Butler v. American Toy Co.

| Conn. | May 15, 1878

Lead Opinion

Park, C. J.

The great question in this case is, whether the charter of the J. & E. Stevens Company by necessary intendment authorized that corporation to continue the business of the American Toy Company as it was then conducted, and had been conducted from its organization. If it. gave this authority, and the business was so continued, then it will he clear that the J. & E. Stevens Company were bound by the acts of the American Toy Company to the same extent precisely as the J. & E. Stevens Company had been previously bound; and the case will be the same that it would have been if Waters had not died and the partnership of J. & E. Stevens & Co. had continued.

It matters but little in the consideration of this question that the partnership of J. & E. Stevens & Co. was technically dissolved on the death of Waters, for the business of the firm was continued by the surviving partners in all respects as it had been, not with a view of winding up its affairs, but to prosecute the business as before. The manufacturing went on just as it had done; goods continued to be sent to the Toy Company for sale, and sales were made, and drafts were drawn and paid as before; indeed the death of Waters worked no change whatever in the management and operations of the company. The business was prosperous, and any break in its management would work injuriously to all concerned. Hence the surviving partners continued the business, using the interest of the deceased partner for the benefit of his widow and heirs, intending, no doubt, at the earliest opportunity to apply, as they did in fact apply, to" the legislature for a charter, in the meantime carrying along the business and using the property of the firm until a corporation could be organized, bridging over the interval in the best manner they were able. This state of things might perhaps be regarded as the formation of a temporary partnership among the surviving partners to accomplish the object they had in view. But however it may be considered, there was no dissolution of the partnership in fact. Duffield v. Brainard, 45 Conn., 424" court="Conn." date_filed="1878-01-15" href="https://app.midpage.ai/document/duffield-v-brainerd-6580635?utm_source=webapp" opinion_id="6580635">45 Conn., 424. The legislature so considered it, for in the preamble of the charter which was subsequently granted, after speaking of the business of the firm and the condition it was in, they go on to say, “which business was profitable, and the continuance of which will be greatly for the interest of the heirs, * * and its discontinuance or serious interruption greatly for the injury of all parties in interest.” Would this language have been used if the business of the firm was then discontinued, or had been seriously interrupted for a number of months ? We think it is clear there was no dissolution of the firm in fact, no discontinuance of its operations, no interruption of its business; and the case must therefore be considered just as it would have been if Waters had not died until after the organization of the corporation.

We will nest consider what the object of the surviving partners and the widow of the deceased partner was, in asking the legislature to turn the partnership into a corporation. This is shown by the preamble already referred to, which goes on to say substantially, that the petitioners have made it appear to the legislature that the business of the firm was prosperous, that one of the partners had died leaving a widow and children, that a discontinuance or serious interruption of the business would be disastrous to all concerned, that in order to prevent such a discontinuance or interruption, and to enable the widow and children to share in the profits of the business, the surviving partners and widow petition the General Assembly for an act of incorporation “ for the purpose of carrying on the business of the late firm.” Here the object of the petitioners is clearly manifested. They never intended and never asked that the business should be curtailed by the proposed act of incorporation, or the manner of carrying it on changed in any particular. The business was prosperous as it was, and its prosperity may have largely come from the mode in which they disposed of their goods through the Toy Company. The object they had in view is further shown by the fact that after the corporation was organized no change was made in the business in any respect. G-oods continued to be sent to the Toy Company for sale, according to the terms of the original partnership, and drafts were drawn and paid by the Toy Company precisely as they always had been, thereby showing that the petitioners never intended that the act of incorporation should work any change whatever in the business, and supposed that it had not. They construed the act to mean nothing more and nothing less than a change of the partnership into a corporation, leaving the business to be conducted as it had before been. Any other view of their conduct would lay them open to the charge of fraud. If they intended ostensibly to carry on the business of the Toy Company as a partner, reap its benefits, and avoid its responsibilities, on the ground that it was beyond their charter powers, their conduct was grossly dishonest. We see nothing in the case tending to such a result, and we therefore give them credit for honesty in their dealings with the legislature, and in their conduct afterwards, and say that they never intended that the Toy Company should be dissolved by the act of incorporation, and that they never supposed that it had been done, and never made such a claim until the exigencies of the present suit required it. Indeed, after continuing the business of the Toy Company for a number of years after the charter was granted, they formally withdrew from the company as a partner and established an agency to settle its affairs. This conclusively shows that up to the present controversy, the J. & E. Stevens Company regarded themselves as a partner in the Toy Company.

We come now to the important question in the case, whether or not the legislature, by the act of incorporation, granted the prayer of the petitioners, that the business, which had been up to that time profitable, might be continued as it was then conducted and had been previously conducted.

The defendants strenuously contend that the petitioners were merely incorporated to manufacture and sell their goods without any reference to the business of the firm as it had been conducted. If so, why did the legislature recite the substance of the petition in the preamble of the act? It says, “ It having been shown to this General Assembly that [the petitioners] were for many years partners in business, &c., * * which business was profitable, and the continuance of which will be greatly for the interest of the heirs, and its discontinuance or serious interruption greatly for the injury of all parties in interest: * * Therefore resolved, &c.” The preamble of a resolution is always important to be considered in giving a construction to the resolution, for in the preamble the legislature states the reasons which induce its action. Here the business of the late firm is referred to as a whole—the business of the firm in all its parts. If it does not mean this, what part of the business was it that would be profitable to have continued ? That part of it carried on by the Toy Company may have been the chief source of their prosperity. For aught that appears the company had no other mode of selling their goods. Shall that be excluded ? We might as well strike out the preamble altogether as throwing no light on the resolution in controversy, which would be contrary to all rules. The legislature say that they were informed of the nature and character of the business, and knew how it was carried on, else they could not have said that it had been shown to them that the business was profitable and should be continued. In the second section of the act of incorporation all the property of the late firm, both real and personal, is transferred to and vested in the corporation as their capital stock. The defendants claim that only the property of the late firm existing at the time of the death of Waters was so transferred. If so, what became of the goods that were manufactured after the death of Waters and before the act of incorporation ? What became of the dioses in action that were received from sales, the stock that was purchased, the drafts that were drawn and not paid in the meantime ? In the preamble, as we have already seen, the legislature speak of the business of the late firm as continuing, as existing. If so then the property used in the business was the property of the firm then existing. The business is called the business of the firm, and the property is called the property of the firm, for it could not have been called by any other name. In the circumstances it all belonged to the firm. The surviving partners could have kept nothing out, for they openly and avowedly professed to be carrying on the business of the firm after the death of Waters just as before. If large profits had been made, the widow and heirs would have been entitled to their share. If the firm had been wound up when the act of incorporation was passed, inasmuch as it was solvent, it would have been wound up as of that date, if the interest of the heirs so required. No one was interested in the matter hut the parties interested in the profits and property, and as among themselves all the property then existing in the business belonged to the firm if it was for the interest of the heirs so to consider it.

We think, therefore, that the act of incorporation transferred to the J. & E. Stevens Company all the property then existing and belonging to the firm, as it would have done if Waters had then been alive; and we think further, that the act authorized the corporation to continue the business as it was then conducted, and to continue the Toy Company as a part of the business. We have come to this conclusion after carefully considering all the facts of the case, and the objections raised by the defendants, which are of a technical character. We can discover nothing which could have induced the legislature to do otherwise. The petitioners requested it to be done. The business was profitable as it was being conducted. The Toy Company was but little more than an agency established for the sale of their goods. It existed at the will of the partners. It would be in the power of the corporation to dissolve it at any time when it ceased to be profitable. There was nothing in the articles of agreement under which the company was organized which was of an objectionable character. It is said that the company was engaged in a general merchandizing business. But it will be found, on inspection of their articles of agreement, that the business was confined to the sale of the goods manufactured by the partners. No provision was made for the purchase of any other goods. These considerations no doubt had their effect upon the legislature, and induced them to authorize the conk nuance of the Toy Company.

The defendants further claim that the plaintiff cannot recover on 'the common count of his declaration. But this question was long ago settled in this state in favor of that form of action. Eagle Bank v. Smith, 5 Conn., 71" court="Conn." date_filed="1823-07-15" href="https://app.midpage.ai/document/eagle-bank-of-new-haven-v-smith-6573774?utm_source=webapp" opinion_id="6573774">5 Conn., 71; Farmers & Citizens’ Bank v. Payne, 25 Conn., 444" court="Conn." date_filed="1857-02-15" href="https://app.midpage.ai/document/farmers--citizens-bank-v-payne-6577120?utm_source=webapp" opinion_id="6577120">25 Conn., 444.

It appears in the case that the drafts drawn by George W. Brown & Co. on the Toy Company, which were discounted by the plaintiff, were generally in excess of three-fourths of the invoiced price of the goods sent by that company to the Toy Company, and when the latter company failed they were largely in excess. It appears farther that the plaintiff knew what the articles of agreement which governed the partnership were, and also knew of the incorporation of the J. & E. Stevens Company, and that the drafts and acceptances were all made for the benefit of George W. Brown & Co., which company was greatly in need of funds, and in many instances paid the plaintiff twenty per cent, for his discounts of the drafts. But the case finds that it did not appear that the plaintiff knew that George W. Brown & Co. had at any time overdrawn their account, unless the fact is to be inferred from the manner in which the discounts were obtained. The defendants insist that these facts were sufficient to put the plaintiff upon enquiry of the J. & E. Stevens Company whether they considered themselves liable on the acceptances of the Toy Company, and having failed to do so he cannot recover. It appears that the discounts were made at Middle-town in this state, where the plaintiff resided, and that the Toy Company was located in the city of New York. Hence the plaintiff could not ascertain whether George W. Brown & Co. had overdrawn their account except by an examination of the books of the Toy Company in New York. The plaintiff knew that those books were at all times open to the inspection of the J. & E. Stevens Company, and having had no notice of the withdrawal of that corporation from the Toy Company, he would naturally suppose that they knew the condition of the books, and knew how many drafts and to what amount George W. Brown & Co. had drawn on the Toy Company. And the plaintiff farther knew that Elisha Stevens, who endorsed all the drafts, was a stockholder, and up to 1873 was a director of the J. & E.'Stevens Company. The drafts were all drawn on the Toy Company in the usual way, and were accepted by that company in the usual manner. These facts would naturally destroy any suspicion that might be awakened by the fact that George W. Brown & Co. were greatly in need of funds, and were willing to pay large premiums for discounts. It is a matter of history that in these days many wealthy firms everywhere were in the same condition. We think this claim cannot prevail.

We leave the question undecided whether the J. & E. Stevens Company would have been bound hy the facts of the case, if their charter had not by necessary intendment authorized the continuance of the Toy Company.

We advise judgment for the plaintiff.

In this opinion Pardee and Granger, Js., concurred; Carpenter and Loomis, Js., dissented.

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Dissenting Opinion

Loomis, J.

The opinion of the majority of the court recognizes the correctness of the proposition that tl\e J. & E. Stevens Company, after its incorporation under the act of 18G9, could not become a partner in the American Toy Company unless expressly or impliedly authorized hy the provisions of that act. While heartily assenting to the truth of the premises, I totally dissent from the conclusion. I know of no recognized rules of interpretation that can extract from the charter any authority to form such a partnership as is referred to. The fact that the charter specifies with unusual particularity the business which the corporation is to engage in, would seem to settle the question. The language is—“with power to engage in and carry on the manufacture of hardware, skates, toys, tools, and other articles of wood or metal; and for the purpose of trade in connection therewith. * * Said corporation to be located at said Cromwell, in the county of Middlesex in this state.” Private Acts of 1869, p. 7, sec. 1. The business is characterized only as manufacturing. But as the goods manufactured must be sold to effectuate the object of making them, the power is added “ to trade in connection therewith.” This can only be construed as a trade conducted by the corporation and confined to the articles allowed to be manufactured, and not as authorizing the formation of a partnership to conduct “ a wholesale and retail toy and general merchandizing business.” Suppose it had been a joint stock corporation located in Cromwell, and its articles of association had specified the business precisely as above, would it not seem preposterous for a lawyer to advise them that they could go beyond the limits of this state and join other parties not mentioned in a general merchandizing partnership ? But the same construction would necessarily be given to the same language.

The authority to become a partner is nowhere expressed or even faintly intimated in the charter or in the preamble. Is such a power implied ? If so, it must be from some language contained in the charter, or must be derived from those incidental powers that are necessary for the purpose of carrying into effect powers that are expressly granted.

At the very threshold of the inquiry after implied powers we are confronted with the fact that the purposes, and business of the corporation are particularly specified, which brings the case within “the sound principle that the specific grant of certain powers in a charter, is an implied prohibition of other and distinct powers.” Firemen Insurance Co. v. Ely, 5 Conn., 572.

But for the purposes of tjhis discussion I am willing to ignore even this fundamental and elementary principle, and give a liberal construction to every part of the act.

Great reliance is placed by a majority of the court upon the preamble. It is claimed to confer an authority on the corporation to continue the business of the late firm in all particulars as they found it. It seems to me otherwise. The business is not left to be determined by extrinsic evidence, but is particularly specified. And in this respect the language of the preamble is just as explicit as that of the act itself. The business of the J. & E. Stevens Company is first specified in the same language used in the act, and. afterwards in every instance where there is any reference to the business the words are “ said business.” And where it speaks of the continuance of the business as one'of the objects of the incorporation, it is-referred to as “said business of the late firm, Ac.,” which for purposes of construction is equivalent to repeating the language first used.

But had the word “said” been omitted in the reference, the fair construction would refer it to the business which had been mentioned. And even a general expression of a purpose to continue their business refers by necessary intendment to their business proper and its incidents, rather than to some particular mode or accidental contract they may have adopted. The business was manufacturing certain articles. The power to sell them would be necessarily incidental; but the mode of selling through a partnership contract with persons not mentioned would not be a necessary incident, but rather a mere accident of their former business.

But it is further said that the reason given to the legislature in favor of an act of incorporation was to prevent the interruption of a profitable business, and therefore, it is argued, they must have intended to continue the partnership contract with George W. Brown & Company. This seems to me a non-sequitur, especially when the business to be interrupted is specified, and no mention is made of anything else. And besides, regard must also be had to the nature of the interruption feared. This was such an one as the death of a partner would occasion—a total dissolution of the firm and consequent apportionment of the assets, not a trifling interruption, resulting from the termination of the contract referred to, and possibly a change in the mode of selling their goods. This change was just as easy on the adoption of the charter as when afterwards made in March, 1873, and doubtless it would have been far better to have made it then. The argument drawn from the provision in the act transferring all the property of the late firm to the corporation, loses its force when we keep in mind the legal distinction between the property owned independently by the J. & E. Stevens Company as a distinct partnership, and that which they owned in another partnership with George W. Brown & Co. The former could have been conveyed by the J. & E. Stevens Company by description as tangible property, but the latter only as an interest or right resulting from a final settlement of the affairs of the Toy Company. And there is surely no presumption that the legislature intended to vest it in any other way except as it might have been transferred by the firm as an existing partnership.

Again, as the purpose of the incorporation was to extricate the concern from the perils and inconveniences of one partnership, it seems the more incredible that the legislature should have intended to subject it to similar perils in another nowhere named or referred to in any of the proceedings.

And not only is the po.wer to form a partnership unnecessary in order to carry into effect the powers expressly granted, hut it will be found inconsistent with, the powers so granted. The provisions putting, the entire management in the hands of seven directors, chosen by and from among the stockholders, and requiring regular returns of the pecuniary condition, it seems to me are liable to be practically nullified if one who happens to be merely a partner in the Toy Company is allowed to secretly appropriate the whole or any part of its assets in the management, or mismanagement, as the case may be, of “ a wholesale and retail toy and general merchandizing business,” located far away from the corporation.

In passing, I may here notice a remark in the opinion of the court that there was nothing objectionable in the articles of agreement of the Toy Company, because those articles confined the business to the sale of goods actually manufactured by the partners. The articles however did not necessarily so confine it, and it does not appear that in fact it was so confined. Under their articles they could have purchased additional toys anywhere else, or any other article of merchandize.

The plaintiff in his supplemental brief, in replying to the defendants’ objection that the Toy Company had no power to accept the drafts in question because the limitation had been exceeded, says:—“The copartnership was formed'for the purpose of hiring and conducting a store in the city of New York for the purpose of carrying on a wholesale and retail toy and general merchandizing business. It is true that it is provided tha’t each partner shall have the right to draw drafts to a certain amount which the Toy Company shall be obligated to accept, but not a word is said in those articles which prohibits the company from giving notes or accepting drafts as might be required in carrying on the general merchandizing business.” ■ ■

The fact that this corporation did engage in this partnership [ apprehend may have had undue weight with the court in construing the charter in question. But this fact has no legitimate place in the discussion if by all the rules of construction the act done is not within either the express or implied powers of the corporation. The doing of the act in itself can never authorize or sanction it. If it could, the doctrine of ultra vires would be unknown. And for the same reason the doctrine of estoppel can never apply to an act not within the scope of the powers of a corporation to perform under any circumstances and for any purposes. I know it sometimes seems hard to see a contract with a third party stricken down by the unrelenting application of this principle, but nevertheless it is perfectly clear that the doctrine of ultra vires is founded upon a wise, necessary, and even beneficent, public policy. Without it, every corporation could defy the sovereign power that created it, and engage in any business or speculation lawful for a natural person to an unlimited extent, and non-assenting stockholders, who have practically no control over the management, and creditors, would be greatly injured. The doctrine in special instances may be wrongfully applied or carried too far, and I would be liberal in conceding to a corporation all necessary incidental powers auxiliary to its main business, but I can scarcely imagine anything more objectionable or hostile to chartered privileges, or more dangerous to the interests of stockholders and creditors, than to allow a corporation to be launched on the uncertain, dangerous, and limitless sea of partnership responsibility.

In this opinion Carpenter, J., concurred.

[Note.—The foregoing ease was argued at an adjourned term of the court at which Judge Granger was present, though not present at the regular term.]