Davis v. Flagstaff Silver Mining Co.

| Utah | Jun 15, 1880

Lead Opinion

BojreMAN, Justice,

delivered the opinion of the Court:

The appellant, the Flagstaff Company, was incorporated in England, to acquire, hold and operate mining and smelting properties in Utah. The respondent sued the company, alleging the purchase of ores from it, and the non-delivery thereof; also, that he had advanced money to said company, and that a contract was entered into by and between the company and himself, whereby he acquired a lien upon the properties of the said company in Utah, and he asked the enforcement of said contract, and that a receiver be appointed. The other defendants were made parties because they were supposed to hold liens against the property of the said company.

The court below entered a judgment appointing a receiver, and requiring defendants to surrender possession of tbe property to the receiver, and enjoining them from interfering with the receiver in his holding, working and disposing of the property; said judgment also fixes the priorities of the alleged lien holders, and requires the receiver to pay off the liens, and to pay to respondent two sums, together amounting to $290,000 and interest.

The defendants, the Flagstaff Company and F. W. Billing, appealed from the judgment of the court below, and from the order of the court overruling the motion of said company and -said Billing for a new trial.

It appears that the respondents, by arrangements with the directors of the said company, had loaned the company very large sums of money, which was to a great extent, if not entirely, used in paying dividends. Subsequently the character of these loans was sought to be changed, and thus was created what are now offered as “ ore contracts.” And thereafter the alleged contract of December 13, 1873, was entered into by said company through its directors, and by said respondent in person. This alleged contract of December 13, 1873, called “Exhibit A,” was based upon the ore contracts and directed their payment.

It seems clear that there was no affirmative action of the stockholders ratifying or approving either the loans, the ore contracts, or the contract of December 13, 1873. "Whatever there was in their conduct supposed to bear such a construction, was of a negative character. But in such matters, a corporation must be judged by its acts, and not by itB failures to act. It cannot be said to approve that which it simply failed to disapprove by express words. There was no direct action in the nature of ratification.

It seems equally clear, as was decided by this court in another suit at a former term, in which suit said Flagstaff Company was plaintiff and said respondent (with others) was defendant, that the directors alone had no power to act.

The question reverts back to the powers of the body of the corporation itself. A corporation has no powers but such as are granted either in express terms or by direct and necessary implication. This company had no power granted to it to make loans of money, except under special limitations, as designated in section 20 of the “Articles of Association ” of said company. There was no affirmative grant to the company to make such loans as were made, and not only so, but this section 20 has the force and effect of an express limitation upon its powers. The loans were far in excess of the amounts authorized. The use of the money to pay dividends was in violation of the acts of Parliament, called the “ Company’s Acts.” By these acts, this corporation is prohibited from declaring any dividends “ except out of the profits arising from the business of the company.” Dividends paid out of borrowed money were not paid out of “ profits.” Thus the company had no grant of authority for using the borrowed money to pay dividends, but it was in fact expressly prohibited from so doing.

It could not be said that respondent was an innocent party, and should not be held responsible for any exercise by the company of powers not granted, or of powers prohibited. Actual knowledge of the want of authority in the company is not necessary to be shown. In dealing with the company, as respondent did — being a party to an executory contract — he must see to it that the company has the .powers it claims to have. In the instance before us, we have no doubt that the respondent was fully aware of the corporate powers of the company. He was one of the incorporators of the company and one of its first directors. He owned and bought and sold large amounts of its stocks. He was a stock broker and manipulator of stocks. He went to London with letters that gave him “ a good position” (to use his own language), and he says that “ In London, the way of operating is very different from here, decidedly old fogyish. They did not understand bulls and bea/rs on the stock exchange. A man would go. a bear a thousand or two pounds there, and mate as much disturbance about that as a man in America would a million.” It was right in the line of his business to know the powers of these stock corporations. The large dividends from the borrowed money increased the market value of the stocks, the public supposing that the company was doing a legitimate business, and paying dividends out of “ profits.” Such people “ did not understand bulls and bears on the stock exchange.” , A shrewd manipulator of stocks could afford to run the risk of losing money loaned to a company to be used to pay dividends, when he knew that he could receive it all back, and much more, too, by the sudden rise in the price of the stocks.

The evidence shows that the directors at that time were acting in entire harmony with the respondent, and willing always to comply with his wishes. The respondent did not propose to lose the money advanced, and hence the claims were put into the shape of “ ore contracts.” A change of shape did not change the substance, however. Being based upon fraudulent and void loans, they were necessarily also fraudulent and void.

But let us assume that no loans ever were made, and that the ore contracts were' original and not based upon prior transactions between the parties. The receipt of forward payments for ores to be delivered in future, as specified in these contracts, was beyond the powers of the corporation. The company has no grant of authority to thus bulk its expected productions and involve the company to its ruin by subsequent inability to comply with the terms of the contract.

Money arising from such forward payments for ores, could mt legally be used to pay dividends. Such money was not “profits arising from the business of the company.” The mo. ey might be termed anticipated profits, but we nowhere find any authority for the company declaring dividends out of any profits except such as are realized out of the business— “arisii. ~r out of the business” of the company. And it is against oublic policy to allow corporations to thus deal so as to deceive and defraud the people. An unscrupulous directory or company might have no ores, and yet sell ore for ten, twenty or more years ahead of the production thereof, and use the money thus acquired in declaring one or two dividends of .•enormous size. Those knowing the inside workings of the company could sell off all their stocks at enormous profits, and leave the company bankrupted and in the hands of those who were deceived and defrauded into buying the stocks. ■Courts cannot look with any favor upon claim* for such powers in corporations.

These ore contracts were the basis of the alleged contract of December 13, 1873, “ Exhibit A,” upon which this action is brought. As the ore contracts were invalid, and not within the power of the corporation to make, it follows that no action •of the company could give them vitality. Their recognition in this contract does not, therefore, give them validity. If it be admitted that the ore contracts were bona fide and binding, what is there in the nature of “ Exhibit A” to warrant the statement that it gives a lien or security to respondent upon the company’s properties in IJtah, for the fulfillment of such •ore contracts? It nowhere says that a lien is given, nor that a security is given. It nowhere says that anything is given to respondent, except the power to appoint an irrevocable agent of the company.

The company had refused to give the property into respondent’s hands as security or for any other purpose. It also refused to give him a mortgage. The company, therefore, never intended to give respondent a mortgage, nor to give him possession of the property. What did it intend to give? It simply intended to give him power to have an agent of his selection control the property of the company at the company’s expense, and without the company having power to remove the agent or to help itself in any way. Take that power out of this contract and there is nothing left that did not exist before the contract was made. The obligation to deliver the ores existed before this contract was made, and if binding at all, it was just as binding before tbis contract was entered into as it was afterwards. No new powers or rights were given respecting the ores, except that of the irrevocable agency. To create an irrevocable agency, and to give the respondent the sole power of the removal of such agent and of appointing his successor, might be a lien, if valid; but the court below very properly said, that so far as the contract purports “ to create an irrevocable agency” “it is not binding on the company.” A corporation cannot by such agency, put beyond its reach, the power to do that for which it was brought into existence. This company was created to own and work mines and carry on smelting in Utah Territory. To create an agency to do this without the power to revoke the authority, and with such power put into the hands of a stranger, is to virtually dissolve the corporation. For it has no power to do that for which it was created. A corporation cannot yield up its life in any such indirect manner. If it be desirable that its business be wound up, the law points out a way for this to be done.

Liens are of two kinds — liens at law and such as are recognized by courts of equity. A lien at law exists when the party has the right to the possession of the property of another until some existing claim upon it is extinguished. Flake the agency revocable at the pleasure of the company, and there is nothing left in the contract to show that respondent had any right to possess the company’s property for any purpose.

A lien, as known in courts of equity, is used to denote merely a charge or incumbrance of one person upon the property of another, but not in possession.

The agent was directed to deliver ores to respondent. But the right to the ores existed before this time, if at all. They were paid for, and respondent was entitled to them before this contract was made. The contract only adds a direction to its own agent to deliver them — and this agency itself is admitted to be within the power of the company to revoke, and there is no obligation in the contract to appoint another agent, but it is in express terms forbidden to do so. The whole contract, therefore, resolves itself back again simply into a recognition of the validity of the ore contracts, whilst such validity existed before this contract was executed.

There was nothing in the nature of trust relation between respondent and the agent. If a trust existed, then respondent had the right to compel the company to make the appointment, and not only so, but such appointment must be satisfactory to the respondent. Yet we have seen that the agency sought to be created here, was revocable at the pleasure of the company, and there was express prohibition upon the company to appoint a successor. If we say that a trust relation existed, therefore, the court must make anew contract for the parties, and not such as they desired or intended.

This contract, “ Exhibit A,” was not one of mutuality. It was made to bind the company but not the respondent. He could ignore it at pleasure and sue on the ore contracts alone, but no such power of repudiation was granted to the company. Eespondent could decline to receive the ores, but the company could not refuse to deliver them. And as we have seen, the company could not remove the agent of its own appointing, but the respondent could do so.

There was no consideration for this contract, so far as the ores were concerned, and all of that part for w'hich there was consideration, was settled and satisfied before this action was brought.

We, for the reasons stated, do not think that respondent has a claim upon the company for the enforcement of this contract, “Exhibit A,” sued upon, nor is he entitled to damages for its breach or non-fulfillment.

The main feature of the judgment in this case is that of appointing a receiver. Everything else in it is made subservient to this one matter — is secondary to it.

Our statute provides for the appointment of a receiver “by the court in which the action is pending, or by the judge thereof.” There must be an 'action pending in which a receiver is asked to be appointed. Compiled Laws, 1870; Practice Act, § 145.

If there be an action pending, the court is authorized to appoint receivers in three general classes of cases. It may appoint the receiver before judgment, to preserve the property until judgment. It may appoint one “after judgment to dispose of the property according to the judgment, or to preserve it during the pending of an appeal;” or, it may appoint “ in such other cases as are in accordance with the practice of courts of equity jurisdiction.” Compiled Laws 1870, p. 438.

In the case at bar, the appointment is neither before judgment nor after judgment, in the sense contemplated by this section of the statute. It is not before judgment in the “ action pending,” because the judgment of which it is a part is the final judgment in the case. It is not after judgment, (1) for the purpose of preserving the property during appeal, because no appeal had been taken when the appointment was made, but the appeal was afterwards taken from the very judgment itself appointing the receiver; (2) nor was it after judgment, in order “ to dispose of the property according to the judgment.” No judgment preceded the appointment requiring any property to be disposed of in any particular way'. The appointment is not in aid of any prior, judgment. Possibly it might be claimed that the judgment of which it is in aid, is part and parcel of the judgment in which the appointment of the receiver is made, and that the vital part of the decree was that granting relief to respondent, which the receiver was to carry out by disposing of the ore and paying the respondent. Perhaps a judgment for general or specific relief might be followed in the same entry by the appointment of a receiver to carry out such judgment by disposing of the property according to the judgment. But that is not this case. No general or special relief is granted to respondent in this decree, which the receiver is directed to carry out. He is directed to pay certain liens prior to those of respondent. But there is no judgment in this case for such liens as against the company. They are simply recognized to exist prior to that date. He is required to pay respondent certain sums of money, but there is no judgment in favor of respondent and against the company for such sums. The respondent, does not to-day have any judgment against the company that the receiver is authorized to cany into execution. We do not think that the authority for the appointment of the receiver can be found under the third general head — that of general equity jurisdiction. Courts of equity ordinarily will not take the management of the affairs of a corporation out of the hands of its own officers and entrust it to the control of a receiver of the court, upon the application of either creditors or shareholders. High on Receivers, § 288.

A court of equity has no power to dissolve a corporation without statutory authority, and then the statute must be followed. To appoint a receiver prevents the corporation from exercising its powers, and virtually winds it up.

The judgment in this case is for the appointment of a. receiver and for nothing else, except that which is incidental thereto. He is appointed, and directed to carry into execution a certain contract. As that cannot be done according to the terms of the contract, he is directed to pay money instead of ores. The defendants are enjoined from interfering with the receiver, and required to deliver certain property to him. The judgment, being solely for the appointment of a receiver and lor matters incidental thereto, and not being made in compliance with either provision of the statute, was improper.

The plea of another action pending is good. The injunction in this case is utterly at war with the injunction in that case. The appointment of the receiver is likewise to render nugatory the judgment in that case. There is nothing in the judgment or opinion of this court in the former case of the defendant, Flagstaff Company v. Davis et al., which would warrant the assumption that the court did, or intended to,, allow respondent to institute a new suit and have a re-trial of the issues settled there in that case.

There are various other points presented by this ease, but. as those questions which we have passed upon are decisive of the case, we shall not consider the others. The judgment and order of the court below are reversed with costs, and the cause, is dismissed.

EmeesoN, J., concurs.

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Dissenting Opinion

Schaeffer, O. J.,

dissented, as follows:

In this case I cannot concur with the majority of the court, because I think the testimony in this case shows a ratification by the stockholders of the ore contracts made by the directors with the plaintiff, and that the contract, “ Exhibit A,” creates, an equitable lien upon the mine which the plaintiff is entitled to have enforced by the appointment of a receiver or trustee by the court.

EoeemaN, J.,

delivered the opinion of the court on the appeal as to defendant McCornick.

The action of the court below in allowing the liens of respondent to take priority of that claimed by appellant, was proper, for the reason that appellant did not have any lien,, and for other reasons; but as the whole judgment has been reversed by this court in the case just decided, Erwin Davis, respondent, v. Flagstaff Company, et al., appellants, and the cause dismissed, this portion of the judgment follows that ruling, and it is therefore reversed and the cause dismissed at. cost of appellants.

Emerson, J., concurs. Schaeffer, 0. J., dissents. Foreman, J.,

delivered the opinion of the court on the appeal, as to defendant McFride.

The judgment of respondent was prior in right to any claim, of appellant. The action of the court in granting him a new trial, therefore, was proper. The action of the court below is-affirmed, but the cause is dismissed at appellant’s costs, in accordance with the decision of this court in the case of Erwin. Davis, respondent, v. Flagstaff Company et al., appellants, tbis appeal being in the same case.

Emerson, J., concurs. Schaeffer, C. J., dissents.