| U.S. Cir. Ct. | Apr 21, 1881
Lead Opinion
The present proceeding is two-fold: First, to obtain a rescission of an order made November 18, 1880, by one of the judges of this court at chambers, touching the issue by the Philadelphia & Heading Hailroad Company of $34,000,000 of “deferred bonds;” and, second, to enjoin the issue of such bonds.
Whatever may be the literal import of the order of November 18, 1880, only the significance and effect of an order by consent can be given to it. The petition for it was referred to one of the masters in the cause. ITis report was favorable. All classes of interest supposed to be affected by it were apparently represented and concurring, and it was, therefore, made without argument and as of course. When it was afterwards challenged by tho complainants hero, the circumstances under which it was made were fully explained, and its phraseology was so changed as to exclude any inference of authoritative sanction of the plan referred to. The petition for the revocation of the order must then stand upon the same footing as to merit with the motion for the injunction.
The deferred-bond plan is challenged for the vital reason that the corporation is legally incompetent to institute it. It is notably peculiar in its features. It is a proposition by the corporation that the stock and bondholders shall subscribe
The principle by which we must be guided in answering this question has been so often the subject of judicial recognition that it has grown into an axiom of construction. It is this: That the exercise of powers which are not conferred upon a corporation by express concession or clear implication must be taken as denied to it. It is thus comprehensively stated by Mr. Justice Miller, in Thomas v. The West Jersey R. Co. 101 U. S. 82:
“ We take the general doctrine to be in tills country, though there may be exceptional cases and some authorities to the contrary, that the powers of corporations organized under legislative statutes are such, and such only, as those statutes confer. Conceding the rule applicable to all statutes, that what is fairly implied is as much granted as what is expressed, it remains that the charter of a corporation is the measure of its powers, ■and that the enumeration of these powers implies the exclusion of all others.” •
Whatever power the defendant has in the premises can •only be found in its general authority to borrow money. Neither in the charter of the defendant, nor in the special act which authorizes it to sell bonds, which it may issue below, par, is anything contained to legalize the contested proposition, unless it can be put on the footing of a loan. Has it then this character ? I think plainly not. It does not propose to create the relation of debtor and creditor between . the defendant and the subscribers. The money obtained by the defendant could not be regarded as borrowed, because that implies -re-imbursement, and it is not demandable by the subscribers or payable by the defendant. It has not the essential and distinguishing qualities of a loan. It contem
In one respect, and in one only, does the plan proposed resemble a loan, and that is In the result to be attained. They are both expedients for raising money, hut the method of accomplishing this result is of the essence of the power of the corporation. If its employment has not explicit legal sanction it cannot he made available. If the defendant were offered a rental for its property amply sufficient to relieve it from the burden of embarassment with which it is now struggling, unless it could show that Its legislative creator had endowed it with a right to make a lease, it could not accept such relief. Thomas v. West Jersey R. Co., ante. And, although it has power to acquire real estate for all necessary corporate purposes, no one would maintain that it could lawfully eider into a contract for the purchase of real estate merely to resell and thereby realize large gains. Authority to raise money by borrowing does not imply the use of another and different method of raising it, however well adapted to the end it may be. Even in the prospectus issued by the president of the defendant (Exhibit 1) the proposed issue of “deferred bonds” is not in any aspect treated as a loan, and the system is correctly stated to be new in the United States, and to have been frequently adopted in Great Britain with great benefit to the companies and to subscribers. But we know that in Great Britain this “system” is expressly authorized by statute, and hence it may be assumed that such legislation was deemed necessary to legalize a resort to it. Is
I am, therefore, of opinion that the issue of “deferred bonds, ” as proposed, is without warrant of law, and that the order of November 18, 1880, ought to be revoked and a preliminary injunction granted, and it is so ordered.
Concurrence Opinion
concurring. I propose to consider one only of the several aspects in which this case has been presented. Are the contemplated acts charged in the bill ultra vires— in other words, have the defendants lawful authority to do what is proposed by the “deferred-bond scheme?” As described in the president’s “plan for financial re-organization,” in the directors’ and receivers’ petition to the court, of November, 1880, and in the prospectus subsequently issued, and as illustrated by the sample before us of certificate or bond to be delivered to subscribers, it proposes an issue of $34,300,000 irredeemable income bonds of $50 each, at the price of $15 per bond, with interest at the rate of 6 per cent, on the face value, payable annually out of such surplus earnings as may remain after defraying expenses and affording dividends of 6 per cent, to the common stockholders, with a right to share equally with such stockholders any balance that may remain after 6 per cent, is thus paid. In the language of the president’s London address, of December 23, 1880, it proposes to give—
“To every one who will pay §15 an obligation for the nominal value of §50, wbicli is never to mature—with no liability on the company’s part to pay the principal, and which shall entitle the holder, after the common shares have had a dividend of 6 per cent., to all that is earned up to 6 percent., and thereafter to a further dividend pari passu with the common shares.”
That the defendants have power to borrow money is not questioned, and could not be. The plaintiffs assert, however, that this is not a proposition to borrow money, but a scheme to sell stock. The defendants claim that it is strictly a proposition to borrow—conceding that, if it is not, but virtually
There is no such thing known to commerce or transactions in money as an irredeemable loan in the sense here involved. Governments have issued obligations without provision or stipulation for repayment of the principal borrowed; but such obligations are redeemable at pleasure. Eunning, however, for an indefinite time, with no power in the holder to exact payment, they have come to be regarded as irredeemable, and an investment in them is, therefore, treated and described, not as a loan, but as the purchase of an annuity or stock. Aside, however, from the abstract considerations involved in defining the term borrow or loan, the corporate powers of the defendants to borrow money must be held to apply only to such methods of borrowing as fall within the ordinary sense of the term—as understood by the community, and illustrated in commercial transactions. Applying this test to the proposition here under consideration, it becomes plain that the transaction contemplated is not a loan. The certificate proposed to be issued would vest in the owner a joint interest with the common stockholder in the capital or property of the corporation, an interest purchased witii his money, the earnings of which would, be paid to him in dividends.
In every essential respect, therefore, he would be a stockholder. The circumstance that he could not vote for directors w'ould not change the character of his interest, or the
The original thought and purpose have so far remained in the minds of the projectors, that the annual payments contemplated are still called “dividends,” as appears by the “plan for re-organization,” the directors’ petition to court, the “prospectus, ” and the president’s London address, while the scheme itself is described by them as an “issue of stock,” and called such in the circular (known as Exhibit K,) wherein, it is said, this
“Issue of stock, with suck prospects at §30 per $100, ougkt to produce a large bonus to such shareholders as may desire to sell their allotments, as its prospect of dividends is much better than those of many existing stocks standing.at a higher price.”
The English precedents which appear to have suggested this scheme, were, so far as we have been referred to them, all sales of stock in the usual form. In his London address the president said:
“This scheme is not a new one. Other companies in England have adopted this plan before. Within the last five or six years, according to a statement furnished me, the London, Brighton & Southeast Railway issued £1,500,000 worth of ordinary stock at 45 per cent, of its par value. The Grand Trunk Railway of Canada issued £7,500,000 of ordinary stock at £22 8s. 1 am told that the Manchester, Sheffield & Lincolnshire Company has issued £1,100,000 of ordinary stock at 50 per cent., and therefore we are not the first company to adopt a new scheme, which has been kor- • aided by a good many pepple with a vast amount of ridicule.”
Thus it appears by the statements of the president not
"Note. As stated in tlie opinions in the foregoing ease, such a plan as that proposed ly the “deferred-bond” scheme is entirely new in this country. And 1 have been unable to find any English decisions that would shod much light on the particular question—an act of Parliament expressly authorizing such a scheme. But some of the “ preferred-stock” eases in this country present strong points of analogy. The power of the corporation to create and issue such stock has been sought to be maintained as falling within the borrowing power of tho corporation; tin; plan, in fact, being used for the purpose of raising money. In the case of Kent v. Quicksilver Min. Co., 78 N. Y. 159, the company being in need of funds, the stockholders adopted a by-law providing' that stockholders who should surrender their certificates and pay five dollars on each share of stock should be entitled to the same number of shares of preferred stock, which should bo entitled to 7 per cent, interest, to be paid out of the profits of the company, any surplus thereafter to be divided pro rata, among common and preferred stockholders. The court held that it did not fall within the power to borrow money, and was ultra vires. Folger, says: “ It was not a borrowing. The idea of borrowing is not filled out unless there is in the agreement therefor a promise or understanding; that what is borowed will be repaid or returned.” Page 177. In these transactions, it is not by what name it is called, but what, in fact, the transaction is, that the courts consider. Thus, in Ohio, “ preferred stockholders” have been held to be creditors of the corporation, the transar, tion really being a borrowing of money, rather than tho creation of an additional and preferred capital stock. Bart v. Battle, 31 Ohio St. 116. But in that case tho “stockholder” had not only not tho right of voting,
PRIVATE CORPORATIONS.
I. Definition, Source, and Extent of Powers, etc. An act of a corporation is described as being ult/ra vires when it is beyond the chartered powers of the corporation. A corporation derives. all its power from its charter, and possesses only such powers as are thereby expressly or impliedly given. Many authorities hold that the charters of corporations are to be construed strictly against the corporation, and that consequently by implied powers are meant only such as are necessarily incident to those expressly granted. Huntington v. Savings Bank, 96 U.S. 388" court="SCOTUS" date_filed="1878-04-15" href="https://app.midpage.ai/document/huntington-v-savings-bank-89719?utm_source=webapp" opinion_id="89719">96 U. S. 388, 393: Bradley v. N. Y., etc.,R. Co. 21 Conn. 306; Pa. R. Co. v. Canal Com’rs, 21 Pa. St. 22; Field, Corps. § 248. For a full discussion of the subject, see Potter on Corps. § 31 et seq. Where the charter fixes the amount of the capital stock and the number of shares, the amount cannot be increased or the number changed except in the manner expressty authorized by the charter, subsequent law accepted by the stockholders, or articles of association. Railway Co. v. Allerton, 18 Wall. 233" court="SCOTUS" date_filed="1874-03-18" href="https://app.midpage.ai/document/railway-company-v-allerton-88806?utm_source=webapp" opinion_id="88806">18 Wall. 233; N. Y., etc., R. Co. v. Schuyler, 34 N.Y. 30" court="NY" date_filed="1865-06-05" href="https://app.midpage.ai/document/ny-nhrr-co-v--schuyler-3585346?utm_source=webapp" opinion_id="3585346">34 N. Y. 30; Salem, etc., Corp. v. Ropes, 6 Pick. 23; Green’s Brice’s Ultra Vir. (2d Ed.) 158, note a. Contra, Belmont v. Erie R. Co. 52 Barb. (N. Y.) 637; but see this case criticised, Jones, Rail. Secur. § 97. Nor can the character of the stock be changed, as by creating a preferred stock, without express authority therefor. Kent v. Quicksilver Min. Co. 78 N.Y. 159" court="NY" date_filed="1879-09-16" href="https://app.midpage.ai/document/kent-v--quicksilver-mining-co-3630095?utm_source=webapp" opinion_id="3630095">78 N. Y. 159; Green’s Brice’s Ultra Vires, (2d Ed.) 164, and note a. Yet, if all the stockholders assented to such change, it will be supported in favor of one who has acted thereon in good faith. Kent v. Quicksilver Min. Co., supra. But, to accomplish the purposes of its creation, the corporation, by implication, has, to a large extent, the powers that an individual would have in the same position. Thompson v. Lambert, 44 Iowa, 239" court="Iowa" date_filed="1876-10-03" href="https://app.midpage.ai/document/thompson-v-lambert-7097023?utm_source=webapp" opinion_id="7097023">44 Iowa, 239, 244; Field, Corp. § 271. For example, the power to borrow money, and give the usual obligations therefor, is an acknowledged incident of a private corporation. Field, Corp. 249, 271; Green’s Brice’s Ultra Vires, (2d Ed.) 213. n. (a,) 223, note a, and cases cited.
II. Ille&ality Are contracts merely ultra vires illegal ? The earlier English cases certainly so held. East Anglian Ry. Co. v. Eastern Co.’s Ry. Co. 11 C. B. 775; McGregor v. Deal, etc., R. Co. 18 Q. B. 618; see, also, Leake, Contracts, 582 et seq.; 5 Am. Law Rev. 272, 282, article by O. W. Holmes, Jr.; Green’s Brice’s Ultra Yires, (2d Ed.) 39 et seq. In the view taken by these decisions, corporate charters were encroachments upon public right, and it was public policy to keep them strictly within the limits prescribed by the organic law; the law impliedly prohibiting acts beyond them. Consequently every act exceeding such limits violated such public policy and implied prohibition, and was illegal and void. As to such contracts, there could be no ratification or estoppel. Id.; Leake, •Contracts, 602. These views were at first accepted in this country, ana the earlier cases rest on that basis. In an article in the Central Law
III. Executory Contracts. As to ultra vires ‘contracts, which are wholly unexecuted, or those as to which the parties can he placed in statu quo, the plea of want of power is always available. The right of a stockholder, or, under certain circumstances, of a creditor, (as in the principal case,) to restrain the corporation or its officers from doing acts and entering into contracts ultra vires, is fully established. Dodge v. Woolsey, 18 How
IV. Apparent Power. Where the question of authority depends, not merely upon the provision of law authorizing the contract, but also on extraneous facts, the corporation will be estopped to plead ultra, vires as against a person without notice that the exercise was for a purpose, with an intent, or under circumstances unauthorized. Miners’ Ditch Co. v. Zellerbach, 37 Cal. 543" court="Cal." date_filed="1869-07-01" href="https://app.midpage.ai/document/miners-ditch-co-v-zellerbach-5436916?utm_source=webapp" opinion_id="5436916">37 Cal. 543, 686-7, 595; Bigelow, Estoppel, 423; Potts, Corp. § 549; 2 Kent, 300, Holmes’ note; Ossipee etc., Co. v. Canney, 54 N. H. 295, 325-6. Thus, when a corporation has power under any circumstances to issue negotiable securities, the title of a bona fide holder of such paper is no more liable to he impeached than that of any other commercial paper. Gelpcke v. City of Dubuque, 1 Wall. 175" court="SCOTUS" date_filed="1864-01-11" href="https://app.midpage.ai/document/gelpcke-v-dubuque-87567?utm_source=webapp" opinion_id="87567">1 Wall. 175; Town of Coloma v. Eaves, 92 U.S. 484" court="SCOTUS" date_filed="1876-03-27" href="https://app.midpage.ai/document/town-of-coloma-v-eaves-89301?utm_source=webapp" opinion_id="89301">92 U. S. 484; Monument Nat. Bank v. Globe Works, 101 Mass. 57" court="Mass." date_filed="1869-01-15" href="https://app.midpage.ai/document/monument-national-bank-v-globe-works-6415595?utm_source=webapp" opinion_id="6415595">101 Mass. 57; Mad., etc.,R Co. v. Norwich, 24 Ind. 457" court="Ind." date_filed="1865-05-15" href="https://app.midpage.ai/document/madison--indianapolis-railroad-v-norwich-saving-society-7036907?utm_source=webapp" opinion_id="7036907">24 Ind. 457; Field, Corp. § 270; Jones, Rail. Secur. §§ 287'. 295.
V. Estoppel. As has been seen, a contract is not illegal simply because' it exceeds the powers of the corporation. Is the corporation, then, absolutely incapable of doing an act which transcends its powers? Theoretically, yes; practically, no. The well-settled liability for torts, and in cases of apparent power, is inconsistent with the idea that it is. See article on Ultra Vires by G. H. Wald, Esq., in 6 Cent. Law Jour. 2; Selden, J., in Bissell v. Railway Cos. 22 N. Y. 282-3. And it would seem to be established by the more recent decisions that, where a contract has in good faith been fully performed either' by the corporation or the other party, the one who has received the benefit will not be permitted to resist the enforcement of the contract by the plea of mere want of power. Oil Creek, etc., R. Co. v. Pa. Transp. Co. 83 Pa. St. 160; State Bd. of Agric, v. Citizens’ St. Ry. Co. 47 Ind. 407; Whitney Arms Co. v. Barlow, 63 N.Y. 62" court="NY" date_filed="1875-10-08" href="https://app.midpage.ai/document/whitney-arms-co-v--barlow-3615741?utm_source=webapp" opinion_id="3615741">63 N. Y. 62; Kent v. Quicksilver Min. Co. 78 N.Y. 159" court="NY" date_filed="1879-09-16" href="https://app.midpage.ai/document/kent-v--quicksilver-mining-co-3630095?utm_source=webapp" opinion_id="3630095">78 N. Y. 159 ; Newburg Pet. Co. v. Weave, 27 Ohio St. 343, 353-4; Chester Glass Co. v. Dewey, 16 Mass. 94" court="Mass." date_filed="1819-09-15" href="https://app.midpage.ai/document/chester-glass-co-v-dewey-6404847?utm_source=webapp" opinion_id="6404847">16 Mass. 94, 102; Gold Min. Co. v. Nat. Bank, 96 U.S. 640" court="SCOTUS" date_filed="1878-01-21" href="https://app.midpage.ai/document/gold-mining-co-v-national-bank-89750?utm_source=webapp" opinion_id="89750">96 U. S. 640; Nat. Bank v. Matthews, 98 U.S. 621" court="SCOTUS" date_filed="1879-01-27" href="https://app.midpage.ai/document/national-bank-v-matthews-89906?utm_source=webapp" opinion_id="89906">98 U. S. 621; Darst v. Gale, 83 Ill. 136" court="Ill." date_filed="1876-09-15" href="https://app.midpage.ai/document/darst-v-gale-6959127?utm_source=webapp" opinion_id="6959127">83 Ill. 136; Lawrence, C. J., in Bradley v. Ballard, 55 Ill. 417; Cozart v. Ga. R. Co. 54 Ga. 379" court="Ga." date_filed="1875-01-15" href="https://app.midpage.ai/document/cozart-v-georgia-railroad--banking-co-5557522?utm_source=webapp" opinion_id="5557522">54 Ga. 379; A. & P. Tel. Co. v. Union, etc., Ry. Co. 1 Fed. Rep. 745; Field, Corp. § 273; Sedgwick, Stat. & Const. Law, (1st Ed.) 90; and cases cited in Green’s Brice’s Ultra Vires, (2d Ed.) 729, note a; and 12 Cent. Law Jour. 389. Contra, older cases—Hood v. N. Y., etc., R. Co. 22 Conn. 502" court="Conn." date_filed="1852-07-15" href="https://app.midpage.ai/document/hood-v-new-york--new-haven-railroad-6576667?utm_source=webapp" opinion_id="6576667">22 Conn. 502; [but see Converse v. Norwich, etc., R. Co. 33 Conn. 166" court="Conn." date_filed="1865-11-15" href="https://app.midpage.ai/document/converse-v-norwich--new-york-transportation-co-6578392?utm_source=webapp" opinion_id="6578392">33 Conn. 166, 180;] Pa., etc., Co. v. Dandridge, 8 Gill & J. 248; Downing v. Mt. Wash., etc., Co. 42 N. H. 230; Bank of Chillicothe v. Swayne, 8 Ohio, 527; [but see 29 Ohio St. 330" court="Ohio" date_filed="1876-12-15" href="https://app.midpage.ai/document/hays-v-galion-gas-light--coal-co-6753174?utm_source=webapp" opinion_id="6753174">29 Ohio St. 330; Id. 341; 27 Ohio. St. 343.] As to what wili constitute assent and acquiescence on part of stockholders, see Jones, Rail. Secur. § 356; Cozart v. Ga. Ry. Co. 54 Ga. 379" court="Ga." date_filed="1875-01-15" href="https://app.midpage.ai/document/cozart-v-georgia-railroad--banking-co-5557522?utm_source=webapp" opinion_id="5557522">54 Ga. 379; Kent v. Quicksilver Min. Co. 78 N.Y. 159" court="NY" date_filed="1879-09-16" href="https://app.midpage.ai/document/kent-v--quicksilver-mining-co-3630095?utm_source=webapp" opinion_id="3630095">78 N. Y. 159.
VI. Torts. Corporations are liable for their torts in the same manner and to the same extent that individuals are liable under like circumstances. Merchants’ Nat. v. State Bank, 10 Wall. 604" court="SCOTUS" date_filed="1871-01-30" href="https://app.midpage.ai/document/merchants-bank-v-state-bank-88298?utm_source=webapp" opinion_id="88298">10 Wall. 604; Nat. Bank v.