.