231 F. 950 | 6th Cir. | 1916
Three corporations, the American Ball Bearing Company, the Packard Motor Car Company, and the Peerless Motor Car Company, were each the owners of separate patents on equipment for the rear axles of automobiles. Their patents were of such nature that apparently, as found by the trial court, they “interlaced or overlapped one another, so that, if one company gave a license under the patent which it owned, complaints of infringements and threatened suits straightway arose from one or another of the other companies.”
They thereupon, so that the ownership of all of the patents might be in one company, which, as owner, could grant licenses) thus saving uncertainty in dealing with the patents, and for the purpose of avoiding litigation between themselves, sought to organize a corporation of Ohio under the name of “The Kardo Company,” with a capital stock of $1,000,000. Articles of incorporation were signed February 21, 1914, by five men in 'the employ of the law firm in charge of the organization, not connected otherwise than as attorney with any of the three companies. The articles were filed with the Secretary of State February 24, 1914. On the same day, each of the incorporators subscribed for one share of the capital stock, and one of them subscribed, as trustee for the American Ball Bearing Company for 995 shares, agreeing to pay $9,500 in cash and $90,000 by the transfer of patents by the American Ball Bearing Company to the Kardo Company. Ten thousand dollars, one-tenth of the $100,000 subscribed, were paid on the day of subscription by the American Ball Bearing Company, and the incorporators at no time paid any sum of money. Each of the other corporations paid in $10,000, the Peerless Company about the 1st of March, and the Packard Company about two weeks afterwards, so that each of the corporations paid in equal amounts; the $10,000 paid on subscription by the American Ball Bearing Company being for itself and the other two.
At the first stockholders’ meeting, February 24, 1914, the five incorporators being present and voting as stockholders, a code of regulations and by-laws was adopted, in which it was provided that the board of directors should be five stockholders, a majority of whom should be citizens of Ohio. The same parties elected themselves directors, and at their meeting as such, 30 minutes later, four of them were elected officers, and adopted a proposed agreement between the three corporations, providing for the sale and transfer to the Kardo Company of the letters patent owned by each, respectively, for which each was to receive $200,000 of the capital stock, which agreement the incorporators, as stockholders, at a meeting held immediately, ap
The purpose of the incorporation, expressed in the articles of incorporation filed with the Secretary of State, was—
“purchasing, leasing, or otherwise acquiring, and of registering, owning and using inventions, improvements, trade secrets, processes, or interests therein, and applying for and receiving, purchasing, or otherwise acquiring, letters patent, or rights or interests in or under letters patent, for or upon motor and other vehicles, or means of transportation, and traction and propelling machinery, and for or upon the mechanism, parts or equipment of the same, or the tools or machinery for the manufacture of the same; and of selling, assigning, or granting licenses and rights under or in respect of such secrets, processes, inventions, improvements or patents, and otherwise dealing in respect of or with the same, or either of them; and of manufacturing, using and dealing in the vehicles, articles, machinery, equipment and parts covered by or provided for in said inventions, patents or improvements, and of doing all things necessary, proper and incidental to the transaction of said business, or any part thereof.”
The hill of complaint was filed, June 25, 1913, by the American Ball Bearing Company, a corporation of Ohio. The defendant answered July 15, 1913, and amended its answer September 25, 1913. The bill was for infringement of a patent, of which the American Ball Bearing Company claimed to be the owner, for an accounting of profits, for treble damages by reason of the aggravated nature of the claimed infringement, and for the destruction of the alleged infringing mechanism in defendant’s possession.
On October 20, 1914, the Kardo Company filed a bill in the nature of a supplemental bill alleging its corporate character and the assignment to it of complainant’s patents and prayed to be substituted as complainant and for relief as prayed in the original bill. The defendant, January 25, 1915, filed a further amendment to its answer, hut did not put in issue the validity of the Kardo Company’s corporate existence under the laws of Ohio, nor did it in any way challenge the pro
Original jurisdiction has been conferred by Congress by virtue of article 3, § 2, of the Constitution on the District Courts in many classes of cases, of which attention need be called to two :
“Of all suits of a civil nature, at common law or in equity, * * * where the matter in controversy exceeds, exclusive of interest and_ costs, the sum or value of three thousand dollars, and * * * is between citizens of different statesand “Of all suits at law or in equity arising under the patent * * * laws.” Judicial Code U. S. § 24, subds. 1, 7.
The provision as to the sum or value of the matter in controversy, does not apply to patent cases. Section 24, subd. 1.
This suit arose under the patent laws, and the jurisdiction of the court to hear and determine the issues raised in it cannot be doubted.
Jurisdiction conferred by reason of diversity of citizenship is a different matter. In Cohens v. Virginia, 6 Wheat. *264, *393 (5 L. Ed. 257), it was said by Chief Justice Marshall:
“In one description of cases, the jurisdiction of the court is founded entirely on the character of the parties; and the nature of the controversy is not contemplated by the constitution-—the character of the parties is everything, the nature of the ease nothing. In the other description of cases, the jurisdiction is founded entirely on the character of the case, and the parties are not contemplated by the constitution—in these, the nature of the case is everything, the character of the parties nothing.”
The court, therefore, had jurisdiction of the subject-matter, and it was immaterial, so far as jurisdiction is concerned, what the citizenship of the parties might be.
In 1875, Congress passed the law, now section 37 of the Judicial Code, providing:
“If in any suit commenced in a district court, or removed from a State Court to a district court of the United Srates, it shall appear to the satisfaction of the said district court, at any time after such suit has been brought or removed thereto, that such suit does not really and substantially involve a dispute or controversy properly within the jurisdiction of said district court, or that the parties to said suit have been improperly or collusively made or joined, either as plaintiffs or defendants, for the purpose of creating a case cognizable or removable under this chapter, the said district court shall proceed no further therein, but shall dismiss the suit or remand it to the court*955 from which it was removed, as justice may require, and shall make such, order as to costs as shall be just.”
The purpose of the act was to protect the court and the parties against fraud upon its jurisdiction. It was so said in Williams v. Nottawa, 104 U. S. 209, 211 (26 L. Ed. 719):
“Congress was specially careful to guard against the consequences of collusive transfers to make parties, and imposed the duty on the court, on its own motion, without waiting for the parties, to stop all further proceedings and dismiss the suit the moment anything of the kind appeared. This was for the protection of the court as well as parties against frauds upon its jurisdiction. * * * ”
See, also, Morris v. Gilmer, 129 U. S. 315, 326, 9 Sup. Ct. 289, 32 L. Ed. 690, and Mining Co. v. Kelly, 160 U. S. 327, 339, 340, 16 Sup. Ct. 307, 40 L. Ed. 444.
The first part of the section deals with jurisdiction over the subject-matter of the suit—the right asserted in it; the second part with jurisdiction dependent upon diversity of citizenship. Since the jurisdiction invoked in this case did not involve the citizenship of the parties, the court’s inquiry could in any event only be directed to the question whether or not a substantial dispute or controversy was involved properly within the jurisdiction of the court. The phrase “within the jurisdiction” has been defined by the Supreme Court:
“It moans, within, tlie judicial cognizance—within the capacity to determine the merits of the dispute or controversy and to grant the relief asked for.” Rosenbaum v. Bauer, 120 U. S. 450, 459, 7 Sup. Ct. 633, 037 (30 L. Ed. 743).
That this case was within the jurisdiction as thus defined, no doubt can be entertained.
This section has been applied to a number of cases, mostly involving jurisdiction based on diversity of citizenship or the amount in controversy ; but we have found no decision in any of the courts of the United States or in any state court which recognizes power in a court to make inquiry, on its own motion, without pleadings, into the capacity of a corporation to sue in a-case over which a court had jurisdiction by reason of the nature of the controversy.
Prior to the act of 1875, in cases dependent for jurisdiction on diversity of citizenship, when the proper allegations of citizenship appeared in the pleadings, a plea in abatement was necessary to raise the issue of citizenship. Farmington v. Pillsbury, 114 U. S. 138, 143, 5 Sup. Ct. 807, 29 L. Ed. 114; Little v. Giles, 118 U. S. 596, 604, 7 Sup. Ct. 32, 30 L. Ed. 269; Gilbert v. David, 235 U. S. 561, 567, 35 Sup. Ct. 164, 59 L. Ed. 360. That issue may now be raised by answer, by motion, or by any method appealing to the sound discretion of the court. Gilbert v. David, 235 U. S. 561, 567, 35 Sup. Ct. 164, 59 L. Ed. 360. Power for the court’s independent inquiry did not exist under the decisions, even when the jurisdiction depended upon diversity of citizenship until section 37 conferred the power. If, without this section, power is not inherent in the court to protect, on its own motion and without pleadings, its jurisdiction in cases in which diversity of citizenship gave jurisdiction, even when fraudulently invoked,
It was said in Byers v. McAuley, 149 U. S. 608, 618, 13 Sup. Ct. 906, 910 (37 L. Ed. 867), by Mr. Justice Brewer:
“The jurisdiction of the Federal courts is a limited one, depending upon either the existence of a Federal question or diverse citizenship of the parties. Where these elements of jurisdiction are wanting, it cannot proceed, even with the consent of the parties.”
And in Powers v. C. & O. Ry. Co., 169 U. S. 92, 98, 18 Sup. Ct. 264, 266 (42 L. Ed. 673), Mr. Justice Gray said:
“The existence of diverse citizenship, or other equivalent condition of jurisdiction, is fundamental; the want of it will be taken notice of by the court of its own motion, and cannot be waived by either party.”
And yet it has been held time and again in the courts of the United States that the defendant must specially aver the plaintiff’s corporate invalidity, and, if he pleads to the merits without doing so, he is held to admit plaintiff’s corporate capacity. Conard v. Insurance Co., 1 Pet. *386, *450, 7 L. Ed. 189; Society, etc., v. Town of Pawlet, 4 Pet. *480, *501, 7 L. Ed. 927; Wickliffe v. Owings, 17 How. *47, *51, 15 L. Ed. 44; Philadelphia, etc., R. R. Co. v. Quigley, 21 How. 202, 214, 16 L. Ed. 73; United States v. Insurance Companies, 22 Wall. 99, 100, 101, 22 L. Ed. 816; Kenton Furnace Co. v. McAlpin, 5 Fed. 737, 741 (C. C.); Emerson v. Nimocks, 88 Fed. 280, 281 (C. C.). Whether or not, since the act of 1875, it is the duty of the district court to inquire of its own motion into the proper organization of a plaintiff corporation when the jurisdiction depends upon diversity of citizenship, we are not called on to decide, for that question does not arise in this case. But we venture to say no suggestion will be found in any of the cases that, when a corporation is a party plaintiff, the court has, irrespective of that act, inherent power, even in cases in which the citizenship of the parties is the test of its jurisdiction, to inquire into and determine the validity of the plaintiff’s corporate existence when the defendant has waived the question by pleading to- the merits.
. It may be said, with certainty, that when the jurisdiction depends upon the nature of the right asserted, as in this case, the court has no power, inherent or statutory, to make an inquiry, sua sponte, into the plaintiff’s corporate capacity when the defendant, by pleading to the merits, has waived that question. Pullman v. Upton, 96 U. S. 328, 329, 24 L. Ed. 818, decided October term, 1877, is directly to the point. An assignee in bankruptcy of a corporation sued a stockholder in the Circuit Court of the United States for the Northern District of Illinois to recover the balance remaining unpaid upon his stock. The bankrupt was a corporation of Illinois, and was decreed a bankrupt in the District Court for the Northern District of that state, the
“But the existence of the corporation was admitted by the defendant’s plea of non assumpsitj and whether the corporate stock had been properly increased was a question the State only could raise. It is well settled, that, in a suit by a corporation, a plea of the general issue admits the competency of the plaintiff to sue as such.”
There are many decisions in the courts of the United States and in the state courts holding a defendant estopped to deny the corporate existence of the plaintiff. Some reference to them will be made hereinafter. The principle is found in the language of Mr. Justice Swayne in Casey v. Galli, 94 U. S. 673, 680 (24 L. Ed. 168) a case not depending for jurisdiction on diversity of citizenship:
“Where a shareholder of a corporation is called upon to respond to a liability as such, and where a party has contracted with a corporation, and is sued upon the contract, neither is permitted to deny the existence or the legal valldity of such corporation. To hold otherwise would be contrary to the plainest principles of reason and of good faith, and involve a mockery of justice.”
Is it possible that when plainest principles of justice estop a defendant himself from denying the corporate capacity of the plaintiff to sue, and that, too, when he pleads to that end, the court may, of its own motion, when the subject-matter of the suit is the basis of its jurisdiction, inquire, without pleadings, into the plaintiff’s capacity, and, if not satisfied, dismiss the bill ?
“The real ground and reason of the decisions in the line of cases now under consideration, is the lack of a complaint on the part of the proper and-only party who has a right to complain, viz., the State, and not the want of capacity or ability in either court to deal with the question involved. In short, the power of this court to deal with any matter brought before it does not depend upon the nature or character of the issue to be tried or question i» be determined, but it depends upon the nature of the right to be administered and enforced, and tbe character of the remedy necessary or appropriate to its enforcement. If the right to be enforced be one properly cognizable by a court of equity, and the remedy necessary to enforce it be such as only a court of equity can administer, then a court of equity has jurisdiction, and the circumstance that, in the course of'its administration, it has to deal with*958 questions of law and fact, of whatever nature they may be, does not stand in its way.”
The complainant’s corporate capacity was an issuable fact. Issues are brought before a court by the pleadings, and its decrees must be considered in connection with the pleadings. Barnes v. Chicago, etc., Ry. Co., 122 U. S. 1, 14, 7 Sup. Ct. 1043, 30 L. Ed. 1128; Graham v. La Crosse Railroad Co., 3 Wall. 704, 710, 711, 712, 18 L. Ed. 247; Reynolds v. Stockton, 43 N. J. Eq. 211, 10 Atl. 385, 3 Am. St. Rep. 305; Munday v. Vail, 34 N. J. Law, 418, 423, 424; Carter v. Gibson, 47 Neb. 655, 66 N. W. 631; Maddox v. Summerlin, 92 Tex. 483, 488, 49 S. W. 1033, 50 S. W. 567; Spoors v. Coen, 44 Ohio St. 497, 502, 503, 9 N. E. 132. This is elementary. Waldron v. Harvey, 54 W. Va. 608, 613, 46 S. E. 603, 102 Am. St. Rep. 959.
Under the pleadings in this case, the questions of the corporate invalidity of the Kardo Company and of the reality of its interest, were hot issues to be tried.
In Ohio this provision is found in section 25 of the Code of Civil Procedure, taking effect January 1, 1853 (Section 11241, Gen. Code Ohio):
“An action must be prosecuted in tbe name of tbe real party in interest. * * * ”
Nevertheless, it is the rule in that state that a corporation commencing an action need not state that it is a corporation, and if it does so, it will not, even upon a general denial, be required to prove that it is a corporation. If the defendant desires to raise that issue he must plead it. Methodist Episcopal Church v. Wood, 5 Ohio, *283, *286; Smith v. Weed Sewing Machine Co., 26 Ohio St. 562, 565; Brady v. National Supply Co., 64 Ohio St. 267, 60 N. E. 218, 83 Am. St. Rep. 753.
We think the court was in error in making the inquiry and in dismissing the bill. Assuming, however, that since the facts have appeared the defendant may amend his answer, if, he desires to do so, or, if he does not, that the court has power to direct him to do so, under the liberal provisions of section 1591, 1 U. S. Comp. Stat. 1913, p. 675, we proceed to determine the question, whether or not the Kardo Company was clothed with sufficient corporate capacity to permit it to maintain against an alleged wrongdoer an action relative to a subject-matter within the jurisdiction of the court. The motives of the incorporators were legitimate; their purposes and the purposes of the three corporations for whom they were acting, were laudable, and it cannot be denied that the purposes expressed in the articles of incorporation were, in all respects, lawful.
No injury or fraud was perpetrated, or sought to be perpetrated, and the claimed invalidity of the incorporation rests upon the facts that three corporations promoted the formation of another corporation; that the incorporators did not intend themselves to become, and did not become, beneficially interested in the stock or in the corporation to be formed; that they; not being actual owners of stock, could not be directors; and that the directors substituted for them were not legally elected, paid nothing for their stock and were not, therefore, bona fide holders.
From these the deduction is drawn that the Kardo Company was a “dummy” company, its directors “dummy” directors, and that, therefore, a court of, equity would look through the form of things to their substance and declare nonexistent that which appeared to exist, whatever the consequences might be, and regardless of the wrongdoing of the defendant as alleged in the bill.
“Upon filing articles of incorporation, the persons who subscribed them, their associates, successors, and assigns, by the name and style provided therein, shall be a body corporate, with succession, power to sue and be sued. * * * ”
In Ashtabula, etc., R. R. Co. v. Smith, 15 Ohio St. 328, 334, the statute was construed, and it was there held, Judge White writing the opinion, that the general powers conferred—
“fall into two classes: such as may be exercised before, and such as can not be until after, the election of directors. Among the former is the right to receive subscriptions to the capital stock, and, when ten per centum of the amount shall bo subscribed, to elect directors. * * * After tile election of directors all the business of the corporation is to be transacted by them, or under their authority; but, the existence of the body corporate does not depend upon the election of, or the right to elect, directors.”
In Powers v. Hazelton, etc., Ry. Co., 33 Ohio St. 429, 432, a suit by a railroad company to condemn land for the construction of its road, the court followed the decision in the other case on this point,
“It was therefore incumbent on the company to show, in addition to the fact of its incorporation, that it had brought itself into a condition to exercise its powers for the construction of the read, by a full organization in the election of directors.’"’
See, also, State ex rel. v. Robinson, 9 Ohio Dec. 383, 12 Wkly. Law Bul. 269.
In Union Water Co. v. Kean, 52 N. J. Eq. 111, 141, 27 Atl. 1015, 1026. Pitney, V. C., quoted with emphasis from Judge Bennett’s- opinion in Railroad v. Clayes, 21 Vt. *30:
“It is the statute which creates the subscribers for stock a corporation and not their organizing under it.”
In Wells Co. v. Gastonia, etc., Co., 198 U. S. 177, 25 Sup. Ct. 640, 49 L. Ed. 1003, it appeared that the charter of a corporation of Mississippi provided that the incorporators “are hereby created a body politic and corporate,” and also that “as soon as ten thousand dollars of stock is subscribed and paid for said corporation shall have power to commence business.” The $10,QOO were not paid, but the corporation after doing business, sued a citizen of North Carolina in the Circuit Court for that state for goods sold. It was held that the subscription and payment of the required amount of capital stock were not such conditions precedent that the corporation did not exist until payment of subscription; that the corporation was created when its charter was approved and the great seal of the state affixed to it and was entitled to sue as a citizen of Mississippi. To the same effect, Frost v. Coal Co., 24 How. 278, 16 L. Ed. 637.
In Ohio, after.the decisions referred to, it seemed settled that the filing of the articles of incorporation creates a body corporate as the statute says, but in State ex rel. v. Insurance Co., 49 Ohio St. 440, 31 N. E. 658, 16 L. R. A. 611, 34 Am. St. Rep. 573, the fifth headnote (in Ohio the law of the case) says:
“The making and filing, for the puepose of profit, of articles of incorporation in the office of the secretary of state, do not make an incorporated company; such articles are simply authority i;o do so. No company exists within the meaning of the statute, until the requisite stock has been subscribed and paid in, and the directors chosen.”
This was taken bodily from the opinion of Judge Minshall. That he and the court did not intend to overrule the previous decisions is clear, from the fact that they were not referred to in the opinion, and the subject-matter of the case did not require so broad a declaration. The statute referred to reads:
“When by the laws of any other state or nation, any taxes, fines, penalties, license fees, deposits of money or of securities or other obligations or prohibitions are imposed on insurance companies of this state doing business in such state or nation, or upon their agente therein, so long as such laws continue in force, the same obligations and prohibitions, of whatever kind, shall be imposed upon all insurance companies of such other state or nation doing busi*961 ness within this state, and upon their agents here.” (Italics in the opinion.) 49 Ohio St. 444, 31 N. E. 659, 16 L. R. A. 611, 34 Am. St. Rep. 573.
To proceedings in quo warranto, the respondent, a corporation of New York with authority to deal in four lines of insurance, answered, when charged that by the laws of New York no Ohio insurance company could transact business in that state in more than one line of insurance, that it bad power in New York to deal in four lines of insurance and that an Ohio company could legally be formed with power to do the same, but that no such company had been formed and hence no' application could be made in New York to do the four lines of insurance there. The relator replied thát the requisite number of persons subscribed and acknowledged articles of incorporation to do the four kinds of insurance in Ohio; that the articles had been approved by the Attorney General and were recorded in the office of the Secretary of State of Ohio, “whereby,” it was averred (49 Ohio St. 443, 31 N. E. 659, 16 L. R. A. 611, 34 Am. St. Rep. 573), “an Ohio corporation was duly and legally formed for the purpose of doing the lines of insurance mentioned in the articles of incorporation.”
Of course, such a corporation was not doing business in Ohio, and, as a company doing business, had no existence. The headnotes are not to be given general application, but are to be read in connection with the facts appearing in the report. Witte v. Lockwood, 39 Ohio St. 141, 145; Sherard v. Lindsay, Treas., 13 Ohio Cir. Ct. R. 315, 321; Adelbert College v. Wabash R. R. Co., 171 Fed. 805, 812, 96 C. C. A. 465, 17 Ann. Cas. 1204 (C. C. A. 6); Ohio Tax Cases, 232 U. S. 576, 577, 589, 34 Sup. Ct. 372, 58 L. Ed. 737.
It is quite clear that as late as 1905 (Telephone Co. v. Cincinnati, 73 Ohio St. 64, 76 N. E. 392), the Supreme Court of Ohio regarded Powers v. Railway Co., 33 Ohio St. 429, as still the law. See first headnote, and the opinion of Judge Spear, 73 Ohio St. at page 77.
The opinion of Judge Johnson in the recent case of Parkside Cemetery Ass’n v. C. B. & G. L. Traction Co., 112 N. E. 596 (decided by the Supreme Court of Ohio, December 7, 1915), would seem to indicate that he intended to leave no doubt that in Ohio the filing of articles of incorporation does not create a corporation. The action was for the appropriation of private property for construction of a railroad, and the existence of the plaintiff corporation was directly in issue under the statute providing for the exercise by a railroad of the right of eminent domain. Section 11046, defining the duty of the court, provides:
“ * * The probate judge shall hear and determine the questions of the existence of the corporation, its right to make the appropriation, its inability to agree with the owner, and the necessity for the appropriation. Upon'all these questions the burden of proof shall be upon the corporation, and any interested person shall be heard.”
The facts are set out in the opinion of the court:
“In this case the formal details such as the preparation and filing of the articles of incorporation, the signing of waivers of notice, the opening of books of subscription, the filing of a certificate of subscription with the secretary of state and the waiver of notice of stockholders’ meeting, election of directors,*962 are all set out in the minute hook. But it is shown by the testimony of directors themselves and the secretary and treasurer that the company never kept any books of account, never had any bank account, there was no certificate book, or other books, exGept the minute book, the shares were written on blanks, which were unnumbered and unidentified and there was no statement on them of the authorized capital stock. One of the incorporators, who was a director, testified that after the certificate of incorporation was received, he paid in the sum of $1,000, which was ten per cent, of the authorized capital stock of the company, but the treasurer testified that there were no books or papers which showed that the director referred to had paid the money to the company for this stock and that he had nothing to show for that. The other-directors admit that they never paid for any shares of stock and some say that after they received them they indorsed them in blank and handed them back to the party from whom they received them. With the exception of the bare statement of Mr. Smartt that he had paid the $1,000 referred to, no payment on any stock is shown and it is not shown what was done with the $1,000 referred to, nor to whom it was paid. The only stock that was ever subscribed for was that originally made by the five incorporators, who each subscribed for two shares of $100 each. These steps and the original resolution of necessity were taken in 1906, and no further action is shown until the filing of the petition in this case in May, 1911.
“The original directors resigned, one after another, as directors and officers and their places were filled by others, who likewise admit that the same stock was given to them without any payment being made by them.”
It was held, among other things, that the plaintiff was a “dummy” corporation, and that testimony offered by the defendant which tended to show that the plaintiff company was endeavoring to acquire the right of way for the sole use and benefit of. the Northern Ohio Traction & Tight Company, and that the latter company had furnished considerable of the money, and, as it was claimed, ■ all of the money that the plaintiff ever had, ought to have been admitted.
We might agree, for the purposes of this case, that on those facts and that evidence there was no proper subscription to tire capital stock and no proper qualification of directors; that the plaintiff was a “dummy” corporation acting for another and had no power to appropriate' private property; that it had no existence as a corporation with power to appropriate another’s land, and that all corporate forms, including the filing of the articles of incorporation, might be disregarded to protect tire land owner from an unlawful and unauthorized appropriation of his land. It was not necessary in that case for the court to' go further than that, and it is not probable they intended to do so; but the third headnote in the case reads:
“The statutory requirements provided by section 8632 et seq., General Code, for the creation of a corporation are mandatory and must be complied with before the corporation can be in existence.”
These sections have to do with the subscriptions to the capital stock' and the initial payments thereon, the election of directors, etc., and, if the language of the headnote is restrained to- the nature of tire action and the facts, and the theretofore declaration of the court of the necessity of compliance with the statutory requirements in those behalfs as a condition precedent to the exercise of the power of eminent domain, we are in hearty accord. But the case did not call for the sweeping language of the headnote, and would have been satisfied ■ if
By the Ohio decisions the “existence” of a corporation under general laws, and the “existence” of a corporation with special power to appropriate private property, are not the same. The Supreme Court of Ohio had before it, in the recent case, the meaning of the word as used in the latter class of cases.
That the Supreme Court of Ohio did not intend the declaration in the third lieadnote of Cemetery Co. v. Traction Co. to be a hard and fast rule covering all cases and circumstances, is shown, not only by their failure to refer bo the express declaration of the statute as to when a corporation is formed with power to sue, and to their former decisions; but also by omitting any reference to' de facto corporations. The doctrine relative to these and their power to- maintain a suit, their inviolability from attack except by the state creating them, and then only in a direct proceeding, is established by a wealth of authority, it will be sufficient to refer to a few cases in the courts of the United States. Lessee of Frost v. Frostburg Coal Co., 24 How. 278, 16 L. Ed. 637; Baltimore, etc., R. R. Co. v. Fifth Baptist Church, 137 U. S. 568, 571, 11 Sup. Ct. 185, 34 L. Ed. 784; Shapleigh v. San Angelo, 167 U. S. 646, 656, 17 Sup. Ct. 957, 42 L. Ed. 310; Miller v. Perris Irrigation Dist., 85 Fed. 693, 698 (C. C.); Id., 99 Fed. 143, 150 (C. C.); Herring v. Modesto Irr. Dist., 95 Fed. 705, 717, et seq. (C. C.); Telegraph Co. v. Railroad Co, 114 Fed. 787 (C. C.); and in this circuit: Farmers’, etc., Co. v. Toledo, etc., Ry. Co, 67 Fed. 49, 55 (C. C.); Continental Trust Co. v. Toledo, etc., R. Co, 82 Fed. 642, 649 (C. C.).
If, in Ohio, a corporation with general powers has no existence at all unless the laws relative to subscription and payment for stock and the election and qualification of directors are strictly complied with, the doctrine of de facto corporations universally recognized in the United States, and, for justice’ sake, frequently applied, has no further place in the Ohio law. It is inconceivable that Judge Johnson, who wrote the opinion in Cemetery Co. v. Traction Co, and the court concurring in the headnotes of it, intended to overthrow that just and salutary doctrine, particularly as they did not even refer to the leading case of Society Perun v. Cleveland, 43 Ohio St. 481, 490, 3 N. E. 357, 360, in which it was said by Judge Owen:
*964 “The theory that a de facto corporation has no real existence, that it is a mere phantom, to be invoked only by that rule of estoppel which forbids a party who has dealt with a pretended corporation to deny its corporate existence, has no foundation, either in reason or authority. A de facto corporation is a reality. It has an actual and substantial legal existence. It is, as the term implies, a corporation."
The infirmity in that' case lay in the very articles themselves; and before the case was decided a judgment of ouster was rendered against the corporation in quo warranto proceedings.
While we might agree that in Ohio three corporations cannot form a corporation in the sense that they may become the incorporators, yet no reason appears why three corporations, or one corporation, may not, for legitimate purposes, cause a corporation to- be formed under the laws of that state through agents selected for the purpose. The theory of separate entity of a corporation is not disturbed by the ownership of all of its stock by another corporation. Peterson v. Chicago, etc., Ry. Co., 205 U. S. 364, 391, 27 Sup. Ct. 513, 51 L. Ed. 841; Richmond, etc., Co. v. Richmond, etc., Co., 68 Fed. 105, 108, 15 C. C. A. 289, 34 L. R. A. 625 (C. C. A. 6th Cir.); Commonwealth v. Monongahela Bridge Co., 216 Pa. 108, 114, 64 Atl. 909, 8 Ann. Cas. 1073; Louisville Gas Co. v. Kaufman, 105 Ky. 131, 158, 48 S. W. 434 et seq. There is no requirement in the law, nor any inference to be drawn from it, that the incorporators of an Ohio corporation must have any financial interest or benefit of any kind in the incorporation sought. The general understanding in Ohio on the subject is found in 1 Couse’s Ohio Pfivate Corporations, § 16. In some jurisdictions, incorporators are directly held to be mere instruments of the law for purposes of preliminary organization. Densmore Oil Co. v. Densmore, 64 Pa. 43, 54; Chase v. Lord, 77 N. Y. 1, 11; Bristol Bank v. Jonesboro, etc., Co., 101 Tenn. 545, 553, 48 S. W. 228; 1 Clark & Marshall on Private Corporations, § 45.
Incorporators, after filing the articles, open books for subscription. When 10 per cent, of the capital stock has been subscribed and 10 per cent, of the subscription paid in, and they have so certified, their duties come to an end. There is no requirement that they shall subscribe to the capital stock, though if they do so, they malee themselves personally liable to the corporation (Henkle v. Salem Mfg. Co., 39 Ohio St. 547, 552; Trust Co. v. Floyd, 47 Ohio St. 525, 541, 26 N. E. 110 et seq.; Pullman v. Upton, 96 U. S. 328, 330, 24 L. Ed. 818); and if there is any deficiency in the amount of the actual payment of 10 per cent, on the stock subscribed at the time they have certified the fact, they are liable to any person affected thereby (section 8634, Gen. Code Ohio).
“ ~ * It is no objection that the organization of a plaintiff corporation was promoted or procured by another corporation, or its stockholders, which is specially interested in the enterprise for which the plaintiff was formed and which could not condemn property in furtherance of such enterprise and such matters cannot be set up in answer to the plaintiff’s petition to condemn.”
Also:
“One who has subscribed and paid for or' who has purchased stock in a corporation has of course the right to make a bona fide gift of it, and in such ease the donee’s title is perfect. And doubtless the originator of a corporation organized in good faith to carry out the purposes stated' in its articles, may properly procure tile requisite number of signatures to all of the preliminary instruments, including the necessary ten per cent, stock subscription, by making an executed bona fide gift to each of the amount necessary to pay the required portion of the subscriptions into the treasury. * * * ”
The “preliminary instruments” are necessarily the articles.
If there was a want of compliance with the law in the organization of the Kardo Company, it lay in the fact that while the subscriptions of the five agents, who were the incorporators, were paid to the corporation, yet the subscribers were not, nor were they intended to he, the owners of the stock; and in the resulting claim that, since directors must be elected by stockholders, their election as directors had not sufficient foundation. Necessarily, the substitution for each of these of other representatives ofi the three corporations could not be regarded as a proper election of directors. If the five shares subscribed by the original agents of the promoters had been given to them, a different situation would be presented; but we see no reason why they cannot be regarded, in this subscription, as agents
Theoretically, no doubt, a corporation, a creature of the state, has only complete existence when the laws giving it being are complied with. But that theory, carried to its logical conclusion, would, in many cases, result in such injustice that the courts, established for the purpose of doing justice, have found a way by which the justice of the particular case may be worked out without really doing violence to logic: This they do by denying to a party to a suit the right to raise the question of corporate capacity of the plaintiff to sue when injustice would result and when considerations of public policy are involved; so that the Kardo Company, while it may not be strictly a corporation de jure, may nevertheless have a sta.tus in the law sufficient to enable it to protect itself from a wrongdoer who seeks to escape his wrongdoing on the ground of its failure to comply with every detail of the law under which it was sought to be organized and because the method of its formation could not be recognized by the state as a compliance with the law on the subject. This is a matter with which one who has done it a wrong has no concern. To so hold is not judicial legislation. The court makes nó attempt to create the plaintiff a corporation. The courts, in the interests of justice, will not permit one who ought not to deny the plaintiff’s corporate existence, to do so.
So far as the conduct and purposes of the promoters, the incorporators, or the directors of the Kardo Company, are concerned, every step taken, both by intention ánd by results, was marked by absolute good faith. This is a vital fact. The case has no resemblance to Bank v. Trebein, 59 Ohio St. 316, 52 N. E. 834, in which the formation of the corporation necessarily resulted in fraud of creditors not in the scheme; nor to Andres v. Morgan, 62 Ohio St. 236, 245, 56 N. E. 875, 78 Am. St. Rep. 712, in which it was held that the mere transfer of partnership interests into the same proportional shares of stock in a corporation formed by partners, would be a fraud on creditors of the partnership. Here nobody was injured, or could be injured, by what was done, or by the failure to follow the law in detail. The wrong done, if any, was to.the state, which has not seen fit to interfere.
Nor does the case present facts appropriate for the application of the rale that equity will look through the forms of things to their substance. It is an ancient doctrine, applied in recent years to corporations. The cases are numerous. It will be sufficient to refer to some in the courts of the United States, and in the Supreme Court of Ohio: McCaskill v. United States, 216 U. S. 504, 30 Sup. Ct. 386, 54 L. Ed. 590; B. & O. Tel. Co. v. Interstate Tel. Co., 54 Fed. 50, 4 C. C. A. 184 (C. C. A. 4th Cir.); In re Muncie Pulp Co., 139 Fed. 546, 71 C. C. A. 530 (C. C. A. 2d Cir.); Gay v. Hudson River, etc., Co., 187 Fed. 12, 109 C. C. A. 66 (C. C. A. 2d Cir.); Hunter v. Baker, 190 Fed. 665 (C. C.); Hunnewell v. N. Y. Cent. & H. R. R. Co., 196 Fed. 543 (C. C.); Smith v. Moore, 199 Fed. 689, 118 C. C. A. 127 (C. C. A. 9th Cir.); Volksblatt Co. v. Hoffmeister, 62 Ohio St. 189, 56 N. E. 1033, 48 L. R. A. 732, 78 Am. St. Rep. 707; Andres v. Morgan, 62 Ohio St. 236, 56 N. E. 875, 78 Am. St. Rep. 712; Park-
“The doctrine of corporate entity is not so sacred that a court of equity, looking through forms to the substance of things, may not in a proper case ignore it to preserve the rights of innocent parties or to circumvent fraud.”
To this might be added: In actions to appropriate private property in Ohio under the power of eminent domain, when the existence of the corporation for such purpose is in issue, as in Cemetery Co. v. Traction Co., the court will look through corporate forms to ascertain the real party in interest, when that also- is made an issue in the case; for it would be unjust to invade the right of private property for public use unless the corporation, seeking to exercise the power, had the power and was the real party in interest. To prevent injustice the rule has been applied also in cases in which one corporation is a mere adjunct or agency of another. In re Watertown Paper Co., 169 Fed. 252, 256, 94 C. C. A. 528 (C. C. A. 2d Cir.); In re Muncie Pulp Co., 139 Fed. 546, 548, 71 C. C. A. 530 (C. C. A. 2d Cir.); B. & O. Tel. Co. v. Interstate Tel. Co., 54 Fed. 50, 54, 4 C. C. A. 184 (C. C. A. 4th Cir.); Hunter v. Baker, 190 Fed. 665, 668 (C. C.); In re Rieger, 157 Fed. 609, 613 (C. C.).
It appearing that the three corporations could promote the formation of another corporation; that the purpose of incorporation was legitimate; that proper articles were filed with the Secretary of State; that 10 per cent, of the capital stock was subscribed, and one-tenth of that paid in, and $20,000 more; that the corporation for eight months attempted to license its patents and to protect them had brought this and two other suits; that it had a seal and was equipped to carry on its business; that no wrong has been perpetrated, or sought to be perpetrated, we think the various elements of a corporation de facto arc present, as defined by the courts of the United States. In Tulare Irrigation District v. Shepard, 185 U. S. 1, 13, 22 Sup. Ct. 531, 536 (46 L. Ed. 773), it was said by Mr. Justice Peckham:
“From the authorities, some of which are above cited, it appears that the requisites to constitute a corporation do }aoto are three: (1) A charter or general law under which such a corporation as it purports to be might lawfully he organized; (2) an attempt to organize thereunder; and (3) actual user of the corporate franchise.”
In Toledo, etc., R. Co. v. Continental Trust Co., 95 Fed. 497, 508, 36 C. C. A. 155, 167, it was said by Judge Uurton, speaking for this court,:
*968 “The test of a de facto corporation is this: Was there a law under which there might have been a de jure corporation of the kind, character, and class to which the organization in question apparently belongs? It is the apparent legality of the organization which gives it its de facto character.”
Judge Taft, in Continental Trust Co. v. Toledo, etc., R. Co., 82 Fed. 642, 650 (C. C.), said:
“ * * * it may be safely stated as the rule that when persons assume to act as a body, and are permitted by acquiescence of the public and the state to act, as if they were legally a particular kind of corporation, for the organization, existence, and continuance of which there is express recognition by general law, such body of persons is a corporation de facto, although the particular persons thus exercising the franchise of being a corporation may have been ineligible and incapacitated by the law'to do so.”
The decisions withholding permission from a party other than the state to deny corporate existence and capacity to sue, rest upon different grounds depending upon the nature of- the case. One such ground is estoppel. The cases are numerous. A few illustrations may be taken from decisions of the United States courts. One dealing, or contracting, with a corporation, as such, may not deny its existence (Close v. Glenwood Cemetery, 107 U. S. 466, 2 Sup. Ct. 267, 27 L. Ed. 408; Andes v. Ely, 158 U. S. 312, 322, 15 Sup. Ct. 954, 39 L. Ed. 996; New Orleans, etc., Co. v. Louisiana, 180 U. S. 320, 328, 21 Sup. Ct. 378, 45 L. Ed. 550; Toledo, etc., Co. v. Trust Co., 95 Fed. 497, 507, 36 C. C. A. 155 [C. C. A. 6th Cir.]); a debtor may not (Harris v. Runnels, 12 How. *79, 13 L. Ed. 901); a subscriber to the capital stock may .not (Chubb v. Upton, 95 U. S. 665, 24 L. Ed. 523; Dallas County v. Huidekoper, 154 U. S. 654, 14 Sup. Ct. 1190, 25 L. Ed. 974); but the cases also show that the doctrine does not by any means rest only upon estoppel. The Supreme Court of Ohio in Society Perun v. Hay, 43 Ohio St. 481, 498, 3 N. E. 357, 364, repudiated the claim that when
“The highest considerations of public policy and fair dealing protest against treating such an organization as a nullity and all of its transactions void.”
'Many other decisions are expressly based on “public policy” and “principles of plain justice.” These may undoubtedly blend into each other, if, indeed, estoppel does not also partake of their characteristics. It is difficult to define public policy. It will be sufficient to say that the public policy of a state will be found in the Constitution, statutes, and the decisions of its highest courts. Vidal v. Girrard, Executors, 2 How. 126, 197, 198, 11 L. Ed. 205; Insurance Co. v. Railway, 175 U. S. 91, 100, 20 Sup. Ct. 33, 44 L. Ed. 84; License Tax Cases, 5 Wall. 462, 469, 18 L. Ed. 497.
The courts have declined in innumerable instances to enforce contracts which are against public welfare, as, for instance, contracts in restraint of trade, and contracts contra bonos mores. The common law “prohibits everything which is unjust or contra bonos mores.” Mr. Justice Wayne in Harris v. Runnels, 12 How. *79, *83, 13 L. Ed. 901. That term may be difficult of definition applicable to all cases; but there can be no doubt that when conduct is of such character as to offend the average conscience, as involving injustice according to commonly accepted standards, it is contra bonos mores. This must be true, not only when parties are contractually dealing with each other, but also when a stranger, having wronged a corporation de fa<?to, seeks to escape the penalty invoked in a court of justice by denying the right of such corporation to maintain the suit because of informalities in its organization. To such conduct, a court of justice will not give its sanction, and it is quite immaterial whether the denial is placed on grounds of public policy or upon principles of plain justice, or upon both of these.
We are not, however, left in doubt as to the public policy of the United States on this subject, as declared by the Supreme Court. Baltimore, etc., R. R. Co. v. Fifth Baptist Church, and another case of the same title, 137 U. S. 568, 571, 572, 11 Sup. Ct. 185, 186 (34 L. Ed. 784), were in their nature actions on the case for damages for the continuance of a nuisance to the church’s use and enjoyment of its house of public worship by the noise, smoke, cinders, ashes and vapors from the railroad’s adjoining engine house, repair shops and locomotives, and by the obstruction of access to its building by the railroad’s unlawful use of a sidetrack in front of it. It was held, Mr. Justice Gray speaking for the court—
“that the plaintiff had in good faith legally organized as a corporation and had long acted as such and was at least a corporation de facto, which is all that is necessary to enable It to maintain an action against any one, other than the state, who has contracted with the corporation or who has done it a wrong.”
The case did not rest upon any rule of estoppel, but upon the ground that the defendant was a wrongdoer and as such could not raise the question of the injured party’s corporate capacity.
“And in an action by it (tbe corporation) to recover such property, no private person will be allowed to inquire collaterally into tbe regularity of its organization. Tbis rule is not founded upon any principle of estoppel, as is sometimes assumed, but upon the broader principles of common justice and public policy. It would be unjust and intolerable if, under such circumstances, every interloper and intruder were allowed thus to take advantage of every informality or irregularity of organization.”
In Stockton, etc., Road Co. v. Stockton, etc., Railroad Co., 45 Cal. 680, the defendant was a trespasser. Persse, etc., Works v. Willett, 1 Robertson (24 N. Y. Super. Ct.) 131, was an action for dam- ' ages for conversion. Denver v. Mullen, 7 Colo. 345, 3 Pac. 693, was a suit for injunction against interference with the plaintiff’s water rights. In Turnpike Co. v. Cutler, 6 Vt. *315, *323, an action'on the case for trespass, it was said by Judge Phelps:
“The existence of a corporation de facto is always sufficient for the ordinary purpose of protecting the corporate rights against a stranger.”
A bill» in equity lies againát a stranger seeking to interfere with the property of a de facto corporation. Railroad Co. v. Railway Co., 75 Ill. 113, 117.
The rule was applied to patent cases in Young, etc., Co. v. Young, etc., Co., 72 Fed. 62 (C. C.), a'decision by Judge Acheson, and American Cable Ry. Co. v. Mayor, 68 Fed. 227 (C. C.), the complainants in each claiming to be corporations and seeking to restrain the infringement of a patent, the defendant denying the complainant’s capacity to sue. In the latter case it was said by Judge Wheeler (68 Fed. 228):
“The corporation was organized, and took the title to this patent, which seems to be within the scope of its corporate powers. No proceedings have been taken to terminate it. Under these circumstances, it seems to exist, so far at least as to be able to maintain this suit against wrongdoers for trespassing upon this corporate property.”
The assignment of a patent must be acknowledged before an officer, and, to be valid as against subsequent purchasers or mortgagees for a valuable consideration without notice, must be recorded in the patent
The discussion should not, however, end without reference to Zanesville v. Gaslight Co., 47 Ohio St. 1, 23 N. E. 55, in which the second headnote reads:
“Whenever an incorporated company, in any action, asserts a. right against another person based upon an assumed franchise or power, the person against whom the right is so asserted may, as a defense, deny the existence of such franchise or power.”
The basis of the Gas Company’s action was its assumed power to fix rates. Its special charter was silent on the subject. The power was denied because it was not expressly granted and not necessarily incidental to the exercise of expressed powers. It will be seen at once that the principle underlying the case has no resemblance to the principle here involved. One has to do with the subject ultra vires, and the other with the doctrine of de facto corporations. The Gas Company was a corporation de jure, seeking to exercise powers it did not have. The Kardo Company is a corporation at least de facto-, seeking to exercise powers which it would have if a corporation de jure. There is no similitude between an attempt by a de jure corporation to exercise a corporate franchise it never had, and an attempt by a de facto corporation to protect itself against a wrongdoer when the corporation would be de jure with ample power were it not for irregularities and informalities in its organization. It is said in 4 Thompson on Corporations (1st Ed.) § 5651:
*972 “If a corporation exists de facto * * * then the law will ascribe to it all the powers which it would have possessed if it had been regularly organized. And this will include all those powers which are ascribed, by implication of law, to corporations generally; such as the power to make and take contracts, acquire and transmit property, sue and be sued, etc.”
This principle is illustrated by its application to contractual relations, concerning which it was said by Mr. Justice Gray in Central Transp. Co. v. Pullman’s Car Co., 139 U. S. 24, 60, 11 Sup. Ct. 478, 488 (35 L. Ed. 55):
“When a corporation is acting within the general scope of the powers conferred upon it by the legislature, the corporation, as well as persons contracting with it, may be estopped to deny that it has complied with the legal formalities which are prerequisites to its existence or to its action, because such requisites might in fact have been complied with. But when the contract is beyond the powers conferred upon it by existing laws, neither the corporation, nor the other party to the contract, can be estopped, by assenting to it, or by acting upon it, to show that it was prohibited by those laws.”
i
Corporations acting ultra vires may not defend on that ground against a tort committed by its agents. 5 Thompson on Corporations (1st Ed.) § 5993. And even against such corporations, one whose rights are not injuriously affected will not be permitted to complain. Of such an one it was said by Mr. Justice Matthews, in Railroad v. Ellerman, 105 U. S. 166, 174 (26 L. Ed. 1015):
“The only injury of which he can be heard in a judicial tribunal to complain is the invasion of some legal or equitable right. * * * If he alleges that the railroad company is acting beyond the warrant of the law, the answer is, that a violation of its charter does not of itself injuriously affect any of his rights. The company is not shown to owe him any duty which it has not performed.”
In Zaneszille v. Gaslight Co., since the business of furnishing gas to a city was impressed with a public use, and, therefore, subject to regulation of rates by the city through ordinances to that end, sanctioned by the Legislature, the suit of the Gas Company was an effojrt under power which did not exist to deprive the city of legal rights. Of course, the city could defend against such usurpation of power. The case has no application here.
The conclusion is that this case is not one for the independent inquiry by a trial judge, on his own motion, and without the issues being raised by the pleadings, into the complainant’s corporate capacity, or the reality of its interest, and that, if those issues are made by amendment, the defendant cannot be heard to defend, on those grounds, the Kardo Company’s action for the infringement of its patent.
The decree below will be reversed, at defendant’s costs, and the cause remanded for further proceedings not inconsistent with this opinion.
The same conclusion will be found in Editorial Notes, Columbia Law Review, vol. XV, No. 8, December, 1915, pp. 706, 707, 708.
