Madison & Indianapolis Railroad v. Norwich Saving Society

| Ind. | May 15, 1865

Lead Opinion

Gregory, J.

Suit by the appellee against the appellant, on the guaranty of the latter of the payment of certain bonds executed by the Martinsville & Franklin Railroad Company, payable to the Madison & Indianapolis Railroad Company, or assigns, at the Merchants’ Bank, in the city of New York, and by the latter railway company assigned to Winslow, Lanier & Co. The bonds were put upon the market, in the city of New York, by Winslow, Lanier & Co., the agents of the payee, by a circular, in which it was represented that the appellant was the owner of the bonds; that the same had been issued to her by the maker, to pay a certain indebtedness of the latter to the former. The appellee is the holder, in good faith, of the bonds and guaranty sued on.

William N. Jackson, on the trial, testified that “he was the secretary of the appellant on the 1st of May, 1852; was such secretary from 1844 to 1853. That the appellant had agreed to indorse the bonds of the Martinsville Company; that the first order was for $25,000, but was increased to $30,000; that the bonds were for the purpose of preparing the Martinsville Road for the iron. The bonds were not issued to, nor indorsed by, the appellant for any indebtedness due from the Martinsville Company; there was no such indebtedness; nor in consideration of iron sold by the Madison Road to the Martinsville Road, hut to give them credit, that the latter might raise money upon them to prepare the road for the iron. The inducement to the Madison Road to indorse the bonds was to get business from the Martinsville Road when completed; this business was expected by the intersection at Franklin. Winslow, Lanier $• Co., were stockholders in the Madison Company, and one of them was a director in the road; thinks it was Winslow. When the bonds were sold, the Madison Company was notified, and the money passed through the office of that road, and Mr. Parks received it as the president of the Martinsville Company. The bonds sold for $85 on the $100. Parks, as president of the Martinsville Company, borrowed money of the Madison Company in advance, which was repaid out of the proceeds of the sale of the bonds. The bonds sold for about $25,000, and the whole proceeds were paid over to Parks, part before, and part after the sale of the bonds. No interest was paid to the Madison Company on advances. The following advances were made in 1850: $5,000, $3,000, $3,000, $2,500 and $2,000. This was in the months of May, June-, August and October, 1850, and in January, 1851. Between that time and September, 1853, the Martinsville Company received $2,500, $1,000, $1,376, with smaller sums making up the amount of sales of the bonds. Thinks that no stock of the Martinsville Company was transferred to the Madison Company. He ceased to be secretary of the Madison Company about June 1st, 1853, and previous to his leaving he thinks no payment in money or bonds was made by the Martinsville Company to the Madison Company, for iron furnished by the latter to the former. The first shipment that was received upon the Martinsville Road was in December, 1853, and the iron had been laid in the summer of 1853.

“ S. S. Gillett was treasurer of the Madison Road. The agreement for running the Martinsville Road by the Madison Road was made after the sale of the bonds, and was in 1853. The records of the appellant are at Madison.

“ I-Iis impression is that Winslow, Lanier Co., notified the Madison-Company as the sales of the bonds were made, and said company then paid to the Martinsville Company the amount, and sometimes paid in advance. The Madison Company transacted its business in New York through Winslow, Lanier § Co.,-and had large business transactions with them. The indorsement of the bonds by the Madison Company was printed with the bonds, but the signature of Mr. Brough was written, and witness’ signature as secretary was written; the date was also written, and the seal was impressed.

“The Madison Company was selling its own bonds at Winslow, Lanier g- Co.’s about the same time; and previous to 1852, they had sold for the Madison Road, perhaps, $600,000 of bonds, or perhaps more. In 1852, the Madison Company had good credit in New York. The Martinsville Company was almost unknown in New York, and could not have had much credit.

“When he signed the indorsement of the bonds, he handed them to the president or treasurer of the Madison Company, but he supposes he handed them to the treasurer, and does not know whether Mr. Parks had them or not.”

It is contended that the charter of the Madison Company did' not empower it to make accommodation paper, and that the construction of the Franklin Road was a purpose foreign to the objects for which the former company was incorporated, and that therefore the bonds and guaranty were issued without authority by the appellant, and are therefore void, even in the hands of an innocent bona fide holder.

The bonds and guaranty were legal on their face. It is within the corporate power of the appellant to sell and guarantee bonds held in the usual course of business. The court -below, sitting as. a jury, had a right, from the evidence, to find that the Madison Company was the holder of the bonds; that it had advanced money thereon to the maker, which was to he reimbursed out of the money arising from the sale thereof.

In the case of Stoney v. The American Life Insurance Company, 11 Paige’s Ch. Rep. 635, it was held by Chancellor Walworth, that “ the negotiable security of a corporation, which upon its face appears to have been duly issued by such corporation, and in conformity with the provisions of its charter, is valid in the hands of a Iona fide holder thereof without notice, although such security was, in fact, issued for a purpose, and at a place, not authorized by the charter of the company, and in violation of the laws of the state where it was actually issued.” In the case of The Farmers’ and Mechanics’ Bank v. The Butchers and Drovers’ Bank, 16 New York Rep. 125, Selden, J., after citing this and two other cases, says: “I have no hesitation in concurring with these learned judges in the principle thus asserted, and am not aware that a contrary opinion has ever been judicially expressed. A citizen who deals directly with a corporation, or who takes its negotiable paper, is presumed to know the extent of its corporate power. But when the paper is, upon its face, in all respects such as the corporation has authority to issue, and its only defect consists in some extrinsic fact, such as the purpose or object for which it was issued, to hold that the person taking the paper must inquire as to such extraneous fact, of the existence of which he is in no way apprized, would obviously conflict with the whole policy of the law in regard to negotiable paper.”

In the case of Smead et al. v. The Indianapolis, Pittsburgh & Cleveland Railroad Company, 11 Ind. 104" court="Ind." date_filed="1858-11-23" href="https://app.midpage.ai/document/smead-v-indianapolis-pittsburgh--cleveland-railroad-7033892?utm_source=webapp" opinion_id="7033892">11 Ind. 104, this court attempted to draw a distinction between paper executed beyond the power, and that executed within the power of the corporation, but by an abuse of the power in that particular instance. After a careful review of all authorities on the question, it is difficult to sustain such a distinction on any sound principle of law or reason, when applied to commercial paper, legal on its face, and when the lack of power must be soughtin extrinsic facts. It is clear, where the paper, on its. face, shows the want of power, that it will be void in the hands of the assignee, for there cannot be an innocent holder of such paper.

The. general principle, we think, fairly deducible .from the authorities, is this; the.general agent of a corporation, clothed with a certain power by the charter, or the lawful act. of the-corporation, may .use that ¡ power for an unauthorized,, or even a prohibited, purpose, in his dealings with an innocent third party, and yet render the corporation liable for his acts.

The judgment is affirmed, with 1 per cent, damages, and costs.

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Rehearing

A petition for a rehearing: having.been filed, the following opinion, overruling the petition, was delivered by

Frazer, J.

In an earnest petition for a rehearing, the appellant insists .that the. bonds bore evidence upon their face that they were being sold for the benefit of the Martinsville. Company, and that the Madison Company had no interest in them,:and was therefore, a .mere accommodation-indorser and,guarantor, .and,that this fact, patent upon the bonds, was notice.to.every, holder. The matter which it is .urged -was sufficient to give this notice, consists of a certificate by the trustee, Mr. Lanier, .and an. order of the board of directors of the Martinsville Company,, printed on the face of ¡each bond, to-wit:

.CERTIFICATE.

“ I, James F. D. Lanier, trustee, do hereby certify that the Martinsville-§ Franklin Railroad Company have.conveyed to me, by deed bearing date the .28th day of April, 1851, their road from Martinsville, to. Franklin,.about twenty-five miles, with its income and franchises, and ¡all the property, rights tand privileges, of the company pertaining thereto,.in. trust ■.for the-useand .benefit of the holders .of their obligations, issued and to be issued; that is to say, the sum of $30,000 dollars on the 1st day of May, 1851, and not exceeding the sum of $50,000, and only so much thereof as may be requisite to be issued, from time to time, after the 1st day of May, 1851, as the same may be necessary to make payment for iron purchased for said road. The first class of said bonds to be redeemable May 1st, 1861, and the latter class redeemable November 1st, 1863, as by reference to said deed of trust, which I have caused to be recorded in the several counties in, or through, which said railroad is located, will more fully and at large appear. I further certify that this bond is one of the obligations issued under said deed. J. E. D. Lanier, Trustee.

New York, May 1st, 1851.”

OEDEE.

“At a regular meeting of the Board of Directors of the Martinsville § Franklin Railroad Company, in the town of Martinsville, county of Morgan, state of Indiana, on Monday, the 7th day of April, 1851, it was ordered by the board: That the president of the board be, and he is hereby, authorized to effect a loan, or otherwise raise a sufficient sum of money, say $35,000, to defray the expenses of putting the superstructure on this road, by the sale of the bonds of this company, the principal of the bonds to be made payable in ten years from date, drawing interest at the rate of seven per cent, per annum; and that he be authorized to purchase or procure the iron necessary for the road, on the best possible terms; also, that he be empowered to execute, or cause to be executed, a mortgage on the road, to secure the payment of the price of the iron aforesaid, and the principal and interest of the said bonds; and that he fix the time of paying the principal of the price of the iron at twelve years, and the rate of interest on the price of the same at a rate not to exceed seven per cent, per annum.”

We cannot perceive how all this can fairly be held sufficient to impart to the holder of the bonds notice that the Madison Company was but an accommodation guarantor. What does appear by the face of the bonds, taken altogether? 1. That the directors of the Martinsville Company authorized the issue of bonds, not exceeding $35,000, to obtain money to put the superstructure on its road; such bonds to be payable in ten years from date. 2. That these bonds were issued under that authority. • 3. That they were payable to the Madison Company, or assigns. 4. That the latter company, a year afterward, indorsed them, and guaranteed their payment. Then it otherwise appears that the latter company afterward pretended to own them; had them in its possession; put them on the market, sold them, and received the proceeds. Thus they were put in circulation with not a circumstance appearing on their face, or extrinsically, suggestive of a doubt that the Madison Company owned the bonds and was selling them on its own account. We find it difficult to imagine any course of conduct possible to have been pursued, which would have been likely to be more effectual in creating a belief among capitalists that the bonds were owned by that company. By assigning them, the company covenanted that they were its property. It is not graceful to deny this now, after parties have been induced to part with their money in consequence of their reliance upon this fact.

If the bonds had been payable to bearer, then the guaranty would have implied little or nothing as to the fact of ownership by the appellant, and would have had little tendency to mislead as to a fact upon the existence of which the power to make the guaranty depended, and, in that case, the question would have been a different one. Every person taking the bonds in suit was bound, it is true, to take notice of the limits of the power of the corporation which had guaranteed the paper. But whether the bonds in question had been received by the company in the course of its lawful business, or whether the company had no Ownership or interest in them, was a question of fact, and not of law. ¡ To hold that, in this ease, the purchaser of the bonds, pos-, sessing as they do the attributes of commercial paper, > must, at his peril, ascertain these extrinsic facts, would be j so utterly at variance with the well settled and just princi-i pies of law relating to such paper, and would, if made a precedent, be fraught with such incalculable mischiefs to public and private interests, that we are not disposed to', take the step. It is not entirely certain that its evil consequences would not be quite as adverse to the interests of railroad corporations, as to those of the community at large.

T. A. Hendricks and O. B. Hord, for appellant. J. S. Newman, H. C. Newcomb and J. 8. Tarkington, for appellee.

The petition for a rehearing is overruled.