Jenson v. Toltec Ranch Co.

174 F. 86, 98 C.C.A. 60, 1909 U.S. App. LEXIS 5152

• Court: Court of Appeals for the Eighth Circuit
• Decided: October 28, 1909
• Docket: No. 3,020
• Status: Published

Opinion

SANBORN, Circuit Judge

(after stating the facts as abové). A •corporation, like an individual, is bound to innocent third persons who act without reasonable cause to believe that a defect of power exists, by the apparent authority with which it clothes its agent within the scope of his general authority and within the powers of the corporation, to the same extent as by the actual power it confers upon him. Merchants’ Bank v. State Bank, 77 U. S. 604, 644, 19 L. Ed. 1008; Chicago, St. Paul, Minneapolis & Omaha Ry. Co. v. Bryant, 65 Fed. 969, 973, 13 C. C. A. 249, 253; Dysart v. Missouri, Kansas & Texas Ry. Co., 122 Fed. 228, 231, 58 C. C. A. 592, 395. Where, without challenge by the other officers or stockholders of a corporation, an officer has exercised the power, within the general scope of his actual authority and within the powers of the corporation to buy and sell property, to borrow money, and to secure its repayment by the pledge of a land contract and some of its personal property, to conduct all its business, and to do these things in its name and on its behalf for such a length of time as to justify others in believing that his acts and his management were within his powers and were approved by his corporation, its directors and stockholders, the corporation, its officers and stockholders, are alike estopped from denying, to the prejudice or injury of those who have acted in reliance upon his apparent authority, that he had actual authority to do acts of a similar nature on its behalf. Martin v. Webb, 110 U. S. 7, 3 Sup. Ct. 428, 28 L. Ed. 49; G. V. B. Mining Company v. First Nat. Bank, 95 Fed. 23, 30, 36 C. C. A. 633, 640.

For more than six years before the transaction at issue, D. P. Tar-pey had managed all the business of the Toltec Company, had bought' and sold real and personal property for it and in its name, had borrowed money many times, and had secured its repayment, sometimes by the pledge of personal property and once by the assignment of a land contract. No stockholder or officer of the company had ever objected to any of his acts, and the bankers of Brigham City had no notice that any of them were disapproved or unauthorized. The corporation was expressly empowered under its articles of incorporation to buy, to sell, to convey, and to mortgage its real estate and to hypothecate its personal property. Tarpey was its president, its general manager, and its treasurer, and he was expressly authorized to sell and to convey its land without the signature upon its deeds of any other officer of the corporation. In this state of the case there is no escape from the conclusion that the Toltec Company and its stockholders are estopped from denying that he had full authority to borrow money for it and in its name, to secure the repayment of that money by a conveyance of its land, or by the pledge of its personal property, and to do any other act within the limits of the lawful powers of the corporation.

. The Toltec Company, by Tarpey, requested the bank to guarantee the contract with the Pipe Company and to pay the checks of the Power Company to an amount not exceeding $18,750, and it agreed to and did conevy its land to Jenson, as trustee, in order to'induce the bank to advance this money and to secure the repayment of it after it should be thus expended. The bank granted its request and paid out $16,386.30 thereon. The legal effect of this transaction was that the Toltec Company borrowed this amount from the bank and mortgaged its land to secure'the payment of its debt. Why, then, should not the mortgaged land be applied to the payment of this obligation? Counsel answer, because the Toltec Company had no corporate power to. purchase the stock of the Power Company, so that it never owed that company $18,750, and it had no corporate power to indemnify the bank for guarantying the obligation of the Power Company to pay the Excelsior Company for the pipe. In support of these propositions they cite decisions in suits to enforce contracts which were beyond the powers of the defendant corporations, such as Park Hotel Company v. Fourth Nat. Bank, 86 Fed. 742, 747, 30 C. C. A. 409; Humboldt. Mining Co. v. American Manufacturing Min. & Mill. Co., 62 Fed. 356, 361, 10 C. C. A. 415; Evans v. Johnson, 149 Fed. 978, 980, 79 C. C. A. 488; In re S. P. Smith Lumber Co. (D. C.) 132 Fed. 620, 621; De La Vergne Co. v. German Savings Inst., 175 U. S. 40, 59, 20 Sup. Ct. 20, 44 L. Ed. 65; Vandagrift v. Rich Hill Bank, 163 Fed. 823, 824, 90 C. C. A. 129; McCormick v. Market Bank, 165 U. S. 538, 550, 17 Sup. Ct. 433, 41 L. Ed. 817; Ward v. Joslin, 186 U. S. 142, 152, 22 Sup. Ct. 807, 46 L. Ed. 1093. But this is not a suit upon a contract beyond the powers of the defendant corporation. Conceding, without deciding, that the indemnity for the guaranty and the purchase of the stock were ultra vires the Toltec Company, how does that fact bar the bank from the application of this security to the payment of the money borrowed of it by the Toltec Company? This is not a suit to enforce the Toltec Company’s agreement to purchase the stock of the Power Company, or its contract of indemnity for the guaranty. Neither of those contracts is the basis of, or is in any way material to, this suit. Neither the bank nor Jenson was a party to the cpntract for the purchase of the stocl^ and the contract of indemnity for' the guaranty has been executed and is not material to the validity of the contract of loan, because the latter contract is supported by another valuable consideration which is within the powers of the Toltec Company. The payment of the checks of the Power Company at the request of the Toltec Company was ample consideration for the agreement to repay the money so advanced and for the conveyance of the land to secure it; and a contract or obligation which is executed by the promisee, and is sustained by a. legal and valuable consideration which the promisor had the power to give, may not -be defeated be cause the promisor also agreed to give another consideration which it. was beyond its corporate power to bestow. The promisee may waive the unauthorized consideration and rely upon that which was within the power of the corporation. Lincoln Sav. Bank & Safe Deposit Co. v. Allen, 82 Fed. 148, 152, 27 C. C. A. 87, 91; Navigation Co, v. Winsor, 20 Wall. 64, 70, 22 L. Ed. 315; Illinois Trust & Sav. Co. v. Arkansas City, 76 Fed. 271, 280, 22 C. C. A. 171, 180, 34 A. 518; Western Union Tel. Co. v. Burlington & S. W. Ry. Co. (C. C.) 11 Fed. 1, 4, and cases cited in the note on page 121.

The Toltec Company had undoubted power to borrow $16,386.30 of the bank and to mortgage its land to secure the repayment of this money. It exercised that power. It borrowed the money and conveyed the land to secure its repayment. The only purpose or this suit is to apply that land, the title to which was conveyed by the Toltec Company to Jenson, to the purpose for which it was deeded, to the payment of that debt. But the bankers knew, say counsel for the Toltec Company, that the money which that company was borrowing from it, and which it requested the bank to pay to the Power Company, would be applied by the Toltec Company and the Power Company to the payment of the former’s unenforceable obligation to pay for the stock which it had not the corporate power to buy.

In Farmer v. Russell et al., 1 Bos. & Pul. 295, it was held that if A. is indebted to B. on a contract forbidden by law, and pays the money to C., for the use of B., a court will give judgment in favor of B., against C., for the money, although B. could not have recovered against A. In Armstrong v. Toler, 11 Wheat. 258, 273, 6 L. Ed. 468, goods of Armstrong, Toler, -and others had been shipped from New Brunswick to the United States during the War of 3812, in violation of the law. They were seized by the government and delivered to the agents of the claimants on the stipulation of Toler to abide the event of the suit. Thereupon Toler delivered to Armstrong the latter’s part of the goods, in consideration of his promise to pay Toler his proportion of any sum for which Toler might become liable if the goods were eventually condemned. They were condemned. Toler paid their appraised value, and sued Armstrong for his proportion of it. Armstrong defended on the ground that his promise arose out of, and was made to carry out, the illegal contract of purchase and importation; but Chief Justice Marshall said:

“The general proposition slated by Lord Mansfield, in Kaikney v. Keynous, that if one person paid tlie debt of another, at liis request, an action limy be sustained to recover the money, although the original contract was unlawful, goes far in deciding the question now before the court. That the .person who paid the money knew it was paid in discharge of a. debt not recoverable at lawr has never been held to alter the case.”

The purchase of the stock by tlie Toltec Company was not prohibited by either the moral or the civil law. It was merely unauthorized. The hank did not request or induce the Toltec Company to make that purchase, and it never derived any benefit from it. It did not request the Toltec Company to borrow money of it to pay the checks of the Power Company for the construction of the electric plant and other improvements. On the other hand, the Toltec Company besought the bank to make the loan, and offered to convey, and did convey, its land to Jen-son, as trustee, to induce the bank to advance this money and to secure its repayment. This contract was not beyond the powers of the Toltec Company. The considerations which induced it, the debt and the conveyance of the land to secure its performance by the Toltec Company on the one hand, and, on the other, the promise to advance and the subsequent payment of the money, were new considerations subsequent to and apart from the purchase of the stock; and the fact that the bank knew that the money was to be applied, and was applied, to the payment of its purchase price, constitutes no defense to this suit to enforce its agreement to pay its debt for money borrowed. It is no defense, to a suit to. enforce a contract that has been performed by the promisee to repay money loaned to or paid for another and to foreclose a mortgage to secure that repayment, that the lender or the payor knew that the borrower intended to use, or was using-, the money for an illegal purpose, or a purpose beyond its corporate powers, where the lender or payor did not combine or conspire with the borrower to induce such a use and did not share in the benefits thereof. Wald’s Pollock on Contracts (3d Ed.) 485; Armstrong v. Toler, 11 Wheat. 258, 273, 6 L. Ed. 468; Armstrong v. American Exchange Bank, 133 U. S. 433, 469, 10 Sup. Ct. 450, 33 L. Ed. 747; Hanover Nat. Bank v. First National Bank, 109 Fed. 421, 48 C. C. A. 482; Kansas City Hydraulic Press Brick Co. v. National Surety Co. (C. C. A.) 167 Fed. 496, 501; Waterbury v. McKinnon, 146 Fed. 737, 77 C. C. A. 294, 296; Ingraham v. National Salt Co., 130 Fed. 676, 681, 65 C. C. A. 54, 59; Taylor v. Mining Company, 79 Cal. 285, 287, 21 Pac. 753; Illinois Trust & Sav. Bank v. Pacific Ry., Co., 117 Cal. 332, 49 .Pac. 197, 201; Holman v. Johnson, 1 Cowp. 341; Faikney v. Reynous, 1 Burr. 2069; Pellecat v. Angelí, 2 Crompt., Mees. & Ros., 311; Hodg-son v. Temple, 5 Taunt. 181; Marion Trust Co. v. Crescent Loan & Investment Co., 27 Ind. App. 451, 61 N. E. 688, 691, 87 Am. St. Rep. 257; Wright v. Hughes, 119 Ind. 324, 21 N. E. 907, 909, 12 Am. St. Rep. 412; First National Bank v. Dovetail Body & Gear Co., 143 Ind. 550, 40 N. E. 810, 812, 52 Am. St. Rep. 435; Tracy v. Talmage, 14 N. Y. 162, 67 Am. Dec. 132; Thompson v. Lambert, 44 Iowa, 239, 245.

There are other considerations, upon which it is unnecessary to dwell, which would lead to the same practical result in the case in hand. If the loan contract had been, like the contract to purchase the stock of the Power Company, beyond the corporate powers of the Toltec Company, there would be no equity in the restoration to the Toltec Company of its land, or the restoration of the stock to the Power Company, before the moneys which these corporations procured of the bank upon these securities were repaid to it. Courts of equity do not restore money or property to corporations that have obtained them by means of contracts or conveyances beyond their powers, until those corporations first restore the money or property they have secured thereby, or its value. He who seeks equity from these courts must first da equity. Logan County Bank v. Townsend, 139 U. S. 67, 72, 77, 78. 11 Sup. Ct. 496, 35 L. Ed. 107; Central Transportation Co. v. Pullman's Car Compan, 139 U. S. 24, 60, 11 Sup. Ct. 478, 35 L. Ed. 55; Pullman’s Car Company v. Transportation Company, 171 U. S. 138, 150, 151, 18 Sup. Ct. 808, 43 L. Ed. 108; Planters’ Bank v. Union Bank, 16 Wall. 483, 21 L. Ed. 473; In re Hovey’s Estate, 198 Pa. 385, 48 Atl. 311, 315; Dunlop v. Mercer, 156 Fed. 545, 553, 86 C. C. A. 435, 443.

The argument o! counsel that the Toltec Company derived no benefit from the loan contract because, at its request, the proceeds of it were paid to the Power Company, and hence that it could not be required to return anything as a condition of the reconveyance of its property, has received careful consideration. But it is not convincing. The Toltec Company obtained, and it never returned, but pledged to the bank, the stock of the Power Company. Notwithstanding the invalidity of its purchase, it was liable to the Power Company to return that stock, or to pay, not its purchase price under the contract, but its value at the time of its conversion. It could not keep the stock without any liability. It kept it, and converted it to its own use by its pledge of it to the bank. While its contract of purchase was not enforceable, its possession of the stock and its conversion of it to its own use rendered it liable on the quantum meruit for tlie value of the stock at the time of its conversion, and this value, in the absence of other evidence, was its purchase price. Logan County Bank v. Townsend, 139 U. S. 67, 72, 77, 78, 11 Sup. Ct. 496, 35 L. Ed. 107. At the request of the Toltec Company the money which that company borrowed, $16,386.30, was applied to the payment of that liability, and under the rule and the authorities which have been cited above the Power Company cannot recover the stock until it repays to the Toltec Company this sum of money. It cannot, therefore, he held that the Toltec Company derived no benefit from this loan contract. It secured all the benefit that could he derived from it, and the fact that the stock may have become worthless since it caused this $16,386.30 to he paid on its liability is not material to this suit, because, if that payment had not been made, its liability to the Power Company would have been greater by that amount.

The conclusion of the -whole matter is that the loan contract and the conveyance of the land to secure the repayment of the money were within the powers of the Toltec Company, and were enforceable, and that, if they had been ultra vires of that company, the hank fully performed its part of the contract, and the Toltec Company would not have been entitled to a reconveyance of its land until it had repaid the $16,386.30 and interest, which it received and applied to the payment of its liability to the Power Company. The evidence has convinced that the bank advanced its money at the request of both defendants, and that they are both indebted to it therefor, hut that between the two defendants the Toltec Company is the principal debtor and the Power Conrpany its surety.

The decree below must be reversed, and the case must be remanded to the Circuit Court, with directions to dismiss the cross-bill, to ascertain the amount of the debt, and to enter a decree for the complainant for the relief prayed in,his bill. ,It is so ordered.- ,

NOTE.- — The following is the opinion of Marshall, District Judge, in the court below:

MARSHALL, District Judge. The plaintiff seeks to have a deed executed in the name of the Toltec Ranch Company declared a mortgage to secure two certain promissory notes made by the defendant the Box Elder Power & Light Company, and a balance of an open account against that defendant, and-for a foreclosure of the mortgage. The indebtedness,- while in the name of the. Box Elder Power & Light Company, is alleged'to be the indebtedness of both of the defendants. The answer of the Toltec Ranch Company denies its liability for this indebtedness, and alleges a want of authority to enter into the transaction in the corporation, and also in its president, who executed the deed, and by cross-bill seeks to have a reconveyance of the property so deeded, and also to have'deelared void a subscription to one-half of the capital stock of the Box Elder Power & Light Company. No subpoena was sued out on this cross-bill; but it was served on the counsel for the plaintiff, and the plaintiff has answered. No service was had on its codefendant, and no answer interposed by that defendant. The Box Elder Power & Light Company answered the plaintiff’s bill and admitted the execution of the notes, but alleged that the indebtedness was that of D. P. Tarpey, or of the Toltec Ranch Company, and that its notes were unauthorized, because given as security for the debt of another.

The facts, so far as necessary to a decision, are these: D. P. Tarpey, the president and general manager of the Toltec Ranch Company, in the name of that company, undertook to subscribe for one-half of the capital stock of the Box Elder Power & Light Company, and, in payment of this subscription, •agreed to pay to the credit of that company into the Bank of Brigham City (a copartnership composed of the plaintiff, Jensen, and John Pingree), the sum of $18,500. The Box Elder Power & Light Company needed ready money, and also required a bond for the execution by it of a certain contract it had entered into. Tarpey and the officers of the Box ELder Power & Light Company entered into an arrangement with the Bank of Brigham City, by which the bank executed the bond and agreed to advance the needed money, and Tar-pey, to secure it, in the name of the Toltec Ranch Company, executed the deed in question, and also pledged to it one-half of the capital stock of the Box Elder Power & Light Company so subscribed for. Throughout the transaction Tarpey acted in the name of, and under the claimed authority of, the Toltec Ranch Company. That company, by its articles of incorporation, was authorized “to carry on the business of buying, owning, holding, leasing, hiring, contracting for, selling, mortgaging, hypothecating, trading, trafficking, managing, and generally dealing in land and live stock; also for the purpose of carrying on a general merchandise and mining business in the United .States of America, the republic of Mexico and the Dominion of Canada.” By resolution of the J)oard of directors of the Toltec Ranch Company, D. P. Tarpey was authorized “to sell or contract to s.ell any and all such parts of the real estate of the said company and -any and all water rights of the said company to whomsoever he may see fit, on such terms and conditions and for such prices as he may deem advisable, and execute, in the name of the company, deeds or contracts for deeds conveying the land or lands and water to such parties as' may be necessary, and he is further empowered to affix the name and corporate seal of said company to all such instruments”; and this appears to have been the only express authority vested in him, and was the resolution recited in the deed to the plaintiff as authority for its execution.

D. P. Tarpey’s relations to the Toltec Ranch Company were somewhat indefinite. He came to Utah from California with money furnished by his brother, M. E. Tarpey, for the purpose of dealing in railroad land. The inference seems justified that at that time the interest of M. F. Tarpey was-that of a creditor, and the entire profits of the enterprise were understood to be-íong to D. P. Tarpey. After some years of such dealing, and after M. F. Tar-pey had advanced a large sum of money, and profit had not resulted, the Toltec Ranch Company was formed to take over the business. About one-quarter of its stock was then issued to M. F. Tarpey, trustee, and one share was issued to each director, including I). P. Tarpey. The remainder of the shares were held in tho treasury of tho company. Tho stock held by M. F. Tarpey, trustee, was to secure him for his advances. Some time thereafter, but prior to the transaction in question, there was an accounting between M. F. Tarpey and the company, at which it was determined that the corporation owed M. F. Tarpey Si57,100, and all of the treasury stock was then issued to him as trustee. It is fairly to be inferred that all of this stock was held by him to secure the repayment of his advances. There seems to have been no definite agreement as to the ownership of the stock after the payment of the indebtedness of the company; but, in view of the prior transactions between the brothers. it is probable that any net profits were tacitly understood to belong to I). P. Tarpey. After a certain period in the history of the company M. If. Tarpey became distrustful of the business capacity of his brother, and intended that the ultimate profits of the speculation should be given to D. P. Tarpey’s wife and children; but there is no evidence that D. P. Tarpey ever assented to this, and it is not important here.

The argument is made that I). P. Tarpey was in fac-t the Toltee Ranch Company and could embark it in any business that he wished. This cannot bo conceded. The state chartering a corporation has an interest that sneli corporation be restricted to the business it is authorized to transact, and tlte creditors of tho corporation have an especial interest in such restriction. M. F. Tarpey was the only substantial shareholder, and, even if the shares held by him were for his protection as a creditor, it was necessary for that protection that tho company should not be permitted to embark in any speculation foreign to the business it was authorized to transact. It is next contended that the Toltee Ranch Company is estopped to plead ultra vires because it had held T>. P. Tarpey out as an unlimited agent. There is no evidence that any officer or agent of the company, other than 1). P. Tarpey, ever had any notice of the particular transaction until after its completion and shortly before its repudiation to the plaintiff’s knowledge, or that the company ever received any benefit from it. There is, likewise, no evidence that any such officer or agent ever had any notice of any similar transaction on the part of I). P. Tarpey, or of any attempt by him to transact business in the name of the company which was beyond its corporate powers. So that there is nothing in ¡he record on which to predicate the plaintiff’s contention. Beyond this, the want of power inhered in the corporation. It is not a ease of the failure to observe some formality in the doing of an act the corporation was competent to perform. The attempt here was to do something that the corporation could not do in any form, and was, therefore, ultra vires in its strict sense, and could not be ratified. All of the facts wore known to the plaintiff at the time of the execution of the deed, except, perhaps; the exact corporate powers of the Toltee Ranch Company; and of those powers he was required to take notice when ho undertook to transact business with that company.

It; follows that the case of the plaintiff against the Toltee Ranch Company wholly fails, and that tho defendant is entitled to a decree on its cross-bill for a reconveyance. No relief can be granted to the Toltee Ranch Company against the Box Elder Rower & Eight Company in respect to the subscription for shares, because no service of the cross-bill was had on that company, nor has it voluntarily appeared to it. No relief can be given the plaintiff on the notes of the Box Elder Rower & Light Company, because the equity of the plaintiff’s bill has wholly failed, and its remedy on the notes is at law. The principle is stated in Dowell v. Mitchell, 105 U. S. 430, 432, 26 L. Ed. 1142. that “the rule is that, where a cause of action cognizable at law is entertained in equity on the ground of some equitable relief sought by the bill which turns out cannot, for defect of proof or other reason, be granted, the court is without jurisdiction to proceed further, and should dismiss the bill without prejudice.” No relief was sought by the plaintiff with respect to the shares of the Box Elder Rower & Eight Company held by him.

Tho bill of the plaintiff will be dismissed without prejudice to an action at law on its notes and indebtedness, and the defendant the Toltee Ranch Company will have a decree for the reconveyance of its land.