fy r. i- ! Law Library Cornell Law School THE GIFT OF Cornelt University Library KF 1384.A7B96 Cases on the law of private corporations 3 1924 019 205 644 Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924019205644 CASES ON THE LAW OF PEIVATE COEPOEATIONS CASES ON THE LAW OF PRIVATE CORPORATIONS SELECTED AND SUPPLEMENTED WITH NOTES DANIEL FREDERICK JURNETT M.S. (Ktttgeeb), J.D. (N.Y.U.) PSOFESSOK OF LAW, NEW YORK UNIVERSITY BOSTON LITTLE, BROWN. AND COMPANY 1917 ^ is- 3^1 Copyright, 1917, By Little, Brown, and Comi?ant. All rights reserved Set up and electrotyped by J. S. Gushing Co., Norwood, Mass., U.S.A. Presswork by S. J. Parkhill & Co., Boston, Mass., U.S.A. 25 1938 PREFACE. The Law of Corporations is not elementary. It belongs to the school of applied, rather than pure science. For, as Professor Wilgus said, it " cuts across nearly the whole body of the Law." This does not mean, however, that its intricate problems may be solved by mere or successive appHcations of the principles of Contract, Agency, Property, Persons, Torts, and the like. True, the courts have made such principles do effective service so far as consonant with the cor- porate concept, but from the conflict of basic individual rights with the relative rights of the many, inherent in such concept, there has been and is being evolved a hving body of corporate law, — a prod- uct distinct from its ingredients, a chemical as distinguished from physical combination, a symphony rather than a solo. And the swelhng volume of statutory modification is best read and interpreted in the light of this organic law. The student's grasp of this law is best attained inductively. Car- dinal principles must be developed, weighed, and harmonized in the class-room. The text is arranged for that purpose. The notes are principally designed to assist the student in prepa- ration for the class-room discussion, — to marshal what has gone before and indicate developments that have ensued^— to present the material for such discussion, for which, experience shows, bare refer- ence does not suffice. In some instances, the notes bridge over and tie in to the principal cases, those situations and their law which are beyond the compass of a single volume and the time normally allotted to this subject. In all instances, they aim to mobihze the referred points as parts of an organic whole. In no instance, are they designed to relieve the student from doing his own thinking and rendering his own appraisement. If, perchance, they stimulate, intensify, and broaden, discussion, their end will be subserved. Keen and, sympathetic appreciation of the labors of those who have preceded the editor in this field is heartily subscribed. It is hoped the present work will prove of service to other students in VI PREFACE. their understanding of the Law of Corporations and their solution of problems yet to come, of which our present studies are but the precursor. D. F. B. New York University, Feb. 1, 1917. TABLE OF CONTENTS. * PAQE Table of Cases Reported xi Table of Cases Cited . xv BOOK I. THE NATURE OF A CORPORATION. CHAPTER I. THE CORPORATION VIEWED AS A SANCTIONED ENTITY 1 CHAPTER II. THE CORPORATION VIEWED AS A PERSON ... 23 CHAPTER III. THE CORPORATION VIEWED AS A COLLECTION OP IN- DIVIDUALS .... 51 CHAPTER IV. THE CORPORATION VIEWED AS A FRANCHISE . . 73 BOOK II. THE CHARTER OF A CORPORATION. CHAPTER I. ITS ACQUISITION DE JURE. Section 1. By Special Act . '. 86 Section 2. By General Enabling Acts 91 Vni TABLE OF CONTENTS. CHAPTER II. PAOB ITS ACQUISITION DB FACTO 103 CHAPTER III. THE CHARTER — AS A MEASURE OF CORPORATE POWERS 141 CHAPTER IV. THE CHARTER — AS A CONTRACT BETWEEN THE STOCKHOLDERS . .166 CHAPTER V. THE CHARTER — AS A CONTRACT BETWEEN STATE AND CORPORATION. ' Section 1. The General Rule 184 Section 2. The Modifications 194 BOOK III. THE POWERS OF A CORPORATION. CHAPTER I. PARTICULAR POWERS. Section 1. To contract 214 Section 2. To acquire and alienate property 227 Section 3. To acquire its own or other shares 265 CHAPTER II. ULTRA VIRES TRANSACTIONS. Section 1. Contracts 285 Section 2. Property 33g Section 3. Torts . 34g Section 4. Crimes 353 BOOK IV. THE INTERNAL MECHANISM OF A CORPORATION. CHAPTER I. ORGANIZATION. Section li. Promotion 359 Section 2. Subscriptions to stock 374 Section 3. Capital and Capital Stock 401 TABLE OF CONTENTS. IX' CHAPTER II. BY-LAWS. PAOB Section 1. Requisites and Validity 418 Section 2. Scope and Operation 426 CHAPTER III. DIRECTORS AND OFFICERS. Section 1. Office and Qualification 430 Section 2. Powers 455 Section 3. Rights 466 Section 4. Disqualification 469 Section 5. Liabilities 507 CHAPTER IV. SHAREHOLDERS. Section 1. Meetings, Votes and Transactions 523 Section 2. Inspection of corporation's books and records . . . 537 Section 3. Di^ddends 544 Section 4. Participation in issues of new stock 661 Section 5. Transfer of stock 569 Section 6. Preferred stockholders 598 Section 7. Actions by stockholder in his own right and in the right of the corporation 615 Section 8. Voting Trusts 657 BOOK V. RIGHTS OF CREDITORS OF A CORPORATION. CHAPTER I. AS AGAINST THE CORPORATION 666 CHAPTER II. AS AGAINST DIRECTORS 681 CHAPTER III. AS AGAINST STOCKHOLDERS ....... 699 X TABLE OF CONTENTS. BOOK VI. DISSOLUTION AND REORGa'nIZATION OF A CORPORATION. CHAPTER I. PAGE DISSOLUTION — ITS CAUSES, MEANS AND EFFECT . . 742 CHAPTER II. REORGANIZATION, CONSOLIDATION AND MERGER OF CORPORATIONS 772 INDEX 799 TABLE OF CASES REPORTED. PAQB American Malt Corp. v. Board of Public Utility Commissioners, 86 N. J. L. 668 81 American Smelting & Refining Co. v. Colorado, 204 U. S. 104 ... 190 American Soda Fountain Co. v. Stolzenbaeh, 75 N. J. L. 721 .... 38 Ashbury Railway Carriage & Iron Co. v. Riche, L. R. 7 H. L. 653 . . 285 Ashley v. Ryan, 153 U. S. 436 73 Astton V. Burbank, 2 Dillon 435 . . . ■ 166 Bangor Eleetrie Light & Power Co. v. Robinson, 52 Fed. 520 . . . 580 Bank v. Trebein, 59 Ohio State 316 51 Bassett v. United States Cast Iron Pipe & Foundry Co., 75 N. J. Eq. 539 613 Bath Gas Light Co. v. Claffy, 151 N. Y. 24 317 Beck V. Pennsylvania R. R. Co., 63 N. J. L. 232 224 Beveridge v. New York Elevated Railroad Co., 112 N. Y. 1 . . . . 455 Boston & Albany R. R. Co. v. Richardson, 135 Mass. 473 583 Boston Glass Manufactory v. Langdbn, 24 Pick. 49 742 Bradbury v. Boston Canoe Club, 153 Mass. 77 147 Bradley w. Reppell, 133 Mo. 545 763 Brindley v. Walker, 221 Pa. 287 433 Broadway Bank v. McEhath, 13 N. J. Eq. 24 687 Browne v. Koenig, 118 N. Y. Supp. 136 532 Bryant's Pond Steam Mill Co. v. Felt, 87 Me. 234 381 Butler V. Broadway Savings Institution, 171 A. D. 682 428 Button V. Hoffman, 61 Wis. 20 24 Cassidy v. Uhlmann, 170 N. Y. 505 681 Central Transportation Co. v. Pullman's Palace Car Co., 139 U. S. 24 . 303 Chapman v. Ironclad Rheostat Co., 62 N. J. L. 498 . , 265 Consohdated Traction Co. v. Bast Orange, 61 N. J. L. 202 .... 198 Continental Securities Co. v. Belmont, 206 N. Y. 7 634 Cottentin v. Meyer, 80 N. J. L. 52 117 Curtin v. Salmon River HydrauUc Gold Mining &c. Co., 130 Cal. 345 458 Cushman v. Thayer Manufacturing Jewelry Co., 76 N. Y. 365 . . . 56ft Daniel v. North Jersey St. Ry. Co., 64 N. J. L. 603 424 Deaderick v. Wilson, 67 Tenn. 108 496 Downing v. Mt. Washington Road Co., 40 N. H. 230 149 Duncomb v. New York &c. R. R. Co., 84 N. Y. 190 490 Dunphy v. Travelers' Newspaper Association, 146 Mass. 495 .... 622 East Birmingham Land Co. v. Dennis, 85 Ala. 565 572 Easton National Bank v. American Brick and Tile Co., 70 N. J. Eq. 732 718 Eaton V. Walker, 76 Mich. 579 129> Edwards v. Warren &c. Gasohne Works, 168 Mass. 564 IS XU TABLE OF CASES EEPOKTED. PAGE Bllerman v. Chicago Junction Railways &'c. Co., 49 N. J. Eq. 217 . . 152 Equitable Life Assurance Society v. Union Pacific R. R. Co., 212 N. Y. 360 607 Pietsam v. Hay, 122 111. 293 ••. 83 Finnegan v. Noerenberg, 52 Minn. 239 103 Fitzpatrick w. McGregor, 133 Ga. 332 . ' 266 Flint V. Pierce, 99 Mass. 68 426 Fort Wayne Electric Corp. v. Franklin Electric Light Co., 57 N. J. Eq. 7 677 Franklin Bridge Co. v. Wood, 14 Ga. 80 91 Eraser v. Selfridge, 62 Cal. 331 96 Galbraith v. McDonald, 123 Minn. 208 374 Gallagher B.-Germania Brewing Co., 53 Minn. 214 27 George Ringler & Co., Matter of, 204 N. Y. 30 440 Gooeh V. MoGee, 83 N. C. 59 666 Goodnow v. American Writing Paper Co., 73 N. J. Eq. 692 .... 407 Greene v. Middlesborough Town &e. Co., 121 Ky. 355 214 Greenwood a. Union Freight R. R. Co., 105 U. S. 13 201 H. Remington & Son Pulp & Paper Co. v. Caswell, 126 A. D. 142 . . 323 Harvey v. Linville Improvement Co., 118 N. C. 693 667 Hawes v. Oakland, 104 U. S. 450 627 Hoadley v. County Commissioners, 105 Mass. 519 11 Hodge V. United States Steel Corp. 64 N. J. Eq. Ill 650 Hogue V. American Steel Foundries, 247 Pa. 12 654 HoUins V. Brierfield Coal & Iron Co., 150 U. S. 371 670 ■ Holmes & Griggs Mfg. Co. v. Holmes & Wessell Metal Co., 127 N. Y. 252 271 Home of the Friendless v. Rouse, 8 Wall. 430 184 Hospes V. Northwestern Mfg. & Car Co., 48 Minn. 174 710 Hubbard v. Worcester Art Museum, 194 Mass. 280 339 Hun V. Gary, 82 N. Y. 65 517 Huntington v. Attrill, 146 U. S. 667 690 Hyatt V. AUen, 56 N. Y. 563 544 Irvine v. New York Edison Co., 207 N. Y. 425 775 Jackson v. Hooper, 76 N. J. Eq. 592 29 Jackson's Administrators v. Newark Plank Road Co., 31 N. J. L. 277 547 Jacksonville &c. Railway & Navigation Co. v. Hooper, 160 U. S. 614 . 217 Jones V. Dodge, 97 Ark. 248 ? . . 385 Katz J). H. & H. Mfg. Co., 109 A. D. 49 420 Kean v. Union Water Co., 52 N. J. Eq. 813 450 Kerfoot v. Farmers' and Merchants' Bank, 218 U. S. 281 336 Knickerbocker Importation Co. v. State Board of Assessors, 74 N. J. L. 683 411 Koehler w. St. Mary's Brewing Co., 228 Pa. 648 . • 257 Euser v. Wright, 62 N. J. Eq. 825 436 Lancaster v. Amsterdam Improvement Co., 140 N. Y. 576 .... 239 Leeds Estate, Building and Investment Co. v. Shepherd, L. R. 36 Ch. Div. 787 512 Liverpool Insurance Co. v. Massachusetts, 10 Wall. 566 5 Lloyd V. Pennsylvania Electric Vehicle Co., 75 N. J. Eq. 263 . . . 698 Long V. Georgia Pacific Ry. Co., 91 Ala. 619 292 Luthy V. Ream, 270 111. 170 659 McCarter a. Firemen's Ins. Co., 74 N. J. Eq. 372 327 McDonald v. Dewey, 202 U. S. 610 " 730 McDonald v. Williams, 174 U. S. 397 725 TABLE OP CASES REPORTED. XIU McLaran v. Crescent Planing Mill Co., 117 Mo. App. 40 McNeil V. Tenth National Bank, 46 N. Y. 325 ... Miners' Ditch Co. v. Zellerbach, 37 Cal. 543 ... . Mokelumne &c. Co. v. Woodbury, 14 Cal. 425 . . . Monument National Bank v. Globe Works, 101 Mass. 67 Morrill v. Little Falls Mfg. Co., 53 Minn.- 371 .... Morrison v. American Snuff Co., 79 Miss. 330 . . . ■ . Moulin V. Trenton &e. Ins. Co., 25 N. J. L. 57 ... 550 575 249 100 295 523 780 45 National Home Building and Loan Association v. Home Savings Bank, 181 m. 35 299 Newcomb v. Reed, 12 Allen 362 89 New York & Westchester Town Site Co., Matter of, 145 A. D. 623 . 396 New York Central & H. R. R. R. Co. v. United States, 212 U. S. 481 353 Nicholson v. Franldin Brewing Co., 82 Ohio St. 94 593 Niles V. New York Central & H. R. R. R. Co., 176 N. Y. 119 .. . 617 Nugent V. The Supervisors, 19 Wall. 241 175 Old Dominion Copper Mining &c. Co. v. Lewisohn, 210 U. S. 206 . . 365 OUver V. Ohver, 118 Ga. 362 . ; . 501 Pearson !). Concord Raihoad Corp., 62 N. H. 537 472 People V. Montecito Water Co., 97 Cal. 276 97 People V. North River Sugar Refining Co., 121 N. Y. 582 787 People V. Pullman's Palace Car Co., 175 111. 125 227 People ex rel. Browne v. Koenig, 118 N. Y. Supp. 136 532 People ex rel. Fraser v. Selfridge, 52 Cal. 331 96 People ex rel. Union Trust Co. v. Coleman, 126 N. Y. 433 401 People ex rel. Winchester v. Coleman, 133 N. Y. 279 13 People's Bank v. St. Anthony's R. C. Church, 109 N. Y. 512 . . . . 459 PolUtz V. Gould, 202 N. Y. 11 645 Pond V. Framingham & Lowell R. R. Co., 130 Mass. 194 669 Remington & Son Pulp & Paper Co. v. Caswell, 126 A. D. 142 .. . 323 Res PubUca Humana, In re, 55 N. Y. L. J. 1312 1 Riker & Son Co. v. United Drug Co., 79 N. J. Eq. 580 772 Ringler, George & Co., Matter of, 204 N. Y. 30 440 Ripin V. U. S. Woven Label Co., 205 N. Y. 442 180 Roberts Mfg. Co. !). Schlick, 62 Minn. 332 j ... 137 Rosenbaum v. United States Credit System Co., 61 N. J. L. 543 . . 759 RusseU V. Henry C. Patterson Co., 232 Pa. 113 484 St. Lawrence Steamboat Co., Matter of, 44 N. J. L. 529 525 San Diego &o. R. Co. v. Pacific Beach Co., 112 Cal. 53 480 Santa Clara Mining Ass'n v. Meredith, 49 Md. 389 466 Sawyer v. Hoag, 17 Wall. 610 703 Schwab V. Potter Co., 194 N. Y. 409 , 277 Seymour v. Spring Forest Cemetery Association, 144 N. Y. 333 . . . 493 Shayne v. Evening Post PubUshing Co., 168 N. Y. 70 754 Silk Manufacturing Co. v. Campbell, 27 N. J. L. 539 615 Snider's Sons Co. v. Troy, 91 Ala. 224 106 Snyder v. Studebaker, 19 Ind. 462 114 Society for Savings v. Coite, 6 Wall. 594 78 Society Perun v. Cleveland, 43 Ohio 481 120 Southwestern Telegraph & Telephone Co. v. Long, 183 S. W. 421 . . 346 Spering's Appeal, 71 Pa. 11 507 State V. Creamery Package Mfg. Co., 115 Minn. 207 767 State ti. Dawson, 16 Ind. 40 86 Stephens v. Fox, 83 N. Y. 313 699 Sternberg v. Brock, 225 Pa. 279 605 Stevens v. Rutland &c. R. R. Co., 29 Vt. 545 167 Stewart v. Lehigh Valley R. R. Co., 38 N. J. L. 505 469 XlV TABLE OF CASES REPORTED. PAGB Stokes V. Continental Trust Co., 186 N. Y. 285 561 Stone V. Mississippi, 101 U. S. 814 194 Taylor v. Griswold, 14 N. J. L. 222 418 Thomas v. Dakin, 22 Wendell 9 2 Thomas «. International Silver Co., 72 N. J. Eq. 224 534 Thomas v. West Jersey R. R., 101 U. S. 71 141 Thornton v: Marginal Freight Ry. Co., 123 Mass. 32 750 Timmis, /to re, 200 N. Y. 177 261 Union Trust Co. v. Coleman, 126 N. Y. 433 401 United States v. Lehigh Valley R. R. Co:, 220 U. S. 257 65 United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 . 55 United States Brewing Co. v. Dolese & Shepard Co., 259 111. 274 . . 235 Upton V. Englehart, 3 DiUon 496 389 Van HummeU v. International Guarantee Co., 23 West. L. Rep. 248 . 359 Van Tuyl v. Schwab, 158 N. Y. Supp. 1133 702 Vardeman v. Penn Mutual Life Ins. Co., 125 Ga. 117 430 Varney v. Baker, 194 Mass. 239 537 Vicksburg &c. Telephone Co. v. Citizens' Telephone Co., 79 Miss. 341 784 Weir V. Dawson, 16 Ind. 40 86 White V. Kineaid, 149 N. C. 415 746 White V. Manter, 109 Me. 408 540 Whittenton Mills v. Upton, 10 Gray 582 220 WilUam B. Riker & Son Co. v. United Drug Co., 79 N. J. Eq. 580 . . 772 WiUiams v. Western Union Telegraph Co., 93 N. Y. 162 556 Williamson v. Smoot, 7 Martin 406 23 Willoughby v. Chicago Junction Railways &c. Co., 50 N. J. Eq. 656 . 640 Winchester v. Coleman, 133 N. Y. 279 13 TABLE OF CASES CITED. PAGE A. A. Griffing Iron Co., Matter of 422,435 Abbott V. Ameriean &e. Rubber. Co 254,255 Ackerman v. Halsey .... 511 Acorn Mfg. Co. v. Rutenberg . 60 Alexander v. Donohoe . . . 644 Alexander v. Searcy . . 274, 645 AUeghany Co. v. AUen . 243, 290 Allegheny v, Pittsburgh, A. & M. &c. Co 560 Allison V. Corker 133 Allman v. Havana &o. R. R. Co. 397 Althouse V. Cobaugh Colliery Co 466 Ambrose Lake Tin Co., /n re . 375 American Case &c. Co. v. Gris- wold 244 American Live Stock &c. Co. v. Chicago live Stock Exchange 427 American Malt Corp. v. Board of P. U. Com'rs .... 93, 774 American Mortgage Co. v. Ten- nille 339 American Railway-IYog Co. v. Haven 432, 535 American Smelting &c. Co. i). Colorado 242 American Soda Fountain Co. v. Stolzenbach 61, 431 American Trust Co. v. Minne- sota Co 117 American Tube Works v-. Boston Machine Co 417 American Typefounders Co. v. Conner . 243 Andrews v. Mines Corpora- tion 544, 657 Andrews Bros. Co. v. Youngs- town Coke Co. ..... 21 Anglo-American Land &c. Co. V. Dyer 397 Anthony v. American Glucose Co 34 FAOB Anthony v. Jeffress .... 522 Appleton V. American Malting Co 644, 646 Archer v. Hesse 569 Ardmore State Bank v. Mason 570 Argus Printing Co., Re 444, 530, 531 Arthur v. Griswold 365 Ashbury v. Watson .... 615 Ashbury Ry. &c. Co. v. Riche 95, 419 Ashley v. Ryan ... 44, 243, 795 Ashton V. Burbank . . . 129, 389 Aspinwall v. Butler .... 567 Athol Music &c. Co. v. Carey . 382 Attorney-General v. Bound Brook R. R. Co 86 Attorney-General v. Central R. R. Co 328 Attorney-General v. Raiboad Companies 329 Attorney-General v. Tudor Ice Co. 329 Audenried v. East Coast Mill- ing Co 461 Austin V. Buffalo Electric Ve- hicle Co 583 Automatic &c. Filter &c. Co. v. Cunninghame 459 Avon Springs &c. Co. v. KeUogg 383 Avon Springs &o. Co. v. Weed . 382 Babcock v. Farwell . . 646, 648 Bacon v. Robertson .... 752 Bagdon v. P. & R. Coal & Iron Co 49, 50, 245 Bagley v. Carthage, Watertown &c. R. R. Co 467 Bagley v. Reno Oil Co. . . . 524 Bagshaw v. Eastern &c. Ry. Co. 623 Bahia & San Francisco Ry., In re • 684 Bailey v. Master Plumbers . . 419 Baldwin v. Canfleld .... 461 Baltimore City &c. Ry. Co. v. Hambleton 378 XVI TABLE OF CASES CITED. PAGE Baltimore Co. v. Church . . . 117 Banet v. Alton &c. R. R. Co. 170, 389 Bank v. Deveaux 44 Bank v. Trebein 257 Bank of Atchison County v. Durfee 595 Bank of Augusta v. Earle . . 246 Bank of California v. San Fran- cisco 95 Bank of Columbia v. Patterson 226 Bank of Commerce v. Tennessee 189 Bank of Holly Springs v. Pin- son . . . . . . . 422, 428 Bank of Middlebury v. Rutland &6. R. Co 461 Bank of Mississippi v. Duncan 757 Bank of Toledo v. International Bank 240 Bank of U. S. v. Dandridge . . 88 Bankers Trust Co. v. Dietz Co. 560 Barber v. Stromberg &c. Mfg. Co 428 Bardstown &c. R. R. Co. v. Metcalfe 147 Barnes v. Spencer &c. Co. . . 690 Barrett v. King 596 Barrow S. S. Co. v. Kane . . 50 Bartholomew v. Bentley . 292, 444 Bartlett v. Drew 700 Bassett v. Fairchild .... 467 Bassett v. Lawrence .... 417 Bassett v. United States Cast Iron Pipe &e. Co 559 Batchelder &c. Co. v. Knopf . 244 Bates V. Coronado Beach Co. . 224 Bath Gas Light Co. v. Claffy 132, 311 Bawden v. Taylor 501 Bawknight v. Ins. Co. ... 50 Beard v. Beard 656 Beatty v. Northwest Transpor- tation Co 489 Beaty v. Johnston 403 Beer Company v. Massachu- setts 196 Belfast &c. R. R. Co. v, City of Belfast 410, 614 BeU Telephone Co. o. Galen HaUCo 244 Benbow v. Cook 524 Bennett v. Keene 463 •Bentlif v. London &c. Finance Corp. 49 Berea College v. Kentucky . . 213 Bergdorf, Matter of . . . . 786 Berger v. U. S. Steel Corpora- tion 266 Bergeron v. Hobbs . . 105, 111, 118 Best Brewing Co. v. Klassen . 217 Bigelow V. Bigelow 665 Bigelow V. Old Dominion Cop- per &c. Co 366, 377 Binghamton Bridge Co., In re . 185 FAQS Bird Coal &c. Co. v. Humes . 470 Bissell V. Michigan &c. R. R. Co 296, 298, 314 Blake v. HoUey 117 Blake v. McClung ..... 43 Blanchard v. Prudential Ins. Co. 560 Bloede Co. v. Bloede .... 595 Bloxam v. Metropolitan Ry. Co. 653 Board of Commissioners of Tip- pecanoe Co. V. Reynolds . . 501 Board of Education v. Berry . 117 Board of Education v. Dupar- quet 590 Boardman v. Lake Shore & M. S. Ry. Co. . 547, 560, 605, 616 Boardman v. Mansfield . . . 550 Bogert V. Southern Pac. Co. . 774 Boldenweok v. Bullis . . . . 648 Bonaparte v. Baltimore, Hamp- den &c. R. R 88 Bond V. Mt. Hope Iron Co. . 570 Booth V. Robinson . . . 274, 478 Booth V. Wonderly 118 Boston & Albany R. R. Co. v. Richardson 572 Boston & Lowell R. R. v. Salem &e. R. R 208 Bostwick V. Chapman . . . 664 Boswell V. Security Mut. Life Ins. Co 205 Boucker Contracting Co. v. W. H. Callahan &c. Co. ... 680 Bowden v. Johnson .... 731 Bowditch V. Jackson Co. . 659, 760 Bowdon Lime Works v. Moss . 493 Bowman Dairy Co. v. Mooney 293, 321 Bradley v. BaUard 316 Bradley v. ReppeU 745 Braintree Water &c. Co. v. Braintree 90, 596 Brand v. Auto Service Co., . . 669 Breslin v. Fries-BresUn Co. . . 377 Brewer v. Boston Theatre . . 623 Brewster v. Van Liew .... 570 Bridgers v. First National Bank 659 Bridges V. Bank 595 Briggs V. Spaulding . . 511, 516 Bright V. Lord 547 Brightman v. Bates .... 659 Brindley v. Walker .... 457 Brinkley v. Hambleton . . . 741 British Seamless &c. Box Co., In re 375 Britton V. American Press Ass'n 543 Broadwell v. Merritt .... 745 Brock V. Poor 746 Brockway Mfg. Co., iJe ... . 690 Brooklyn Gravel Road Co. v. Slaughter 463 Brooklyn, Winfleld &c. R. R. Co., Re 101 TABLE OF CASES CITED. XVll FAOB Brooks V. State 532 Brown v. Pacific Mail Steamship Co 659 Brown v. Winnisimmet Co. . . 148 Brown v. Wyandotte &o. Co. . 101 Browne v. Koenig 699 Brundred v. Rice 118 Buckeye Marble &c. Co. v. Harvey 274, 315 Buckler v. Black 493 Bucks Stove &c. Co. v. Vickers 243 Buell V, Buekinghani . . 471, 472 Buffalo &c. R. R. Co. v. Dudley 172, 212 Building & Loan Association &e. V. Chamberlin .... 132 Bull V. International Power Co 464, 680 Burland v. Earle 644 BurraU v. Bushwiek R. R. Co. . 402, 604, 708 Bturill V. Nahant Bank . . . 465 Burroughs v. North Carolina R. R. Co 547 Burt V. Battle .... 603, 604 Butler V. Standard Mil^s: &c. Co. 656 Butler Paper Co. v. Cleveland . 90 Butler University v. Scoonover 379 Button V. Hoffman .... 789 Bynum v. Scott 516 California Bank v. Kennedy . 314 Camden & Amboy R. R. Co. v. Mays Landing &c. R. R. Co 132, 321 Camden Interstate Ry. Co. v. Lee 256 Camden Rolling Mill Co. v. ' Swede Iron Co 49 Camden Safe Deposit &c. Co. V. Citizens &e. Storage Co. . 326 Cammack v. Levy 389 Cammeyer w. United German Churches 461 Campbell v. Merchants &c. Ins. Co. ... 429 Canadian Improvement Co. v. Lea 636 Canal Commissioners v. Sani- tary District 90 Cape May Navigation Co., Re 530 Capps V. Hastings Prospecting Co 129 Carnegie Trust Co. v. Security Life Ins. Co 659 Carpenter v. Danforth . . . 501 Cartwright v. Dickinson . . . 389 Carus V. Matthiesen .... 524 Carver v. Southern &c. Steel Co 653 Cary v. State 438 Case V. Kelly .... 293, 338 Case V. Steele Coal Co. . . . 352 FAQB Casper Vt Kalt-Zimmers Mfg. Co 444 Cass V. Realty Securities Co. . 611, 603, 604 Cassidy v. Uhlmann . . 461, 465 Central Bridge Corporation v. City of Lowell 208 Central of Ga. R. Co. v. Union Springs &c. Co 444 Central R. R. Co. v. CoUins . 273 Central R. R. &6. Co. v. Georgia 795 Central Transportation Co. v. Pullman's &e. Car Co. . . 254, 793 Chamberlain v. Trogden . . . 393 Chandler v. Hart 439 Chapman v. Barney .... 21 Chapman v. Iron Clad &c. Co. 268 Charles River , Bridge Co. v. Warren Bridge Co 185 Charlestown &c. Shoe Co. v. Dunsmore 459 Charlotte &c. Nat. Bank v. Na- tional Exchange Bank . . . 275 Charter Gas Engine Co. v. Charter 524 Chavelle v. Washington Trust Co 461 Cheeney v. Lafayette &c. R. R. Co 467 Chemical National Bank v. Col- well ...... 445, 698, 732 Chemical National Bank u. Havermale 314 Chenango Bridge Co. v. Bing- hamton Bridge Co. .... 185 Cheraw & Chester R. R. Co. v. White 101 Chetlain v. Republic Life Ins. Co 389 Chicago' &c. Cab Co. v. Yerkes 625 Chicago &c. R. R. Co. v. Heidenreich .... 132, 795 Chicago &o. R. R. Co. t. Mar- seilles 268 Chicago &c. R. R. Co. v. Mul- ford 224 Chicago City R. R. C6. v. Allerton 419, 456 Chick V. Fuller 516 Child V. New York &c. R. R. Co 774 Childs V. White . . . 365, 620, 690 Chilson V. Cavanagh . . . . 721 Christensen v. Eno . . 701, 708 Chiiroh V. Swetland .... 774 Citizens' B. L. & S. Ass'n v. Coriell 511 Citizens' Central &e. Bank v. Appleton 316 City of Detroit v. Detroit &c. Plank Road Co. . . . 195, 210 City of St. Louis v. Shields . . 118 Clapp V. Peterson 268 XVlll TABLE OF CASES CITED. PAGE Clark V. Bever 714 Clark ». Sigourney 665 Clark V. Wild 524 Clarke v. American Cannel Coal Co 117, 132 Clearwater &o. Bank v. Bagley &c. Tel. Co 147 Clevenger v. Moore .... 701 Clews V. Friedman 590 Cluthe V. EvansviUe &e. R. R. Co 101 Cockburn v. Union Bank of Louisiana " . 539 Cohen v. Big Stone &c. Co. . . 536 Cole V. Adams 721 Cole V. Millerton Iron Co. 255, 256 Cole V. Wells .... 638, 640 Colgate ». U. S. Leather Co. 489, 774 Collins V. Hoffman 470 Colorado & S. Ry. Co. v. People 194 Combes v. Keyes 745 Commercial Nat. Bank v. Wein- hard ., 455 Commonwealth v. Dalzell 530, 536 Commonwealth v. Detwiller 435, 532 Commonwealth v. Erie &o. R. R. Co 185 Commonwealth v. Illinois Cen- tral R. R. Co 357 Commonwealth v. Phoenix Iron Co. 538 Commonwealth v. Pulaski County &e. Assn 357 Commonwealth v. Smith . . 147 Commonwealth v. Tradesmen's Trust Co 678 Commonwealth v. Worcester . 425 Commonwealth of Virginia v. West Virginia 403 Commonwealth Trust Co. v. Seltzer 505 Cone V. Russell 662 Conley v. Mathieson &c. Works 49, 375 Connecticut &c. R. R. Co. v. . Bailey , 400 Conner v. Todd 680 Continental &c. Co. Ltd. v. Daimler Co. Ltd. .... 26 Continental Ins. Co. v. New York &o. R. R. Co. ... 484 Continental Securities Co. v. Belmont 455, 456, 460, 648, 792 Converse v. United Shoe Ma- chinery Co. ... 623, 630, 642 Cooper V. Spring VaUey Water Co 571 Cooper Mfg. Co. v. Ferguson . 242 Copeland v. United Shoe Ma- chinery Co 774 Coppin V. Greenlees & Ransom Co 268, 270 Coulter V. Robertson .... 757 County of San Mateo v. S. P. Ry. Co 43, 75, 210, 243 Courtright V. Deeds .... 378 Covington Drawbridge Co. v. Shepherd 669 Cox V. Stokes 774 Crafford v. Supervisors ... 43 Cratty v. Peoria &e. Library Ass'n 616 Cravens v. Eagle Cotton Mills 389 Crawford v. Roney .... 411 Creveling v. Fritts 475 Crichton v. Webb Press Co. . 560 Crowell V. Jackson 501 Crutcher v. Kentucky .... 243 Culver V. Reno 616 Cumberland Trust Co. v. B. S. Ayars &o. Co. ..... 463 Cunningham v. German Ins. Bank 460 Cunningham v. Spokane Hy- draulic Co 50 Cunningham's Appeal . . . 567 Curtin v. Salmon River &c. Co 461,471 Curtis V. Leavitt 148 Cushman v. Cloverland Coal &c. Co 463 Dalsheimer v. Graphic Arts Co. 256 Dana v. Morgan 644 D'Arcy v. Tamar, &c. By. Co 461 Darst ». Gale 316 Dartmouth College v. Wood- ward 185, 197, 207 Davenport v. Dows David Lupton's Sons Automobile Club, &c. Davis V. Las Ovas Co. Davis V. Old Colony &c, Co Delaware & Hudson Canal Co, Mahlenbrock Co. B. B 642 243 378 22a 242 Delaware & Hudson Co. v. Al- bany & Susq. R. R. Co. 627, 634 Den V. De Hart 25& Denham, Jn re 511 Denver Fire Ins. Co. v. McClel- land 295, 297, 321 Derrickson v. Smith .... 698- De Ruvigne's Case .... 444 Detroit &e. R. R. Co. v. Camp- bell 128 Dock V. Schliehter Jute &c. Co 555 Doctor V. Harrington . . 627, 634 Dodge V. PsTolusite Manganese Co 670 Dodge V. Woolsey 623 Dolbear v. Wilkinson .... 524 Dominion Fertilizer Co. v. White 243 TABLE OF CASES CITED. XIX PAGE Donald v. American Sijielting &e. Co 721 Donovan v. Purtell .... 292 Dooley v. Gladiator &e. Mines &e. Co . . . 570 Dorris V. Sweeney 129 Doty V. American T. & T. Co. 95 Dovey v. Cory 515 Downey v. Finueane .... 365 Driscoll V. West Bradley &c. Co. 595 Duke V. Markham 461 Duke V. Taylor .... 117, 524 Dunbar v. American Tel. &c. Co. 274 Dunphy v. Traveler's News- paper Ass'n 464 Durfee v. Old Colony &o. R. R. Co 168, 172, 211, 213 Dwight ». Phelps 105 E. L. Moore & Co. v. Murchi- son 516 Earle v. American Sugar Refin- ing Co 536 East Anglian Ry. Co. v. Eastern &e. Ry. Co 292 East Hartford &o. Co. v. Hart- ford Bridge Co. ..... 197 East Norway &c. Church v. Froislie 116 Eastman v. Parkinson . . . 147 Easton Nat. Bank v. American Brick &c. Co 701 Eaton V. Manter 543 Eaton V. Walker 115 Eddleman v. Union &e. Co. . . 128 Edgerly v. Emerson .... 461 Edgeworth v. Wood .... 11 Edwards v. Warren &c. Works 44, 795 Eichner v. Bowery Bank . . . 352 Einstein v. Raritan Woolen MiUs 179 Elkins V. Camden & Atlantic R. R. Co 600 Ellerman v. Chicago Junction Rys. Co. . . 217, 329, 457, 640 Elyton Land Co. v. Dowdell . 260 Empire Life Ins. Co. v. Brown . 396 Empire State Trust Co. v. Trustees 678 Empress Engineering Co., In re 363 Endicott v. Marvel . ."- 493, 646 Equitable Life &c. Society v. Pennsylvania 244 Equitable Life &c. Society v. Union Pacific R. R. Co. . . 412 Erlanger v. New Sombrero Phos- phate Co 372 European &c. Ry. Co. v. Poor . 470 EvansviUe Pubfic Hall Co. v. Bank of Commerce .... 493 Everitt V. Farmers & Mer- chants Bank 590 Excelsior &c. Co. v. Pierce . . 411 Exchange Nat. Bank v. Capps . 118 Ezzard v. State National Bank 256 Farmers & Merchants Ins. Co. V. Needles 118 Farmers Loan &c. Co. v. N. Y. «&c. R. R. Co. ... 274, 275 Farmers' &c. Bank &c. v. Downey 470 Farmers' Bank &c. v. Smith , . 364 Faulds V. Yates 659 Faxon Co. v. Lovett Co. . . . 244 Fay V. Noble 137 Fear v. Bartlett 395 Fechheimer v. Nat. Exchange Bank 596 Fechheimer Fishel Co., In re . 604 Fensky v. Maryland Casualty Co 352 Fernschild v. Yuengling Brewing Co 774 Fidehty Trust Co. v. Louisville Gas Co 147 Field V. Lamson &c. Mfg. Co. . 550 Fietsam v. Hay .... 669, 793 Finley &o. Leather Co. v. Kurtz 461 Finn v. Brown ... . . 516 First National Bank v. Chris- topher 461 First National Bank v. Price . 698 Fisher v. Bush 659 Fitzgerald &e. Const. Co. v. Fitzgerald . '. 467 Fitzpatrick v. McGregor . 389, 706 Flaucher v. Camden . . 133, 134 Fleming v. Black &c. Copper Co 627 Flostroy v. Wm. B. Corby Coal Co 590 Flynn v. Brooklyn City R. R. Co 456, 624 Fogg V. Blair 403, 715 Ford V. East Hampton &c. Co. 552 Forest of Dean Coal Min. Co., In re 511 Forrest v. Manchester &c. Ry. Co .... 595 Fort Payne &c. Mill v'. Hill '. '. 471 Foss V. Harbottle .... 623, 630 Foster v. Essex Bank .... 753 Fox V. Horah 767 Franklin Bank v. Commercial Bank 273, 570, 792 FrankUn Bridge Co. v. Young Franklin Co. v. Lewiston Insti tution for Savings . Frashella v. Taylor Freeland v. Ins. Co. Freeman v. Auld . . Freeman v. Cooke . . Freon v. Carriage Co. . Fulgam V. Macon &c. R. R. Co 81 273 583 132 325 585 571 379 XX TABLE OF CASES CITED. Galena v. Corwith 147 Gallagher v. Asphalt' Co. . . . 677, 678, 680, 708 Gallagher v. Germania Brewing Co 789 Gamble v. Queens &c. Water Co. 147, 457, 490, 624, 625, 750 Gardner v. Kleinke .... 255 Garmany v. Lawton .... 460 Gaul V. Kiel & Arthe Co. . . 243 General Rubber Co. v. Benedict 621 George Ringler & Co., Matter of 452, 531, 794 Georgia &c. R. R. Co. v. Mer- cantile Trust Co. . . 117, 132 Gerhard v. Walsh 617 Germania Nat. Bank v. Case . 275 Germantown Passenger &c. Co. V. Fitler 400 Gibbons v. Anderson .... 515 Gillette v. Chicago Title &c. Co. 721 Gleason v. Earles 669 Gleason v. McKay 13 Glidden v. ChamberUn . . . 118 Gluckstein v. Barnes . . . . 373 Godley v. Crandall & Godley Co 466, 640 Gold Co., In re 376 Goldey v. Morning News . . 49 Gooeh V. McQee 793 Goodbody v. Delaney .... 644 Goodnow V. American Writing Paper Co 546 Goodwin v. N. Y. &c. R. R. . 44, 61, 774 Gould V. Town of Oneonta . . 379 Gould Copper Mining Co. v. Walker 479, 484 Gow V. Collin &c. Lumber Co. 118 Graham v. R. R. Co. . 256, 712, 726 Grant v. Cananea &c. Copper Co. . 49 Gray v. Graham 590 Gray v. Portland Bank ... 420 Grays v. Turnpike Co. ... 90 Great Luxembourg Ry. Co. v. Magnay 624 Great So. Fire Proof Hotel Co. V. Jones 21 Great Western &e. Co. v. Burn- ham 396 Green v. Bissell . . . 667, 560, 661 Greene v. Middlesborough Town &c. Co 162, 794 Greene v. Nash .... 669, 665 Greenfield Savings Bank v. Abercrombie 517 Greenfield Savings Bank v. Simons 517 Greenwood v. Union Freight R. R. Co. .... . 186, 254, 744 Grenell v. Detroit Gas Co. . . 256 Gress v. Knight 396 Griffing Irou Co., Matter of A. A. 422, 435 Griggs V. Day ...... 403 Groel V. United Eleetrie Co. . 634 Guokert v. Hacke . . . . 95, 113 Guilford v. Western Union Tel. Co 570, 572, 656 Gummaer v. Cripple Creek Tun- nel &c. Co 471, 524 Guthrie v. Harkness .... 639 H. Remington & Son &c. Co. v. Caswell 646 Hackett v. Multnomah Ry. Co. 224 Hale V. Mechanics &c. Ins. Co. 428 HaU V. Merrill Trust Co. . . 666 Hallenborg v. Cobre &c. Copper Co 164 Hall's Safe Co. v. Herring-Hall- Marvin Safe Co. 34, 292, 431, 690 Halsey v. McLean 698 Hammond v. Edison. Illuminat- ing Co. &c 667 Hampton v. Clinton &e. Co. . 128 Handley v. Stutz . . 709, 715, 717 Hankins v. NeweU 527 Harding v. American Glucose Co 254, 255, 261 Harris, Appeal of 403 Harris v. Independence Gas Co. 293, 321, 338 Harris v. Muskingum Mfg. Co. 741 Harrison v. Alabama Midland R. R. Co. . 226 Harrison v. Armour .... 721 Harrod v. Hamer 102 Harvey v. Linville Improve- ment Co 527 Hassehnan v. U. S. Mortgage Co 117 Hastings, Matter of ... . 530 Haston v. Castner 255 Hatch V. Dana . . . 396, 700, 703 Hauser v. Tate 516 Havemeyer v. Havemeyer . . 669 Haverland v. Lane . . . 601, 605 Hawes v. Oakland 627 Hawkins v. Fidelity & Casualty Co 50 Hayden v. Williams . . 725, 729 Hayes v. Bums 454 Hayward v. Leeson .... 377 Hazard v. Wight 708 Hazeltine v. Belfast &e. R. R. Co 615 Heard v. Talbot ...... 101, 744 Hearst v. Putnam Mining Co. . 644 Heath v. Barmore 767 Heaton's Estate, In re ... 561 Hechelman v. Geyer .... 569 Henning v. Planters Ins. Co. . 49 Henry v. Babcock & Wilcox Co. 643 Henry v. R. R. Co 396 TABLE OP CASES CITED. XXI PAGE Herron Co. v. Shaw .... 720 Heublein v. Wight 490 Hibbs V. Brown . . ; . . 18, 794 Hibernia Ins. Co. v. Transporta- tion Co 257 Hicks, Matter of 256 Higgins V. Illinois Trust &c. Bank 721 Hill V. Atlantic &c. R. R. Co. . 645 Hill V. Beach 118 HiU V. Murphy 517 Hill t). Nisbet 274 Hill V. Pine River Bank ... 570 HiU V. Town 524 Hillyer v. Overman &c. Mining Co 461 Hilson Co. V. State Board of As- sessors 603, 604 Hinkley v. Sac Oil &c. Co. . . 396 Hodge V. New England Screw Co 274, 517 Hodge V. U. S. Steel Corp. 543, 595 Hodgens v. United Copper Co. 544 Hogue II. American Steel Foun- dries . 457, 774 Hoisting Machinery Co. v. Goel- ler Iron Works . . . . . 463 Holbrook v. New Jersey Zinc Co. 584 Holoombe v. Trenton White City Co 461, 464, 721 HoUins V. Brierfield Coal & Iron Co 709,726 Holmes v. Doe Run Lead Co. . 543 Holmes, Ex parte 535 Holmes &c. Mfg. Co. v. Holmes &c. Metal Co. . . 256, 293, 412 Hooker v. Midland Steel Co. . 601 Hoopes V. Basic Company . . 442 Hopper V. Sage 547 Hoppin V. Buffum 530 Horbach v. Tyrrell 431 Hornblower v. Crandall . . . 365 Horton v. Davis 326 Howard v. Turner 394 Howland v. Com 489 Hoyt V. Thompson's Bxr. . . 465 Huber v. Martin 117 Huffaker v. Krieger's Assignee . 467 Hughes V. Antietam Mfg. Co. . 397 Huguenot Mills !;.Jempson& Co. 224 Hun V. Cary 517 Hundley v. Hewitt . . . 389, 680 Hunt V. O'Shea 553 Hunter v. Roberts &c. Co. . . 614 Hurd V. N. Y. &c. Laundry Co 256, 781 Hutchinson v. Green .... 469 Huylar v. Cragin Cattle Co. . 639 Hyatt ». McMahon .... 210 lauch V. de Socarras .... 709 Illinois Central B. R. Co. v. Adams . . 634 PAOB ImperiaJ Bldg. Co. v. Chicago &c. Board of Trade .... 119 Imperial &c. Hotel Co. v. Hampson 435 Indiana Bond Co. v. Ogle . 95, 117 Indianapohs Furnace &c. Co. v. Herkimer ......; 129 Industrial &c. Trust v. Todd . 774 Insurance Co. v. Keyser . 429, 459 International Text Book Co. v. Pigg 243 Inter-Ocean Pub. Co. v. Asso- ciated Press 419 Ireland v. Globe Milling &c. Co. 595 Irvine v. N. Y. Edison Co., . . 256 Island Heights &c. Co. v. Brooks & Brooks Corp 283 J. L. White Furnace Co. v. C. W. MiUer Transfer Co 244 Jackson v. Hooper . . . 330, 656 Jackson v. Meek . . '. . . 741 Jackson v. Stackhouse . . . 417 Jackson's Admrs. v. NewarTs Plank Road Co. . . 560, 570, 620 Jacobs V. WilUams 690 Jacquith v. Mason 605 Janney v. Minneapolis Indus- trial Exposition . . . 470, 493 Jassoy Co., Matter of 701 Jay Gould v. Town of Oneonta 379 Jermain v. Lake Shore & M. S. Ry. Co 647 Jersey City Gaslight Co. v. Con- sumers' Gas Co 745 John V. Farmers' &c. Bank . . 118 John V. Farwell Co. v. Wolf . Ill Johnson v. Albany &c. R. R. Co 379 Johnson v. Langdon .... 643 Johnson v. Northern Trust Co. 117 Johnson v. Smith .... 64, 137 Johnson v. Trade Ins. Co. . . 50 Johnston v. Laflin . . . 679, 732 Jones V. Aspen Hardware Co . 102, 117 Jones V. Bank of Tenn. . . . 118 Jones V. Concord &c. R. R. Co 569, 612 Jones V. Green 530 Jones V. WilUams 465 Jones, Matter of 18 Jorguson v. Apex Gold Mines . 410 Joseph ScMitz Brewing Co. v. Ester 243 Joslyn V. St. Paul DistilUng Co. 686 Junction R. Co. v. Reeve . . 461 Just V. Idaho Canal &c. Co. . 646 Kadish v. Garden City Building Ass'n J . . . 316 Kardo Co. v. Adams .... 387 Kean v. Johnson 212 xxu TABLE OF CASES CITED. PAGE Keller v. Eureka Brick &c. Co. 570 Kelner v. Baxter 363 Kendall v. American &c. Loom Co. . . 49 Kenosha &c. R. R. Co: v. Marsh 389 Kent V. Quicksilver Mining Co. 419 Kenton Furnace Co. v. McAlpin 530 Keokuk &c. Ry. Co. v. Missouri 795 Keyes v. Smith 117 Kharas v. Barron C. Collier, Inc 352 Kilpatrick v. Penrose &c. Bridge Co 466 KimbaU v. St. Louis &e. Ry. . 656 Kimball v. Union Water Co. . 571 King V. Paterson &c. Ry. Co. . 553 Kinnan v. Forty-second St. &c. R. R. Co. . . . . . . . 570 Kintrea's Case 731 Klaus, In re 595, 596 Klein v. Independent Brewing Ass'n 470 Klotz i;. Pan-American Match Co 544, 657 Knickerbocker Importation Co. I). State Board of Assessors 266, 721 Knight V. Alamo Mfg. Co. 549, 614 Knox V. Eden Musee &c. Co. . 429 Kohlruss V. Zachery . 116, 293, 338 Kortright V. Buffalo &c. Bank . 570 Kuser v. Wright 530 Lake Erie &c. R. R. Co. v. Nickals 615 Lancaster v. Amsterdam &c. Co 50, 76, 338, 339 Lang V. Bayonne . . . 132, 446 Lansing v. Smith 620 Lantz V. MoeUer 721 Laumaon v. Lebanon Valley R. R. Co 254, 261 Laurentide Co. Ltd. v. Durey &c. Collectors .....' 244 Lawrence v. Maxwell .... 536 Leathers v. Janney 256 Lee V. Neuchatel Asphalt Co. . 411 Leeds Estate, B. & L. Assn. v. Shepherd .... 510, 517, 545 Leggett V. New Jersey Mfg. &c. Co 147 Lehigh & N. Y. R. R. Co. v. Sohmer 243, 412 Leigh V. American Brake Beam Co 303, 315 Leland v. Hayden 560 Leroy v. Globe Ins. Co. . . . 553 Leslie, Matter of 444 Lewey's Island &c. Co. v. Bolton 400 Lewis V. Fakes 479 Lillard v. Oil, Paint & Drug Co. 489 Lincoln &c. Bank v. Richardson 88 Lincoln &c. Realty Co. v. Ken- tucky &c. Trust Co. ... 645 PAGE Lindenberger Cold Stor.'&e. Co. V. Lindenberger 364 Linkauf v. Lombard .... 292 Litchfield v. Henson Oil Co. . 572 Little V. Fearon 579 Llewellyn v. Aberdeen Brewing Co 436 Loan Society v. Eavenson . . 522 Lockhart v. Van Alstyne .. 410, 614 Lockyer v. De Hart .... 255 London Bank v. Aronstein . . 572 London Trust Co. w. Mackenzie 375 Long V. Georgia Pacific Ry. Co. 338 Long Island R. R. Co., In re . 530 Longyear v. Hardman . . . 597 Lord V. Equitable Life Assur. Society . . . 204, 207, 209, 213, 564, 793 Louisville v. Louisville Home &o. Co 328 Louisville &c. R. Co. v. Boney . 669 Louisville &c. R. Co. v. Letson 44 LouisviU6 &c. R. Co. v. Louis- ville Trust Co 217 LouisviUe &o. R. Co. v. McVay 463 Louisville &c. R. Co. v. Western Union Tel. Co 444 Louisville Trust Co. v. Louis- ville &c. Ry. Co 774 Loverin v. McLaughlin ... 90 Low V. California &c. R. R. Co. 217 Lowry v. Commercial &o. Bank 584 Ludlow V. Executors of Ludlow 529 Lum V. American Wheel &c. Co. 721 Lund V. Wheaton Roller Mill Co. 590 Lupton's Sons Co. v. Automobile Club, &o 243 'Lynia.n v. Bonney 517 Lyndeborough Glass Co. v. Mas- sachusetts Glass Co. . . . 148 Maohinsts' National Bank v. Field » . . 584 Mackay v. New York, N. H. & H. R. R. Co 774 Macon &c. R. R. Co. v. Parker 669 Madison v. Madison Gas &c. Co. 328 Madison v. Morristown Gas Light-Co 186 Magnolia Metal Co. v. Savannah 49 Mahar v. Harrington Park &c. Sites 243 Mahoney Mining Co. v. Anglo- California Bank ." . . . . 439 Mallory v. Hanaur Oil Works . 223 Mandel v. Swan &c. Cattle Co. 400 Manice v. Powell . . . 432, 435 Manufacturers' Commercial Co. V. Hecksoher 701 Mapleton Bank v. Standrod . 590 Marcy v. Guanajuato Develop- ment Co. 479 TABLE OF CASES CITED. XXUl FAOE Marion Trust Co. v. Blish . . 396 Marr v. Marr 493 Marseilles Extension Ry. Co., In re 461 Marson v. Deither 379 Martin v. ZeUerbach . . 256, 408 Martyne v. American &e. Ins. Co 247, 680 Maryland Rail Co. v. Taylor . 721 Master v. Green 419 Matthews v. Associated Press . 419 Matthiessen v. Lihme . . 444, 590 MasTiard v. Looker .... 533 Mayor &c. of N. Y. v. Twenty- third St. Ry. Co. .... 205 McArthur v. Times Printing Co. 363 McCain ». Des Moines . . . 105 McCampbell v. Fountain &c. R. R. Co 648 McCarter v. Firemen's Ins. Co. 37, 223, 455, 793, 794 MeClaine v. Rankin .... 698 McClung V. ColweU .... 590 McClure v. Law 470 MoCoach V. Minehill &c. Ry. Co 243 McConneU v. Combination &e. Co 220, 646 McCourt V. Singers-Bigger . . 470 MoDermott v. Woodhouse . . 701 McDonald v. Williams . . . 516 McGawt). Acker, Merrall&c. Co. 470 McGregor v. Home Ins. Co. . 599 McGrew v. City Produce Ex- change 292 McBanley v. Wheeler .... 34 McLean.w. Wright Medicine Co. 570 McMahon v. Pneimiatic Tran- sit Co 721 MoNeely v. Woodruff .... 535 McNulta ». Corn Belt Bank . 595 McQueen v. Middletown Mfg. Co 49 MeUiado v. Porto Alegre . . . 363 Mellon V. Mississippi Wire Glass Co. . 411, 605 Memphis &c. Elevator Co. v. Memphis &o. R. R. Co. . . 217 Menier v. Hooper's Telegraph Works 625 Mercantile Trust Co., Matter of 536 Merchants' .&c. Bank v. Beling- ton Coal &c. Co 721 Merchants' v. Livingston . . . 579 Meredith v. N. J. Zinc &c. Co 179, 567 Metropolitan Bank v. Van Dyck 87 MetropoUtan Fire Ins. Co. v. Middendorf 625 Metropolitan St. Ry. Co. v. New York ...-..,... 205 Metropolitan St. Ry! Co. v. State Board of Tax Com'rs . 205 MetropoUtan Telephone Co. v. Domestic Telegraph Co. . . 465, 478, 479 Miller v. Coal Co 766 MiUer v. Ewer 524 Milliken v. McGarrah .... 536 MiUs V. Northern Ry. &c. Co. . 670 Mills V. Stewart 400 MiUsaps V. Chapman .... 471 Milwaukee Masons' &c. Ass'n V. Neizerowski 419 Miner v. Belle Isle Ice Co. . . 471 Miners' Ditch Co. v. Zeller- bach .... 287, 297, 669, 748 Mitchell V. Hotchkiss . . 690, 698 Mitchell !). Vermont Copper &e. Co 400 Mobile Land &c. Co. v. Gass . 472 Mobile & Ohio R. R. Co. v. Nicholas 664 Mobile & Ohio R. R. Co. v. Tennessee 410 Moffltt V. Hereford .... 403 Montgomery v. Forbes . . . 118 Montgomery v. Merrill . . 50, 97 Montgomery &c. Co. v. Matthews 391 Montgomery light Co. v. Lahey 646 Montgomery Web Co. v. Dienelt 256 Moore, E. L. & Co., v. Murchi- son 516 Moore & Handley &c. Co. v. Towers &c. Co 34 Morel V. Hoge 659 Morgan v. Bank of North America 570 Morgan v. Lewis 271 Moriarity v. Meyer .... 363 Mormon Church v. United States 757 Morrison v. Indianapolis &c. R. R. Co 128, 444 Morton Gravel &c. Co. v. Wysong 422 Moses V. Tompkins . 400, 438, 449 Mouhn V. Trenton &c. Ins. Co. 49 Mower v. Staples . . . 175, 183 Moyer v. Bast Shore Terminal Co 428 Mullanphy &o. Bank v. Schott . 690 Mumma v. Potomac Co. . 101, 743, 752 Munn V. WeUsburg Banking &c. Co 436 Munson v. Syracuse &c. R. R. Co. . : 475 Murphy v. Cane . . . 439, 463 Mutual Life Ins. Co. v. Stephens 321, 338 Nappanee Canning Co. v. Reid, Murdock & Co 690 National Bank v. Case . , . 731 XXIV TABLE OF CASES CITED. 595 590 698 49 118 National Bank v. Matthews 314, 338 National Bank v. Watsontown Bank National Bank v. Western Pa- cific R. R. Co. .... National Bank of Auburn v. DiUingham . . . . . National Condensed Milk Co, V. Brandenburgh . . . National Ins. Co. v. Bowman National Loan &o. Co. ;;. Rock- land 467, 468 National State Bank v. Vigo &e. . Nat. Bank 463 Natusch. V. Irving . . . 212, 213 Nebraska Chicory Co. v. Led- nicky 383 Nelson v. Hubbard .... 147 Newcomb v. Reed . . . .96, 101 New England Trust Co. v. Abbott 596 New Haven Wire Co. Cases . 117 New Memphis Gaslight Co. Cases . 493 New Orleans &c. Co. v. Louisiana .... . . . 118 New Orleans &c. Packet Co. v. Brown 467 New Sombrero Phosphate Co. v. Erlanger 376 New York Cable Co. v. Mayor of N. Y. . '. New York Central & Hudson River R. R. Co., Matter of . New York El. R. R. Co., In re New York & Long Island Bridge Co. v. Smith . . . New York & Westchester Town Site Co., In re 465 New York &e. R. R. Co. v. Ketcham 466 New York &e. R. R. Co. v. Schuyler 417, 570 New York &c. Terra Cotta Co. V. Williams .... 242, 243 Nims V. Mount Hermon Boys' School 348 Norris v. Stapps 418 North Hudson B. & L. Ass'n v. Childs 611 North Milwaukee &c. v. Bishop 422 Northern Bank &c. Co. v. Day 721, 729 Northern Pacific Ry. Co. v. Boyd 774 Northern Securities Co. v. United States 274 Northside Ry. Co. v. Worth- ington 217 Northwest Transportation Co. V. Beatty 489, 625 Northwestern Marble &o. Co. V. Carlson 550 128 402 93 101 PAOE Norton v. Shelby Co 133 Nugent V. Supervisors 206, 209, 213, 389, 783 NunneUy v. Southern Iron Co. 690 O'Bear Jewelry Co. v. Volfer . 676 O'Connor v. International Silver Co 442, 535 O'Connor Mining &c. Co. v. Coosa Furnace Co. . 257, 479, 690 'Grady v. United States &e. Tel. Co 442, 665 O'Neile v. Ternes 501 O'Neill V. Walcott Mining Co. . 572 Ogilvie V. Knox Ins. Co. . 700, 703 Ohio Ins. Co. v. Nunnemaker . 567 Ohio &c. R. R. Co. v. McPher- son 118, 449 Old Dominion Copper &c. Co. V. Bigelow . . 367, 371, 373, 377 Old Dominion Copper &c. Co. V. Lewisohn .... 373, 377 Oliver v. Rahway Ice Co. . . 266 Olsen V. Homestead L. & I. Co. 560 Oregon Ry, &c. Co. v. Orego- nian Ry. Co 95 Ottawa First Nat. Bank v. Con- verse 275 Overend, Gurney & Co. v. Gibb 517 Overton Bridge Co. v. Means . 668 Owen & Co. v. Storms & Co. 147, 217 Ozark Cooperage Co. v. Quaker City Cooperage Co. . . . 242 Pacific National Bank v. Eaton 380 Page V. American & British Mfg. Co 612 Parker v. Bethel Hotel Co. . 26, 745, 746 Parker v. Thomas 391 Parkin v. Thorold . . » . . 411 Parkside Cemetery Ass'n v. Cleveland &c. Traction Co. 387, 444 Parsons v. Joseph 648 Paul V. Virginia 43, 243 Paxon V. Sweet 425 Payne's Case 731 Peabody v. Flint 374 Pearsall v. Western Union 'Tel. Co . 428 Pearson v. Concord R. R. CorJ) 274, 624 Pennsylvania Life Ins. Co. v. Meyer 244 Pennsylvania R. R. Co. v. Na- tional Railway Co 186 Penobscot Boom Corp. v. Lam- son 546 People V. American Press Ass'n 743 People V. Ballard 254 People V. Buffalo Stone &c. Co. 771 People V. Campbell .... 148 TABLE OF CASES CITED. XXV PAGE People V. Chicago Gas &o. Co 95, 273, 274, 282 People V. Chioago Live Stock Exchange 419 People V. Coleman . . . . 13, '18 People V. Dole 117 People V. Equitable Life Assur. Soc 511 People V. Horn Silver Mining Co 244 People V. Koenig 599 People V. Lihme .... 444, 590 People V. Matthiessen .... 524 People V. Moss 220 People V. North. River. Sugar Refining Co. 65, 85, 224, 274, 769 People V. O'Brien . . . . ' . 204 People V. Powell . . . 432, 435 People V. Pullman Car Co. . . 148 People V. Roberts 411 People V. Rochester Railway &c. Co. . . 256 People V. Saxe 412 People V. Selfridge 273 People V. Sohmer . . . 243, 412 People V. State Board of Tax Com'rs 205 People V. Utica Ins. Co. . . 86, 144 People's Bank v. Superior Court 664 People's Mutual Life Ins. Co. v. Westeott 449 People's &c. Park Co. v. Roh- leder 27 Perkins v. Sanders 102 Peterson v. Chi., R. I., & Pac. Ry 375 Phillips V. Library Co. ... 49 Phillips V. Providence Steam Engine Co 254 Phinizy v. Anniston City Land Co 625, 750 -Phoenix Ins. Co. v. Feissell . . 517 Phoenix Iron Co. v.- Common- wealth 539 Pierce v. Commonwealth . . . 533 Pierce v. Old Dominion &e. Smelting Co 479 Pioneer Paper Co., Be . . . 530 Pitcher v. Lone Pine &c. Mining Co 653 Pittsburgh & Buffalo Co. v. Duncan 789 Plainfield &c. Water Co. v. In- habitants 208 Plimpton V. Bigelow .... 604 Pollard V. Bailey 703 Poor V. Yarnell 543 Pope V. Terre Haute &c. Mfg. Co 49 Porter v. Healy 569 Pratt V. Boston & Albany R. R. Co 571 Pratt V. Machinists' Bank . . 584 PAOB Price V. Holcomb 254 Proprietors of Charles River Bridge V. Warren Bridge . . 185 Protection Life Ins. Co. v. Os- good 570 Provident Trust Co. v. Geyer 370, 569 Public Service Gas Co. v. Public , Utility Commissioners . . . 205 Pullman's Palace Car Co. v. Central Transportation Co. 316, 411 Purchase v. Atlantic &c. Trust Co 467, 474, 476 Queen v. Arnaud 23 Rabe v. Dunlap 645 Ralston v. Bank of California . 570 Ramsey v. Gould 653 Rathbone v. Ayer 721 Rathbun v. Snow 428 Raub V. Blairstown Creamery Ass'n 463 Reade v. Livingston .... 255 Reed v. Richmond St. R. R. Co. 97 Reeves v. So. Ry. Co 50 Reid V. Manufacturing Co. . . ' 516 Reinhardt v. Interstate Tele- phone Co 442 Remington Auto Co., Matter of 701 Remington Co. v. O'Dougherty 117 Remington & Son &c. Co. v. Caswell 646 Republican Mountain &c. Co. V. Brown _ 456, 625 Rex V. Bank 6f England . . . 571 Rex V. Cutbush 419 Reynolds v. Supreme Council &o. Royal Arcanum . . . 420 Rice V. Rockefeller . . . 595, 653 Richards v. Farmers &c. Insti- tute, &c 439 Richardson v. Clinton Wall Trunk Co 417 Richelieu Hotel Co. v. Inter- national &c. Encampment Co. 220 Richmond &c. Potomac R. R. V. Louisa R. R. . . . . :. 208 Ridgewood Land &c. Co. v. Saxe 412 Ringler, George & Co., Matter of 452, 531, 794 Rio Grande Junction &c. Co. v. United States 243 Ripin V. U. S. Woven Label Co 282, 423, 534 Ritchie v. McMullen . 536, 620, 621 Riverside &c. Mills v. Menefee 49 Rives V. Bartlett . . . 365, 690 Roberts v. Roberts-Wicks Co 411, 610 Robinson v. American Linseed Co 244 XXVI TABLE OP CASES CITED. PAGE Robinson v. Mollett .... 377 Bobinson v. National Bank of New Berne , 570 Robotham v. Prudential Ins. Co 479, 625, 626 Rockwell V. Knights Templars &c. Ass'n 420 Roe V. OradeU &c. Dairy Co. . 396 - Rogers, Matter of 661 Roundtree v. Adams Express Co. 21 Royal Consol. &c. Co. v. Royal &e. Mines Co .530 Ruofl V. Long & Co 583 Russell V. American Gas &c. Co 568, 569, 612 Russell V. American &c. Tel. Co. 581 Russell V. Henry C. Patterson Co 625 Rutland Electric Light Co. v. Bates 470 St. Clair v. Cox 49 St. Johns Mfg. Co. v. Munger . 391 St. Lawrence Steamboat Co., Matter of . . 443, 452, 535, 536 St. Louis, VandaUa &c. R. R. Co. V. Terre Haute &c. R. R. Co 295 St. Paul &o. R. Co. V. Robbins 379 St. Ronies v. Levee Steam &c. Co 380 Salisbury Mills v. Townsend i . 584 Salomon v. Salomon .... 375 San, Joaquin Land &c. Co. v. Beecher 449 San Luis &c.. County v. Murphy 217 Sargent v. Franklin Ins. Co. . 570 Saunders v. Adams Express Co. 11 Savings Bank of Louisville v. Caperton 517 SchJitz Brewing Co. v. Ester . 243 Schmidt v. Mitchell 454, 528, 530, 533 Schulte V. Boulevard Gardens &c. Co 271 Sohumm v. Seymour .... 461 Schwab V. Frisco Mining &c. Co. . 449 Schwab V. Potter Co 417 Scott V. Central R. & B. Co. . 560 Scott V. Gittings 757 Seagrist v. Reid 642 Searsburgh &c. Co. v. Cutler . 117 See V. Heppenheimer .... 721 Seeberger v. McCormick . . . 292 Sejrmour v. Spring Forest Ceme- tery Ass'n 470, 511 Seymour v. Sturgess . . 396, 428 Sharpe v. Chartiers Oil Co. . . 774 Shaw V. Bankers' Nat. Life Ins. Co 465 Shepaug Voting Trust Cases 662, 664 Sheridan Elec. Light Co. v. Chat- ham Nat. Bank .... 465 PAOE Sherman v. Clark 454 Sherman v. Fitch 465 Shields v. Clifton, &c. Land Co. 364 Shields v. Hobart 411 Shields v. Ohio 210 Shipley v. Mechanic's Bank . . 571 Siegel V. Riverside Box &c. Co. 570 Simon v. Southern Ry. Co. . 50, 245 Singer v. National Bedstead Mfg. Co 680 Smith V. Cornelius 444 Smith V. Dana .... 410, 557 Smith V. Hurd .... 619, 620 Smith V. Iron Mountain &c. Co 532 Smith V. San Francisco & N. P. Ry 659, 664 Smith V. Southern Foundry Co. 604 Smith V. Wells Mfg. Co. . . . 460 Smithson v. Roneo 242 Smolik V. P. & R. Coal Co. . . 245 Snider's Sons' Co. v. Troy 118, 137 Snyder v. Charleston &c. Bridge Co. ........ . 380 Society for Savings v. Coite . . 793 Society for Visitation &c. v. Commonwealth 95 Society of Practical Knowledge V. Abbott . 375 Society Perun v. Cleveland 116, 117, 273 439 South Side Trust Co. v. Wash- ' ington Tin Plate Co. . . 479 Southworth v. Morgan . 701, 708 Spahr V. Bank 113 Sparrow v. EvansviUe &c. R. R. Co 175, 179 Spear v. Rockland-Rockport Lime Co 600, 605, 616 Spering's Appeal . . . 511, 517 Spring Co. V. Knowlton . . . 417 Spring Valley Works v. Schott- ler ........ 75, 95 Springfield v. Connecticut River R. R 208 Spurr V. United States . . . 516 Staats V. Biograph Co. . . . 556 Stacy V. Glen &c. Hotel Co. . 220 Stafford v. Middle River Co. . 461 Standard Distilling &c. Co. v. Springfield Coal Co. ... 256 Star Mills v. Bailey .... 471 Starr v. Shepard 627 State V. Atlantic City &c. R.R. 95, 282, 517, 794, 795 State V. Bailey 757 State V. Butler 745 State V. Chilhowee Woolen Mills Co 745 State V. Citizens' Bank . . . 544 State V. Clausen . . . 196, 200 State V. Creamery Package Mfg; Co 796 TABLE OF CASES CITED. xxvu PAOE state V. Des Moines .... 105 State V. Doe Run Lead Co. . . 543 State V. International Inv. Co. . 95 State V. Jessup & Moore Paper Co 544 State V. Kupferle .'.... 449 State V. Manufacturers' &c. Ass'n 444 State V. Missouri Pacific Ry. Co. 274, 479, 789 State V. Overton 425 State V. Portland &c. Gas Co. . 769 State V. Rutland &c. Light &c. Co 132,795 State V. Smith 569 State V. Standard Oil Co. 34, 64, 793 State V. Superior Court . . . 117 State V. Turnpike Co 668 State V. United States Endow- ment &c. Co 769 State Bank v. State .... 757 State Trust Co. v. Turner . . 720 Steele v. Farmers' & Merchants' &c. Tel. Ass'n 597 Stein V. Howard 715 Steinmetz v. Versailles &c. Co. . 449 Steinway, Matter of . . 529, 539 Stephany v. Marsden .... 627 Sternbergh v. Wolff .... 457 Stevens v. Davison 422 Stevens v. Episcopal Church History Co 721 Stevens v. Meriden Britannia Co 680 Stevens v. Rutland &c. R. R. Co. . . 183,211,261,274,774 Stewart v. Harris 505 Stockton V. Anderson .... 377 Stockton V. Central R. R. Co. . 65 Stoddard v. Lum 708 Stokes V. Continental Trust Co 283, 564, 612 Stokes V. New Jersey Pottery Co 463 Stone V. Mississippi .... 187 Stoutimore v. Clark .... 118 Stowe V. Wyse 461 Stoystown &c. Turnpike &c. Co. V. Craver 461 Strattou-Massaehusetts &c. Mines Co. v. Davis .... 449 Strause v. Richmond Wood- working Co 364 Stribbling v. Bank 43 Strickland v. National Salt Co 605, 614 Strong V. Brooklyn &c. R. R. Co. . . ^ 412 Strong V. Repide 505 Studebaker Co. v. Montgomery 117 Summers v. Sleeth 378 Supreme Commandery- &o. v. Ainsworth 420 Swentzel-f. Bank 511 Swift V. Pacific Mail S. S. Co. . 224 Tanner v. Lindell R. R. Co. . 254 Taussig V. St. Louis &c. R. R. Co. 467 Taylor, Re 541 Taylor v. Griswold . . , 527, 532 Taylor v. Order of Sparta . . 678 Taylor v. Portsmouth &e. Ry. . 132 Temple v. Dodge 465 "Ten Eyck v. Pontiac &c. R. R. Co 467 Tepel V. Coleman 721 Terry v. Eagle Lock Co. . 555, 558 Terry v. Tubman 703 Terwilliger v. G. W. Tel. Co. . 379 Texas &c. Ry. Co. v. DashieU . 417 Thilmany v. Iowa Paper Bag Co. 292 Third National Bank v. Buffalo &c. Ins. Co 595 Thomas v. Board of Trustees of Ohio &c. University . . 21, 795 Thomas v. International Silver Co 530 Thomas v. Matthews . . . ■ . 605 "Thomas v. West Jersey R. R. . , 95, 254, 793 Thompson-Starrett Co. v. Ellis Granite Co 659 Thorington v. Gould .... 449 Thornton v. Marginal Freight Ry. Co 795 Tidewater &c. R. R. Co. v. Jordan 524 Tiger v. Rogers Cotton &o. Co. 389 Timm v. Grand Rapids Brewing Co 217 Timmis, In re . . . 261, 638, 748 Tooker v. National Sugar Ref. Co 721 Tower's Estate, In re . . . . 566 Towers v. African Tug Co. . . 646 Travis v. Knox Terpezone Co. . 571, 572, 656 Trevor v. Whitworth .... 267 Trimble v. American Sugar Ref. Co 648 Troy Congregational Soo. v. Perry 118 Troy &c. R. R. Co. v. Tibbits . 400 Trust Co. of Georgia v. State . 329 Tulare &c. District v. Shepard . 128 Tunis V. Hestonville &e. R. R. Co 530 Tuttle V. George A. Tuttle Co. 363 Twin-Lick Oil Co. v. Mar- bury 492, 493 U. S. Brewing Co. v. Dolese . 316 U. S. Fire Apparatus Co. v. G. W. Baker Mach. Co. . . . 461 U. S. Wood Preserving Co. v. Lawrence 137 XXVIU TABLE OF CASES CITED. PAGE Union &c. Ins. Co. v. Keyser 429, 459 Union Pacific R. R. Co. v. Blair 721 Union Pacific R. R. Co. v. Chi- cago, Rock Island, &c. Co. . 456 United Cigarette Machine Co. V. Brown 599 United States v. Emery &c. Realty Co. ...... 243 United States v. Lehigh VaUey R. R. Co 274, 789 United States v. Milwaukee &c. Transit Co. 789 United States v. Van Schaick . 356 United States &c. Co. vl Atlan- tic &c. R. R. Co 478 Umted States .&c. Co. v. Schlegel 118 United States &c. Co. v. Spinks 560 United States Brick Co. v. Read- ing Co . . 707 United States Steel Corp. v. Hodge 470, 484 United Verde Copper Co. v. Roberts 411 Upton V. Englehart . . ' . . 706 Upton V. Tribilcock . . 392, 393 Van Aemam v. Bleistein ... 18 Van TTiiTnTnp.11 v. International &c. Co . . 468 Van Oss v. Premier Petroleum Co ; ... 750 Van Slyke v. Van Slyke ... 417 Van Tuyl v. Schwab .... 9 Vanneman v. Young .... 102 Vatable v. New York, Lake Erie, &c. R. R. Co 774 Vermeule v. Hover . . . 473, 474 Vermont Farm &c. Co. v. HaU 242, 243 Venner v. Chicago City Ry. Co. 543 Venner v. Great Northern Ry. Co 634 Venner v. N. Y. Central &c. R. R. Co 217, 281 Victor G. Bloede Co. v. Bloede 595 Virginia v. West Virginia . . 403 Visaha&c. R. R. Co. v. Hyde 397, 456 Von Arnim v. American Tube Works 617 Von Au V. Magenheimer 505, 636, 620, 621 Von Seyfried v. Vollers ... 242 Vreeland v. New Jersey Stone Co 396 Wabash R. R. Co. v. Adelbert College 645 Wabash &e. Ry. Co. v. Ham . 726 Walker v. John Hancock &o. Ins. Co 426 Wall V. Utah Copper Co. . . 569 Wallace v. Pierce-Wallace Pub. Co 457 PAGE Wallin V. Johnson City Lumber &c. Co 547 Walsh V. Goulden 501 Ward V. City Trust Co. . . . 708 Ward V. PuUman Car Corp. i . 690 Warren v. King 604 Warren v. Pim 659 Warren v. Stikeman .... 403 Warwick v. Dawes 326 Wasson v. Buzzell 656 Waterman v. Chicago &c. R. R. Co. 438 Wathen v. Jackson &c. Refining Co 634 Watt's Appeal 511 Way V. American Grease Co. . 568 Weatherford &c. Ry. Co. v. Granger 364 Webster v. Upton 741 Weissinger Tobacco Co. v. Van Buren .391 Wells Co. V. Gastonia Cotton &c. Co 102 West Nashville &c. Mill Co. v. NashviUe Sav. Bank . . .740 West River Bridge v. Dix . . 208 Western Maryland R. R. Co. v. Blue Ridge Hotel Co. . 217, 220 Western Union Tel. Co. v. Davenport 572 Westervelt v. Demarest . . . 690 Westminster Nat. Bank v. New England &c. Works . 275, 572, 646, 666 Wetherbee v. Baker .. . 680, 703 Wheeler v. Abilene National &c. Co 257, 625 Wheeler v. Everett Land Co. . 217 Wheeler v. Home Savings &c. Bank 217 White V. Manter 543 White V. Thomas Inflatable Tire Co 664 White V. Tryon 227 White Furnace Co. v. C. W. MiUer Transfer Co 244 White Water &c. Co. v. Vallette 147 Whitlock V. Alexander . . . 721 WTiitney v. Wyman .... 34 Whitney Arms Co. v. Barlow . 321 Whittaker v. AmweU National Bank 410 Whittenton Mills v. Upton 274, 331, 455 461 Wight u. Springfield &C.R.R. Co. ' 444 Wilks V. Georgia Pacific Ry. Co 293, 338 Williams v. Citizens Co. . . . 117 WilUams v. McDonald . 616, 517 WiUiams v. Montgomery . . . 659 Williams v. Western Union Tel. Co 411 TABLE OF CASES CITED. 3DC1X PAGU Williams' Case 731 Wills V. Wiedemann Brewing Co 570 Wilson V. Leary 757 Wilson V. Martin &c. Alarm Co. 50 Wilson V. Stevens . . . 255, 690 Winete^er v. Coleman ... 18 Winchester v. Howard . . . 690 Winchester &c. Turnpike Co. v. Wickliffe 550 WindmuRer v. Standard DistU- hng Co 626, 748 Wineburgh v. U. S. Steam &c. Co 656 Wines v. Crosby & Co 690 Winget V. Quiney Building Ass'n 117, 132 Winsor v. Commonwealth Coal Co 659 Withington v: Bradley . 541, 543 Wolcott V. Waldstein .... 721 PAQS Wood V. Ferguson 64 Wormser v. Metropolitan St. Ry. Co 645 Wright V. American Finance &c. Co 678 Wright V. Bank of Metropolis . 570 Yeiser v. United States &e. Paper Co 378 Yellow Jacket &c. Mining Co. V. Stevenson 461 York V. Mathis ...'... 465 Young V. Canada &c. S. S. Co. 465 Young V. South Tredegar Iron Co 590 Zabriskie v. Hackensack &c. R. R. Co 172, 212 Ziemer v. C. G. Bretting Mfg. Co 783 Zwolanek v. Baker Mfg. Co. . 427 CASES ON PKIYATE CORPORATIONS. BOOK I. THE NATURE OF A CORPORATION. CHAPTER I. THE CORPORATION VIEWED AS A SANCTIONED ENTITY. IN RE RES PUBLICA HUMANA. N. Y. Supreme Court — Special Term 55 N. Y. L. J. 1312. 1916. Mk. Justice Goff : Three devoted women and two gallant men apply for approval of a certificate which states that it is their desire to form a corporation under the name "Res Publica Humana, The Club and Society of the Human Republic, Inc.," and that the ob- jects of the proposed 'corporation are : (1) "To promote the welfare and sociability of mankind." (2) "To give opportunity for educa- tion and to assist in every possible manner persons in need, regardless of creed, nationality or sex." And (3) that its "slogan" shall be "Education and Benevolence." A truly noble progranome, and, if carried out, would emulate the great religions of the world, that for centuries have been endeavoring to accomplish those objects. There is neither moral impediment or legal obstacle to the incorporators setting to work now to construct their splendid conception of the Republic of Humanity. Indeed, right-minded men would applaud their acts as they have applauded in the abstract all the ideal republics from Plato's to Harrington's "Oceana." When, however, the crea- tion of an artificial being endowed with certain legal qualities is pro- posed, the question should be asked. Is the object one within the bounds of practical accomplishment? The purpose of the statute plainly is to enable men by united effort under corporate form, re- lieved of personal responsibility, to achieve an object not only legal but feasible. Where the object is manifestly futile or visionary, or in the nature of things impracticable, the forms of law should 2 THE COKPOEATION VIEWED AS A SANCTIONED ENTITY. [CHAP. I. not be used to give semblance of reality to fiction. The design of the law is to regulate the acts of men in relation to things concrete. Their dreams, desires and imagination are beyond its purview. Recognizing the praiseworthy motives which actuate the incorpora- tors, I will not deny approval on the merits, but withhold it without prejudice to reapphcation if made in substantial compliance with views herein expressed. THOMAS V. DAKIN. 22 WendeU (N. Y.) 9. 1839. The facts are suflBciently stated in the opinion. Nelson, C. J. This is an action brought by the plaintiff, as president of the Bank of Central New York, an association formed under what is familiarly known as the General Banking Law, passed April 18, 1838, to recover several demands due the institution. . . . Are these associations corporations? In order to determine this question, we must first ascertain the properties essential to constitute a corporate body, and compare them with those conferred upon the associations; for if they exist in common, or substantially corre- spond, the answer will be in the aflBrmative. A corporate body is known to the law by the powers and faculties bestowed upon it, expressly or impliedly, by the charter ; the use of the term corpora- tion in its creation is of itself unimportant, except as it will imply the possession of these. They may be expressly conferred, and then they denote this legal being as unerringly as if created in general terms. It has been well said by learned expounders, that a corporation ag- gregate is an artificial body of men, composed of divers mdividuals, the ligaments of which body are the franchises and liberties bestowed upon it, which bind and unite all into one, and in which consists the whole frame and essence of the corporation. The "franchises and liberties ", or, in more modern language,, and as more strictly appli- cable to private corporations, the powers and faculties, which are usually specified as creating corporate existence, are : 1. The capacity- of perpetual succession ; 2. The power to sue and be sued, and to grant and receive in its corporate name ; 3. To purchase and hold real and personal estate ; 4. To have a common seal ; and 5. To- make by-laws. These indicia were given by judges and elementary writers at a very early day : since which time the institutions have greatly multiphed, their practical operation and use have been thoroughly tested, and their peculiar and essential properties much better understood. Any one comprehending the scope and purpose of them, at this day, will not fail to perceive that some of the powers- CHAP. I.] - THOMAS «. DAKIN. 3 above specified are of trifling importance, while others are wholly unessential. For instance, the power to purchase and hold real estate is no otherwise essential than to afford a place of business; and the right to use a common seal, or to make by-laws, may be dis- pensed with altogether. For as to the one, it is now well settled that corporations may contract by resolution, or through agents, without seal ; and as to the other, the power is unnecessary, in all cases where the charter sufficiently provides for the government of the body. The distinguishing feature, far above all others, is the capacity con- ferred, by which a perpetual succession of different persop,s .shall ; be regarded in the law as one and the same body, and may at all times act in fulfillment of the objects of the association as a single individital. In this way, a legal existence, a body corporate, an artificial being, is constituted ; the creation of which enables any number of persons to be concerned in accomplishing a particular object, as one man. 'While the aggregate means and influence of all are wielded in effectiiig it, ■ the operation is conducted with the simplicity and individuality of a natural person. In this consists the essence and great value of these institutions. Hence it is apparent that the only properties that can be regarded strictly as essential, are those which are indispensable to mould the different persons into this artificial being, and thereby enable it to act in the way above stated. When once constituted, this legal being created, the powers and faculties that may be conferred are various — limited or enlarged, at the discretion of the legislature, and will depend upon the nature and object of the institution, which is as competent as a natural person to receive and enjoy them. We may, in short, conclude by saying, with the most approved authorities at this day, that the essence of a corporation consists in a capacity : 1. To have perpetual succession under a special name, and in an arti- ficial form ; 2. To take and grant property, contract obligations, sue and be sued by its corporate name as an individual ; and 3. To receive and enjoy in common, grants of privileges and immunities. We will now endeavor to ascertain with exactness the powers and attributes conferred upon these associations by virtue of the statute. The first fourteen sections (1 to 14) prescribe the duties of the comp- troller in furnishing notes for circulation, taking the required securities, &c. The 15th provides, that any number of persons may associate to establish ofiices of discount, deposit and circulation. The 16th, that they shall make and file a certificate, specifying : 1. The namie to be used in the business ; 2. The place where the business shall be carried on ; 3. The amount of capital stock, and number of shares into which divided ; 4. The names of the shareholders; 5. The dura- tion of the association. The 18th confers upon the persons thus asso- ciating, the most ample powers for carrjdng on banking operations together with the right "to exercise such incidental powers as shall be necessary to carry on such business" ; also to choose a president, 4 THE COEPOEATION VIEWED AS A SANCTIONED ENTITY. [CHAP. I. vice president, cashier, and such other officers and agents as may be necessary. By the 21st and 22d sections, contracts, notes, bills, &c. shall be signed by the president and cashier ; and all suits, actions, &c. are to be brought in the name of, and also against the president for the time being ; and not to abate by his death, resignation or re- moval, but to be continued in the name of the successor. 24th sec- tion : The association may purchase and hold real estate, &c. the con- veyance to be made to the president, or such other officer as shall be designBited, who may sell and convey the same free from any claim against shareholders. 19th section : The shares of capital stock to be deemed personal property, transferable on the books of the associa- tion ; and every person becoming a shareholder by such transfer, shall succeed to all the rights and Uabilities of the prior holder. 23d sec- tion : No shareholder to be personally liable ; and the association is not to be dissolved by the death or insanity of any shareholder. 1. Upon a perusal of these provisions, it will appear that the asso- ciation acquires the power to raise and hold for common use any given amount of capital stock for banking purposes, which, when subscribed, is made personal property, and the several shares transferable the same and with like effect as in case of corporate stock ; to assume a common name under which to manage all the affairs of the association ; to choose all officers and agents that may be necessary for the purpose, and remove and appoint them at pleasure. It will hence be seen, that although the association may be composed of a number of differ- ent persons, holding an interest in the capital stock, its operations are so arranged that they do not appear in conducting its affairs ; all are so bound together, so moulded into one, as to constitute but a single body, represented by a common name, or names, (the knot of the com- bination,) and in which all the business of the institution is conducted by common agents. In this way it purchases and holds real and per- sonal property, contracts obhgations, discounts bills, notes and other evidences of debt, receives deposits, buys gold and silver bullion, bnis of exchange, &c., loans money, sues and is sued, &c. It is true, some portion of the business is conducted in the assumed name, and some in the name of the president for the time being ; but this in no manner changes the character of the body. A corporation may have more than one name ; it may have one in which to cbntract, grant, &c., and another in which to sue and be sued ; so it may be known by two different names, and may sue and be sued in either ; and the name of the president, his official name, or any other, will answer every pur- pose. 2 Bacon's Ah: 5. 2 Salk. 451. 2 id. 237. Ld. Raym. 153, 680. The only material circumstance is, a name, or names, of some kind, in which all the affairs of the company may be conducted. So much, and no more, is essential to give simpUcity and effect to the operation. An artificial being is thus plainly created, capable of re- ceiving all the ample powers and privileges conferred upon the asso- CHAP. I.] LIVERPOOL INSURANCE COMPANY V. MASSACHUSETTS. 5 ciations, and of managing their diversified concerns in an individual capacity. All business is to be conducted in' a common or proper name. 2. This artificial being possesses the powers of perpetual succession. Neither sale of shares, or decdh of shareholders affect it ; if one should sell his interest, or die, the purchaser or representative, by operation of law, immediately takes his place. § 19. Nor can the insanity of a member work a dissolution. Id. Ofiicers and agents for conducting the business of the association are secured. In case of vacancy, by death or otherwise, the place may at once be filled. § 18. For the , entire duration, therefore, of the association, and which may be with- out limit, § 16, svh. 5, the whole body of shareholders, though per- petually shifting, constitute the same uniform, artificial being which is to be engaged through the instrumentality of ofiicers and agents in conducting the business of the concern, and no member is personally hable. § 23. Then, as to the powers conferred, without again spe- cially recurring to them, it will be seen at once that the associations possess all that are deemed essential, according to the most approved authorities, to constitute a corporate body. They have a' cl^city : 1. To have perpetual succession tmder a common name, and in an artificial form ; 2. To take and grant property, contract obligations, to sue and be sued by its corporate name, in the same manner as an individual ; 3. To receive grants of privileges and immunities, and to enjoy them in common. All these are expressly granted, and many more, besides the general sweeping clause, "to exercise such incidental powers as shall be necessary to carry on such business," (meaning the business of banking,) under which even the seal and right to make by-laws are clearly embraced, if essential in conducting the affairs of the institution. . . . LIVERPOOL INSURANCE COMPANY v. MASSACHUSETTS. 10 WaU. (U. S.) 666. 1870. Ehrok to the Supreme Judicial Court of Massachusetts ; the case being this : A statute of the State just named imposes upon "each fire, marine, and fire and marine insurance company, incorporated or associated under the laws of any government or State other than one of the United States, a tax of 4 per cent, upon all premiums charged or received on contracts made in this commonwealth for insurance of property." The same statute imposes a tax of but 2 per cent, upon such premiums when the company is incorporated under the laws gf any one of the United States other than Massachusetts ; upon which r 6 THE COEPORATION VIEWED AS A SANCTIONED ENTITY. [CHAP. I. premiums, where the company is incorporated by itself, it imposes but 1 per cent. ; while no tax is imposed by the laws of the State upon the business of insurances transacted by any natural persons citizens of the same. With the enactment just mentioned on its statute-book, the State of Massachusetts, in 1868, filed a bill in its Supreme Judicial Court against the Liverpool and London Life and Fire Insurance Company (a company doing a large business in that State), to collect a tax of 4 per cent, on its premiums upon contracts made in Massachusetts for insurance of property, and to restrain the company from doing further business till the tax was paid. The company set lip that it was not "incorporated" at all, but was an association, under the laws of Great Britain, of natural persons, some of whom were citizens and residents of the country just named ; and some citizens and residents of the State of New York ; formed for the purpose of conducting the business of insurance under certain deeds of settlement, and having the legal character of a partnership ; that accordingly it could not be taxed as a "company incorporated under the laws of any govern- meiit or State other than one of the United States" ; . . . The first question ■^- and the only one if it was resolved affirmatively — was whether the company was a corporation or not. Thfe company had been originally formed, in May, 1836, in Liver- pool, by a "deed of settlement." This instrument, as far as it could be done without the aid of Par- liament, estabhshed a company under the name of " The Liverpool Life and Fire Insurance Company," with a capital of £2,000,000 sterling, which was divided into 100,000 shares of £20 each, and declared its purpose to be making insurance on life and against fire. These shares could be sold and transferred, and executors and administrators represented them in the company on the death of the owner. If, by the laws of the association, a share became forfeited, the owner was released from all further hability to the company. The business of the company was to be conducted by a board of directors exdiisively, and they could make by-laws and change and modify them. There was a covenant that suits might be brought by or against the com- pany in the names of one or more directors, which should bind the stockholders, and that no stockholder would plead in abatement the nonjoinder of the others ; and it was fiu-ther covenanted that a judg- ment so obtained against a director might be made out of the prop- erty of any of the stockholders. Numerous other provisions were found in the original articles, which consisted of over a hundred sec- tiohs, but only those are referred to here which bear on the question which the court had before it. There were also three subsequent deeds of settlement, and three acts of ParUament were passed to give efficiency to the purposes of the association. The first of these acts provided that the association might sue and CHAP. I.] LIVERPOOL INSXIRANCE COMPANY V. MASSACHUSETTS. 7 be sued in the name of the chairman or deputy chairman of the board of directors ; that the stockholders might sue the company as plain- tiffs, or be sued by it as defendants. It regulated the manner in which the shareholders might be made individually liable for the debts of the asso- ciation'; and it declared that the act should not be construed to incor- porate the company or relieve its members from their individual liability, except as provided in the act. The second act of Parliament changed the name of the company to that which it now bears, and authorized it to make contracts by the new -name, and it also contained a provision that the act should not make the company a corporation; and there was a third act which au- thorized amalgamation with another company, and which again pro- vides against its being construed into an act of incorporation or a limited liability partnership. The Supreme Judicial Court of Massachusetts gave a decree against the company, and enjoined it from the further prosecution of its busi- ness till the taxes found to be due were paid. . . . Messrs. B. R. Curtis and J. G. Abbott, for the company, plaintiff in error: Whatever may be the character of the defendants, their association together and their relations to others, they must depend upon the laws of Great Britain. If the defendants are not a corporation by the Eng- lish law, then they are not by our law, because here they have done no act in any way to alter or change their legal status or their relations to others. Indeed, our law does not in any way apply to them, act upon or affect their character, or profess to do it ; it leaves that to be defined by the laws of the country under which they formed their association. Now, under the laws of Great Britain, it cannot be maintained that the defendants are a corporation, or in fact anything more than a partnership of a large number of natural persons, having procured certain privileges from the government, under which they associated together for the convenience of those who deal with them. In Great Britain, the King and Parliament alone can create corpora- tions. In this case, neither has exercised the power, but when Parlia- ment granted to the company certain privileges, especial care was taken to declare that the grant made should not create a corporation. This seems conclusive. With us the defendants would not possess and enjoy the privilege,, or be subject to the liability of 'being sued, and suing in the name of an officer of their association, but would be obliged to sue or be sued in the name of all partners, for the acts of Parliament giving that right and imposing 'that liability, apply to the manner of enforcing a remedy, and cannot avail beyond its own limits and courts. So that when the defendants transact their business in this country, 8 THE CORPORATION VIEWED AS A SANCTIONED ENTITY. [CHAP. I, the acts of Parliament, giving some of the privileges of corporations, are of no avail to them ; in fact they are like any partnership of natu- ral persons, and must be treated in the same way, entitled to the same rights and privileges, and subject to the same liabihties. . . . But if the defendants were an association of our own citizens, formed here under like deeds of settlement, and like acts of the legislature, they would not be held to be corporations. The association does not make out of its members a new artificial political person ; it still re- mains a body of natural persons, with certain privileges conferred upon them. No new body is created by the legislature with the prop- erty of individuality, and the capacity of holding property and trans- acting business. Indeed, the association falls entirely short of being a corporation, as usually defined and understood. Nor does this case fall within a principle often acted upon by courts, that when a collective body of natural persons are granted powers, rights, and privileges by a collective name, and there is no mode in which they can be enjoyed and exercised, without acting in a corpo- rate capacity, such a body is held to be a corporation by necessary implication. Here, such implication is precluded by the legislative declaration that a corporation shall not exist, and by the fact that the deeds and legislative acts very minutely and carefully provide in what manner the rights and powers granted shall be enjoyed and exercised. Indeed, it is always holden, that where a corporation is so established by impUcation, the legislative intention to confer a corporate existence must be certain and plain Miller, J. dehvered the opinion of the court. The institution now known as the Liverpool and London Life and Fire Insurance Company, doing an immense business in England and in this country, was first organized at Liverpool by what is there called a deed of settlement, and would here be called articles of association. It will be seen by reference to the powers of the association, as or- ganized under the deed of settlement, legalized and enlarged by the acts of Parhament, that it possesses many, if not all, the attributes generally found in corporations for pecuniary profit which are deemed essential to their corporate character. 1. It has a distinctive and artificial name by which it can make contracts. 2. It has a statutory provision by which it can sue and be sued in the name of one of its officers as the representative of the whole body, which is bound by the judgment rendered in such suit. 3. It has provision for perpetual succession by the transfer and transmission of the shares of its capital stock, whereby new members are introduced in place of those who die or sell out. CHAP. I.] LIVERPOOL INSURANCE COMPANY V. MASSACHUSETTS. 9 4. Its existence as an entity apart from the shareholders is recog- nized by the act of Parliament which enables it to sue its shareholders and be sued by them. The subject of the powers, duties, rights, and liabilities of corpora- tions, their essential nature and character, and their relation to the business transactions of the community, have undergone a change in this country within the last half century, the importance of which can hardly be overestimated. They have entered so extensively into the business of the country, the most important part of which is carried on by them, as banking companies, railroad companies, express companies, telegraph com- panies, insurance companies, &c., and the demand for the use of corporate powers in combining the capital and the energy required to conduct these large operations is so imperative, that both by statute, and by the tendency of the courts to meet the requirements of these public necessities, the law of corporations has been so modi- fied, liberalized, and enlarged, as to constitute a branch of jurispru- dence with a code of its own, due mainly to very recent times. To attempt, therefore, to define a corporation, or limit its powers by the rules which -prevailed when they were rarely created for any other than municipal purposes, and generally by royal charter, is impossible in this country and at this time. Most of the States of the Union have general laws by which persons associating themselves together, as the shareholders in this company have done, become a corporation. The banking business of the States of the Union is now conducted chiefly by corporations organized under a general law of Congress, and it is believed that in all the States the articles of association of this company would, if adopted with the usual formalities, constitute it a corporation under their general laws, or it would become so by such legislative ratification as is given by the acts of Parliament we have mentioned. To this view it is objected that the association is nothing but a part- nership, because its members are liable individually for the debts of the company. But however the law on this subject may be held in England, it is quite certain that the principle of personal liability of the shareholders ^ attaches to a very large proportion of the cor- porations of this country, and it is a principle which has warm advo- cates for its universal application when the organization is for pecuni- ary gain. So also it is said that the fact that there is no provision either in the deed of settlement or the act of Parliament for the company suing or being sued in its artificial name forbids the corporate idea. But we see no real distinction in this respect between an act of Parliament, which authorized suits in the name of the Liverpool and London Fire ' For illustration see Van Tuyl v. Schwab, reported infra, Book V, Chap. 3. 10 THE CORPOEATION VIEWED AS A SANCTIONED ENTITY. [CHAP. I. and Life Insurance Company, and that which authorized suit against that company in the name of its principal officer. If it can contract in the artificial name and sue and be sued in the name of its officers on those contracts, it is in effect, the same, for process would ha,ve to be served on some such officer even if the suit were in the artificial name. It is also urged that the several acts of Parliament we have men- tioned expressly declare that they shall not be held to constitute the body a corporation. But whatever may be the effect of such a declaration in the courts of that country, it cannot alter the essential nature of a corporation or prevent the courts of another jurisdiction from inquiring into its true character, whenever that may come in issue. It appears to have been the pohcy of the Enghsh law to attach certain consequences to incorporated bodies, which rendered it desirable that such associations as these should not become technically corporations. Among these, it would seem from the provisions of these acts, is the exemption from individual liability of the shareholder for the contracts of the corpora- tion. Such local policy can have no place here in determining whether an association, whose powers are ascertained and its privileges con- ferred by law, is an incorporated body. The question before us -is whether an association, such as the one we are considering, in attempting to carry on its business in a manner which requires corporate powers under legislative sanction, can claim, in a jurisdiction foreign to the one which gave those powers, that it is only a partnership of individuals. We have no hesitation in holding that, as the law of corporations is understood in this country, the association is a corporation, and that the law of Massachusetts, which only permits it to exercise its cor- porate function in that State on the condition of payment of a specific tax, is no violation of the Federal Constitution or of any treaty pro- tected by said Constitution. Mr. Justice Bbadley : Whilst I agree in the result which the court has reached, I differ from it on the question whether the company is a corporation. I think it is one of those special partnerships which are called joint- stock companies, well known in England for nearly a century, and cannot maintain an action or be sued as a corporation in this country without legislative aid. But as it is a company associated under the laws of a foreign country, it comes within the scope of the Massachu- setts statute, and cannot claim exemption from its operation for the causes alleged in that behalf. It could not have been the intent of the treaty of 1815 to prevent the States from imposing taxes or license laws upon either British corporations or joint-stock companies desiring to establish banking or insurance business therein. And CHAP. I.] HOADLEY V, COUNTY COMMISSIONERS OP ESSEX. 11 certainly these companies cannot be exempted from such laws on the ground that citizens of other States have chosen to take some of their Judgment affirmed.^ HOADLEY V. COUNTY COMMISSIONERS OF ESSEX.^ 106 Mass. 519. 1870. McKay owning legal title to certain patents, &c. in which others were equitably interested in various amounts, declared himself to hold the business conducted by him including property real and personal and the patents in trust for all who were or might become interested therein, upon conditions that those so interested should constitute an association known as the McKay Sewing Machine Association, btit that no member should have right to contract or bargain or transact any business for the association without special authority ; it was to continue thirty years ; death of members was not to dissolve or affect the association except that those who became owners of the interest of decedent should succeed to his rights ; that the association should be the equitable owner of the property and business, which was to be divided into 50,000 shares to be distributed among the members proportionally, and evidenced by certificates of beneficial interest transferable by assignment in writing upon the certificate, and surrender thereof, to the trustee who was thereupon to issue a new certificate ; that the general management of the business was to be in an executive committee to be chosen by the whole body of share- holders who were to serve until others were chosen in their stead. Provision was also made for choosing a new trustee in case of death, resignation or disability of McKay. Upon the execution of this instrument by McKay, all the persons then interested in the property or business signed an agreement to receive such certificates and declaration of trust as the sole evidence of their respective interests. Certificates were then issued, an exec- utive committee chosen at a shareholders' meeting, and by-laws adopted for the regulation of the business of the association, which has since been conducted under the provisions of the declaration and by-laws, McKay still holding the legal title of all its property as trustee. ' Accord : Edgeworth v. Wood, 58 N. J. L. 463 ("Whether an aggregation.of individ- uals united in an artificial body is a corporation or not is to be deterniined rather by the faculties and powers conferred upon the body than by the name or description given to it ") . But see Saunders v. Adams Express Co., 71 N. J. L. 520 (" Even if tKe defendant was possessed of enough of the faculties or powers of a corporation to sub- ject it to a suit in this state (Edgeworth v. Wood) , it has also enough of the qualities of a partnership (People v. Coleman, 133 N. Y. 279) to subject it to liability in a suit in thia state as an unincorporated association.") * Statement of facts abridged and rewritten. Portions of opinion omitted. 12 THE CORPORATION VIEWED AS A SANCTIONED ENTITY. [CHAP. I. He was taxed for its property and that tax was paid. Hoadley who owned shares in the association was also taxed upon his shares. He now brings certiorari to quash the last mentioned tax proceedings, contending that the association was merely a partnership. D. Saunders, for the respondents. The association is not a partnership. Although there may be an equitable community of interest, between the shareholders, in its property and profits, yet this does not make them partners, any more than a community of interest in a vessel and her earnings makes her part owners partners. A partner is agent for all the other partners in the business, and can contract for the firm. But the petitioner has no authority to interfere with the business of this association. No third person can be introduced into a firm as a partner, without con- currence of all the partners. An executor even does not succeed to his testator's membership of a firm. But every member of this asso- ciation has power to make as many new members of it as he has shares, without consulting any other member. The shareholders surely are not partners inter sese, for by the very terms of the certificate, the only evidence of their interest, they are prohibited from using or enjoying any power of pa,rtners. If as between themselves they are not part- ners, third persons are not obliged to treat them as such, and no.error has been committed by the respondents in treating the shares as per- sonal property -for which the petitioners should be assessed personally. Having assumed to exercise the usual powers of a corporation, they may for the purposes of taxation be treated as members of a corpora- tion.. Oliver v. Liverpool & London Insurance Co. 100 Mass. 531. The fact that McKay holds the property of the association in trust, ■ and that it is taxed to him, is immaterial. He does not hold the peti- tioner's shares in trust. Morton, J. The only question presented in this case is, whether the petitioner is hable to be tax;ed for the shares in the McKay Sewing Machine Association owned by him. We are unable to find any pro- vision of statute which makes such shares taxable. The McKay Sewing Machine Association is not a corporation. It has never received an act of incorporation, nor been organized as a corporation under the general laws. A corporation can only be created and exist by sanction of the legislature. This is a voluntary association of individuals, and its articles of agreement, although they adopt some of the forms of managing the business usual in cor- porations, constitute a copartnership. It cannot sue and be sued as- a corporation; its members are individually hable for its debts; and it has none of the special attributes which belong to a corporation duly organized under our laws. Oliver v. Liverpool & London In- surance Co., 100 Mass. 531. Tyrrell v. Washburn, 6 Allen, 466. The provision that each member may sell and transfer his interest, and thus introduce a new partner, though unusual, is not inconsistent with the contract of copartnership. CHAP. I.] PEOPLE V. COLEMAN. ,13 It is clear, therefore, that shares in this association could not be taxed under the Gen. Sts. c. 11, § 4, as "stocks in a moneyed corpora- tion." Being a copartnership, the laws applicable to that relation must govern its rights and liabilities. The petitioner, therefore, was not taxable in Lawrence for his interest in the personal property of the firm. The argument of the respondents, that these shares are as much property as stock in corporations, and therefore ought to be taxed, is fallacious, because it necessarily results in double taxation of the same property. If this tax is upheld, the property of the petitioner is subjected to double taxation ; once in the business domicil of the firm, and once in the town where he resides. We are therefore of opinion that the tax assessed by the city of Lawrence upon the petitioner was illegal. We have not deemed it necessary to consider what is the effect of the fact that the legal title to the property of the association is by the articles of agreement vested in McKay as trustee. This fact cannot make the case more favorable for the respondents, because, if the property is to be regarded as prop- erty held in trust under the Gen. Sts. c. 11, § 12, cl. 5, it is clear that it is taxable to the trustee, and not to the petitioner. Writ of certiorari to issued THE PEOPLE EX REL. WINCHESTER, AS TREASURER, ETC., RESPONDENT, v. COLEMAN ET AL., COM- MISSIONERS OF TAXES, ETC., APPELLANTS. 133 N. Y. 279 ; 16 L. R. A. 183. 1892. Certiobari to review the action of the commissioners of taxes and assessments of the city of New York, in imposing an assessment upon the capital stock of the National Express Company, a joint-stock company, of which the relator is treasurer. The commissioners appealed from an order affirming vacation of the assessments.* Finch, J. The relator was taxed upon its capital on the ground that it had become a corporation within the meaning of the provision of the Revised Statutes which enacts that "all monied or stock cor- , porations deriving an income or profit from their capital or otherwise, • Accord: Gleason v. McKay, 134 Mass. 419. ("The defendant in this case is not a corporation. It is merely a partnership, with all the incidents and responsibilities of a partnership. ... It enjoys no franchises conferred upon it by the legislature. It does not ask for or enjoy any corporate or special privileges. It has constituted its partnership under its common law rights and such legal agreements as it chooses to make. The peculiar feature that the interest of each member may be transferred with- out the special assent of the other members, is created by agreement of the partners under their natural rights at common law.") ^ Statement of facts condensed. 14 THE COKPOEATION VIEWED AS A SANCTIONED ENTITY. [CHAP.- 1. shall be liable to taxation on their capital in the manner hereinafter prescribed." (1 R. S. .title 4, chap. 13, part 1.) The company was formed as a joint-stock company or association in 1853 by a written agreement of eight individuals with each other, the whole force and effect of which, in constituting and creating the organization, rested upon the common-law rights of the individuals and their power to contract with each other. The relation they assumed was wholly the product of their mutual agreement and dependent in no respect upon the grant or authority of the state. It was entered into under no statutory license or permission, neither accepting nor designed to accept any franchise from the sovereign, but founded wholly upon the individual rights of the associates to join their capital and enter- prise in a relation similar to that of a partnership. A few years earlier the legislature had expKcitly recognized the existence and vaHdity of such organizations, founded upon contract and evolved from the common-law rights of the citizens. (Laws of 1849, chap. 258.) That act provided that any joint-stock company or association, which consisted of seven or more members, might sue or be sued in the name of its president or treasurer, and with the same force and effect, so far as the joint property and rights were concerned, as if the suit should be prosecuted in the names of the associates. But the act explicitly disclaimed any purpose of converting the joint-stock associations recognized as existing, into corporations by a section pro- hibiting any such construction. (§ 5.) In 1851 the act was amended in its form and application, but in no respect material to the present inquiry. There is no doubt, therefore, that when the company was formed and went into operation the law recognized a distinction and substantial difference between joint-stock companies and corporations and never confused one with the other, and that the existing statute , which taxed the capital of corporations had no reference to or opera- tion upon joint-stock companies or associations. But two things have since occurred. The legislature, while steadily preserving the distinction of names, has with equal persistence con- fused the things by obUterating substantial and characteristic marks of difference, until it is now claimed that the joint-stock associations have grown into and become corporations by force of the continued bestowal upon them of corporate attributes. It is said, and very probably correctly said, that the legislature may create a corporation, without expUcitly declaring it to be such, by the bestowal of a cor- porate franchise or corporate attributes, and the cases of banking associations are referred to as instances of actual occurrence. (Thomas v. Dakin, 22 Wend. 9 ; Bank of Watertown v. Watertown, 25 id. 686 ; People v. Niagara, 4 Hill, 20.) It is added that such result may happen even without the legislative intent, and because the gift of corporate powers and attributes is tantamount to a corpo- rate creation. It is then asserted that a series of statutes, beginning CHAP. I.] PEOPLE V. COLEMAN. 15 ■with the act of 1849, has ended in the gift to joint-stock associations of every essential attribute possessed by and characteristic of corpora- tions (Laws of 1853, chap. 153, Laws of 1854, chap. 245, Laws of 1867, chap. 289) ; that the hnes of distinction between the two, however far apart in the beginning, have siieadily converged until they have melted into each other and become identical ; that every distinguish- ing mark and characteristic has been obliterated, and no reason re- mains why joint-stock associations should not be in all respects treated and regarded as corporations. Some of this contention is true. The case of People ex rel. Piatt V. Wemple (117 N. Y. 136), shows very forcibly how almost the full measure of corporate attributes has, by legislative enactment, beeii bestowed upon joint-stock associations, until the difference, if there be one, is obscure, elusive and difficult to see and describe. And yet the truth remains that all along the line of legislation the distinc- tive names have been retained as indicative and representative of a difference in the organizations themselves. As recently as the acts of 1880 and 1881, which formed the subject of consideration in the Wemple case, the legislature, dealing with the subject of taxation and desiring to tax business and franchises, imposed the liability upon "every corporation, joint-stock company or association whatever now or hereafter incorporated or organized under any law of this state." It is significant that the words "or organized" were inserted by amendment, and evidently for the understood reason that joint- stock companies could not properly be said to be "incorporated", but might be correctly described as "organized" under the laws of the state. This persistent distinction in the language of the statutes I should not be inchned to disregard or treat as of no practical conse- quence, when seeking to arrive at the true intent and proper construc- tion of the statute, even if I were unable to discover any practical or substantial difference between the two classes of organizations upon which it could rest, or out of which it grew, for the distinction so sedu- lously and persistently observed would strongly indicate the legisla- tive intent, and so the correct construction. But I think there was an original and inherent difference between the corporate and joint-stock companies known to our law which legislation has somewhat obscured, but has not destroyed, and that difference is the one pointed out by the learned counsel for the re- spondent, and which impresses me as logical and well supported by authority. It is that the creation of the corporation merges in the artificial body and drowns in it the individual rights and habilities of the members, while the organization of a joint-stock company leaves the individual rights and liabilities unimpaired and in full force. The idea was expressed in Supervisors of Niagara v. People (7 Hill, 512), and in Gifford v. Livingston (2 Den. 380), by the statement that the corporators lost their individuality and merged their individual 16 THE CORPORATION VIEWED AS A SANCTIONED ENTITY. [CHAP. I. characters into one artificial existence; and upon these authorities a corporation is defined on behalf of the respondents to be "an arti- ficial person created by the sovereign from natural persons and in which artificial person the natural persons of which it is composed become merged and non-existent." I am conscious that legal defini- tions invite and provoke criticism, because the instances are rare in which they prove to be perfectly accurate ; and yet this one offered to us may be accepted if it successfully bears some sufficient test. In putting it on trial we may take the nature of the individual liabiUty of the corporators on the one hand and of the associates on the other, for the debts contracted by their respective organizations, as a suffi- cient test of the difference between them, and contrast their nature and character. It is an essential and inherent characteristic of a corporation that it alone is primarily Uable for its debts, because it alone contracts them, except as that natural and necessary consequence of its crea- tion is modified in the act of its creation by some explicit command . of the statute which either imposes an express Habihty upon the cor- porators in the nature of a penalty, or affirmatively retains and pre- serves what would have been the common-law Hability of the mem- bers from the destruction involved in the corporate creation. In other words, the individual Habihty of the members, as it would have existed at common law, is lost by their creation into a corporation, and exists thereafter only by force of the statute, upon some new and modifying conditions, to some partial or changed extent, and so far preventing, by the intervention of an express command, the total destruction of individual UabiUties which otherwise would flow from the inherent effect of the corporate creation. The penalties some- times imposed are of course new statutory HabiHties which never at common law rested upon the individual members. The retained liabihty occasionally estabhshed is in the nature and a parcel of such original Habihty, as we had occasion to show in Rogers v. Decker (131 N. Y. 490), but is retained by force of the express command of the! statute and in that manner saved from the destruction which otherwise would follow the simple creation of the corporation. Ordinarily, these individual HabiHties exist upon other than common- law conditions, and make the corporators rather sureties or guaran- tors of the corporation than original debtors,- since in general their liability arises after the usual remedies against the corporation have been exhausted. But where that is not so, the invariable truth is that the creation of the corporation necessarily destroys the common- law Hability of the individual members for its debts, and requires at the hands of the creating power an affirmative imposition of new personal HabiHties or a specific retention of old ones from the destruc- tion which would otherwise follow. Exactly the opposite is true of joint-stock companies. Their formation destroys no part or portion CHAP. I.] PEOPLE V. COLEMAN. 17 of their common-law liability for the debts contracted. Those debts are their debts for which they must answer. Permission to sue their president or treastirer is only a convenient mode of enforcing that liability, but in no manner creates or saves it. The statute of 1853 did interfere with it. That act required in the first instance a suit against the president or treasurer, and so a prehminary exhaustion of the joint property. But that act was modal, and determined the procedure. It suspended the common-law right, but recognized its existence. We so held in Witherhead v. AHen (4 Abb. Ct. App. Dec. 628), and at the same time said that the associations were not cor- porations but mere partnership concerns. Even that mode of proced- ure has been modified by the Code (§§ 1922, 1923), so that the credi- tor at his option may sue the associates without bringing his action against the president or treasurer. These last and quite recent enact- ments show that the legislative intent is still to preserve and not destroy the original difference between the two classes of organiza- tions ; to maintain in full force the common-law liability of associates and not to substitute for it. that of corporators; and preserving in continued operation that normal and distinctive difference, to evince a plain piu-pose not to merge the two organizations in one or destroy the boundaries which separate them. That intent, once clearly as- certained, determines the construction to be adopted, and may be the only reUable test in view of the power of the state to clothe one organi- zation withi all the attributes of the other. The drift of legislation has been to lessen and obscure the original and characteristic differ- ence. On the one hand corporations have been created with positive provisions retaining more or less the individual liability of the members, and on the other the joint-stock companies have been clothed with most of the corporate attributes, but enough of the original difference remains to show that our legislation not only carefully preserves the distinction of names, but sufficient, also, of the original difference of character and quality to disclose a clear intent not to merge the two. ■ We may thus see upon what the legislative intent to preserve them as separate and distinct is founded and what distinguishing charac- teristics remain. The formation of the one involves the merging and destruction of the common-law liability of the members for the debts, and requires the substitution of a new or retention of the old Hability by an affirmative enactment which avoids the inherent effect of the corporate creation ; in the other, the common-law liability re- mains imchanged and imimpaired and needing no statutory inter- vention to preserve or restore it ; the debt of the corporation is its debt and not that of its members, the debt of the joint-stock company is the debt of the associates however enforced ; the creation of. the corporation merges and drowns the liability of its corporators, the crea- tion of the stock company leaves unharmed and unchanged the liability of the associates ; the one derives its existence from the con- 18 THE COKPORATION VIEWED AS A SANCTIONED ENTITY. [CHAP. I. tract of individuals, the other from the sovereignty of the state. The two are aUke but not the same. More or less, they crowd upon and overlap each other, but without losing their identity, and so, while we cannot say that the joint-stock company is a corporation, we can say as we did say in Van Aernam v. Bleistein (102 N. Y. 360), that a joint-stock company is a partnership with some of the powers of a corporation. Beyond that we do not think it is our duty to go. The order should be affirmed, with costs. All concur. Order affirmed} EDWARDS V. WARREN LINOLINE AND GASOLINE WORKS & TRUSTEE. 168 Mass. 564 ; 38 L. R. A. 791. 1897. Lathbop, J.^ The question then is whether the trustee was prop- erly discharged, and this depends upon whether the principal de- fendant, an association formed under the laws of the State of Penn- sylvania, is a partnership or a corporation. 1 In Hibbs v. Brown, 190 N. Y. 167 (1907) a joint stock company of that state issued bonds secured by trust deed providing that no present or future shareholder, officer, manager, or trustee should be personally liable as a partner or otherwise in respect to such bonds but that' the same shoul'd be payable solely out of the assets covered by the trust deed or out of other assets of the company. Opinions delivered seriatim held the bonds and coupons thereof negotiable. The majority considered that the bonds were not payable out of a particular fund so as to be non-negotiable, altho the individual liability of members was excluded, deeming the company for the pur- poses of this question a quasi corporate entity. Concurring opinions, however, reach the same result on the distinct ground that the exemption clause was invalid. Bakt- LETT, J. said : "... It is unnecessary to point out in detail the very great difference between the joint stock association and a corporation. The association has not ap- pealed to the sovereignty of the state for its right to exist, and is, therefore, free from the visitorial powers to which corporations are subjected ; nor is it amenable to those various commands of the statute which if disobeyed lead to the impositibn of certain liabilities and penalties. The association need not disclose the amount of its capital, or the number of its shares ; the corporation is obliged to do so. It is the obvious policy of the state to maintain this distinction, to-wit : If men desire to embark in great business ventures, practically exempt from governmental control, they must do so subject to the joint and several liability to pay the debts thereby incurred. If they wish to be freed from that liability they can secure the same result by forming a cor- poration and submitting to governmental visitation and control and to various statu- tory restraints by virtue of which the rights of creditors are protected. Public policy clearly requires that such vast transactions shall be carried on either ilnder corporate restraint or the rigorous common-law rule of joint and several liability for debts. The distinguishing feature of the joint stock association is the personal liability of its mem- bers. (Van Aernam v. Bleistein, 102 N. Y. 360 ; People ex rel. Winchester v. Coleman, 133 N. Y. 279 ; Matter of Jones, 172 N. Y. 575, and cases cited in above authorities.) " I am in favor of declaring that a sound public policy dictates that this feature of personal liability is co-existent with the life of the association and cannot be abrogated by the contract of the parties in interest. " It follows that the clause in the bonds of the Adams Express Company seeking to release the members thereof from personal liability is void and the bonds and coupons are negotiable instruments." 2 Portions of opinion omitted. CHAP. I.] EDWARDS V. WARREN &C. WORKS. 19 The trustee's answers to interrogatories refer to Brightly's Pur- don's Digest, (12th ed.) 1086-1088, and to the cases of Eliot v. Himrod, 108 Penn. St. 569, and Sheble v. Strong, 128 Penn. St. 315, as contain- ing the law relative to the statement in the answer, that the principal defendant was a partnership, and not a corporation. From the Digest it appears that such an association is styled a "partnership association", and not a corporation. By the terms of the various acts which have been passed upon the subject, such an association may be formed by three or more persons. The capital is alone to be Uable for the debts. There is no personal liability of the members, except to the extent of any unpaid subscription, if cer- tain provisions of the act are comphed with. " Interests in such part- nership associations" are declared to be personal estate, and are transferable, under such rules and regulations as shall from time to time be prescribed ; but if there are lio such rules and regulations, the transferee of any interest in any such association is not entitled to any participation in the subsequent business of the association, unless elected to membership therein by a vote of a majority of the members in number and value of their interests. The business is to be conducted by a board of managers. The duration of the associa- tion may be fixed by the articles of association, but is not to exceed twenty years. Power to adopt and use a common seal is given in case the associa- tion has occasion to execute a deed of conveyance or bonds and mortgages. Land sold to the association, or by it, is required to be conveyed in the name of the association. It is further provided : "Said association shall sue and be sued in their association name; and when suit is brought against any such association, service thereof shall be made upon the chairman, secretary, or treasurer thereof; which service shall be as complete and effective as if made upon each and every .member of such association." In Ehot V. Himrod, 108 Penn. St. 569, 580, it is said by Mr. Justice Trunkey, in delivering the opinion of the court : "The formation of a limited partnership association is materially different from the crea- tion of a corporation. Such association is treated in the statute as a partnership which, upon the performance of certain acts, shall possess specified rights and immunities. In contemplation that the associa- tion may consist of many members, for convenience it is clothed with many of the features and powers of a corporation, such as the right to sue and be sued, grant and receive, in the association name. But no man can purchase the interest of a member and participate in the sub- sequent business, unless by a vote of a majority of the members in number and value of their interests. No charter is granted to the persons who record their statement." Sheble v. Strong, 128 Penn. St. 315, 318, is to the same effect. If the question presented were an open one in this Commonwealth, 20 THE CORPORATION VIEWED AS A SANCTIONED ENTITY. [CHAP. I. it might well be held that such an association could be considered to have so many of the characteristics of a corporation that it might be treated as one. At common law, a joint stock company formed for business pur- poses is considered in this Commonwealth merely as a partnership. Tappan v. Bailey, 4 Met. 529 ; Tyrrell v. Washburn, 6 Allen, 466. In Taft V. Ward, 106 Mass. 518, 524, speaking of the New York statutes, it was said by Chief Justice Chapman : "These statutes provide, in substance, that any association, con- sisting of seven or more shareholders or associates, may sue and be sued in the name of the president or treasurer ; that in such suit a judgment may be rendered against the company ; and until an execu- tion is issued against the company, and returned unsatisfied, no action shall be maintained against individuals. These statutes seem to apply to all copartnerships consisting of seven or more members. The members of such companies are authorized to hold their interests in shares, which are assignable like shares of stock in a corporation, and the action against the members is regarded as supplementary to the action against the company. Waterbury v: Merchants' Union Express Co. 50 Barb. 157 ; Robbins v. Wells, 1 Robertson, 666. " So far as these statutes relate to the procedure in courts for the recovery of debts, they are limited to the State of New York ; for each State adopts its own forms of remedy. Story, Confl. Laws, §§ 556- 558. The plaintiff could not in this Commonwealth bring an action against the president or secretary, and obtain a judgment against the company by its name ; nor could he bring an action against the members, or any of them, as a supplement to such an action. In order to do so, we must hold that the statutes of New York pre- scribing forms of action are in force here. In this Commonwealth, such a company is a mere copartnership." There is nothing inconsistent with an association being a partner- ship that it has shares, or that the shares are transferable, or that the death of a member shall not work a dissolution of the partnership. Phillips V. Blatchford, 137 Mass. 510. See also Hoadley v. County Com.missioners, 105 Mass. 519 ; Gleason v. McKay, 134 Mass. 419. * The case mostly relied upon by the plaintiff is Liverpool Ins. Co. v. Massachusetts, 10 Wall. 566, which was taken to the Supreme Court of the United States on a writ of error from this court. See Ohver v.. Liverpool & London Ins. Co. 100 Mass. 531. This court, after stating that it was not a pure corporation nor a pure partnership, but was an association intermediate between cor- porations known to the common law and ordinary partnerships, and was so far clothed with corporate powers that it might be treated, for the purposes of taxation, as an artificial body, proceeded to say: "We think the defendants are an association of the kind to which the statute of 1862 was expressly intended to apply, as well as to bodies CHAP. I.]. EDWARDS V. WARREN &C. WORKS, 21 wholly corporate in their character ; and that, being permitted by the comity of our laws to exercise their functions within this Common- wealth, they can claim no exemption from regulations appropriate to their collective action on account of the citizenship or nationality of their individual members'." In the Supreme Court of the United States, the decree of this court was affirmed, on the ground that the company was a foreign corpora- tion ; but Mr. Justice Bradley, while agreeing in the result, differed on the question whether the company was a corporation. He was of opinion that it was one of those special partnerships called joint stock companies, and that it could not sue or be sued in this country without legislative aid. This view of Mr. Justice Bradley is in accord with the view of this court, and we are not aware that the view taken by the Supreme Court of the United States has been followed in this Commonwealth. The decisions which we have already cited show that a foreign joint stock company is considered as an association or partnership, and not as a corporation. An examination of the statutes further shows that the Legislature has clearly recognized the distinction between foreign corporations and associations ; and that where it has deemed it best that an act should apply to an association as well as to a corporation, it has said so in plain language. Unless the principal defendant can be considered a corporation, it cannot be sued here under the name which the laws of Pennsylvania authorize it to use. Such laws have no extra-territorial force or effect. The trustee, therefore, was properly discharged. In the opinion of a majority of the court, the order discharging the trustee and dismissing the action must be A firmed.^ 'While a joint stock company may be authorized by the laws of the state where organized to institute suit in the name of its officers, that fact carmot give the com- pany power by that name, to sue in a federal court, as if it were a corporation under the rule whereby the members of a corporation for the purposes of suing and being sued in the federal courts, are conclusively presumed to be citizens of the state by whose laws it was created (so as to effect the diversity of citizenship requisite to the jurisdic- tion of those courts). Chapman v. Barney, 129 U. S. 677 (1889). Accord: Great Southern Fire Proof Hotel Co. v. Jones, 177 U. S. 450 (1800), overruling a strong contra presentation in Andrews Bros. Co. i). Youngstown Coke Co., 68 U. S. Appeals 444 (1898) ; Thomas v. Board of Trustees of Ohio State University, 195 U. S. 207 (1904) ; Roundtree v. Adams Express Co., 165 Fed. Rep. 152 (1908). In the Jones case, supra, the court said : — "When the question relates to the jurisdiction of a circuit court of the United States as resting on the diverse citizenshii) of the parties, we must look in the case of a suit by or against a partnership association, to the citizenship of the several persons composing such association. . . . That a limited partnership association created under the Pennsylvania statute may be described as a 'quasi cor- poration' having some of the characteristics of a corporation, or as a 'new artificial person' is not a sufficient reason for regarding it as a corporation within the jurisdic- tional rule heretofore adverted to. That rule must not be extended." In the Thomas case, supra, the court said: — "While the state court may not conclusively determine for this court what is and what is not a corporation within the meaning of the jurisdictional rule that a corporation, for purposes of suing and being 22 THE CORPORATION VIEWED AS A SANCTIONED ENTITY. [CHAP. I. sued in the courts of the United States, is, under the Constitution and laws of the United States, to be deemed a citizen of the State by whose laws it is created, never- theless, this court should accept the judgment of the highest court of a State upon the question whether a particular body created by its laws is or is not a corporation, by virtue of those laws, unless a contrary view is demanded by most cogent reasons involving or affecting the constitutional and statutory jurisidiction of the Federal courts. No such reasons exist in this case ; and accepting the above decision of the Supreme Coiurt of Ohio as correctly interpreting the constitution and laws of that State, we hold that while the defendant Board is clothed with some, it is not clothed with all, of the functions belonging to technical corporations, and is not such a corporation as may sue and be sued in a Circuit Court of the United States as a citizen of Ohio. A con- trary ruling would, we apprehend, produce confusion and embarrassment in litigation relating to those public state institutions or agencies in Ohio which, according to the decision of its highest court, were not endowed, nor intended to be endowed, with corporate powers." CHAP. II.] WILLIAMSON V. SMOOT. 23 CHAPTER II. THE CORPORATION VIEWED AS A PERSON, WILLIAMSON V. SMOOT. 7 Martin (La.) 406. 1819. Mathews, J. delivered the opinion of the court.^ The plaintiffs, having caused an attachment to be levied on the steamboat Alabama, the St. Stephens Steamboat Company intervened in their corporate capacity, and claimed her as their property. The intervening party are a body politic, created by an act of the legislature of the territory of Alabama, the capital stock of which is divided into shares of a certain amoimt, and Smoot, the defendant, owns ten of them. Can the shares or stock of any individual stockholder be legally attached? The existence of the claimants being recognized as a body corporate, and it being admitted that the boat attached belongs to them as a part of their common stock, it is clear that Smoot does not possess such certain and distinct individual property in it, as to make his interest attachable. The estate and rights of a corporation belong so completely to the body, that none of the individuals who compose it has any right of ownership in them, nor can dispose of any part of them. Civ. Code, 88, Art. 11. The court is of opinion that the district court erred in disallowing the claim of the company. It is therefore adjudged, that the judgment be annulled, avoided and reversed, and that the attachment of the plaintiff and appellant be quashed, so far as it relates to the said steamboat the Alabama, and that she be released therefrom.^ ' Part of opinion omitted. ^Accord: Queens. Ainaud, 16 L. J. N. S. 50. ("The individual members of the corporation, no doubt, are interested in one sense in the property of the corporation, as they may derive individual benefit from its increase or loss from its destruction; but in no legal sense are the individual members the owners.") 24 THE CORPORATION VIEWED AS A PERSON. [CHAP. II. BUTTON V. HOFFMAN. 61 Wis. 20. 1884. Replevin. The facts sufficiently appear from the opinion. The defendant appealed from a judgment in favor of the plaintiEf. Orton, J.i This is an action of replevin in which the title of the plaintiff to the property was put in issue by the answer. In his instructions to the jury the learned judge of the circuit court said : "I think the testimony is that the plaintiff had the title to the property." The evidence of the plaintiff's title was that the property belonged to a corporation known as "The Hayden & Smith Manu- facturing Company," and that he purchased and became the sole owner of all of the capital stock of said corporation. As the plaintiff in his testimony expressed it, " I bought all the stock. I own all the stock now. I became the absolute owner of the mill. It belonged at that time to the company, and I am the company." There was no other evidence of the condition of the corporation at the time. Is this sufficient evidence of the plaintiff's title? We think not. From the very nature of a private business corporation, or, indeed, of any corporation, the stockholders are not the private and joint owners of its property. The corporation is the real, though artificial, person substituted for the natural persons who procured its creation and have pecuniary interests in it, in which all its property is vested, and by which it is controlled, managed, and disposed of. It must purchase, hold, grant, sell, and convey the corporate property, and do business, sue and be sued, plead and be impleaded, for corporate purposes, by its corporate name. The corporation must do its busi- ness in a certain way, and by its regularly appointed officers and agents, whose acts are those of the corporation only as they are within the powers and purposes of the corporation. In an ordinary copartnership the members of it act as natural persons and as agents for each other, and with unlimited Uability. But not so with a cor- poration ; its members, as natural persons, are merged in the corporate identity. Ang. & A. on Corp. sees. 40, 46, 100, 591, 595. A share of the capital stock of a corporation is defined to be a right to partake, according to the amount subscribed, of the surplus profits obtained from the use and disposal of the capital stock of the company to those purposes for which the company is constituted. Id. sec. 557. The corporation is the trustee for the management of the property, and the stockholders are the mere cestui-que-trusts. Gray v. Portland Bank, 3 Mass. 365; Eidman v. Bowman, 4 Am. Corp. Cas. 350, ' Portions of opinion omitted. CHAP. II.] BUTTON V. HOFFMAN. 25 The right of aKenation or assignment of the property is in the cor- poration alone, and this right is not affected by making the stock- holders individually liable for the corporate debts. Ang. & A. on Corp. sec. 191 ; Pope v. Brandon, 2 Stewart (Ala.), 401 ; Whitwell v. Warner, 20 Vt. 444. The 'property of the corporation is the mere instrument whereby the stock is made to produce the profits, which are the dividends to be declared from time to time by corporate authority for the benefit of the stockholders, while the property itself, which produces them, continues to belong to the corporation. Brad- ley V. Holdsworth, 3 Mees. & W. 422 ; Waltham Bank v. Waltham, 10 Met. 334 ; Tippets v. Walker, 4 Mass. 595. The corporation holds its property only for the purposes for which it was permitted to acquire it, and even the corporation cannot divert it from such use, and a shareholder has no legal right to it, or the profits arising therefrom, until a lawful division is made by the directors or other proper oflBcers of the corporation, or by judicial determination. Ang. & A. on Corp. sees. 160, 190, 557 ; Hyatt v. Allen, 4 Am. Corp. Cas. 624. A convey- ance of all the capital stock to a purchaser gives to such purchaser only an equitable interest in the property to carry on business under the act of incorporation and in the corporate name, and the corporation is still the legal owner of the same. Wilde «. Jenkins, 4 Paige, 481. A legal distribution of the property after a dissolution of the corporation and settlement of its affairs, is the inception of any title of a stockholder to it, although he be the sole stockholder. Ang. & A. on Corp. sec. 779a. These general principles sufficiently establish the doctrine that the owner of all the capital stock of a corporation does not therefore own its property, or any of it, and does not himself become the corporation, as a natural person, to own its property and do its business in his own name. While the corporation exists he is a mere stockholder of it, and nothing else. The consequences of a violation of these principles would be that the stockholders would be the private and joint owners of the corporate property, and they could assume the powers of the corporation, and supersede its functions in its use and disposition for their own benefit without personal liability, and thus destroy the corporation, terminate its business, and defraud its creditors. The stockholders would be the owners of the property, and, at the same time, it would belong to the corporation. One stockholder owning the whole capital stock could, of course, do what several stockholders could lawfully do. It is said in Utica v. Churchill, 33 N. Y., 161, "the interest of a stockholder is of a collateral nature, and is not the interest of an owner" ; and in Hyatt v. Allen, supra, that "a share- holder in a corporation has no legal title to its property or profits until a division is made." In Baldwin v. Canfield, 26 Minn. 43, it was held that the sole owner of the stock did not own the land of the corporation so as to convey the same. In Bartlett v. Brickett, 14 26 THE CORPORATION VIEWED AS A PERSON. [CHAP. II. Allen, 62, an action of replevin was brought by A., B., and C, as the "Trustees of the Ministerial Fund in the North Parish in Haverhill", which was the corporate name. In portions of the writ the plaintiffs were referred to as "the said trustees" and "the said plaintiffs." In the bond, "A., B., and C, trustees as aforesaid", became bound, and the officer, in his return, certified that he had taken a bond "from the within-named A., B., and C", and the property was receipted by "A., B., & C, plaintiffs." It was held that the action was not by the corporation, as it should have been, and judgment was rendered for the defendant. In Bennett v. Am. Art Union, 5 Sandf. Super. Ct. 614, it was held that, "as a general rule, the whole title, legal and equi- table [to its property], is vested in the corporation itself," and that the individual members have no other or greater interest in it than is expressly given to them by the charter, and the prayer of the com- plainant, as a shareholder in the Art Union, for an injunction against a certain disposition of its property, was denied, because he had no interest in it. It is true that none of the above cases are precisely parallel with the present case in facts, but they are sufficiently analogous to be authority upon the principle that the plaintiff, as the sole stockholder of the corporation, is not the legal owner of its property. He may have an equitable interest in it, but in this action he must show a legal title to the property in himself in order to recover, and he has shown that such title is iu another person. Timp v. Dockham, 32 Wis. 146 ; Sensenbrenner v. Mathews, 48 Wis. 250. In analogy to the above principle it was held in Murphy v. Hanrahan, 50 Wis. 485, that the sole heirs of an estate did not have such a legal title to a promissory note given to their father as would entitle them to sue the maker upon it, because the title to it was in the administrator, and they could obtain the title only by administration and distribution according to law. The heirs in that case certainly had, as much equitable interest in that note as this plaintiff has in the property in controversy. The want of title to the property being fatal to the plaintiff's recovery in the action between the present parties, other alleged errors will not be considered. By the Court. — The judgment of the circuit court is reversed, and the cause remanded for a new trial} 1 Accord: Parker v. Bethel Hotel Co., 96 Tenn. 255. (Owner of all of the corporate stock cannot make valid conveyance of its realty except in its name signed thereto by an agent thereunto duly authorized by its board of directors. Nor does his sole pro- prietorship of all its stock dissolve the corporation or make him equitable owner of its property.) In Continental &c. Co. Ltd. v. Daimler Co. Ltd. (1915), 1 K. B. 893 (Held — A British corporation, all of whose directors were Germans resident in Ger- many and all of whose 25,000 shares except one were held by Germans so resident, was an English subject in times of war as well as peace, and hence not an alien enemy subject as such to common law disabilities and those imposed by Royal Proclamation in force during the war between England and Germany. "It remains an English company regardless of the residence of its shareholders or directors either before or after the dec- CHAP. II.] GALLAGHER V. GEKMANLA BREWING CO. 27 GALLAGHER v. GERMANIA BREWING CO. 53 Minn. 214. 1893. Mitchell, J. The plaintiff, as assignee of one Westphal under a general assignment for the benefit of creditors, brought this action to recover for goods sold and deUvered by his assignor to the defendant corporation. Jacob Barge and John Vander Horck intervened, and set up in their complaint that they owned, and for nearly two years had owned, (each one-half,) all the capital stock of the defendant, no other person but themselves having any interest in the stock or prop- erty of the corporation ; that each of them had a valid and unsatisfied judgment against Westphal upon a cause of action which accrued before the assignment to plaintiff ; that Westphal was, and for over two years had been, utterly insolvent ; and that his estate, of which plaintiff is the assignee, was so hopelessly insolvent that it was insufficient to pay even the expenses of administering the assignment. The relief, sought was that their claims against Westphal might be allowed, in equal amounts, as equitable set-offs to the claim of the plaintiff against the defendant corporation. From an order over- ruUng a demurrer to the complaint, the plaintiff appeals, his conten- tion being — First, that Barge and Vander Horck had no such interest in the litigation as to entitle, them to intervene ; second, that their claims cannot be set off against a claim against the corporation, because a corporation is a legal entity, entirely distinct from its stock- holders. These two propositions amount really to the same thing, for, if Barge and Vander Horck .cannot set off their claims against that of plaintiff against the corporation, they have no such interest in the subject of litigation as would entitle them to intervene ; on the other hand, if their claims are proper equitable set-offs, their right to inter- vene for the purpose of setting them up is very clear. The case is certainly a novel one, for we doubt whether an instance can be found in the books where stockholders ever attempted to set up their several equities by way of set-off to claims against the corporations. Of course, the want of a precedent is by no means controUing with courts, especially in administering equitable rehef ; but it would seem that, if the relief here asked was consistent with legal or equitable principles, some case would be found where it had been granted. laration of war. ... It is a living thing with a separate existence which cannot be swept aside as a technicality. It is not a mere name or mask or cloak or device to con- ceal the identity of persons and it is not suggested that the company was formed for any dishonest or fraudulent purpose.") In People's &c. Park Co. v. Rohleder, 109 Va. 439, held a restrictive covenant that title to the laud in controversy should never "vest in a person or persons of African descent" is not breached by conveyance to a corporation composed entirely of colored people. 28 THE COEPORATION VIEWED AS A PERSON. [CHAP. II. The facts of the present case appeal to a natural sense of justice, for while, by fiction of law, a corporation is a distinct entity, yet in reality it is an association of persons who ape in fact the beneficial owners of all the corporate property. Hence, if interveners cannot set off their claims, the practical result is that Westphal's estate will collect its entire claim out of what is really their property, while the- estate is at the same time indebted to them on claims of greater amount, which they will wholly lose because of Westphal's insolvency ; but, as has been often said, hard cases are hable to make bad law. The right of equitable set-off is, of course, not derived from, or dependent upon, statute, but rests upon a distinctly equitable doc- trine, which courts of equity have applied on certain well-recognized equitable grounds, the object being to effect a clear equity and pre- vent irremediable injustice ; and it may be stated as a general rule that, whenever necessary to accomplish that end, the courts will permit an equitable set-off, although the debts accrued in different rights ; as, for example, by allowing a separate debt to be set off against a joint debt, or, conversely, a joint debt against a separate debt. They will also disregard the nominal parties to the record, and consider the real parties in interest ; as, for example, when the assignor of a chose in action sues for the benefit of the assignee, or a trustee for the benefit of the cestui que trust. Hence; had the plain- tiff's claim been a joint one against the interveners, there would have been no doubt of their right to set off their separate claims against it, for insolvency is well recognized as a distinct equitable ground for allowing such a set-off. But such a case is not analogous to the present. To allow the set-off here, it is necessary to wholly ignore the legal doctrine, or fiction, whichever you may call it, that a corporation is an entity separate and distinct from the body of its stockholders, and to treat it as a mere association of individuals who are the real parties in interest. In dealing with the rights of creditors, and the obhgations existing between a corporation and Its share- holders by reason of their contract of membership, undoubtedly the courts often find it necessary to consider the real parties in interest as the individual shareholders ; but it may be laid down as a rule that, expept in such cases, it has been found absolutely essential, for the administration of justice, to treat a corporation as a collective entity, without regard to its individual shareholders. In no other way can the title to corporate property be kept free from compUcation and uncertainty. The transferable nature of stock in a corporation is also a good reason why the theory of a corporate entity should be pre- served, and why it is necessary to discriminate sharply between corporate rights and obhgations and those of shareholders personally. If the rights or liabilities of a corporation could be affected by the acts of the stockholders, except when acting in the corporate, name, or if shareholders could set up their several equities against persons CHAP. II.] JACKSON V. HOOPER. 29 having claims against the corporation, or, conversely, if claims in favor of the corporation could be set off against claims against individ- ual stockholders, it can easily be seen into what confusion and chaos corporate affairs would inevitably fall. Inasmuch as the two interveners own all the stock of this corpora- tion, the facts of this case seem comparatively free from embarrass- ments, and the contention of respondent quite plausible. But, sup- pose there were fifty other stockholders, (which would not alter the principle,) what would be the result? Could interveners then inter- pose their claims as set-offs, and, if so, could they do so to the full amount of their claims, or only in the proportion which their shares bore to the whole capital stock? And, if the former, would they have a claim for the excess against the corporation, or a right to callon the other stockholders for contribution? Again, the right of set-off, if any exists, must be mutual. Hence, if stockholders can interpose their individual demands as set-offs to a demand against the corporation, it follows that a defendant can set up demands against the individual stockholders as set-offs to demands in favor of the corporation. Illustrations might be multipUed indefinitely to show that to recog- nize any such right would result in the worst sort of complications, and that the only safe or sound rule is to adhere strictly, in such cases, to the doctrine of a corporate entity distinct from the individual stockholders. What means, if any, the interveners might have had, or may here- after have, of protecting themselves, it is not now our business to inquire, but we are clear that their claims against plaintiff's assignor are not the subjects of equitable set-off to a claim against the defend- ant corporation. Order reversed. JACKSON V. HOOPER. 76 N. J. Eq. 592. 1909.' 27 L. R. A. (N. S.) 658. Dill, J. The bill and injunction in this case rest upon the theory that the complainant, who united with the defendant Horace E. Hooper in "acquiring in equal shares all the stock of two foreign cor- porations, pursuant to an agreement claimed to create a partnership or joint adventure, is entitled to treat the two corporations, organized under foreign laws, as mere agencies or instrumentalities in the conduct of the joint business and to subject not only the stock owned by both parties, but all the corporate property to the control of the ' Portions of opinion omitted. 30 THE CORPORATION VIEWED AS A PERSON. [CHAP. II. court of chancery according to the principles of the law of partner- ship. The vice-chancellor held that "the complainant and the defendant Horace E. Hooper were engaged as principals in a joint undertaking " ; that "the English and lUinois corporations were respectively agencies by which they accomplished their results", and that, as the rules governing partnerships applied, a preliminary injunction should be granted. From the injunction brder the defendants appeal. We are constrained to differ radically from the learned vice-chancel- lor in his views of the power and scope of the court of chancery, in dealing with corporate property, and we reach the conclusion that neither the bill nor the injunction can be sustained. Prior to 1900 the complainant and the defendant Horace E. Hooper had been associated in London, England, in the business of publishing and selling subscription books, "through the agency of a company known as ' The Clarke Company, Ltd. '," an English corpora- tion. In 1900 they acquired in equal portions all the stock of that company under an agreement that "upon the acquisition of the Clarke interests and so long as they might be associated together in business, their general pohoy in respect of their joint undertakings should be determined by mutual assent, each to have and exer- cise the authority and control of equal partners." In 1902, to avoid the English tax law, the business transacted in England was separated from that conducted elsewhere. The Clarke Company, Ltd., was dissolved, and its assets and all the busi- ness carried on by the parties in interest were conveyed to two cor- porations, one "Hooper & Jackson, Ltd.", of England, to carry on the business in the United Kingdom; the other, a New York cor- poration, "The Encyclopaedia Britannica Company", to operate else- where. The stock and securities of these corporations were issued to the two parties equally in payment for the property thus acquired by the corporations from these parties. The bill alleges that both these corporations were "intended to become merely instrumentalities or agencies for carrying out certain partnership purposes", and to be subject to the original agreement. In 1903, for reasons of their own, the parties dissolved the New York corporation and transferred its assets to an Illinois corporation of the same name and under the same general understanding that the busi- ness should be carried on as a partnership, with five directors, of whom the complainant and Hooper were two, the other three being "nomi- nal" directors. As to the "nominal" directors the bill alleges in the plainest lan- guage that they were mere dummies, both in the New York company and its successor, the Illinois corporation, and says : "It was clearly understood that the election of particular persons 'to these three positions was not intended to, and did not, confer upon them any CHAP. II.] JACKSON V. HOOPER. 31 authority or control or the management of the business of the plaintiff and Hooper, but that at all times such persons, employees or others, should have no right or authority whatever in corporate matters other than to vote as directed by Hooper and the plaintiff acting jointly." From 1902 to 1908 the business in which the companies were engaged, including the publication of the Encyclopaedia Britan- nica, extended all over the civilized world and ran up into millions, the accounts receivable alone, at the time of the filing of the bill, amounting to over $2,000,000. During all this time, according to the bill, the business was conducted in the names of corporations but always in accordance with the original agreement as to equal owner- ship, interest, authority and control, the three nominal directors being mere employees and automatons of the parties, and the existence of the corporations being always disregarded- "except as agencies and instrumentalities created by them for carrying out certain of their co-partnership purposes." In 1908 the complainant and Hooper quarreled as to the business policy, and their differences having become irreconcilable the thereto- fore dimimy directors voted with Hooper and against the complainant. This, as the bill puts it, constituted a breach of the so-called partner- ship agreement that Jackson and Hooper should have equal control and equal voice in the management of the companies and that the other three directors should be and remain dummies. The charge of the bill is that Hooper and the three nominal directors passed corporate resolutions and amended by-laws which changed the complainant's alleged partnership control, contrary to his wish, or, in other words, that the three dummy directors, assisting Hooper, practically ousted the complainant from his alleged partnership con- trol over the corporation. This was done by the passage of resolu- tions, as, for example, requiring checks to be signed by two officers, thus putting it out of the complainant's control to draw on the assets of the company, as a partner would, whenever he saw fit and by his own check. The reUef asked for is that the court appoint a receiver of all the assets and joint property of the complainant and the defendant Horace E. Hooper, including their stock in the two corporations, such receiver to have the usual powers of receivers of assets of a copartner- ship ; that the defendants — directors of the Illinois corporation — • be restrained from selling any of the assets of the copartnership, including such stock, or from voting upon the same ; from withdraw- ing from the business heretofore conducted by Hooper and the com- plainant or from any one of their bank accounts, in whatever name the same may be, any money otherwise than in the ordinary course of business ; that defendants be restrained from preventing complainant from participating, as prior to 1908, in the conduct of the business carried on by the complainant and Hooper, whether the said business 32 THE CORPORATION VIEWED AS A PERSON. [CHAP. II. is carried on in the name of themselves or their compadnies ; that the defendants be enjoined from causing any assets of the copartnership to be transferred to or bytjie Illinois corporation, irrespective of the name in which such assets stand, from selling either the English or American rights of the Encyclopadia Britannica, eleventh edition, or disposing, except in the ordinary course of business, of any other assets of the copartnership, whether they stand in individual or corporate names ; that the copartnership be dissolved, that an account be taken and that the assets of the copartnership be sold and distributed between the complainant and Horace E. Hooper. After a careful review of the facts the vice-chancellor concluded that while the complainant had been unable to establish the existence of a copartnership between himself and Horace E. Hooper, he did prove that "the series of transactions set out in the bill . . .belonged to that class of transactions which are known by the name of joint adventures" and are subject to the same rules of law which apply to partnerships. He held that the complainant was entitled to a pre- liminary "injunction broad enough to hold the status quo and yet so limited as not to interfere with the orderly, regular and usual conduct of the business." He granted an injunction which, although reciting that nothing therein should "interfere or be deemed to interfere with the integrity or autonomy of the two corporations mentioned in the bill of com- plaint, to wit, Hooper and Jackson, Ltd., an English corporation, and the Encyclopaedia Britannica Company, an Illinois corporation, or either of them, or to interfere with the business or property of either of said corporations, except as herein specifically stated", forthwith pro- ceeds to enjoin the defendants, who, with the complainant, constitute the entire boards of directors of the English, and IlUnois corporations, from transferring any of the shares of stock therein, from withdrawing from the business of the complainant and Hooper or "from any one of the bank accounts of the said business, in whatever name the same may be, any money or moneys for the private or personal use of the defendants ... or otherwise than in the payment in the ordinary • course of business," except that such defendants as are employees may receive their respective salaries. He further issued a mandatory injunction that the complainant and the defendant Horace E. Hooper may withdraw such sums for their private use as they may mutually agree upon, or, in absence of an agreement between them, that each may draw $5,000 per month ; that either complainant or said Hooper shall have the right to sign checks for such amount, except that any debt of the business may be paid out of the funds thereof in whatever name standing. The order further enjoins the defendants from inter- fering with the complainant in his entrance and exit to and from any office where the business is carried on or in his examination of its books and accounts, and proceeds to enjoin the defendants from trans- CHAP. II.] JACKSON V. HOOPEK. 33 ferring or causing to be transferred any of the assets of the English corporation to the lUinois corporation, or vice versa, except in the regular course of business, and from "selling or causing to be sold" the rights, of the Encyclopaedia Britannica Company in the eleventh edition, or "any assets of the said business carried on by the com- plainant and the defendant Horace E. Hooper, in whosesoever name the same may stand." In our view of the case the fundamental question is not whether the complainant has estabUshed the agreement alleged, but whether, assuming that he has, the court has the power to enforce it. The first question to be discussed is whether, assuming the fact of the partnership or joint adventure as alleged to be satisfactorily proven, the complainant and the defendant, after the organization of the foreign corporations, were, as matter of law, partners or merely shareholders. It is conceded that the corporations in question were legally organized, existing and doing business under foreign laws. It is not disputed that when the corporations were formed and the stock and bond interests acquired the parties retained no legal title to the property or business transferred. It is not questioned that the forms of law were complied with by the election of directors and officers and the prosecution of the corporate business. Indeed, the record abounds with evidence establishing the fact that the corpora- tions as such, through their ofiicers and agents, made contracts and in general transacted the business for which they were organized. Thus, from 1904 to 1909, promissory notes for over a million dollars were executed by and in the name of the Illinois corporation. It is true that directors' and stockholders' meetings were seldom held and that the financial and other business affairs of the corporation were often informally and loosely conducted, yet, on the whole, the operations of the companies were the same as those of innumerable other so-called "close corporations" in which all the stock is held by a few persons who are as one in the conduct and policy of corporate action. It is claimed, however, that these owners of all the stock were really copartners, doing business in corporate form for their own convenience, and that a court of equity has the power to control the property and affairs of the companies even to the extent of eliminating the corporate functions and powers as mere incidents and wholly disregarding the substantive law governing the creation, supervision and dissolution of corporations. We cannot subscribe to any such doctrine. An agreement or course of dealing by which corporations are organized for the purpose of using them merely as agencies or instru- mentaUties, or forms in the conduct of a copartnership or joint busi- ness, and by the consent of the parties in interest to be independent 34 THE CORPORATION VIEWED AS A PERSON. [CHAP. II. of statutory control, cannot be recognized, enforced or perpetuated by the court of chancery in this state. It is fundamental that, no matter how the shares of stock are held, the corporation itself is an entity wholly separate and distinct from the individuals who compose and control it.^ The complainant and the defendant, though owning the entire capital stock of the two corporations, are not, as expressed by Chief- Justice Waite in the leading case of Pullman Palace Car Co. v. ' Thus in Hall's Safe Co. v. Herring-Hall-Marvin Safe Co., 146 Fed. 37, the "Hall's Safe & Look Company," an Ohio corporation, sold for a valuable consideration all its property and good wUl to the complainant, "Herring-Hall-Marvin Safe Co.," a N. J. corporation, and covenanted to close up its afjairs and be dissolved and not to continue or engage in its former business. This sale and agreement were assented to by the individual defendants, then stockholders in and some of them officers of the Ohio corporation. Thereafter they organized a new corporation, the other defendant and appellant, "Hall's Safe Co.", and this company then engaged in the business of manu- facturing andselling safes. This bill in equity sought to restrain the several defendants from conducting such business. The court said (at page 40) : — "Undoubtedly the Herring-Hall-Marvin Company acquired by its contract of pur- chase with the Hall's Safe & Lock Company all its physical properties and the good will which it had acquired in its business, as well as the right to use such trade-names as had been customarily used to identify its products. It acquired also the right to require that the Hall's Safe & Lock Company should go out of business, or, in substance, that it should not longer engage in business of the kind which it sold to the Herring-Hall- Marvin Company. But it is contended that the contract reaches beyond the corpora- tion, the Hall's Safe & Lock Company, and binds the defendants who were stockholders and officers of the corporation, and prevents them and any corporation of which they may become stockholders and managers from doing what the Hall's Safe & Lock Com- pany could not do ; and the principal reason for this contention is the fact that these individual defendants participated in the sale, and as stockholders received its benefits. We are of opinion that this proposition cannot be sustained. The contract which the Herring-Hall-Marvin Company had was with the corporation only, and not with its stockholders or ofiicers. The officers who conducted the business of the selling company were not parties to the contract. It is a familiar rule that an agent, who, having lawful authority, makes a contract with another for a known principal, does not bind himself, but his principal only (Story on Agency, § 261 ; Mecheni on Agency, § 555 ; Whitney 11. Wyman, 101 U. S. 392, 25 L. Ed. 1050) ; and the officers of a private corporation, in respect to their liability on contracts eutfered into by them in behalf of the corporation, stand upon the same footing as agents of private individuals (21 Am. &'^Eng. Ency. of Law [2d Ed.] 879 ; Whitney ». Wyman, supra). If the purchaser desired to make the officers and agents of the selling corporation subject to the stipulations of the company in the contract of sale, it should have required their personal agreement to that effect. " The cases cited by counsel for the complainant to support their contention that the court may look through the form of a corporate organization, and fasten upon the stockholders a Kability for the acts of the corporation, do not support such a doctrine as applicable to contract relations. These are State v. Standard Oil Co., 49 Ohio St. 137, 30 N. E. 279, 15 L. R. A. 145, 34 Am. St. Rep. 541, McKinley v. Wheeler, 130 U. S. 630, 9 Sup. Ct. 638, 32 L. Ed. 1048, and Anthony v. American Glucose Co., 146 N. Y. 407, 41 N. E. 23. They were all cases where, for special purposes and in special circum- stances, the court held that it was competent and proper to regard the rights and duties of stockholders in corporations. None of them impugns the general rule above stated that in matters of contract the officers and agents of a corporation are not bound personally by stipulations made by them in behalf of their principal. This rule is not affected by the circumstance that they are indirectly interested as stock- holders m the contracts of their corporation. If it were so, it would break down all distinction between the corporate entity and its component parts." Accord: Moore & Handley &c. Co. v. Towers &c. Co., 87 Ala. 206. (Bill for injunction retained, however, on allegation that new corporation had "ratified" the individual contracts made previously by its organizers.) CHAP. II.] JACKSON V. HOOPER. 35 Missouri Pacific Railway Co., 115 U. S. 587, "the corporation, in the sense of that term as applied to the management of the corporate business or the control of the corporate property." The law never contemplated that persons engaged in business as partners may incorporate, with intent to obtain the advantages and immunities of a corporate form and then, Proteus-like, become at will a copartnership or a corporation, as the exigencies or purposes of their joint enterprise may from time to time require. The policy of the law is to the contrary. If the parties have the rights of partners they have the duties and liabilities imposed by law ' and are responsible in solido to all creditors. If they adopt the corporate form, with the corporate shield ex- tended over them to protect them against personal liability, they cease to be partners and have only the rights, duties and obligations of stockholders. They cannot be partners inter sese and a corpora- tion as to the rest of the world. Furthermore, upon grounds of pubhc policy, the doctrine contended for cannot be tolerated as it renders nugatory and void the authority of the legislature — a co-ordinate branch of the government — estab- " lished by the constitution in respect to the creation, supervision and winding up of corporations. These views are amply sustained by abundant authority. "A corporation is a legal person just as much as an individual," said the court in Sheffield, &c.. Building Society, 22 Q. B. D. 476. And in Society v. Abbott, 2 Beav. 567, Lord Langdale, master of rolls, held that, as in this case, great confusion arises by failure to distin- guish the body corporate from the individuals who constitute, "not the corporation, but all the members of the corporation." The doctrine repeatedly urged by the complainant and adopted by the vice-chancellor, viz., that "the English and Illinois corpora- tions were, respectively, agencies by which they (Jackson and Hooper) accomphshed their results," was expressly repudiated by the house of lords in Salomon v. Salomon, Limited, 45 Week. Rep. 193 ; L. R. App. Cas. (1897) 22, where Lord Halsbury met this argument, saying : " I will, for the sake of argument, assimie the proposition that the cotu-t of appeal lays down, that the formation of the company was a mere scheme to enable Salomon to carry on business in the name of the company. . . . Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Salomon. If it was not, there was no person and no thing to- be an agent at all, and it is impossible to say at the same time that there is and there is not a company." And Lord Macnaghten thus concurred : "The company is at law a different person altogether from the subscribers to the memorandum, and, though it may be that after 36 THE CORPORATION VIEWED AS A PERSON. [CHAP. II. incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them." I Two years earlier Lord- Justice Lindley' asserted the same rule in the case of Newman & Co. (1895), 1 Ch. 674, 685 : "It is true that this company was a small one, and is what is called a private company, but its corporate capacity cannot be ignored. Those who form such companies obtain great advantages, but ac- companied by some disadvantages. . . , An incorporated com- pany's assets are its property and not the property of the shareholders for the time being. . . . The court is bound to recognize the com- pany as incorporated, and to give effect to all the consequences of such incorporation." The same theory and the same argument urged upon this court by the complainant's counsel were presented to the court of last resort of Massachusetts more than seventy-five years ago, and in a case strikingly similar to and on all fours with the case at bar. That court characterized the argument as ingenious but declared the theory fallacious and the conclusions unsound. Russell v. M'Lellan, 14 Pick. 63. The Massachusetts court said of the bill in that case : "This wa,s a bill in equity, setting forth that the plaintiff and the defendant were owners of a manufactory in Framingham from 1823 to the time of filing the bill ; that in 1826 they organized themselves, under an act of incorporation passed in 1813, by the name of the Framingham Manufacturing Company, and that the business, both before and after such organization, was carried on by them jointly as partners, and praying for an account and for general reUef." The plaintiff and the defendant purchased in equal portions the entire stock of a manuf actiu-ing company pursuant to a written agree- ment that they should thereby become partners in the business thus carried on. The issue was as to whether the plaintiff and the defendant were partners or shareholders. The court, after discussing the difference in law between a shareholder and a partner, said : "It was argued that the proposal of the defendant to the plaintiff to become jointly interested in this concern, each taking eight shares, made them partners or joint tenants or tenants in common, ipso facto, upon its adoption. But we cannot perceive that inference, for the corporation continued. The parties did not, by the new arrange- ment, acquire a legal title to the corporate property. They had, indeed, joint and equal control over it, but their acts and doings must appear through the proceedings of the corporation in the due forms of the law. "It is said that the parties held for two years without doing any CHAP. II.] JACKSON V. HOOPER. 37 corporate act. If it were so, we cannot perceive that they would become partners instead of corporators. "Upon the whole, we are of opinion that these parties are not partners, tenants in common or joint tenants, and that the bill must be dismissed." In this state, Einstein v. Rosenfeld, 38 N. J. Eq. (11 Stew.) 309, announces the same rule. The facts were similar to those in the case at bar, excepting that the corporation was a domestic one. Chancellor Runyon said : " It is urged, however, that in this case the corporation was but a mere form which the partners gave to what was, iii fact, only a co- partnership, and that this court is therefore at hberty to treat and deal with it as a copartnership. The bill alleges that the corporation is a quasi partnership. It appears by the answer that a partnership was at first agreed upon between the parties, but it was afterwards agreed between them to form a corporation instead. It is entirely clear that the court, in dealing with the subject, must treat the com- pany as a corporation, and it cannot, in order to acquire jurisdiction over it to dissolve it, disregard and ignore its form and character." This decision was quoted with approval by this court in Sternberg v. Wolff, 56 N. J. Eq. (11 Dick.) 389. Two sets of stockholders were contending for control. Complainant owned one-half of the stock and defendant the other half. Suit was filed to restrain the defendant from acting as treasurer and for a receiver. In denying an order for an injunction and receiver, Vice-Chancellor. Pitney held that the remedies available as between partners and "joint adventm-ers" cannot be applied to stockholders of corporations. The basic proposition upon which the bill and the injunction rest, viz., the partnership and agency theories, having thus been disposed of adversely to the complainant, the contention that a court of eqmty, acting in -personam, may bind the conscience of a party even to the extent of sequestrating property in a foreign state, falls with it. The remaining questions, two in number, are controlled by well- settled and famiUar rules of corporation law. [The Coiurt then decides (1) that the contract upon which com- plainant reUes is unenforceable as contrary to law so far as it provides for the creation, election and maintenance of dummy directors ; ' (2) that equity had no jurisdiction to exercise visitorial powers over foreign corporations and regulate the management of their internal affairs.^] We hold that the parties are not partners as to the corporate property, but merely stockholders in two foreign corporations, distinct legal entities; that the agreement whereby these dummy directors ' See cases infra in Book IV, Chap. 3, Sec. 2 ; also McCarter v. Firemen's Ins. Co., 74 N. J. Eq. 372 infra. ' See cases infra in Book IV, Chap. 3, Sec. 2. 38 THE CORPORATION VIEWED AS A PERSON. [CHAP. II. were bound to act in accordance with the will of the complainant and Hooper was illegal and therefore unenforceable in any court; that the whole subject-matter of the controversy relates to, and the injunction attempts to regulate, the management of the internal affairs of two foreign corporations ; that the court of chancery has no juris- diction to entertain the bill and that the injunction and all proceedings thereunder should be vacated and held for naught. For the reasons already given the order appealed from is reversed, with costs. AMERICAN SODA FOUNTAIN CO. v. STOLZENBACH. ' 75 N. J. L. 721. 1908. DiLLj J. The American Soda Fountain Company, a New Jersey corporation, sold a fountain to one Brownley, who gave his notes therefor to the company, secured by a chattel mortgage upon the property, which was duly recorded. Subsequently, a judgment creditor of the mortgagor seized the property in the mortgagor's possession. The American Soda Fountain Company thereupon instituted an action in replevin, in which the defendant claimed title under a judgment, execution and sheriff's sale, the company, in oppo- sition to this claim, relying upon its chattel mortgage. The case was tried upon stipulated facts on the theory that, if the affidavit to the chattel mortgage complied with the statute, title was in the mortgagee, the plaintiff in error here. The affidavit was as follows : " County of Philadelphia, 1 • " State of Pennsylvania, j ^^' "Alfred H. Lippincott, of full age, being diily aiflrmed according to law, saith that he is vice president of American Soda Fountain Co., the mortgagee named in the foregoing chattel mortgage ; that the true consideration thereof is for one 20 Syrup 6 Draught ' Penrose ' Soda Water Apparatus . . . , and that the amount due and to grow due thereon is the sum of Two thousand and two hundred and twenty-seven dollars, with interest. ... "A. H. Lippincott, " Vice President. "Affirmed and subscribed to before me this twenty-third day of October 1901. "Daniel S. Mann, "Commissioner of Deeds for New Jersey." Admittedly the mortgage in question is void as to the defendant in error unless it had "annexed thereto an affidavit or. affirmation. CHAP. II.] AMERICAN SODA FOUNTAIN CO. V. STOLZENBACH. made and subscribed by the holder of said mortgage, his ager attorney, stating the consideration of said mortgage and as near possible the amount due and to grow due thereon." Chattel IV gage act (Pamph. L. 1902, p. 487, § 4). The second ground of attack of the defendant in error rests on premises : The first, that when a statutory affidavit is made by an ager by an attorney specially appointed, the affidavit must demonsi by recitation that the affiant is in fact such agent or attorney, is ^ appointed, and that, in the making of the affidavit, he is acting wi the scope of his authority. The second, that a corporation cannot make such an affid per se, but only per alium by an agent or by an attorney. Resting upon these premises the defendant in error urges that affidavit of consideration in this case, reciting that the affiant is vice president of the corporation, the holder of the mortgage, nullity, and that therefore the mortgage is void as against credit His points are : First, that the vice president, as such, vi\ officii has no authority, prima facie, to act for the corporation in matter; in other words, that our corporation statute does no express terms name the vice president as a statutory officer and < not define his powers ; second, the first proposition being correct, the affidavit of an officer comes within the rule above cited as to requisites of an affidavit by an attorney or agent and should 1 set forth that the affiant was the agent or attorney of the corporal was duly appointed and was acting under corporate authority. Assiuning, but not deciding, that the requirements as to an affid made by an attorney or agent are as stated in the first premise, ii effect of the statute under consideration was to limit the clas persons by whom the affidavit might be made to agents and atton of the holder, there would be more force in the criticism of the def ant in error. On the contrary, the statute specifically provides that the affid is to be made by the "holder" of the mortgage, adding in the a native "his agent or attorney." Inasmuch as a corporation ma; a holder of a chattel mortgage, a judicial decision that as such ho it may make the affidavit only by an agent or attorney speei appointed, would rest either upon the denial of the right of a corp tion to be a holder within the meaning of and entitled to the ben of the statute, or else upon the assumed right of the court to nu one of the three modes by which the legislature has allowed affidavit to be made. There is, however, no necessity for assur either of these untenable positions. A corporation may be a ho of a chattel mortgage and may make this statutory affidavit, as s 40 THE CORPORATION VIEWED AS A PERSON. [CHAP. II. holder, through its administrative officers, or it may make it by a duly authorized agent or by its attorney. The fallacy of the argument of the defendant in error is that it fails to note the distinction between a corporate act, performed through the intermediation of a person specially empowered to act as its agent or its attorney, and a like act done immediately by the corporation through its own administrative officers, its inherent agencies. The right of an artificial person to empower and employ agents or attorneys is identical with that of a natural person — each is governed alike by the law of principal and agent. The fundamental difference between the natural and the artificial person is that the latter, even when not acting as a principal through the intermediation of an agent, acts through some agency, inherent in its corporate form. Normally such agency inheres in the natural persons who hold and administer the offices of the corporation. The analogy of a natural body having a head and members holds good in the case of the artificial body, the common and declared law recognizing that the officers are the means, the hands, the head, by which corporations normally act. Bank of Toronto v. McDougall, 15 U. C. C. P. 475, 482. The very word "officer" has this precise meaning. Webster gives the etymology of the word as "ops" (help), and "facere" (to do or act). Hence when a corporation does not go outside of its cor- porate machinery and capacity in doing a corporate act, it is a con- fusion of terms and of ideas to say that it is acting through an agent when the fact is that it is acting through an agency, and in chief. This distinction is not merely verbal, and hence trivial, but, on the contrary, marks the wide difference that exists between acting for oneself by an inherent faculty and the employment of another person to act for one and in one's stead. In this, as in all cases, loose terminology implies and conduces to loose reasoning. The maxim qui facit per aliumfadt per se requires and should be applied only when the agent, the alius, is not the prin- cipal acting for himself. Similarly the rule is established in New York that the verification of a pleading by an officer of a corporation is the verification of the corporation ; that because an officer of the corporation acts in chief and not by delegation in making such verification he is neither an agent nor an attorney, nor within the rule that an agent or attorney must state his authority and the sources of his information and the grounds of his belief. "Such verification," says the court, "is the verification of the corporation and a verification by the party." American Insulator Go, v. Bankers', &c. Telegraph Co., 13 Daly CHAP. II.] AMERICAN SODA FOUNTAIN CO. V. STOLZENBACH. 41 (N. Y.) 200, 205 ; Henry v. Brooklyn Heights RaUroad Co., 43 Misc. Rep. (N. Y.), 589, 590. . . . The Enghsh decisions, drawing a distinction between the act of an administrative officer in behalf of the corporation and the act of the corporation by an attorney or agent, hold, in the case of the officer, that the act of the corporation is per se, but that the act of the cor- poration through an agent or attorney is per alium. Deffell v. White, 36 L. J., C. P. (N. S.) 25 (1866) ; Shears v. Jacobs, 35 Id. (Part 2), 241 (1866) ; Penwarden v. Roberts, 51 L. J., C. L. (N. S.) (Part 2), 312 (1882). Our conclusion that the affidavit of the vice president is, prima fade, the affidavit of the corporation, the holder of the mortgage, is in accord with the reasoning of this court in Hopper v. Lovejoy, supra. In that case this court held that the acknowledgment of the president was the acknowledgment of the corporation. The commissioner cer- tified that there personally came before him James H. Ferguson, "president of the company, which I am satisfied is the grantor in the within indenture named ", &c. Justice Dixon, speaking of the Recording act, says: "The act says, the officer taking the acknowledgment must be satisfied that the person executing and acknowledging the deed is the grantor mentioned in it. With regard to corporate deeds, he must therefore be satisfied that such person is, in the eye of the law, the grantor mentioned in it — that is, authorized to represent the corporation in executing and acknowledging the conveyance. Being so satisfied, he accepts the acknowledgment of the representative as that of the grantor itself," citing with approval Merrill v. Montgomery, 25 Mich. 73, where the Supreme Court of Michigan held that the acknowledg- ment by the cashier was the act of the bank. As opposed to the view for which we are contending the case of North Penn Iron Co. v. Boyce, 42 Vroom, 434, in our Supreme Court, is cited. That was a motion to quash a writ of attachment upon the ground that the affidavit made by the secretary of a corporation was not authorized. The ground of that decision, however, was that the authority of such officer, having been expressly defined and limited by the then existing statute, would hot, in the face of such limitation, be extended by mere implication. The question now under consideration was not decided, and, apparently, not considered — certainly not in any fashion com- mensurate with its importance. If that opinion be cited as holding and to the extent that it decides that a corporation cannot act through an officer save as it has con- tracted with him and given him authority under the law of principal and agent, or that an administrative officer cannot make, in behalf of the corporation, a statutory affidavit except as the alius, the agent of 42 THE COEPORATION VIEWED AS A PERSON. [CHAP. II. the corporation and subject to the rules and hmitations of an agent, then it is repugnant to the well-considered opinions of the same court which we have cited with approval and to our conclusion here. In the light of this fundamental distinction the argument made to us by the defendant in error falls far short of the mark, for the resaon that it is addressed wholly to the law of principal and agent, and not at all to the corporate law touching official function and agency. Thus it is insisted that the affidavit upon which depends the validity of the chattel mortgage in this case must appear to have been made by "the holder of said mortgage, his agent or attorney;" that the vice president of a corporate holder is not, by virtue of his ofEce, the agent of the corporate holder for the purpose of making such an affidavit, and hence the affidavit is a nullity. It is also insisted that the affidavit before us must, if made by an officer of the corporation, be made by some officer specifically named in and whose powers are created by statute, and who therefore is, under the statute, virtute officii, the attorney or agent of the corpora- tion and specifically authorized to make such an affidavit. The affidavit before us, it is said, is a nonentity, is made by a stranger to the record, the argument being that a vice president is not an officer specifically named by statute although included under the provisions of our statute authorizing "other officers, agents, and factors" (section 14, Corporation act; Pamph. L. 1896, p. 277) ; that the statement in the affidavit that the affiant is the vice president carries with it no prima facie evidence of official relationship or authority of the corporation; that it amounts to nothing in the absence of specific language that he is the agent of the corporation and was precedeiitly authorized to make the affidavit. These arguments as to "quifacit per alium" are evidently pointless upon the question of what a corporation may do "per se." This whole line of argument is not only wide of the mark for the reason already stated, but also involves the further and fundamental error of assuming that the issue here arises under the law of principal and agent, and the question is as to the authority of an officer to bind a corporation as by a contract, where the corporation repudiates the act and denies the corporate obhgation, whereas the question here is at once a narrower and different one. The vice president, in making the affidavit of consideration annexed to the chattel mortgage, was not attempting to bind the company as by a contract ; he was merely performing an act ancillary to a contract already made, which ancillary act was inherently and inevitably beneficial to the corporation. The contract, viz., the mortgage, was good as between the parties without this affidavit. It had been executed. The affidavit was but a statutory condition precedent to recording the mortgage and thus obtaining the wider benefits of a public record. CHAP. II.] AMERICAN SODA FOXOTTAIN CO. V. STOLZENBACH. 43 The action of the vice president in making the affidavit, as well as the act of recording it, were alikCj to use the term employed in Angell & Ames on Corporations, "incidental services," as distinguished from acts creating a liability on the part of the company. How can the defendant in error, upon the record here, successfully challenge the action of the vice president as unauthorized? In- dubitably, the sale of the goods, the acceptance of the credit, the receipt of the chattel mortgage, were acts of the American Soda Fountain Company. Likewise, after the affidavit had been made, the corporation availed itself of it and recorded the affidavit and the mortgage, thus making it the act of the corporation. Neither the corporation nor anyone authorized to speak for it at that time or subsequently took exception to the action of the vjce president in making the affidavit or dissented from the action of the corporation in availing itself of this act. • In view of these authorities, it is unnecessary to answer the objec- tion which lies at the foundation of the contention of the defendant in error, that, where a party to a transaction is a corporation, and the statute deals only with individuals, and not with corporations, and the party is required to make an oath or to make an acknowledgment, corporations thereby are barred per se from the benefit of the provis- ion. The final answer in this state has always been an emphatic nega- tive. ... In this court it was lately urged in behalf of a corporation that, because the Chancery act of this state did not recognize a corpora- tion by name, service of a subpoena ad respondendum was ineffectual unless served "upon the stockholders or the directors or the trustees when convened as a body or upon the registered statutory agent." The service was made upon the vice president, and the argument there, as here, was that the vice president was not a statutory officer authorized to receive the process. Applying the principle that, in the absence of statutory enactment to the contrary, the name "person" in a statute included the corpora- tion if it fell within the general reason and design of the act, both as to the benefits and restrictions of the act,' we held that service upon an 1 Accord: Crafford v. Supervisors, 87 Va. 110. The term "'person'' must be con- strued to embrace corporations unless something appears to show legislative intent to restrict its application. Stribbling ». Bank, 5 Rand, at 180. Thus a corporation is a "person" within the 14th amendment to the national constitution providing "No state shall . . . deprive any person of life, liberty or property without due process of law, nor deny to any person the equal protection of the law." County of San Mateo v. S. P. Ry. Co., 13 Fed. 722 ; 118 U. S. 394. For application to foreign corporations, see Blake v. McClung, 172 U. S. 239. On the other hand, a corporation is not a " citizen " within Sec. 2, Ait. 4 of the consti- tution providing "The citizens of each state shall be entitled to all the privileges and immunities of citizens in the several states." Paul v. Virginia, 8 Wall. 168. See also 44 THE CORPORATION VIEWED- AS A PERSON. [CHAP. 11. officer of the defendant corporation was equivalent, under the statute, to personal service upon an individual defendant, and that the service of a subpoena ad respondendum upon the vice president was personal service on the corporation. Martin v. Atlas Estate Co., 65 Atl. Rep. 881. In this case we hold that a statute that authorizes the doing of a certain act by a corporation or by its agent should be given effect by permitting the corporation to act either per se through its officer or per aKum through its agent ; and furthermore that where it becomes necessary for a corporation, to gain the advantage of a statute or otherwise, to make an affidavit, the affidavit may be made in its behalf by an officer thereof acting under the authority of the corpora- tion and possessed of the requisite knowledge to make such an affidavit as the law requires ; that such affidavit is, in legal contemplation, the affidavit of the corporation and not of an agent or attorney. . . . In the absence of evidence of Umitation upon the powers of the officer his official rank makes no difference in the application of the rule, because, provided the official relationship of the affiant appears in the affidavit, it will not, for the purpose of defeating that act, be presumed, in the absence of proof to the contrary, that he did it other- wise than in his official capacity. Especially is this true where a corporation affirms, not repudiates, the validity of the proceeding of which the affidavit is a part. Tested by these rules, the affidavit of the vice president was the affidavit of the corporation, the holder of the mortgage, and it was unnecessary that it should appear that the vice president was au- thorized, virtute officii or otherwise, to make the affidavit. . . . Accordingly the judgment under review must be reversed and judg- ment in the court below ordered for the plaintiff, in accordance with the stipulation in this case} Ashley v. Ryan, 153 U. S. 436, infra, Book I, Chap 4. But a corporation is conelusively presumed to be a "citizen" of that state under whose laws it was created, irrespective of the citizenship of its several shareholders, within Sec. 2, Art. 3 of the constitution providing "the judicial power shall extend to all cases between citizens of different states." Louisville &c. R. Co. v. Letson, 2 How. 497, overruling the contrary doctrine in Bank ii. Deveaux, 5 Cranch, 61 and other earlier oases. Also see notes to Edwards i). Warren &c. Works, ante. Book I, Chap. 1, and the case of Goodwin v. N. Y. &c. R. R. 124 Fed. 358, infra, Book VI, Chap. 2. ' See article by Machen : " Corporate Personality" in 24 Harv. L. R. 253 and 347. CHAP. II.] MOULIN V. TRENTON INSURANCE CO. . 45 MOULIN V. THE TRENTON MUTUAL LIFE AND FIRE INSURANCE COMPANY.i 25 N. J. L. 57. 1855. Action of debt, upon a judgment obtained by plaintiff against de- fendants in the Supreme Court of the state of New York. The defendants pleaded, that they had never been served with J)rocess, or made appearance or defence to said suit in the state of New York ; that at the commencement of said suit they were not resi- dents or citizens of the state of New York, or existing as a corporation under and by virtue of its laws ;- that they kept no office, and did not transact any business there ; that they were a corporation under and by virtue of the laws of New Jersey, where its president and officers resided and were citizens ; that the president of said company was only accidentally in New York when he was served with process ; by reason whereof the court there never obtained jurisdiction of the case. To this plea the plaintiff demurred, and the demurrer was overruled (4 Zab. 222). Thereupon the plaintiff filed replication : "That the judgment mentioned in the declaration was rendered upon a contract of insurance made and entered into by the defendants with the plaintiff in the state of New York, to wit, at Buffalo, and at the time of making the said contract, the defendants had offices and places of business in said state of New York, to wit, at Buffalo aforesaid, and also in the city of New York, and had agents at said office duly authorized by them, for them and in their names, to make contracts of insiu-ance within the state of New York, and that said contracts upon which said judgment was recovered were made in such state of New York, by such agents so authorized and empowered, and that at and before the times of entering into said contracts upon which said judgment is founded, and while said defendants had such offices and agents in the state of New York, said Joseph C. Potts, in said plea mentioned, was president of the defendants, and from time to time, by direction and authority of said defendants, went to the state of New York, and was in said state to attend to the affairs and business of said defendants in the said state of New York, in manner aforesaid, done by said defendants, through their agents in said statp." To this repUcation the defendants filed a demurrer and the plain- tiff a joinder. The Chief Justice. When this case was before the court on a former occasion, it was decided that when a corporation confines its business within the state by which it is chartered, the service of 1 Facts restated. 46 THE CORPORATION VIEWED AS A PERSON. [CHAP. 11. process upon one of its officers within the jurisdiction of another state is not service upon the corporation : and that even if such service of process were authorized by law of the state within which it was made, it would not here be regarded as a vahd service, or as bringing the corporation within the jurisdiction of the court by whom it was issued. In so deciding, we adhere to the famiUar principles of the common law, that a corporation has a legal existence only within the limits of the state by which it is created, and that its officers do not carry their official character or functions with them out of the state. At the same time it was distinctly intimated that the principle would not be held to apply to a corporation which did not confine its business within the state by which it was chartered, nor to the service of pro- cess upon such corporation, in accordance with the law of another state within which it held property or carried on its business. If a corporation may sue within a foreign jurisdiction, it would seem consistent with sound principle that it should also be liable to be sued within such jurisdiction. The difficulty is this, that process against a corporation must, at common law, be served upon the pria- cipal officer of the corporation within the jurisdiction of that sover- eignty by which it was created. The rule is founded upon the prin- ciple, that the artificial, invisible, and intangible corporate body is exclusively the creature of the law ; that it has no existence, except by operation of law, and that, consequently, it has no existence with- out the limits of that sovereignty, and beyond the operation of those laws by which it was created, and by whose power it exists. The rule rests upon a highly artificial reason, and, however, technically just, is confined at this day in its application within exceedingly narrow limits. A corporation may own property, may transact business, may contract debts ; it may bring suits, it may use its com- mpn seal ; nay, it may be sued within a foreign jurisdiction, provided a voluntary appearance is entered to the action. It has .then exist- ence, vitahty, efficiency, beyond the jurisdiction of the sovereignty which created it, provided it be voluntarily exercised. If it be said that all these acts are performed by its agents, as they may be in .a case of a private individual, and that the corporation itself is not present, the answer is, that a corporation acts nowhere, except by its ofl&cers and agents. It has no tangible existence, except through its officers. For aU practical purposes, its existence is as real, as vital, and efficient elsewhere as within the jurisdiction that created it. It may perform every act without the jurisdiction of the sovereignty that created it that it may within it. Its existence anywhere and everywhere is but ideal. It has no actual personal identity and exist- ence as a natural person has, no body which may exist in one place and be served with process while its agents and officers are in another. Process can only be served upon the officers of a corporation within its own jurisdiction, not upon the corporation itself. CHAP. II.] MOULIN V. TRENTON INSURANCE CO. 47 Process cannot be served upon the officer of a corporation in a foreign jurisdiction, because he does not carry his official character and functions with him. And yet the officers and agents of corpora- tions do carry their official character and functions with them into foreign jurisdictions, for the purpose of making contracts and trans- acting the business of the corporation. The seal of a corporation, its distinguishing badge, at the common law the only evidence of its con- tracts, may be taken by its officers, and used within a foreign juris- diction. Doubts were formerly entertained whether a corporation could make a contract or maintain an action out of its own jurisdiction, or whether its property could be attached in a foreign jurisdiction. These que&tions have been long since settled, either by judicial con- struction or legislative enactment, in accordance with the reason of the thing and the usage of the conunercial world. Sound principle requires that while the powers of corporations are world wide, while for all practical purposes they may exist and act everywhere, the tech- nical rule of the common law, that they exist only within the jurisdic- tion of the sovereignty which created them, should be applied only within its strictest limits, and not be suffered to defeat the obvious claims of justice. It is difficult to conceive (says Mr. Justice Rogers of the Supreme Court of Pennsylvania) that if corporations are artificial persons, if they can do all acts that natural persons may, if they can sue within a foreign jurisdiction, why they may not also be Uable to suit in the same manner and under the same regulations as domestic corporations. Bushel V. The Commonwealth Insurance Company, 15 Serg. & Rawle, 176. This opinion is cited with approbation in Ang. & Ames on Corp. §402. The question now before the court is not upon the validity of th« common law principle ; to that we adhere. The suit is brought upon a judgment recovered in the state of New York upon a contract made by the corporation in that state. The process in the original action was served and the defendants' appearance effected in strict conform- ity with the mode prescribed by the laws of that state. It is admitted by the pleadings that the individual upon whom the process was served, was president of the corporation when the contract was made and when the process was served. The simple inquiry is, whether the statute of the state of New York, which authorizes the service of process in the mode adopted in this case, is so unreasonable, so contrary to natural justice and the principles of natural law, that it ought not to be sanctioned. The utmost that can be said is, that it is a deviation from the technical rule of the common law. The defendants were not con- demned unheard and without an opportunity of making defence. The process was served precisely upon the officer and in the mode 48 THE CORPORATION VIEWED AS A PERSON. ; [CHAP. II. that it would have been had the process been served in this state. The corporation, it is true, were drawn into the forum of a foreign sovereignty to htigate ; but having voluntarily entered that jurisdic- tion, and transacting business there ; having invoked the comity and the protection of the laws of that sovereignty for their own bene- fit, can they complain that the contracts there made are enforced within that sovereignty and in accordance with its laws? Does it involve the violation of any principle of natural justice or that pro- tection which is due to the citizens of our own state? If the cor- poration were carrying on its business within the ^tate of New York at the time of the service of the process, the court has already inti- mated its opinion that the service would be valid. "I think," says Justice Elmer, "under such circumstances natural justice requires that corporations should be subject to the laws of the state whose comity they thus invoke. For the purpose of being sued, they ought to be regarded as voluntarily placing themselves in the situation of citi- zens of that state." 4 Zab. 234. And such it seems should be the rule independently of any express statute authorizing the mode of serving process. Ang. & Ames on Corp. § 402, (ed. 1852). The fact that the corporation had ceased to transact business, whatever techni- cal difficulty it may seem to create, cannot alter the reason and jus- tice of the proceeding. It is said truly by the defendants' counsel, that the question is one of jurisdiction, and that the sole inquiry is, whether the defend- ants were within the jurisdiction of the court by which the judgment was rendered ? But the question obviously resolves itself into another, viz. whether the process was served in such manner as to effect their appearance in court ? The statute .of New York declares that it was ; and upon purely technical grounds, where no injustice was done, this court is called upon to decide that it was not so served. It is worthy of remark, that the courts of Westminster hall have gone quite as far in sustaining the validity of foreign judgments as the courts of the states of this Union have done in sustaining the judgments of their sister states under the provisions of the federal constitution ; ' and it may be well to be on our guard, lest, in our zeal to maintain state rights, we deny to the courts of our sister states jurisdiction in cases where it would be freely conceded to the courts of foreign governments. . . . I am of opinion that the demurrer should be overruled. Elmer, J. . . . It has been strongly insisted, by the counsel of defendant, that if we hold the company bound by this judgment, we must, upon the same principle, hold that every citizen of this state who goes into another state, and makes a contract there, so far makes himself a 1 /. e. the "full faith and credit" clause. CHAP. II.] MOULIN V. TRENTON INSURANCE CO. 49 citizen of that state that he would be bound by a suit on a contract thus made, commenced by means of a notice published in a news- paper, if the laws of that state happen to sanction such a procedure. I do not think this follows. Corporations hold a very different posi- tion from individual citizens. The latter always carry with them their personal rights and responsibilities. While the former confine their business to the state creating them, and where they have their proper location, we hold that their officers are not clothed with their official character out of its limits, so that as no rights are carried beyond those limits, neither are their responsibilities. But when a corporation thinks proper to invoke the comity of another state, and transacts its business there, they ought to be held to have voluntarily submitted themselves to the laws of that state, not only while their ■ officers are within the state about its business, but when they subse- quently go there. . . . The plaintiff is entitled to judgment, and the demurrer must be over- ruled. Note. — The early cases declared a foreign corporation (i.e. one organized under the laws of any state other than that of the forum) immune to suit in personam because being a creature of law and a law having no extraterritorial effect, it could not "migrate" i.e. enter any other state, so as to be "found" there and thus be subject to the process of its courts. McQueen v. Middletown Mfg. Co., 16 Johns. (N. Y.) 5. But the later cases hold that it is so liable if it transacts business in the state of the forum, for that constitutes an entry and service of process may then be effective in the latter state upon the proper representatives therein of the foreign corporation. St. Clair ». Cox, 106 U. S. 350 ; National Condensed MUk Co. v. Brandenburgh, 40 N. J. L. 111. But this doctrine should only apply to the contingency above named. Camden Rolling Mill Co. V. Swede Iron Co., 32 N. J. L. 15 ; Phillips v. Library Co., 141 Pa. 462. Thus it was held in Moulin v. Trenton &c. Ins. Co. , 24 N. J. L. 222, referred to in the principal case, that a statute of New York, authorizing service of process in that state upon an officer of a New Jersey corporation, who upon his own private business was acci- dentally in New York, and whose corporation had confined its business to New Jersey, was so contrary to law and "natural justice" that the coiu't of New Jersey would not give effect to the New York judgment founded upon such service ; and this despite the "full faith and credit clause " of the federal constitution, for that is only operative when the court pronouncing the judgment had a proper jurisdiction over the subject matter and the person as well. But such service is good according to the New York courts. Pope V. Terre Haute &o. Mfg. Co., 87 N. Y. 137 ; Grant v. Cananea &c. Copper Co., 189 N. Y. 241. But such service will be set aside by the federal courts sitting in New York, if the cause of action be such that defendant is able to remove it thereto. Bentlif V. London &c. Finance Corp., 44 Fed. 667. See note in 23 L. R. A. 490 et seq. for collection of cases and incisive criticism of the New York doctrine. The later federal decisions are conclusive that judgment founded upon such service ignores the essentials of due process of law. Goldey ». Morning News, 156 U. S. 618 ; Conley v. Mathieson &c. Works, 190 U. S. 406 ; Kendall v. American &c. Loom Co., 198 U. S. 477 ; Riverside &c. MiUs v. Menefee, 237 U. S. 189. Even in New York, the last pronouncement of the Court of Appeals, Bagdon v. P. & R. Coal & Iron Co., 217 N. Y. 432 (1916), although a dictum, expressly declares its earlier decisions must yield to the Riverside Mills case, supra. And a decision in that state to the same effect, rendered however by an inferior court, is found in Magnolia Metal Co. v. Savannah Co., 167 N. Y. Supp. 355 (1915). _ .... A judgment against a foreign corporation is not admissible in evidence in the courts of another state unless it appears "somewhere in the record, either in the application for the writ or accompanying its service or in the pleadings or in the finding of the court that the corporation was engaged in business in the state" where that judgment was rendered. St. Clair d. Cox, supra. See also Henning v. Planters Ins. Co., 28 Fed.~440 50 THE CORPORATION VIEWED AS A PERSON. [CHAP. U. and Cunningham v. Spokane Hydraulic Co., 18 Wash. 524. And defects in the record cannot be patched up by parol evidence : 28 Fed. 440 ; Montgomery v. Merrill, 36 Mich. 97. Where the action is brought by a foreign corporation, if its complaint omits to dis- close that it is doing business in the state of the forum, it will be presumed until the contrary is shown, that the contract sued on was not made within that state and that the corporation was not doing business there. Acorn Mfg. Co. v. Rutenberg, 147 A. D. 533, and cases therein cited. As to what constitutes "doing business" within the state, see notes to Lancaster v. Amsterdam &c. Co., 140 N. Y. 576, infra, Book III, Chap. 1, Sec. 2. It is manifest from the principal case, that if the foreign corporation is engaged in business in the state of the forum, service of process upon the president, or resident oflScer or other proper agent in that behalf, within that state is justifiable and valid. And this is so, although the cause of action has no relation to the business there trans- acted. Barrow S. S. Co. v. Kane, 170 XJ. S. 100. Unless the action is local, in which event it must of course be tried in the state where the land lies, such service is valid irrespective of the nature of the cause of action, e.g. whether it arose out of business transacted in the state of the forum or not. Bagdon ». P. & R. Coal & Iron Co. , supra. (" Officer and agent aUke are in the service of a corporation engaged in business in this state. Their presence in that service has brought the corporation within our juris- diction ; and in coming here it has become subject to the rule that transitory causes of action are enforcible wherever the defendent may be found.") Accord : Johnson v. Trade Ins. Co., 132 Mass. 432; Wilson v. Martin &c. Alarm Co., 149 Mass. 24; Reeves v. So. Ry. Co., 121 Ga. 561 ; Hawkins v. KdeUty & Casualty Co., 123 Ga. 722, overruling Bawknight ». Ins. Co., 55 Ga. 194. But these cases must be distinguished from the principle exhibited in Simon ». Southern Ry., 236 U. S. 115. See notes to Lancaster v. Amsterdam Improvement Co 140 N. Y. 576, in/ra, Book III, Chap. 1, Sec. 2. CHAP. III.] BANK ET AL. V. TREBEIN. '51 CHAPTER III. THE CORPORATION VIEWED AS A COLLECTION OF INDIVIDUALS. BANK ET AL. v. TREBEIN ET AL.i 59 Ohio St. 316. 1898. Bill in equity by two national banks, each of which had recovered judgment against F. C. Trebein, against said Trebein and "The F. C. Trebein Co.", a corporation, to set aside a conveyance of real estate made to the corporation by Trebein, on the ground that it was made to hinder, delay, and defraud the complainants. The trial court dismissed the action and complainants now appeal. It ap- peared inter alia that Trebein, being an endorser upon the notes of Columbia Straw Paper Co., and knowing it to be unable to meet or renew said notes at maturity, made certain conveyances to his wife and daughter not involved in this suit, and, before the judgments recovered by complainants, conveyed all the residue of his property then insufficient to pay his outstanding obligations, to The F. C. Trebein Co., a corporation organized by him and his wife, daughter, son-in-law, and brother-in-law. Of its 600 shares, 596 were issued to him in payment of said conveyance. The other 4 shares were taken by the other incorporators who paid $90 a share therefor. He retained 1 share and pledged the remaining 595 shares with other creditors as collateral security for their claims against him. He re- mained in charge of the affairs of the corporation as president, treas- urer and general manager and continued the business theretofore conducted individually by him. MiNSHALL, J. We are unable to see how, as against his creditors, the transaction by which F. C. Trebein with his wife, his daughter, his son-in-law and his brother-in-law, formed "The F. C. Trebein Company" and then conveyed to it every vestige of property he had not before conveyed, either to his wife or to his daughter, cain be sus- tained, against the justice of their demand to have the property so transferred administered for the benefit of all his creditors under ' Statement of facts condensed and rewritten ; portions of opinion omitted. 52 COBPORATION VIEWED AS COLLECTION OF INDIVIDUALS. [CHAP. III. . the insolvent laws of this state. He was at the time liable in a large sum of money on indorsements he had made for the accommodation of the Straw Paper Company of which he was a member and one of its directors. He knew it was about to fail and that he would have to respond to these indorsements. This fact induced the conveyances he had before made to his wife and to his daughter, whether for a valid consideration or not was not considered by the court, for the reasons stated in its finding, that there were suits then pending to set them aside. The capital of The F. C. Trebein Company was fixed at $60,000, divided into 600 shares of $100 each, Trebein taking 596 of the shares and each of the other persons named taking one share. It was formed on January 22, 1895, Trebein being made the president, treasurer and general manager, and conveyed to the company the property in question, estimated to be worth $60,000, and received therefor the shares above stated, and at once placed all of them, except one, in pursuance of his original purpose, with three of the banks who held his indorsements bf the paper of the Straw Paper Company, for the purpose of securing them on his indorseinents; and he continued in the control and management of the milling and grain business as he had before the corporation was formed and the conveyance made. The court found that this was all done in good faith. But, in view of the facts, we are unable to see how the court could have meant more than that he rneant no wrong by it. Good faith in law, however, is not to be measured always by a man's own standard of right, but by that which it has adopted and prescribed as a standard for the observance of all men in their dealings with each other. When one conveys all his property to another with the in- tention of hindering and delaying his creditors, or a part of them, in pursuing their legal remedies against him and his property, his con- duct in law is deemed fraudulent however honestly he may have in- tended to deal with all his creditors, in the future. Trimble v. Doty, 16 Ohio St. 118. The good faith of a party under such circum- stances must be determined by the legal effect of what he deliberately does. Brinkerhoff v. Tracy, 55 Ohio St. 558 ; Lee v. Hennick, 52 Ohio St. 177 ; Gashe v. Young, 51 Ohio St. 376, 389. The forma- tion of the corporation and the conveyance to it by Trebein of all the property he then had, necessarily hindered and delayed all his credi- tors in the. pursuit of their claims against him. The formation of the corporation in no way facilitated the transaction of his riuUing busi- ness and that connected with it. Nothing was added to his capital, unless we regard the few hundred dollars that may have been paid for the four shares of stock taken by the other members of his family, such an addition. Evidently an addition to capital was not the con- trolhng object. The transaction cannot be likened to a conveyance to a third person for a valuable consideration — considered in the light of the facts, it was no more than a conveyance from himself to CHAP. III.] BANK ET AL. V. TEEBEIN. 53 himself. The corporation was in substance another F. C. Trebein. His identity as owner of the property was no more changed by his conveyance to the company than it would have been by taking off one coat and putting on another. He was as much the substantial owner of the property after the conveyance as before ; and had sub- stantially the same use of it as if the conveyance had not been made. The only purpose the creation of the corporation and the convey- ance to it subserved, was to hinder creditors in levying upon the property and selling it on execution at law ; and it is this hinderance the law wiU not permit, and, when ascertained in a proper proceed- ing, requires the conveyance to be set aside and the property admin- istered for the benefit of all the creditors of the fraudulent grantor. It is suggested that the property may be levied on. This is true, but it cannot be sold on execution until the conveyance is set aside ; for it is not the poUcy of the law to sell a law suit. It is also suggested that the stock of Trebein may be reached by a proceeding provided by statute^ This is true, but it is not the simple proceeding of an exe- cution at law; besides few persons, at this day, would care to take stock in a manufacturing or any similar company, with its statutory hability attached, as a substitute for tangible property. The fiction by which an ideal legal entity is attributed to a duly formed incorporated company, existing separate and apart from the individuals composing it, is of such general utiUty and application, as frequently to induce the belief that it must be universal, and be in all cases adhered to, although the greatest frauds may thereby be perpetrated under the fiction as a shield. But modern cases, sus- tained by the best text writers, confine the fiction to the purposes for which it was adopted — convenience in the transaction of business and in suing and being sued in its corporate name, and the continu- ance of its rights and liabihties, unaffected by changes in its corporate members ; and have repudiated it in all cases where it has been in- sisted on as a protection to fraud or any other illegal transaction. Thus in Brundred v. Rice, 49 Ohio St. 640, where an incorporation had been formed for the purpose of giving effect to an illegal agree- ment between it and a railroad company for a discrimination in freight between it and other shippers, the fiction was disregarded, and a re- covery allowed against the promoters by one who had been thus dis- criminated against, in hke manner as if the corporation had no exist- ence. See also the following citations : Morawetz on Corporations, sections 1 and 227 ; Railway Co. v. Miller, 51 N. W. 981 ; Gas Com- pany V. West, 50 Iowa 16 ; Booth v. Bunce, 33 N. Y. 139 ; State ex rel. Atty. Gen. v. Standard Oil Co., 49 Ohio St. 137; Bennett v. Minott, 28 Oregon 339, 348. A like attempt has frequently been made of late to use this fiction in connection with a conveyance to the legal entity, as a means of defrauding creditors ; but seems to have uniformly failed. 54 CORPORATION VIEWED AS COLLECTION OP INDIVIDUALS. [CHAP. III. In Montgomery Web Co. v. Dienelt, 133 Pa. St. 585, which was a suit by a creditor of one company to set aside a conveyance by it to another, as in fraud of his rights, it appeared that the latter was formed substantially by the stockholders of the former, who relinquished their stock in it for stock in the latter ; this being substantially all the con- sideration given by the purchasing company. This was held to be a fraud on the creditors of the former company, called the Aronia. The case does not differ in principle from the one before us. Here the conveyance was by an individual, and in consideration of stock taken in the corporation formed. The judge, delivering the opinion, said : "Is the Montgomery Company so completely a new and diiler- ent company from the Aronia Company that the law must close its eyes to the fact that the difference is a mere jungle of names? We do not think there is any compulsion to such legal bUndness. Settled general principles, and the analogies of the law, are against such a con- tention. If the corporation had merely changed its name, there could have been no doubt of the continued liability of the property." As to the creditors of the old company who had taken stock for their claims in the new one, they were held bound to know the nature of the transaction, and that the property conveyed could be followed by the creditors of the old company for the satisfaction of their claims. In Bennett v. Minott, 28 Oregon 337, a case quite similar to the one before us, in all its facts, the court held that : "When a debtor, for the purpose of hindering and delaying creditors, organizes a corpora- tion and transfers to it all his assets, he himself being the owner of practically all the corporate stock, and continuing the business the same after as before the incorporation, using the proceeds for his own benefit, equity will set aside such transfer at the instance of creditors, notwithstanding the incorporation is vahd, and the corporate stock subscribed by the debtor is subject to sale under execution. Under such circumstances a court of equity will look beyond the legal forms, and decide the case on the rights of the parties." Terhune v. Savings Bank, 45 N. J. Eq. 344, is another case, where an insolvent debtor, with the members of his family, formed a corporation, a manufactur- mg company, and conveyed to it his property, real and personal, much as in the case under review. The conveyance was set aside at the suit of a creditor. It was there said that in conveying his property to the corporation so formed, he simply "changed his habili- ments." The fiction in regard to a corporation being a legal entity was not allowed to avail him. And Kellogg v. Douglas County Bank, +u +u\ t ' ^® ^ ^^^^^^ °^^^ °^ similar character. It was there held, that, A fraud may be perpetrated by an insolvent merchant through the instrumentality of a corporation organized and controlled by him- self, to which he transfers the bulk of his property, as well as by a transfer to an individual ; and where it appears that this has been done for the purpose of hindering and delaying creditors and enabling 'chap. III.] U. S. V. MILWAUKEE &C. TRANSIT CO. 55 the debtor to retain the management and control of his property, and of depriving his creditors of an opportunity to collect their dues, and when such insolvent retains substantially all the stock in the cor- poration, and no innocent person contributes any substantial sum to its assets, the court in sustaining attachments levied on the property, and directing the sale thereof to satisfy the claims of creditors, is warranted in treating the whole transactidn as a sham." We are so clearly satisfied that the conveyance by Trebein of his property to the corporation, was made to hinder and delay creditors, and should have been so declared by the court, and ordered adminis- tered for the benefit of all his creditors under the provisions of section 6344, Revised Statutes, that we think it, unnecessary to consider whether, upon the facts, it did not also constitute an assignment in trust, in contemplation of insolvency, to secure one or more creditors, within the meaning of section 6343, Revised Statutes, and, for such reason, should be ordered administered as before stated. . . , The decision, however, is placed on the ground that the conveyance by Trebein to the company was fraudulent as to his other creditors, and should be set aside, and the property administered for the benefit of all his creditors. The judgment is reversed, and cause remanded to the court of common pleas for further proceedings under section 6344) Revised Statutes. UNITED STATES v. MILWAUKEE REFRIGERATOR TRANSIT CO.i 142 Fed. 247. 1905. Sanborn, District Judge. This is a bill in equity for an injunc- tion to prevent the payment of alleged rebates on freight, brought under Elkins Act Feb. 19, 1903, c. 708, 32 Stat. 847 [U. S. Comp. St. Supp. 1905, p. 599]. The defense outHned in argument of the demur- rers is that it appears on the face of the bill that the alleged rebates were not paid back to the shipper (the brewing company), but to the Refrigerator Transit Company, and, in substance and effect, nothing more is shown than the payment to a sohciting agent (the transit com- pany) of a commission of an eighth or teiith of the published tariff rates, thus showing, in real effect, acts neither unlawful, immoral, nor injurious. A motion is also made on behalf of the brewing company to strike out certain allegations averring prior and disconnected illegal acts on its part, said to be material in proof, to characterize the acts ' Portions of opinion omitted. 56 CORPORATION VIEWED AS COLLECTION OF INDIVIDUALS. [CHAP. III. of its principal officers and managers in organizing the transit com- pany, and rebut the theory that the moneys paid by the carriers to the transit company were paid as commissions for obtaming the busi- ness and not as prohibited rebates. The provisions of section 10 of the interstate commerce act, the act of 1889 (Act March 2, 1889, 25 Stat. 857 [U. S. Comp. St. 1901, p. 3160]), and the Elkins act, may be thus summarized : Section 10. — Interstate Commerce Act. Common carriers, and the officers of such as are corporations, re- ceivers, agents, etc., of such corporations, are prohibited from giving rebates, preferences, and advantages, and making unjust discrimina- tions, and are punishable by fine and imprisonment. Under this sec- tion only the agents of corporate carriers, and not the carriers them- selves, were punishable. U. S. v. Mich. Cent. R. Co. (D. C.) 43 Fed. 26. Act op 1889. Agents of carriers : Any common carrier, and officers and agents of corporation carriers, who by means of false billing, classification, weighing, or other device or means, shall assist, suffer, or permit any one to obtain transportation at less than established rates, shall be guilty of a, misdemeanor, punishable by fine and imprisonment. Shippers : Any person or corporation agent shipping property, who shall knowingly, by false bilUng, classification, etc., or other de- vice or means, with or without the carrier's consent or connivance, obtain carriage at less than such estabhshed rates, shall be deemed guilty of fraud, declared to be a misdemeanor, punishable by fine and imprisonment. Bribery to obtain unjust discrimination : Any such pergon, officer, etc., who shall by paying money or thing of value, or by solicitation, induce a carrier to discriminate unjustly in his favor as against other shippers, or aid or abet such discrimination, he shall be deemed guilty of a misdemeanor, ptinishable by fine and imprisonment. Tort action : Shippers discriminated against are given action for damages against such person, officer, etc., as well as the carrier. Corporation carriers themselves, it wiU be noticed, are not within the penalties of these acts ; and the defense that the supposed discrimi- nation was made not under hke circumstances and conditions was always available. Elkins Act op 1903. Corporation carriers are made liable to the same extent as were their agents under the earUer statutes, but subject to fine only not imprisonment. Their willful failure to publish tariffs or rates, or CHAP. III.] U. S. V. MILWAUKEE &C. TRANSIT CO. 57 strictly observe them, is a misdemeanor punishable by fine. It is made unlawful and punishable for any person or corporation to offer, grant, or give, or to solicit, accept, or receive, or offer so to do, any rebate, concession, or discrimination in respect of transportation in interstate or foreign commerce by common carriers within the former statutes, whereby any such property shall, by any device whatever, be carried at less than the pubhshed tariff rate. Offenses under the earher acts, followed by convictions after this act, are punishable only by fine. The acts or omissions of agents are deemed the acts or omissions of the carrier also. The published rate is made conclusive, and any departure therefrom punishable. Suits in equity by the commission, as well as those directed by the Attorney General, are authorized, and the provisions of the expedition act and anti-trust act are made ap- plicable. It will be observed that this act makes the corporation car- riers themselves Uable, eHminates the question of like circumstances and conditions by making the published rate conclusive, and abolishes punishment by imprisonment. In effect the bill in this case is claimed to charge the creation by a shipper of a dummy corporation as a device to cover rebates on large shipments of beer in interstate and foreign traffic. The car- riers which are charged with paying the rebates are joined as de- fendants, and some of them have filed general demurrers for want of equity in the bill. The Pabst Brewing Company has also moved to strike out the following paragraph : " That until the passage and promulgation of the act of Congress entitled 'An act to further regulate commerce with foreign nations and among the states,' approved February 19, 1903, said defendant Pabst Brewing Conipany had, through the agency of said Gustav G. Pabst and Frederick Pabst, ha- bitually received from many of the railroads and common carriers, which so transported the beer and other articles so shipped by it from the state of Wisconsin into foreign countries and states other than Wisconsin, rebates and concessions and other discriminations." The bill, after stating that the Pabst Brewing Company, Mil- waukee Refrigerator Transit Company, and Wisconsin Central Rail- way Company are Wisconsin corporations, and the other defendants foreign corporations, that the Attorney General has directed these pro- ceedings, that the shipments originate in Milwaukee and continue in other states and countries, contains the following allegations, here given in brief outline (the figures refer to the numbered paragraphs of the bill) : (11) The transit company was, on October 7, 1903, organized, inter alia, to operate refrigerator cars on defendants' and other lines. It owns or controls 540 such cars. It was conceived, and is operated, as defendants' carriers well knew, as a device to cover the receiving, of rebates, concessions, and discriminations, to wit, an eighth or tenth of the pubhshed rate ; whereby the traffic is carried at less than pubhshed 58 CORPORATION VIEWED AS COLLECTION OF INDIVIDUALS. [cHAP. III. rates. Such rebates are paid and accepted under the pretense, claim, and guise of "commissions", and amount to large sums to complain- ants unknown. (12) The transit company was incorporated by procurement of the attorneys of the brewing company, and at its instance and request, with a capital of $150,000, having five i directors, and with power to acquire and operate refrigerator cars, and contract for the supply and operation of refrigerator transportation by land and water. (13) The brewing company is a Wisconsin corporation operating a large brewery, and selling and shipping beer into all the states and territories and to purchasers in foreign countries. It has a capital of $10,000,000 or 10,000 shares. Gustav Pabst and Fred Pabst are brothers, owning 2,000 shares, and with their mother and sisters over half of the stock. They vote and control a majority of the stock, and have always directed and controlled the election of direc- tors, and their action ; they have been and are its president, vice presi- dent, and general managers, and have always controlled all its sales, purchases, and shipments. (14) (Here occurs the passage above quoted as to rebates prior to the Elkins act.) Upon the passage of that act the brewing company was no longer able to directly secure rebates, and cast about for some device to evade the statute, and the Pabsts, as such officers, and one Howe, as traffic manager, intending to contrive and operate a device for such evasion, caused the transit company to be formed. Of its 1,500 shares, 1,340 were issued to the two Pabsts, 35 shares to Fred Pabst's wife, and the balance to dummy directors, to give color to the claim that its stock was not owned by the brewing company. After investigation by the interstate commerce commission in May, 1905, Gustav Pabst transferred his stock in the transit company to Fred Pabst, and had some person elected director in his place; but such acts were colorable merely, he still retaining a large pecuniary inter- est in the corporation, and participating in its control. (15) Immediately on the creation of the transit company the , Pabsts, as controlling officers of the brewing company, contracted ' with themselves as executive officers of the transit company, for a term, not yet expired, to give the latter exclusive control of the ship- ment of all freight of the brewing company moving in interstate and foreign commerce, which it is still exercising. The contract was made to enable the transit company to route the shipment of such freight on the fines of such companies as will pay rebates, and withhold it from such as wiU not ; and all the rebates, concessions, and discriminations charged m the biU have been exacted by threats of such diversion. Many thousand tons of said freight have been hauled by defendant carriers since the contract was made. On such shipments the brewing company pays to the carriers the fufi tariff rate, and the carriers pay the transit company for use of its refrigerator cars for mileage three- CHAP, m.] tr. S. V. MILWAUKEE &C. TRANSIT CO. 59 fourths of a cent to a cent per mile, and in addition an eighth or tenth of the sums paid them by the brewing company ; and in every instance the property is transported by defendant carriers at an eighth or tenth less than the published tariff. Such rebates amount to many thou- sands of dollars, the exact sum unknown to complainants. (16) All the defendant carriers well knew that the transit company was organized in the interest of the brewing company, and for the purpose of evading the law, and paid such rebates with the like purpose and intent. (18) The transit company claims and pretends that such repayments were made and accepted as compensation for its services in soliciting and procuring freight for carriage by defendants ; but such claim or pretense is untrue. The transit company has entire control of all the shipping business of the brewery, comprising almost the entire business of the transit company, which it does not solicit ; the only possible consideration moving from it to the carrier being its refraining to di- vert the business. All such repayments have always been known to all said parties to be a device for unlawful rebate, concession, and dis- crimination. But such payments constitute unlawful concession and discrimination, whether or not the transit company solicits the ship- ments, which, if not so solicited and procured, would be diverted from the carrier so paying. Such are the charges of the bill challenged by the demurrers. Two questions are presented : Whether the payments are suflSciently shown to have been made, "by any device whatever", not as com- missions, but with intent to evade the law; and whether the two Wisconsin corporations are so vmited in interest, control, and man- agement as to make them substantially the same. The Question of Intent. Here is an act of doubtful or equivocal import, asserted on the one hand to be innocent and lawful, and on the other to be a mere device or subterfuge to evade the law. Are the payments lawful commissions or unlawful rebates? The question can only be answered by finding out with what intent the acts were done. Some acts are made crimi- nal without respect to their intent, hke counterfeiting ; but in most cases intent is material. The payments in question were innocent and lawful if in good faith intended as commissions, but criminal if intended as rebates. The intent becomes therefore not merely mate- rial, but absolutely vital. The bill states several facts tending to show unlawful purpose : Such as prior habitual violations of former laws, not then sufficiently punishable, and later the creation of a dummy corporation to escape from the strictness of an amended statute; which corporation, though a separate legal entity, should be substan- tially the same aggregation of persons, interests, and aims ; scienter 60 CORPORATION VIEWED AS COLLECTION OF INDIVIDUALS. [CHAP. III. of the carriers of the purposes of such manipulation ; tha,t the transit company soUcits no freight, etc. As said by the commission in the Chicago Joint Rate Case, 10 Interst. Com. Com'n R. 385, the manifest purpose of these statutes is to strike through all pretense, all ingenious device, to the substance of the transaction itself. The allegations seem to me sufficient to call for plea or answer, so far as the question now under consideration is concerned. The Question of Corporate Identity or Control. > It is further essential, to bring the case within the law, that the re- payments be made to the brewing company, or for its benefit, directly or indirectly, and not merely to third persons for obtaining the busi- ness ; otherwise the repayment is no more than a salary or other ex- pense incident to the carrier's business. The remaining question, then, is whether this is sufficiently shown in the bill. It is forcibly argued that the bill carefully avoids the statement that the brewing comptoy received the money repaid, or even that it was paid back for its benefit ; and that the two corporations are not only distinct legal entities, but have different stockholders. The bill shows the creation, by the controlUng interests of the brewing company, of a dummy cor- poration, with dummy directors, and scienter of its character by the carriers, with intent to evade the law. It is argued that these aver- ments show that the transit company is merely the alter ego of the brewing corporation ; both being substantially identical in interest and control, and the brewing company the ultimate beneficiary, in some form, of the operations in question. Now is not this the usual device of a shipper securing discrimination by manipulation of car- riers in which it is interested? That the transit company is controlled by the managing agents of the brewing company is entirely clear. But is it controlled by the shipper corporation? The solution of this question depends on whether the brewing corporation, in a case like this, is an association of individuals, rather than a legal entity apart from those who own and control it. No doubt the general rule that a corporation is a legal entity, an institution, artificial, intangible, existing only by legal contemplation, and separate and apart from its constituents, is firmly imbedded in the common law of this country. It has been so laid down in hundreds of cases. In the Dartmouth College Case Chief Justice Marshall adopted and expressed it, almost in the exact lan- guage of Lord Coke, in Coke on Littleton, 27b ; and this definition has been universally approved, especially in cases involving the extent of the corporate powers. It is, however, most significant that the Supreme Court of the United States was the first to break away from the notion that a corporation is only a legal entity, when its literal application would CHAP. III.] IT. S. V. MILWAUKEE &C. TRANSIT CO. 61 operate with injustice. If a corporation is only a legal entity, of course, it cannot be a citizen of a state. Hence the Supreme Court, in order to sustain the most important and far-reaching jurisdiction of the national courts over corporations, depending on the citizenship of the parties, was obhged to adopt some other theory of corporate constitution than that laid down by the great chief justice. This was accomplished by holding that a corporation is an association of persons who may have citizenship, and following this with the adop- tion of a fiction of law, supported by a conclusive presumption, by which the members of a corporation are conclusively presumed to be citizens of the state creating it.^ Hope Ins. Co. v. Boardman, 5 Cranch, 57, 3 L. Ed. 36 ; Louisville, etc., R. Co. v. Letson, 2 How. 497, 11 L. Ed. 353 ; Marshall v. R. Co., 16 How. 314, 14 L. Ed. 953. In reaching these results, the court, in answering the argument that a corporation is an artificial person, a mere legal entity, invisible and intangible, said that it was not reasonable that those who deal with corporate affairs or agents should be deprived of the valuable privilege of litigating in the federal coiu-ts by a syllogism, or rather sophism, which deals subtly with words and names, without regard to the things or persons they are used to represent. 16 How. 327, 14 L. Ed. 953. "For all purposes of acting, contracting, and judicial remedy", said Mr. Justice Grier, "they can speak, act, and plead only through their representatives or curators." Id. Thus the idea that a cor- poration is, for some purposes, an aggregation of individuals, and not a legal entity, was adopted, through a fiction of law, and given full effect. It was the same kind of fiction by which the English Court of Exchequer usurped jurisdiction by permitting an allegation that plaintiff was the King's debtor, and then allowing no one to deny it. But, when the case of a consolidated corporation incorporated in two or more states,* having the same stockholders, arose, the Supreme Court partially returned to the rule that a corporation is a legal entity, existing only in contemplation of law. And it was held that there are as many corporations as there are states in which the same group of persons is incorporated. In each of such states it is con- clusively presvmied that the shareholders are, for jurisdictional pur- poses, citizens of that state alone. Hence, a citizen of lUinois cannot in Illinois sue in a federal court the Chicago & Northwestern Rail- way Company, consolidated by incorporation in both Illinois and Wis- consin ; but he may do so in Wisconsin. Railroad Co. v. Wheeler, 1 Black, 286, 17 L. Ed. 130 ; RaUway Co. v. Whitton, 13 Wall. 270, 283, 20 L. Ed. 571. This result was reached by applying the rule that the legal entity existing by force of law can have no existence beyond • See note 1, page 43 ante. « See infra. Book VI, Chap. 2. 62 CORPORATION VIEWED AS COLLECTION OF INDIVIDUALS. [CHAP. III. the state or sovereignty which brings it into life and indues it with its faculties and powers. Id. " It is true that for certain purposes the law will recognize the corporation as an entity distinct from the in- dividual stockholders ; but that fiction is only resorted to for the pur- pose of working out the lawful objects of the corporation. It is never resorted to when it would work an injury to any one, or allow the corporation to perpetrate a fraud upon anybody." Held, that stock in one corporation directed by another corporation to be issued to the stockholders of the latter, and paid for by it, was in reality received by the corporation. The Sportsman Shot Co. v. American Shot & Lead Co. (Superior Court of Cincinnati), 30 Wkly. Law Bui. 87 ; State v. Standard Oil Co., 49 Ohio St. 137, 177, 30 N. E. 279, 15 L. R. A. 145, 34 Am. St. Rep. 541. "The abstract idea of a corporation, the legal entity, the impalpable and intangible creation of human thought, is itself a fiction, and has been appropriately described as a figure of speech. It serves very well to designate in our minds the collective action and agency of many individuals as permitted by the law ; and the substantial inquiry always is what in a given case has been that collective action and agency ?" People v. North River Sugar Re- fining Co., 121 N. Y. 582, 621, 24 N. E. 834, 9 L. R. A. 33, 18 Am. St. Rep. 843. "A corporation is an artificial person, created by law as the representative of those persons, natural or artificial, who contribute to and become the holders of shares in the property in- trusted to it for a common purpose. ... It is exclusively the work of the law." In re Gibb's Estate, 157 Pa. 59, 27 Atl. 383, 22 L. R. A. 276, 281. " Corporations are but associations of individuals." Hightower v. Thornton, 8 Ga. 492, 52 Am. Dec. 412; 1 Kyd on Corp. 13. "Who, in law, constitute the company, if it be not the stockholders?" Gelpcke v. Blake, 19 Iowa, 268. "A private cor- poration is, in fact, but an association of individuals united for a law- ful purpose and permitted to use a common name in their business, and to have a change of members in their business." Field, J., in Kansas Pacific v. Atchison Railroad, 112 U. S. 414, 5 Sup. Ct. 208, 28 L. Ed. 794. On the other hand, when dealing with the question* of corporate power, the Supreme Court has gone so far as to hold that a contract ultra vires of the corporation, although assented to by all the stockholders, is void. Oregon Railway & Navigation Co v Oregonian Ry. Co., 130 U. S. 1, 9 Sup. Ct. 409, 32 L. Ed. 837 A stockholder owning nearly all the stock cannot bind the cor- poration by a contract made in his individual capacity. Donoehue V I. & K M. Ry. Co., 87 Mich. 13, 49 N. W. 512; Finley Shoe & ^qo fi M F «.?"'t!' ^^ ^'t ^^' ^"^^^'^^ '■ I^earborn, 141 Mass. 590 6 N. E. 837. It seems that an act of all the stockholders, as in- pT ^""fi nV 1' tje corporation, as no one can object. Bundy v. Iron Co., 38 Ohio St. 300 (mortgage by all but one stockholder, to the re- mammg one, of corporate property, executed in the individual names CHAP. III.] U. S. V. MILWAUKEE &C. TRANSIT CO. 63 of the stockholders, held valid). A corporation, from one point of view, may be considered an entity, without regard to its shareholders, yet the fact remains self-evident that it is not in reality a person or thing distinct from its consistent parts. The word corporation is but a collective name for the members who compose the association. Home Fire Ins. Co. v. Barber (Neb.), 93 N. W. 1024, 60 L. R. A. 927. If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a gen- eral rule, and until sufficient reason to the contrary appear; but, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. This much may be ex- pressed without approving the theory that the legal entity is a fiction, or a mere mental creation ; or that the idea of invisibihty or intangi- bihty is a sophism. A corporation, as expressive of legal rights and powers, is no more fictitious or intangible than a man's right to his own home or his own liberty. Applying the rule here laid down to the circumstances shown to surround the brewing company and transit company, can it be doubted that there really is, in substance and effect, an identity of interest, or that the brewing company, considered as an association of individuals, really owns and fully controls the transit company ? Or that the pay- ment of the eighth or tenth of the rate is in reality, and in some form, a payment to, or for the benefit of, the shipper ? I think sufiicient is alleged to show this. Moreover, it clearly appears that the shipper practically controls the transit company, and I think this shows a sufficient identity of interest among the shareholders of both in these repayments to make them rebates, if paid and received with unlawful intent. It is said that the procurement of the shipments through the contract is the mere soUciting of them for the carriers, for which they are lawfully authorized to pay a part of the rate, in order to get the business ; and the transit company, owning a large number of refrig- erator cars, and wishing to keep them employed, simply gives the freight to those competing shippers who will make the best terms, the business being of great volume, and the sums paid for freights large. But this theory of innocence is exploded by the fact, as alleged (whatever the actual proof may show), that the transit company is a mere separate name for the brewing company, being in fact the same collection of persons and interests. Assuming the truth of the aver- ments, the device adopted is "neither new, nor deserving of new success." As the patent lawyers say of an aggregation, there is no new mode of operation, new use, or new result — simply the use of old things in a different situation. 64 CORPORATION VIEWED AS COLLECTION OF INDIVIDITALS. [CHAP. III. The Motion to Strike Out. It has been shown that the question of the intent of the brewing company, the transit company, and the carriers, is a material and vital issue in the case. It is asserted that the repayments are commissions only. On this issue it is certainly pertinent to show the facts alleged in the quoted paragraph. The leading American case on the admissi- bility of such evidence is People v. Mohneux, 168 N. Y. 264, 61 N. E. 286, 62 L. R. A. 193. It can only be put in to prove knowledge, motive, intent, or system, or rebut the theory of accident or mistake. Where the act is clearly unlawful with or without intent, such proof is excluded. But in case of an equivocal act, which is unlawful if so intended, though not otherwise, or claimed to have been accidental or through mistake, e-vidence of unconnected but similar facts is always admissible, to show intent or system or rebut accident. The following cases also illustrate the principle on which such proof is admitted : Bottomley v. U. S., 1 Story 135, Fed. Cas. No. 1,688 ; Penn. M. L. Ins. Co. V. M. L. B. & T. Co., 19 C. C. A. 286, 72 Fed. 422, 38 L. R. A. 33. The rule is fully discussed and illustrated by Prof. Wig- more in his work on Evidence (sections 300-372). The demurrers are overruled, and the motion to strike out denied. Note. — In State v. Standard Oil Co., 49 Ohio St. 137, the court said; — The general proposition that a corporation is to be regarded as a legal entity, existing separate and apart from the natural persons composing it, is not disputed ; but that the statement is a mere fiction, existing only in idea, is well understood, and not controverted by any one who pretends to accurate knowledge on the subject. It has been introduced for the convenience of the company in making contracts, in acquiring property for cor- porate purposes, in suing and being sued, and to preserve the limited liability of the stockholders, by distinguishing between the corporate debts and property of the com- pany, and of the stockholders in their capacity as individuals. All fictions of law have been introduced for the purpose of convenience, and to subserve the ends of jus- tice. It is in this sense that the maxim in fictione juris siibsistit cequitas, is used, and the doctrine of fictions applied. But when they are urged to an intent and purpose not within the reason and policy of the fiction they have always been disregarded by the courts. Broom's Legal Maxims, 130. " It is a certain rule," says Lord Mansfield, C. J.^ "that a fiction of law shall never be contradicted so as to defeat the end for which it was invented, but for every other purpose it may be contradicted." Johnson v. Smith, 2 Burr. 962. "They were invented", says Brinkerhoff, J., in Wood v. Ferguson, 7 Ohio St. 291, "for the advancement of justice, and will be applied for no other pur- pose." . . . No reason is perceived why the principles applicable to fictions in general, should not apply to the fiction that a corporation is a personal entity, separate from the natural persons who compose it, and for whose benefit it has been invented. . . . "The statement," says Mr. Morawetz, "that a corporation is an artificial person, or entity, apart from its members, is merely a description, in figurative language, of a cor- poration viewed as a collective body ; a corporation is really an association of persons, and no judicial dictum or legislative enactment can alter this fact." See his work on Corporations, sec. 227. So that the idea that a corporation may be a separate entity, in the sense that it can act independently of the natural persons composing it, or ab- stain from acting, where it is their will that it shall, has no foundation in reason or authority, is contrary to the fact, and, to base an argument upon it, where the ques- tion is, as to whether a certain act was the act of the corporation, or of its stockholders. CHAP. III.] UNITED STATES V. LEHIGH VALLEY R.K. CO. 65 UNITED STATES v. LEHIGH VALLEY R.R. CO. 220 y. 8. 257. 1910. Mr. Chief Justice White delivered the opinion of the court. This case is one of what were known as the commodities cases pre- viously decided and reported in United States v: Delaware & Hudson Co., 213 U. S. 366. The controversy now is but a sequel to that dis- posed of in the previous cases. To understand the question now for consideration it is essential to have in mind the contentions which arose for decision upon the previous appeal and the disposition which was made of them. We therefore refer to those subjects. The United States proceeded, both by suits in equity and manda- mus, against certain railroad companies, including the Lehigh Valley, to prohibit them from transporting coal in interstate commerce in violation of what were deemed to he the prohibitions of the fifth paragraph of the first section of the act to regulate commerce as amended on June 29, 1906, usually referred to as the commodities clause of the Hepburn Act. The clause is as follows : "From and after May first, nineteen hundred and eight, it shall be unlawful for any railroad company to transport from any State, Territory, or the District of Columbia, to any other State, Territory, or the District of Columbia, or to any foreign country, any article or commodity, other than timber and the manufactured products thereof, manufactured, mined or produced by it, or under its authority, or which it may own in whole, or in part, or in which it may have any cannot be decisive of the question, and is therefore illogical ; for it may as likely lead to a false, as to a true result. Now, BO long as a proper use is made of the fiction, that a corporation is an entity apart from its shareholders, it is harmless, and because convenient, should not be called in question ; but where it is urged to an gnd subversive of its policy or such is the issue, the fiction must be ignored, and the question determined, whether the act in question, though done by shareholders, that is to say, by the persons united in one body, was done simply as individuals and with respect to their individual interests as share- liolders, or was done ostensibly as such, but, as a matter of fact, to control the cor- poration and effect the transaction of its business, in the same manner as if the act had been clothed with all the formalities of a corporate act. This must be so, because the stockholders having a dual capacity, and capable of acting in either, and a possible interest to conceal their character when acting in their corporate capacity, the absence of the formal evidence of the character of the act, cannot preclude judicial inquiry on the subject. If it were otherwise, then, in one department of the law, frau^ would enjoy an immunity awarded to it in no other. See also People v. N. R. Sugar Refining Co., irt/ra, Book VI, Chap. 2. In Stockton v. Central R. R. Co., 50 N. J. Eq. 52, at 76 the court said: "It must not be thought that courts are powerless to strip oflr disguises that are designed to thwart the purposes of the law. The mere suggestion of such a condition is an insult to the intelligence of the judiciary. Whenever such disguises are made apparent they can readily be disrobed. The difficulty is in showing the disguises, not in penetrating thejn when they appear." 66 CORPORATION VIEWED AS COLLECTION OF INDIVIDUALS. [CHAP. III. interest, direct or indirect, except such articles or commodities as may- be necessary and intended for its use in the conduct of its business as a common carrier." 34 Stat. 584, c. 3591. In effect, the contention of the Government was that the clause in question prohibited railroad companies from moving in the channels of interstate commerce articles or commodities other than the articles excepted by the provision which had been manufactured, mined or produced by the companies or under their authority or which were at the time of the transportation owned by them or which had been previously owned by them in whole or in part or in which the com- panies then or previously had any interest, direct or indirect. The Government, moreover, insisted that these general propositions em- braced the movement by the companies in interstate commerce of a commodity which had been manufactured, mined or produced by a corporation in which the transporting railroad company was a stock- holder, irrespective of the extent of such stock ownership. The railroad companies in effect defended the suits upon the ground that the statute as construed by the Government was repugnant to the Constitution. Each of the cases was submitted upon bill and answer and petition and return to the Circuit Court of the United States for the Eastern District of Pennyslvania, held by three circuit judges under the Expediting Act of February 11, 1903. 32 Stat. 823, c. 544. The submission in each case was made as a result of a stipulation be- tween counsel "that the submission on bill and answer and any aver- ment or admission in the pleadings of either party shall in no wise prejudice the said parties in any other suit or proceeding heretofore or hereafter instituted, and shall be operative and take effect only with respect to the present suit and for the purpose thereof." Treating the commodities clause in question as having the signifi- cance attributed to it by the United States the court held it to be repugnant to the Constitution. Judgments and decrees were ac- cordingly entered, denying the applications for mandamus and dis- missing the bills of complaint. The reasons which led to this action were expounded in one opinion, made appHcable to all the cases, the court briefly but comprehensively stating the facts in each case which were rehed upon by the Government as bringing the defendant cor- poration within the clause as the Goverimient construed it. The cases were then brought here. As was done in the lower court, the cases here were all disposed of by one opinion, the facts in each case as summarized by the court below being, stated. In deciding the cases it became necessary first to ascertain the meaning of the commodities clause. In performing this duty the conclusion was reached that the clause did not have the far-reaching significance attributed to it by the Government and which had been substantially adopted by the court below, but on the contrary had a much narrower meaning. Attention was directed CHAP. III.] UNITED STATES V. LEHIGH VALLEY R.R. CO. 67 to the fact that the statute disjunctively applied four generic prohi- bitions, that is, it forbade a railway company from transporting in interstate commerce articles or commodities, 1, which it had manu- factured, mined or produced ; 2, which have been so mined, man- ufactured or produced under its authority ; 3, which it owns in whole or in part ; and, 4, in which it has an interest, direct or indirect. All these prohibitions, however, were held to have but a common purpose, "that is, the dissociation of railroad companies prior to transporta- tion from articles or commodities, whether the association resulted from manufacture, mining, production or ownership, or interest, direct or indirect." In coming to determine whether the Government was correct in its contention that these prohibitions operated to prevent a railroad company from transporting a product because it was owned by or had been mined, manufactured or produced by a corporation in which the raiboad company was the owner of stock, irrespective of the amoimt of such stock ownership, it was expressly decided that thfe pro- hibitions of the statute were addressed only to a legal or equitable interest in the commodities to which the prohibitions referred, that they therefore did not prohibit a railroad company from transporting commodities mined, manufactured, produced or owned by a distinct corporation, merely because the railroad company was the owner of some or all of the stock in such corporation. Summing up its review as to the true construction of the com- modities clause, the court held (p. 415) that it prohibited "a railroad company engaged in interstate commerce from transporting in such commerce articles or commodities under the following circumstances and conditions : (a) When the article or commodity has been man- ufactured, mined or produced by a carrier or under its authority, and at the time of transportation the carrier has not in good faith before the act of transportation dissociated itself from such article or com- modity ; (6) When the carrier owns the article or commodity to be transported in whole or in part ; (c) When the carrier at the time of transportation has an interest, direct or indirect, in a legal or equi- table sense, in the article or commodity, not including, therefore, articles or commodities manufactured, mined' or produced or owned,, etc., by a bona fide corporation in which the railroad company is a stockholder." Thus construed, the clause was held to be within the power of Con- gress to enact. As this conclusion rendered it necessary to reverse the action of the court below which had been exclusively predicated upon the unconstitutionality of the statute, the question arose as to what disposition should be made of the cases. That is to say, the constitutionality of the statute being settled and its true meaning being expounded, the question was whether the cases should be finally disposed of or should be left in such a position as to give the 68 CORPORATION VIEWED AS COLLECTION OF INDIVIDUALS. [cHAP. III. Government the right to proceed to apply and enforce the prohibi- tions of the statute against the various corporations which were de- fendants if it deemed a good case existed for so doing. Disposing of this subject in the light of the consent upon which the cases had been tried in the court below, and of the error which had obtained as to the true meaning of the statute and of the consequent concentration of the attention of the court and of the parties to the question of the constitutionality of the statute, instead of its application to the facts, when correctly construed, it was determined that the decree should not conclude the right of the United States in the respective causes to further proceed to enforce the statute as construed, and hence that that subject should be left open for future action. Referring to this matter, it was said (p. 418) : "As the court below held the statute wholly void for repugnancy to the Gonstitutipn, it follows from the views which we have expressed that the judgments and decrees entered below must be reversed. As, however, it was conceded in the discussion at bar that in view of the public and private interests which were concerned, the United States did not seek to enforce the penalties of the statute, but commenced these proceedings with the object and purpose of settling the differ- ences between it and the defendants concerning the meaning of the commodities clause and the power of Congress to enact it as correctly interpreted, and upon this view the proceedings were heard below by submission upon the pleadings, we are of opinion that the ends of justice will be subserved, not by reversing and remanding with partic- ular directions as to each of the defendants, but by reversing and re- manding, with directions for such further proceedings as may be nec- essary to apply and enforce the statute as we have interpreted it." Accordingly, the mandate of this court provided that the cause "be, and the same is hereby, remanded to the said Circuit Court for further proceedings in conformity with the opinion of this court." Upon the filing of the mandate the court below vacated its decree dismissing the bill in this (the equity) cause, and reinstated the case upon the docket. Th€ United States then presented an amended bill ' and asked leave to file it. The amendment contained copious aver- ments in regard to the actual relations existing between thq railroad company and one of the coal companies mentioned in the original bill, viz., the Lehigh Valley Coal Company. In substance it was averred that as to this particular coal company the railroad company was nqt only the owner of all the stock issued by the coal company, but that the railroad company so used the power thus resulting from its stock ownership as to deprive the coal company of all real, independent exlste^ce and to make it virtually but an agency or dependency or department of the railroad company. In other words, in great detail facts were averred which tended to establish that there was no distinc- tion m practice between the coal company and the railroad company, CHAP. III.] UNITED STATES V. LEHIGH VALLEY B.R. CO. 69 the latter using the coal company as a mere device to enable the rail- road company to violate the provisions of the commodities clause. It was expressly charged that in consequence of these facts : ■ " The coal company is not a bowa^de mining company, but is merely an adjunct or instrumentality of the defendant. The defendant is in legal effect the owner of and has a pecuniary interest in the coal mined by the coal company, and which is transported by the defendant." Not only was it thus charged that the railroad company used its stock ownership to so commingle the operating of the affairs of the mining company with its own as to render it impossible to distinguish as a matter of fact between them, but it was moreover expressly in substance charged that exerting its influence as the owner of all the stock of the coal company the railroad company caused the coal company to buy up all the coal produced by other mining companies in the area tributary to the railroad and fix the price at which such coal was bought so as to control the same and the transportation thereof and establish the price at which the coal thus ostensibly acquired by the coal company by purchase should be, sold when it reached the seaboard. It was charged that by these abuses the production, shipment and sale of all the coal within the territory served by the railroad company was brought within the dominion of that company practically to the same extent as if it was the absolute owner of the same. Finally it was alleged as follows : "That by virtue of the facts hereinbefore set out and otherwise, and more particularly by virtue of the control, direction, domination, and supervision exercised by the persons who are the officers of the defendant railroad and by the defendant over all the operations of the said coal company, embracing the mining and production of said coal, the shipment and transportation of the same over the defendant railroad, and the sale thereof at the seaboard, it follows : "First. That the coal company, not being in substance and in good faith a bona fide corporation, separate from the defendant, but a mere adjunct or instrumentality of the defendant, the defendant, at the time of transportation, has an interest, direct or indirect, in a legal or equitable sense, in said coal. "Second. That said coal of said coal company is mined and pro- duced under the authority of defendant, and the defendant at the time of transportation and before the act of transportation has not in good faith dissociated itself from all exercise of authority over said coal but continues to exercise authority over said coal at the time of transportation and over the subsequent sale thereof." On the objection of the railway company the court denied the request of the United States for leave to file the amended bill, The United States then moved for a decree dismissing its original bill 70 CORPORATION VIEWED AS COLLECTION OF INDIVIDUALS. [CHAP. UI. without prejudice, and after argument that motion also was denied. Thereupon counsel for the railroad company moved to dismiss the bill absolutely, and upon the statement of counsel for the United States that it "would not proceed any further in view of the fact that the proposed amendment had been disallowed ", the court reached the conclusion "that the bill should be dismissed absolutely upon the allegations of the bill and answer." A decree to that effect was en- tered, and the Government prosecutes this appeal, relying for reversal upon the error which it is insisted was committed in refusing to allow the proposed amended bill to be filed and in dismissing the suit. At the threshold it is insisted by the railroad company that the action of the court below in refusing to permit the proposed amend- ment, however germane that amendment may have been to the cause of action stated in the original bill and even although the subject- matter of the amendment was not foreclosed by our previous decision, is not susceptible of being reviewed, because the allowance of amend- ments to pleadings is discretionary with a trial court, and the action of the court below in refusing to permit the amendment, even though erroneous, may not be reversed for error unless a gross abuse of dis- cretion was committed. The principle is elementary, but is inapplica- ble to this case for a twofold reason : First, because the analysis which we have hitherto made of the opinion of this court on the prior hearing makes it certain that the undoubted object was not to foreclose the right of the Government to enforce in the pending causes the commod- ities clause as correctly construed, and therefore in this regard the discretion of the court below was controlled by the action of this court. Second, because, in view of the express reservations in the opinion and the exphcit language of the mandate of this court, the conclusion cannot be escaped that an absolute abuse of discretion re- sulted from refusing to permit the amendment, even although such abuse was obviously occasioned by a misconception of tRe character of the action of this court and the scope of the mandate. It remains only to consider, first, whether the proposed amendment was germane to the original cause of action, and' if it was, whether it was foreclosed by our previous decision. As to the first question. When it is borne in mind that the suit was brought by the Government to enforce as against the defendant the commands of the commodities clause, the fact that the proposed amendment was germane to such cause of action is too apparent to need anything but statement. Indeed, in the argument at bar on behalf of the railroad company this is in effect conceded, since it is insisted that the amendment should not have been allowed, because in substance its averments virtually constituted part of the original > cause of action. And we think it is equally clear that the grounds of the amendment were not foreclosed by our former decision. While that decision expressly held that stock ownership by a railroad CHAP. III.] UNITED STATES V. LEHIGH VALLEY E.R. CO. 71 company in a bona fide corporation, irrespective of the extent of such ownership, did not preclude a railroad company from transporting the commodities manufactured, mined, produced or owned by such corporation, nothing in that conclusion foreclosed the right of the Government to question the power of a railroad company to transport in interstate commerce a commodity manufactured, mined, owned or produced by a corporation in which the railroad held stock and where the power of the railroad company as a stockholder was used to obliterate all distinctions between the two corporations. That is to say, where the power was .exerted in such a manner as to so com- mingle the affairs of both as by necessary effect to make such affairs practically indistinguishable and therefore to cause both corpo- rations to be one for all purposes. To what extent the amendment charged this to be the case will become manifest by again particularly considering its averments concerning the use by the railroad company of the coal company as a purchaser of coal, as also the direct charge made in the proposed amendment that by such acts the railroad company was enabled to control all or a greater portion of the coal produced in the region tributary to its road, and thus to dominate the situation and fix the price, not only at which all the coal could be bought, but at which it could be sold at the seaboard for consumption. That the facts thus averred and the other allegations contained in the proposed amended bill tended to show an actual control by the railroad company over the property of the coal company and an actual interest in such property beyond the mere interest which the railroad company would have had as a holder of stock in the coal company is, we think, clear. The alleged facts, therefore, brought the railroad company, so far as its right to carry the product of the coal company is concerned, within the general prohibitions of the . commodities clause, unless for some reason the right of the railroad company to carry such product was not within the operation of that clause. The argiunent is that the railroad company was so excepted, because any control which it exerted or interest which it had in the product of the coal company resulted from its ownership of stock in that company, and would not have existed without such ownership. The error, however, lies in disregarding the fact that the allegations of the amended bill asserted the existence of a control by the railroad company over the coal corporation and its product, rendered possible, it is true, by the ownership of stock, but which was not the necessary result of a bona fide exercise of such ownership and which could only have arisen through the use by the railroad of its stock ownership for the purpose of giving it, the railroad company, as a corporation for its own corporate purposes, complete power over the affairs of the coal company, just as if the coal company were a mere department of the railroad. Indeed, such a situation could not have existed had the fact that the two corporations were separate and distinct legal entities 72 CORPORATION VIEWED AS COLLECTION OF INDIVIDUALS. [CHAE. III. been regarded in the administration of the affairs of the coal company. Granting this to be the case, however, it is in effect urged, as the rail- road company held all the stock in the coal company, and therefore any gain made or loss suffered by that company would be sustained by the railroad company, no harm resulted from commingling the affairs of the two corporations and disregarding the fact that they were separate juridical beings, because ultimately considered they were but one and the same. This, however, in substance but amounts to asserting that the direct prohibitions of the commodities clause ought to have been applied to a case of. stock ownership, particularly to a case where the ownership embraced all the stock of a producing company, and therefore that a mistake was committed by Congress in not including such stock ownership within the prohibitions of the commodities clause. We fail, however, to appreciate the relevancy of the contention. Our duty is to enforce the statute, and not to ex- clude from its prohibitions things which are properly embraced within them. Coming to discharge this duty it follows, in view of the express prohibitions of the commodities clause, it must be held that while the right of a railroad company as a stockholder to use its stock owner- ship for the purpose of a bona fide separate administration of the affairs of a corporation in which it has a stock interest may not be denied, the use of such stock ownership in substance for the purpose of destroying the entity of a producing, etc., corporation and of com- mingling its affairs in administration with the affairs of the railroad company, so as to make the two corporations virtually one, brings the railroad company so voluntarily acting as to such producing, etc., corporation within the prohibitions of the commodities clause. In other words, that by operation and effect of the commodities clause there is a duty cast upon a railroad company proposing to carry in interstate commerce the product of a producing, etc., corporation in which it has a stock interest not to abuse such power so as virtually to do by indirection that which the commodities clause prohibits, a duty which plainly would be violated by the unnecessary commin- gling of the affairs of the producing company with its own, so as to cause them to be one and inseparable. Deciding, as we do, that error was committed in denying leave to file the proposed amended bill, the decree below is reversed and the cause remanded with directions for further proceedings in conformity with this opinion. CHAP. IV.] ASHLEY V. RYAN. 73 CHAPTER IV.l THE CORPORATION VIEWED AS A FRANCHISE. ASHLEY V. RYAN. 153 U. S. 436. 1894. The Wabash, St. Louis and Pacific Railroad Company, which owned and operated lines running through the States of Ohio, In- diana, Ilhnois, Missouri, and Michigan, having defaulted in the payment of interest on its bonds, foreclosure proceedings were com- menced in the Federal courts for the sale of its property. Subse- quently a committee was entrusted with the duty of buying in the property. After purchase by the committee the property in the several States was transferred to companies incorporated in those States. The following were the companies thus organized, and ta whom the necessary transfers were respectively made : In Ohio : The Toledo and Western ; capital stock, $700,000. In Michigan : The Detroit and State Line Wabash ; capital stock, $300,000. , In Indiana : the Wabash Easterrt, of Indiana ; capital stock, $9,000,000. In Illinois : The Wabash Eastern, of Illinois ; capital stock, $12,000,000. In Missouri : The Wabash Western ; capital stock, $30,000,000. Thereafter these several companies were consolidated into one. Section 148a of the Revised Statutes of Ohio contains, among other provisions, the following : "The Secretary of State shall hereafter charge and collect the following fees for official services : . . . "3. For filing articles of agreements of consolidation of corporations having a capital stock, the following fees shall be collected by the Secretary of State : Said articles or agreements of consohdation shall be treated as the articles of incorporation of the new consoHdated corporations created by such articles or agreements of consolidation, and the fees for fihng such articles or agreements of consolidation shall 74 THE CORPORATION VIEWED AS A FRANCHISE. [CHAP. IV. be the same in each case as is hereinbefore set forth ^ for the filing of articles of incorporation of a corporation having the same amount of capital stock, as is provided for by the articles or agreements of consoUdation for the new consohdated corporation, created by any such articles or agreement of consolidation ; and in fixing the aniount of such fees, no credit shall be allowed for fees previously paid by any of the constituent corporations, parties to such consohdation, but the same shall be determined solely by the amount of capital stock of the new corporation created by such articles or agreements of consoUdation." _ ; The plaintiffs in error presented their articles of consohdation, for fihng, to the Secretary of State, and tendered $700, that being one- tenth of one per cent on the capital stock of the Toledo and Western Railroad, the only Ohio corporation which had entered into the consoUdation. The secretary refused to file the proffered articles for that amount, and demanded $52,000, or one-tenth of one per cent of the par value of the entire stock of the consohdated corporation. This amount was paid under protest, and suit was at once brought to recover aU the excess paid over and above the $700 originally tendered, upon the ground that its enforcement would violate the Constitution of the United States, because it would be an attempt on the part of the State of Ohio to lay a burden on interstate commerce, or the instruments of such commerce, and to give an extra-territorial force to its taxing power. The cause was ultimately taken to the Supreme Court of the State of Ohio, and by that court the judgment which maintained the vaHdity of the charge was affirmed. The plaintiffs in error thereupon brought the cause here for review. Mr. Justice White, after stating the case, deUvered the opinion of the court .^ The writ of error brings before us only the Federal question. Watson V. Mercer, 8 Pet. 88; Barbier v. Connolly, 113 U. S. 27. Nor does the determination of the Federal question render it necessary ' to define the nature of the charge imposed ; for, whether this charge be viewed as a tax, a Ucense, or a fee, if its exaction violated the inter- state commerce clause of the Constitution of the United States, or involved the assertion of the right of a State to exercise its powers of taxation beyond its geographical hmits, it was void, whatever might be the technical character affixed to the exaction. The purpose of the tender of the articles of consolidation to the Secretary of State was to secure to the consohdated company certain powers, immunities, and privileges which appertain to a corpora- tion under the laws of Ohio. The rights thus sought could only be > To wit: one-tenth of one per cent, upon the authorized capital stock. " Jrortions of opinion omitted. CHAP. IV.] ASHLEY V. RYAN. 75 acquired by the grant of the State of Ohio, and depended for their existence upon the provisions of its laws. Without that State's con- sent they could not have been procured. Hence, in seeking to file its articles of incorporation, the company was applying for privileges, immunities, and powers which it could by no means possess, save by the grace and favor of the constitution of the State of Ohio and the statutory provisions passed in accordance therewith. At the time the articles were presented for filing, the statute law of the State charged the parties with notice that the benefits which it was sought to procure could not be obtained without payment of the sum which the Secre- tary of State exacted. As it was within the discretion of the State to withhold or grant the privilege of exercising corporate existence, it was, as a necessary resultant, also within its power to impose whatever conditions it might deem fit as prerequisite to corporate life.^ The act of fiHng, constituting, as it did, a claim of a right to the franchise " granted by the state law, carried with it a voluntary assumption of any burden with which the privilege was accompanied, and without which the right of corporate existence could not have been procured. We say voluntary assumption, because, as the claim to the franchise was volimtary, the assumption of the privilege which resulted from it partook necessarily of the nature of the claim for corporate existence. Having thus accepted the act of grace of the State and taken the advantages which sprang from it, the company cannot be permitted to hold on to the privilege or right granted, and at the same time repudiate the condition by the performance of which it could alone obtain the privilege which it sought. That the right to be a state corporation depends solely upon the grace of the State, and is not a right inherent in the parties is settled. Thus, in Cahfornia v. Pacific Railroad Co., 127 U. S. 1, 40, speaking through Mr. Justice Bradley, the court said : "A franchise is a right, privilege, or power of piibhc concern, which ought not to be exercised by private individuals at their mere will and pleasure, but should be reserved for public control and administration. . . . Under our system, their existence and disposal are under the control of the legislative department of the government, and they cannot be assumed or exercised without legislative authority. . . . No private persons can take another's property, even for public use, without such authority ; which is the same as to say, that the right of eminent domain can only be exercised by virtue of a legislative grant. This is a franchise. No persons can make themselves a body corporate and politic without legislative authority. Corporate capacity is a franchise. , The list might be continued indefinitely." In Home Insurance Co. v. New York, 134 U. S. 594, 599, through ' But cf. County of San Mateo v. S. P. Ry. Co., infra, in note-at page 210. ^ A splendid discussion of the nature of a franchise and its distinction from a com- mon-law right is found in Spring Valley Water Works v. Schottler, 62 Gal. 69. — Ed. 76 THE CORPORATION VIEWED AS A FRANCHISE. [CHAP. IV. Mr. Justice Field, we said : "The granting of such right or privilege rests entirely in the discretion of the State." Nor is the question at issue affected by the fact that some of the constituent elements which entered into the consohdated company were corporations owning and operating property in another State. The power of Corporations of other States to become corporations, or to constitute themselves a consohdated corporation under the Ohio statutes, and thus avail of the rights given thereby, is as completely dependent on the will of that State as is the power of its individual citizens to become a corporate body, or the power of corporations of its own creation to consohdate under its laws. Bank of Augusta v Earle, 13 Pet. 519; Paul v. Virginia, 8 Wall. 168, 181. ^^ In the latter case, speaking through Mr. Justice Field, we observed : "Now a grant of a corporate existence is a grant of special privileges to the corporators, enabUng them to act for certain designated pur- poses as, a single individual, and exempting them (unless otherwise specially provided) from individual hability. The corporation, being the mere creation of local law, can have no legal existence beyond the limits of the sovereignty where created. As said by this court in Bank of Augusta v. Earle, 'It must dwell in the place of its creation and cannot migrate to another sovereignty.' The recognition of Its existence, even, by other States, and the enforcement of its con- tracts ma^e therein depend purely upon the comity of these States - a^comity which is never extended where the existence of the cor- or rpZnTJ f ^T"''^ r '*', ^°^^'' ^'^ prejudicial to their interests are 3nL Vn ^t'^" •- ' ^ .^' '^' P^^^^"* ^^^ corporations are multiphed to an almost indefinite extent. There is scarcelv ■a business pursued requiring the expenditure of large capTtT o^ he union of large numbers, that is not carried on by corS ^iS It is^t too much to say that the wealth and business ofTe country S ci^ze^fTonTsTlTh""'' '^ *'^"- ^' ''' -^en coSpoS be eScfsed in other 1;«f ""-^rP^^^^^ P°^"^^ ^""^ f^^^^^se, could privikgeT: Srown'Srt' that a state, in granting a corporate mitting a fore gnTornorS T' k ^* '' eqmvalent thereto, in per- ments of TcSdated cZ- + '^^^ '''^' °^ '^' constituent ele- impose such coSolf asTd!p '''^^"''"^ "°^^^ ^t« 1^^«' «iay of the francMse in Ser cl SLf^^^^^^ ""'^.*^^* *^« ^''^^Pt^nce e«ner case imphes a submission to the conditions ^a^*.tr.V°ctVotri^^^^^^^^^ see notes to Lancaster . CHAP. IV.] ASHLEY V. RYAN. 77 without which the franchise could not have been obtained. In Paul V. Yir^nia,, supra, the court said, p. 181 : "Having no absolute right of recognition in other States, but depending for such recognition and the enforcement of its contracts upon their assent, it follows, as a matter of course, that such assent may be granted upon such terms and conditions as those States may think proper to impose. They may exclude the foreign coi-poration entirely ; they may restrict ■ its business to particular locaUties, or they may exact such security for the performance of its contracts with their citizens as in their judgment will best promote the pubKc interest." The case of Philadelphia Fire Association v. New York, 119 U. S. 110, 119, involved the validity of a tax imposed by the State of New York on an insurance company which had been incorporated in Pennsylvania. Mr. Justice Blatchford, in delivering the opinion of the court, said : "This Pennsylvania corporation came into the State of New York to do business by the consent of the State under this ' act of 1853, with a license granted for a year, and has received such license annually, to run for a year. It is within the State for any given year under such hcense, and subject to the conditions pre- scribed by statute. The State, having the power to exclude entirely, has the power to change the conditions of admission at any time, for the futm-e, and to impose as a condition the payment of a new tax or a further tax as a license fee. If it imposes such license fee as a prerequisite for the future, the foreign corporation, until it pays such license fee, is not admitted within the State or within its juris- diction. It is outside, at the threshold, seeking admission, with consent not yet given." The question here is not the power of the State of Ohio to lay a charge on interstate commerce, or to prevent a foreign corporation from engaging in interstate commerce within its confines, but simply the right of the State to determine upon what conditions its laws as to the consoUdation of corporations may be availed of. Considering, as we do, that the payment of the charge was a condi- tion imposed by the State of Ohio upon the taking of corporate being or the exercise of corporate franchises, the right to which depended solely on the will of that State, and hence that liability for the charge was entirely optional, we conclude that the exaction constituted no tax upon interstate commerce, or the right to carry on the same, or the instruments thereof, and that its enforcement involved no attempt on the part of the State to extend its taxing power beyond its territorial hmits. Judgment affirmed. 78 THE CORPORATION VIEWED AS A FRANCHISE. [CHAP. IV. SOCIETY FOR SAVINGS v. COITE. 6 Wall. 594. 1867. Mr. Justice Clifford delivered the opinion of the court.' . Savings banks, and societies for savings, in the State of Connecticut are required by the law of the State to pay annually to the State treasurer for the use of the State a sum equal to three-fourths of one per cent, on the total amount of deposits in such institution on the first day of July in each year. Payment of the tax is required to be made in semi-annual instalments, and the provision is that the tax, so levied, shall be in lieu of all other taxes on said institutions and the deposits therein. Institutions called savings and building associations are also embraced in the same provision, but the clauses of the section hav- ing respect to such associations are omitted, as they are not in any view material in this investigation. They are stock associations of a novel and peculiar character, organized under a general law, and are quite distinct from savings banks and societies for savings, which are merely banks of deposit and loan, having no stock, and which were created under special charters from the legislature of the State. Such institutions are banks of deposit, but they have no capital stock or stockholders, and are without any authority to make dis- counts or issue any circulating medium. Money in hmited, amounts may be deposited in such banks for safekeeping and be withdrawn at the pleasure of the owner, under such regulations as the charter and by-laws may prescribe. Authority is vested in the corporation by its charter to receive such deposits in trust for the owner, and to loan, use, and improve the same, and to apply and divide the net income and profits thereof in just proportions among the persons making such deposits, subject to certain reasonable deductions as therein provided. Like other corporations they may choose their, own ofi&cers and may admit new members ; and the charter also provides that they may sue and be sued,, that they may take and hold real estate, other than such as is conveyed as security or in payment of debts, to a limited amount, and may vest their funds in the stock of the State banks or other pubHc stock of the State or of the United States, and may dispose of the same from time to time in such amounts as will meet the demands for the deposits made in such institution. Whole amount of deposits in the defendant bank on the first day of July, 1863, was $4,758,273.37, of which the sum of $500,161 was * Portions of opinion omitted. CHAP. IV.] SOCIETY FOE SAVINGS V. COITE. 79 then invested and held in securities of the United States, declared ■by act of Congress to be exempt from taxation, as appears by the return of the treasurer of the bank to the comptroller of public accoimts and by the agreed statement in the record. Prompt payment of the first instalment of the tax, as required by law, was made by the bank, less the prescribed percentage upon the amount of the deposits invested in government securities, which they refused to pay, insisting that the tax to that extent was unauthorized and illegal. Due proceedings were accordingly instituted by the plaintiff, as the treasm-er of the State, to recover of the bank the balance of the tax so withheld. Judgment in the court below was rendered for the plaintiff, and the defendants sued out this writ of error. 1. Payment is required to be made to the treasurer of the State, for the use of the State, of a sum equal to three-fourths of one per cent, on the total amoimt of deposits in such institution, on the first day of July in each year, and the question is whether, by the true construction of that provision, the assessment is properly to be regarded as a tax on property or as a tax on the privileges and franchises of the defendant corporation. Viewed as a tax on prop- erty the assessment, so far as respects the amount in controversy, would be illegal, as it is well settled by repeated decisions of this court that the States cannot tax the securities of the United States, declared by act of Congress to be exempt from taxation, for any purpose whatever. Congress has power to borrow money on the credit of the United States, and the people, by making the govern- ment supreme, have shielded its action in the exercise of that power from every species of unfriendly State legislation. Undoubtedly the States may tax all subjects over which the sovereign power of the State extends, but they are not authorized to tax the instruments of the Federal government nor the means employed by Congress to carry into effect the enumerated powers of the Constitution, or ■any other power vested by the fundamental law in the government of the United States. Such were the early doctrines of this court upon the subject, and those doctrines have been reaffirmed and enforced in the recent decisions of the court. True reason for the rule is that the Constitution of the United States and the laws of Congress made in pursuance thereof are the supreme law of the land, and the express provision is that the judges in every State court shall be bound thereby, anything in the con- stitution or laws of any State to the contrary notwithstanding. 2. None of these principles are denied by the original plaintiff. On the contrary, he admits that the States do not possess the power, by taxation or otherwise, to retard, impede, burden, or in any manner to control the operation of the constitutional laws passed by Congress to carry into execution the powers vested in the Federal govern- ment. Conceding all this, he still denies that the tax in this case is 80 THE COKPORATION VIEWED AS A FRANCHISE. [CHAP. IV. in any proper sense subject to any such objection, but insists that in any and every point of view it is a tax on the privileges and fran- chises of the defendant corporation, which was created by the legis- lature of the State, and which, by all the authorities, it is entirely competent for the State to tax, with the other property of the citi- zens, for the support of the State government. Power to tax is granted for the benefit of all, and none have any right to complain if the power is fairly exercised and the proceeds are properly applied to discharge the obligations for which the taxes were imposed. Such a power resides in government as a part of itself, and need not be reserved when property of any description, or the right to use it in any manner, is granted to individuals or cor- porate bodies.^ Unless exempted in terms which amount to a contract, the privi- leges and franchises of a private corporation are as much the legiti- mate subject of taxation as any other property of the citizens which is within the sovereign power of the State. Repeated decisions of this court have held, in respect to such corporations, that the taxing power of the State is never presumed to be relinquished, and conse- quently that it exists unless the intention to relinquish it is declared in clear and unambiguous terms.^ Corporate franchises are legal estates vested in the corporation itself as soon as it is in esse. They are not mere naked powers granted to the corporation, but powers coupled with an interest which vest in the corporation upon the possession of its franchises, and what- ever may be thought of the corporators, it cannot be denied that the corporation itself has a le^al interest in such franchises.^ Nothing can be more certain in legal decision than that the privi- leges and franchises of a private corporation, and all trades and avocations by which the citizens acquire a livelihood, may be taxed by a State for the support of the State government. Authority to that effect resides in the State independent of the Federal govern- ment, and is wholly unaffected by the fact that the corporation or individual has or has not made investment in Federal securities,* Private corporations engaged in their own business and pursuing their own interests according to their own will are as much subject to the taxing power of the State as individuals, and it cannot make any difference whether the tax is imposed upon their property, unless exempted by some paramount law, or the franchise of the corpora- tion, as both are alike under the protection and within the control of the sovereign power.' > Providence Bank ». Billings et al., 4 Peters, 563. 2 P. & W. R. R. Co. V. Maryland, 10 Howard, 393. ' Dartmouth College ». Woodward, 4 Wheaton, 700. * Osborn v. Bank of the United States, 9 Wheaton, 859 ^^ Angell & Ames on Corporations (8th ed.), § 438 ; Brown v. Maryland, 12 Wheaton, CHAP. IV.] AMEE. MALT CORPORATION V. PUBLIC UTILITY BOARD. 81 [The Court construed the tax to be upon the corporation, i.e. upon its privileges and franchises and not upon its property]. Judgment affirme^. AMERICAN MALT CORPORATION AND AMERICAN MALTING COMPANY, v. BOARD OF PUBLIC UTILITY COMMISSIONERS ET AL. 86 N. J. L. 668. 1914. On Appeal from the Supreme Court. A majority of the directors of the American Malt Corporation and of the American Malting Company, corporations organized under the General Corporation act of this state, entered into an agree- ment of merger and consolidation, providing for the merger of the American Malting Company into the American Malt Corporation. This agreement was approved at special meetings of stockholders, by the holders of more than two-thirds of the stock of each of the corporations. Thereafter apphcation was made to the board of public utility commissioners under chapter 19 of the laws of 1913, for approval of the proposed merger. The board after hearing, determined that it could not approve the merger and consolidation in the form proposed and the application was therefore denied and the petition dismissed. A certiorari to review and set aside the proceedings of the board was sued out of the Supreme Court, and that court, Mr. Justice Swayze sitting, sustained the action of the board in the following per curiam : "In order to expedite the proposed appeal, I will indicate suc- cinctly the views I hold. The case was argued as if it involved the constitutionality of chapter 19 of the laws of 1913, which requires that corporations intending to merge shall first secure the approval in writing of the board of public utility commissioners. It is said that this involves a delegation of legislative power. No statute is pointed to which becomes a law or ceases to be a law as the result of any act of the commissioners. There is none. It seems to be thought that the commissioners would legislate if they adopted any rules for their own guidance in granting or withholding their approval of a proposed merger of corporations, but such rules would have no bind- ing force even upon the commissioners themselves, since they could rescind them at pleasure ; they lack all semblance of legislation and surely could not render unconstitutional an act of the legislature.' The requirement of approval by the commissioners is no more than ' Cf. Franklin Bridge Co. v. Young, infra, Book II, Chap. 1, Sec. 2, 82 T'HE CORPOEATION VIEWED AS A FRANCHISE. [CHAP. IV. the requirement that some judicial- or clerical officer shall pass upon the regularity of incorporation papers, or the requirement of the act of the secretary of state in Iowa Life Insurance Co. v. Eastern Mutual Life Insurance Co., 64 N. J. L. 340, or the requirement of certificates from the commissioner of banks and insurance under our present statutes. If it were necessary to sustain the constitutionality of the act, it would be quite natural to hold that the intent of the legisla- ture was no more than to require an ascertainment by the commis- sioners of the fact that the proposed merger was of a character a,uthor- ized by law. It is not, however, necessary to go so far as to limit in this way the powers of the commissioners. The real question is whether the legislature itself had the right to impose as a condition of merger the approval of the commissioners. To state the question is to answer it. The right to merge is purely statutory and there is no constitutional objection to the legislature fixing such terms as it chooses, including, since that is its pleasure, the written consent of the commissioners. The legislature is under no compulsion to author- ize a merger, and it may impose even fanciful conditions ; it might, for instance, prescribe that the approval should be written in red ink." ... No doubt the action of the Board must be reasonable and not arbitrary, but that is because we will not attribute to the legislature an intent to exercise or permit the exercise of arbitrary power. The action of the commissioners must have a foundation in reason ; it has such foundation when it is based upon the requirements of the Corporation act, or upon settled legal principles, and not upon the mere whim of the commissioners. [The Supreme Court then determined that the action of the Com- missioners in refusing approval to the merger was reasonable, and affirmed their action.] Per Curiam. Our examination of this case has led us to the conclusion that it was rightly decided in the court below. We do not, however, wish to be understood that had we differed from the Supreme Court and reached the conclusion that the board of public utility commissioners had not exercised a sound but an arbitrary and unreasonable discretion in disapproving of the merger of these corporations, that our decision would be different. The question, whether or not the Supreme Court has the power to review and reverse the determination of such board in the matter of approv- ing or disapproving the merger of corporations under chapter 19 of the laws of 1913, not having been raised or argued, is not decided. The judgment of the court below will be affirmed, for the reasons stated m its per curiam, except as to the observation to the effect that the action of the board in these matters must be reasonable and not arbitrary. Upon that question we express no opinion. CHAP. IV.] FIETSAM V. HAY. 83 FIETSAM V. HAY. 122 m. 293. 1887. Mr. Justice Mtjlkey delivered the opinion of the Court : The People's Bank of Belleville, incorporated under a special act of the legislature, approved and in force March 27, 1869, having become insolvent, on the 17th of April, 1878, made a general assign- ment of all its property and effects for the benefit of creditors. The assignee presented a petition to the county court of St. Clair county, at its March term, 1887, for leave to sell "all the rights, privileges, powers and immunities which were granted by the said act incorporat- ing said bank." The judge of the county court being interested in the result of the proceeding, the venue was changed to the circuit court of St. Clair county, where, upon due consideration of the peti- tion, that court entered an order dismissing the same. The present appeal is from the order of dismissal. The correctness of the decision of the circuit court depends entirely upon whether the title to the franchise created and conferred by the bank charter passed as an asset of the bank, to the assignee, under the. assignment. That its language is sufficiently compre- hensive and adequate to pass the franchise to the assignee, if, as matter of law, the bank could transfer it at all, we have no doubt. This is not questioned. The question, therefore, is, whether a corporate franchise, in the absence of statutory authority, is in' law capable of being assigned or transferred. Differently put, the ques- tion, as formulated by the parties themselves, is, "Did the franchise of the said bank pass with the deed of assignment to the assignee as a salable asset of the said bank?" The word "franchise" is often used in the sense of privileges generally, but in its more appropriate and legal sense the term is confined to such rights and privileges as are conferred upon corpo- rate bodies by legislative grant. It is in the latter sense, alone, the word is now to be considered. The franchise proposed to be sold is a corporate franchise, and the artificial body or political entity to which it pertains is what is known to the law as an aggregate cor- poration. Such a corporation has been well defined to be, "an artificial being created by law, and composed of individuals who subsist as a body politic under a special denomination, with the capacity of perpetual succession, and of acting, within the scope of its charter, as a natural person." Now, a franchise is nothing more than the right or privilege of being a corporation, and of doing such things, and such things only, as are authorized by the corpora- tion's charter. This right of a body of men- to be and act as an 84 THE CORPORATION VIEWED AS A FRANCHISE. [CHAP. FV. artificial person, without, as a general rule, incurring individual re- sponsibility, is declared by Blackstone to be "a royal privilege, or branch of the king's prerogative, subsisting in the hands of a subject." (2 Blackstone, 37.) Such right or franchise is defined by Bouvier to lae "a certain privilege conferred by grant from govern- ment, and vested in individuals." (1 Bouvier, 545.) Now, it is clear from these definitions, and from the very nature of a corpo- ration, that a franchise, or the right to be and act as an artificial body, vests in the individuals who compose the corporation, and not in the corporation itself. This fact, we think, is not without significance in reaching a conclusion upon the main question to be determined, outside of the numerous authorities bearing directly on the subject. ■ It will be kept in mind that the corporate body, for purposes of ownership, and, indeed, for most purposes, has a distinct identity from that of the individual corporators. The latter may be wealthy, when at the same time the former is insolvent, and vice versa. The corporation has no right to appropriate, sell, or otherwise dispose of any of the property or effects of a corporator. The relation of debtor and creditor may subsist between them in the same manner as between the company and other persons. The company's entire property may be swept away from it by sequestration, or other means, and yet its franchises will remain vested in the corporators until they are either abandoned or forfeited to the State. All these propositions are familiar to the courts and the profession, and are well sustained by authority. If, then, the franchise is vested in and belongs to the corporators, and not to the corporation itself, how could the latter transfer or assign it to another? On the plainest of principles this could not be done without legislative authority for that purpose, and we find nothing, either in the statute or the company's charter, conferring such authority. While it is conceded the legislature might confer on the artificial body the power to sell or assign the franchise to strangers, yet this would be, in effect, to authorize it to commit a species of suicide, for it is manifest the corporation could not exist a moment after the franchise conferred upon its members had been transferred to others. Indeed, when we consider the attributes and essential elements of corporate existence, resulting from the grant of the franchise, and without which the artificial body could not accomplish the objects of its creation or perform the duties im- posed upon it by law, the sale or assignment of the franchise with- out special legislative authority would seem to be wholly inadmissible. It IS proposed here, it wUl be noted, to sell simply the fraSJe of would'be-thf:Zrf*^V '',%^°°^' *^^ ^"^^*i°^ ™«- wh^t would be the effect of such a sale? It clearly could not haVe the effect of making the purchasers, if more than one, an aggregate cor! qHAP. IV.] FIKTSAM V. HAY. 83 poration, with the general banking powers conferred by the bank charter. To assert such a proposition would be simply startling; and yet, if in such case the purchasers would take anything at all, they certainly could not take less than the right to be a banking cor- poration, with all the powers and privileges conferred by the charter for these rights, — are of the very essence of the franchise ; and conse- quently, the one could not be thus acquired without, by the same act, securing the others, — a view which, as already indicated, has no sanction in reason or authority. While statements are to be found on this subject in some of the text books, as well as in some of the decided cases, which can not be reconciled with the conclusion we have reached, yet we are clearly of opinion that a corporation, in the absence of statutory authority, has no right to sell or transfer * its franchise, or any property essen- tial to its exercise, which it has acquired under the law of eminent domain. This proposition, in our judgment, is sustained both by reason and the decided weight of authority. Black et al., v. Delaware and Raritan Canal Co. 24 N. J. Eq. 455 ; Freeman on Executions, sees. 179, 180 ; Pearce on Railroads, 496-1 ; Jones on Mortgages, sec. 161 ; Rorer on Judicial Sales, (2ded.)222; Archer «;..Terre Haute and IndianapoHs Railroad Co. 102 111. 493 ; Bruffett v. Great Western Railroad Co. 25 id. 353; Chicago and Rock Island Railroad Co. z;. Whipple, 22 id., 105 ; Ottawa, Oswego and Fox River "Valley Rail- road Co. V. Black, 79' id., 262. The circuit court having reached this conclusion, its order and judgment will be afl^rmed. Judgment affirmed.^ ' Cf. People V. N. R. Sugar Refining Co., infra, Book VI, Chap. 2. ' For further cases in respect to the corporate franchise, see Book II, Chap. 5, Sections 1 and 2 infra. 86 THE CHARTER — ACQUISITION DE JURE. [CHAP. I. BOOK II. THE CHARTER OF A CORPORATION. CHAPTER I. ITS ACQUISITION DB JURE. Section 1.---By Special Act. THE STATE, ON THE RELATION OF WEIR, PROSE- CUTING ATTORNEY, &c. v. DAWSON AND OTHERS. 16 Ind. 40. 1861. Perkins, J. Information » against the defendants, charging that they are pretending to be a corporation, and to act as such, when they are not a corporation. It charges that in January, 1849, the Legislature of the State_ of Indiana enacted a special charter of incorporation (which is set out at length), for a railroad from Fort Wayne, Indiana, to Jeffersonville, to be called the Fort Wayne and Southern Railroad ; that the persons named in the charter as directors • "An information, in the nature of a writ of quo warranto, is a substitute for that ancient writ, which has fallen into disuse ; and the information which has superseded* the old writ is defined to be a criminal method of prosecution, as well to punish the usurper by a fine for the usurpation of the franchise, as to oust him, and seize it for the crown. It has, for a long time, been applied to the mere purpose of trying the civil right, seizing the franchise or ousting the wrongful possessor, the fine being nominal only." Such information ''need not show a title in the people to have the particular franchise exercised, but calls on the intruder to show by what authority he claims it, and if the title set up be incomplete, the people are entitled to judgment. This position is illustrated by the nature and form of the information ; the title of the king is never set forth ; but after stating the franchise usurped, the defendant is called upon to show his warrant for exercising it." — Spencer, J. in People v. Utica Ins. Co., 15 Johns (N. Y.) 358. In Attorney General ». Bound Brook R. R. Co., 38 N. J. L. 282, question arose whether an information in the nature of a writ of quo warranto was a real or a personal action. Dixon, J. said : — "This information is not in such a sense an action at all. It is rather an inquisition which the sovereignty, by its courts, institutes for the pur- pose of ascertaining whether its prerogative rights have been invaded, to the end that such invasion, if it appear, may be stayed and punished." SECT. 1.] STATE ». DAWSON. 87 did not accept said charter till June 2, 1852, when they did meet and accept the same, and organize under it. It is alleged that the defend- ants are assuming to act under said charter, never having organized under any other. The Court below sustained a demurrer to the information ; thus holding the defendants to be a legal corporation. The present Constitution of Indiana took effect on November 1, 1851. It contains these provisions : "All laws now in force and not inconsistent with this Constitution, shall remain in force, until they shall expire or be repealed." Sched. (1 sub. sec.) of Const. "Corporations, other thaii banking, shall not be created by special act, but may be formed under general laws." Art.' 11, § 13. "All acts of incorporation for municipal purposes shall continue in force under this Constitution, until such time as the General Assembly shall, in its discretion, modify or repeal the same."- Sched. supra, sub. sec. 4. The charter for the Fort Wayne and Southern Railroad was not a charter for municipal purposes, and, hence, was not specially con- tinued in existence. Art. 11, § 13, above quoted, prohibits the crea- tion of a corporation by special act^ or charter, that is, as we construe the prohibition, through, or by virtue of, such special act or charter, after November 1, 1851. The policy ^ that induced the prohibition, as well as its literal import, demands this construction. It is neces- sary for us to ascertain, then, when the defendants, if ever, were created a corporation. The simple enactment of the charter for the corporation, by the Legislature, did not create 'the corporation. It required one act on the part of the persons named in the charter to do that, viz. acceptance of the charter enacted. Says Grant, in his work on corporations, vide p. 13 : "Nor can a charter be forced on any body of persons who do not choose to accept it." And again, at page 18, he says, "The fundamental rule is this ; no charter of incorporation is of any effect until it is accepted by a > Creation of corporations by special act of Legislature, although formerly the rule, is now obsolescent, for, in most states, constitutional provisions forbid the same or else narrowly limit such power. These provisions generally take the form mentioned in the instant case, i.e. "shall not be created by special act" or else the form of the Ohio provision therein cited, i.e. "The legislature shall pass no special act conferring cor- porate powers, but they shall pass general laws under which corporations may be organized." As to the nature of these general laws, see Sec. 2 next following. ' A peculiar subversion of this policy is exhibited in Metropolitan Bank v. Van Dyck, 27 N. Y. 400 at 448: — "By section 1 of article 1 of the Constitution of this State, it is declared that corporations may be formed under general laws, and shall not be created by special act, except in cases where, in the judgment of the Legisla- ture the objects of the corporation cannot be attained under general laws. By this provision of the Constitution it is left to the Legislature to decide whether the objects of a corporation can be attained under a general law. It is well settled in this State that whether a special act of incorporation is necessary or not, is a matter entirely for the judgment and discretion of the Legislature, and that the courts have no power to review this action of the Legislature." 88 THE CHARTER — ACQUISITION DE JURE. [CHAP. I. majority of the grantees, or persons who are to be the corporators under if. Bagge's Case, 2 Brownl. & G. 100; S. C 1 Roll. Rep. 224; Dr. Askew's Case, 4 Burr. 2200; Rutter v Chapman 8 M. & W. 25; per Wilmot, J., Rex v. .Vice-Chancellor of Cambridge, 3 Burr 1661. This is analogous to the general rule that a man can not be obliged to accept the grant or devise of an estate. Townson v. Tickell, 3 B. & Aid. 31." See, also,. Ang. & Am. § 83, where it is said, if a charter is granted to those who did not apply tor it, the grant is said to be in fieri till acceptance. We need not inquire whether this rule extends to municipal corporations in this country. As to what may constitute an acceptance we are not here called on to decide, as the information expressly shows that there was none in this case till June, 1852, which fact is admitted by the demurrer. The grant of the charter in question, then, to those who had not appUed for it, was but an o£fer,i on the part of the State ; a consent that the persons named in the charter might become a corporation, might be created such an artificial being, by accepting the charter offered. But an offer, till accepted, may be withdrawn. In this case, the offer made by the State, in 1849, was withdrawn by the State, November 1, 1851, by then declaring that no corporation, after that date, should be created except pursuant to regulations which she, in future, through her Legislature would prescribe. This pretended corporation, then, was not created before Novem- ber 1, 1851 ; and it could be created afterward only by the concurrent consent of the State and the corporators. But, at that date, the Constitution prohibited both the State and corporators from giving consent to such a corporation, to wit : one coming into existence through a special charter; and hence necessarily prohibited the creation thereof. . . . Whether, as a matter of fact, the charter in this case was accepted under the old Constitution, must be determined on, a trial of the cause below. Had the provision in our Constitution, like that on this subject in the Constitution of Ohio, ordained that the Legislature should "pass no special act conferring corporate powers", the restraint would clearly have been imposed alone upon future legislative action ; but, in our Constitution, the restraint is plainly imposed upon the creation, the organization, of the corporation itself. See The State V. Roosa, 11 0. St. R. 16. Per Curiam. — The judgement is reversed, with costs. Cause re- manded for further proceedings in accordance with this opinion. 1 Like other offers, a legislative grant of franchise lapses unless accepted within a reasonable time ; and so may be withdrawn prior to acceptance ; and a conditional or partial acceptance is equivalent to a rejection. So no particular form of acceptance 18 «^^«°t'*>-rt °>^y be inferred from acts. Bonaparte v. Baltimore, Hampden &c. K. R., 75 Md. 340 ; Lincoln &c. Bank v. Richardson, 1 Greenl. (Me.) 79 ; Bank of U. S. «. Dandndge, 12 Wheat. (U. S.) 64. v / . SECT. 1.1 NEWCOMB V. BEED & OTHERS. 89 NEWCOMB V. REED & OTHERS. 12 AUen (Mass.), 362. 1866. Contract, in which the plaintiff sought to charge the officers of the Boston Mechanical Bakery Company with a debt contracted in the name of the corporation, in consequence of their neglect to file certificates and statements of the condition of the corporation. At the trial in the superior court, before Ames, J. without a jury, the judge found for the defendants upon facts which are stated in the opinion ; and the plaintiff alleged exceptions. HoAE, J. The defence to this action rests wholly upon the assump- tion that the corporation, whose officers the plaintiff seeks to charge with a statute liability for its debts, never had a legal existence. The only defect suggested in the organization of the corporation is, that the call for the first meeting was signed by only one of the per- sons named in the act of incorporation, and not by a majority of them, as required by St. 1855, c. 140. The case of Utley v. Union Tool Company, 11 Gray, 139, is the authority on which the defendants chiefly rely. That case decided that in order to charge as stockholders of a manufacturing corporation persons who had been summoned in an action against it under St. 1851, c. 315, the plaintiff must prove the legal existence of the cor- poration. The alleged corporation had no charter or act of incor- poration from the legislature, but was an association which had undertaken to assume corporate powers under a general act for the formation of joint stock companies, St. 1851, c. 133. That statute authorized three or more persons who had entered into "articles of agreement in writing" for the transaction of certain kinds of busi- ness, to organize in a manner prescribed, and thereby to become a corporation ; and the court were of opinion that written articles of agreement were essential to constitute a corporation, and that these articles must fix the amount of the capital stock, and set forth dis- tinctly the purpose for which and the place in which the corporation was established. The court say, "There is an obvious reason for making such organization by written articles of agreement a condi- tion precedent to the exercise of corporate rights. It is the basis on which all subsequent proceedings are to rest, and is designed to take the place of a charter or act of incorporation, by which corporate rights and privileges are usually granted." And they add that "it is not a case of a defective organization under a charter or aqt of incorporation, nor of erroneous proceedings after the necessary steps were taken to the assumption of corporate powers, but there is an absolute want of proof that any corporation was ever called into 90 THE CHARTER — ACQUISITION DE JURE. [CHAP. I. being, which had the power of contracting debts or of rendering per- sons liable therefor as stockholders." We think these reasons have no appUcation to the case now betore us In this, there was an act of incorporation from the legislature There is no question that the corporate powers which it conferred were assumed by the persons by whom it was intended that they should be enjoyed, so far as they chose to avail themselves of them. The organization was not strictly regular, but can hardly be con- sidered even as defective. , . , -^ • ■ j And if the object of the statute is regarded, by which it is required that the first meeting shall be called by a majority of the persons named in the act of incorporation, it will be evident that it is directory merely, and only designed to secure the rights conferred by the char- ter to those to whom it was granted, among themselves, by provid- ing an orderly method of organization. Thus, if all the persons interested should come together without any notice or call whatever, and proceed to accept the charter, and do the other acts necessary to constitute the corporation, we cannot doubt that their action would be valid, and that neither the public, nor any persons not belonging to the association, would have any interest to question their proceedings. The purpose of the statute was probably to avoid such difficulties as were disclosed in the case of Lechmere Bank v. Boynton, 11 Cush. 369, where two parties had attempted to organize separately under the same charter, each claiming to be the corporation. There is nothing in the facts found and reported to show that all persons interested were not actually notified of the meeting for organization. On the contrary, it would seem that they were. No one has questioned the regularity of the proceedings, or clainied, as in Lechmere Bank v. Boynton, a right to organize in a different manner. The evidence was ample to show that the persons named in the act of incorporation with their associates, or at least all of them who desired to do so, have accepted the act, organized under it, issued stock, elected officers who have acted and served in that capacity, carried on business, contracted debts, and exercised all the functions of corporate existence. It is therefore too late to deny that the cor- poration ever had any legal existence, or for these officers to avoid the liabilities which the statutes of the Commonwealth impose. . . . Exceptions sustained} 1 The word "ehall" does not imperatively require a construction that a statutory provision is mandatory. Canal Commissioners v. Sanitary District, 184 111. 597. If the court construes the provision to be directory and not mandatory, the state is not interested, and hence no one, unless prejudiced, is in position to raise the point erf non-compliance. Unless mandatory, it is not a "condition" at all. See Butler Paper Co. ». Cleveland, 220 111. 128 distinguishing Loverin u. McLaughlin, 161 III. 417 ; Braintree Water &c. Co. v. Braintree, 146 Mass. 482 ; Grays v. Turnpike Co., 4 Rand. (Va.) 578. This applies, of course, whether the corporation is formed under special act or general laws. SECT. 2.] FKANKLIN BRIDGE COMPANY V. WOOD. 91 Section 2. — By General Enabling' Acts. FRANKLIN BRIDGE COMPANY v. WOOD. 14 Ga. 80. 1853. The Franklin Bridge Company was incorporated under the Act of the Legislature of 1843, to prescribe the mode of incorporating companies for certain purposes, by an order of the Inferior Court of Heard county. The Company sued the defendant, Wood, for his subscription to their stock. The defendant pleaded that the Company was not legally incor- porated; contending that the Act of the Legislature, referred to, was unconstitutional and void. Upon argument, the Court held that the Act aforesaid, was un- constitutional, and non-suited the plaintiffs. To this decision plaintiff excepted. By the Court. — Lumpkin, J. delivering the opinion.* Is the act of 1843, and .that of 1845, amendatory thereof, point- ing out the manner of creating certain corporations and defining their rights, privileges and liabilities, unconstitutional? By the first section of the act of 1843, it is provided "That when the persons interested, shall desire to have any church, camp ground, manufacturing company, trading company, ice company, fire com- pany, theatre company, or hotel company, bridge company, and ferry company, incorporated, they shall petition in writing the Superior or Inferior Court of the county where such association may have been formed, or may desire to transact business for that pur- pose, setting forth the object of their association, and the privilege they desire to exercise, together with the name and style by which they desire to be incorporated ; and said Court shall pass a rule or order, directing said petition to be entered of record on the minutes of said Court." Section 2 enacts "That when such rule or order is passed, and said petition is entered of record, the said companies or associations shall have power respectively, under and by the name designated in their petition, to have and use a common seal; to contract, and, be con- • Portions of opinion omitted. 92 THE CHAKTER — ACQUISITION DE JXJEE. [CHAP. I. tracted with ; to sue, and be sued ; to answer, and be answered unto in any Court of Law, or Equity ; to appoint such officers as they may deem necessary; and to make such rules and regulations as they may think proper for their own government : not contrary to the Laws of this State : but shall make no contracts, or purchase, or hold any property of any kind, except such as may be absolutely necessary to carry into effect the ob j ect of their incorporation . Noth- ing herein contained, shall be so construed as to confer Banking or Insurance privileges on any company or association herein enumer- ated ; and the individual members of such manufacturing, trading, theatre, ice, and hotel companies, shall be bound for the punctual pa3Tnent of all the contracts of said companies, as in case of part- nership." Section fifth. "For entering any of said petitions and orders, and furnishing a certified copy thereof, the Clerk shall be entitled to a fee of five dollars ; . . . — And that such certified copy shall be evidence of the matters therein stated in any Court of Law and Equity in this State." (Cobb's Digest, 542, 3.) By the act of 1845; the provisions of the act of 1843, are extended to all associations and companies whatever, except Banks and Insur- ance companies : and the individual members of all such incorpo- rations are made personally liable for all the contracts of said associations or companies. (Ibid.) The argument against the validity of the charter of the Franklin Bridge Company, created under these Statutes, is this : [1.] That in England, corporations are created and exist by prescrip- tion; by Royal Charter; and by Act of Parliament. — With us, they are created by authority of the Legislature, and not otherwise. That to establish a corporation, is to enact a law ; and that no power but the Legislative body can do this. [2.] That Legislative power is vested, under our Constitution, in the General Assembly, to consist of a Senate and House of Repre- sentatives, to be elected at stated periods, by the citizens of th^e respective counties. [3.] And that the General Assembly is bound to exercise the power of making laws, thus conferred upon them, by the people, in the primordial compact, ux the mode therein prescribed, and in none other ; and that a law made in any other mode is unconstitutional and void. That the Legislature is but the agent of their constituents ; and that they cannot transfer authority delegated to them to any other body, corporate or otherwise — not even to the Judiciary a co-ordmate department of the government, unless expressly empow- ered by the Constitution to do so. That to do this, would be to violate one of the fundamental maxims of jurisprudence, as well as of political science, namely: delegata potestas, non potest delegari. Ihat to do this, would not only be to disregard the constitutional SECT. 2.] FRANKLIN BRIDGE COMPANY V. WOOD. 93 inhibition, which is binding upon the representative, but by shift- ing responsibility, introduce innovations upon our system, which would result in the overthrow and ultimate destruction of our politi- cal fabric. The constitutional inquiry thus presented, is an exceedingly grave one. It reaches far beyond the case made in the Bill of Exceptions, and extends to the whole range of topics which fall under Legislative cognizance. In the view we take, however, of the Statutes before us, no such proposition as that which has been discussed, is presented for our adjudication. And we rejoice that it is so — not only on account of the delicacy of the task, in pronouncing an act of the Legis- lature unconstitutional and void; one which is never justifiable, unless the case is clear and free from doubt; and evien then, one might almost be forgiven for shrinking from the performance of a duty, which would be productive of such incalculable mischief and confusion. Bridges have been. built at a heavy expense; manu- facturing and innumerable other associations, have been formed in Georgia, and are in full operation, under charters incorporated under this law. And in view of the consequences, any Court might hesitate, unlessthe repugnance between the Statute and the Consti- tution, was so palpable as to admit of no doubt, and produce a settled conviction of their incompatibility with each other. [4.] It was formerly asserted, that in England, the act of incor- poration must be the immediate act of the King himself, and that he could not grant a license to another, to create a corporation. (10 Reports, 27.) But Messrs. Angell and Ames, in their Treatise on Corporations, state that the law has since been settled to the contrary ; and that the King may not only grant a license to a subject to erect a particular corporation ; but give a general power, by charter, to erect corporations indefinitely ; on the principle that qui fadt per alium, fadt per se; that the persons to whom the power is delegated, of establishing corporations, are only an instrument in the hands of the Government. (1 Kyd, 50 ; 1 Black. Comm. Ang. & Am. 63.) Before the revolution, charters of incorporation were granted by the proprietaries of Pennsylvania, under a derivative authority from the Crown ; and those charters have since been recognized as valid. (3 Wilson's Lectures, 409,) A similar power has been delegated by the Legislature of Pennsylvania, with regard to churches. (7 S. & R. 517.) The acts of the instrument in these cases, become the acts of the mover, under the familiar maxim above mentioned. {See also 1 Missouri, R. 5.) [5.] Our opinion is, that no Legislative power is delegated to the Courts by the acts under consideration.^ There is simply a minis- ^ Accord: Re N. Y. El. R. R. Co., 70 N. Y. 327. Cf. American Malt Corp. v. Board of P. U. Com'rs, ante Book I, Chap. 4. 94 THE CHARTER — ACQUISITION DE JimE. [CHAP. I. terial act to be performed— no discretion is given to the Courts. The duty of passing the rule or order, directing the petition of the corporators to be entered of record on the minutes of the Court, setting forth to the public the object of the association and the privilege they desire to exercise, together with the name and style by which they are to be called and known, is made obligatory upon the Courts ; and should they refuse to discharge it, a mandamus would lie to coerce them. It is true, the Legislature has seen fit to use the Courts for the purpose of giving legal form to these companies. But it might have been done in any other way. Under the Free Banking Law of 1838, instead of petitioning the Court, and having the order passed and entered upon its minutes, the certificate, specifying the name of the association ; its place of doing business ; the amount of its capital stock ; the names and residence of the shareholders ; and the time for which the Company was organized, is required merely to be proven, and acknowledged, and recorded in the office of the Clerk of the Superior Court, where any office of the Associa- tion is estabhshed, and a copy filed with the Comptroller General. (Cobb's Digest, 107, 8.) And so under the Act of 1847, authorizing the citizens of -this State, and such others as they may associate with them, to prosecute the business of manufacturing, with corporate powers and privileges. The persons who propose to embark in that branch of business, are required to draw up a declaration, specifying the objects of their association, and the particular branch of business they intend carry- ing on, together with the name by which they will be known as a corporation, and the amount of capital to be employed by them; which declaration is required to be first recorded in the Clerk's office of the Superior Court of the county where such corporation is located, and published once a week for two months in the two nearest Ga- zettes : which, being done, it is declared that said asgociation shall become a body corporate and politic, and known as such, without being specially pleaded in all Courts of Law and Equity in this State ; to be governed by the provisions, and be subject to the liabilities therein specified. (Cobb's Digest, 439, 440.) In these two instances, and others which might be cited, the Legislature have dispensed with the action of the Courts, or of any other agency to carry out their enactments, with regard to these various associations ; which have become the usual and favorite mode of conducting the industrial pursuits of the civihzed world in modern times. All these Statutes were complete as laws when they came from the hands of the Legislature ; and did not depend for their force and efficacy, upon the action or will of any other power. It is true that they could only take effect upon the happening of some event, such as the filing the petition or declaration, and giving publicity to the SECT. 2.] FEANKLIN BRIDGE COMPANY V. WOOD. 95 purpose of the association, in the mode prescribed by the act. But if this were a good reason for regarding these Statutes as invalid, then how few corporations could abide the test. For it requires the acceptance of the charter, to create a corporate body; for the government cannot compel persons to become an incorporated body, without their consent. And this consent, either express or implied, is generally subsequent, in point of time, to the creation of the charter. And yet, no charter that we are aware of, has been adjudged invalid, because the law creating it and previously defin- ing its powers, rights, capacities and liabilities, did not take effect until the acceptance of the corporate body, or at least a majority of them was signified. The result, therefore, of our deliberation upon this case is, that the Acts of 1843 and 1845, vesting in all associations, except for Bank- ing and Insurance, the power of self-incorporation, do not impugn the constitution ; arid that the Charter of the Franklin Bridge Com- pany, and all others, created under them, and in conformity to their provisions, are legal and valid. With the policy of these Statutes, we have nothing to do. The province of this, and all other Courts, is jus dicere, not jus dare. Judgment reversed.^ ' A corporation, organized under general laws, by virtue of which all citizens may incorporate themselves (if compliance therewith be made) without further action by the Legislature, is nevertheless the result of a franchise. Spring Valley Water Works V. Schottler, 62 Cal. 69. A common right is not necessarily a common law right. Ibid. Such corporation derives its right to existence directly from the sovereign power. Bank of California ». San Francisco, 142 Cal. 276. Its certificate of organi- zation or articles of association, together with the provisions contained in the enabling act, constitute its charter and are equivalent to a special act of Legislature. Society for Visitation &c. u. Commonwealth, 52 Pa. St. 125 ; People v. Chicago Gas &c. Co., 130 111. 268; Oregon Ry. &c. Co. o. Oregonian Ry. Co., 130 V. S. 1. But no incorporation can be effected except for a purpose delineated in the enabling act. Indiana Bond Co. v. Ogle, 22 Ind. App. 593 ; Doty v. American T. & T. Co., 123 Tenn. 329. General words following permission to incorporate for certain named pur- poses, e.g. "or for any lawful business or purpose whatever" are confined in construc- tion to include only such as are kindred or cognate to the purposes specifically named. State V. International Inv. Co., 88 Wis. 512. Cf. rule of construction of corporate charters : — Ashbury Ry. &c. Co. v. Riche, infra Book III, Chap. 2, Sec. 1 ; Thomas V. West Jersey R. R., infra Book II, Chap. 3. A further corollary is found in those cases which hold "that where the legislature passes separate acts providing for the organization of certain classes of corporations (especially those owing duties and responsibilities to the public) under conditions inconsistent with or different from those prescribed by the General Corporation Act, the effect is to impliedly prohibit the organization of corporations of those classes under the latter act, although there be no express prohibition in terms." State v. Atlantic City &c. R. R., 77 N. J. L. 465 and cases cited. In Guckert v. Hacke, 159 Pa. 303, Sterkett, C. J., said: — "Enabling statutes, on the principle of expressio unius est exclusio alterius, impliedly prohibit any other mode of doing the act which they authorize ; they must be strictly construed : Sutherland on Stat. Construction, § 454." 96 THE CHARTER — ACQUISITION DE JURE. [CHAP. I. PEOPLE BY HAMILTON, ATTORNEY-GENERAL, ON THE RELATION OF ERASER v. SELFRIDGE, ET AL. 52 Cal. 331. 1877. Appeal from the District Court, Fifteenth Judicial District, City and County of San Francisco. On the 2nd day of March, 1876, the defendants filed in the office of the Clerk of the City and County of San Francisco, articles of incorpo- ration under the name of the "Pacific Homeopathic Medical Society of the State of California." On the next day, a certified copy of said articles was filed in the office of the Secretary of State, and the Secretary issued to the defendants a certificate that a copy of the articles containing the required statement of facts had been filed in his office. Upon receipt of such certificate, the defendants com- menced acting as trustees of said corporation, and assumed to be a corporation. The complaint contained a statement of the facts and a copy of the articles, and averred that the defendants had usurped the franchises of a corporation, and asked that they be excluded from such franchises. The answer did not deny the allegations of the complaint, but averred that a majority of the associates were present and voted. The plaintiff moved for judgment on the pleadings, and the Court granted the motion. The defendants appealed. The other facts are stated in the opinion. By the Court : 1. The right to be ,a corporation is in itself a franchise ; and to acquire a franchise under a general law, the prescribed statutory conditions must be comphed with. The Civil Code (sec. 594) re-^ quires that the articles of incorporation shall, among other matters, "set forth . . . that a majority oj (he members of such association . . '. voted at such election", etc. The certificate in this case altogether omits any statement in this respect, and is, therefore, insufficient to constitute the association a corporation.^ 2. The information avers that the claim of the defendants to be a corporation is based upon the certificate just referred to, and sets out the certificate as constituting the title of the defendants — which as we have seen, is insufficient. ' 3. The defect appearing upon the face of the certificate is not ' Cf. note to Newcomb v. Reed, ante, See. 1. SECT. 2.] PEOPLE V, THE MONTECITO WATER COMPANY ET AL. 97 aided ' by the averment found in the answer,' that in point of fact a majority of the members of the association did vote at the election mentioned in the certificate. Judgment affirmed? PEOPLE V. THE MONTECITO WATER COMPANY ET AL. 97 Cal. 276. 1893. Temple, C? — Plaintiff appeals from a judgment entered upon demurrer to complaint. The demurrer was general, and on the ground of insufficiency of the facts. It is a proceeding taken by the attorney-general of the state in the nature of a quo warranto to deprive the defendant cor- poration of its corporate charter, and procure its dissolution on two grounds : 1. For want of a substantial compliajiee with the statu- tory requirements in its formation; and 2. For abandonment and misuse of its corporate franchise and powers, and for alleged viola- tions of law. In answer to the first point, the respondent raises the preliminary objection that by making the corporation a defendant, its corporate character is admitted, and cannot be questioned in this proceeding. As authority for this proposition, the case of People v. Stanford, 77 Cal. 360, is chiefly relied upon. In that case it was alleged in the complaint that the assumed cor- poration had never been a corporation. If it were not a corporation of any character, it had no legal existence, and could not be sued. By making it a party, plaintiff conceded that it was a person that could be sued. It was said that the corporation could not be treated as a person which could be' sued simply to obtain a judgment that it was not and never had been such a person. There is no such in- consistency here. It is averred that the corporate defendant is a cor- poration de facto, but it is claimed that it did not become a corpora- tion de jure, because the persons who attempted the incorporation did not comply with the conditions which the statute makes condi- tions precedent to its rightful incorporation. Under such circum- ' Cf. Montgomery ». Merrill, 36 Mich. 97 (defects in record cannot be patched up by parol) . ' Accord: Reed ». Richmond St. R. R. Co., 50 Ind. 342. (Omission to name and fix number of directors in articles of association as required in the general act held fatal to action by the alleged corporation to recover upon a subscription to its stock. "If one of these requirements can be dispensed with, or held to be directory merely, "we do not see where we are to stop.") ^ Portions of opinion omitted. 98 THE CHARTER — ACQUISITION DE JURE. [cHAP. I. stances, although the association is a legal entity, which may be sued, its right to corporate existence may be questioned by the state m a proceeding of this character. (Civ. Code, sec. 358.) This court said in People v. La Rue, 67 Cal. 530, and repeated the language in First Baptist Church v. Branham, 90 Cal. 22: "A corporation de facto may-legaUy do and perform every act and thmg which the same entity could do or perform were it a de jure corpora- tion. As to all the world except the paramoimt authority under which it acts, and from which it receives its charter, it occupies the same position as though in all respects valid ; and even as against the state, except in direct proceedings to arrest its usurpation of power, it is submitted, its acts are to be treated as efficacious." _ Under such circumstances, it seems clear that the corporation is not only a proper but a necessary party. (People v. Flint, 64 Cal. 49 ; People v. Gunn, 85 Cal. 244.) It is contended that the corporation is not rightfully such, because, while five incorporators signed the articles of incorporation, only- four acknowledged the same. Section 292 of the Civil Code reads as follows: "The articles of incorporation must be subscribed by five or more persons, a majority of whom must be residents of this state, and acknowledged by each before some officer authorized to take and certify acknowledgments of conveyances of real property." It was said in People v. Selfridge, 52 Cal. 331 : "The right to be a corporation is in itself a franchise ; and to acquire a franchise under a general law, the prescribed statutory conditions must be complied with." Still, a substantial rather than a literal compliance will suffice. (People v. Stockton etc. R. R. Co., 45 Cal. 313 ; 13 Am. Rep. 178.) Was there a substantial compUance in this case? Because a substantial compUance will do, it does not follow that any positive statutory requirement can be omitted on the ground that it is unimportant. They are conditions precedent to acquiring; a statutory right, and none can be dispensed with by the court. What is a substantial rather than a literal compliance may be illustrated from the cases. In Ex 'parte Spring Valley Water Works, 17 Cal. 132, the certificate stated the place of business, but did not describe it as the "principal place of business," as required. The court said: "The statement that San Francisco was the place of business would seem to imply that it was not only the principal but the only place of business." In People v. Stockton etc. R. R. Co., 45 Cal. 306, 13 Am. Rep. 178, the affidavit required in such cases to be attached to the certificate stated that ten per cent, of the amount subscribed had been actually paid in, omitting the words "in good faith," which the statute required. In the certfficate it was stated that more than ten per cent had been actually in good faith paid in. It was held sufficient • and SECT. 2.] PEOPLE V. THE MONTECITO WATER COMPANY ET AL. 99 it would seem that if it was actually paid in cash, it must have been paid in good faith. And it was further held that payment by checks drawn against sufficient funds in a bank, which was ready to accept and pay the checks, was substantially payment in cash. In People v. Cheeseman, 7 Col. 376, the acknowledgment taken by the notary omitted to state that the persons whose acknowledg- ments were taken were personally known to the notary. The certifi- cate did state that the persons who signed appeared before him and acknowledged it. The statute did not prescribe what the acknowledg- ment should contain, and it was held a substantial compliance with the requirement, although the form prescribed for acknowledgments to deeds was not followed. It was acknowledged. In all these cases it will be seen that the thing required was done, but not literally, as directed. But there was no omission of any requirement. No case has been cited where the entire omission of a thing prescribed has been excused, imless it be the case of Larrabee V. Baldwin, 35 Cal. 155. That was not an action instituted by the state to disincorporate on the ground of non-compliance. As we have seen, unless the state complains, a de facto corporation must be considered, under our code, as possessing a corporate character, and the stockholders, when sued upon their individual liability, should not be allowed to make the point that they did not comply with the law. Section 292 of the Civil Code required the articles to be subscribed and acknowledged by each. As this is an express condition precedent to a valid incorporation, it is not of consequence to the court whether it be a wise or necessary requirement or not. Still, it is easy to see a reason for it. The certificate secures the state and all concerned against the possibiUty of any fictitious names being subscribed ta the articles, and furnishes proof of the genuineness of the signatures. If the acknowledgment can be dispensed with as to one, why not as to two, or three, or aU? Ordinarily, no doubt the state would not be expected to institute a proceeding of this character for such a defect alone, and we must presume that the attorney-general would not have instituted this inquiry, if he were not convinced that there were reasons suflicient to justify it. Other reasons are alleged, but as the statute authorizes a proceeding to forfeit the charter where the statute has not been compUed with, although the corporation is acting in good faith, and is a de facto corporation, the complaint must be held to state a cause of action, and the demurrer should be overruled. The judgment should be reversed, and the cause remanded, with direc- tions to overrule the demurrer. 100' THE CHARTER — ACQUISITION DE JURE. [cHAP. I. MOKELUMNE HILL CANAL & MINING CO. v. WOOD- BURY. 14 Cal. 425. 1859. Cope, J. delivered the opinion of the Court — Baldwin, J. and FiELDj C. J. concurring. It is alleged in the comprint that the plaintiff is a corporation, and this allegation being denied in the answer, the case was tried in the Court below upon that issue alone. The plaintiff dates its corporate existence as far back as 1852, and claims to have been duly and regiSlarly incorporated under the general Act of 1850, providing for theformation of corporations for manufacturing, mining, mechani- cal, and chemical, purposes. Section 122 of that Act provides that any three or more persons, who may desire to form a company for either of these purposes, "may make, sign, and acknowledge, before some officer competent to take the acknowledgment of deeds, and file in the office of the Clerk of the county in which the business of the company shall be carried on, and a duplicate thereof in the office of the Secretary of State, a certificate in writing," etc. Sec- tion 123 provides, that "when the certificate shall be filed as afore- said," the persons executing the same and their successors, shall be a body politic and corporate. Section 130 provides, that "the copy of any certificate of incorporation filed in pursuance of this Act, certified by the County Clerk or his Deputy to be a true copy, and of the whole of such certificate, shall be received in all Courts and places as presumptive legal evidence of the facts therein stated. On the trial of the case, it was shown that a certificate? in conformity with the requirements of the Act, had been filed in the office of the Clerk of the proper county, and a certified copy thereof was produced, and read in evidence, but it was not shown that a duphcate had been ' filed m the office of the Secretary of State. It appeared in proof that the company had been doing business as a corporation since 1852, but the Court held, that as it was not shown that a duphcate had been filed as required by the Act, the evidence did not estabUsh tne tact oi incorporation. The general rule is, that the existence of a corporation maybe proved by producing its charter, and showing acts of user under it;, but this rule has no apphcation to a corporation formed under the provisions of a general statute, requiring certain acts to be performed before the corporation can be considered in esse, or its transactions. miTbeTov'elt*^-. '''' '"^'r' °^ ^ «°^P°^^tion thus formed must be proved by showmg at least a substantial compUance with /o/ OCT ^ I V ^^ ,SECT. 2.] MOKELUMNE HILL CANAL & MINING CO. V. WOODBuW.VmI ^ the requirements of the statute. But there is a broad and obvKlm^ — distinction ' between such acts as are declared to be necessary steps in the process of incorporation, and such as are required of the indi- vidual seeking to become incorporated, but which are not made pre- requisites to the assumption of corporate powers. In respect to the former, any material omission will be fatal to the existence of the corporation, and ipay be taken advantage of, collaterally, in any form in which the fact of incorporation can properly be called in question. In respect to the latter, the corporation is responsible 1 The distinction is that between conditions precedent and subsequent. The diffi- culty lies in determining whether the Legislature intended compliance with the statu- tory requirement to precede or follow corporate existence. The problem, then, is merely one of construction. If construed as precedent, non-compliance is fatal to the corporation's claim to exist de jure (although it may nevertheless be a de facto corpora- tion as we shall see in the next chapter) . If construed as subsequent, the corporation, despite non-compliance, is de jure and so continues until the state takes advantage of the default which is a cause of forfeiture to be sure, but "a cause of forfeiture how- ever great cannot be taken advantage of or enforced against corporations collaterally or incidentally or in any other mode than by a direct proceeding for that object in behalf of the government." Bigblow, J. in Heard v. Talbot, 7 Gray (Mass.), 113. It is assumed that the condition, whether construed as precedent or subsequent, is mandatory. If it be merely directory, then it is not really a condition. See notes to Newcomb v. Reed,, ante, sec. 1 of the chapter. If, however, the statutory requirement be construed to be a limitation (and hence necessarily subsequent) as distinguished from a subsequent condition, which limita- tion (in analogy to real property law) requires no entry by the state to divest the corporate right to existence, then the penalty of non-compliance is that corporate existence terminates instantly without action by the State. Thus in Re Brooklyn, Winfield, &c. R. R. Co. 72 N. Y. 245, the general act provided that if any corporatioii formed thereunder should fail to begin construction of its Toad within a certain, time "its corporate existence and powers shall cease." It was held the quoted words con- stituted a limitation, hence were self-executing, and upon default, the corporation became extinct. Allen, J. said: — "It needed no action or judicial procedure to declare or complete a forfeiture of the charter and loss of corporate power." And its powers were not simply suspended or in abeyance but the corporation was so far extinct, that a subsequent express waiver by the Legislature of the forfeiture was ineffectual to revive and rehabilitate that defunct corporation. Such waiver would have enured to its benefit if the requirement had been a condition instead of a limitation. Re Brooklyn, Winfield, &c. R. R. Co. as reported in 75 N. Y. 335. And the fact as dis:- tinguished from a cause of dissolution may be set up by anyone. Mimima v. Potomac Co. 8 Pet. (U. S.) 281. The distinction, then, is between a limitation and a condition. Again the problem is merely one of construction. The legal effect varies as the solution reached. New York & Long Island Bridge Co. ■». Smith 148 N. Y. 540. (" The question as to whethet a forfeiture clause is or is not self-executing, depends wholly upon the language employed by the legislature.") But in the absence of "strong and unmistakable language ", the courts will hold the requirement to be a condition and not a limitation. N. Y. &c. Co. V. Smith, supra. See also Brown v. Wyandotte &c. Co. 68 Ark. 134; Cluthe 1). Evansville &c. R. R. Co. 176 Ind. 162 and the chapter on Dissolution, infra. Book VI, Chap. 1. In like manner, the court inclines to construe an ambiguous condition as subsequent rather than precedent, especially where a present grant of corporate existence and powers is consonant with and necessary to effectuate the ultimate purpose of the con- dition. Cheraw & Chester R. R. Co. v. White, 14 So. Carolina 51. (Corporate powers were conferred in praesenti "Provided that said persons shall commence operations upon said road within two years" &c. Held — "The grant, in terms importing im- mediate corporate capacity, was intended to operate as such for the purpose of con- ferring on the corporation the most perfect means for accomplishing that which it was 102 THE CHARTER — ACQUISITION DE JUKE. [CHAP. I. only to the government and in a direct proceeding to forfeit its charter. The right of the plaintiff to be considered a corporation, and to exercise corporate powers, depends upon the fact of the per- formance of the particular acts named in the statute as essential to its corporate existence. Under the issues presented m the pleadings, there is no doubt that performance of these acts should have been shown, and if the fiUng of the dupUcate of the certificate of incorpora- tion is to be regarded as one of them, the Court below properly held that the existence of the corporation had not been estabhshed. But we do not see upon what principle such a construction of the statute is admissible. It is certainly not justified by the natural and ordi- nary import of the language used, which must furnish the rule of construction unless a contrary intention clearly appear. Section 122 of the Act provides, as we have seen, for the fiUng of a certificate with the Clerk, and a duplicate with the Secretary of State; but Section 123 declares that when the certificate shall be filed, the per- sons executing the same and their successors, shall be a body poUtic and corporate. The intention of the Legislature clearly was, that so far as individuals are concerned, the corporation should acquire a vahd legal existence upon the fifing of the certificate. The filing of the dupUcate is exclusively a matter between the .corporation and the Staite.i The rights and privileges conferred by the statute, vest in the corporation upon the filing of the certificate, and can be divested only by a direct proceeding for that purpose. If the duplicate had not been filed, the assumption of corporate powers amounts simply to a usurpation of the sovereign rights of the State, the remedy for which rests with the State alone. Judgment reversed, and cause remanded for a new trial. the purpose of the proviso to secure.") For further illustration, holding the condition to be subsequent, see Harrod v. Hamer, 32 Wis. 162 ("The corpor,ate existence is clearly acknowledged — and the prohibition is only against its commencing business until the requirements of the section are complied with") and Vanneman ». Young, 52 N. J. L. 403. (Filing and recording of certificate not a condition precedent to cor- porate existence but merely the necessary evidence under the statute of such exist- ence.) As recognizing the distinction pointed out in the instant case, but construing payment of the state's incorporation fees to be a condition precedent, see Jones v. Aspen Hardware Co. 21 Col. 263. It is manifest that if the words used are clearly either precedent or subsequent in character, then there is no room for construction. — Ed. ' And so in every condition which is construed to be subsequent. See note 1 supra. Also Wells Co. 1). Gastonia Cotton &c. Co. 198 U. S. 177, distinguishing Perkins v. San- ders 56 Miss. 733. As to how that matter between the state and the corporation will be resolved, see chapter on Dissolution, Book VI., Chap. 1. CHAP. II.] FINNEGAN V. NOERENBERG ET AL. 103 CHAPTER II. ITS ACQUISITION DB FACTO. FINNEGAN v. NOERENBERG ET AL. 52 Minn. 239; 18 L. R. A. 778. 1893. Appeal by plaintiff from a judgment that he take nothing by his action. Gilfillan, C. J. Eight persons signed, acknowledged, and caused "to be filed and recorded in the office of the city clerk in Minneapolis, articles assuming and purporting to form, under Laws 1870, ch. 29, a corporation, for the purpose, as specified in them, of "buying, own- ing, improving, selling, and leasing of lands, tenements, and here- ditaments, real, personal, and mixed estates and property, including the construction and leasing of a building in the city of Minneapohs, Minn., as a hall to aid and carry out the general purposes of the or- ganization known as the 'Knights of Labor.'" The association re- ceived subscriptions to its capital stock, elected directors and a board ■of managers, adopted by-laws, bought a lot, erected a building on it, and, when completed, rented different parts of it to different parties. The plaintiff furnished plumbing for the building during its con- struction, amounting to $599.50, for which he brings this action against several subscribers to the stock, as copartners doing business under the firm name of the "K. of L. Building Association." The theory upon which the action is brought is that, the association hav- ing failed to become a corporation, it is in law a partnership, and the members liable as partners for the debts incurred by it.^ 'The statement preceding the opinion shows: — "Plaintiff furnished materials and did plumbing thereon to the value of S599.50 at the request of the board of mana- gers. The defendant Noerenberg subscribed and paid for ten shares 'of the stock. The other defendants were also stockholders. The association became insolvent and •owed over $40,000 which it was unable to pay. The attempt to incorporate was made in good faith, and the defendants beUeved they were duly incorporated, and that they were only liable as stockholders, not as partners, for the debts contracted. When the plaintiff furnished materials and did the plumbing, he believed he was dealing with the corporation and not with a copartnership." 104 THE CHAETEE — ACQUISITION DE FACTO. [CHAP. II. It is claimed that the association was not an incorporation because — First, the act under which it attempted to become incorporated, to wit, Laws 1870, ch. 29, is void, because its subject is not properly expressed in the title ; second, the act does not authorize the forma- tion of corporations for the purpose or to transact the business stated in the articles ; third, the place where the business was to be carried on was not distinctly stated in the articles, and they had, perhaps, some other minor defects. It is unnecessary to consider whether this was a de jure corpora- tion, so that it could defend against a quo warranto, or an action in the nature of quo warranto, in behalf of the state ; for, although an association may not be able to justify itself when called on by the state to show by what authority it assumes to be, and act as, a cor- poration, it may be so far a corporation that, for reasons of public policy, no one but the state will be permitted to call in question the lawfulness of its organization. Such is what is termed a corpora- tion de facto, — that is, a corporation from the fact of its acting as such, though not in law or of right a corporation. What is essen- tial to constitute a body of men a de facto corporation is stated by Selden, J., in Methodist, etc., Church v. Pickett, 19 N. Y. 482, as " (1) the existence of a charter or some law under which a corpora- tion with the powers assumed might lawfully be created; and (2) a user by the party to the suit of the rights claimed to be conferred by such charter or law." This statement was apparently adopted by this court in East Norway Church v. Froislie, 37 Minn. 447, (35 N. W. Rep. 260 ;) but, as it leaves out of account any attempt to organize under the charter or law, we think the statement of what is essential defective. The definition in Taylor on Private Corpora- tions (page 145) is more nearly accurate : "When a body of men are acting as a corporation, under color of apparent organization, in pur- suance of some charter or enabling act, their authority to act as a corporation cannot be questioned collaterally." To give a body of men assuming to act as a corporation, where there has been no attempt to comply with the provisions of any law authorizing them to become such, the status of a de facto corporation might open the door to frauds upon the pubhc. It would certainly be impolitic to permit a number of men to have the status of a cor- poration to any extent merely because there is a law under which they might have become incorporated, and they have agreed among themselves to act, and they have acted, as a corporation. That was the condition in Johnson v. Corser, 34 Minn. 355, (25 N. W. Rep. 799) m which it was held that what had been done was ineffectual to limit the individual liability of the associates. They had not gone far enough to become a de facto corporation. They had merely signed articles, but had not attempted to give them pubUcity by filing for record, which the statute required. CHAP. II.] FINNEGAN V. NOERENBEEG ET AL. 105 Color of apparent organization under some charter or enabling act does not mean that there shall have been a full compliance with what the law requires to be done, nor a substantial compliance. A substantial compliance will make a corporation de jure. But there must be an apparent attempt to perfect an organization under the law. There being such apparent attempt to perfect an organization, the failure as to some substantial requirement will prevent the body being a corporation de jure ; but, if there be user pursuant to such attempted organization, it will not prevent it being a corporation de Jacto} [The court then determined, as a matter of constitutional law, that the title of the act, under which incorporation was attempted, properly expressed its subject.] The provisions in the body of the act are in abcord with the title, and it is therefore not open to the objection made against it. The purposes for which, under the act, corporations may be formed, are "of trade, or of carrying on any lawful mechanical, manufac- turing, or agricultural business." The main purpose of the act being to enable men of small capital, or of no capital but their labor and their skill in trades, to form corporations, for the purpose of giving employment to such capital or labor and skill, the language express- ing the purposes for which such corpora'tions may be formed ought not to be narrowly construed. Giving a reasonably liberal meaning to the word "trade" in the act, it would include the buying and sell- ing of real estate, and, upon a similar construction, the word "me- chanical" would include the erection of buildings. The doing of the mason, or brick, or carpenter, or any other, work upon a building is certainly mechanical. There can be little question that corporations might be formed to do either of those kinds of work on buildings, and, that being so, there is no reason why they may not be formed to do all of them. There is no reason to claim that such a corpo- ration must do its work as a contractor for some other person. It may do it for itself, and, as the act authorizes the corporation to "take, hold, and convey such real and personal estate as is neces- sary for the purposes of its organization ", it may, instead of working for others as a contractor, make its profit by buying real estate, erecting buildings on it, and either selUng or holding them for leasing. The omission to state distinctly in the articles the place within which the business is to be carried on, though that might be essential to make it a de jure corporation, would not prevent it becoming one de Jaclo.^ ' In Dwight D. Phelps, 94 Atl. Rep. 294 — Vermont, the court quoting from Cooley Const. Lim. says ; — " ' Color of law' does not mean actual law. ' Color,' as a modifier, in legal parlance, means 'appearance, as distinguished from reality.' Color of law means 'mere semblance of legal right.' " State v. Dea Moines, 96 Iowa, 521 ; McCain V. Des Moines, 174 U. S. 168. 2 In Bergeron v. Hobbs, 96 Wis. 641, held that defendants were neither a corpora- 106 THE CHAETER — ACQUISITION DE FACTO. [CHAP. II. The foundation for a de facto corporation, having been laid by the attempt to organize under the law, the user shown was sufficient ^ Judgment affirmed^ SNIDER'S SONS' CO. v. TROY.« 91 Ala. 224; 11 L. R. A. 515. 1890. This action was brought by Louis Snider's Sons' Company a corpo- ration, against D. S. Troy. The complaint contained a smgle count, which claimed $827.92 for goods consisting of paper and other prmting materials, sold by plaintiffs in March, April, May, and July, 1888, to or on the order of the Dispatch Publishing Company. The com- tioH dejure nor de facto but liable as partners, because the articles of association, while- "recorded", were not "filed" as required by the Act; that "so long as an act. re- quired as a condition precedent, remains undone, no immunity from individual liability '^Marshall, J. in a strong dissenting opinion said: — "If we hold with Missouri, Arkansas, and some other states, that unless all the steps necessary to the creation of the corporation have been taken there is no corporate existence, and that the members of the association are personally liable, we, in effect, say that it is not sufficient to endble such members to escape personal liability to show that their organization is a corporation de facto; that nothing short of a corporation de jure wiU do. But if we adopt the growing doctrine, supported, as I shall show, by the overwhelming weight of authority in this country, that if a person contracts with a de facto corporation, the members of the latter and such person believing, in good faith, in its legal existence, such members cannot be held personally Uable, then we concede, necessarily, that it is not essential to freedom from such Uability that all the statutory requisites to the existence of a corporation be complied with, because, when that is done, the organiza- tion, obviously, is not a corporation de facto only ; it is a corporation de jure. This i» too plain to admit of serious discussion." And again, after exhaustive review of the authorities: — "It only remains to be considered whether the association in question was a de facto corporation. My brethren say no, and, as I understand it, because there was a failure to perform some condition precedent to its being a corporation de jure. I must assume that such is really not the doctrine of this court, for the essential element of a mere corporation de facto is failure to comply with some provision of law requisite to its legal existence. Where such conditions are all complied with, then the corporation becomes an organization. de jure, as well as de facto, and the doctrine pertaining to the latter class of official bodies has no application whatever. If it were the law that a corporation must be such de jure in order to be such de facto, obviously, the doctrine pertaining to the latter, upon which much learning has been displayed by the courts and text writers, would stand as the result of much useless expenditure of mental energy." ' Students should be cautioned not to conclude from the foregoing case and anno- tation that the principles developed in the preceding chapter are of moment only when the State is the moving party. Marshall, J. confined his remarks to a de facto cor- poration, a tem\ of definite legal significance, embodying a doctrine, not of mere or sheer usurpation of corporate powers, but of extenuation, to be applied only whea certain circumstances concur. It is the object of this chapter to ascertain the requisite circumstances, determine the reasons for applying the doctrine, and resolve the result- ant legal effects accordingly as the doctrine is applied or not. See excellent article by Prof. E. H. Warren in 20 Harvard Law Review, 456. — "Collateral Attack on De. Facto Corporations." — En. ' Statement of facts and arguments abridged ; portions of opinion omitted. CHAP. II.] SNIDEB's sons' CO. V. TROY. 107 plaint alleged that said publishing company was at the time a part- nership, and defendant was one of the partners ; that the company- claimed to be a corporation under the laws of Alabama, but was never in fact incorporated; that it was insolvent when plaintiffs' account matured, and has ceased to do business. The defendant filed a special plea, alleging that on the 2d October, .1885, he and two other persons named, filed in the office of the judge of probate of Montgomery county a declaration in writing for the formation of a corporation under the name of the Dispatch Publish- ing Company, stating the substance of the declaration ; that this defendant and his associates, immediately after the filing of said declaration as aforesaid, proceeded to organize said company, by electing a board of directors, and commenced doing business under the name and style of the Dispatch PubUshing Company, by the pub- Hcation of a newspaper in said city of Montgomery ; that the debt now sued for was contracted by said company as such corporation, and not otherwise ; that plaintiffs knew that said company was doing business as a corporation, and made said contract with it as a corpo-. ration, and not as a partnership, or association of individuals, and dealt with it as a corporation, and sold said bill of goods td it as a corporation, and not in any other capacity whatsoever. The court overruled a demurrer to the plea, and its judgment is here assigned as error. E. P. Monissett, for appellants. — The theory of the plaintiffs' case is, that the defendant is liable as at common law, for goods sold to the Dispatch Publishing Company, notwithstanding the abortive attempt to incorporate made by him and his associates in that enter- prise ; that the attempted incorporation was a nullity, and neither conferred any rights on the parties, nor discharged them from per- sonal liability. The defense is, that the Dispatch Publishing Com- pany was a corporation de facto; that plaintiff dealt with it as a cor- poration ; and is estopped from holding the members liable except as stockholders. The case involves the question, to what extent wUl the doctrine of corporations de facto be carried? will the courts recog- nize and enforce statutory requirements, as conditions precedent to corporate existence, or, in effect, expunge from the statute book, as meaningless, the several provisions which regulate the formation of different kinds of corporations, organized for different purposes,, and endowed with different powers? or will some line of demarkation be drawn, separating mere irregularities in corporate organization, where acts may be valid by recognition as those of a corporation de- facto, from the fundamental requirements.whiph are conditions prece- dent to corporate existence ? . . . The general proposition is conceded, that one who receives a benefit from an association, in recognition of its corporate capacity, can not 108 THE CHAETEE — -ACQUISITION DE FACTO. [CHAP. 11. be heard, in avoidance of a correlative obligation, to deny the au- thority to impose it. This is the equitable principle announced in Lehman v. Warner (61 Ala. 455), and Cent. A.& M. Asso. v. Ala. Gold Life Ins. Co. (70 Ala. 120) ; and it is specially appHcable to stockholders seeking to avoid Kability to creditors, and is chiefly in- tended for the protection of strangers. — 70 Ala. 86 ; 84 Ala. 621. But this is a suit by a creditor against a proposed corporator, no rights of third persons intervening, and no question of public policy arising. Acts in excess of corporate authority do not estop parties who have dealt with the corporation from showing that such acts are ultra vires. Can greater effect be allowed to acts or transactions which are without any authority whatever? That the Dispatch Publish- ing Company, if sued as a corporation, would be estopped from show- ing that it was not a corporation, does not estop a creditorfrom show- ing that there was no corporation. Mutuality is not an indispensable requisite of an estoppel. — Bigelow on Estoppel, 597, note 2 ; 143 Mass. 109-15 ; 115 U. S. 512 ; 16 La. Ann. 153. An abuse of corpo- rate franchises, or the unlawful exercise of powers not conferred, can be remedied only by the State, by proceedings in the nature of quo warranto; but any person interested may collaterally assail the exist- ence of a corporation, by showing non-compliance with conditions precedent to organization. The attempt at incorporation here being a nUlMty, the defendant is personally liable, as at common law, on contracts within the scope of the common business. Tompkins & Troy, contra. The law recognizes two classes of corpo- rations — corporations de jure, and corporations de facto. The parties signing the declaration of incorporation in this case were certainly not partners inter s.ese — they had no intention of creating a partnership, • and the court will not make them partners. — Ward v. Brigham, 127 Mass. 24 ; Bank v. Walker, 66 N. Y. 424 ; Cook on Stock, &c. §232. The plaintiff dealt with the corporation, and not with the corporators individually or as partners ; and the court will not attempt to make or enforce a new contract between them. — 2 Mor. Corp § 748- Taylor on Corp., §§ 148, 739 ; Bank v. Padgett, 69 Geo. 159 ;' Bank v Stone, 38 Mich. 779 ; Fay v. Noble, 7 Cush. 188 ; Trowbridge v. Sad- ler, 11 Cush. 83 ; 22 Fed. Rep. 197 ; 4 A. & E. Encyc. Law, 199, note 1 Clopton, J. A corporation de facto exists, when from irregularity or defect m the organization or constitution, or from some omission . to coniply with the conditions precedent, a corporation de jure is not created, but there has been a 5olorable compliance with the require- ments of some law under which an association might be lawfully in- corpora,ted for the purposes and powers assumed, and a user of the rights claimed to be conferred by the law - when there is an organiza- tion with color of law and the exercise of corporate franchises. Meth Hj. Un. Church v. Pickett, 48 N. J. L. 599.i » The correct citation is 19 N. Y. 482. CHAP. II.] SNIDER'S sons' CO. V. TROY. 109 The enabling law, under which a corporation for the purposes and objects of the Dispatch Publishing Company, and with the powers assumed, might have been lawfully created at that time, is contained in sections' 1803-1812 of the Code of 1876, and the amendatory acts, — Acts 1882-3, p. 40. The plea avers. that defendant and two other named persons filed, September 2, 1885, with the judge of probate of Montgomery county a written declaration, signed by themselves, setting forth substantially the matters required by the statute, except the residences of the persons ; that they organized by the election of directors, and commenced and continued to do business in a corporate capacity, and were so doing business when the debt sued for was contracted. If the averments of the plea be true, the truth of which is admitted by the demurrer, the Dispatch Publishing Company was an association having capital stock divided into shares, organized by the election of officers, transacting business, and exercising fran- chises, functions and powers, after an attempted incorporation, as if it were a corporation de jure — a colorable compliance with the requirements of an existing and enabHng law, and User of the rights claimed to be conferred thereby — the essential elements of a corpora- tion de facto. — Cen, Agr. & Mech. Asso. v. Ala. Gold Life Ins. Co., 70 Ala. 120. Whether the shareholders in a corporation de facto are individually liable for the corporate debts, in the absence of fraud or a statute, is a question as to which the authorities are in direct antagonism. In Cook on Stock and Stockholders, § 233, the doctrine asserted is : "A corporate creditor, seeking to enforce the payment of his debt, may ignore the existence of the corporation, and may proceed against the supposed stockholders as partners, by proving that the prescribed method of becoming incorporated was not compUed with by the com- pany in question." The leading cases supporting this doctrine are Bigelow V. Gregory, 73 111. 197 ; Abbott v. Omaha Smelt. Co., 4 Neb. 416 ; Garrett v. Richardson, 35 Ark. 144 ; Ferris v. Thaw, 72 Mo. 446 ; Richardson v. Mayo, 40 Ohio St. 9 ; Coleman v. Coleman, 78 Ind. 344. In 2 Mor. on Corp. § 748, the doctrine is stated as follows : " If an association assumes to enter into a contract in a corporate capacity, and the party dealing with the association contracts with it as if it were a corporation, the individual members can not be charged as parties to the contract, either severally or jointly, or as partners." The following cases maintain the doctrine, that the members of a. corporation de facto can not be held Hable as partners for the corporate debts: Fay v. Noble, 7 Cush. 188; First Nat. Bank v. Avery, 117 Mass. 476 ; Stout v. Zulick, 48 N. J. L. 599 ; Plan. Bank v. Padgett, 69 Ga. 164 ; Mer. & Man. Bank v. Stone, 38 Mich. 779 ; Humphrey V. Mooney, 5 Cal. 282 ; Cen. City Sav. Bank v. Walker, 66 N. Y. 424 ; Gartside Coal Co. v. Maxwell, 22 Fed. Rep. 197 ; Whiting v. Wyman, 101 U. S. 392. 110 THE CHAETER — ACQUISITION DE FACTO. [CHAP. II. The plea and demurrer do not raise the question of the hability ■of the supposed stockholders as partners, where there has been no intention or attempt to incorporate ; where they are acting as a body corporate, without even color of legislative authority — sheer usur- pation.^ The plea avers that the debt sued for was contracted by the Dispatch Pubhshing Company, which is alleged to have been a de facto corporation, and that plaintiff sold the goods to, and con- tracted with the company as a corporation, knowing that it was doing business as such. The question before us, and the only question we propose to decide, is whether, there being no fraud alleged, nor stat- ute making the stockholders individually liable, a creditor who has dealt with a de facto corporation as a corporation, who has entered into contractual relations with it in its corporate name and capacity, can disregard the existence of the corporation, arid, electing to treat it as a partnership, enforce the collection of his debt from the stock- holders individually? The conflicting authorities afford aid in the solution of this question, only so far as their opinions may be in ac- cord with settled principles and sustained by reason. Though it is an undecided question in this State, principles have been well settled, which materially bear upon the inquiry, and mark the way to a correct conclusion. Corporations may exist either de jure or de facto. If of the latter class, they are under the protection of the same law, and governed by the same legal principles as those of the former, so long as the State acquiesces in their existence and exercise of corporate functions. A private citizen, whose rights are not invaded, who has no cause of complaint, has no right to inquire collaterally into the legality of its existence. This can only be done in a direct proceeding on the part of the State, from whom is derived the right to exist as a corporation, and whose authority is usurped. This principle was clearly and em- phatically declared in Lehman v. Warner, 61 Ala. 455, in the follow- ing language : "The corporation must, of necessity, be presumed to be rightfully m possession of the franchise, and rightfully to exercise the power, which the legislative grant confers. Individual right is iiot mvaded if the negative is true in fact, and there is usurpation. It IS trie btate — the sovereign — whose rights are invaded, and whose rights are usurped. The individual could not create the corporation - could not grant, define, Umit its powers ; and no grant of these by the sovereign can lessen his rights. There can consequently be no cause of complaint by the citizens, and no right to inquire whether the corporate existence is rightful -de jure -or merely colorable"- Taylor on Corp. § 145; 4 Amer. & Eng. Encyc. of Law, 198 The creditor can not proceed against the stockholders as partn;rs, without proving non-comphance with prescribed conditions precedJt thus ' See note 1, page 106, ante. CHAP. II.] SNIDER's sons' CO. V. TEOY. HI inquiring collaterally, not into the fact, but the legality of its exist- ence.^ It is also an established rule of general application, that a party who contracts with a corporation, exercising corporate powers, and performing corporate functions — existing as a de facto corporation — in its corporate name and capacity, will not be permitted, in a suit on the contract, to deny and disprove the rightfulness of its existence. — 4 Amer. & Eng. Encyc. of Law, 198. In Smartwood v. Michigan Air Line R. R. Co., 24 Mich. 390, Cooley, J. declares the rule as fol- lows : "Where there is thus a corporation de facto, with no want of legislative power to its due and legal existence, when it is proceeding in the performance of corporate funcfions, and the public are deahng with it on the supposition that it is what it professes to be, and the questions are only whether there has been exadt regularity and strict compliance with the provisions of the law relating to corporations; it is plainly a dictate alike of justice and public policy, that in con- troversies between the de facto corporation and those who have entered into contract relations with it, as corporators or otherwise, that such questions should not be suffered to be raised." The general rule is thus stated by Brickell, C. J. : "Whoever contracts with a corporation in the use of corporate powers and franchises, and within the scope of such powers, is estopped from denying the existence of the corporation, or inquiring into the regu- larity of the corporate organization, when an enforcement of the con- tract, or of rights arising under it, is sought." — Cahall v. Citizens' M. B. Asso., 61 Ala. 232 ; Central Agr. & Mech. Asso. «. Ala. Gold Life Ins. Co., 70 Ala. 120; Schloss v. Montg. Trade Co., 87 Ala. 411. It is conceded that the rule has been invoked and applied most frequently in suits against the stockholders or corporation, or persons ' Mabshall, J. in Bergeron ». Hobbs, 96 Wis. 641, says: — " So we say the law is that he who deals with a de facto corporation cannot attack its legal existence, though in administering it courts do not agree as to all the reasons for the doctrine. By some it rests on the ground thq.t courts can only enforce contracts actually made by parties — cannot make contracts for them ; by others upon the ground of estoppel ; by others upon the broad, universally established principle that only the state can ques- tion the eadstence of a corporate organization, or the legality of its exercise of powers ; and by still others upon the ground that broad principles of justice and public policy require that persons who, in good faith, assume to exercise corporate powers and have a de facto right so to do, should not be compelled, in all their business transactions, in all courts and places, to be ready to successfully meet attacks upon their right in this regard ; that so long as the law exists under which they might legally do the very thing they assume to do, and thfe failure to comply with the law is a mere usurpation of power, which only concerns the community in its sovereign capacity without prejudice to the individual members of the state, justice and the certainty of contracts, upon ■which prosperous business in the complicated, practical affairs of life depend, require that such persons as against all but the state shall be regarded as that which they assume to be, and might in fact be, except for some act on their part not attributable to bad faith. In our judgment, all of the reasons strongly support the doctrine, and either is sufficient, particularly the one sanctioned by this court in John V. Farwell Co. Ti. Wolf, ante, p. 10, that only the state can question the legality of corporate existence -when there is a colorable right to so exist." 112 THE CHAETEE — ACQXnSITION DE FACTO. [CHAP. II. who have contracted with it, where the stockholder, corporation or person is seeking to avoid a Uabihty by denying the legality of the corporate organization; But why should it not be apphcable m other cases ? Why should a stockholder be estopped, in a suit by a creditor of an insolvent corporation, to require payment of his unpaid sub- scription, and the creditor allowed to ignore the existence of the cor- poration, and proceed against the stockholder as a partner? Why should not. the estoppel be mutual? Taylor, in his work on Corpo- rations, § 148, having stated the general rule, that a corporation when sued on its contract, and the person who contracted with it, when sued on his contract, is each estopped to deny its legal incorporation, adds: "Furthermore, persons who have contracted with a corpora- tion as such, and have acquired claims against it, are estopped from denying its corporate existence for the purpose of holding its share- holders, liable as partners." And the same rule was apphed in several of the cases cited above, in which a corporate creditor was seeking to hold the stockholder hable as a partner for a corporate debt. The abrogation of the foregoing well estabhshed rule is the logical sequence of maintaining a suit by a creditor of a de facto corporation, charging the stockholders as partners. Another consideration. Section 8 of Article XIV of the Consti- tution declares : " In no case shall any stockholder be individually liable, otherwise than for the unpaid stock owned by him or her." Exemption from liability, other than for unpaid stock, is the de- clared policy of the State. It can not be imposed by legislation, or by the judgment of a court. In view of the constitutional provision, it is manifest that the share-holders of the Dispatch Publishing Com- pany intended, by the attempt to incorporate, to avoid individual liability for the debts contracted by the corporation. When a party deals and contracts with a corporation as corporators, exemption from individual habihty enters as an element of the contract. It is true that the liability of persons associated in an enterprise or adventure is not determinable by the name they assume, but by the legal con- sequences of their acts. A partnership may arise as to third persons, by mere operation of law, and contrary to the intention of the par- ties ; but, to have this effect, the elements essential to constitute a partnership as to third persons must exist. A corporation de facto has an independent status, recognized by the law as distinct from that of its members. A partnership is not the necessary legal con- sequence of an abortive attempt at incorporation.' As said in Fay:?;. Noble, supra, "Surely, it can not be, in the absence of all fraudulent intent, that such a legal result follows as to fasten on parties in- voluntarily, for such a cause, the enlarged hability of copartners, a hability neither contemplated nor assented to by them. The state- ment of the proposition carries with it a sufficient refutation." ' See note, page 137, infra. CHAP. 11,] SNIDER's sons' CO. «, TROY. 1I3 Maintenance of such suit involves judicial nullification of fran- chises and powers enjoyed and exercised by a rfe facto corporation, as a distinct entity recognized by the law, acquiesced in by the State ; defeats the corporate character of the contract, changes the relation from that of stockholders to that of partners; substitutes other and new parties to the contract, and effects the imposition of an enlarged liability, which they did not assume, but intended to avoid : so understood by the creditor, when he contracted the debt with the corporation, as such. The contract is valid and binding on the corporation, which the creditor trusted. No injustice is done him, for all his rights and remedies are preserved by the principle that the corporation and the share-holder are estopped from denying its legal existence, as against him. It will not answer to say that he is not repudiating, but enforcing the contract. He repudiates the party — the corporation — with which he made the contract, and seeks its enforcement against parties who never entered into contractual rela- tions with him. The doctrine that a creditor who has dealt with a de facto corpora- tion, in its corporate capacity, can not charge the stockholders as partners with the corporate debt, there being no fraudulent intent alleged and proved, seems to us to be sustained by the weight of au- thority, maintained by stronger reasoning, consistent with well settled principles, and in harmony with the policy of the State. Affirmed} ' If the parties have dealt with each other aa if the associates on the one hand • were partners, then, in the absence of knowledge, actual or imputed, by the other party that the associates constituted a de facto corporation, the associates are indi- vidually liable, notwithstanding all the so-called "requisites" of B,de facto corporation appear. Guctert v. Hacke, 159 Pa. 303. And subsequent transactions between the parties by virtue of which notice might be imputed tp that other party, will not per sese affect his right to hold them to personal liability. Ibid. Stekeett, C. J., in reversing a judgment for defendants, said : — "It may be conceded that had plaintiff dealt with defendants as a corporation he would have been estopped from claiming against them in any other capacity, even though they failed to record their charter: Spahr D. Bank, 94 Pa. 429. But it is not pretended that he had any knowledge of the existence of the charter; and there was certainly nothing, either in the name under which they did business or in their conduct, which should have put him upon inquiry. In these circumstances he was amply justified in dealing with them as partners. It _ was through their default — not his — that they were so treated ; and it would be manifest injustice that he should lose his admittedly honest claim. " In the absence of an express agreement the acceptance of a note from the defend- ants, as a corporation, after plaintiff had performed his part of the contract, cannot operate by way of election or estoppel. The relation of the parties was fixed by their status when the original contract was made and cannot be changed by gratuitous in- ference. The members of the alleged corporation were the defendants, and were not injured by the acceptance of the note." 114 THE CHARTER — ACQUISITION DE FACTO. [CHAP. II. SNYDER V. STUDEBAKER. 19 Ind. 462. 1862. WoRDEN, J.i This was an action by Snyder against Studebaker, to recover possession of a certain tract of land. Judgment for the defendant. The same question is presented by the pleadings and the evidence. It appears that, in March, 1853, the plaintiff, who was then the owner of the land, conveyed the same to the Fort Wayne and Southern Railroad Company, by deed, duly executed and dehvered. This conveyance was made on account of a stock subscription. Afterward, in November, 1855, the railroad company, for a valu- able consideration, conveyed the premises to the defendant. The Fort Wayne and Southern Railroad Company was chartered by an act of the legislature, passed in 1849 ; and it appears that the corporators named in the act in question met in the town of Bluffton, in said county of Wells, on the 19th day of November, 1851, and then and there accepted the act of incorporation, and organized the com- pany pursuant to the provisions of said act. If the corporation was not created before the 1st of November*, 1851, when the new constitution took effect, it could have no exist- ence at all, as that instrument prohibits the creation of corporations, other than banking, by special act. The State v. Dawson, 16 Ind. 40.'' Harriman v. Southam, Id. 190. The plaintiff claims, that inasmuch as there was no acceptance of the charter, or organization under it, until after the adoption of the constitution of 1851, there was no such corporation as The Fort Wayne and Southern Railroad Company at the time he executed the conveyance, and, hence, that no title passed from him. But is he in a, condition to dispute the existence of the corporation at the time he made his conveyance to it? It has been held, in numerous cases in this State, that a party who has contracted with a corporation, as such, is, as a general proposi-* tion, estopped by his contract to dispute the existence of the corpo- ration at the time of the contract. The following cases may be cited, though there are, perhaps, others reported, and some not reported as yet. Judah v. The American Live Stock Insurance Company, 4 Ind. 333. Jones v. The Cincinnati Type Foundery Company, 14 Id. 89. Meikel v. The German Savings Fund Society, 16 Id. 181. Heaston v. The Cincinnati and Fort Wayne Railroad Company, Id. 275. ' Portions of opinion omitted. » Reported ante in Chap. 1. Sec. I. of this book. CHAP. U.] SNYDER V. STUDEBAKEK. 115 The doctrine is by no means confined to the State, but prevails elsewhere. The Dutchess Cotton Manufactory v. Davis, 14 Johns. 238. All Saints Church v. Lovett, 1 Hall, 191. Palmer v. Lawrence, 3 Sand. Sup. C. R. 161. Eaton v. Aspinwall, 6 Duer. 176. Jones v. Bank of Tennessee, 8 B. Mon. 122. Worcester Medical Institution v. Harding, 11 Cush. 285. The Congregational Society v. Perry, 6 N. H. 164. People's Savings Bank, etc. v. Collins, 27 Conn. 142. West Winsted Savings Bank v. Ford, Id. 282. Angel and Ames on Corp., sec. 94. The estoppel arises upon matter of fact only, and not upon niatter of law. Hence, if there be no law which authorized the supposed cor- poration, or if the statute authorizing it be unconstitutional and void, the contract does not estop the party making it, to dispute the exist- ence of the corporation.^ But if, on the other hand, there be a law which authorized the corporation, then, whether the corporators have comphed with it, so as to become duly incorporated, is a question of fact, and the party making the contract is estopped to dispute the organization or the legal existence of the corporation. This propo- sition is substantially stated in the cases of Jones v. The Cincinnati Type Foundery Company; Meikel v. The German Savings Fund Society; and Heaston v. The Cincinnati and Fort Wayne Railroad Company, supra. Let us apply the doctrine to the case before us. The corporators named in the act to establish the Fort Wayne and Southern Railroad Company had a right, at any time before the offer of the franchises was withdrawn, that is, before the constitution of 1851 was adopted, to accept the charter, and organize under it. If they did so accept the charter, and organize, the corporation was legitimately created, and the new constitution did not destroy it. Whether they did so accept the charter, and organize, was a ques- tion of fact, and the plaintiff, by his conveyance, is estopped to deny such acceptance and organization. That the corporators accepted the charter, and organized under it, within the time when it was competent to do so, was as fully admitted by the contract, as was any other step necessary to an organization. The conclusion necessarily follows, that the plaintiff is estopped to dispute the existence of the corporation at the time of his con- veyance to it. This point was ruled the other way in the case of Harriman v. Southam, 16 Ind. 190, but, upon more mature reflection, we are satis- fied that the decision upon this point was wrong, and should be over- ruled. We may remark, also, that the doctrine of estoppel was erroneously applied in the case of The Evansville, etc. Railroad Co. v. The City ' See Eaton v. Walker and notes, infra. 116 THE CHAKTEE — ACQUISITION DE FACTO. [cHAP. II. of Evansville, 15 Ind. 395. There the point made was, that the law, under which the corporation was organized, was unconstitutional and void. A party, we have seen, does not, by his contract, estop himself to deny that there is any law, or any valid law, by which the corporation was authorized. Some further observation, in respect to the case before us, will not be out of place. The doctrine of estoppel, as applied to the case, does not rest upon a mere technical rule of law. It has its foundation in the clearest equity, and the principles of natiu-al justice. The doc- trine of estoppel, in pais, is of comparatively recent growth, but is firmly and clearly estabHshed. In Doe ex dem. Richardson v. Bald- win, 1 Zabriskie, 397, it was said, that "The doctrine of estoppel rests upon the principle, that when one has done an act, or made a statement, which it would be a fraud, on his part, to controvert or impair, and such act or statement has so influenced any one that it has been acted upon, the party making it will be cut off from the power of retraction. It must appear, 1. That he has done some act, or made some admission inconsistent with his claim; 2. That the other party has acted upon such conduct or admission ; 3. That such party will be injured by allowing the conduct or admission to be with- drawn." Here the plaintiff, by his conveyance to the corporation, admitted that it had an existence, and could receive the title. Upon this act and admission of the plaintiff the defendant has acted, in pur- chasing the land of the company. If the plaintiff had not conveyed to the corporation, the defendant would not have purchased from it. The law will not now permit the plaintiff to withdraw the admission made by him in conveying to the corporation, and deprive the de- fendant of the land which he purchased on the faith of such admission. In our opinion, the judgment below is right, and must be affirmed.^ 1 A siipilar result but on different grounds was reached in East Norway &c. Church V. Froislie, 37 Minn. 447, an action to recover possession of real property from defend- ant. The defense set up that plaintiffs, corporations, had not made compliance with the enabhng act and, moreover, that the act itself was unconstitutional. These de- fenses were overruled. The court, Mitchell, J. said : - "Under the view we take of* the case it is wholly unnecessary to consider any of these questions. The plaintiffs are at least corporations de facto. Such a corporation, at least where there is a law under which a corporation might have been legally formed with such power, is capable of taking and holding property as grantee as weU as a corporation de jure, and con- veyances to It are valid as to all the world, except the state in proceedings \nZ> war- cht; °7nd'[n r"* r^'u^T."^ '"•^"^'^ '"*° "^ "^l^* *° «--«i^« corporarfran- ^nnwl'^ t ° • ,f f ° }^^ ••* *° ''^''°''^'' '""^ property, no private person wiU be allowed to inquire collaterally into the regularity of its organization. This mleTs not founded upon any principle of estoppel, as is sometimes assumed, but upon thTbroader principles of common justice and pubUo policy. It would be uX,t ^r,^ W„iT m If under such circumstances, every interloper and int^Ter wer^lbwed t4s ^ take advantage of every mformaUty or irregularity of organization." reference thereto annotated to monograph note in L. R A It will be observed that the identical results, reached by variant theories, are never- CHAP. 11.] COTTENTIN V. MEYER ET AL. 117 COTTENTIN v. MEYER ET AL. 80 N. J. L. 52. 1910. SwATZE, J.i . . . Wfe think the evidence justified the submission to the jury of the question whether the Cottentin Hotel Company- was organized as a corporation at the time the plaintiff made the contract upon which his suit was brought.^ The evidence is quite theless predicated in each instance upon the de facto existence of the corporation. And, generally, in the absence of the de facto requisites, collateral attack is permissible and the doctrine of estoppel cannot be invoked. Indiana Bond Co. v. Ogle, 22 Ind. App. 593 ; Duke v. Taylor, 37 Fla. 64 ; Jones v. Aspen Hardware Co., 21 Colo. 263 ; Clarke v. American Cannel Coal Co. 165 Ind. ; Johnson v. Northern Trust Co. 265 111. 263 ; Huber v. Martin, 127 Wis. 412. Why the equitable and salutary rule of estoppel should be thus limited is not clear. And there are some cases whose decisions, as distinguished from the reasons assigned therefor, place no such confines upon estoppel. See Blake v. HoUey, 16 Ind. 383 ; Hasselman u. U. S. Mortgage Co. 97 Ind. 365 ; Studebaker Co. v. Montgomery, 74 Mo. 101 ; and note 1, on page 118, infra. Thus in Winget ti. Quincy Building Association, 128 III. 67, where plaintiff sought relief from the consequences of membership in defendant corporation because the statute under which it was organized was unconstitutional, the court said : — "It is sufficient to say that whatever may be the fact in relation to the valid legal existence of said association as a corporation, the complainants are not in a posi- tion in which they can be permitted to challenge its validity. A party who has con- tracted with a corporation de facto as such, cannot be permitted, after having received the benefits of his contract, to allege any defect in the organization of such corporation, as affecting its capacity to enforce such contract, but all such objections, if valid, are available only on behalf of the sovereign power of the State. . . . And this rule applies even where the corporation is organized under a law alleged to be unconstitu- tional." The case of American Trust Co. v. Minnesota Co., 157 111. 641, is distinguishable because there was no law in force under which the plaintiff corporation might have incorporated. Of course, one who has not himself exercised good faith, should not be allowed to invoke estoppel in any event. See note 2, below. AH the cases agree that if the de facto requisites do appear, then such corporation may acquire and assert ownership and protect its property, redress via damages torts committed against it or seek specific reparation of the tort as circumstances may require, and enforce its contracts, the same as a, de jure corporation, saving the State and even then the question cannot be raised collaterally. People s. Dole, 22 Cal. 486 ; Searsburgh &c. Qo. v. Cutler, 6 Vt. 315 ; Keyes ji. Smith, 67 N. J. L. 190 ; New Haven Wire Co. cases, 57 Conn. 352 ; State v. Superior Court, 15 Wash. 668 ; Georgia &c. R. R. Co. 11. Mercantile Trust &c. Co., 94 Ga. 306 ; Baltimore Co. ». Church, 137 U. S. 568; Board of Education v.. Berry, 62 West Va. 433; Williams v. Citizens Co., 130 Ind. 71 ; Remington Co. o. O'Dougherty, 65 N. Y. 570. And see the cases cited by the court in Society Perun v. Cleveland, infra. If the corporation, however, be not even de facto, conveyances to it should vest title in the associates as individuals with the attendant rights of ownership. Jones v. Aspen Hardware Co., swpra. ' Portions of opinion omitted. ^ The question whether the parties have dealt on a partnership or any other basis involving personal liability, or on a corporate basis with concomitant immunity from such liability, is one of fact for the jury. So is the question of the knowledge, actual or imputed, of the other party, as to the corporate character of the associates. . So is the question of the good faith of the associates. Since the <2e f(Klo doctrine 118 THE CHARTER — ACQUISITION DE FACTO. [cHAP. II. persuasive that it was and this is supported by the facts that the plaintiff's own written agreement described it as a corporation and that he has seen fit to join the corporation as a joint contractor with the individual defendants ; but on the other hand the alteration of the date of record of the certificate of organization, coupled with Cotten- tin's testimony that he knew the paper wasn't done, is some evidence to the contrary. If, in fact, the certificate was not signed until August, there was no de facto corporation in the preceding April ^ and the case is one of extenuation, it cannot be invoked except by those who, in the attempt to incorporate, have acted in good faith. Montgomery v. Forbes, 148 Mass. 249. Booth ». Wonderly, 36 N. J. L. 250; Brundred v. Rice, 49 Ohio St. 640. Except, however, its absence is not prejudicial. United States etc. Co. v. Schlegel, 143 N. Y. 537. The presence of affirmative fraud should, on familiar principles, vitiate the incorporation. Hill 1). Beach, 1 Beas. 31 ; New Orleans &c. Co. v. Louisiana, 180 U. S. 320, and cases supra- But see Gow ». Collin &c. Lumber Co., 109 Mich. 45. 1 Mere appellation as a corporation does not satisfy the de facto requisites. It may, however, be a source of imputed notice that the parties are dealing on a cor- porate basis. See note 1 on page 113, ante. And it may well suffice as prima facie proof of incorporation. Glidden ». Chamberlin, 167 Mass. 486. But in Stoutimore v. Clark, 70 Mo. 471, it was held conclusive, the court stating that the maker of a note to a corporate payee (described not expressly as a corporation but merely as "Missouri City Savings Bank") "would not have been allowed to deny the corporate existence of the bank for the reason that by executing the note he admitted the fact that it was a corporation, which estopped him from disputing it. This prin- ciple was distinctly enunciated in the case of National Insurance Co. v. Bowman, 60 Mo. 252, following the case of Farmers and Merchants Insurance Co. ». Needles, 52 Mo. 17, and the case of O. & M. R. R. Co. v. McPherson, 35 Mo. 13. In the case of City of St. Louis v. Shields, et al., 62 Mo. 247, it was expressly held that the obligors on a bond given to a corporation by making and signing the instrument admit the corporate capacity of the obligee, and in a, suit on such bond cannot plead nut tiel corporation. The cases cited indisputably establish that Clark, the obligor in the note upon which the judgment rests, could not have set up as a defense that the bank was not a corporation." See also John v. Farmer's &c. Bank, 2 Blackf. 367 ; Jones v. Bank of Tenn., 8 B. Mon. 122 ; Exchange Nat. Bk. v. Capps, 32 Neb. 242 ; Troy Congregational Soo. u. Perry, 6 N. H. 164. The conflict between this line of cases and those in note 2 following, is not solved by merely extending the doctrine of good faith (note 2 supra) so as to operate recip- rocally. For good faith is the gist of estoppel. Perhaps the courts are being led unwittingly but surely to take cognizance of and give effect to incorporations that lack the de facto requisites. ^ , If estoppel is properly applied there appears no persuasive reason why slavish adherence to those requisites should be yielded. See note Ion pages 116 and 117, ante. The requisites themselves are after all judicial legislation. 2 Cf. Bergeron ». Hobbs, 96 Wis. 641. (" Until the articles of incorporation are filed . . . , there is no color of legal right to act as a corporation.") Also the alter- native explanation afforded by MarshaU J., in his dissenting opinion in case last cited. ("The very meaning of the term 'de /ocio' indicates that nothing more is necessary to the existence of a de facto corporation than the exercise of corporate powers in good faith. Corporation de facto, — that is, a corporation from the fact that it is acting as such under color of right in good faith. The existence of the law, and some attempt to comply with it, are essential, because without them there can be no assumption of the right to corporate existence in good faith. Persons cannot be said to honestly claim the right to corporate existence, in the absence of any law, authorizing the organi- zation, or in the absence of some honest attempt to comply with such law, if one exists. ) In absence of the de faOo requisites, the assumption to act as a corporation consti- tutes sheer usurpation." Snider's Sons' Co. ». Troy, arOc, at page 110. Unless estoppel may be invoked, (see note on pages 116 and 117, ante) the alleged iucor- CHAP. II.] COTTENTIN V. MEYER ET AL. 119^^ is not controlled by the rule of Hackensack Water Co. v. De Kay, 9 Stew. Eq. 548, 559 ; Stout v. Zulick, 19 Vroom 599, and Vanneman v. Young, 23 Id., 403. Nor does it come within the rule of Den v. Van Houten, 5 Halst. 270, and the numerous cases in other jurisdictions where a similar situation was presented. Those cases rest upon the doctrine of estoppel. In Den v. Van Houten the mortgagor, by giving a mortgage in form to a corporation, represented in effect to the assignee of the mortgage that the original mortgagee was in fact a corporation. In Close V. Glenwood Cemetery, 107 U. S. 466, Close, by making deeds in the name of the corporation for cemetery plots, represented that there was an acutal corporation capable of owning and conveying the lots. There are cases which go further and hold that one who deals as with a corporation and thereby obtains a benefit, cannot afterwards, when sued in the corporate name, deny the actual exist- ence of the corporation. It is as Mr. Machen, in his recent book on Corporations, points out (section 282), difficult to see how the prin- ciple of estoppel is applicable to such a case, since it can hardly be supposed that those who act as a corporation without even a color- able organization, can be misled into a belief that they are actually incorporated by the representation of an outsider who is without their means of knowledge. Even those cases, however, fall short of the present. If, in fact, Meyer and McKenna were merely using the 'corporate name in which to make their own contracts, they were in no way misled by the act of Cottentin in entering into a written contract which expressly described the Cottentin Hotel Company as a New Jersey corporation. On the contrary it was they who in that event misled Cottentin by purporting to contract as a corporation and they cannot escape liability if, in fact, Cottentin Hotel Company was merely their trade name. This, under the evidence, was a jury question. The judge excluded an offer by the defendant to prove that the Cottentin Hotel Company was the lessee of the hotel by the produc- tion of a lease signed by the landlord, accompanied by proof that there was a counterpart signed by the tenant. He distinctly said he gave no reason for sustaining the objection. We think of no valid reason. It was certainly competent to prove business transactions by the hotel company since they tended to prove that it was a de facto corporation at the time. The judgment is reversed, and the record remitted to the Common Pleas for a new trial. porators must be held personally responsible. The mere fact of dealing on a corporate basis, in the absence of any law, authorizing such a corporation, does not inhibit col- lateral attack even by tenant v. landlord. Imperial Bldg. Co. v. Chicago &c. Board of Trade, 238 111. 100. As to the analogous situation when the charter has expired, see cases on Dissolu- tion, Book VI. Chap. I. As to the nature of the liability incurred, see note on page 137. 120 THE CHARTER — ACQUISITION DE FACTO. [CHAP. II. SOCIETY PERUN v. CLEVELAND. 43 Ohio 481. 1885. On the 28th of January, 1874, the city of Cleveland conveyed to Perun (an incorporated school and hbrary society), certain real estate situated in that city, and to secure the unpaid purchase-money there- for, Perun, on the same date, executed and delivered to the city its four promissory notes and a mortgage upon the premises conveyed. The city neglected to file this mortgage for record until the 21st day of October, 1879. In February, 1874, certain persons attempted to organize a mutual benefit association under an act supplementary to an act to provide for the creation and regulation of incorporate companies passed May 1, 1852 (S. & C. Stat. 271), passed April 20, 1872 (69 Ohio L. 82), under the corporate name of Society Perun. Thereafter, in May, 1874, Perun delivered to Society Perun its deed purporting to convey to the latter the premises theretofore mort- gp,ged to the city. From that time forward, and prior to the filing of the city's mortgage for record. Society Perun, acting in its supposed corporate capacity, f jom time to time, executed and delivered deeds, mortgages, and executory contracts of sale, purporting to convey, incumber and sell parcels of these mortgaged premises to various parties, who were made defendants in the action below, and some of whom are cross-petitioners in error. Thereafter, in June, 1880, in a proceeding in quo warranto, in this court, instituted by the Attorney- General, Society Perun was adjudged not to have become incorpo- rated in conformity to the laws of this state, but that its pretended in- corporation was in violation, thereof ; and it was accordingly ousted of all rights and franchises to be a corporation. ' These proceedings in quo warranto were had pending, and prior to the final judgment in the action below, which was brought by the city, to foreclose her mortgage, and also to foreclose her supposed vendor's" Hen on the mortgaged premises, as against these subsequent grantees, inortgagees, and purchasers. , The cause was appealed from the court of common pleas to the dis- trict court, wherein it was tried upon the issues, the court finding among other things, that, as to the city of Cleveland, Society Perun was not a corporation either in law or in fact, and that the convey- ance to it by Perun was void as against the city ; and that the mort- gages and other liens and claims of all the defendants (except the lien of Amasa Stone for taxes, and the claims of certain defendants for improvements on the premises), were subsequent and inferior to the hen of the city, in whose favor the court adjudged the second lien, and subsequent only to the lien of Amasa Stone for taxes paid by CHAP. II.] SOCIETY PERUN V. CLEVELAND. 121 him, but of equal rank and merit with the holders of liens for expen- ditures on account of improvements above mentioned. By the judgment in the quo warranto proceeding it was by this court in form adjudged that the defendants (the pretended incorporators) ever since their pretended incorporation, had unlawfully and without authority exercised the franchises of, and usurped the right to be, a body corporate ; that the pretended organization of these defendants as a corporation was wholly void and of no effect, and vested in them no corporate rights, powers, privileges, or franchises of any descrip* tion whatever. It was further in form adjudged that the defendants never had, nor had any of them, the authority or lawful right to be a body cor- porate or to exercise or hold any of the powers, rights and liberties, privileges, functions or franchises of a body corporate ; but that they and each of them in the use and exercise of the same were and had ever been usurpers thereof. The sole ground upon which this judg- ment of ouster was rendered was that while the statute required that they should set forth in their certificate of incorporation (among other things) the manner of carrying on the business of the associa- tion, the attempted compliance with this requirement was in these words : l^l "Third. That the manner of carrying on the business of said association shall be such as may be from time to time prescribed by the by-laws of such association ; provided that the same shall not be inconsistent with the laws of the state of Ohio." Upon the trial below the plaintiff gave in evidence, against the objection of defendants, the record of the guo- warranto proceedings. The defendants offered in evidence the writing which was filed with the secretary of state as the certificate of incorporation of So- ciety Perun. They also offered to prove that the pretended incorporators pro- ceeded to comply strictly with the requirements of the statutes; that they elected trustees, prepared a certificate of incorporation stating explicitly the manner of carrying on the business ; that this was forwarded to the secretary of state, who submitted it to the attorney-general for examination and approval; that the secretary of state returned this paper with another form of certificate which had been approved by the attorney-general and secretary of state, and which was the identical certificate actually filed with the secre- tary of state, and under the supposed authority of which an organi- zation was in good faith attempted, and that they proceeded in good faith to act and transact its business under the supposed authority of such incorporation. All this was excluded, and the defendants excepted. To reverse this judgment the present proceeding is prosecuted. The alleged errors chiefly reUed upon are the exclusion of the 122 THE CHARTER — ACQUISITION DE FACTO. [CHAP. II. evidence offered to prove an attempt, in good faith, to incorporate Society Perun; the finding and holding of the court that Society Perun had never been in law or fact a corporation ; that as against the city the deed from Perun was void ; and adjudging the city s lien to be prior to the rights and liens of Society Perun and its mortgagees, grantees, and purchasers. Willson & Sykora, for plaintiff in error.' The judgment of ouster in the quo warranto proceeding was ren- dered long after all the rights of the parties to these suits had become vested. It could not have a retroactive effect so as to defeat the vested rights of Society Perun and its grantees. The acts of an officer de facto, when questioned collaterally, are as binding as those of an officer de jure. To constitute an officer de facto of a legally existing office it is not necessary that he should derive his appointment from one competent to invest him with a good title to the office. It is sufficient if he derive his appointment from one having colorable authority to appoint. A. T. Brinsmade, and W. E. Sherwood, for the city of Cleveland. When the corporate existence of an association pretending to exist as a corporation is denied, that fact must be established by affirmative proof. A certified copy of the articles of incorporation made out in conformity with the statutory requirements, and filed with the secretary of state, is made prima fade evidence only of the exist- ence of such corporation. The non-corporate existence of Society Perun was alleged and proved by the introduction of the judgment of ouster. The question, then, is not one as to the right of collateral inquiry, but one as to whether the defendants below should have been permitted to make prima facie proof by the introduction of the pretended certificate of ■ a corporate existence which the supreme court had" previously de- clared did not exist and never had existed, and which showed on its face a fatal defect. The district court properly held that the judgment of this court in quo warranto was conclusive, and that Society Perun was not a corporation de jure. The city of Cleveland had the right of collateral inquiry. Inasmuch as the city of Cleveland had no direct contract relation with the Society Perun, and had not otherwise recognized its legal corporate existence, the city was entitled to dispute such existence. As to the city the society was not a corporation de facto. No case can be found where it is held that there is a corporation de facto against persons who have in no way recognized its existence as a corporation. User will not raise a corporation de facto as against one who has not taken any part in the acts of user, and this for the ' Arguments are condensed and parts omitted. CHAP. II.] SOCIETY PERTJN V. CLEVELAND. 123 reason that user is not necessary to the creation of a corporation under general laws, especially under the law authorizing such a corporation as Society Perun attempted to become. If a corporation does not become so by virtue of compliance with the statute, it can not, as to those who have not dealt with it as such, become so by user, however long such user may continue. The notion of a de facto corporation is based on the doctrine of estoppel ; "when estoppel can not be invoked there can be no de facto corporation. There being no corporation, there was no legally existing grantee. Owen, J.^ The defendants below, .conceding that Society Perun had never been a corporation de jure, maintain that the court below should have permitted them to prove that such society was a de facto corporation; that it attempted, in good faith, to become a body corporate; proceeded to act and transact business in good faith under the supposed authority of incorporation, and that its acts ought not to have been declared to be wholly void as against the city of Cleveland. The judgment of ouster was an adjudication between the state and the society upon the right of the, latter to exercise corporate franchises. For the purposes of such adjudication it was competent for this court to consider and determine what had been its status from its first attempt to incorporate. But. it had no power to pass upon or determine the rights of parties not before it. It was not competent for this court to determine in that proceed- ing that Society Perun had never been a corporation de facto, or that its acts and business transactions, under the color of its supposed charter powers, were void. The authority of the court in that behalf was derived from sec. 6774 (Rev. Stats.), which provides: "When a defendant is found guilty of usurping, intruding into, or unlawfully holding or exercising an office, franchise, or privilege, judgment shall be rendered that such defendant be ousted and altogether excluded therefrom, and that the relator recover his costs." When the court had excluded the society from its franchises to be a corporation, it exhausted its jurisdiction over the subject-matter. It had no power to speak concerning whatever rights may have been acquired by the society as a corporation de facto, or by third parties in their transactions with it as an acting corporation. It is conceded by the city that parties who had recognized the existence of the society by their transactions with it as a supposed corporation are estopped to deny its corporate existence. But it is maintained that the city, having engaged in no transactions with it, is free to challenge its existence as a corporation de facto as well as de jure. The argument is that : "No case can be found where it is held that there is a corporation de facto against persons who have 1 Parts of opinioQ omitted. 124 THE CHARTER — ACQUISITION DE FACTO. [CHAP. II. in no way recognized its existence as a corporation", and that : "The notion of a de facto corporation is based on the doctrine of estoppel ; when estoppel can not be invoked there can be no de facto corpora- tion." . 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 cor- poration. "It is a self-evident proposition that a contract can not be niade with a corporation unless the corporg,tion be in existence at the time. A real contract with an imaginary corporation is as impossible, in the nature of things, as a real contract with an imaginary person. It is essential, therefore, in order to establish the existence of a con- tract with a corporation, to show that the corporation was in exist- ence, at least de facto, at the time the contract was made." Mora- wetz Private Corporations, sec. 137. It is bound by all such acts as it might rightfully perform as a corporation dejure. Where it has attempted in good faith to assume corporate powers; where its proceedings in that behalf are color- able, and are approved by those officers of the state who are author- ized to act in that regard; where it has honestly proceeded for a number of years, without interference from the state, to transact business as a corporation ; has been reputed and dealt with as a duly incorporated body, and valuable rights and interests have been acquired and transferred by it, no substantial reason is suggested why its corporate existence, in a suit involving such transactions, should be subject to attack by any other party than the state, and then only when it is called upon in a direct proceeding for that pur- pose, to show by what authority it assumes to be a corporation. Proof was offered upon the trial below to show, (1) That the per- sons seeking to incorporate first filed with the secretary of state a certificate which fully complied with the requirements of the statutes, and free from the defect which finally proved fatal to its existence, but which was disapproved by the attorney-general ; (2) That the certificate of incorporation which was finally filed with the secre- tary of state recited that, "said association has been formed and organized for the mutual protection and relief of its members, and for the payment of stipulated sums of money to the families or heirs of the deceased members of said association ; that the officers of said association have been duly chosen ; that for the purpose of becoming a. body corporate under an act passed by the general assembly of the state of Ohio, entitled, an act supplementary to an act, entitled an act to provide for the creation and regulation of incorporated com- CHAP. II.] SOCIETY PEEUN V. CLEVELAND. 125 panies in the state of Ohio, passed May 1, 1852, passed April 20, 1872"; (3) That this certificate was approved by the secretary of state, and also by the attorney-general, as provided by the statutes (69 Ohio L. 150) ; (4) That it proceeded in good faith to transact business peculiar to corporations provided for by the act under which it attempted to incorporate. All this was excluded, and the decision of the court below practi- cally rested on the proof offered by the city, that Society Perun had been ousted of its franchises, which was evidently construed as determining that such society had from the first no corporate existence, either de jure or de facto, and consequently no capacity to receive or impart any interest in or title to real estate except as against such parties as were by reason of their recognition of or dealings with it, estopped to deny its incorporate existence. ■ Did the court err? This fairly presents the controlling and very important question : Was it competent to show, as against a party who was not estopped to deny its corporate existence, that Society Perun was, at the time of the transactions involved in controversy, a corporation de facto f In Attorney-General ex rel. Pettee v. Stevens, Saxton (N. J. Eq.) 369, the relator sought to enjoin the Camden and Amboy R. R. and Transportation Co. and others acting under its authority from erect- ing a bridge over a navigable stream. The claim was that the act authorizing the corporation had been perverted and disregarded, and that there was no legal incorporation. The relators were in no manner estopped to attack the corporate existence of the respond- ent. The court held : "Where a set of men claiming to be a legally incorporated com- pany under an act of the legislature, have done every thing necessary to constitute them a corporation, colorably at least, if not legally, and are exercising all the powers and functions of a corporation ; they are a corporation, de facto, if not dejure; and'this court will not inter- fere, in an incidental way, to declare all their proceedings void, and treat them as a body having no rights or powers." The chancellor, speaking for the court, said : "Here, then, is a set of men claiming to be a legally incorporated company under the act of the legislature, exercising all the powers and functions of a corporation. They are a corporation de facto, if not de jure. Every thing necessary to constitute them a corpora- tion has been done, colorably at least, if not legally ; and I do not feel at liberty, in this incidental way, to declare all their proceedings void, and treat them as a body having no rights or powers. It has been seen that the court will not do this where a corporation properly organized has plainly forfeited its privileges ; and there is but little difference in principle between the two cases. In both the corpora- tion is actually in existence, but whether legally and rightfully so is 126 THE CHARTER — ACQUISITION DE FACTO. [CHAP. II. the question. And it appears to me that if the court can take cogni- zance of the matter in this case, it must in all others where it can be brought up, not only directly, but incidentally." This case is approved and followed in National Docks R. Co. v. Central R. R. Co., 32 N. J. Eq. 755. The rule of estoppel found no place in this case. In S. & L. G. R. Co. v. S. & C. R. R. Co., 45 Cal. 680, it was held that : "If a corporation de facto is in the actual possession of a pubHc highway, under a grant of a franchise to improve and collect tolls on the same, a mere trespasser can not justify his entry thereon on the ground that it was only a corporation de facto, and was not de jure entitled to the franchise." In Williamson v. Kokomo B. & L. Ass'n., 89 Ind. 339, one Leach gave to an acting corporation his mortgage on real estate. Subse- quent to the execution and recording of it, he executed another mort- gage on the same land to Williamson. In a proceeding to foreclose the junior mortgage, Williamson maintained that the pretended corporation had no legal existence, by reason of defects and omissions in the proceedings to incorporate, and that the senior mortgage was void. He was in no manner estopped, by deahngs with, or recogni- tion of, the first mortgagee to deny its corporate existence. The court held that : "A junior mortgagee can not defeat a senior mort- gage by showing that the corporation to which the senior mortgage was executed was defectively organized, if it be a corporation de facto." Elliot, J., said : " . . . private persons can not collaterally question the right of such an association to a corporate existence, although there has not been a full compliance with the provisions of the statute. Baker v. Neff, 73 Ind. 68. This rule is not limited to cases where one by contract admits corporate existence, but is a rule of general application." It is not easy to distinguish the principle of this case from that of the case at bar. In Pape v. Capitol Bank, 20 Kan. 440, Pape and wife gave their notes to "James M. Spencer or bearer", and their mortgage on real estate to secure them. Spencer transferred the notes to the Capitol' Bank of Topeka, an acting corporation, with this indorsement: "Pay the bearer, without recourse on me; James M. Spencer."" The mortgage was also transferred to the bank, which proceeded by suit to collect the notes and foreclose the mortgage. Pape and wife interposed the defense that the bank was not, and never had been, a body corporate, by reason, among others, of a defective organization. The bank had assumed corporate functions after an atjiempt, in good faith, to incorporate, and for a number of years was in the actual and notorious exercise of corporate franchises Pape had transacted banking business with the plaintiff prior to the purchase of the notes and mortgage, but such business was wholly unconnected with the notes and mortgage in suit. His wife how- CHAP, n.] SOCIETY PEKUN V. CLEVELAND. 127 ever, had not in any manner recognized the existence of the bank as a corporate body, and the doctrine of estoppel was not invoked to aid the court in sustaining a judgment of foreclosure against Pape and wife. Brewer, J., says: "The corporation is one de facto; and only the state can inquire, and that, in a direct proceeding, whether it be one de jure. . . . No mere matters of technical omis- sion in the incorporation, no acts of forfeiture from misuser after the incorporation, are subjects of inquiry in such an action. This is not upon the ground of equitable estoppel but upon grounds of public policy. If the state, which alone can grant the authority to incor- porate, remains silent during the open and notorious assertion and exercise of .corporate powers, an individual will not, unless there be some powerful equity on his side, be permitted to raise the inquiry." In Thompson v. Candor, 60 111. 244, Willetts, in February, 1858, deeded to "Mercer Collegiate Institute", a body pretending to be a corporation, the tract of land in controversy. He died in March, 1858. In 1868 his heirs quitclaimed their interest in the land to Thompson, who filed a bill in chancery for the cancellation of the deed from Willetts to the "Institute ", allegiag, as one of the grounds of relief, that the named grantee was not legally incorporated — had no capacity to take the title, and that the deed was void. Thornton, J., says : "In 1856 an attempt was made to organize a corporation under the general incorporation law. . . . Here then was a corporate body de facto, which had been engaged in an undertaking involving important interests. The regularity of its organization can not be questioned collaterally. Any alleged non- compliance with the law can only be inquired into by the writ of quo warranto or scire facias." There is no suggestion throughout the entire case of the rule of estoppel as an element affecting its disposition. In Jones v. Dana, 24 Barb. 395, it was lield that if a company has in form a charter authorizing it to act as a body corporate, and is in fact in the exercise of corporate powers at the time of taking a note from an individual, it is, as to him and all third persons, a corpora- tion de facto, and the validity of its corporate existence can only be tested by proceedings on behalf of the people. It is very clear that the proceedings to incorporate were colorable ; and so far as this fact is a test of the existence of a corporation de facto, it is most amply established. That there was proof of user is manifest from the evidence which was received without objection. That the judgment of ouster did not and could not have a retro- active effect upon the rights of the society, and of parties who had dealt with it during its de facto existence, is suggested by the opinion ■ of Wright, J., in Gaff v. Flesher, 33 Ohio St. 115. The evidence which was offered and excluded would, if credited, have shown Society Perun capable of holding and transferring the 128 THE CHAKTER — ACQUISITION DE FACTO. [cHAP. II. legal title to the lands in controversy. Walsh v. Barton, 24 Ohio St. 43 ; Darst v. Gale, 83 111. 136 ; Shewalter v. Pirner, 55 Mo. 218 ; Nat. Bank v. Matthews, 98 U. S. 628 ; Goundie v. Northampton Water Co., 7 Penn. St. 233 ; Barrow v. Nashville Turn. Co., 9 Humph. 304 ; Kelly v. People's Trans. Co., 3 Ore. 189 ; Bogardus v. Trmity Church, 4 Sandf. Ch. 758. The pubhc and all persons deahng with this society were justified in assuming that the certificate filed with the secretary of state, and by him admitted to record in his office, had been approved by him, and also by the attorney-general, as required by statute (69 Ohio L. 150), and that it so far conformed to all legal requirements that, as provided in section 2 of the act of incorporation (69 Ohio L. 83), "a copy, duly certified by the secretary of state, under the great seal of the state of Ohio, shall be evidence of the existence of such association." It would seem that such approval, record, and certificate, followed by uninterrupted and unchallenged user for nearly six years, of all of which proof was tendered, would constitute a corporation de facto, if such a body is, under any circumstances, entitled to legal recog- nition. The highest considerations of public policy and fair dealing pro- test against treating such an organization as a nullity, and all of its transactions void. The priQciple of the above cases is to be distinguished from a case where a mere corporation de facto attempts to assert the. power of eminent domain by the appropriation of private property to public use. It has been held that the exercise of this right (which is but a delegation of the sovereign power of the state), depends upon the sufficiency and legal validity of the certificate of incorporation and pubhc record of its organization.' " R. R. Co^ v. SuUivant, 5 Ohio St. 276 ; Atkinson v. R. R. Co., 15 Ohio St. 21. The case of Raccoon River Nav. Co. v. Eagle, 29 Ohio St. 238, is rehed upon by the defendant in error. It was an action to recover upon a stock subscription .^ A plea of nul tiel corporation was inter- ' Accord: New York Cable Co. v. Mayor &c. New York, 104 N. Y. 1. ("In order to sustain proceedings by which a body claims to be a corporation, and as such em- powered to exercise the right of eminent domain, and under that right to take the property of a citizen, it is not sufficient that it be a corporation de facto. It must be a corporation de jure. . . . The constitutional protection of the rights of private property requires that the powers granted by the legislature be strictly pursued, and aU the prescribed conditions be performed.") Hampton v. Clinton &c. Co. 65 N. J L 158; Tulare &c. District v. Shepard, 185 U. S. 1. Contra: Morrison v. Indianapolis &c. R. R. Co., 166 Ind. 511 ; Eddleman v. Union &c. Co., 217 111. 409 ; Detroit &c. R. R. Co. ». Campbell, 140 Mich. 384 See article on " De Facto Corporations" by C. E. Carpenter, in 25 Har.' L. R. 623. ^ Where defendant s stock subscription is made not with an existing corporation but with respect to one to be brought into existence in the future, his contract is, in I ,! u ' , . i"^ and pay for the stock subscribed for, in case the organization should be perfected and the corporation brought into legal existence, and not other- CHAP. II.] EATON V. WALKER. 129 posed. The plaintiff claimed to be organized under an act to author- ize the incorporation of companies "for the purpose of improving any stream of water . . . declared navigable by any law of the state of Ohio." On the trial the plaintiff offered in evidence a certificate by which it appeared that the company was formed for the purpose of improving, etc., Big Raccoon river. Unfortunately there was no navigable stream in Ohio by that name. No other testimony was offered. There was no proof of user. There was no defect in the form of the proceedings to incorporate, biit an attempt to organize and incorporate for a purpose impossible of accomplishment. There was neither a de jure nor de facto corporation. Judgment was prop- erly rendered for defendant. In excluding proof of what was actually done looking to the incor- poration of Society Perun, and of the subsequent acts of user, which was offered in evidence, there was error. Judgment reversed- EATON V. WALKER. 76 Mich. 579. 1889. 6 L. R. A. 102. Long, J.' Plaintiff, in the year 1883, was a dealer in grain and produce, residing at Mason, in this State. Defendants were the sole parties interested in a business of buying and selling grain and provisions for immediate and future delivery for themselves and other persons on commission at Detroit, and were members of the Board of Trade of Detroit. This action is brought upon an account stated by defendants to wise." Hence the subscriber is not estopped to deny the de jure existence of the cor- poration, and anything less appearing, he is not liable upon the subscription. Indian- apolis Furnace &o. Co. v. Herkimer, 46 Ind. 142. Accord: Capps v. Hastings Pros- pecting Co., 40 Neb. 470. ("A fair construction of this promise is that they meant to become stockholders in a corporation de jure and not a corporation de facto.") Dorris -0. Sweeney, 60 N. Y. 463. ("It may be that a corporation de facto was established, and that if the defendant had contracted with it after its formation he would have precluded himself from setting up the invalidity of its organization as a defense to an action upon his contract. This, however, would rest upon the ground that by con- tracting with it he had recognized its existence ^s a corporation. No such ground could be assumed where the contract was made before the formation of the corpora- tion, and was conditioned upon its formation. A legal and effectual formation of a corporation or joint stock company fof the purpose specified in the contract was a condition precedent to his obligation to put in his capital. He would not be bound under such a contract to invest his capital in the stock of a corporation not legally formed.") Cf. Ashton V. Burbank, infra. Book II. Chap. 4, > Portions of opinion omitted. 130 THE CHARTER — ACQUISITION DE FACTO. [CHAP. II. plaintiff in the sum of $3,562.68. The account was erroneously made out in the name of the firm of Walker Summer & Co w^tb whom plaintiff had formerly done busmess, and of whom Mr. Walker was at that time a member. , , ,, + j„„ +>,« „lom No question was made on the trial as to the amount due the plain- tiff from Walker, Hopkins & Co., but the defense rested on the smgle ground that Walker, Hopkins & Co. were a corporation, and not liable as individuals. . , , • j +1,^ „^,„w- The cause was tried before the court without a jury and the court^ made the following finding of facts and conclusions of law : " 1. On the third day of May, A. d. 1882, the defendants organized' a corporation under the name of Walker, Hopkins & Co. "2 This corporation assumed to organize under Act JNo. 187 ot the Session Laws of 1875, as amended by Act No. 274 of the Session Laws of 1881. . .j , ^t. • ^ 1 "3. The defendants Livingstone and Hopkms paid tor their stocJc. "4. Prior to the organization of this corporation, a copartnership, of which the defendant Charles H. Walker was one of the copartners, conducted a business in buying and selling grain, and doing a general commission business, under the name of Walker, Summer & Co. Neither- the defendant Hopkins nor the defendant Livingstone was connected with this copartnership. Prior to the organization of the corporation of Wallcer, Hopkins & Co., the defendant Walker purchased all of the assets of the firm of Walker, Summer & Co., and transferred such assets to Walker, Hopkins & Co. ; an agreement being executed between the defendant Walker, and Walker, Hop- kins & Co., providing, in effect, that the stock of the defendant Walker should be paid for out of collections to be made out of the assets thus transferred to Walker, Hopkins & Co. "5. Soon after the organization of the corporation of Walker, Hopkins & Co., as above stated, it commenced to do business as a corporation in buying and selUng grain and provisions for immediate or future delivery. Such business was continued by said Walker^ Hopkins & Co., as such corporation, till the twenty-seventh day of July, 1883, when it made an assignment for the benefit of its credi- tors to Charles M. Swift as assignee. " 6. The business of said corporation during the time it so conducted said business was managed by the defendants Hopkins and Walker as president and secretary and treasurer of said corporation. The defendant Livingstone took no part in the transaction of the ordinary business of the corporation. "7. The plaintiff, who had been a custom^er of the firm of Walker, Summer & Co., upon the organization of the corporation of Walker, Hopkins & Co., continued to do business with it, as he had done business with Walker, Summer & Co., prior to the organization of the corporation of Walker, Hopkins & Co. CHAP. II.] EATON V. WALKER. 131 " 8. At the date of the execution of the assignment aforesaid, Walker, Hopkins & Co. was indebted to the plaintiff in the sum of $3,562.68. "9. At the time that said Walker, Hopkins & Co. commenced business as aforesaid, and during the time it continued to do busi- ness, the plaintiff had full notice that Walker, Hopkins & Co. was a corporation and not a copartnership, and he continued to do busi- ness with said Walker, Hopkins & Co. as such corporation. "10. That the plaintiff transacted his business with Walker, Hopkins & Co. as a corporation, and the indebtedness sued for herein was contracted while said plaintiff was dealing with said Walker, Hopkins & Co. as such corporation. "11. The defendant Livingstone became a party to the organiza- tion of said corporation of Walker, Hopkins & Co., and a subscriber to its stock, in entire good faith, and all his dealings had with said corporation were had in good faith, and he never after the organiza- tion of said corporation received, directly or indirectly, any benefit therefrom by way of return of stock subscribed and paid for, or divi- dends thereon, and never, at any time while said corporation con- tinued to do business, had any suspicion that the organization of said corporation was in anywise defective. ^ "conclusions op law. "a — Whether Act No. 274 of the Session Laws of 1881, under which the corporation of Walker, Hopkins & Co. assumed to organize, was a vaUd law or not, by reason of the alleged defect or imperfec- tion in its title, the plaintiff is not entitled to recover in this cause. The defendant Livingstone having acted in good faith with refer- ence to the organization of said corporation and the transaction of its business, and the plaintiff having dealt with it as a corporation, he is now estopped to question the validity of its incorporation. "b — The defendants are entitled to a judgment in this case." The court subsequently filed the following conclusions : "From these facts, as found, I am clearly of the opinioHu that Walker, Hopkins & Co., with whom the plaintiff dealt, and by whom the account was rendered, was a corporation de facto, if not de jure, and that the plaintiff knew that Walker, Hopkins & Co. was a cor- poration. "He never dealt with them as partners, . . . and under the weight of authority I think that the plaintiff is estopped to deny that Walker, Hopkins & Co. was a corporation, or to claim that the defendants, who were stockholders, therein, are liable as partners." Judgment was entered upon these findings in favor of defendants. Plaintiff brings the case to this Court. 132 THE CHARTER — ACQUISITION DE FACTO. [CHAP. II. The defendants claim to be incorporated under Act No. 187 of the Public Acts of Michigan of 1875. _ . - [The Court determines that this act is unconstitutional because embracing a purpose outside its title.] Therefore there was no statute under which defendants could lawfully incorporate as a mercantile company, and their acts as such are wholly void. tt i • s n Defendants' counsel, however, insist that Walker, Hopkins & Uo. were a corporation de facto, if not de jure. But, there being no valid * law of this State under which the defend- 1 starting from the premise that " there cannot be a corporation de facto when there cannot be one de jure", Clark v. American Cannel Coal Co. 165 Ind. 213, it neces- sarily follows that there cannot be a corporation de facto under an unconstitutional statute, for such a statute is void, and a void law is no law." Ibid. This is the rule in mostijurisdictions together with its corollary, that "if there is no law under which a corporation de jure might exist, its non-existence may be set up even in a collateral proceeding." Ibid. • ■ i. i, u Some cases, however, ignoring blind logic and sensing inherent equities have held those who have dealt with a corporation organized under an unconstitutional law, "estopped" to challenge its validity. See Winget v. Quincey Bldg. Assn. 128 111. 67 quoted in extenso in note 1 on page 117, supra. Also Freeland v. Ins. Co. 4 Pa. St. 504 ; Building and Loan Assn. &c. v. Chamberlin, 4 So. Dakota 271 ; Georgia &c. R. R. Co. V. Mercantile Trust Co. 94 Ga. 306 ; Taylor d. Portsmouth &c. Ry. 91, Me. 193. It is not a technical estoppel, for no one is estopped to plead the law. It would be less confusing to declare that under certain circumstances the court bars or precludes or will not listen to the attack. Cf. Van Syckel, J. in Camden & Amboy R. R. Co. V. May's Landing &c. R. R. Co., 48 N. J. L. 530 (an ultra vires case) : — " The law recognizes the obligation ; it precludes or estops the attempt to evade it. Apply to it what legal phrase you may, the underlying principle is that the corpora- tion cannot set up its own infirmity when it is unconscionable to do so. The law for- bids the defense on account of the flagrant injustice which would otherwise be done. The question ... is not entertained." It is further submitted that there is a manifest difference between a constitutional prohibition or an utter absence of legislative volition on the one hand, and, on the oiher, such will imperfectly or unconstitutionally expressed. B. & L. Assn. case supra. The courts make analogous distinction in the ultra vires doctrine between illegal con- tracts and mere unauthorized undertakings. Bath Gas Light Co. v. Claffy, 151 N. Y. 24. Admittedly, in the presence of a constitutional inhibition or in the absence of some expression of legislative volition, there can be neither corporation de jure nor de facto. Thus, an attempt to consolidate corporations without such volition is a nullity. State v. Rutland &c. Light &c. Co. 85 Vt. 91. But if there is such volition evidenced by a statute, a de facto consolidation may be effected despite failure of some of the constituent corporations to conform to its terms. Chicago &c. R. R. Co. v. Heidenreich, 254 111. 231. If the essence of the requirement be legislative sanction, then judicial disapproval of the mode of exercise or expression of an undoubted legis- lative power falls short of a denial of the power itself. If the law is declared uncon- stitutional on the former grounds, why should the associates be not entitled to the protection of the de facto doctrine ? A further factor on the effect to be accorded to and the protection afforded by an unconstitutional law, is presented by Gummeke, C. J. in Lang v. Bayonue, 74 N. J. L. 455 dealing with the analogous doctrine of de facto ofiioers. He says: — "In that case [Norton v. Shelby Co. 118 U. S. 425] Mr. Justice Field declared that the con- tention there made, viz., that if the act creating the board of county commissioners of Shelby County was void and the commissioners were not officers de jure they were nevertheless officers de facto was met by the fact that there cannot be any officer de facto or de jure if there be no office to fill ; that the act attempting to create the office of commissioner never became a law and that therefore the office never came into existence ; that ' an unconstitutional act is not a law — it confers no right ; it imposes CHAP. II.] EATON V. WALKER. 133 ants could legally be incorporated, could "they, even colorably, become a corporation, or have any existence as a corporation de facto, or would the plaintiff be estopped from inquiry into their corporate existence under such circumstances ? no duties ; it affords no protection ; it creates no office ; it is, in legal contemplation, as inoperative as though it had never been passed.' Notwithstanding the great weight which the opinion of so distinguished a jurist carries with it ; notwithstanding that Norton ». Shelby County has been frequently cited with approval in other juris- dictions, I am unable to accept as sound the doctrine upon which it is rested, namely, that an unconstitutional law is void ab initio and affords no protection for acts done under its sanction. That it works injustice in its application to the citizen is ap- parent. The Flauoher case [56 N. J. L. 244] is a pregnant example of the truth of this assertion. The le^slature had enacted a general law, making the unlicensed sales of intoxicating liquor a criminal offence, but legalizing such sales when made by a person holding a license from the proper authority. It then, by a subsequent statute, created the county board of license commissioners the proper authority to grant such licenses in the county of Camden. Flaucher applied to, and received from this board a license to sell liquors at his saloon in the city of Camden. At that time the law creating the county board stood upon the statute book, apparently as valid, as much entitled to be respected and obeyed as the enactment which prohibited the sale of liquor without a license. And yet, notwithstanding that he scrupulously observed the law, as declared by the legislature, he was made a criminal by judicial decision, a decision which in its operation and effect were as much ex post facto as any statute which makes criminal an antecedent act which violated no law at the time when it was done. The vice of the doctrine of Norton v. Shelby County, as it seems to me, is that it fails to recognize the right of the citizen, which is to accept the law as it is written, and not to be required to determine its validity. The latter is no more the function of the citizen than is the making of the law. Each of these functions has been dele- gated by the constitution, the one to the judicial and the other to the legislative branch of the government. And it is to be observed that the judicial function of determining the validity of statutes is confined within a very narrow scope. Courts are not vested with the general supervision of legislation. They have received no authority from the people to inspect each statute, as it comes from the hands of the legislature, and declare whether or not it infringes constitutional limitations. The function of the judicial department with respect to legislation deemed unconstitutional is not exer- cised in rem, but always in personam. Allison v. Corker, 38 Vroom 596. Only such statutes as affect the rights of parties to judicial proceedings are ever subjected to the scrutiny'of the courts. And these are comparatively few. Of the twenty-four hun- dred and more acts of the legislature passed in this state during the last ten years, less than four hundred have received judicial consideration. The remaining two thousand which are upon the statute book (except those which have been repealed by the legislature) are accepted and enforced as a part of the law of the land. And this, in my judgment, is the only way in which a government such as ours can be safely administered. To require the citizen to determine for himself, at his peril to what extent, if at all, the legislature has overstepped the boundaries defined by the constitution in passing this mass of statutes would be to place upon him an intolerable burden, one which it would be absolutely impossible for him to bear — a duty in- finitely beyond his ability to perform. In iny opinion the provisions of a solemn act of the legislature, so long as it has not received judicial condemnation, are as binding upon the citizen as is the judgment of a court rendered against him so long as it re- mains unreversed. * * * . * * * * In my judgment, the same public policy which requires obedience from the citizen to the provisions of a public statute which creates a municipality, and provides for its government, even though unconstitutional, so long as it has not received judicial con- demnation, equally justifies his obedience to every other law which the legislature has seen fit to enact until such law has been judicially declared to be invalid. I conclude that an officer appointed under authority of a statute to fill an office created by the statute is at least ^ de facto officer, and that acts done by him ante- 134 THE CHARTER — ACQUISITION DE FACTO. [cHAP. 11. Two things are necessary to be shown in order to establish a cor- poration de facto, viz. : 1. The existence of a charter or some law under which a corpora- tion, with the powers" assumed, might lawfully be created. 2. A user by the party to the suit of the rights claimed to be con- ferred by such charter or law. U. S. Bank v. Stearns, 15 Wend. 314. If the law exists, and the record exhibits a bona fide attempt to organize under it, very slight evidence of user beyond this is all that can be required. M. E. Church v. Pickett, 19 N. Y. 487. In Heaston v. Cincinnati, etc., R. R. Co., 16 Ind. 275, the court says : "The estoppel goes to the mere de facto organization ; not to the question of legal authority to make an organization. A de facto corporation, that by regularity of organization might be one de jure, can sue and be sued. And a person who contracts with such corpora- tion while it is acting under its de facto organization — who contracts with it as an organized corporation — is estopped, in a suit on. such contract, to deny its de facto organization at the date of the contract ; but this does not extend to the question of legal power to organize. Hence, if an organization is completed where there is no law, or an unconstitutional law, authorizing an organization as a corporation, the 'doctrine of estoppel does not apply." In the present case, however, there was no law authorizing the parties to file their articles of association, or to become incorporated ; and there could, under such circumstances, be ho corporation de facto. It cannot, therefore, in any proper legal sense, be said that the carrying on of the business in the corporate name is evidence of user which can be considered in aid of their legal corporate existence. Counsel for the defendants contend that the case of Merchants', etc.. Bank v. Stone, 38 Mich. 779, is decisive of this case. In that case the defendants claimed to be incorporated as the "Charles Stone Timber Company." It appeared that the plaintiff transacted a large amount of business with the defendants, upon the specific understanding that the concern was contracting as a corporation, and not otherwise ; and this Court said : "Now, the proof that, as a matter of fact, the company carried on busmess as a corporation in the name of 'The Charles Stone Timber Company' when the bank dealt with it, established, pnma facie, that It was a corporation pursuant to law; and certainly the evidence the bank adduced in regard to the operations of the com- pany, the attitude it maintained, and the character in which the and should not be followed." ^'^"clier v. Camden rests upon an unsound basis •CHAP. II.] EATON V. WALKER. 135 two concerns dealt together, showed that the company was a cor- poration de facto, and so acknowledged by the bank." In the present case the plaintiff offered evidence to show that he never knew, or had any information, that the defendants claimed that Walker, Hopkins & Co. were a corporation, but, on the contrary, that Mr. Walker, of that firm, asked him to continue his business with the firm as he had carried it on formerly with Walker, Summer & Co., and that the firm was composed of himself, William Living- stone, Jr., and Mark Hopkins, Jr.; and that he always beheved and understood that Walker, Hopkins & Co. were a firm. This testimony the court below excluded. In addition to this, and upon this point, this case differs radically from the case of Mer- chants' etc., Bank v. Stone. The whole facts show that the firm never had any corporate existence, and never was a cor- poration, even de facto. It is very evident to us that the facts here presented do not bring this case within the ruling . of the former case. In the present case, as in that, the name would not indicate that the firm was a corporation. It gave no clue to the nature of the company as being corporated or unincorporated, and there is no pretense of proof that the plaintiff dealt with it as a corporation, ■except the fact that defendants were doing business as a corporation, and had published such fact in two of the Detroit papers, and mailed circulars to their customers announcing that they had organized as a corporation under the laws of the State of Michigan, and also that their letter-heads showed this fact ; some of the circulars being mailed to plaintiff, and the corporation having also sent by mail statements of its accounts to plaintiff written upon such letter-heads. The plaintiff testified that he had no recollection of receiving such circulars, or of ever having seen such announcements in the pubHc press. Plaintiff also testified that he had no recollection •of ever having received any letter-heads containing the information that defendants were a corporation; aiid it appears that when the account was made up by defendants showing their indebtedness to plaintiff, and transmitted to him, it was upon the letter-head of Walker, Summer & Co., which did not contain any showing that Walker, Hopkins & Co. were a corporation. Plaintiff's counsel also offered to show by the testimony of the plaintiff that Mr. Walker soHcited the plaintiff to do business with Walker, Hopkins & Co., stating to him that it was a partnership ■composed of Walker, Livingstone, and Mark Hopkins, Jr., and that in the faith of that statement the plaintiff commenced business with them. This testiniony the court excluded. Defendants' counsel, however, contend that inasmuch as the trial ■court found as a fact that Walker, Hopkins & Co. were a corpora- tion, and that, during the time it continued to do business, plaintiff 136 THE CHAETER — ACQUISITION DE FACTO. [CHAP. II. had full knowledge that they were a corporation, and not a co- partnership, and continued to do business with them as a cor- poration, such finding is conclusive, and will not be disturbed by this Court. It would be true that, if there was any proof to support the find- ing, this Court would be bound by it, though, upon the facts, it might not be able to agree with the circuit court in its conclusions. But the fact is made to appear, by the evidence returned, that the court excluded the evidence^ of the plaintiff that he did not know that they were a corporation, and did not deal with them as such, but was informed by Walker that they were a partnership, and dealt with them in the belief that they were a partnership ; and yet the court below finds, under the evidence which defendants were per- mitted to offer, that plaintiff did deal with them as a corporation, and had full knowledge that they were such, and bases such finding and conclusion upon the fact that defendants published the state- ments in the public press, and mailed circulars and letter-heads to plaintiff which it is not shown that he ever received. Under such circumstances, the court was in error -in excluding the testimony, and we think there is no proof to sustain the finding. It is undoubtedly well settled that a person who has entered into contract relations with a de facto corporation cannot, in an action thereon, deny its corporate character, or set up any informality in its organization, to defeat the action. The distinction between such cases and the present one is to my mind clear. If there had been any law under which defendants had a right to incorporate, and the offer had been to show a mere abuse or excess of its corporate powers, or had it appeared that it was a de facto corporation, and the question related to the regularity of its organi- zation merely, there could be no doubt that the plaintiff would be estopped from questioning its corporate existence. But the two things necessary to show a corporation, even de facto, do not exist. There is no law under which the powers they assume might lawfully be created ; and the mere fact that they assumed to ' act as such, even in the full behef that they were legally incorporated, would not constitute them a corporation de facto. , It is admitted upon this record that an indebtedness was due to the plamtiff in the sum of $3,562.68 at the date of the trial, July 19, 1888, and plamtiff seeks to hold defendants hable therefor as partners, and m this contention we think he is right. The defendants were not a corporation. They had associated together, each sharing the profits and losses of the business equally, according to the money each put in as capital stock, each holding and owning one-third part of the shares. The fact that they took counsel and acted in good faith m organizing under what they were advised was a vaUd law does not relieve them of their liabiUty. It is well settled that CHAP. II.] EGBERTS MANUFACTURING COMPANY V. SCHLICK. 137 obligors are bound, not by the style which they give to themselves, but by the consequences which they incur by reason of their acts. They have had the benefit of the plaintiff's means ; they are indebted to hun, as is conceded ; but have sought to shift individual hability to a corporate one. There is no such corporation, and the mere fact that defendants assumed to act as such does not relieve them from personal habihty. Under the circumstances of this case, the defendants must be held liable as partners.' The judgment of the court below must be set aside and vacated, and judgment entered here in favor of plaintiff in the sum of $3,562.68, with interest from July 27, 1883, being the date when the parties, claiming to be a corporation, made an assign- ment for the benefit of their creditors, together With costs of both this and the circuit court. ROBERTS MANUFACTURING COMPANY v. SCHLICK. 62 Minn. 332. 1895. Start, C. J. Briefly stated, the facts in this case are that certain individuals, named in the second subdivision of the findings of the trial court, ''on February 28, 1893, associated themselves together for the purpose of forming a corporation, securing a bank charter, and engaging in a general banking business as the MetropoUtan National Bank of St. Paul, Minnesota, under the provisions of the national bank act. They executed articles of association, elected directors and other necessary ofiicers. The defendant was not one of the original associates or promoters, but on April 15, 1893, he was chosen a director to fill a vacancy caused by a resignation, accepted the position, apd thereafter acted as a director of the asso- ciation. The board of directors, through its authorized committee, entered into certain contracts for the association, and in its proposed ' If the corporation fail to attain a de facto status, personal liability is visited, in most jurisdictions, upon the associates as partners. The argument is presented and cases collected by F. M. Burdick in article in 6 Columbia Law Rev. 1, entitled "Are Defectively Incorporated Associations Partnerships?" Some courts declare that "a partnership is not the necessary legal consequence of an abortive attempt at incorporation." Snider's Sons' Co. ». Troy, ante. Conceding personal liability, it is imposed on those who represented themselves as agents of such corporation, in analogy to the "familiar principle of law that a person who acts as ag^nt without authority or without a principal is himself regarded as a principal and has all the rights and is subject to all the UabiUties of a principal." Fay s. Noble, 7 Cush. (Mass.) 188. See Johnson v. Smith, 21 Conn. 627, also U. S. Wood Preserving Co. V. Lawrence, 95 Atl. Rep. (Conn.) 8. Another theory is presented in the case next following. 138 THE CHARTER — ACQUISITION DE FACTO. [CHAP. II. corporate name, for the lease of a banking office, and for a safe and the necessary office furniture and fixtures. The contract for the latter was made with the plaintiff on April 19, 1893, by a committee appointed by the board of directors before the defendant became a member. After the performance of this contract by the plamtiff on its part, the promoters voluntarily abandoned their purpose of becoming a corporation and engaging in the banking business, and are not, and never were, a corporation. All the promoters except the defendant and one other have paid their proportionate share of the amount due to the plaintiff on its contract, and have been released by it from further hability therefor. This action was brought to recover from the defendant the bal- ance of his proportionate share of such amount. The trial court found substantially the foregoing facts, and other evidential facts,, and ordered judgment for the plaintiff for the amount claimed ; and from an order denying his motion for a new trial the defendant appealed. 1. The plaintiff claims that the defendant is liable as a partner, but we neither discuss nor decide this question, for we are of the opinion that the defendant, in any view of the case, is liable upon the general principles of contract and agency. Where individuals associate themselves for the purpose of promoting and organizing a corporation for the pecuniary gain of its members, and act as an association by electing directors and other officers, through whom contracts are made for and in the name of the proposed corporation, and they afterwards abandon their purpose to form a corporation, their relation, one to the other, as to persons dealing with the asso- ciation, if not that of partners, is that of agent and principal, and each will be individually Uable upon any contracts of the associa- tion which he directly or indirectly authorized or ratified. The defendant vigorously challenges the sufficiency of the evidence to bring him within this rule, and insists that there is no evidence in the case that he ever authorized or ratified the contract in ques- tion. Where, as in this case, it is shown that the defendant was one of several promoters, and that all acted as a body by a board of directors, and that he was a member thereof, only slight additional evidence is required to estabhsh prima fade his authorization or . ratification of contracts made in the name of the association, whether they were made before or after he became a director. We are of the opinion that the evidence in this case is ample to sustain the material findings of fact and conclusion of law of the trial court to the effect that the defendant is liable on the contract in question. The evidence shows that the promoters organized .by electing a. board of directors, president, cashier, and other officers, and that business was done by the board, which kept a correct record of aR Its acts and proceedings. At its first meeting, March 2, 1893, a CHAP. II.] ROBERTS MANUFACTXnilNG COMPANY V. SCHLICK. 139 committee on location and fixtures for the bank, consisting of three directors, one of whom was the cashier, was appointed. This com- mittee reported, at the second meeting, held on March 15, the terms upon which a lease of an office could be secured, and the board ac- cepted the terms, and authorized the committee to take the lease. The defendant, at the third meeting, April 15, wais elected a director, and at this meeting the committee reported in favor of accepting the bid of the plaintiff for office fixtures, and the report was referrred back to it to enter into and complete the contract in their discretion, which it did on April 19. The defendant was not present at any of these meetings, but at the fourth meeting, April 18, he was present as a director, and was present at all subsequent meetings, acting as a director, up to and including June 29, 1893. At the first meeting at which he was present as a director the board voted $300 for adver- tising purposes, and at the last one, it appointed a committee to arrange the best possible adjustment of all claims against the bank under contracts with various parties. This evidence tends to show that the promoters were acting as an association under a common name, promoting the common enter- prise by and through its representatives, its directors, of whom the defendant was one; and that he had ample opportunity to learn, and in the exercise of ordinary prudence and sagacity in the dis- charge of his duties as director he must have learned, by an ex- amination of the records, of the making of this contract here in question. The records were not voluminous, and afforded the de- fendant the ready means to learn all about the association he was acting for. It is for this reason that the records of the proceed- ings of the board of directors prior to the time the defendant became a member thereof were properly received in evidence, notwithstand- ing his objection to such evidence. The articles of association, although not executed by the defendant, were correctly received in evidence, for they show the organization and purposes of the asso- ciation of which he afterwards became a member. If the defendant knew that the board of directors had made and were making contracts for and in the name of the association as a reasonably necessary work of preparation for doing a general banking business when it should become incorporated, and with such knowledge he continued to take an active part in the proceedings of the board as a director, without objection or protest, it would tend to show a ratification of this contract. If he did not do so, and had no notice of the mak- ing of this contract, it was a matter peculiarly within his own knowl- edge ; yet he was not a witness on the trial, and there is no explana- tion of his significant silence. The undisputed evidence tends further to show that he knowingly and without objection, through a third party, paid to the plaintiff |50 on this contract. No further evidence was necessary to make a strong prima facie case against the defendant. 140 THE CHARTER — ACQUISITION DE FACTO. [CHAP. II. 2. The claim of the defendant that the committee on bank fixtures did not make the contract with the plaintiff, but that it was made by one of the individual members of the committee, is not supported by the evidence, which tends to show that the committee acted upon the proposition of the plaintiff to furnish the fixtures, and decided to accept it, and authorized the cashier to sign an accept- ance, which he did for the bank. . . . Order Affirmed. CHAP. III.] THOMAS V. EAILKOAD CO. 141 CHAPTER III. THE CHARTER — AS A MEASURE OF CORPORATE POWERSii THOMAS V. RAILROAD 00.=^ 101 U. S. 71. 1879, Errob to the Circuit Court of the United States for the Eastern District of Pennsylvania. Action of covenant, by George W. Thomas, et al., against the West Jersey Railroad Company. To maintain the issue, plaintiffs offered to prove the following facts : — On the eighth day of October, 1863, the Millville and Glassboro Railroad Company, a corporation incorporated by the legislature of New Jersey, entered into an agreement with them, whereby the company did lease its road, buildings, and rolling-stock to them for twenty years from the 1st of August, 1863, for the consideration of one-half of the gross sum collected from the operation of the road by the plaintiffs during that period; that the company might at any time terminate the contract and retake possession of the, rail- road, and that in such case, if the plaintiffs so desired, the company would arbitrate the value of the contract to them, and the loss and damage incurred by, and justly and equitably due to them, by reason of such termination thereof. On the 10th of April, 1867, the legislature of New Jersey enacted that it should be imlawful for the directors, lessees, or agents of said railroad to charge more than the sums therein named for pas- sengers and freight respectively. The plaintiffs claim that at the date of this act it was well knownthat they were acting under the said agreement of 8th October, 1863. On the 12th of October, 1867, articles were entered into between the Millville and Glassboro Railroad Company and the defendant, ' The purpose of this chapter is confined to its caption. The charter, or its modern legal equivalent; the certificate of organization coupled with the provisions of the enabling act, is examined as a gauge of the express powers therein conferred and as a source or basis for the derivation of implied, or, more accurately, inferred powers. Consideration of the existence, extent, and exercise of particular powers and the application thereto of the ultra vires doctrines, is found in Book III, infra. * Facts abridged ; part of opinion omitted. 142 THE CHARTER AS A MEASURE OF POWERS. [CHAP. III. whereby it was agreed that the former should be merged into and consohdated with the latter. In November, 1867, a written notice was served by the MiUviUe and Glassboro Raihoad Company upon the plaintiffs, puttmg an end to the contract and to all the rights thereby granted, and notify- ing them that the company would retake possession of the railroad on the first day of April, 1868. On the 18th of March, 1868, the legislature of New Jersey enacted that, the Millville and Glassboro Railroad Company should be con- sohdated with the West Jersey Railroad Company, "subject to all the debts, habihties, and' obhgations of both of said companies." The railroad was duly dehvered by the plaintiffs to the West Jersey Railroad Company onthe 1st of April, 1868. On the 21st of December, 1868, an agreement of submission was entered into between the plaintiffs and the latter company. The arbitrators made an award, by which the value of the unexpired term of the lease, and the loss sustained by reason of the termina- tion thereof to and by the plaintiffs, was adjudged to be the sum of $159,437.07; and the West Jersey Railroad Company was ordered to pay that sum to the plaintiffs. This award was subsequently set aside in a suit in equity brought in New Jersey. The plaintiffs further offered to prove their compHance in all respects with the terms of the lease, its value, and the loss and damage they had sustained by reason of its termination as aforesaid. The court excluded the offered testimony on the groimd that the lease by the MiUville and Glassboro Railroad Company to the plaintiffs was ultra vires, and directed the jury to return a verdict for the defendant. The plaintiffs duly excepted and sued out this writ. Mr. Justice Miller dehvered the opinion of the court. The ground on which the court held the. contract to be void and on which the ruhng is supported in argument here, is,' that the con- tract amounted to a lease, by which the railroad, rolling-stock, and franchises of the corporation were transferred to plaintiffs, and that such a contract was ultra vires of the company. It is denied by the plaintiffs that the contract can be fairly called a lease. The provision for the complete possession, control, and use of the property of the company and its franchises by the lessees is perfect. Nothing is left in the lessor but the right to receive rent. No power of control in the management of the road and in the exercise of the franchises of the company is reserved. A sohtary exception to this statement, of no value in the actual control of affairs, is found in the sixth clause of the lease, which covenants that the lessees will discharge any one in their service on the request of the corporation, evidenced by a resolution of the board of directors. But while we are satisfied that the contract is both technically CHAP. III.] THOMAS V. RAILROAD CO. 143 and in its essential character a lease, we do not see that the decision of that point either way affects the question on which we are to pass. That question is, whether the railroad company exceeded its powers in making the contract, by whatever name it may be called, so that it is void. It is, perhaps, as well to consider this question in the order of its presentation by the learned counsel for plaintiffs, upon whom the iDurden of showing the error of the Circuit Court devolved the duty of proving one of the following propositions : — 1. The contract was within the powers granted to the railroad company by the act of the New Jersey legislature under which it "was organized. 2. That if this be not established, the lease was afterwards ratified and approved by another act of that legislature. The authority to make this lease is placed by counsel primarily in the following language of the thirteenth section of the company's charter : — "That it shall be lawful for the said company, at any time during ■the continuance of its charter, to make contracts and engagements with any other corporation, or with individuals, for the transporting or conveying any kinds of goods, produce, merchandise, freight, or passengers, and to enforce the fulfilment of such contracts." This is no more than saying, "you may do the business of carrying goods and passengers, and may make contracts for doing that busi- ness. Such contracts you may make with any other corporation or with individuals." No doubt- a contract by which the goods re- ceived from railroad or other carrying companies should be carried over the road of this company, or by which goods or passengers from this road should be carried by other railroads, whether connecting immediately with them or not, are within this power, and are prob- ably the main object of the clause. But it is impossible, under any sound rule of construction, to find in the language used a permission to seU, lease, or transfer to others the entire road and the rights and franchises of the corporation. To do so is to deprive the company of the power of making those contracts which this clause confers and of performing the duties which it implies. In The Ashbury Railway Carriage & Iron Co. v. Riche, decided in the House of Lords in 1875 (Law Rep. 7 H. L. 653), the memo- randum of association, which, as Lord Cairns said, stands under the act of 1862 in place of a legislative charter, thus described the busi- ness which the company was authorized to conduct: "The objects for which this company is established are to make, sell, or lend on hire, railway-cairriages and engines, and all kinds of railway plant, fittings, machinery, and rolling-stock ; and to carry on the business of mechanical engineers and general contractors; to purchase and sell as merchants, timber, coal, metals, or other materials; and to 144 THE CHABTEK — AS A MEASXIRE OF POWERS. [CHAP. III. buy and sell any such materials on commission or as agents." This company purchased a concession for a railroad in Belgium, and entered into a contract for its construction, on which it paid large sums of money. The company was sued afterwards on its agreement with Eiche, the contractor, and the contract was held vaUd in the Exchequer Chamber by a majority of the judges, on the ground that while it was in excess of the power conferred on the directors by the memorandum, it had been made vahd by ratification of the shareholders, to whom it had been submitted. The House of Lords reversed this judgment, holding unanimously that the contract was beyond the powers conferred by the memoran- dum above recited, and being beyond the powers of the association, no vote of the shareholders whatever could make it vaUd. The case is otherwise important in its relation to the one before us, but it is cited here for its parallelism in the construction of the clause defining the powers of the company. If a memorandum which describes the parties as engaging in fur- nishing nearly all the. materials, machinery, and rolling-stock which enter into the construction of a railroad and its equipments, and then empowers them to carry on the business of mechanical engineers and general contractors, cannot authorize a contract to build a rail- road, surely the authority to build a railroad and to contract for carrying passengers and goods over it and other roads is no authority to lease it and with the lease to part with all its powers to another company or to individuals. We do not think there is anything in the language of the charter which authorized the making of this agreement. It is next insisted, in the language of counsel, that though this may be so, "a corporate body may (as at common law) do any act which is not either expressly or impUedly prohibited by its charter ; although where the act is unauthorized by the charter a shareholder may enjoin its execution; and the State may, by proper process, forfeit the charter." We do not concur in this proposition. We take the general doc- trme to be in this 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 thos© statutes confer. Conceding the rule appUcable to all statutes, that what IS fairly impUed 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.^ ' 4ccord; — People v. Uti6a Ins. Co., 15 Johns (N. Y.), 358 ("Many powers and capacities are tacitly annexed to a corporation duly created ; but they are sucbonlv as are necessary to carry into effect the purposes for which it warestabl "hed The specification certain powers operates as a restraint to such objects only and is a^ implied prohibition of other and distinct powers ") "DJeois only, and is an. See note on page 95 for analogous rule of construction of enabling acts. CHAP. HI.] THOMAS V. RAILROAD CO. 145 This class of subjects has received much consideration of late years in the English courts, and counsel have reUed largely on the decisions of those courts. Among the cases cited by both sides is The East AngUan Railways Co. v. The Eastern Counties Railway Co., 11 C. B. 775. In that case the Eastern Coimties Railway Company had made a contract in which, among other things, it covenanted to take a lease of several other railroads whose companies had introduced into Parliament a bill for consolidation under the name of East Anglian Railways Company, and to assume the payment of the parHamentary expenses of this act of consolidation. This covenant was held void as beyond the power conferred by the charter. "They cannot," said the court, "engage in a new trade, because they are incorporated only for the pinrpose of making and maintaining the Eastern Counties Railway. What additional power do they acquire from the fact that the undertaking may in some way benefit their hne? Whatever be their object or prospect of success, they are still but a corporation for the purpose only of making and maintaining the Eastern Counties Railway ; and if they cannot em- bark in new trades because they have only a limited authority, for the same reason they can do nothing not authorized by their act and not within the scope of their authority." There is another principle of equal importance and equally con- clusive against the validity of this contract, which, if not coming exactly within the doctrine of ultra vires as we have just discussed it, shows very clearly that the railroad company was without the power to make such a contract, That principle is that where a corporation, hke a railroad com- pany, has granted to it by charter a franchise intended in large measm-e to be exercised for the public good, the due performance of those functions being the consideration of the public grant, any contract which disables the corporation from performing those func- tions which undertakes, without the consent of the State, to transfer •to others the rights and powers conferred by the charter, and to re- lieve the grantees of the burden which it imposes, is a violation of the contract with the State, and is void as against public policy. This doctrine is asserted with remarkable clearness in the opinion of this court, dehvered by Mr. Justice Campbell, in The York & Maryland Line Railroad. Co. v. Winans, 17 How. 30. This court said : "But those acts involve an overturn of the relations which the charter has arranged between the corporation and the community. Important franchises were conferred upon the corporation to enable it to provide facilities for communication and intercourse, required for the pubhc convenience. Corporate management and control over these were prescribed, and corporate responsibility for their insufficiency provided as a, remuneration to the community for their 146 THE CHARTER AS A MEASURE OF POWERS. [cHAP. III. grant. The corporation cannot absolve itself from the performance of its obhgations without the consent of the legislature. Beman v. Rufford, 1 Sim. N. s. 550 ; Winch v. B. & L. Railway Co., 13 L. & Eq. 506." And in the case of Black v. Delaware & Raritan Canal Co., 22 N. J. Eq. 130, Chancellor Zabriskie says: "It may be considered as settled that a corporation cannot lease or alien any franchise, or any property necessary to perform its obligations and duties to the State, without legislative authority." P. 399. For this he cites some ten or twelve decided cases in England and in this country.' This brings us to the proposition that the legislature of New Jersey has given her consent by an act which amounts to a ratification of this lease. That act is entitled "A supplement to the act entitled 'An Act to incorporate the Millville and Glassboro Railroad Company,'" ap- proved April 10, 1867; and its only purpose was to regulate >he rates at which freight and passengers should be carried. It reads as follows : — "That it shall be unlawful for the directors, lessees, or agents of said railroad to charge more than three and a half cents per mile for the carrying of passengers, and six cents per ton per mile for the carrying of freight or merchandise of any description, unless a single package, weighing less than one hundred pounds ; nor shall more than one-half of the above rate be charged for carrying any fertilizing materials, either in their own cars or cars of other companies running over said railroad : Provided, that nothing contained in this act shall deprive the said railroad company, or its lessees, of Jthe benefits of the provi- sions of an act entitled 'An Act relative to freights and fares on rail- ways in the State,' approved March 4, 1858, and applicable to all other railroads in this State." It may be fairly inferred that the legislature knew at the time the statute was passed that plaintiffs were running the road, and claim- ing to do so as lessees of the corporation. It was not important for the purpose of the act to decide whether this was done imder a lawful contract or not. No inquiry was probably made as to the terms of that lease, as no information on that subject was needed. The legislature was determined that whoever did run the road and exercise the franchises conferred on the company, and under whatever claim of right this was done, should be bound by the rates of fare established by the act. Hence, without undertaking to decide in whom was the right to the control of the road, language was used which included the directors, lessees, and agents of the railroad. The mention of the lessees no more implies a ratification of the contract of lease than the word "directors" would imply a disap- proval of the contract. It is not by such an incidental use of the » See Book I, Chap. 4. CHAP. III.] BRADBUJRY V. BOSTON CANOE CLUB. 147 word "lessees" in an effort to make sure that aU who collected fares ■should be bound by the law, that a contract unauthorized by the charter, and forbidden by public pohcy, is to be made vahd and ratified by the State. Jvdgment affirmed. BRADBURY v. BOSTON CANOE CLUB. 153 Mass. 77. 1891. Holmes, J. This is an action upon a promissory note for one hundred and fifty dollars and interest, given by the defendant to the plaintiff for money lent to it by the plaintiff to be used in building a club-house. There is a second count for money lent. At a meeting, duly called, the corporation passed a vote authorizing its treasurer to borrow money in terms sufficiently broad to cover the loan in ques- tion. . . . The money was received by the corporation, and was Tised by it for the purpose mentioned. The only question for us is, whether the corporation acted illegally in borrowing money for the purpose of erecting a club-house upon land of which it held a lease. The defendant is a corporation formed under the Pub. Sts. c. 115, § 2, for encouraging athletic exercises. By §7 it "may hold real and personal estate, and may hire, purchase, or erect suitable build- ings for its accommodation, to an amount not exceeding five hundred thousand dollars," etc. We are of opinion that under these words the defendant had power to take a lease of land and to erect a suitable club-house upon it. Having this power, it was entitled to raise money for the purpose.^ No argument is needed to show that the power at the end of § 7, to receive and hold in trust funds received by gift or bequest, does not confine the corporations to that mode of raising it. Borrowing money is a usual and proper means of accom- plishing what the statute expressly permits. See Fay v. Noble, 12 Cush. 1, 18; Morville v. American Tract Society, 123 Mass. 129, 136; Davis v. Old Colony Railroad, 131 Mass. 258, 271, 275. As ' And from the power to borrow money, necessary to carry out the purposes of incorporation, and lacking which the charter would be nugatory. Fidelity Trust Co. v. Louisville Gas Co., 118 Ky. 588, is derived the power to issue bonds and other evidences of indebtedness, White Water &c. Co. ». VaUette, 21 How. (U. S.) 414 ; Com- monwealth 1). Smith, 10 Allen (Mass.) 448 ; Galena v. Corwith, 48 111. 423 ; even for less than par, Gamble v. Queens &c. Water Co., 123 N. Y. 91 ; Clearwater &c. Bank v. Bagley &c. Tel. Co., 116 Minn. 4; Nelson v. Hubbard, 96 Ala. 238. This, of course, does not apply to an accommodation note. Owen & Co. v. Storms & Co., 78 N. J. L. 154. And such borrowed money, however the debt be evidenced, may, in the absence of statutory prohibition, be secured by mortgage of the corporation's property. Leggett V. New Jersey Mfg. &c. Co., 1 N. J. Eq. 541 ; Eastman ». Parkinsdn, 133 Wis. 375 ; Bardstown &c. R. R. Co. ». Metcalfe, 4 Mete. (Ky.) 199. 148 THE CHARTER AS A MEASURE OF POWERS. [CHAP, III. this is a sufBcient reason for giving the plaintiff judgment, it is un- necessary to consider whether there are not others. Judgment for the plaintiff} ' In Brown ». Winnisimmet Co., 11 Allen (Mass.) 326 the court said : "We know of no rule or principle by which an act creating a corporation for certain specific objects or to carry on a particular trade or business is to be strictly construed, as prohibitory of all other dealings or transactions, not coining within the exact scope of those desig- nated. Undoubtedly the main business of a corporation is to be confined to that class of operations which properly appertain to the general purposes for which its charter was granted. But it may also enter into contracts and engage in transactions which are incidental or auxiliary to its main business, or which may become necessary, expedient or profitable in the care and management of the property which it is author- ized to hold under the act by which it was created. For example, it might perhaps be held that a corporation established for the purpose of manufacturing cotton and woollen cloth could not properly invest all its capital in mill powers and privileges, and engage exclusively in the business of leasing them to others to be used for manufactur- ing purposes, or that it could not lawfully confine its operations to. the making of steam-engines and machines for sale. But no one could doubt that it would be within the scope of its powers to allow another person or corporation, for a reasonable compen- sation, to draw surplus water from its mill-pond, or to employ that portion of its steam power which was not required for its own use. So a stage-coach company or a street railway corporation would exceed its corporate powers if it engaged extensively in the transportation of passengers and merchandise on land or sea by steam ; but it would be acting strictly within the limits of its capacity if it should occasionally let a horse or a coach or car, not required for its own immediate purposes, to another person or corporation, or should enter into a contract for the employment of its horses in another occupation during a portion of the year when the business of the corporation did not require- their use." Cf. People V. Campbell, 144 N. Y. 166, in which question arose whether a corpora- tion organized to manufacture and sell gold and silverware, had power to purchase and sell goods of the same general character manufactured by other parties, which it could not itself advantageously manufacture, but which were necessary to make its. stock complete to meet the wants of customers. The court said : "It is well settled that a corporation possesses not only powers specifically granted in terms, but (as expressed in the Revised Statutes) such powers ' as shall be necessary to the exercise of the powers so enumerated and given.' (1 Rev. St. 600, § 3.) The unexpressed and incidental powers possessed by a corporation are not limited to such as are absolutely or mdispensably necessary to enable it to exercise the powers specifically granted. Whatever incidental powers are reasonably necessary to enable it to perform its corporate functions are implied from the powers affirmatively granted. (Comstock ■ " V"?v \ ^®^'"**' 1^ N- '^- ^-J But powers merely convenient or useful are not implied if they are not essential, having in view the nature and object of the incorpora- tion The power assumed by the relator in this case to supply from other sources goods which it could not itself profitably manufacture, was a convenient and useful one and doubtless contributed to the success of its general business, but it cannot, we think' be said to be essential to its business as a manufacturing corporation. The power to sell its products, even.if it had not as in this case been expressly included among the enumerated powers, would be necessarily implied in the charter of a manufacturing n^^!". ^^'*'i°"* the power of sale the business of production could not be B^^ th» ^-^^ ^ ^^^f "'" '"dispensable adjunct to a manufacturing business. .~A T^t """^'derations do not apply where a manufacturing corporation is also n??hfr.W ^ r"-"^ ^""^ '^^' °^ ^°°^^ manufactured by other parties. This part of the relator s business was not, we think, within its chartered powers." KT^ '■ i^f "^^' ^°" ^" "1- 125 (infra. Book III, Chap. 1, Sec. 2). In Lyndeborough Glass Co. v. Massachusetts Glass Co., Ill Mass. 315 a corpora- tion newly formed for the purpose of manufacturing and selling all the varieties of glass contracted to purchase glassware, for the purpose of keepLg up their stock and ceZrrt^ ™'*°T-' "''*^'.*''' ^°'^' ^•^'"•^ tl^^y ^^^ purchased from a company p^e- rn^n Vurre7of thXT'- ^"'t '""^^ r*"^"^^ ^^« ^"""^^ -^^ incideX to the rorerr'eTupo" lm7y law'"""*"'" ^"' ^'' ''""'^ "•*'^- '"^^ -°P« °* '^'^ Po-- CHAP, in.] DOWNING V, MOUNT WASHINGTON EOAD COMPANY. 149 DOWNING V. MOUNT WASHINGTON ROAD COMPANY.' 40 N, H. 230. 1860. Assumpsit to recover the price of eight omnibuses, and a model for the same, one light wagon, and one baggage wagon, made for the defendants, under a contract entered into by D. 0. Macomber, president of the defendant corporation, in their behalf. The light wagon was made and sent to one Cavis, the agent for building the road, and was used by him in making it. The omnibuses and baggage wagon were intended to be used in conveying passengers up and down the mountain, after the road was completed. The omnibuses were constructed in a peculiar way, and are not fit for use on ordinary roads. The defendants denied the authority of Macomber to make such a contract in behalf of the corporation, and the power of the corporation under its charter either to authorize or enter into such a contract. Bell, C. J. Corporations are creatures of the legislature, having no other powers than such as are given to them by their charters, or such as are incidental, or .necessary to carty into effect the purposes for which they were estabhshed. Trustees v. Peaslee, 15 N. H. 330 ; Perrine v. Chesapeake Canal Co., 9 How. 172. In giving a construc- tion to the powers of a corporation, the language of the charter should in general neither be construed strictly nor liberally, but according to the fair and natural import of it, with reference to the purposes and objects of the corporation. Enfield Bridge v. Hartford R. R., 17 Conn. 454; Strauss v. Eagle Co., 5 Ohio (N. S.) 39. If the powers conferred are against common right, and trench in any way upon the privileges of other citizens, they are, in cases of doubt, to be construed strictly, but not so as to impair or defeat the objects of the incorporation.^ In the present case the power to take the lands of others, and to take tolls of travelers, must be strictly construed, if doubts should arise on those points ; but it is not seen that the other grants to the defen- dant corporation should not receive a fair and natural construction. The charter of the Mount Washington road empowers them to lay out, make and keep in repair, a road from Peabody River Valley to the top of Mount Washington, and thence to some point on the north- west side of the mountain. It grants tolls on passengers and carriages, and authorizes them to take lands of others for their road, and to build and own toll-houses, and erect gates, and appoint toll-gatherers to ' Facts abridged, ' Fiirther eases on construction of corporate charters are found in Book II, Chap. 5, infra. 150 THE CHARTER AS A MEASURE OF POWERS. [CHAP. III. collect their tolls. The reinaining provisions contain the ordinary- powers of corporations, relating to directors, stock, dividends, meet- ings, &c. Laws of 1853, chapter 1486. This charter confers the usual powers heretofore granted to turnpike corporations, and no others. The most natural and satisfactory- mode of ascertaining what are the powers incidentally granted to such companies, is to inquire what powers have been usually exercised under them, without question by the pubhc or by the corporators. It may be safely assumed that the powers which have not heretofore been found necessary, and have not been claimed or exercised under such charters, are not to be considered generally as incidentally- granted. Such charters have in former years been very common in this and other States, and they have not, so far as we are aware, been understood as authorizing the corporations to erect hotels, or to estab- lish stage or transportation lines, to purchase horses or carriages, or to employ drivers in transporting passengers or freight over their roads ; and no such powers have anywhere been claimed or exercised under them. We are, therefore, of opinion that the power to establish stage and transportation lines to and from the mountain, to purchase carriages and horses for the purpose of carrying on such a business, was not incidentally granted to the defendant corporation by their charter. State V. Commissioners, 3 Zab. 510. But it is contended that the power to make this contract is con- ferred by the act in amendment of the charter, passed July 12, 1856. By this act the corporation may " erect and maintain, lease and dis- pose of any building or buildings which may be found convenient for the accommodation of their business, and of the horses and carriages and travelers passing over their said road." By their business, which the buildings to be erected were designed to accommodate, it is said the legislature must have intended some permanent and continuing business beyond that of merely building and maintaining^a road ; and that it could be no other than that of erecting a hotel on the mountain, and establishing hnes of carriages, for the purpose of carrying -vdsitors up and down the mountain. But the foundation of this implication is very slight. The express grant is of an authority to erect, &c., buildings, not of all kinds, but such as may be found convenient for the accommodation of their business, and of travelers, &c. The business here referred to must be understood to be such as they are by their charter authorized to en- gage m. If nothing had been said of horses and travelers, there could hardly be any foundation for the idea that a hotel could have been contemplated by the legislature. Buildings suitable for the accom- modation of their toll-gatherers and workmen employed on their road, would probably be thought everything the legislature intehded to authorize by this additional act. Connected as this authority now IS with travelers, horses and carriages, there is scarce a pretence CHAP. III.] DOWNING 11. MOUNT WASHINGTON ROAD COMPANY. 151 for argument, that this additional act goes any further than the origi- nal act, to authorize a stage and transportation company. It is not unlikely that some of the projectors of this enterprise intended to secure much more extensive rights than those of a turnpike and hotel company, but it seems certain they have not exhibited this feature of their case to the legislature so distinctly as to secure their sanction, and the charter and its amendment as yet justifies them in no such claim. . . . The contract set up in this case was made not by the corporation itself, by a vote, nor by an agent expressly authorized to sign a con- tract already drawn, but it was made by the president of the corpora- tion, acting under an appointment as their general agent ; and it is argued that he was fully authorized by votes of the corporation to bind them by such a contract as the present ; but it is not necessary to consider this question, as we think it settled that the powers of the agents of corporations to enter into contracts in their behalf are limited, by the nature of things, to such contracts as the corporations are by their charters authorized to make. This principle is distinctly recognized in McCuUough v. Moss, 5 Den. 567 ; overruling the case of Moss V. Rossie Lead Co., 5 Hill 137, and in Central Bank v. Empire Co., 26 Barb. 23 ; Bank of Genesee v. Patchin Bank, 3 Kern. 315. The same want of power to give authority to an agent to contract, and thereby bind the corporation in matters beyond the scope of their corporate objects, must be equally conclusive against any attempt to ratify such contract. What they cannot do directly they cannot do indirectly. They cannot bind themselves by the ratifica- tion of a contract which they had no authority to make. 5 Den. 567,,- above cited. The power of the agent must be restricted to the business which the company was authorized to do. Within the scope of the business which they had power to transact, he, as its agent, may be authorized to act for it, but beyond that he could not be authorized, for its powers extend no further. This view seems to us entirely conclusive against the claim made for the omnibuses and model, and probably for the baggage wagon. As to the light wagon, that may stand on a different ground. Such a wagon might be useful and necessary for the use of the agent of the company, in conducting the undoubted business of the corporation — the building and maintaining the road. * We are unable to assent to the position taken in the argument, that a ratification of part is a ratification of the whole contract. While the corporation may be restricted from ratifying a contract beyond the scope of the objects of the corporation, there could be no such objection as to any matter clearly within their power. The other contracting party might have a right to reject such ratification, claiming that the contract is entire, and if not ratified as such, it should 152 THE CHARTER — AS A MEASURE OF P0WI;RS. [CHAP. HI. not be made good for a part only. But if they claim the benefit of the partial ratification, the corporation can hardly object. ELLERMAN v. CHICAGO JUNCTION RAILWAYS AND UNION STOCKYARDS COMPANY, et aU 49 N. J. Bq. 217. 1891. Bill by complainant on behalf of himself, a stockholder in above corporation, and all other stockholders who shall come in and contrib- ute to the expense of this suit, to enjoin performance of a contract dated July 27, 1891, made by it with the other defendants Armour & Co., Nelson Morris & Co., and Swift & Co. The corporate defendant, hereinafter styled "The Junction Com- pany," was organized in 1890 under the laws of New Jersey. The objects for which said company was formed are to purchase, hold, pledge, transfer, sell, or otherwise dispose of, or deal in, the shares of the capital stock of the Union Stockyards and Transit Conipany, a corporation organized under the laws of Illinois ; to receive dividends on any of said shares held by it, and to exercise, in respect of any of said shares held by it, any and all the rights, powers and privileges of owners of shares of said capital stock ; to purchase, hold and dis- pose of any bonds, debentures or other evidences of indebtedness of .said Transit Company, and to do any and all acts and things tending to increase the value of the shares of the capital stock of said company ; to issue bonds, and to secure the same ; and in the promotion of its corporate business to purchase, receive, hold and dispose of any securities of any person or corporation, whether such securities shall be bonds, mortgages, debentures, notes or shares of capital stock, and in respect of any such securities to exercise any and all the rights and privileges of owners thereof, and to the extent authorized by law to lease, purchase, hold, sell, assign, mortgage and convey real and personal property of any name and nature. The Union Stockyards and Transit Company, hereinafter styled "The Transit Company", is a corporation organized in pursuance of an act of the legislature of the State of Illinois. It was formed, among other things, to locate, construct and maintain all the necessary yards, buildings, railway lines, tracks, switches, and aqueducts, for the re- ception, saferkeeping, feeding and watering, and for the weighing, deUvering and transfer of cattle and live stock, and also dead and undressed animals that may be at or passing through or near the city of Chicago, and for the accommodation of the business of a general • statement of (acta rewritten ; parta of opinion omitted. CHAP, ni.] ELLERMAN V. CHICAGO JUNCTION RAILWAYS. 153 union stockyard for cattle and live stock, including the erection and establishment of one or more hotel buildings, and the right to use the same, if deemed expedient, for the convenience of drovers, dealers, and the public doing business at the said yards ; to make reason- able charges for such care, subsistence, and handling, and to construct a railway to connect with the tracks of railroads which terminate in said city; to transport and allow to be transported on their railroad all cattle and Uve stock, and persons accompanying the same, to and from their yards ; and to take and receive toll. Its capital was $13,200,000, divided into one hundred and thirty-two thousand shares of $100 each, and all of said shares had been issued and are now outstanding. The Transit Company became established in business in the city of Chicago and the owner of a large plant and property therein. It owns 470 acres of land and 130 miles of steel-tracked railway, all in Chicago, and about one mile of river front accessible to the largest lake vessels, with docks half a mile in extent, all connected with the said railroad tracks. On the greater part of said land are railway sid- ings, cattle-sheds and pens to accommodate cattle, sheep and hogs, brick stabling for horses, water works, forty miles of water and drainage pipes, fifteen miles of macadamized streets, bank buildings, merchants' officesj, a cattle exchange, a hotel with capacity for five hundred guests, an extensive electric light plant Hghting the yards, a hotel exchange, a large warehouse and depots, and the railway afore- said extends north and southeast so as to connect with every railroad entering the city of Chicago. The profits of the said company are principally derived from a yardage charge or toll upon cattle, calves, hogs, sheep and horses received at said company's yards, and from the sale of hay, corn and other feed for the use of said cattle and ani- mals while in said yards. For the year ending the 30th day of June, 1890, the net profits amounted to more than $1,700,000, and have materially increased since that date. The capital stock of The Junction Company is $13,000,000, divided into 130,000 shares of $100 each, one-half of which is preferred and the other general or common stock. It issued the whole amount of its capital stock, both preferred and common, except about 5000 shares. The complainant is the holder and owner of 91 shares of preferred stock and 292 shares of common stock and has so held and owned the same for a long time, and previous to the negotiations for and the date of the agreement involved in this suit. On or about the 10th day of July, 1890, the Junction Company purchased 129,770 shares of the capital stock of the said Transit Company for the sum of $22,587,283.90. Nelson Morris & Company are the owners of all the shares of stock of the Fairbank Canning Company. The Swifts are the owners of a majority of the shares of the stock of Swift & Company, both being 154 THE CHARTER— AS A MEASURE OF POWERS. [cHAP. III. corporations, and with the establishment of Armour & Company being the largest and the principal of the slaughtermg, packmg and canning plants and establishments in the neighborhood of the stock- yards, the vicinity being a portion of the city of Chicago known as Packingtown ; the business and purchase of cattle and Uve stock of -these three parties representing and constituting, for several years, from fifty-five to sixty per cent, of the whole revenue and mcome derived by the Transit Company from yardage and charges. These three parties, Armour & Company, Morris & Company and Swift & Company, have recently purchased the Central stockyards in Packingtown, adjacent to the yards of the Transit Company, and have constructed on said premises platforms, sheds, pens, railway sidings, &c., for the purpose of receiving and distributing among them- selves all cattle and live stock owned or purchased by them, or directly consigned to them, or either of them, thereby endeavoring to avoid payment of any yardage or charges to the Transit Company, and had demanded that the Transit Company permit the use of their raikoad tracks for the transportation of such cattle and live stock to the Central stockyards without the payment of yardage fees and recently commenced three several suits against the Transit Company, demand- ing as relief that the court should compel the Transit Company to afford facilities over its railroad for the transportation and delivery of all cattle and live stock consigned to them, or any of them, or to said Central stockyards, without payment of the usual yardage and charges thereon theretofore paid by the said parties and collected by the Transit Company. Armour & Company, Morris & Company and Swift & Company have also purchased land at ToUeston, in Indiana, within twenty-five miles of Chicago, consisting of 4000 acres, for the purpose of establish- ing and conducting thereon the business of general stockyards for cattle and live stock, with the intention of forthwith repaoving their ■entire slaughtering, packing and canning establishment from Packing- town, in Chicago, to ToUeston, and of inducing other slaughtering, packing and canning establishments to likewise remove their plants to ToUeston, and have made arrangements to that end, and have ■entered into negotiations with railroad companies to furnish facilities for transportation, and have organized a corporation, under the name of "The ToUeston Stockyards Company," for the purpose of conduct- ing on said tract the business aforesaid. The disputes between the Transit Company and the packers led to ■efforts on the part of the Junction Company to effect some settlement. The packers insisted, in view of the large contribution they made to the business of the Transit Company, and which they could save by carrying out their plans, that if they abandoned the same they should be paid the sum of $3,000,000. Negotiations were carried on, by which the Junction Company was to obtain certain property and CHAP. III.] ELLERMAN V. CHICAGO JUNCTION RAILWAYS. 155 secure valuable business arrangements, and the board of directors of the Junction Company having determined that it was for the best interests of the company so to do, by a resolution, ordered and directed the officers of The Junction Company to execute an agreement be- tween said company of the first part, and the firm of Armour & Com- pany, the firm of Nelson Morris & Company, the Swifts, and Swift & Company, a corporation, as parties of the second part. In pursuance of said resolution, the president of the Junction Company executed the agreement in its name but as yet the provisions thereof have not been carried out. The same board which ordered and directed the making and execution of the said agreement is still in power and threatens to carry out its provisions and undoubtedly will, unless prevented. The recitals of the agreement set up the incorporation of the Transit Company, the facts before stated and that the purchase of the shares of the Transit Company was made by the Junction Company with the expectation and belief that the revenue and income of the Transit Compaiiy from its business would continue and increase ; that the market and demand for cattle and live stock at the yards of the Transit Company, in Chicago, arise from the presence of many large slaughtering, packing and canning establish- ments in the immediate neighborhood and contiguous to said stock- yards, and that the largest and principal of such establishments are owned and controlled by the party of the second part who have offered to settle their claims and demands against the Transit Company, as alleged in the three suits, and to convey to it the Central stockyards ; also, to continue for fifteen years to conduct their several businesses at Chicago, and to purchase cattle and live stock at the yards of the Transit Company and pay yardage and charges for cattle and live stock purchased and owned by or consigned to them ; also, to transfer to the Junction Company all the stock of the Tolleston Company ; that the removal from Chicago of the said business of the parties of the second part, respectively, would diminish the demand and market for cattle and live stock and shipment thereof to the yards of the Transit Company, so as to result in a large decrease of its business, revenue and income ; that if said litigation should be successful there would be a further loss of revenue and income to the Transit Company ; that the growth of Chicago, or municipal ordinances, or legislation, or other causes, may thereafter render it necessary and expedient to permanently remove the said stockyards to some less populous centre; that the parties of the second part, although requested so to do, have declined and refused to withdraw the claims and demands made by them in the said suit, or to continue to pay to the Transit Company the yardage and charges on cattle and Uve stock consigned to them, or to abstain from removing their said establishments to Tolleston, save and except upon the terms and cove- nants in the agreement specified. 156 THE CHARTER — AS A MEASURE OF POWERS. [CHAP. III. FoUowing these recitals is the agreement, the substance of which is stated in the opinion. ■ ^ t ^J• c u- Geeen, V. C. The bill is filed by a stockholder in behalf of him- self and any other applying stockholders against the corporation to prevent its carrying a contract, made by the directors, into execution on the ground that the same is not legally within the powers conferred by its charter. . „ , , j e j- + The agreement has the unanimous sanction of the board ot directors, to whose judgment and determination the management and control of the affairs of the company has been entrusted without restriction. If the prudence of the contract were open to question by the com- plainant, a moment's consideration of the condition of affairs would demonstrate not only its advantages to both parties, but that it was well-nigh vital to the interests of the Transit Company, and of the Junction Company, its principal stockholder. ■ Stated concisely, the provisions of the contract and the covenants are: First. The Central stockyards are purchased for $250,000. Second. The suits involving the railroad connections and facilities ' are settled. Third. The Junction Company buys all the stock of the ToUeston Company. Fourth. Armour & Company, Morris & Company and Swift & Company agree that all their business for fifteen years shall pass through the yards of the Transit Company, unless they are previously removed. Fifth. The same parties covenant that their business in yardage and charges at said yards shall produce at least $2,000,000 during the next six years. Sixth. They agree that for fifteen years the land they bought at Tolleston and did not sell to the ToUeston Company shall not be used for stockyard purposes. Seventh. They agree that so long as the Transit Company shall conduct its business on its premises in Chicago, they will not, directly or indirectly, carry on there the business of stockyards for the general use of the public. Eighth. That for fifteen years they will not, directly or indirectly, engage in or carry on the business of public or private stockyards in Chicago, or within two hundred miles thereof. The Junction Company contracts for the conveyance to the Transit Company of the Central stockyards, and the payment therefor, by the Transit Company, of $250,000 in cash or by a consideration mortgage. Second. That the Junction Company will buy the stock of the Tolleston Company at par, that company to possess one thousand acres of land selected from the four thousand acres, with easements and connections over the remaining three thousand acres. CHAP. III.] ELLERMAN U. CHICAGO JUNCTION RAILWAYS. 157 Third. That as a price of the whole thing, and compensation for all which it gets, other than the Central stockyards, it will pay $750,000, in cash or stock, and will guarantee the bonds of the Tolles- ton Company, whose stock it buys to the amount of $2,000,000, the same being secured by the mortgage of that company; or, at its option, take the title to the one thousand acres and issue its own bonds for $2,000,000 to the parties of the second part. The consideration of the contract is not to be arrived at by a dis- integration and appraisement of its separate parts ; it is essentially an entirety ; it is agreed to as a whole ; it recites that the parties of the second part had decUned and refused to enter into the covenants imposed upon them except on the terms and conditions specified in the agreement. The answer of the company says the consideration moving the defendant and to be received by it for its execution of the agreement was, in the unanimous opinion of the directors of the defendant, equal to at least the sum of $3,000,000, without regard to the value of the shares of the capital stock of the ToUeston Company, or to the great benefit and advantage which might result if the said stockyards were ultimately compelled. to remove from the said city of Chicago; and said directors believed that the covenants to continue in business, to deal exclusively at said stockyards and to abandon all the claims in said suits, were, of themselves, ample and sufficient consideration for said sum of $3,000,000, and that such consideration therefor was, under the facts and circumstances therein stated, just and equitable, and was proportionate to the consideration agreed to be paid by it for the transfer of the property, and the covenants therein specified and contained. But the question of adequacy of the consideration received by the company for what it agreed to pay is one which is not open to the plaintiff. So long as the consideration was valuable, and not so inadequate as to impute fraud, the amount to be paid was in the discretion of the board of directors and will not be inquired into by the court. The terms of the contract and the consideration having then been settled by the directors, on what ground is it attacked ? There is no intimation of fraud — no improvidence is alleged, no extravagance, no absence of occasion moving such a contract, no allegation of haste or of mistake of facts ; nothing is alleged but error in law on the part of the directors who unanimously approved the agreement. The legal presumption is in favor of the validity of the agreement. " If it is not, on its face, necessarily beyond the scope of the power of the corporation by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed to contract within their powers." Railway Co. v. McCarthy, 96 U. S. 267. The law will not presume an agreement to 158 THE CHARTER — AS A MEASURE OF POWERS. [CHAP. III. be invalid which is capable of a construction which will make it valid. Curtis V. Gokey, 68 N. Y. 300, 304 ; Ormes v. Dauchy, 82 N. Y. 443, 448. The burden is upon the complainant to demonstrate that the agreement was beyond the corporate powers, and to show how and where the legal restraint arises, or was imposed, which rendered the contract ultra vires. In Elkins v. Camden and Atlantic R. R. Co., 9 Stew. Eq. 241, 242, Vice-Chancellor Van Fleet says : "The courts will, as a general rule, presume that contracts made by a railway corporation, which appear to be designed to promote its legitimate and profitable operation, are within the limits of the powers, and, if their vahdity be assailed, will require the assailant to assume the biu-den of demonstrating that fact." The charge of the complainant is, that — "the said contract is not within the power and franchise of the Junc- tion Company to make, and that such agreement is ultra vires the corporation, and that the carrying out of the same would be a perver- sion of the franchises and privileges of the corporation, and the creation of debts and liabilities on the part of the said corporations- and the payment of moneys contrary to the rights of the stockholders, and to law and equity." The prayer is that the said agreement may be decreed as not within the powers and franchises of the Junction Company and null and void. As I understand, the learned counsel of the complainant, in his. argument, insists that the agreement does not come fairly within any part of paragraph 3 of the certificate, which can be considered as a, statement of objects within the contemplation of the law. The argument is that the clauses "to exercise in respect to said shares the rights, powers and privileges of owners of the stock," and " to do any acts and things tending to increase the value of the shares," read in connection with that authorizing the company to deal in said stock, confines the operations of the company to transactions in. the shares of stock as such ; that as owner of the stock it has the power to exercise with respect thereto the rights of owners without any such declaration, and that the clauses relating to the doing of any act tending to increase the value of the stock, if not limited to the handUng and operation of shares in dealing therein, is too in- definite to be considered as the proper statement of an object of the corporation. This contention limits the objects of the Junction Company practically to the buying and selhng of the stock of the Transit Company. This, it seems to me, is too narrow a construc- tion. If such were alone the object of the promoters of the company, there would be no occasion to incorporate for such purpose, or, if they did so, to have done more than use the first subdivision of para- graph 3. The general object of the corporation is to be gathered not from any one of the specifications, but from the whole of the CHAP. III.] ELLEEMAN V. CHICAGO JUNCTION RAILWAYS. 159 paragraph. It is not simply to deal in the Transit Company's stock, but to own and hold it., and to increase its value not by operations in the market, but by the exercise of auxiliary corporate acts which possibly it was not within the power of the Transit Company to exercise. It is said that a statement to do any and all acts tending to increase the value of the stock is too indefinite to be considered as the statement of an object of incorporation, as required by the statute ; that there must be something specific stated, and it is asked, can such recital really confer any corporate power? And, if so,, what is the hmit of its exercise? If it was a declaration of power to do any and all acts tending to increase the value of its own stock, it would certainly be without effect. Re Crown Bank, 44 Ch. D. 634. It would be either surplusage, or else too indefinite to be considered as a statement of a purpose as required by law, because, first, so far as any authorized acts are concerned, the company would possess. the right to do them without such statement, and, second, it could confer no other powers, because the law requiring the objects to be named must mean they should at least be indicated ; but here the stock referred to, to be benefited, is not the stock of the Junction Company, but the stock of another, namely, the Transit Company ; the statement is that the Junction Company shall have the power to do acts tending to increase the value of the stock, not its own, but that of the Transit Company, and it seems to me that such clause may be fairly construed to authorize such acts, tending to increase the value of that stock, as fall within recognized lawful corporate powers — those not against the poHcy of the law, which are germane to the general purposes of the corporation, and are specially enumer- ated in the certificate, or are incident thereto. Simpson v. West- minster P. H. Co., 8 H. L. Cas. 712 ; Peruvian Railways Co. v. Ins. Co., L. R. (2 Ch. Div.) 617 ; Studdert v. Grosvenor, 33 Ch. Div. 528, 538 ; Henderson v. Bank, 40 Ch. Div. 170. The recital in the certificate anticipates and answers the question and objection asked and urged by the complainant, viz. : how can the funds of the Junc- tion Company be used for the direct benefit of the stock of another, namely, the Transit Company, and only indirectly to the benefit of the Junction Company as a stockholder of the company directly benefited? For such recital expressly confers such power. What limitation is then to be applied to ihe powers sought to be secured by subdivisions 3 and 5 of paragraph 3, and can the agree- ment be brought within the provisions of the general Corporation act or the specifications of the certificate? The general act gives to all corporations general corporate powers and all others necessary to their exercise. If these were not sufficient to effect the objects of the corporation, recourse was formerly had to the legislature for a specific grant of power. The constitution providing that "the legislature shall pass no special act conferring corporate powers, but 160 THE CHARTER AS A MEASURE OF POWERS. [CHAP. III. shall pass general laws under which corporations may be organized and corporate powers of every nature obtained," and the general Corporation act being, as it now stands, passed in obedience to the mandate of the constitution, the certificate required by that act becomes the charter of the company, and the equivalent of the former special act of the legislature.^ Ashbury Co. v. Riche, L. R. (7 Eng. & I. Ap.) 653 ; Guinness v. Land Corp., L. R. (22 Ch. Div.) 349, 357. As amended, the Corporation act permits incorporations not only for objects specified therein but for "any lawful business or purpose whatsoever," which general clause is not, however, to be construed as embracing powers to do those things which would de- prive the corporation of its ability to carry out the objects for which it was formed, or discharge any duties which it might under its charter owe to the public, or which are contrary to the policy of the law. Oregon Ry. Co. v. Oregonian Ry. Co., 130 U. S. 1. By the statement, therefore, in the certificate of incorporation of the desired powers under the head of objects of the corporation, the special powers are obtained, and, as incident thereto, such others as may be necessary for their exercise. So that the General Corpora- tion act confers on the company certain powers, the certificate con- templates others, and incidental powers follow not only with respect of the general but also of the special powers. The learned counsel strongly presses the provisions of section 3 of the Corporation act, as follows : "In addition to the powers enumerated in the first section of this act and to those expressly given in its charter or certificate under which it is or shall be incorporated, no corporation shall possess or exercise any corporate powers except such as shall be necessary to the exercise of the powers so enumerated and given." The construction to be given to the words "necessary to the exercise" is settled in this state. Chief -Justice Beasley, dehvering the opinion of the court of errors and appeals in State, R. R. Co. v. Hancock,'6 Vr. 537 (at p. 545), says : "Power necessary to a corpora- tion does not mean simply power which is indispensable." Page 546 * ''k power which is obviously appropriate and convenient to carry into effect' the franchise granted has always been deemed a neces- sary one." Page 547 : "In short, the term comprises a grant of the right to use all the means suitable and' proper to accomplish the end which the legislature had in view at the time of the enactment of the charter." McCulloch v. Maryland, 4 Wheat. 316, 414; Olmsted v Morris Aqueduct, 18 Vr. 311; Crawford v. Longstreet, 14 Vr 325- Morris Canal v. Love, 8 Vr. 63. 1 Morawetz Priv. Corp. § 362 says : "It is a well-established general rule that a corporation may carry * See note on page 95. CHAP. III.] ELLERMAN V. CHICAGO JUNCTION RAILWAYS. 161 on the business for which it was chartered in the manner in which a business of that particular kind is usually carried on. What the usual manner of carrying on a business is cannot be determined by the appUcation of purely legal principles ; it is a question of fact, and not a question of law. Evidently, therefore, it is impossible to decide abstractly that acts of a particular description are within or without the chartered powers of a corporation. The right of a corporation to perform an act depends, in every case, upon all the surrounding circumstances; no act is authorized under all circumstances, and facts can be conceived which would render almost any act justifiable. Thus, a railroad company may usually buy coal and material for constructing its road, but it would have no authority to buy coal or anything else as a speculation, with the intention of selling it again. On the other hand, it would clearly be unauthorized, under any ordinary state of facts, to use the funds of a railroad company for building a church or a theatre ; yet this use of the corporate funds might be entirely justifiable, if a church or a theatre were required for the use of the company's workmen in a part of the world where no church or suitable place of recreation was accessible." Applying these principles, we proceed to examine the contract in detail with reference to the question whether it is within the chartered powers of the corporation. CENTRAL STOCKYARDS. It can scarcely be pretended that the purchase of the Central stockyards is ultra vires either of the Transit Company, which takes the title, or of the Junction Company, which owns the stock of the Transit Company and which contracts in this regard as a ■stockholder. The Junction Company, though under no obligation to do so, might lawfully pay the purchase-money, for, through its stock, it would receive an immediate equivalent therefor in the increase of the assets of the Transit Company. It is argued, however, that as the Junction Company is the owner of only one himdred and twenty-nine thousand seven hundred and seventy shares of the one hundred and thirty-two thousand shares of the Transit Company, that the expenditure of the funds of the Junction Company will enhance the value of the remaining two thousand two hundred and thirty shares of the Transit Company without the owner thereof contributing anything to such increased value. If the expenditure was to be made for a benefit which would accrue only to the holders of the other shares, there would be force in the suggestion, but the argument itself is based on the assumption that by the transaction the value of the stock is to be increased) and if the 162 • THE CHAKTEK AS A MEASURE OF POWERS. [CHAP. Ill, value of the two thousand two hundred and thirty shares is increased by carrying the contract into effect, by the same ratio will the holdings of the company be increased. PUKCHASE OF THE TOLLESTON STOCK. The Junction Company has express power by its articles of or- ganization, paragraph 3, subdivision 7, in the promotion of its cor- porate business "to buy, hold and dispose of any securities of any person or corporation whether such securities shall be bonds * * * or shares of stock, and in respect to any such securities to exercise any and all the rights and privileges of owners thereof." The corporate business of the Junction Company being to deal ia stock of the Transit Company, and to do anything authorized by its charter to increase its value, and being, as above, authorized to buy the stock of any corporation, the buying of the stock of an intended rival, with the probable intent to use the purchase for the extension of the Transit Company's business, and with the certain effect of preventing the depreciation of that company's stock, is certainly within the powers contemplated by the certificate of the Junction. Company. The tendency and intent of the contract is to raise or preserve,, which is the same thing, the value of the capital stock of the Transit Company, the capital in trade of the Junction Company. Buying this stock is within the chartered powers, because it tends, to preserve the value of the Transit Company's stock and to afford the Transit Company an opportunity for the enlargement of busi- ness, and because the Junction Company has the right under the charter, in its corporate business, to buy the stock of any other company. GUARANTEE * OF THE TOLLESTON BONDS. The Junction Company was authorized by its charter to issue its own bonds, and by it, and by section 4 of the Corporation act to* mortgage its real estate. ' The amount of the bonds to be guaranteed represents so much of the consideration to be given by the Junction Company for all it is to receive under the contract. As stated, it could, under its charter pay the amount by the issue of its own bonds. By guaranteeing the bonds, and the packers taking the guarantee as part payment of the consideration, the same result is reached without circumlocution and so far as its legality is concerned, mere routine of action cannot be material. By this means, instead of paying the money itself, which might Tol"^^" ^^^^^°* " speciecally considered in the case of Greene v. Middlesboroueh. Town &o. Co., reported %nfra. Book III, Chap. 1, Sec. 1. iviiaaiesoorougn. CHAP. III.] ELLERMAN V. CHICAGO JUNCTION RAILWAYS. 163 have been required, it gains a credit for all the years during which these bonds have to run ; instead of pledging its own credit directly, as by issuing its own bonds, or debentures, or notes, it lets the ToUes- ton Company remain the principal debtor, while it assumes the formal position of surety. If it received no consideration and was only guaranteeing for the accommodation of the ToUeston Company, in which it had no interest, the contract would be ultra vires and void — it would be a fraud on the stockholders ; but given as part of the consideration, the transaction amounts simply to this : the packers did not exact money, nor even the bonds of the Junction Compahy for the money; they agreed to accept the direct promise of the ToUeston Company, secured by its mortgage, and a conditional agree- ment of the Junction Company that the promise should be kept. It is just as lawful for the corporation to give a conditional contract to its creditor to pay him money as it is to give him a contract to pay directly and without provision. It is the business of the creditor to determine whether he will take one or the other. Both are equally binding if there is consideration for them. The form of the contract is nothing. The whole question turns on the consideration. The foregoing embrace the covenants of the Junction Company, except the payment of the $750,000. Question is made as to the corporate right to expend the money of the company for the purposes covered by the contract. It is asked, can this money be used "to virtually swallow up another corporation?" "Did the stockholders of the- Junction Company subscribe to or take their stock under any possible thought that the Junction Company was, in fact, to operate the Transit Company and pay out its money and create its habihties for the benefit of the Transit Company as such?" The contract does not contemplate that the Junction Company is to operate the Transit Company. There is no amalgamation or consolidation of the companies — each preserves its own organization and manages its own affairs by its own officers — neither of them part with any element of their powers, or deprive themselves of their ability to discharge their corporate duties and exercise their franchises. The Junction Company is a stocldiolder, and contracts as a stocltholder, and must carry out its contract as such. That it can be such- stock- holder, without limitation as to amount, is provided for by the certificate, and is the fundamental purpose of its being. The stock- holders are presumed to have taken their shares with full notice that the funds of the company might be expended for any object contemplated by its certificate of incorporation, and it expressly con- templates the doing of those things which tend to increase the value of the stock of the Transit Company. The covenants considered seem to be covered by the provisions of the certificate, or fairly incidental thereto. There remain two other elements of the contract which form part of the consideration for the 164 THE CHAKTEE AS A MEASURE OF POWERS. [CHAP. III.' expenditure of the money of the company, both of which are appar- ently for the benefit of the stock of the Transit Company, viz., the provisions for the compromise of the suits and for non-competition. Neither of these objects are referable to any specification in th& certificate, but they are powers incident to corporate management and business. The Junction Company may lawfully compromise the suits against the Transit Company and use the company's funds for this purpose. Brice U. V.' (2d Eng. ed.) 609 says : "Lastly there is a compromise of dispute. This may come into play in connection with two distinct classes of matters — ordinary disputes as to the construction &c. of contracts, and as to the rights and liabiUties in respect thereof, and of other matters ; and disputes as to the position of shareholders, and as to their rights and liabilities. As to the former class of matters, probably it may be laid down withoiit quaUfication that the capacity to settle these must be incident to every form of general agency for corporations, and that, therefore, governing bodies not positively restricted therefrom may compromise all such disputes." Morawetz Priv. Corp. § 424 says : "There can be no doubt that any corporation may enter into a compromise, and the payment of a claim by the agents of a corpora- tion in good faith, for the purpose of avoiding litigation, will not be held unauthorized merely because the claim was not a just one." In First National Bank v. National Exchange Bank, 92 U. S. 122 (at p. 127), the court says : "Compromise to avoid or reduce losses are oftentimes the necessary results of this condition of things. These compromises come within the general scope of the powers committed to the board of directors and the officers and agents of the bank, and are submitted to their judgment and discretion, ex- cept to the extent that they are restrained by the chatter or by-laws. Banks may do in this behalf whatever natural persons could do under like circumstances." * * * At page 128: "In the honest exercise of the power to compromise a doubtful debt owing to a bank, it can hardly be doubted that stocks may be accepted in payment and satisfaction, with the view to their subsequent sale or conversion mto money so as to make good or reduce an anticipated loss. * * * It IS difficult to see how a debt due from, or a contested obiigation restmg upon a bank, occupies any different position in respect to this power of adjustment and compromise from that of a debt owing to iV The object in both cases is to get rid of or reduce an appre- hended loss growing out of legitimate business, and it would seem that whatever might be done in the one case ought not to be excluded irom the other under the same circumstances." » CHAP. III.] ELLERMAN V. CHICAGO JUNCTION RAILWAYS. 165 The non-competition was but an incident subsequent to the affirmative agreement to remain the customers and patrons of the Transit Company, but if the purpose of the agreement had been the prevention of competition, such a purpose would have been lawful.* In my opinion, the covenants entered into by the company in this contract are referable to the objects stated in their certificate of incorporation or to powers incident to the corporation, and are authorized by its charter, and that covenants seventh and eighth, entered into by the packers, are not in illegal restraint of trade, and advise that the bill be dismissed, with costs. ' The court found no illegal restraint of trade. Discussion of this point is omitted. 166 THE CHAETEK — AS A STOCKHOLDERS' CONTRACT. [CHAP. IV. CHAPTER IV. THE CHARTER — AS A CONTRACT BETWEEN THE STOCKHOLDERS. ASHTON V. BURBANK, ET AL.i 2 DUlon (U. S. Circuit), 435. 1873. Action on a promissory note made by defendants to the Provident Life Insurance and Investment Company. The defendants were sub- scribers of that company, and the note in suit was given for an assess- ment upon their stock. The original charter of said company authorized it to transact a "life and accident insurance" business. •After the defendants' subscription to the stock, the charter was amended, and the name of the company changed to the Eagle In- surance Company, and it was also authorized, by the amended charter, to transact the business of "fire, marine, and inland in- surance." The amended charter was accepted, but, in point of fact, the company took no risks during the short period it afterwards did business, except such as were authorized by its original charter. The note in suit, when long past due, was transferred by the com- pany to the plaintiff. The defendants neither procured nor assented to said last men- tioned act, nor did they know of it. until after its passage, and there- upon they protested against it, and refused to pay the note "in suit on this ground. Dillon, Circuit Judge. — We hold the following propositions : — 1. The plaintiff taking the note in suit directly from the company, long after it was due, and after the change in the charter, . . . stands precisely in the place of the company, and cannot recover on the note unless the company could have recovered, had the action been brought by it. 2. The note being given for an unpaid stock assessment, repre- sents, for all the purposes of this action, that assessment, and the note not having been paid, it follows that the defendants have not paid the stock assessment for which the note was given. ' Statement of facta coudenaed. CHAP. IV.] STEVENS V. RUTLAND & BURLINGTON R.R. CO., ET AL. 167 3. The change in the charter, by which a life and accident com- pany was authorized to transact fire, marine, and inland insurance, is an organic change of such a radical character as to discharge previous subscribers to the stock of the company from any obliga- tion to pay their subscription, unless the change is expressly or im- pliedly assented to by them. Here there was no such assent, and no acquiescence in the structural change made in the charter of the ■company. The company could not, against such a subscriber, maintain a suit to collect his subscription, and take the money and use it as capital for the transaction of business under the charter as altered. We think, in such a case, the subscriber is not bound to •enjoin action under the amended charter, but may, if he elects, de- fend against an action to recover on his subscription to the stock. If the company accepted the amended charter, as it did by adopt- ing the new name, it is not essential to such a defense to show that at the time of the trial the corporation had actually exercised the enlarged powers conferred upon it. The defendants are not bound, on their subscription, to pay to the company money which, if paid, may be used as capital to carry on the business authorized by the amended charter. Judgment for the defendants.^ STEVENS V. RUTLAND & BURLINGTON R.R. CO., ET AL.^ 29 Vt, 545. 1851. Bill against the railroad and three of its directors to enjoin de- fendants from applying the corporate funds or pledging its credit in constructing a 30 mile extension of its road beyond the termini specified in its charter of 1843. The orator or plaintiff became one of the original stockholders, and ever since has owned 5 shares. The Legislature in 1850 authorized the corporation to construct such extension. This subsequent act was accepted by the directors and by the majority stockholders against the plaintiff's protest. Bennett, Chancellor. The question is, can the orator, upon such a state of facts, claim, at the hands of the chancellor, his injunction. 1^ It is an admitted principle, that in partnerships, and joint stock associations, they cannot by a vote of the majority change or alter their fundamental articles of copartnership or association, against the will of the minority, however small, unless there is an express or implied provision in the articles themselves that they may do it. * Cf. note 2, page 128, ante. ' Facts restated ; portions oi opinion omitted. 168 THE CHARTER — -.AS A STOCKHOLDERS' CONTRACT. [CHAP. IV. It is equally well settled, that a court of chancery will,_ upon the application of an individual member of a partnership, or joint stock association, restrain, by injunction, the majority from using the funds or pledging the credit of the partnership or association in a business not warranted, and not within the scope of their funda- mental articles of agreement. Courts of equity treat such proceed- ings by a majority, as a fraud upon the other members, which they will neither sanction or permit. To prevent the commission of fraud, by injunction, has been one of the earliest and most appro- priate heads of equity jurisdiction, as well as to relieve against it, when committed. It was upon this principle that Lord Eldon, when High Chancellor, upon the application of a humble individual member of a company, which had been organized for the purpose of carrying on a fire and life insurance business, restrained the com- pany, by injunction, from embarking also in the marine insurance business ; though the applicant had paid into the funds of the com- pany only one hundred and fifty pounds as a deposit upon fifteen shares, and the company gotten up by the Rothschilds of England, and composed of six or seven hundred individuals, with a capital of five millions sterling. See Natusch v. Irving and others; Gow on Part. Appendix, 576. It was well conceded, in the argument on the defense, that if the corporation had been about to proceed to a construction of the contemplated extension without the act of 1850, it would have been a proper case for an injunction. The only question which can be open to debate is, as to what shall be the effect 6f the act of 1850, and a subsequent adoption of the act by the corporation, upon the individual rights of a shareholder who does not assent to its adop- tion? If bound by it, there is no equity in this bill. It is, and must be admitted, that the legislature has no constitutional power, unless it be reserved in the grant, to change or alter an act of incor- poration without consent, and thereby cast upon the company new and additional obligations, or take from them rights guaranteed under the original charter.^ And indeed this the legislature have not attempted to do. It is also equally true that it is a part of the_ law of corporations, that they act according to the voice of the majority.'' But it is to be remembered, that this is not a suit in • This subject is considered in the next chapter. ' In I>"rfee J). Old Colony &o. R. R. Co., 5 AUen (Mass.) 230, the court (Bige- Lo-w, O. J.) said : We suppose it may be stated as an indisputable proposition, that every person who becomes a member of a corporation aggregate by purchasing and holding shares agrees by necessary implication that he wUl be bound by all acts and proceedings, within the scope of the powers and authority conferred by the charter, which shall be adopted or sanctioned by a vote of the majority of the corporation, duly taken and ascertained according to law. This is the unavoidable rbsult of the fundamen- tal principle that the majority of the stockholders can regulate and control the HWul exercise of the powers conferred on a corporation by its charter. A holder of shares m an incorporated body, so far as his individual rights and interest may be involved CHAP. IV.] STEVENS V. RUTLAND & BURLINGTON R.R. CO. ET AL. 169 which the plaintiff seeks to protect himself in any corporate right, but in his own individual right, growing out of the fact of his having become a corporator by his subscription and its payment, to the capital stock of the company. One of an aggregate corporation may contract with the company, as well as a third person ; and the rights of the individual so contracting are no more distinct and in- dependent in the one case than in the other. The plaintiff, by his subscription, assupaed to pay to the corporation, and only for the purpose specified in the charter, its amount, according to the assess- ments ; and there was at the same time a trust created, and an implied assumption on the part of the corporation, to apply it to that object, and none other. The corporation also assumed upon themselves to account to this corporator for his share of the divi- dends, when this road should be completed and put in operation, and for his share of capital stock, though not in numero. The rela- tion between each original shareholder and the corporation is the same. The obligation of the contract between the legislature and the corporation,^ after an acceptance of the charter, is no more sacred than that which is created between the corporation and the individual corporator. Does any one suppose the legislature could, without the consent of parties, absolve a corporator from liability on his subscription to the corporation, or modify it? and can they do the reverse of it? It is conceded that there is a class of alterations in a charter, which the corporation may obtain and adopt, that would not so essentially change the contract as to absolve the corporator from his subscrip- tion, or give him a right to complain in a court of justice, in case he had previously paid it. Where the object of the modification or alteration of the charter is auxihary to the original object of it, and designed to enable the corporation to carry into execution the very purpose of the original grant, with more facility and more beneficially in the doings of the corporation, acting within the legitimate sphere of its corporate power, has no other legal control over them than that which he can exercise by his single vote in the meetings of the company. To this extent, he has parted with his personal right or privilege to regulate the disposition of that portion of his property which he has invested in the capital stock of the corporation, and sm-rendered it to the will of a majority of his fellow corporators. The jus disponendi is vested in them so long as they keep within the line of the general purpose and object for which the corporation was established, although their action may be against the will of a minority, however large. It cannot, therefore, be justly said that the contract, express or implied, be- tween the corporation and the stockholders is infringed or impaired by any act or pro- ceeding of the former which is authorized by a majority, and which comes within the terms of the original statute creating and establishing their franchise, and conferring on them capacity to exercise control over the rights and property of their members. On the contrary, the fair and reasonable implication resulting from the legal relation of the stockholder and the corporation is, that the majority may do any act either coming within the scope of the corporate authority, or which is consistent with the terms and conditions of the original charter, without and even against the consent of an indi- vidual member." ' See second preceding note. 170 THE CHARTER — AS A STOCKHOLDERS' CONTRACT. [CHAP. IV. than they otherwise could, the original corporator cannot complain ; and I should apprehend it would make no difference with the rights of a corporation, in such a case, though he could show that he charter, as amended, was less beneficial to the ^o^atof than the original one would have been.^ The ground upon which such amend- ments bind the corporator, I deem to be his own consent. When he becomes a corporator by his signing for a portion of the capital stock, he in effect agrees to the by-laws, rules and votes of the com- pany, and there is an imphed assent, on his part, with the corpora- tion, that they may apply for, and adopt such amendments as are within the scope, and designed to promote the execution _oi the original purpose; and he signs, and the corporation receive his subscription, subject to such implied contingency; and if we_ regard it in the nature of a hcense, only, it would not alter the princip e. Both parties having acted upon it, it would not be countermandable. But suppose the object of the alteration is a fundamental change in the original purpose, and designed to superadd to it something which is beyond and aside of it ; does the same principle apply? In the Middlesex Turnpike Corporation v. Locke, 8 Mass. 268, the court held that a variation and change in the course of the turnpike road, from that which was prescribed in the original charter, was such a fundamental alteration as to absolve the subscribers from the payment of assessments made after the amendment to the charter, upon a subscription for stock, made before. The case of the Hartford and New Haven' Railroad Company v. Croswell, 5 Hill 385, has an important bearing upon the one before us. The amendment in that case to the original charter, authorized the defendant to purchase, hold, and run upon the sound, steamboats, in connection with their railway, and gave the company, for that purpose, an increase of capital not exceeding two hundred thousand dollars. This seems to be nothing rtiore or less, so far as principle is concerned, than an extension of the terminus of the road at NeV Haven, by steam power, on the railroad which the God of nature 1 Thus in Banet v. Alton &o. E. R. Co., 13 111. 504, the court said : "An alteration in a charter may be so extensive as to work a dissolution of the contract of subscription. An amendment which essentially changes the nature or objects of a corporation will not be binding on the stockholders. A corporation formed for the purpose of constructing a railroad cannot be converted into a company to construct an improvement of a dif- ferent character without the consent of all the corporators. A road intended to secure the advantages of a particular line of travel and transportation can not be so changed as to defeat that general object. The corporation must remain substantially the same, and be designed to accomplish the same general purposes, and subserve the same general interests. But such amendments of the charter as may be considered useful to the public, and beneficial to the corporation, and which will not divert its property to new and different purposes, may be made without absolving the subscribers fj-om their engagement. The straightening of the line of the road, the location of a bridge at a. different place on a stream, or a deviation in the route from an intermediate point, will not have the effect to destroy or impair the contract between the corporation and the subscribers." CHAP. IV.] STEVENS V. RUTLAND & BURLINGTON R.R. CO. ET AL. 171 has made, instead of a railroad by land, constructed by the art of man. This amendment was accepted both by the directors of the company and by the corporation convened for that purpose; and yet it was held that the alteration was fundamental, and absolved the defendant from all liability for the assessments on his stock; there being no evidence that the defendant had personally assented to an acceptance of the amendment. In that case the assessments were made, and had become payable, and had been demanded of the defendant, before the amendment of the charter. Ch. J. Nelson, in his opinion, lays down this general proposition, "that corporations can exercise no power over the corporators, beyond those conferred by the charter to which they have subscribed, except on the condition of their agreement or consent." This is a sound proposition. The consent or assent may, however, be impHed in a class of cases, as has already been stated, where the amendment is not regarded as fimdamental, and can be brought within the scope of the original purpose of the association; and this is going to the very verge of the powers of the corporation. ■ It is difficult, and would be unwise, to attempt to lay down any general rules to determine in what precise cases the assent of the corporator should be impUed, and in what not.* It is sufficient for the present purpose to say, that his assent cannot be imphed, in a case like the present, from a majority vote. Courts may. differ, and doubtless will, in regard to what alterations shall be sufficient to constitute a fundamental change. But in the present case, I think, on this point there can be but one opinion. The termini of the road, as fixed by the charter, are Burlington, and some point on the west bank of Connecticut River, in the county of Windsor or Windham. The capital stock is one million of dollars, with a right in the corporation to increase it to an amount sufficient to complete said road, and furnish the necessary apparatus for conveyance. The supplementary act of 1850 purports to authorize the corporation, within three years, to construct and extend their railroad from the • terminus in Burlington, to some point in Swanton, in the county of Franklin, a distance of about thirty miles ; and the act provides that in the construction of the road, they shall have all the rights and privileges, and be subject to all the liabilities, contained in their original charter, and the acts in addition to it. The franchise granted to this company was territorial; and an extension of the termini necessarily is an extension of the franchise. It cannot remain the same thing in substance, until it can be estab- lished that a part is equal to the whole. Besides, the company may increase the capital stock to such additional sum as shall be necessary to construct the extension. ' Cf. cases arising under the reserved power to repeal, alter, and amend. See Chap. 5, Sec. 2, infra. 172 THE CHARTER -AS A STOCKHpLDERS' CONTRACT. [cHAP. IV. The statute of 1850 is little less in effect i^. ^^J^^^^J'^^^J^^ attempt to create in a summary manner, and by the way ot reterence a new corporation, and to transfer all the old corporators to it. If :il the cor'porlors'had assented to this transfer ^^ ^as we\en^^^^^^ The change in the purpose was not ^^r^^^^'^^^^'^^f^^^ tt Csl- from the 5th of Hill than in this It is not nec^ssarf that the busi ness should be changed in Idnd, to «l^fj^g\*J%°"f;f^^^^^^^^^ If this is not a change in purpose, it would not be *« ^^^^^^ th^^^^^^^^^ in one direction to Canada line, and in the other to Massachusetts Une; and there would be no limits to the control which the corpora- tion might acquire over the individual corporators, and this, too, without their consent, except what arises from the confines of legis- ^The^change, then, in the charter being fundamental and the corporation not being able to bind the plaintiff by a majority vote what must be the result? If he had been sued for an assessment, upon his stock, he might have claimed, that he was absolved from all liabiUty upon the acceptance of the amendment. And is not this reasonable? Shall it be said that the legislature and the corporation- have power to embark this corporator in a speculation to which he has never consented ? If it can be done in one case it can in another. But having paid his funds into the corporation, he has a right m chancery to compel a faithful performance of the trust by the cor- poration, in conformity to the original charter, and to keep them within its purview. No one can suppose, that upon the payment of his subscription, the personal identity of the plaintiff was merged in the corporation, or that he ceased to have distinct and independent rights. In the case before us, it must follow, if the plaintiff is not bound by the conjoined effect of the act of 1850, and a majority vote of the corporation, the defendants can stand on no better ground, than a voluntary association, who are about to go beyond and aside of their original articles, against the will of a minority. This, in effect, was 1 Accord: Zabriskieii. Hackensack, &c. R. R. Co., 18 N. J. Eq. 178. ("The exten- sion would be about twelve miles in length, through an uneven country, mostly, if not wholly, agricultural ; with no village, except the very small one at New Bridge, on its route ; and it runs into the state of New York some distance, and terminates at a point on that part of the Erie railway which the company have abandoned for regular traffic, and on which few trains are run. It is an entirely different enterprise.") Contra: Buffalo &c. R. R. Co. ». Dudley, 14 N. Y. 336. (Change of name, increase of capital, and extension of road held not organic. "The change is not fundamental. The new powers conferred are identical in kind with those originally given. They are enlarged merely, the general objects and purposes of the corporation remaining still the same.") Durtee ». Old Colony &c. R. R. Co., 5 Allen (Mass.) 230. ("The obliga- tion of the contract which subsists between the corporation and a stockholder, by virtue of his being a proprietor of shares in the corporate stock, is not impaired by an act of the legislature which amends and alters the charter and authorizes the corporation to undertake new and additional enterprises of a nature similar to those embraced within the original grant of power, if such act is accepted by a majority of the stock- holders in the mode provided by law.") CHAP. IV.] STEVENS V. RUTLAND & BURLINGTON R.R. CO. ET AL. 173 conceded in the argument. There was nothing improper in the passage of the act of 1850, though upon the apphcation of a portion of the directors of the company, as stated in the bill. No attempt is made by the legislature to impair the obligation of any contract between themselves and the corporation, or to cast upon the company any new and additional burthens without their consent. There was no attempt to impair any contract arising under the prior charter, between the corporation and the corporator as an individual, or disturb any vested right in either. The act is not mandatory ; and there is, in fact, an implied condition annexed to it, that it is to be accepted by all whose individual and corporate interests are to be affected by it, before it shall become operative. But suppose this act had been mandatory upon the corporation and the several stock- holders, to build this extension in the road within three years ; would not all cry out against its palpable injustice? Suppose, instead of this, the legislature had left it optional with the corporation to accept or reject the act of 1850, and had provided, that in case of the acceptance of the amendment by the corporation, it should bind the corporators who dissented from it, or did not assent to it, and this, too, in their individual rights ; would there not be the same reason to cry out against it? Would it not, by its carrying a stockholder into an enterprise which he had never consented to, and changing the principles of liabiUty between the corporation and the individual corporator from what they were under the original compact, impair and disturb vested rights under it? I have no hesitaltion in saying, that, in my opinion, it would be beyond the pale of the constitutional authority of the legislature. In ElUs V. Marshall, 2 Mass. 269, it was held that no man could be made, by act of legislation, a member of an aggregate corporation without his personal consent; and the same principle would seem to apply when he is asked to remain and become a corporator under a supplementary act, to be attached to and become a part of the charter, where that which it is proposed to superadd is vital, and constitutes a fundamental change in the charter, which is but the constitution of the company. If, in a case like the present, the majority cannot bind the minority, it is plain that there is an equity in this bill, and that the defendants can stand in no better situation than if they had, by a vote of the company, proceeded to build the extension, and to apply the funds and credit of the corporation to that purpose, without any additional act of the legislature. In the case of Natusch v. Irving et al., which was also the case, of a voluntary association, an injunction was allowed to restrain them from going into a business not within the scope of the original articles, in pursuance of a vote of the majority. And in that case, before the hearing, the defendant had. offered to pay back all that the orator had paid into the company, with, interest 174 THE CHARTER — -AS A STOCKHOLDEKS' CONTRACT. [CHAP. IV. from the date of the payment, and also to fully indemnify him against all loss by the transactions of the company already had or thereafter to be had in the business which was beyond their original articles. Lord Eldon to this part of the case rephes, in substance, that it is not competent for any number of persons in a partnership (unless so provided for) formed for specified purposes, to effect that formation by calling upon some of their partners to receive back their capital stock and interest, and quit the concern, which, in effect, would be merely compelling them to retire upon such terms as should be dictated to them, so as to form a new company; and that it is the right of a partner to hold his associates to the specified purposes whilst the partnership continues, and not to rest upon indemnities with respect to what he had not contracted to engage in ; and that a partner cannot be compelled to part with his shares, though for double what he originally gave for them ; and that it may be his principal reason for keeping them, to have the partnership carried on according to the original contract. This doctrine of Lord Chan- cellor Eldon necessarily grows out of the doctrine that it is the business of courts of justice to enforce the contracts of parties, not to make them. To give to courts not only the power to enforce, but also the power to make, or even modify in one iota a contract fairly made, would be the rankest despotism. In regard to the expediency of bringing this bill, the chancellor cannot, and has no right to judge. The orator has the constitutional and sole right of determining this matter ; and if he thinks it ex- pedient, we must acquiesce in it ; and no plea of the pubhc good or inequality of interests involved can justify the chancellor in denying to the orator a right which is clearly accorded to hun by well es- tablished chancery principles. The pubhc good is best promoted by an impartial administration of justice according to the right of the case ; and courts cannot measure the equality or inequahty of mterests m the htigant parties and make that a basis for a decision notwithstandmg what has been urged in the argument. ' Where it is clearly shown that a corporation is about to exceed Its powers, and to apply their funds or credit to some object beyond their authority, it would, if the purpose of the corporation was carried out, constitute a breach of trust; and a court of equity cannot refuse to give rehef by injunction. See Agar v. The Regent's Canal Company, Cooper's Eq. 77; The River Dun Navigation cZT7,^^ North Midland Railway Company, 1 Eng. Railway Sd ;i 1' t^^^^l^t bar the corporation had no power to build the extension under their origmal charter ; and the act of 1850 is not binding upon the orator without his consent The injunction must therefore be allowed, but only so far as to restram he defendants until the further order of the chancellor from applying the present funds of the corporation or thetrcome CHAP. IV.] NUGENT V. THE SUPERVISOES OF PUTNAM COUNTY. 175 from the present road, either directly or indirectly to the purpose of building said extension in said road, or to pay land damages and other expenses which may be contingent upon the building of it ; and also from using or pledging, directly or indirectly, the credit of the corporation in effecting the object of the extension ; and at the same time the company will be left at Hberty to build the extension with any new funds which they may see fit to obtain for that specific object. After the above decision was announced, and before the injunc- tion was issued, the defendants proposed to file bonds to indemnify "the plaintiff against all damages which he might sustain by reason of the extension ; upon which the chancellor suggested, that he did not deem it competent for him to make contracts for the parties ; and that upon the authority of the case of Natusch v. Irving et al., it could make no difference, if filed, in the result.^ NUGENT V. THE SUPERVISORS OF PUTNAM COUNTY." 19 WaU. (U. S.) 241. 1873. A GENERAL statute of Illinois enabled all railroad companies, then or thereafter to be organized, to consolidate with foreign corporations. This statute, as well as a similar one in Indiana, being in force, the State of Illinois, by special act, incorporated the Kankakee & Illinois River Railroad Co. with prescribed termini in Illinois. The 11th section of its charter similarly authorized consolidation. At the same time, the county of Putnam, Illinois, was empowered by a ' In Sparrow v. Evanaville &o. R. R. Co., 7 Ind. 369, the court said : These authorities " proceed upon the ground that the relation between the stockholder and the company is one of contract, and that any legislative enactment which, without his assent, author- izes a material change in the powers or purposes of such corporation, not auxiliary to its original object, is of no binding force, because such change, if made, would be an invasion of his individual rights under the contract." In Mower v. Staples, 32 Minn. 284, held that a legislative alteration increasing the number of directors from five to nine was not fundamental. "Alterations which materially change the nature and purposes of the corporation or of the enterprise for the prosecution of which it was created, are fundamental, while those which work no such material change are not fundamental. ... If no alteration . . . can be made, even in matters of administrative detail, or as to the means and agencies through which the corporate enterprise shall be carried on, except with the consent of every stockholder, the result would be not only great public and private inconvenience but in many cases a complete practical failure of the enterprise itself." The proposed alteration "in no way changes the nature or purpqse of the boom company or of the enterprise tor which it was created. It is a change respecting modus operandi merely ; a change, not of the nature or purpose or character of the company or of the company's enterprise, but a change of the instrumentalities and agency — the machinery by which that purpose is to be effected and that enterprise carried on." ^ Facts restated ; portions of opinion omitted. 176 THE CHAETER — AS A STOCKHOLDEKS' CONTRACT. [CHAP. IV. general law to subscribe for stock of the company and to issue its bonds in payment of its subscription. In attempted exercise ot the power thus conferred, the county Supervisors ordered an election to be held to determine whether the county should subscribe for stock of the railroad company to the amount of $75,000 to be paid for with the bonds of the county. The election was held and re- sulted in favor of the subscription. The railroad company accepted the subscription. Coupon bonds, as authorized by the popular vote of the county, were executed. After that election, but before they were delivered to the railroad company, an Indiana corpora- tion had been organized, under the laws of the latter state, to build and operate a raikoad therein. With this corporation, the first mentioned railroad consolidated after the election, the consolidated company taking the name of the Indiana corporation. The con- solidation being completed, the bond and coupons were delivered to the raih-oad company and certificate for a corresponding amount of stock in the consoHdated company dehvered to the county. Certain of the coupons passed into the hands of the plaintiff bona fide. On these coupons the present suit was brought. To a judgment against him the plaintiff took this writ of error. Mr. Justice Strong delivered the opinion of the court. We think the Circuit Court erred in sustaining the demurrer to the plaintiff's replication. The bonds to which the coupons in suit were attached, purport to have been made and issued by the order of the board of supervisors of Putnam County, in payment of the county's subscription to the capital stock of the Kankakee and lUinois River Railroad Company. They are made payable to that company or bearer, and the plaintiff is a bona fide holder of the coupons, having paid value for them without notice of any defense. If, then, the bonds are valid obligations, if they were rightfully issued, the right of the plaintiff to a judgment against the county is plain. That by what it did in the matter the county became in effect a subscriber to the capital stock of the railroad company, and liable for the sums designated, admits of no serious question. The county accepted the position of a stockholder, received certificates for the stock subscribed, voted as a stockholder, and proceeded to levy a tax to pay the interest falling due on the bonds. Were this all of the case, the vaUdity of the bonds, and of their accompanying coupons in the hands of a bona fide holder for value, would be beyond doubt. The Circuit Court, however, was of opinion, and so decided, that the bonds are invalid, because before their delivery the Kankakee and Illinois River Railroad Company had become consolidated with the Plymouth, Kankakee, and Pacific Raiboad Company, another corporation. This consolidation was authorized by th& general laws of the two States, and by a section in the special charter CHAP. IV.] NUGENT V. THE SUPERVISORS OP PUTNAM COUNTY. 177 of the latter company. No claim is made that it was not legally- effected. The result necessarily was, that the consohdated company succeeded to all the rights, property, and privileges which belonged to each of the two companies out of which it was formed, before their consohdation. It was not until after this had taken place that the county bonds were handed over and sold, and it was certificates of the stock of the consohdated company which the county received. What, then, was the legal effect of the consolidation? Did it release the county from its prior assumption to take stock in the Kankakee and Illinois River Railroad Company and give its bonds in payment? Or, did it render unauthorized the subsequent de- livery of the bonds, and make them invahd even in the hands of a bona fide purchaser? These are the only questions presented by the record that need discussion. It must be conceded, as a general rule, that a subscriber to the stock of a railroad company is released from obhgation to pay his subscription by a fundamental alteration of the charter. The reason of the rule is evident. A subscription is always presumed to have been made in view of the main design of the corporation, and of the arrangements made fOr its accomphshment. A radical change in the organization or pm-poses of the company may, therefore, take away the motive which induced the subscription, as well as affect injuriously the consideration of the contract. For this reason it is held that such a change exonerates a subscriber from liability for his subscription; or, if the contract has been executed, justifies a stockholder in resorting to a com-t of equity to restrain the company from applying the funds of the original organization to any project not contemplated by it. But while this is true as a general rule it has no applicabihty to a case like the present. The consolidation of the Kankakee and Illinois River Railroad Company with another company was no departure from its original design. The general statute of the State, approved February 28th, 1854, authorized all railroad companies then organized, or thereafter to be organized, to consolidate their property and stock with each other, and with com- panies out of the State, whenever their lines connect with the lines of such companies out of the State. The act further declared that the consolidated company should have all the powers, franchises, and immunities which the consolidating companies respectively had before their consolidation. Nor is this all. The special charter of the Kankakee and Illinois River Railroad Company contained, in its eleventh section, an express grant to the company of authority to unite or consoUdate its railroad with any other railroad or rail- roads then constructed or that might thereafter be constructed within the State, or any other State, which might cross or intersect the same, or be built along the line thereof, upon such terms as might be mutually agreed upon between said company and any other 178 THE CHARTER — AS A STOCKHOLDERS' CONTRACT. [CHAP. IV. company. It was therefore contemplated by the legislature, as it must have been by all the subscribers to the stock of the company, that precisely what has occurred might occur. Subscribers must be presumed to have known the law of the State and to have contracted in view of it. When the voters of the county of Putnam sanctioned a county subscription by their vote, and when the board of super- visors, in pursuance of that sanction, resolved to make the subscrip- tion, they were informed by the law of the State that a consolidation with another company might be made, that the stock they proposed to subscribe might be converted into stock of the consohdated com- pany, and that the habihty they assumed might become owing to that company. With this knowledge and in view of such contin- gencies they made the contract. The consoUdation, therefore, wrought no change in the organization or design of the company to which they subscribed other than they contemplated at the time as possible and legitimate. It cannot be said that any motive for their subscription has been taken away, or that the consideration for it has failed. Hence the reason of the general rule we have con- ceded does not exist in this case, and, consequently, the rule is inapplicable. In a multitude of cases decided in England and in this country it has been determined that a subscriber for the stock of a company is not released from his engagemeilt to take it and pay for it by any alteration of the organization or purposes of the company which, at the time the subscription was made, was authorized either by the general law or by the special charter, and a clear distinction is recognized between the effect of such alterations and the effect of those made under legislation subsequent to the contract of subscrip- tion. They uniformly assert that the subscriber for stock is released from his subscription by a subsequent alteration of the organization or purposes of the company, only when such alteration is both funda- mental and not -provided for or contemplated by either the charter itself or the general laws of the State. No well-considered cases are in conflict with them. Marsh n. Fulton County [10 Wall. (U. S.) 676] is altogether a different case. In that it appeared that the people of the county voted in November, 1853, in favor of a subscription for stock in the Mississippi and Wabash Railroad Company, and in April, 1854, the board of super- visors of the county ordered their clerk to make the subscription. It was not, however, then made. Subsequently, in 1857, the legis- lature made fundamental changes in the organization of the com- pany, dividing it substantially into three companies, with a distinct governing body for each, and with three classes of stockholders. It was after this that the county subscription was made ; and made not for the stock of the Mississippi and Wabash Railroad Company, but for the stock of one of the divisions. Necessarily, therefore, we CHAP. IV.] NUGENT V. THE SUPERVISORS OF PUTNAM COUNTY. 179 held that there was no authority to make the subscription which was made, that it had not been approved by a popular vote, and hence that the bonds issued in payment for it were invalid. The county had entered into no contract until after the radical changes had been made in the organization of the company. It never as- sented to such a change, and when' the proposed subscription was approved by the popular vote, there was no reason to expect the change afterwards made. There was at that time nothing in the general law of the State, and nothing in the charter, which authorized the company to change its organization, or which looked to its divi- sion into several distinct corporations. It needs nothing more to show how uliUke that case was to the present. In the case in hand the county had, under lawful authority, under- taken to subscribe for stock before the consolidation was made, and ihe undertaking had been accepted. And the subscription was made in full view of the law that allowed an amalgamation with another company. The contract was made with reference to that law.' Nothing has taken place which the county was not bound to an- ticipate as likely to happen, and to which the people in voting for the subscription, and the board of supervisors in directing it, must not be considered as having consented. The plaintiff is a bona fide holder of some of the coupons for value paid. He found the bonds and the coupons upon the market, pay- able to the Kankakee and Illinois Eiver Railroad Company, or bearer. Proposing to buy, he had only to inquire whether the county was, by law, authorized to. issue them, and whether their issue had been approved by a popular vote. He was not bound to inquire farther, and had he inquired he would have found full author- ity for the issue, and if he had also known of the consolidation it would not have affected him. Judgment reversed.^ ' See Sparrow v. Evansville &o. R. R. Co., 7 Ind. 369. ("When the defendant con- tracted, an authority to consolidate existed which . . . the two companies had a perfect right to exercise, and of which he was then legally cognizant. His contract, having been made under that law, must be presumed to have been made with reference to it, and can not,. therefore, be impaired by the law, because the law is a part of the con- tract.") ^ In Meredith v. N. J. Zinc &c. Co., 55 N. J. Eq. 211, the court said "It is conceded . . . that the original certificate of organization of this company forms a contract between the several stockholders, which, except by unanimous consent, cannot be affected by any change in it made by virtue of any subsequent act of the legislature, but that it can only be effectually changed by virtue of some act of the legislature then in force, which can and should be, so to speak, read into the contract." In the absence of any provision that may thus be read into the contract, unanimous consent of the stockholders is required to effect any change. Thus in Einstein ». Raritan Woolen Mills, 74 N. J. Eq. 624, a special charter limited the issue of capital stock to a certain sum. It was sought to increase the capital stock under a permission, afforded by statute, subsequent to the charter. Held, the charter provision that the capital shall not be increased was " a limitation upon the power of the company against the objection of the holder of a single share." in 180 THE CHARTER — AS A STOCKHOLDERS' CONTRACT. [CHAP. IV. RIPIN ET AL. V. UNITED STATES WOVEN LABEL COMPANY ET AL. 205 N. Y. 442. 1912. CuLLEN, C. J. The action was brought to restrain an increase .a the number of the directors of the United States Woven Label Company. That defendant was incorporated under the Business Corporations Law of this state (Laws 1890, ch. 567; amended Laws 1895 chap. 671), and in the certificate of incorporation filed by the corporators it was provided: "The number of its directors is to be four (4) ; said directors shall not be required to be stockholders of said corporation ; and said number shall not be changed, except by the unanimous consent of all the stockholders of said corpora- tion." Notwithstanding this provision, a majority of the stock- holders, at a meeting held on February 25th, 1911, adopted, against the protest of the minority, a resolution increasing the number of directors to five. Thereupon this action was brought by the minority stockholders to restrain an election of the additional director. The vahdity of the provision quoted from the certificate of incorporation was challenged by the defendants, but upheld by the Special Term, which granted the injunction prayed for. That order has been affirmed by the Appellate Division, which has allowed an appeal to this court, certifying two questions : "1st. Was there a valid increase in the number of directors of the corporation, notwithstanding the fact that the resolution did not receive the unanimous consent of all the stockholders, but did receive the affirmative vote of stockholders owning a majority of the stock in the corporation? •> "2d. Is a provision in a certificate of incorporation of a cor- poration organized in November, 1902, under the provisions of the Business Corporations Law of the State of New York, valid anJ authorized which provides that the number of directors of the cor- poration shall not be changed except by the unanimous consent of all the stockholders of the corporation ? " It is contended that the certificate provision quoted is illegal be- cause it was in conflict with section 21 of the Stock Corporation Law (Laws 1892, ch. 688, now Cons. Laws, ch. 59, § 26), which prescribes that "The number of directors of any stock corporation may be increased or reduced, but not above the maximum nor below the minimum number prescribed by law, when the stockholders owning a majority of the stock of the corporation shall so determine, at a meeting," etc. But it was also provided, by section 10 of the General Corporation Law : "No corporation shall possess or exercise CHAP. IV.] KIPIN V. U. S. WOVEN LABEL CO. 181 any corporate powers not given by law, or not necessary to the exer- cise of the powers so given. The certificate of incorporation of any corporation may contain any pr.ovision for the regulation of the -business and the conduct of the affairs of the corporation, and any limitation upon its powers, or upon the powers of its directors and stockholders, which does not exempt them from the performance of any obligation or the performance of any duty imposed by law." (L. 1895, ch. 672 ; Cons. Laws, ch. 23.) Therefore, unless the certificate limitation on an increase of directors tended to exempt the corporation or its directors or stockholders from the performance of any obligation or the performance of any duty imposed upon it by law, or was inconsistent with public policy, it was expressly authorized by this statute. That there was no duty or obligation imposed upon the corporation or its members to increase the number of directors is plain. It is true that this provision is in conflict with the statutory regulation for increase of directors, but unless it was intended by section 10 to allow the corporators at the time of the organization of a corporation to prescribe regulations for the conduct of its affairs and limitations on the power of the corporation and its members different from those prescribed by the statute, the privilege granted to the corporators would be of little or no efficacy. Of course, this privilege must be exercised in one direction. It must limit, not increase, the powers of the corporation or those of its directors or stockholders. On this premise the learned counsel for the appellant makes the ingenious contention that the certificate provision before us is not a limitation of the powers of the stock- holders, but an increase, for it increased .the power of a minority to resist the will of the majority. But every Umitation on the power of the stockholders as a body necessarily increases the powers of a minority to obstruct, for whatever power is granted to the stock- holders is granted to a majority or a number greater than a majority.' There is no power to compel the majority to take action it does not desire to take. The privilege granted by section 10 of the General Corporation Law was, therefore, necessarily intended to increase the rights of the minority. Nor do we see any force in the claim that the pubHc poHey of the state requires that in all cases a majority should be allowed to increase the number of directors. Indeed, it is difficult to see how public policy is concerned in an increase in the number of directors at all. Section 21, now 26, of the Stock Cor- poration Law provides that the number shall not be decreased below the minimum number prescribed by law. The statute has thus taken care that the body shall not be reduced below that deemed necessary in all cases to represent the corporation. But no limit is prescribed for the maximum number. When the statute provided for the organization and internal regulation and management of corporations it was necessary to prescribe many details which did 182 THE CHARTER — AS A STOCKHOLDERS' CONTRACT. [CHAP. IV. not involve public policy or the relations of the corporations with the public. It was necessary simply because there had to be some rules or regulations on the subject. Appreciatmg this, the law- makers, while prescribing general rules in default of agreement to • the contrary, permitted the incorporators, by agreement made at the inception of the corporation and embodied m the certificate by which the corporation got life, to regulate these unessential matters in such manner as they might agree. This statutory pro- vision became part of our corporation law in 1895 (Ch. 672). ihe poUcy of the state had become very hberal in granting the privilege of incorporation. By the Business Corporations Law three or more persons might form a corporation for any lawful business with certain specified exceptions, such as railroad, moneyed corporations and others of a pubhc or quasi pubhc character. Under this statute many businesses or private enterprises which formerly had been conducted by partnerships or individuals, became the subject of corporate control and ownership. Such corporations were httle more (though not quite the same as) than chartered partnerships. There was danger, however, in the very plenitude of the power granted to such corporations, as has been shown by the Utigations in the courts on claims of oppressive or dishonest action of the ma- jority towards the minority. Indeed, abuse of power by a majority in many of these private corporations had become a scandal. Such corporations were allowed to increase their capital stock, the number of directors and consolidate with other corporations. Persons might be desirous of transferring their business to or of investing their capital in a corporation advantageous so long as the relations be- tween the parties in interest were harmonious, but in case of dis- sension subjecting the minority to great chance of oppression by the majority. It was to enable parties to incorporate without being subject to these dangers that the statute of 1895 was enacted so that the parties in interest, might, by their original agreement of incorporation, limit their respective rights and powers in respects that did not affect the public. Of course a limitation which, if found in the certificate of incorporation of a mere trading company, would have no relation to the public or public policy, might, in the case of a quasi public corporation, present a different question. We have before us, however, merely a trading corporation. Reliance is made by the appellant on certain decisions of the Supreme tourt, some of which have been affirmed by this court. In Matter of Rapid Transit Ferry Company (15 App. Div. 530) it was held that a by-law requiring that a majority of the stock of a corporation should be necessary to elect directors, was in conflict with section 20 of the Stock Corporation Law, which provided that diriectors should be elected by a plurality of the votes of the stock- holders voting at the election, and, therefore, invalid. In Katz v. CHAP. IV.] RIPIN J). U. S. WOVEN LABEL CO. 183 H. & H. Manufacturing Company (109 App. Div. 49; affd., 183 N. Y. 578) it was held that a by-law requiring the vote of 90% of the stockholders to change the number of directors instead of a majority as prescribed by statute was invahd. These decisions are not in point. Under the General Corporation Law (§11) the power to enact by-laws is limited to such as are "not inconsistent with any existing law." No such limitation is placed on the right granted by section 10 to limit the powers of the corporation, its directors and stockholders. The distinction between authority to make a by-law and that to incorporate the agreement of the incorporators in the certificate of incorporation is marked. To uphold a by-law incon- sistent with the statutory provision regulating the affairs of a cor- poration would allow a majority to invade the rights of a minority and to impose limitations on a stockholder to which he never gave assent, while to uphold the provisions of the certificate is merely to compel a party to live up to his agreement. Thus, a provision in the articles of association that no shareholder owing the association a debt should be permitted to transfer his share or receive a dividend or interest until such debt had. been paid, is vahd against persons having knowledge of the provision (Leggett v. Bank of Sing Sing, 24 N. Y. 283 ; Gibbs v. Long Island Bank, 83 Hun, 92 ; affd. on opinion below, 151 N. Y. 657), while a mere by-law to that effect would be invalid. (Driscoll v. West Bradley & Cary Mfg. Co., 59 N. Y. 96.) Nor is the case 6f People ex rel. Barney v. Whalen (119 App. Div. 749; affd., without opinion, 189 N. Y. 560) in point. In that case it was held that a provision in a certificate of incorpora- tion which it was sought to file, providing that the " directors might, with the consent of the holders of two-thirds of the capital stock, sell the whole of its property to any person or corporation, domestic or foreign," was unauthorized, and that the secretary of state was not required to accept the certificate. The provision was plainly illegal, for its effect was to increase, not to limit, the powers both of the corporation and of the directors. The order appealed from should be affirmed, with costs. The first question certified answered in the negative, the second in the affirmative. Gray, Haight, Vann, Werner, Hiscock and Collin, JJ., concur. Order affirmed.^ * Cf. Mower v. Staples cited in final note to Stevens v. Rutland &c. R. R. Co., ante. 184 THE CHARTER — AS A CONTEACT WITH THE STATE. [cHAP. V. CHAPTER V. THE CHARTER — AS A CONTRACT BETWEEN STATE AND CORPORATION Section 1. — The General Rule. HOME OF THE FRIENDLESS v. ROUSE.^ 8 Wall (U. S.) 430. 1869. The Home was incorporated by special act of the Legislature of Missouri in 1853, which provided inter alia that "all property of said corporation shall be exempt from taxation" and that certain sections of the general statute of 1845, subjecting all charters there- after granted to alteration, suspension, and repeal, at the discretion of the legislature, "shall not apply to this corporation." The State Constitution of 1865 authorized the legislature to im- pose certain taxes. The legislature, subsequently and by virtue of the authorization in that behalf conferred by the State Constitution of 1865, imposed certain taxes upon the property of the Home, who filed this bill against the collector of taxes to enjoin their collection. The State court dismissed the bill. ' The case is now here for review ; the Supreme Court of Missouri certifying, as a part of the record, that in the determination of the, suit there was necessarily drawn in question the construction of that clause of the Constitution of the United States, which prohibits a State from passing a law impairing the obligation of a contract, and that the decision was against the right claimed by the com- plainant. Mr. Justice Davis delivered the opinion of the court. The object for which the Home of the Friendless was incorporated was to enable those persons of the female sex, who were desirous of estabUshing a charitable institution in St. Louis for the relief of destitute and suffering females, to carry out their laudable under- taking. '.Facts restated ; portions of majority opinion omitted. SECT. 1.] HOME OF THE PEIENDLESS V. HOUSE. 185 This charter is a contract between the State of Missouri and the corporators that the property given for the charitable uses specified in it, shall, so long as it is apphed to these uses, be exempted from taxation. It follows, that any attempt to tax it impairs the obliga- tion of the contract. It is proper to observe, that the immunity from taxation does not attach to the property after the corporation has parted with it, but is operative on it while owned by the corpora- tion, and devoted to the uses for which it was originally given. It is objected that there is no consideration stated in the act for the release from taxation, which it is claimed is necessary in order to uphold the contract. But this is a mistaken view of the law on this subject. There is no necessity of looking for the consideration for a legis- lative contract outside of the objects for which the corporation was created. These objects were deemed by the legislature to be bene- ficial to the community, and this benefit constitutes the consideration for the contract, and no other is required to support it. This has been the well-settled doctrine of this court on this subject since the case of Dartmouth College v. Woodward.^ It is contended that the rules of construction applicable to legis- lative contracts are more stringent than those which are applied to contracts between natural persons, and that, applying these rules to this contract, it cannot be sustained as a perpetual exemption from taxation. It is true that legislative contracts are to be construed most favor- ably to the State if on a fair consideration to be given the charter, any reasonable doubts arise as to their proper interpretation ; ^ ' This case, reported in 4 Wheat. (U. S.) 518, is further considered in Sec. 2, infra. See therein especially Greenwood v. Union Freight R. R. Co. and notes. ' The leading case on construction of legislative grants is Proprietors of Charles River Bridge v. Proprietors of Warren Bridge, 11 Pet. (U. S.) 420, where the court held, "No rights are taken from the public, or given to the corporation, beyond those which the words of the charter, by their natural and proper construction, purport to convey." Accord: Chenango Bridge Co. v. Binghamton Bridge Co. 3 Wall. (U. S.) 51. ("All rights which are asserted against the State must be clearly defined, and not raised by inference or presumption ; and if the charter is silent about a power, it does not exist. If, on a fair reading of the instrument, reasonable doubts arise as to the proper inter- pretation to be given to it, those doubts are to be solved in favor of the State ; and where it is susceptible of two meanings, the one restricting and the other extending the powers of the corporation, that construction is to be adopted which works the least harm to the State. But if there is no ambiguity in the charter, and the powers conferred are plainly marked, and their limits can be readily ascertained, then it is the duty of the court to sustain and uphold it, and to carry out the true meaning and intention of the parties to it.") Commonwealth v. Erie &c. R. R. Co., 27 Penn. State 339. ("An act of incorpora- tion is and always must be interpreted by a rule so simple, that no man, whether lawyer or layman, can misunderstand or misapply it. That which a company is authorized to do by its act of incorporation, it may do ; beyond that all its acts are illegal. And the power must be given in plain words or by necessary implication. All powers not given in this direct and unmistakeable manner are withheld. It is strange that the Attorney-General, or anybody else, should complain against a company that keeps itself within bounds, which are always thus clearly marked, and equally 186 THE CHARTER — AS A CONTEACT WITH THE STATE. [CHAP. V. but, as every contract is to be construed to accomplish the intention of the parties to it, if there is no ambiguity about it, and this in- tention clearly appears on reading the instrument, it is as much the duty of the court to uphold and sustain it, as if it were a contract between private persons.' Testing the contract in question by -these rules, there does not seem to be any rational doubt about its true meaning. "All property of said corporation shall be exempt from taxation," are the words used in the act of incorporation, and there is no need of supplying any words to ascertain the legislative intention. To add the word "forever" after the word "taxation could not make the meaning any clearer. It was undoubtedly the purpose of the legislature to grant to the corporation a valuable franchise, and it is easy to see that the franchise would be com- paratively of Httle value if the legislature, without taking direct action on the subject, could at its will, resume the power of taxation. This view is fortified by the provisions of the general law of the State regarding corporations, in force at the time this charter was granted, and which the legislature declared should not apply to this corporation. The seventh section of the act concerning cor- porations, approved March 19, 1845, provided that "the charter of every corporation that shall hereafter be granted by the legislature shall be subject to alteration, suspension, and repeal, in the discretion of the legislature." As the charter in controversy was granted in 1853, it would have been subject to this general law if the legislature had not, in express terms, withdrawn from it this discretionary strange that a company which has happened to transgress them should come before us ■with the faintest hope of being sustained. In such cases, ingenuity has nothing to work with, since nothing can be either proved or disproved by logic or inferential reason- ing. If you assert that a corporation had certain privileges, show us the words of the legislature conferring them. Failing in this, you must give up your claim, for nothing else can possibly avail you. A doubtful charter does not exist ; because whatever is doubtful, is decisively certain against the corporation.") Pennsylvania R. R.'Co. ii. National Railway Co., 23 N. J. Eq. 441. ("Its object and aim are apparent, and of the very highest importance. They are to prevent men from obtaining from the legislature the passage of acts without disclosing their real meaning and purpose ; to protect the legislature from being misled by doubtful or ambiguous language ; to permit nothing to be acquired from the public by covert and cunningly devised phrases ; to compel those who ask for special privileges to say franldy and unmistakably what they mean, so that plain men cannot fail to understand what it is they are asked to vote away. The same things are meant to be secured by that part of our state Constitution, which ordains : Article 4 ; section 7 ; clause 4 : ' To avoid improper influences which may result from intermixing in one and the same act such things as have no proper relation to each other, every law shall embrace but one object, and that shall be expressed in the title.'") ' Accord: Madison v. Morristown Gas Light Co., 63 N. J. Eq. 120. (Charter to lay ■gas pipes in Morristown and its vicinity construed from context and geographical loca- tion to include such power in Madison, five miles distant from Morristown. "It is true that any ambiguity in the terms of a grant must operate against the corporation and in favor of the public, and that the corporation can claim nothing that is not clearly given. Pennsylvania Railroad Co. v. National Railroad Co., 8 C. E. Gr. 455. But in the grant of power words must receive their ordinary and proper meaning, and if, giving them this meaning, the power is in terms conferred, the court has no right to cut it down.") SECT. 1.] HOME OF THE FRIENDLESS V. ROUSE. 187 authority. Why the necessity of doing this if the exemption from taxation was only understood to continue at the pleasure of the legislature ? The validity of this contract is questioned at the bar on the ground that the legislature had no authority to grant away the power of taxation.^ The answer to this position is, that the question is no longer open for argument here, for it is settled by the repeated adjudications of this court, that a State may by contract based on a consideration, exempt the property of an individual or corporation from taxation, either for a specified period, or permanently. And it is equally well settled that the exemption is presumed to be on sufficient consideration, and binds the State if the charter containing it is accepted. It is proper to say that the present constitution of Missouri pro- hibits the legislature from entering into a contract which exempts the property of an individual or corporation from taxation, but when the charter in question was passed there was no constitutional restraint on the action of the legislature in this regard. Without pursuing the subject further, we are of the opinion that the State of Missouri did make a contract on sufficient consideration with the Home of the Friendless, to exempt the property of the corporation from taxation, and that the attempt made on behalf of the State through its authorized agent, notwithstanding this agreement, to compel it to pay taxes, is an indirect mode of impair- ing the obligation of the contract, and cannot be allowed. Judgment reversed, and the cause remanded to the court below, with directions to proceed in conformity with this opinion. Mr. Justice Miller, dissenting. The Chief Justice, Mr. Justice Field, and myself, do not con- cur in these judgments. It is the settled doctrine of this court, that it will, in every case affecting personal rights, where, by the course of judicial proceed- ings, the matter is properly presented, decide whether a State law impairs the obhgation of contracts ; and if it does, will declare such law ineffectual for that purpose. And it is also settled, beyond controversy, that the State legislatures may, by the enactment of statutes, make contracts which they cannot impair by any subse- quent statutes. It may be conceded that such contracts are so far protected by the provisions of the Federal Constitution that even a change in the fundamental law of the State, by the adoption of a new constitu- tion, cannot impair them, though express provisions to that effect are incorporated in the new constitution. We are also free to admit that one of the most beneficial provisions of the Federal Constitu- • Cf. police power. See Stone v. Mississippi, Sec. 2, infra, and its comment on exemption from taxation. 188 THE CHARTER — AS A CONTRACT WITH THE STATE. [CHAP. V. tion, intended to secure private rights, is the one which protects contracts from the invasion of State legislation. And that the manner in which this court has sustained the contracts of individuals has done much to restrain the State legislatures, when urged by the pressure of popular 'discontent under the sufferings of great financial disturbances, from unwise, as well as unjust legislation. In this class of cases, when the vahdity of the contract is clear, and the infringement of it by the legislature of a State is also clear, the duty of this court is equally plain. But we must be permitted to say, that in deciding the first of these propositions, namely, the validity of the contract, this court has, in our judgment, been, at times, quick to discover a contract that it might be protected, and slow to perceive that what are claimed to be contracts were not so, by reason of the want of authority in those who profess to bind others. This has been especially apparent in regard to contracts made by legislatures of States, and by those municipal bodies to whom, in a limited measure, some part of the legislative function has been confided. In all such cases, where the validity of the contract is denied, the question of the power of the legislative body to make it necessarily arises, for such bodies are but the agents and representatives of the greater political body. — the people, who are benefited or injured by such contracts, and who must pay, when anything is to be paid, in such cases. That every contract fairly made ought to be performed is a proposi- tion which lies at the basis of judicial education, and is one of the strong desires of every well-organized judicial mind. That, under the influence of this feeling, this court may have failed in some in- stances to examine, with a judgment fully open to the question, into the power of such agents, is to be regretted, but the error must be attributed to one of those failings which lean to virtue's side. In our judgment, the decisions of this court, relied upon here as conclusive of these cases, belong to the class of errors we have described. We do not believe that any legislative body, sittmg under a State constitution of the usual character, has a right to sell, to give, or to bargain away forever the taxing power of the State. This is a power which, in modern political societies, is absolutely necessary to th6 continued existence of every such society. While under such forms of government, the ancient chiefs or heads of the government might carry it on by revenues owned by them personally, and by the ex- action of personal service from their subjects, no civilized govern- ment has ever existed that did not depend upon taxation in some form for the continuance of that existence. To hold, then, that any one of the annual legislatures can, by contract, deprive the State forever of the power of taxation, is to hold that they can SECT. 1.] ■ HOME OF THE FRIENDLESS V. ROUSE. 189 destroy the government which they are appointed to serve, and that their action in that regard is strictly lawful. It cannot be maintained, that this power to bargain away, for an unlimited time, the right of taxation, if it exist at all, is limited, in reference to the subjects of taxation. In all the discussion of this question, in this court and elsewhere, no such limitation has been claimed. If the legislature can exempt in perpetuity, one piece of land, it can exempt all land. If it can exempt all land, it can exempt all other property. It can, as well, exempt persons as corporations. And no hindrance can be seen, in the principle adopted by the court, to rich corporations, as railroads and express companies, or rich men, making contracts with- the legislatures, as they best may, and with such appliances as it is known they do use, for perpetual exemp- tion from all the burdens of supporting the government. The result of such a principle, under the growing tendency to special and partial legislation, would be, to exempt the rich from taxation, and cast all the burden of the support of government, and the payment of its debts, on those who are too poor or too honest to purchase such immunity. With as full respect for the authority of former decisions, as be- longs, from teaching and habit, to judges trained in the common- law system of jurisprudence, we think that there may be questions toucWg the powers of legislative bodies, which can never be finally closed by the decisions of a court, and that the one we have here considered is of this character. We are strengthened, in this view of the subject, by the fact that a series of dissents, from this doc- trine, by some of our predecessors, shows that it has never received the full assent of this court;, and referring to those dissents for more elaborate defence of our views, we content ourselves with thus renewing the protest against a doctrine which we think must finally be abandoned.* , 1 See Bank of Commerce v. Tenneaaee, 161 XT. S. 134. ("Taxes being made the sole means by which sovereignties can maintain their existence, any claim on the part of any one to be exempt from the full pajrment of his share of taxes on any portion of his property must, on that account, be clearly defined and founded upon plain language. There must be no doubt or ambiguity In the language used upon which the claim to the exemption is founded. It has been said that a well-founded doubt is fatal to the claim ; no implication will be indulged in for the purpose of construing the language used as giving the claim for exemption, where such claim is not founded upon the plain and clearly expressed intention of the taxing power.") 190 THE CHARTEB — AS A CONTRACT WITH THE STATE. [CHAP. V. AMERICAN SMELTING AND REFINING CO. v. COLORADO.* 204 U. S. 104. 1906. Writ of error to the Supreme Court of Colorado which had affirmed a judgment forfeiting the right of the corporation, the plaintiff in error, to do business within that state until a certain tax was paid. The corporation was organized under the laws of New Jersey and in 1899 it made application to transact business in Colorado. Sec. 499, (Mills Annotated Statutes of Colorado), after making provi- sion for the performance of certain conditions by a foreign corporation entering the State, continued, "and such corporations shall be sub- jected to all the liabilities, restrictions and duties which are or may be imposed upon corporations of hke character organized under the general laws of this State, and shall have no other or greater pawers." Section 500 of the same statute provided that a foreign corporation must file in the office of the Secretary of State a copy of its charter, or, if incorporated under a general corporation law, a copy of such certificate of incorporation, and such general corporation law duly- certified. Section 1 of chapter 51 of the Session Laws of Colorado for 1897 provided that every foreign corporation should pay to the Secretary of State, for the use of the State, certain fees, graduated to the amount of capital stock ; that no corporate powers should be exercised or business transacted within the state until the prescribed fees were paid. The act of 1901 provided for the issuance of a certificate by the Secretary of State when the fees had been paid. In accordance with the provisions of section 1 of the Laws of 1897, above mentioned, the corporation paid, upon filing its certificate, April 28, 1899, to the Secretary of State, for the use of the State, $9,792.50 on its original capitalization ; and on May 17, 1901, the further sum of $5,250 upon its subsequent increase of capital stock. Thereupon the Secretary of State issued a certificate, stating the filing of the proper papers with him, and further stating that " pur- suant to the provisions of section 10 of said act (1901), I hereby certify that the said company has made full payment of all fees prescribed by law to be paid to the Secretary of State and due at the time of the issuing of this certificate, and is hereby authorized to exercise any corporate powers provided for by law." There were at this time no other statutes providing for the payment of any charges, fees or taxes for coming into and doing business in Colorado. At the time the corporation was permitted to enter and carry on its business m the State the statute of Colorado provided '■ statement of facts condensed ; portions of opinion omitted. SECT. 1.] AMEBICAN SMELTING AND REFINING CO. V. COLORADO. 191 that the term of life of corporations formed under the laws of that State should be twenty years. After the corporation had been doing business for some three years, and on March 22, 1902, the legislature of Colorado passed an act in relation to taxes. Section 64 provided that all domestic corporations should there- after pay "an annual state corporation hcense tax" of two cents upon each one thousand dollars of its capital stock. Section 65 provided that every foreign corporation which had theretofore obtained "the right and privilege to transact and carry on business within the limits of the State of Colorado shall, in addi- tion to the fees and taxes now provided for by law, and as a condition precedent to its right to do any business within the limits of this State, pay annually ..." a state license tax of four cents upon each one thousand dollars of its capital stock. Section 66 provided that every corporation which should fail to pay the tax provided for in sections 64 and 65 (supra) should forfeit its right to do business within the State until the tax was paid, and should be deprived of all rights and privileges, and the fact of such failure might be pleaded as an absolute defence to any and all actions, suits or proceedings, in law or in equity, brought or maintained by or on behalf of such corporations, in any court of competent juris- diction within the limits of the State, until such tax was paid. This corporation refused to pay, and the State, through its District Attorney and Attorney General, commenced this suit for the purpose of forfeiting its right to remain in that State, unless and untU it paid the money imder the statute of 1902. Mr. Justice Peckham delivered the opinion of the court. It is conceded that the corporation has paid all its indebtedness for taxes or otherwise to the State of Colorado, except the amount demanded under the above-mentioned law of 1902, and that it has obeyed all the laws of the State with that exception. It is urged, however, upon the part of the corporation that, by its admission into the State, with its right to do business therein by the payment of the amount of money required for such purpose under the then existing law, a contract between the State and itself was thereby made that it should be permitted to remain therein during the term of life which the State by law allowed to corporations created by it (which was twenty years), without being again subjected to further exactions of money for what it had once paid for, viz., the right to remain and transact business in that State. Undoubtedly, if the corporation violated the laws of the State properly applicable to it, or if otherwise it gave just cause for its expulsion, it could not insist upon such a contract as a defense. It is also conceded on behalf of the corporation that it is not en- titled to any exemption from taxes which the State of Colorado can properly impose upon persons or corporations within her borders. 192 THE CHARTER — AS A CONTRACT WITH THE STATE. [CHAP. V. Having obtained permission to enter the State and do business as above mentioned the question, aside from that of the extent of the term, is whether any contract between the State and the corporation arose under these laws and the facts above mentioned. In 1899, when this (foreign) corporation appUed for a permit to enter and do business in the State, the laws of Colorado only granted such application on the payment of a certain fee named in the statute of 1897, which was payable upon filing its certificate of incorpora,- tion in the office of the Secretary of State of Colorado, and until that payment was made and the certificate filed no such corporation was permitted to have or exercise any corporate powers, nor was it permitted to do any business in the State. Section 30 of the act of 1901 provided that, upon payment of all taxes, etc., due under the law, the Secretary of State was to issue a certificate acknowledg- ing the fact, for which the corporation was to pay a stated fee ; and until the certfficate was received from the Secretary of State by the corporation it should not exercise any corporate powers or do any business in the State, as provided for by the act of 1897. The result of these statutes was that the foreign corporation, upon filing the proper papers and paying the statutory fees and obtaining the certificate to that effect from the Secretary of State, obtained the right to enter and do business in Colorado. The act of 1901 did not increase the amount of the exaction for entering and doing business in the State, but simply provided for a certificate, acknowledging payment, from the Secretary, and it imposed the payment of a small fee for such certificate. The right obtained was a right to enter the State and do business therein as a corporation. It was also subject by statute to the liabilities, restrictions and duties which were or might thereafter be imposed upon domestic corporations of hke character. Domestic corporations at that time had the right to a corporate existence of twenty years. These provisions of law, existing when the corporation applied for leave to enter the State, made the payment required and received its permit, amounted to a contract that the foreign corporation so permitted to come in the State and do business therein, while sub- jected to all, should not be subjected to any greater liabilities, re- strictions or duties than then were or thereafter might be imposed upon domestic corporations of like character. A provision in a statute of this nature subjecting a foreign corpora- tion to all the liabilities, etc., of a domestic one of like character must mean that it shall not be subjected to any greater liabilities than are imposed upon such domestic corporation. The power to impose different liabihties was with the State at the outset. It could make them greater or less than in case of a domestic corporation, or it could make them the same. Having the general power to do as it pleased, when it enacted that the foreign corporation upon coming SECT, 1.] AMERICAN SMELTING ANT) REFINING CO. V. COLORADO. IqS in the State should be subjected to all the liabilities of domestic corporations, it amounted to the same thing as if the statute had said the foreign corporation should be subjected to the same liabili- ties. In other words the Habilities, restrictions and duties imposed upon domestic corporations constitute the measure and limit of the liabiUties, restrictions and duties which might thereafter be imposed upon the corporation thus admitted to do business in the State. It was not a mere license to come in the State and do business therein upon payment of a sum named, liable to be revoked or the sum in- creased at the pleasure of the State, without further Umitation. It was a clear contract that the liabilities, etc., should be the same as the domestic corporation, and. the same treatment in that regard should be measured out to both. If it were desired to increase the liabilities of the foreign, it could only be done by increasing those of the domestic, corporation at the same time and to the same extent. Such being the contract, how long was it to list? Only until the State chose to alter it? Or was it to last for some definite time, capable of being ascertained from the terms of the statutes as they then existed? It seems to us that the only limitation imposed is the term for which the corporation would have the right to continue in the State as a corporation. One of the restrictions as to domestic corporations is that which limits its corporate life to twenty years, unless extended as provided by law. The same restriction applies to the foreign corporation. Iron Silver Sic. Co. v. Cowie, 31 Colorado, 450. Counsel for the State concedes that the corporation was ad- mitted for a period of twenty years, but subject to the power of the State to tax. During that time, therefore, the contract lasts. This is the only legitimate, and we think it is the necessary, implication arising from the statute. This is not an exemption from taxation, it is simply a limitation of the power to tax beyond the rate of taxation imposed upon a domestic corporation. Instead of such a limitation the act of 1902, already referred to, imposes a tax or fee upon or exacts from the foreign corporation double the amount which is imposed upon or exacted from the domestic one. This cannot be done while the right to remain exists. It is a violation of the obligation of an existing valid contract. Home of the Friendless v. Rouse, 8 Wall. 430. Nor is this a case where the power given by the state constitution to the ge^eral assembly to alter, amend or annul a charter is appli- cable. The act does not alter the charter or annul or amend it. It simply increases the taxation which up to the time of its enact- ment had been imposed on all foreign corporations doing business in the State. A discussion as to the name or nature of the tax imposed by the act of 1902, or the former acts, is wholly unimportant with reference 194 THE CHAETER — AS A CONTRACT WITH THE STATE. [CHAP. V, to the view we take of this case. After the payment of the monejr and the receipt of the permit to enter and do business m the State the corporation could not, as we have said, be thereafter further taxed than was the domestic one. The tax on the latter under that act is the same in substance and. effect as that upon the foragn. corporation, but it is for only one-half thereof in amount. The domestic must pay "an annual state corporation hcense tax , while the foreign corporation must pay "a state hcense ta,x annually. The means of enforcing payment are not different, and such means are stated in section 66 of the act of 1902. ■ Whatever be the name or nature of the tax, it must be measured in amount by the same rate as is provided for the domestic institu- tion, and if the latter is not taxed in that way neither can the State thus tax the foreign corporation. _ Holding that the act of 1902 impaii-ed the obhgation of the con- tract existing between the corporation and the State, and is therefore void as to the corporation, it becomes unnecessary to decide the other questions discussed at the bar. The judgment of the Supreme Court of Colorado is reversed and the case remanded to that court for further proceedings not incon- sistent with this opinion. Reversed} The. Chief Justice, Mr. Justice Harlan, Mr. Justice Holmes and Mr. Justice Moody dissented. Section 2. — The Modifications. STONE ET AL. v. MISSISSIPPI." 101 U. S. 814. 1879. Information in the nature of a quo warranto filed by the Attorney- General of Mississippi in the Circuit Court of that state against Stone et al. alleging that, without authority, they were and had been carrying on a lottery ; that their Society was incorporated by special act of the Mississippi Legislature in 1867 for a term of 25 years ; that the new state constitution of 1868 forbade any lottery theretofore authorized to be drawn or tickets therein to be sold ; ' Although certain foreign corporations may be relieved under this decision, the state may still enforce Section 64 against domestic corporations. "Their burdens may be different. The tax is not on commerce but is an excise tax on the privilege of corporate existence within the state. Colorado & S. Ry. Co. v. People, 156 Pao. Rep. (Colorado — 1916) 1095. ' Facts restated ; portions of opinion omitted. SECT. 2.] STONE ET AL. V. MISSISSIPPI. 195 that the constitutional provision and the act of 1870 passed pur- suant thereto, virtually and in effect repealed the aforesaid charter which the defendants denied. Judgment of ouster was rendered in the state court and defendants bring this writ of error. Mr. Chief Justice Waite deUvered the opinion of the court. It is now too late to contend that any contract which a State actually enters into when granting a charter to a private corporation is not within the protection of the clause in the Constitution of the United States that prohibits States from passing laws impairing the obligation of contracts. Art. 1, sect. 10. The doctrines of IVustees of Dartmouth College y. Woodward (4 Wheat. 518), announced by this court more than sixty years ago, have become so imbedded in the jurisprudence of the United States as tomake them to all intents and purposes a part of the Constitution itself. In this connection, however, it is to be kept in mind that it is not the charter which is protected, but only any contract the charter may contain. If there is no contract, there is nothing in the grant on which the Con- stitution can act. Consequently, the first inquiry in this class of cases always is, whether a contract has in fact been entered into, and if so, what its obligations are.' In the present case the question is whether the State of Mississippi, in its sovereign capacity, did by the charter now under consideration bind itseK irrevocably by a contract to permit "the Mississippi Agricultm-al, Educational, and Manufacturing Aid Society," for twenty-five years, "to receive subscriptions, and sell and dispose of certificates of subscription which shall entitle the holders thereof to" "any lands, books, ■ paintings, antiques, scientific instruments or apparatus, or any other property or thing that may be ornamental, valuable, or useful," "awarded to them" "by the casting of lots, or by lot, chance, or otherwise." There can be no dispute but that imder thi^ form of words the legislature of the State chartered a lottery company, having all the powers incident to such a corpora- tion, for twenty-five years, and that in consideration thereof the company paid into the State treasury $5,000 for the use of a uni- versity, and agreed to pay, and until the commencenfent of this suit did pay, an annual tax of $1,000 and "one-half of one per cent on the amount of receipts derived from the sale of certificates or tickets." If the legislature that granted this charter had the power to bind the people of the State and all succeeding legislatures to allow the corporation to continue its corporate business during the whole term of its authorized existence, there is no doubt about the > Cf. City of Detroit «. Detroit &c. Plank Road Co., 43 Mich. 140. (" Legialators cannot . . . bind the hands of their successors where the elements of contract, con- cession, and consideration do not appear ; and the doctrine that they may do so by contract is one so exceptional and so liable to abuses that courts will not be astute in discovering the existence of a contract between the state and those who claim the franchises under it, where the essential elements of a contract are not manifest.") 196 THE CHARTER — AS A CONTRACT WITH THE STATE. [CHAP. V. sufficiency of the language employed to effect that object, although there was an evident purpose to conceal the vice of the transaction hy the phrases that were used. Whether the alleged contract exists, therefore, or not, depends on the authority of the legislature to bind the State and the people of the State in that way. All agree that the legislature cannot bargain away the police power of a State. "Irrevocable grants, of property and franchises may be made if they do not irnpair the supreme authority to make laws for the right government of the State; but no legislature can curtail the power of its successors to make such laws as they may deem proper in matters of pohce." Metropolitan Board of Excise v. Barrie, 34 N. Y. 657; Boyd v. Alabama, 94 U. S. 645. Many attempts have been made in this court and elsewhere to define the police power, but never with entire success. It is always easier to deterinine whether a particular case 'comes within the general scope of the power ,1 than to give an abstract definition of the power itself which will -be in all respects accurate. No one denies, however, that it extends to all matters affecting the public health or the pubhc morals. Beer Company v. Massachusetts, 97 id., 25 ; ^ Patterson V. Kentucky, id., 501. Neither can it be denied that lotteries are proper subjects for the exercise of this power. From 1822 to 1867, without any constitutional requirement, they were prohibited by law in Mississippi, and those who conducted them punished as a kind of gamblers. During the provisional gov- ernment of that State, in 1867, at the close of the late civil war, the present act of incorporation, with more of like character, was passed. The next year, 1868, the people, in adopting a new constitution with a view to the resumption of their political rights as one of the United States, provided that "the legislature shall never authorize any lottery, nor shall the sale of lottery-tickets be allowed, nor shall any lottery heretofore authorized be permitted to be drawn, or tickets therein to be sold." Art. 12, sect. 15. The question is therefore directly presented, whether, in view of these facts, the legislature of a State can, by the charter of a lottery company, defeat the will of the people, authoritatively expressed, in relation to the further continuance of such business in their midst. ' This is a question of constitutional, not of corporation, law. ' In this case, the court said : "Whatever differences of opinion may exist as to the extent and boundaries of the police power, and however difiacult it may be to render a satisfactory definition of it, there seems to be no doubt that it does extend to the pro- tection 6f the lives, health and property of the citizens, and to the preservation of good order and the public morals. The Legislature cannot, by any contract, divest itself of the power to provide for these objects. They belong emphatically to that class of objects which demand the application of the maxim, Solus populi suprema lex; and they are to be attained and provided for by such appropriate means as the legislative discretion may devise. That discretion can no more be bargained away than the power4t3elf." An excellent discussion of present day conceptions of the nature, extent, and limita- tion upon the police power is found in State v. Clausen, 65 Wash. 156. SECT. 2.] STONE ET AL. «. MISSISSIPPI. 197 We think it cannot. No legislature can bargain away the public health or the pubUc morals. The people themselves cannot do it, much less their servants. The supervision of both these subjects of governmental power is continuing in its nature, and they are to be dealt with as the special exigencies of the moment may require. Government is organized with a view to their preservation, and cannot divest itself of the power to provide for them. For this purpose the largest legislative discretion is allowed, and the discre- tion cannot be parted with any more than the power itself. Beer Company v. Massachusetts, supra. We have held, not, however, without strong opposition at times, that this clause [the contract clause of the federal constitution] pro- tected a corporation in its charter exemptions from taxation. While taxation is in general necessary for the support of government, it is not part of the goverrmient itself. Government was not organized for the purposes of taxation, but taxation may be necessary for the purposes of government. As such, taxation becomes an incident to the exercise of the legitimate functions of government, but nothing more. No government dependent on taxation for siipport'can bar- gain away its whole power of taxation, for that would be substantially abdication. All that has been determined thus far is, that for a consideration it may, in the exercise of a reasonable discretion, and for the public good, surrender a part of its powers in this particular.. But the power of governing is a trust committed by the people to the government, no part of which can be granted away. The people, in their sovereign capacity, have established their agencies for the preservation of the public health and the public morals,, and the protection of public and private rights. These several agencies can govern according to their discretion, if within the scope of their general authority, while in power; but they cannot give away nor sell the discretion of those that are to come after them, in respect to matters the government of which, from the very nature of things, must "vary with varying circumstances." They may create corporations, and give them, so to speak, a limited citizenship ; but as citizens, limited in their privileges, or otherwise, these crea- tures of the government creation are subject to such rules and regulations as may from time to time be ordained and established for the preservation of health and morality. The contracts which the Constitution protects are those that re- late to property rights, not governmental.^ It is not always easy ' The Dartmouth College principle does not apply to public or municipal corpora- tions. East Hartford &c. Co. ». Hartford Bridge Co., 10 How. (U. S.) 533, where it was held that an act of Legislature revoking a ferry franchise theretofore conferred upon a municipality, and granting it to a bridge company, did not contravene the- contract clause of the federal constitution. "The legislature was acting here on the one- part, and public municipal and political corporations on the other. They were acting, too, in relation to a public object, being virtually a highway across the riVer, over 198 THE CHAETEK — AS A CONTRACT WITH THE STATE. fCHAP. V. to tell on which side of the line which separates governmental from property rights a particular case is to be put; but in respect to lotteries there can be no difficulty. They are not, in the legal acceptation of the term, mala in se, but, as we have just seen, may properly be made mala prohibita. They are a species of gambUng, and wrong in their influences. They disturb the checks and balances of a well-ordered community. Society built on such a foundation would almost of necessity bring forth a population of speculators and gamblers, Uving on the expectation of what, "by the casting of lots, or by lot, chance, or otherwise," might be "awarded" to them from the accumulations of others. Certainly the right to suppress them is governmental, to be exercised at all times by those in power, at their discretion. Any one, therefore, who accepts a lottery charter does so with the implied understanding that the people, in their sovereign capacity, and through their properly constituted agencies, may resume it at any time when the pubhc good shall require, whether it be paid for or not. All that one can get by such a charter is a suspension of certain governmental rights in his favor, subject to withdrawal at will. He has in legal effect nothing more than a Hcense to enjoy the privilege on the terms named for the specified time, unless it be sooner abrogated by the soveMgn power of the State. It is a permit, good as against exist- ing laws, but subject to future legislative and constitutional control or withdrawal. On the whole, we find no error in the record. Judgment affirmed. CONSOLIDATED TRACTION CO. v. EAST ORANGE. 61 N. J. L. 202. 1897. LipPiNcoTT, J.i The ConsoHdated Traction Company, a corpora- tion of this state, is operating an electric street railway in Main street, in the township of East Orange. On the southerly side of Main street the ConsoHdated Traction Company had strung its electric feed-wires on poles to supply the motive power to the cars. On that side of the street shade trees 3tt^' ^f7^^ "tl and down the river. From this standing and relation of these part es and from the subject matter of their action, we think that the doings of the kgislature as to this erry must be considered rather as public laws than as contracts They related to public interests. They changed as those interests demanded The S h^ 'i ■^'"'k',*''^ ^"""^ ^'"S '"^'^ organizations for public purpos^ were" liable • Portions Of opinion omitted. SECT. 2.] CONSOLIDATED TRACTION CO. V. EAST OKANGE. 199 were growing along the edge of the sidewalk. On December 21st, 1896, the company deeming it necessary for the operation of the street railway and to prevent them from interfering with these wires, proceeded to cut off some of the limbs and branches of such trees. The employees of the company, the other prosecutors herein, did the cutting under the direction of the company. Complaint was made against them and they were convicted before a justice of the peace of violating the ordinance of the township, and a fine of $25 each Imposed upon them. Thereupon these writs of certiorari were sued out to review the validity and reasonableness of the ordinance by virtue of which the convictions were had. The fourth section of the ordinance provides "that no person shall cut, trim or break any tree, hmb or twig thereof, standing upon & pubUc street or highway of the township, without first obtaining permission of the township committee or their authorized agent." The fifth section provides for the imposition of a penalty of $25 for a violation of any of the provisions of the ordinance. The only question arising is whether the ordinance is vahd as a reasonable exercise of the police powers of the township authorities. [The court first determines that ample power had been delegated by the legislature to the township committee to enact such kind of ordinance.] The ordinance is reasonable in its provisions. It provides only before the trees shall be cut down or the branches thereof cut off ■that the consent of the township committee shall be obtained. This is necessary and reasonable for the orderly control and regulation of the streets and public places in this respect, to the end that the iisefulness of the streets and the trees thereon be, so far as practicable, preserved to the public. Under the power and duty conferred by the legislature it would, seem to be reasonable that before such trees should be cut down, defaced or the limbs thereof cut off by any person or corporation in the use of the street, the consent of the municipal authorities should be obtained, in respect to the mode in which the destruction, partially or wholly, should be effected. The ordinance is not prohibitory but only regulative, and is reasonable in all its essential features. The question is not whether the acts of cutting or trimming these trees were reasonable acts in the operation of this electric street railway, but whether the .ordinance requiring consent of the municipal authorities is a reasonable exercise of the municipal pohce power conferred by the legislature of the state upon them. The conclusion is that it is not only a valid but also a reasonable €xercise of such power. The ordinance is a reasonable one. A contention is made by the prosecutors that because the town- ship of East Orange granted permission to operate its cars and string 200 THE CHAETEK — AS A CONTRACT WITH THE STATE. [CHAP. V. its wires through this street, it has also, ipso facto, granted what- ever rights it had in the trees therein, in so far as a proper operation of the cars by the stringing of wires is concerned. This contention cannot for a moment be admitted. As a matter of fact neither the ordinances nor the agreement by which these wires are strung and tlie cars operated through this street confer or convey any such rights to the company. The wires are required to be strung on poles, and no mention whatever is made of any control over the trees or any use to which they can at all be devoted. The clear impUcation, I think, would be that in erecting the poles and stringing the wires all interference with the trees should have been avoided. Nearly all kinds of reasonable regulations can be imposed upon street railways in the use of the streets, by the municipahty, under the authority granted by the legislature to pass ordinances to regu- late the use of the streets, and such resolutions are never declared unlawful on the ground that they impair the franchises of the com- pany. Even direct legislative authority to a street railway company to carry passengers over the streets of a city does not exempt the corporation from municipal or pohce control. The principle is a general one, that when a business is authorized to be conducted by a corporation within a municipality, the latter presumptively pos- sesses the same right to regulate it that it has over a like business conducted by private persons. A grant to a corporation of the right to own property and to transact business affairs confers no immunity from police control to which the citizen would be sub- jected, and a reasonable regulation of the franchise is not a denial of the right, or an invasion of the franchise, nor a deprivation of its property, or interference with the business of the corporation. The company is presumed to know that the business of operating a city street railway must be conducted under such reasonable* rules and regulations as the municipality may impose, and subject to its share of the burdens incident to the conduct of the municipal government. Upon these principles the ordinance in question was a valid and reasonable exercise of the police power of the municipality, and it, and the convictions under it, must be affirmed, with costs.^ ' Everything sought to be accomplished in the name of the poUce power is not there- fore lawfuUy done. The power is subject to the Constitution. The test of police regulation when thus measured is reasonableness as distinguished from arbitrary or capncious action. State v. Clausen, 65 Wash. 156. SECT. 2.] GBEENWOOD V. UNION FREIGHT R.R. CO. 201 GREENWOOD v. UNION FREIGHT RAILROAD COMPANY ET AL.i 105 U. S. 13. 1881. Mr. Justice Miller delivered the opinion of the court. The appellant, Greenwood, a citizen of the State of New York, brought his bill of complaint against "the Union Freight Railroad Company, a corporation established by the laws of Massachusetts ; against the Marginal Freight Railroad Company, hkewise a Massa- chusetts corporation; against the city of Boston, its mayor and aldermen by name ; and against the directors of the Marginal Freight Railroad Company, — all citizens of Massachusetts. The Union Freight Railroad Company demurred to the bill, and the demurrer was sustained and the bill dismissed. It is this decree which we are called on to review on appeal taken by complainant. The case made by the bill is that the Marginal Freight Railroad Company, which we shall hereafter call the Marginal Company, was organized under an act of the legislature of Massachusetts of the date of April 26, 1867, to build and operate a railroad through various streets in the city of Boston, "with all the privileges and subject to all the duties, restrictions, and HabiUties set forth in the general laws, which now are or may hereafter be in force, relating to street-railway corporations, so far as they are applicable." The right of way of this company for part of its route lay over the line of a railway previously granted to the Commercial Freight Railroad Company, and the Marginal Company, by virtue of a provision in its charter, purchased and paid the Commercial Company for the joint use of its track, so far as it ran through the same streets. After- wards, on May 6, 1872, the legislature of Massachusetts incorporated, by an act of that date, the Union Freight Railroad Company, which, by virtue of its charter and the authority of the board of aldermen of Boston, was authorized to run its track through the same streets and over the same ground covered by the track of the Marginal Company, and to take possession of the track of that and any other street-railroad company, on payment of compensation. This latter act also repealed the charter of the Marginal Company. Sections 4, 6, and 7 of this act constitute the foundation of com- plainant's grievance, because they are said to impair the obligation of the contract found in the charter of the Marginal Company, and, as they are short, they are here given verbatim : — "Sect. 4. Said corporation may, within its authorized liniits > Portions of opinion omitted. 202 THE CHARTER — AS A CONTRACT WITH THE STATE. [CHAP. V. and for the purposes of this act, enter upon and use any part of the tracks of any other street railroad, and may suitably strengthen and improve such tracks; and if the corporations cannot agree upon the manner and conditions of such entry and use, or the com- pensation to be paid therefor, the same shall be determined m ac- cordance with the provisions of the thirty-eighth section of chapter three hundred and eighty-one of the acts of the year eighteen hun- dred and seventy-one." xi. r xt, "Sect. 6. Sai-d corporation shall, within four months from the passage of this act, take the tracks, or any part thereof, of the Mar- ginal Freight Railway Company, subject to the laws relating to the taking of land by railroad companies and the compensation to be made therefor. "Sect. 7. Chapter one hundred and seventy of the acts of the year eighteen hundred and sixty-seven, entitled an 'Act to incor- porate the Marginal Freight Railway Company,' and so much of chapter four hundred and sixty-one of the acts of the year eighteen hundred and sixty-nine as relates to said Marginal Freight Railway- Company, are hereby repealed." The bill avers that the Union Freight Railroad Company has been organized, and is about to proceed in such a manner under this act that the Marginal Company will be utterly destroyed, and its several contracts, franchises, rights, easements, and properties will be impaired and destroyed, and the stock of complainant in said company will be destroyed and made valueless, and he wilL sustain irreparable damage and mischief. The prayer of the bill is for an injunction against all the defendants, to prevent these acts so injurious to the rights of the Marginal Freight Railroad Company. [The court determined that, under the circumstances, complainant, as a stockholder, had shown a standing to sue in behalf of his; corporation. This subject is considered infra, Book IV, Chap. 4, Sec. 7.] As none of the defendants are charged with a purpose to exercise any power or to perform any acts not authorized by the terms of the act of May 6, 1872, the remaining question to be decided is, whether the featirres of that act to which complainant objects in his biU are beyond the power of the legislature of Massachusetts, or are forbidden by anything in the Constitution of the United States. These exercises of power in the statute complained of are divisible into two : — 1. The repeal of the charter of the Marginal Company. 2. The authority vested in the Union Company to take its track for the use of the latter company. It is the argument of counsfel, pressed upon us with much vigor, that the two taken together constitute a transfer of the SECT. 2.] GBEENWOOD V. UNION FREIGHT R.R. CO. 203 property of the one corporation to the other, and with it all the corporate franchises, rights, and powers belonging to the elder corporation. We are not insensible to the force of the argument as thus stated ; and we think it must be conceded that, according to the unvarying decisions of this court, the unconditional repeal of the charter of the Marginal Company is void under the Constitution of the United States, as impairing the obligation of the contract made by the acceptance of the charter between the corporators of that company and the State, unless it is made valid by that provision of the General Statutes of Massachusetts, called the reservation clause, concerning acts of incorporation; or unless it falls within some enactment covered by that part of its own charter which makes it "subject to all the duties, restrictions, and habiUties set forth in the general laws, which now are or may hereafter be in force, relating to street- railway corporations, so far as they may be appKcable." The first of these reservations of legislative power over corpora- tions is found in sect. 41 of chap. 68 of the General Statutes of Mas- sachusetts, in the following language : "Every act of incorporation passed after the eleventh day of March, in the year one thousand eight hundred and thirty-one, shall be subject to amendment, alter- ation, or repeal, at the pleasure of the legislature." It would be difficult to supply language more comprehensive or expressive than this. Such an act may be amended ; that is, it may be changed by addi-, tions to its terms or by quaHfications of the same. It may be altered by the same power, and it may be repealed. What is it may. be re- pealed? It is the act of incorporation. It is this organic law on which the corporate existence of the company depends which may be repealed, so that it shall cease to be a law; or the legislature may adopt the milder course of amending the law in matters which need amendment, or altering it when it needs sub- stantial change. All this may be done at the pleasure of the legis- lature. That body need give no reason for its action in the matter. The validity of such action does not depend on the necessity for it, or on the soundness of the reasons which prompted it. This ex- pression, "the pleasure of the legislature," is significant, and is not found in many of the similar statutes in other- States. This statute having been the settled law of Massachusetts, and representing her poHcy on an important subject for nearly fifty years before the incorporation of the Marginal Company, we cannot doubt the authority of the legislature of Massachusetts to repeal that charter. Nor is this seriously questioned by counsel for ap- pellant; and it may, therefore, be assumed that if the repeafing clause of the act of May 6, 1872, stood alone, its vahdity must be conceded. Crease v. Babcock, 23 Pick. (Mass.) 334 ; Erie & N. E. 204 THE CHAETER — AS A CONTRACT WITH THE STATE. [CHAP. V. Railroad Co. v. Casey, 26 Pa. St. 287; Pennsylvania College Cases, 13 Wall. 190; 2 Kent, Com. 306. It is argued, however, that the act is to be examined as a whole, and that as the earUer sections of the statute bestow upon the Union Company the right to seize the track and other property of the Marginal Company, this repeahng clause is inserted merely to aid in the general purpose of transferring a valuable property and its appurtenant franchise from one corporation to another. What is the effect of the repeal of the charter of a corporation likethis? .,,,.•, i One obvious effect of the repeal of a statute is that it no longer exists. Its life is at an end. Whatever force the law may give to transactions into which the corporation entered and which were authorized by the charter while in force, it can originate no new transactions dependent on the power conferred by the charter. If the corporation be a bank, with power to lend money and to issue circulating notes, it can make no new loan nor issue any new notes designed to circulate as money. If the essence of the grant of the charter be to operate a railroad, and to use the streets of the city for that purpose, i* can no longer so use the streets of the city, and no longer exercise the franchise of running a railroad in the city. In short, whatever power is de- pendent solely upon the grant of the charter, and which could not be exercised by unincorporated private persons under the general laws of the State, is abrogated by the repeal of the law which granted these special rights. Personal and real property acquired by the corporation during its lawful existence, rights of contract, or choses in action so ac- quired, and which do not in their nature depend upon the general powers conferred by the charter, are not destroyed by such a re- peal ; ' and the courts may, if the legislature does not ptovide some 1 Accord: People v. O'Brien, ill N. Y. 1. (While the repeal of the charter, under the power reserved in that behalf, was valid, and effected a dissolution of the corpora- tion, its property, nevertheless, including acquired rights in the streets and its other special franchises, survived such dissolution, and title thereto became vested thereby in its directors then in office, as trustees for its creditors and stockholders.) In Lord ». Equitable Life Assur. Society, 194 N. Y. 214, the court said : "What was decided in that case? [People v. O'Brien, supra.] Three statutes were before the court and the claim was made that each was passed in violation of the Constitution. (L. 1886, chs. 268, 271 and 310.) The first simply repealed the charter of 'The Broad- way Surface Railroad Company.' That was held constitutional. The second and third were general acts and provided for winding up the affairs of corporations whose icharterg had been repealed by the legislature in such a way as to interfere with special frarachises, as well as mortgages and traffic contracts. These were held unoonstitutioiial. As the vote of the judges shows, no other question was decided, but necessarily involved in that was the great question whether the right to ' maintain tracks and run cars on Broadway survived the dissolution of the corporation.' " In order to fully appreciate the decision it may be useful to mark the distinction between the repeal of a charter and the repeal of a franchise. Here definitions become' important. The charter of a corporation is the law which gives it existence as such. SECT. 2.] GREENWOOD V. UNION FREIGHT R.R. CO. 205 special remedy, enforce such rights by the means within their power. The rights of the shareholders of such a corporation, to their interest in its property, are not annihilated by such a repeal, and there must remain in the courts the power to protect those rights. ; A short reference to the origin of this reservation of the right to repeal charters of corporations may be of service in enabling us to That is its general franchise, which can be repealed at the will of the legislature. A special franchise is the right, granted by the public, to use public property for. a public use but with private profit, such as the right to build and operate a railroad in the streets of a city. Such a franchise, when acted upon, becomes property and cannot be repealed, unless power to do so is reserved in the grant, although it may be condemned upon making compensation. As we recently said : ' The general franchise of a corpora- tion is its right to live and do business by the exercise of the corporate powers granted by the state. The general franchise of a street railroad company, for instance, is the special privilege conferred by the state upon a certain number of persons known as the corporators to become a street railroad corporation and to construct and operate a street railroad upon certain conditions. Such a franchise, however, gives the corpora- tion no right to do anything in the public highways without special authority from the state, or some municipal officer or body acting under its authority. When the right of way over a public street is granted to such a corporation, with leave to construct and operate a street railroad thereon, the privilege is known as a special franchise, or the right to do something in the public highway, which, except for the grant, would be a trespass.' (People ex rel. Metr. St. Ry. Co. v. State Board of Tax Com'rs, 174 N. Y. 417, 435.) " The right to be a corporation is frequently called a franchise, as it is in one sense, but not in the sense that the grant of a right to build a railroad in a public street is a fran- chise, and it is unfortunate that the same word is used with widely different meanings, for it leads to confusion unless qualified by an appropriate adjective, such as 'general' or ' special.' The right to be a corporation, or the corporate right of life, is inseparable from the corporation itself. It is a part of it and cannot be sold or assigned. That franchise is general and dies with the corporation, for it cannot survive dissolution or repeal. On the other hand, grants to do something in the public streets or special fran- chises are not a part of the corporation. They can be made to an individual with the same legal force or effect as to a corporation. Unless there is some legislative restric- tion they can be mortgaged and sold. They are no part of corporate life, if owned by a corporation, any more than they are a part of individual life if owned by a human being. When the vote of the judges is analyzed it will be seen that all that was decided in the O'Brien case is that the repealing act was valid and that the special franchise survived the death of the corporation, or, in other words, that the special franchise to build a railroad in Broadway lived after the legislature had taken away the life of the corpora- tion owning it. (Boswell !).. Security Mut. Life Ins. Co., 193 N. Y. 465.) . . . " The right to amend a charter, however, does not include the right to take away money invested in reliance thereon, or property acquired thereunder. The power of amendment reserved by the Constitution or statutes of a state does not permit inter- ference with property or property rights, because they are protected by the Constitution of the United States. When the legislature has created a corporation and has given it power to acquire property, it cannot take away the property so acquired without pro- viding for compensation. (Mayor, etc., of N. Y. v. Twenty-third St. Ry. Co., 113 N. Y. 311, 317.)" A special franchise, being property, is taxable unless the right of taxation is expressly- relinquished. Metropolitan Street Ry. Co. *. New York, 199 U. S. 1. And it is immaterial whether it be a gift to the corporation or be purchased, either by payment of a sum in gross or by recurring payments or by performance of stipulated obligations. Ibid. But in determining the reasonableness of a rate to be charged by a public utility, "no allowance should be made for the value of the special franchises, in a case where it is not legally exclusive and where the state still retains the right to fix rates." Public Service Gas Co. v. Board of Public Utility Commissioners, 84 N. J. L. 463, reversed (87 N. J. L. 581) but affirmed after re-argument (87 N. J. L. 581). 206 THE CHARTER — AS A CONTRACT WITH THE STATE. [CHAP. V. decide upon its office and effect when called into operation by the legislative exercise of the power. As early as 1806, in the case of Wales v. Stetson (2 Mass. 143), the Supreme Court of that State made the declaration "that the rights legally vested in all corporations cannot be controlled or de- stroyed by any subsequent statute, unless a power for that purpose be reserved to the legislature in the act of incorporation." In Trustees of Dartmouth College ». Woodward (4 Wheat. 518), de- cided in 1819, this court announced principles on the subject of the protection that the charters of private corporations were entitled to claim, under the clause of the Federal Constitution against im- pairing the obligation of contracts, which, though received at the time with some dissatisfaction, have never been overruled in this court. The opinion in that case carried the protection of the con- stitutional provision somewhat in advance of what had been decided in Fletcher v. Peck (6 Cranch, 87) and the preceding cases, and held that it applied not only to contracts between individuals, and to grants of property made by the State to individuals or to corpora- tions, but that the rights and franchises conferred upon private as distinguished from public corporations by the legislative acts under .which their existence was authorized, and the right to exercise the functions conferred upon them by the statute, were, when accepted by the corporators, contracts which the State could not impair. It became obvious at once that many acts of incorporation which had been passed as laws of a public character, partaking in no general sense of a bargain between the States and the corporations which they created, but which yet conferred private rights, were no longer subject to amendment, alteration, or repeal, except by the consent of the corporate body, and that the general control which the legis- latures creating such bodies had previously supposed tjiey had the right to exercise, no longer existed. It was, no doubt, with a view to suggest a method by which the State legislatures could retain in a large measure this important power, without violating the pro- vision of the Federal Constitution, that Mr. Justice Story, in his concurring opinion in the Dartmouth College case, suggested that when the legislature was enacting a charter for a corporation, a provision in the statute reserving to the legislature the right to amend or repeal it must be held to be a part of the contract itself, and the subsequent exercise of the right would be in accordance with the contract,! and could not, therefore, impair its obligation. And he cites with approval the observations we have already quoted from the case of Wales v. Stetson, 2 Mass. 143. It would seem that the States were not slow to avail themselves of this suggestion, for while we have not time to examine their legis- • Cf. Nugent ii. Supervisors, ante, page 175. SECT. 2.] GREENWOOD V. TINION FREIGHT R.E. CO. 207 lation for the result, we have in one of the cases cited to us as to the effect of a repeal (McLaren v. Pennington, 1 Paige (N. Y.), 102), in which the legislature of New Jersey, when chartering a bank with a capital of $400,000 in 1824, declared by its seventeenth sec- tion that it should be lawful for the legislature at any time to alter, amend, and repeal the same. And Kent (2 Com. 307), speaking of what is proper in such a clause, cites as an example a charter by the New York legislature, of the date of Feb. 25, 1822. How long the legislature of Massachusetts continued to rely on a special reserva- tion of this power in each charter as it was granted, it is unnecessary to inquire, for in 1831 it enacted as a law of general application, that all charters of corporations thereafter granted should be subject ■to amendment, alteration, and repeal at the pleasure of the legis- lature, and such has been the law ever since.' This history of the reservation clause in acts of incorporation supports our proposition, that whatever right, franchise, or power in the corporation depends for its existence upon the granting clauses of the charter, is lost by its repeal. It results from this view of the subject that whatever right re- mained in the Marginal Company to its rolling-stock, its horses, its harness, its stables, the debts due to it, and the funds on hand, if any, it no longer had the right to run its cars through the streets, or any of the streets, of Boston. It no longer had the right to cumber these streets with a railroad track which it could not use, for these belonged by law to no person of right, and were vested in defendants only by virtue of the repealed charter. It was, therefore, in the power of the Massachusetts legislature to grant to another corporation, as it did, the authority to operate a street railroad through the same streets and over the same ground previously occupied by the Marginal Company. Whether this 1 The explanation afforded in Lord v. Equitable Life Aasur. Society, supra, is : "The provision in the Revised Statutes was the result of public alarm and protest caused by the decision of the Supreme Court of the United States in the celebrated Dartmouth College case, decided in 1819. ... In that case it was held that a charter granted in 1769 by the king of England to the trustees of a college in New Hampshire, was a con- tract so protected by the Federal Constitution that the state could not modify it in any material respect without the consent of the corporation. As soon as it was realized that the principle of the decision applied to the charters of all corporations and placed them forever beyond the power of legislation, the situation caused great anxiety throughout the nation. It was felt that danger threatened the public welfare when a thing created by law was placed beyond the control of law. The determination became general that if existing charters were stronger than the state, no future charter should be, and action followed accordingly along the line suggested by Mr. Justice Stout in his concurring opinion in the Dartmouth College case, that if a state wished to alter charters it must reserve the right to do so. . . . In this state as in others the feeling was almost universal that there never should be another corporation with powers beyond- ttie control of the legislature, and when the revisers reported the provision quoted from the Revised Statutes with an exception in favor of ' religious, literary and charitable societies', the legislature brushed away the exception and made all charters subject to alteration in its discretion, and this became the permanent policy of the state when the -Constitution of 1846 was adopted." 208 THE CHARTER — AS A CONTRACT WITH THE STATE. [CHAP. V. action was oppressive or unjust in view of the public good, or whether the legislature was governed by sufficient reason in thus repealing the charter of one company and in chartering another at the same time to perform as part of its functions the duties required of the first, is not, as we have seen, a judicial question in this case. That in creating the later corporation, whose object was to tulfaL a pubUc use, it could authorize it to take such property oj ot^ier corporations as might be necessary to that use as weU as that of individuals, can hardly admit of question. The property of cor- porations, even including their franchises, when that is necessary, may be taken for pubhc use under the power of eminent domain, on making due compensation.^ . Accord: Plainfield &c. Water Co. v. Inhabitants &c., 83 N. J. L. 332. In Central Bridge Corporation v. City of LoweU, 4 Gray (Mass.) 474, the court said : "It is true that the plaintiffs, by accepting and acting under tne act by which they were created, and by advancing their money and building the bridge upon the faith of it, are entitled to insist that the legislature shall not invalidate or disrega,rd the power granted to them or the right created and vested by their charter. But it is also true that their powers and privileges, including everything which constitutes their franchise, are held and enjoyed in the same manner and by the like tenure as all other property and every species of valuable right and interest are possessed and owned under our constitution and laws. They can claim no special exemption or privilege for their franchise. It is subject to the same sovereign right of eminent domain, by which the property and rights of all subjects and individuals are liable to be taken and appro- priated to a pubUc use, in the manner provided in the Constitution, whenever the legis- lature shall deem that the pubhc exigencies require it. This principle is too well settled by the highest authority to be now open to question. West River Bridge i>. Dix, 6 How. 507 ; Richmond, Fredericksburg & Potomac Railroad v. Louisa Railroad, 13 How. 83 ; Boston & Lowell Railroad ». Salem & Lowell Raihroad, 2 Gray, 35 ; Spring- field V. Connecticut River Railroad, 4 Cush. 63. In the case first cited, it was fully i^cognized and applied to facts very similar to those in the case at bar. It was there held, that a franchise to btiild and maintain a bridge might be taken and appropriated to a pubhc use, and that the right of a corporation, under a charter from a state legis- lature, to erect and keep up a bridge and take tolls theron, might be taken for a highway in the due exercise of the right of eminent domain. " Nor is the principle thus recognized any violation of justice or souijd policy, nor does- it in any degree tend to impair the obligation or infringe upon the sanctity of contracts. It rests on the basis that public convenience and necessity are of paramount importance and obUgation, to which, when duly ascertained and declared by the sovereign author- ity, all minor considerations and private rights and interest must be held, in a measure and to a certain extent, subordinate. By the grant, of a franchise to individuals for one public purpose, the legislature do not forever debar themselves from giving to others, new and paramount rights and privileges when required by public exigencies, although it may be necessary in the exercise of such rights and privileges to take and appropriate a franchise previously granted. If such were the rule, great public improvements, rendered necessary by the increasing wants of society in the development of civilization, and the progress of the arts, might be prevented by legislative grants which were wise and expedient in their time, but which the public necessities have outgrown and ren- dered obsolete. The only true rule of policy, as well as of law, is that a grant for one public purpose must yield to another more urgent and important, and this can be effected without any infringement on the constitutional rights of the subject. If in such cases suitable and adequate provision is made by the legislature for the compensa- tion of those whose property or franchise is injured or taken away, there is no viblation of pubhc faith or private right. The obligation of the contract created by the original charter is thereby recognized. The property of individuals in it, and the rights acquired by them under it, like other property appropriated for public uses, form proper subjects for indemnity in damages under the provision in the tenth article of our Declaration of Rights." SECT. 2.] GREENWOOD V. XHSriON FREIGHT R.R. CO, 209 But it is the sixth section of the act which is most bitterly assailed as an invasion of appellant's rights. It declares that the Union Freight Company, within four months from the passage of the act, shall take the tracks, or any part thereof, of the Marginal Freight Company, subject to the laws relating to taking land by railroad companies and the compensation therefor. If, as the language seems to imply, the new company is bound to take so much of the track of the old one as it sha,ll need or elect to use, and pay for it within four months, it is a requirement favorable to this company in preference to others, and with especial reference to the fact that its power to use the track for railroad purposes has ceased. If it is merely a permission to take the track on payment of compensation, it is still a favor to the Marginal Company to require this to be done within four months. In fact, in regard to the whole question discussed as to the mode of making compensation, and its sufficiency to indemnify the Mar- ginal Company for what is taken, it seems to us to be premature; for whenever the attempt to adjust the compensation is made, the question of its sufficiency and its compliance with the law on that subject may arise, and it can then be decided. Nor are we satisfied of the soundness of the argument of counsel that the clause in the Marginal Company's charter, which declares it to be subject to the restrictions and liabilities contained in th6 general laws relating to street railways, withdraws it from the opera- tion of the forty-first section of chapter 68 of the General Laws of the State. The latter clause declares all acts of incorporation sub- ject to its provisions. This subjection is not impaired by the fact that a particular corporation is made by its charter subject to other laws also of a general character. We are of opinion that the question of the repeal of the charter of the Marginal Company is to be decided by the construction of the general statute, whose effect and history we have discussed. These considerations require the affirmance of the decree of the Circuit Court sustaining the demurrer to appellant's bill. Decree affirmed} ' The courts have experienced difficulty in defining the scope and proper operation of the clause reserving to the state the right to alter and amend corporate charters or the law under which they are acquired. Four propositions are advanced herewith for the student's consideration. A. "Power to amend a general law of incorporation involves power to amend charters taken out under that law." Lord v. Equitable Life Assur. Society, 194 N. Y. 212. B. By virtue of such reservation and independent then of corporate consent, the legislature may, subject to the proviso hereinafter mentioned, alter the charter or the enabling law at pleasure, i.e. without assignment of or justification for their reasons. Such alteration manifestly does not impair any contract, for it is the result of exercise of a power contemplated by the contract. Nugent «. Supervisors, ante. But consti- tutional safeguards , are not confined to the prohibition against impairment of the obligation of contracts. Hence, although the legislative act may thus avoid attack on 210 THE CHARTER — AS A CONTRACT WITH THE STATE. [CHAP. V. this ground, it still may be challenged if it contravenes any other constitutional limita- tion or inhibition. This is the proviso, it is submitted, which qualifies the reserved power aforesaid. Thus, under the reserved power, the state cannot deprive the corporation of its property. "A statute which could have this effect would not be a statute to amend franchises, but a statute to confiscate property ; it would not be a stat- ute of regulation but of spoliation." City of Detroit u. Detroit &c. Plank Road Co., 43 Mich. 140. In Shields v. Ohio, 95 U. S. 319, it is said: "Sheer oppression and ■wrong cannot be inflicted under the guise of amendment or alteration." This state- ment standing alone, might justify the inference, reached in Hyatt v. McMahon, 25 Barb. (N. Y.) 457, that the legislature could not capriciously or wantonly exercise the reserved power. But an amendment is virtually a repeal pro tanto, and a repeal, irrespective of reasons or their absence, is not per se violative of the contract clause of the Constitution if made pursuant to power reserved in that behalf. So an amendment, thus enacted, is not per se vicious. It becomes so only when the legislature transcends " the bounds otherwise expressly imposed by the Constitution. This meaning of the quotation from the Shields case appears from the very clause next following it : "Be- yond the sphere of the reserved powers, the vested rights of property of corporations, in such cases, are surrounded by the same sanctions and are as inviolable as in other cases." So CoOLET, J. in the Detroit Plank Road case, supra, finds there is no limit or quali- fication whatsoever upon the reserved power of the State, except constitutional limita- tions and inhibitions other than the contract clause ; but that when this proviso is fouled, the act must fail as any other, which is inconsistent with the Constitution. He says: "But for the provision in the Constitution of the United States which forbids impairing the obligation of contracts, the power to amend and repeal corporate charters would be ample without being expressly reserved. The reservation of the right leaves the state where any sovereignty would be if unrestrained by express constitutional limitations, and with the powers which it would then possess. It might therefore do what it would be admissible for any constitutional government to do when not thus restrained, but it could not do what would be inconsistent with constitutional prin- ciples." The well-considered opinion of Field, J. in County of Mateo v. Southern Pacific R. R. Co., 13 Fed. 722, sheds further light upon the limitations of the Legislature. Cf. note 1 , page 75 ante. The railroad resisted payment of a state tax on the grounds, (1) that its deprivation of the privilege of deducting its mortgage indebtedness, as in cases of individuals, from the assessment, denied it equal protection of the laws ; (2) that its deprivation of notice of assessment and hearing thereon, deprived it of its property without due process of law. The state contended "that on the original creation of the corporation the state might have imposed any conditions whatever as to the manner and the amount in which its property should be taxed ; that under the reserved power of amendment of the law creating the corporation, the state could at any time after- wards impose such a condition ; that the new constitution, in continuing the defendant and other railroad corporations in existence, and at the same time authorizing the tax- ation of their property upon a valuation different from that at which the property of mdividuals is assessed, imposed that condition upon them, and that the subsequent , exercise of its franchises by the defendant implies an assent to such condition." Field, J. answered : "The state, in the creation of corporations, or in amending their charters, or rather in passing or amending general laws under which corporations may be formed and altered, possesses no power to withdraw them when created or by amendment, from the guaranties of the federal constitution. It cannot impose the con- dition that they shall not resort to the courts of law for the redress of injuries or the protection of its property; that they shall make no complaint if their goods are plundered and their premises invaded ; that they shall ask no indemnity if their lands be seized for public use, or be taken without due process of law, or that they shall submit without objection to unequal and oppressive burdens arbitrarily imposed upon them; that, in other words, over them and their property the state may exercise unlmiited and irresponsible power. Whatever the state may do, even with the orea- t ,Hnn° Tt""^" ' f ""f * ^° '° ^'ibordination to the inhibitions of the federal consti- doW hiisL'^rnT A^ '*' general laws, upon corporations certain capacities of it= ^„ t • tK r'°^ perpetual succession in their members. It may make Its grant in these respects revocable at pleasure; it may make the grant subject to modifications andimpose cond tions upon its use, and reserve the right^o change these at will. But whatever property the corporations acquire in the exercise of the capac- SECT. 2.] GREENWOOD V. UNION FREIGHT R.R. CO. 211 ities conferred, they hold under the same guaranties which protect the property of individuals from spoliation. It cannot be taken for public use without compensation. It cannot be taken without due process of law, nor can it be subjected to burdens different from those laid upon the property of individuals under like circumstances. " The state grants to railroad corporations formed under its laws a franchise, and over it retains control, and may withdraw or modify it. By the reservation clause it retains power only over that which it grants ; it does not grant the rails on the road ; it does not grant the depots along-side of it ; it does not grant the cars on the track, nor the engines which move them, and over them it can exercise no power except such as may be exercised through its control over the franchise, and such as may be exercised with reference to all property used by carriers for the public. The reservation of power over the franchise, — that is, over that which is granted, — makes its grant a condi- tional or revocable contract, whose obligation is not impaired by its revocation or change. . . . The reservation relates only to the contract of incorporation, which, without such reservation, would be irrepealable. It removes the impediment to legis- lation touching the contract. It places the corporation in the same position it would have occupied had the supreme court held that charters are not contracts, and that laws repealing or altering them did not impair the obligation of contracts. The property of the corporation, acquired in the exercise of its faculties, is held inde- pendently of such reserved power, and the state can only exercise over it the control which it exercises over the property of individuals engaged in similar business." C. "There .would seem to be no reason to doubt that, with the concurrence of the corporation . . ., the legislature may make any alteration in or addition to the power and authority conferred by the original act of incorporation." Durfee v. Old Colony &c. R. R. Co., 5 Allen (Mass.) 230. No case quarrels with this elementary proposition. The Dartmo^th College case makes corporate concurrence necessary, in the absence of a power reserved to the state to repeal, alter and amend. And in such absence, cor- porate concurrence means the unanimous consent of the stockholders. Stevens v. Rutland &o. R. R. Co., Chap. 4, ante. Is this true, if such power were reserved? The negative is upheld in the Durfee case, supra. It decides that corporate concur- rence in such event means adoption of the legislative act by the majority of the stock- holders, whose acceptance thereupon binds a dissenting minority, even though thereby a new enterprise is embraced or additional Uabilities and burdens incurred, provided, however, "it is not foreign to the purposes and objects for which it [the original incor- poration] was enacted, and which it was designed to accomplish." This result [the proviso is discussed in Proposition D infra] manifestly depends upon the construction to be accorded the clause reserving power to amend, &c. Bigelow, C. J. says; "In creating a corporation, no contract is made by the legislature with the individual members or stockholders, any further than they are represented by the artificial body which the act of incorporation calls into being. They have no other rights except those which exist or grow out of the constitution of the body corporate of which they are members. To this only can we look, in order to ascertain whether there has been any breach of contract or violation of chartered rights. It constitutes, of itself, the con- tract by which the rights of all parties are to be governed. When, therefore, it is expressly provided between the legislature on the one hand and the corporation on the other, as part of the original contract of incorporation, that the former may change or modify or abrogate it or any portion of it, it cannot be.said that any contract is broken or infringed when the power thus reserved is exercised with the consent of the artificial body of whose original creation and existence such reservation formed an essential part. The stockholder cannot say that he became a member of the corporation on the faith of an agreement made by the legislature with the corporation, that the original act of incorporation should undergo no change except with his assent. Such a position might be asserted with more plausibility, if there was an absence of a clause in the original act of incorporation providing for an alteration in its terms. In such a case it might per- haps be maintained that there was a strong implication that the charter should remain inviolate, and that the holders of shares invested their property in the corporation rely- ing upon a contract entered into between it and the legislature that the provisions of the act creating it should remain unchanged. But it is difficult to see how such a construc- tion can be put on a contract which contains an express stipulation that it shall be sub- ject to amendment and alteration. If it be asked by whom such amendment or altera- tion is to be made, the answer is obvious : by the parties to the contract, the legislature on the one hand and the corporation on the other ; the former expressing its intention by means of a legislative act, and the latter assenting thereto by a vote of the majority 212 THE CHARTER — AS A CONTRACT WITH THE STATE'. [CHAP. V. of the stockholders, according to the provisions of its charter. It is nothing more than the ordinary case of a stipulation that one of the parties to a contract may vary its terms vpith the assent of the other contracting party. In such case, aU persons claiming derivative rights or interests under the original contract, with notice of its terms, would be bound by the amendment or alteration t« which the parties should agree. . . .It is a mistake, therefore, to say that the contract of a stockholder with a corporation estabUshed under our statutes binds the latter to undertake no new enterprise and engage in no business or operation other than that contemplated by the original charter. This interpretation puts aside the express provision authorizing an amendment or alter- ation of the act of incorporation, and gives it no effect as against a stockholder without his assent, although he bought his stock or subscribed for his shares subject to the legal effect of such a stipulation. The infirmity of the argument in behalf of the plaintiff is, that it admits that an amendment may be legal and valid as to the corporation, if they assent to it by a vote of the majority, while at the same time it sets it aside as against the stockholder who refuses to sanction it, on the ground that as to him it is illegal and void. But we cannot see how the amendment can be said to be legal and illegal uno el eodem flatu. If it is valid as to the corporation, for the reason that they have accepted and approved it according to the provisions of their charter, it would seem that it must also be binding on the stockholder, who has agreed that his rights and interests in the corporation shall be regulated and controlled by a vote of a majority, acting in con- formity to the original -constitution of the corporation, and within the scope of its corporate powers. The real contract into which the stockholder enters with the cor- poration is, that he agrees to become a member of an artificial body which is created and has its existence by virtue of a contract with the legislature, which may be amended or changed with the consent of the company, ascertained and declared in the mode pointed out by law. Having, by virtue of the relation which subsists between himself and the corporation as a holder of shares, assented to the terms of the original act of incorporatioi, he cannot be heard to say that he will not be bound by a vote of the majority of the stockholders accepting an amendment or alterations of the charter made in pursuance of an express authority reserved to the legislature, and which by such acceptance has become binding on the corporation. Such we understand to be the result of the adjudicated cases." Accord: Buffalo &c. R. R. Co. v. Dudley, 14 N. Y. 336. The affirmative is upheld in Zabriskie v. Hackensack &c. R. R. Co., 18 N. J. Eq. 178. The court says; "After the effect of the rule established in the Dartmouth College case began to be felt in the states, it was found that by the numerous acts of incorporation, freely and perhaps necessarily granted, great inconveniences resulted, and that provisions incautiously inserted, too much restricted the power of future legis- latures ; and that the laws, which experience showed were necessary to govern corpora- tions in the exercise of their powers, could not be passed. And the legislature of many states, by degrees and successively, adopted the practice of inserting in acts granting franchises, that they might alter, modify, or repeal the act ; and also, by general law, provided that all acts of incorporation thereafter passed, should be subject to such, alteration and repeal. ... " The object and purpose of these provisions are so plain, and so plainly expressed in the words, that it seems strange that any doubt could be raised concerning it. It was a reservation to the state, for the benefit of the public, to be exercised by the state only. The state was making what had been decided to be a contract, and it reserved the power of change, by altering, modifying, or repealing the contract, Neither the words nor the circumstances, nor apparent objects for which this provision was made, can, by any fair construction, extend it to giving a power to one part of the corporators as against the other, which they did not have before. " It was to avoid the rule in the Dartmouth College case, not that in Natusoh v. Irving, that the change was made. The words limit the power to that object. " On general principles, and the settled rules of construction, I would hold this to be the effect, and only effect, of the provision in the general act and in the charter of the defendants, without any hesitation, were it not for a series of decisions by most respect- able courts, which hold that this provision obviates the effect of the rule in Natusch i>. Irving, and Kean v. Johnson, and enables a majority of the corporators in all charters subject to a like provision, to change, by legislative permission, and within certain limits, the object and purpose of the corporation. They hold that the contract between associate corporators, that they will confine their business to life insurance, is changed by legislative permission to engage in marine insurance, or a contract to join in con- SECT. 2.] GREENWOOD V. UNION FREIGHT R.R. CO. 213 struoting a railroad from New York to Newark, can be changed to one from New York to Elizabeth by legislative consent. The reasoning is founded on the fact that the sub- scription for the stock, which is the contract, was made as in this case under a charter which authorizes a road from the Paterson road to Hackensack, and authorizes the legis- lature to alter and modify the act. And from this they infer that it is a contract to join in building any road that the legislature may, by such alteration, authorize the company to build ; and that such authority, or additional privilege, may be accepted by a majority of the corporators. " So far as the alteration is made by the legislature, in a way to be comptilsory on the corporation, this is correct ; as, if they should require the company to build a double track, or widen the draws in a bridge, or exact less fare or toll ; these would be within the.contract, or would be annexed to it as a condition, and every stockholder would take his stock subject to the contingency of such alteration. " But if the change in the act is simply offering the corporation the privilege of enter- ing upon another and a different enterprise, it is not within the condition to the sub- scription. The only construction to be given is, that the legislature may alter, not that the stockholders may, as between each other. The case of Natusch v. Irving was decided upon this very ground. The act of Parliament had given the company the power to embark in marine insurance, but the consent of all the parties was still held necessary. The plain object of the reservation in this case was to give the legislature, not a bare majority of the stockholders, power. " This view of the case is so clear upon principle that I feel constrained to be guided by it, although the weight of the decisions in other states is against it. . . . " The Supreme Court of Massachusetts has followed the decisions in New York, and in the well considered and well argued case of Durfee v. The Old Colony R. Co., S Allen 230, arrived at the conclusion that the reserved right to alter and repeal author- ized a company to engage in a new enterprise, without the consent of all the share- holders. The reasoning of the able counsel who combated this position contains the best exposition of the law that I have found any where. The reasoning of Chief Justice Blgelow, in delivering the opinion of the court, does not convince me. . . . He assumes (On p. 244,) that it is the object of the provision, that an amendment may be made by the consent of both parties, the legislature on the one side, and the corporation on the other ; the former expressing its assent by a legislative act, and the latter by a vote of the majority of stockholders ; and observes ' that it is nothing more than the ordinary case of a stipulation that one of the parties to a contract may vary its terms, with the consent of the other contracting party.' " Now in this state it is settled that an alteration made by the legislature, under this reserved power, is valid and binding, without the consent, and against the will of the corporation, and all its members." D. Dicta still continue that exercise of the reserved power of the legislature must " not defeat or substantially impair the object of the grant," Berea College «. Kentucky, 211 U. S. 45, or amend the charter in any respect that is "fundamental when the object of the corporation and property acquired by it are considered," Lord v. Equitable Life Assur. Society, 194 N. Y. 212. It is submitted that these supposed qualifications upon legislative power result from confusing therewith the limitations imposed upon the power of the majority stock- holders under the Massachusetts and New York doctrine developed in Proposition C. If that doctrine, — that since reservation of power to amend is part of every corporate charter, the stockholders take their stock "not only subject thereto, but in assent there- to," Lord !). Equitable &c. Society; supra, — is itself sound, it is difficult to perceive the force of the limitations imposed upon it. Cf. Nugent v. Supervisors, ante. And it is more remarkable to find them engrafted therefrom upon legislative power which is sovereignty itself, untrammeled save by express constitutional limitations. 214 POWERS — CONTRACT. [CHAP. I. BOOK III. THE POWERS OF A CORPORATION. CHAPTER I. PARTICULAR POWERS. Section 1. — To Contract. GREENE V. MIDDLESBOROUGH TOWN AND LANDS CO. 121 Ky. 355. 1905. Opinion ' by Judge Barker. This case is here for the second time. The opinion on the first appeal is to be found in 61 S. W. 288, 22 Ky. Law Rep. 1715, from which we borrow the following statement : ■ "Appellant instituted this action to recover of appellee. Middles- borough Town & Lands Co., the sum of $420, alleged to be due her as dividends on certain shares of stock issued by the Investment Co. of Middlesborough, which dividends were guaranteed for 10 years at 7 per cent, by the Middlesborough Town Co. It is alleged that, in consideration of 200 shares of stock in the Investment Co.* the Town Co., a corporation duly organized and created, with power to sue and be sued, to contract and be contracted with, by a writing on the back of the stock issued by the Investment Co. — the Mid- dlesborough Town Co. — guaranteed the payment of dividends for a fixed period. The written guaranty is as follows : 'Eor value re- ceived, the Middlesborough Town Co. guaranties to the holder hereof payment of a dividend at the rate of 7 per cent, per annum, payable semi-annually on the 1st day of January and July, at the Coal & Iron Bank of Middlesborough, Kentucky, for a period of ten years from the first day of July, 1891.'" Upon the first trial in the circuit court a general demurrer to ' Portion omitted. SECT. I.] GREENE V. MIDDLESBOROUGH TOWN AND LANDS CO. 215 the petition was sustained, and, the appellant declining to plead further, her petition was dismissed. Upon the appeal from that judgment to this court it was reversed, in an opinion holding that the petition stated a cause of action; and in replying to the conten- tion of the corporation that the pleading contained no allegation sufficient to warrant the inference that the Middlesborough Town Co. was authorized by its charter to make the guaranty sued on it was held that the plea of uUra vires was a defense, and must be presented by proper pleading. Upon the return of the case, ultra vires was pleaded as to the guaranty in question, and upon a trial of the issue so made the articles of incorporation and amendments were read in evidence, and a judgment was rendered by the trial court that the Middlesborough Town Co. was without authority to make the guaranty sued on, and again dismissing the petition, from which judgment the appellant has again appealed. In order to simplify matters, we say now that we concur with the circuit judge in his conclusion that the Middlesborough Town, & Lands Co. and the Middlesborough Town Land Co. are merely reorganizations of the Middlesborough Town Co., and they are each responsible for any debt owed by the Middlesborough Town Co. This reduces the issue involved here to the question, was the Middlesborough Town Co. authorized by its charter and its amend- ments to guaranty the stock of the Investment Co. of Middles- borough? The Middlesborough Town Co. was organized under chapter 56 of the Gen. Stats., and so much of the articles of incorporation as is pertinent hereto is as follows: ". . . to make contracts, acquire and transfer property, possessing the same powers in such respects as private individuals now enjoy, ... It is further especially agreed : . . . (2) The business of said corporation shall be to buy and sell .and deal in lands of all kinds, to purchase, survey, plat and locate town sites within or without the State of Kentucky, and to lay off the same in lots, parks, streets, alleys or pubhc ways, to con- struct streets, alleys, bridges, parks, culverts or sewers, and maintain the same, to advertise, buy, sell or deal in town lots, to construct and maintain waterways, gasworks, electric Ught plant and apparatus, and street railways." The foregoing provisions constitute the authority of the corpora- tion to do business, and it is clear that there is nothing expressed or impUed of authority to guarantee the stock of another corpora- tion. Counsel for appellant lay great stress upon the language in the original articles of incorporation, that the corporation "shall have power to make contracts, acquire and transfer property, pos- sessing the same powers in such respects as private individuals now enjoy;" and it is insisted that, as individuals possess the power to make contracts of guaranty, this language authorizes the corpora- 216 ' POWERS — CONTRACT. [CHAP. I. tion to do the same. The error of this reasoning lies in that it over- looks the fact that the articles of incorporation must be construed as a whole, and the expression "to make contracts" is to be con- sidered with, and is hmited by, that part of the articles which defines the business the corporation may do. In other words, the power to make contracts is conferred with reference to the business authorized to be done. Nowhere is there conferred the power to guaranty- stock of another corporation, either express or implied. Nor do we think that it alters matters that, as a consideration for the guaranty of the stock of the Investment Co. of Middlesbor- ough, the Middlesborough Town Co. received $20,000 par value of its stock. If the act to be done was vltra vires, the consideration in no wise changed the quaUty of the act. In Humboldt Min. Co. v. American Manufacturing, Mining & Milling Co., et. al., 62 Fed. 356, 10 C. C. A. 415, United States Circuit Court of Appeals for the Sixth Circuit, speaking through Judge Taft, said : "The general rule in this country and in England is that one corporation is imphedly prohibited from guarantying the contract or debt of another. The objection to the guaranty is that it risks the funds of the company in a different enterprise and business, under the control of another and different person or cor- poration, contrary to what its stockholders, its creditors, and the State have the right from its charter to expect." In the case of Louisville Railway Co. v. Louisville Trust Co., 174 U. S. 567, 19 Sup. Ct. 823, 45 L. Ed. 1081, the rule is thus laid down: "A railroad corporation, unless authorized by its act of in- corporation or by other statutes to do so, has no power to guarantee the bonds of another corporation ; and such a guaranty, or any con- tract to give one, if not authorized by statute, is beyond the scope of powers of the corporation, and strictly ultra vires unlawful and void, and incapable of being made good by ratification or estoppel." The rule is that corporations must have authority to guarantee the obhgations of other corporations or persons. This grows out of the general principle that the State confers in the charter all the authority it desires the corporation to possess. The charter thus constitutes a guide to those who may desire to purchase the stock of the corporation ; for by examination they can be advised as to its limitations and powers, and thus obtain a foundation for a rational judgment as to the hazard involved in the investment. If, as in the case at bar, the corporation holds out to a proposed purchaser of stock the contract of another corporation, which is beyond the power of that other corporation to make, this fact by an examina- tion of the charter of that corporation can readily be discovered, and the danger growing out of it avoided. Presumably, stockholders intend to mvest their directors only with the powers conferred in the charter, and they are chosen with reference to their fitness to SECT. 1.] JACKSONVILLE &C. CO. V. HOOPER. 217 discharge the business for which the corporation was organized. It is obvious that, if a directory may hazard the whole corporate property by guarantying the obUgations of another corporation without authority so to do, no one could invest money in corporate stock without hazarding its loss by the action of men whom he had no voice in choosing and no power to restrain. For these reasons the judgment is affirmed. Petition for rehearing by appellant overruled.'- JACKSONVILLE &c. RAILWAY AND NAVIGATION CO. V. HOOPER." 160 U. S. 514. 1895. Erhor to the U. S. Circuit Court for the Northern District of Florida. Appellant corporation was sued therein upon covenants in a lease to it from plaintiff which lease purported to grant for a term of two years certain land whereon was erected an hotel. The corporation agreed to pay certain rent and to keep the premises insured in the sum of $6000. During said term and while it was in possession, the hotel was totally destroyed by fire. For the amount of the loss occasioned by the absence of insurance and for the back rent the action was brought. Defendant contended the lease was ultra vires. Judgment below against defendant. Shibas, J. This is no^ a case in which, either by its charter, or by some statute ' A corporate contract of guaranty or suretyship is not void if the corporation have express authority in that behalf, San Luis, &c. County v. Murphy, 162 Cal. 588, or if by reasonable implication that power is, in fact, conferred. Timm v. Grand Rapids Brewing Co., 160 Mich. 371 ; Louisville &c. R. R. Co. v. Louisville Trust Co., 174 U. S. 552 ; Wheeler v. Everett Land Co. 14 Wash. 630 ; Wheeler v. Home Savings &c. Bank, 188 111. 34. The question, then, is whether such implied power is reasonably necessary to effectuate the purposes of incorporation — a problem in the derivation of powers as distinguished from a mere inquiry to ascertain whether a benefit was conferred upon the guarantor or surety. Best Brewing Co. c. Klassen, 185 111. 37 ; Northside Ry. Co. v. Worthington, 88 Tex. 562. If the corporation possesses power to directly contract to pay a given debt or obligation, it may guarantee the payment of that debt. EUerman v. Chicago Junction Rys. Co., Book II, Chap. 3, ante, Low v. California, &c. R. R. Co., 52 Cal. 53 ; but the limit of derivation of implied powers is reached when the agency employed to effect an authorized result is not under the control of the guarantor cor- poration. Memphis &e. Elevator Co. v. Memphis &o. R. R. Co., 85 Tenn. 703 ; North- side Ry. Co. V. Worthington, supra ; Western Maryland R. R. Co. v. Blue Ridge Hotel Co., 102 Md. 307. Of course, an accommodation guarantee by a corporation is ultra vires. Owen & Co. V. Storms & Co., 78 N. J. L. 154. As to the distinction between the guaranty of a debt and a conditional purchase, see Venner v. New York &c. R. R. Co., cited irifra, page 281. ' Facts restated ; portion of opinion omitted. 218 POWERS — CONTRACT. [CHAP. I. binding upon it, the company is forbidden to make such a contract. Indeed, the public laws of Florida, referring to the powers of railroad companies, provide that every such corporation shall be empowered "to purchase, hold, and use all such real estate and other property as may be necessary for the construction and maintenance of its road and canal and the stations and other accommodations neces- sary to accomplish the objects of its incorporation, and to sell, lease, or buy any land or real estate not necessary for its use." McClell. Digest of the Laws of Florida, p. 276, sec. 10. They are likewise authorized "to erect and maintain all convenient buildings, wharves, .docks, stations, fixtures, and machinery for the accommodation and use of their passengers and freight business." Although the contract power of railroad companies is to be deemed restricted to the general purposes for which they are designed, yet there are many transactions which are incidental or auxiliary to its main business, or which may become useful in the care and man- agement of the property which it is authorized to hold, and in the safety and comfort of the passengers whom it is its duty to transport. Courts may be permitted, where there is no legislative prohibition shown, to put a favorable construction upon such exercise of power by a railroad company as is suitable to promote the success of the company, within its chartered powers, and to contribute to the com- fort of those who travel thereon. To lease and maintain a summer hotel at the seaside terminus of a railroad might obviously increase the business of the company and the comfort of its passengers, and be within the provisions of the statute of Florida above cited. Courts may well be astute in dealing with efforts of corporations to usurp powers not granted them, or to stretch their lawful fran- chises against the interests of the public. Nor would we be under- stood to hold that, in a clear case of the exercise of a power forbidden by its charter, or contrary to pubUc pohcy, a raiboad company would be estopped to dechne to be bound by its own act, even when fulfilled by the other contracting party. Davis v. Old Colony Rail- road Co., 131 Mass. 258; Thomas v. Railroad Co., 101 U. S. 71- Central Transportation Co. v. Pullman's Car Co., 139 U S 24 So' too it must be regarded as well settled, on the soundest principles of public pohcy, that a contract, by which a railroad company seeks to render Itself incapable of performing its duties to the pubhc, or attempts to absolve itself from its obhgation without the consent of the State is void and cannot be rendered enforceable by the doc- tnnes of estoppel The New York & Maryland Railroad Co. .. Winans, 17 How. 30; Thomas v. Railroad Co., 101 U. S. 71 • Central Transportation Co. v. Pullman's Car Co., 139 U S 24 We do not seek to relax but rather to affirm the rule laid down by this court in Centra Transportation Co. v. Pullman's Car Company (above cited,) that "a contract of a corporation, which is XS SECT. 1.] JACKSONVILLE &C. CO. V. HOOPER. 219 in the proper sense, that is to say, outside the object of its creation as defined in the law of its organization, and, therefore, beyond the powers conferred upon it by the legislature, is not voidable only, but whoUy void, and of no legal effect — the objection to the con- tract is not merely that the- corporation ought not to have made it, but that it could not make it. Such a contract cannot be ratified by either party, because it could not have been authorized by either. No performance on either side can give the unlawful contract any vaHdity, or be the foundation of any right of action upon it." 139 U. S. 59, 60. But we think the present case falls within the language of Lord Chancellor Selborne, in Attorney General v. Great Eastern Railway, 5 App. Gas. 473, 478, where, while declaring his sense of the im- portance of the doctrine of ultra vires, he said : "This doctrine ought to be reasonably, and not unreasonably, understood and apphed, and that whatever may fairly be regarded as incidental to, or con- sequential upon, those things which the legislature has authorized, ought not, unless expressly, prohibited, to be held, by judicial con- struction, to be ultra vires." In the application of the doctrine the court must be influenced somewhat by the special circumstances of the case. As was said by Romilly, M. R., in Lyde v. Eastern Bengal Railway, 36 Beav. 10, where was in question the validity of a contract by a railway company to work a coal mine : "The answer to this argimaent appears to me to depend upon the facts of each particular case. If, in truth, the real object of the colliery was to supply the railway with cheaper coals, it would be proper to allow the accidental additional profit of selling coal to others ; ■ but if the principal object of the colliery was to undertake the business of raising and selling coals, then it would be a perversion of the funds of the company, and a scheme which ought not to be permitted, however profitable it might appear to be. The prohibition or per- mission to carry on this trade would depend on the conclusions which the court drew from the evidence." The contract between the parties hereto was for leasing a hotel at the terminus of the railroad, situated at a beach, distant from any town. If not fairly within the authority granted by the statute of Florida "to erect and maintain all convenient buildings ... for the accommodation and use of their passengers," it certainly cannot be said to have been forbidden by such laws. Nor can it be said to have been, in its nature, contrary to public policy. To maintain cheap hotels or eating houses, at stated points on a long line of railroad through a wilderness, as in the case of the Pacific railroads, or at the end of a railroad on a barren, unsettled beach, as in the present case, not for the purpose of making money out of such business, but to furnish reasonable and necessary accommoda- tions to its passengers and employfe, would not be so plainly an act 220 POWERS — CONTRACT. [CHAP. I. outside of the powers of a railroad company as to compel a court to sustain the defence of ultra vires, as against the other party to such a contract. But even if the railroad company might be answerable for the rent of the premises, it is contended that the covenant to procure insurance was so far outside of the company's powers as not to be enforceable. No one could deny that it would not be competent for a railroad company, without the authority of the legislature, to carry on an insurance business. But this covenant to keep the premises insured is correlative to the obligation of the lessors to rebuild in case the hotel should be destroyed by fire, and to the provision that, in such an event, the rents should cease until the hotel should be put in habitable condition and repair by the lessors. Such mutual cove- nants are quite usual in leases of this kind, and are merely incidental to the principal purpose of the contract. Judgment affirmed.^ WHITTENTON MILLS v. UPTON ET ALS.« 10 Gray (Mass.) 582. 1858. This was an insolvency proceeding. A partnership had been entered into by a corporation with one Mason. It became necessary to determine if the corporation was capable in law of forming such partnership. E. R. Hoar & H. Gray, Jr. for the assignees. The power to make a contract of partnership is not a distinct corporate power, tb be created or conferred only by a special grant ; but, like the appoint- ment of an agent — and each partner is, as between themselves, an agent of the other — is only one mode or instrumentality of effecting the lawful objects for which the corporate powers were ' Accord : Richelieu Hotel Co. v. International &c. Encampment Co., 140 111. 24S (corporate subscription to fund for establishing encampment calculated to attract guests). Cf. Davis v. Old Colony &c. R. R. Co., 131 Mass. 258 (guarantee by railroad of expenses of a musical festival held vUra vires). And a railroad may not guarantee dividends on stock of a hotel company to be constructed on its line. Western Maryland R. R. Co. 1). Blue Ridge Hotel Co., 102 Md. 307. In general, the corporation cannot give away its property against the dissent of a mmority, McConnell v. Combination &c. Co., 30 Mont. 239 (political donation) ; People V. Moss, 187 N. Y. 410 (same — "motive of indirectly promoting the corporate affairs through the supposed advantage of continuance in power of the Republican admmistratiou") except in a case, where the donation, calculated to further its objects, may.be reasonably predicated upon its express powers, e.g. dedication of streets and parks by a land development company. See Stacy v. Glen &c. Hotel &c. Co., 223 111. 546, and notes thereto in 8 L. R. A. (N. S.) 966. * Facts restated ; portion of opinion omitted. SECT. 1.] WHTTTENTON MILLS V. UPTON ET ALS. 221 given. A corporation therefore may form a contract of copartner- ship to effect any purpose which it may lawfully accompUsh by other means, agencies or instrumentalities. This case falls within the principle upon which congress has been held to have the power to incorporate a bank, although no such power is expressly granted. Similar powers are lawfully exercised, and a like construction of the incidental and implied authority conferred by a charter is recog- nized, in analogous cases. A manufacturing corporation may own a water privilege, dam, warehouses, teams and carriages, weighing apparatus, a herd of cows to furnish manure for dyeing, fire engines, shares in an aqueduct, a reservoir and the like. Cannot it insure in a mutual insurance company, and thus incidentally engage in the business of insurance? Or keep a shop, as a convenient mode of pajdng its operatives, and allow other persons to purchase goods there? Or associate itself with other persons or corporations owning mill privileges on the same stream, in constructing a reservoir for their common benefit? Thomas, J. ■ At the threshold of the cause and of its elaborate discussion is the question, Was this corporation capable of forming a partnership, of entering into the contract? This question presents itself in two forms. The more general one is : Has a corporation, as one of its usual inherent powers, the capacity to form a contract of copartner- ship? The narrower question, but for this case the practical and pertinent one, is. Can a manufacturing corporation in this common- wealth, incorporated since February, 1831, and subject to the provi- sions of the thirty-eighth and forty-fourth chapters of the revised statutes, enter into a contract or society of copartnership? ■^ This corporation was created in March, 1836, as a manufacturing corporation, for the purpose of manufacturing cotton goods in the town of Taunton, and for that purpose was invested with all the powers and privileges and made subject to all the duties, restrictions and liabilities set forth in the thirty-eighth and forty-fourth chapters of the revised statutes, passed on the fourth of November preceding, but not to take effect till the first of May eighteen hundred and thirty six. St. 1836, c. 19. This charter, with the provisions of the chapters referred to and made part of it, is the origin and source of the powers and fimctions of the corporation. What powers are granted expressly, or by implication, because necessary or usual for the purposes which this charter was given to effect, the corporation has, and no more. There is one obvious and important distinction between such a society as this charter creates and that of a partnership. An act of the corporation, done either by direct vote or by agents authorized for the purpose, is the manifestation of the collected will of the 222 POWERS — CONTRACT. [CHAP. I. society. No member of the corporation, as such, can bind the society. In a partnership each member binds the society as a principal. If then this corporation may enter into partnership with an individual, there would be two principals, the legal person and the natural person, each having, within the scope of the society's business, full authority to manage its concerns, including even the disposition of its property. The second section of c. 38 of the Rev. Sts. provides that the business of every such manufacturing corporation shall be managed and conducted by the president and directors thereof and such other officers, agents and factors as the company shall think proper to authorize for that purpose. It is plain that the provisions of this section cannot be carried into effect where a partnership exists. The partner may manage and conduct the business of the corpora- tion, and bind it by his acts. In so doing he does not act as an officer or agent of the corporation by authority received from it, but as a principal in a society in which all are equals, and each, capable of binding the society by the act .of its individual will. Indeed, in examining this chapter, it will be found that there is scarcely a provision for the conduct of the business of a manufactur- ing corporation that is not inconsistent with the existence of a con- tract by which the power to manage the business of the company and to bind the corporation by his acts is vested in one not a member of the corporation nor its officer or agent. Such are the third, fourth and fifth sections, providing how the president and directors, and other officers, agents and factors of the corporation shall be chosen. Such too is the sixth section, which authorizes every such company to make by-laws for its own regulation and government. Such are the several provisions authorizing the stockholders to fix the amount of the capital stock, to increase the same within the limit fixed by law or to reduce it. §§ 9, 11, 19. And such is the provision requiring the president and directors to give annual notice of the amount of the debts of the corporation ; the means of stating which would not be in their power if another principal had the power of creating the debts. §22. Of the same character is the twenty- fifth section, by which it is declared that the whole amount of the debts which the corporation shall at any time owe shall not exceed the amount of the capital stock actually paid in, and which renders the directors, under whose administration an excess shall occur, liable personally to the extent of such excess ; a provision evidently based upon the ground that the exclusive power to contract debts is vested in such directors, and that they cannot be divested of it, and which is wholly inconsistent with the existence of a power in the corporation to enter into a contract of partnership, by which another principal would be created, having equal power to contract debts and to bind the partnership and the corporation in solido. SECT. 1.] WHITTENTON MILLS V. UPTON ET ALS. 223 Indeed the effect of all our statutes, the settled poHcy of our legislature, for the regulation of manufacturing corporations is that the corporation is to manage its affairs separately and exclusively; certain powers to be exercised by the stockholders, and others by officers who are the servants of the corporation and act in its name and behalf. And the formation of a contract, or the entering into a relation, by which the corporation or the officers of its appoint- ment should be divested of that power, or by which its franchises; should be vested in a partner with equal power to direct and control its business, is entirely inconsistent with that poUcy.^ The power to form a partnership is not only not among the powers granted expressly or by reasonable imphcation, but is wholly incon- sistent with the scope and tenor of the powers expressly conferred, and the duties expressly imposed, upon a manufacturing corporation under the legislation of the Commonwealth. We are therefore all of opinion that in the formation of the alleged partnership the corporation exceeded the powers given by its charter expressly or by imphcation, and that the contract of copartnership was illegal and void. It is said however by the respondents that if this be so, such viola- tion of the charter can only be alleged by the Commonwealth upon proceedings for a forfeiture of the charter, and that the vaUdity of the partnership cannot be called in question by the corporation or by its creditors or debtors. The charter of the corporation is part of the pubUc law. Rev. Sts. c. 2, § 3. Those who deal with the corporation must take notice of the extent of its powers, and that the corporation is legally incapable of entering into the contract of partnership; that that contract was beyond the scope of its authority, and that this in- capacity resulted from considerations not personal or peculiar to this corporation or its members, but from general grounds of public policy, which the corporation and those deaUng with it cannot be permitted to contravene and defeat. That policy is to confine these corporations within the limits prescribed by law, to protect the stockholders from UabiUties which the charter and laws do not create ; and, while it imposes upon the stockholders of the corpora- tion heavy responsibihties, to retain to them the legal control of its business and conduct of its affairs. Proceedings set aside in accordance with the petition and prayer of the corporation.^ ' Cf. McCarter v. Firemen's Ins. Co., infra. Chap. 2, Sec. 1. 2 Accord : Mallory v. Hanaur Oil Works, 86 Tenn. 598. ("A partnership and a cor- poration are incongruous. Such a contract is wholly inconsistent with the scope and tenor of the powers expressly conferred and the duties expressly enjoined upon a cor- poration, whether it be a strictly business and private corporation or one owing duties to the public, such as a common carrier. In a partnership each member binds the firm when acting within the scope of the business. A corporation must act through its 224 POWERS — CONTRACT. [CHAP. I. BECK V. PENNSYLVANIA RAILROAD CO.' 63 N. J. L. 232. 1899. The action was in tort for the recovery of damages for injury received by Beck, defendant in error, while in the employ of the company, plaintiff in error. In its defence the company proved the establishment by it and some of its employees of a relief department, and put in evidence the regulations governing the same, which provided inter alia that a fund managed by the company, should be contributed by the employees, and used for the payment of certain sick, injury and death claims, the company to pay the deficiency if the fund was insufficient therefor. One regulation read : — "58. Should a member or his legal representative bring suit against the company for damages on account of injury or death of such member, payment of the benefits from the relief fund on ac- count of the same shall not be made until such suit is discontinued. If prosecuted to judgment or compromise, any payment of the judgment or amount in compromise shall preclude any claim upon the reUef fund for such injury or death." The company also put in evidence an application for membership made by Beck, the pertinent parts of which application are as follows : "And I agree that the acceptance of benefits from the said relief fund for injury or death shall operate as a release of all claims for damages against said company arising from such injury or death directors or authorized agents, and no individual member can, as such member, bind the corporation. " Now, if a corporation be a member of a partnership, it may be bound by any other member of the association, and in so doing he would act not as an officer or agent of the corporation, and by virtue of authority received from it, but as a principal in an associa- tion in which all are equal, and each capable of binding the society by his acts. Th^ whole policy of the law creating and regulating corporations, looks to the exclusive man- agement of the affairs of each corporation by the officers provided for or authorized by its charter. This management must be separate and exclusive, and any arrangement by which the control of the affairs of the corporation should be taken from its stock- holders and the authorized officers and agents of the corporation would be hostile to the policy of our general incorporation acts.") Cf. People v. N. R. Sugar Refining Co., 121 N. Y. 582, infra. Book VI, Chap. 2. The reason of the rule failing, the rule does not apply to mere co-ownership, nor bar an accounting of the profits accruing therefrom. Huguenot Mills v. Jempson & Co., 68 S. C. 363 ; Hackett s. Multnomah Ry. Co., 12 Ore. 124. Nor will the rule apply where there is no partnership result of reciprocal agency as where a corporation enters into contract with an individual to carry out certain cor- porate objects under agreement that the gains or losses of the venture shall be borne equally. Bates ». Coronado Beach Co., 109 Cal. 160. So mere traffic arrangements providing for division of rates and freight are not infringements of the rule. Swift ». Pacific Mail S. S. Co., 106 N. Y. 206 ; Chicago &c. R. R. Co. ». Mulford, 162 111. 522. ' Statement of facts abridged. SECT. 1.] BECK V. PENNSYLVANIA RAILROAD CO. 225 which could be made by or through me, and that I or my legal repre- sentatives will execute such further instrument as may be necessary formally to evidence such acquittance. "I also agree that this application, when approved by the superin- tendent of the relief department, shall ipake me a member of the relief fund and constitute a contract between myself and the said company, and that the terms of this application and the regulations of said department shall during my membership, be a part of the conditions of my employment by the company." It was also proved that the application of Beck had been approved according to the regulations, and that after the injury received by Beck he accepted benefits in accordance with the regulations from September 12th, 1897, the date of his injury, to May 8th, 1898. This evidence was admitted under objection. At the close of defendant's case counsel for the company moved that a verdict be directed for it on the ground that the proof established a release or discharge of any liability of the company to Beck. This motion was denied, and the trial judge, on motion of Beck's counsel, over- ruled and struck out all the above-stated evidence. To these rulings the company took exceptions, which were duly allowed. The case was submitted to the jury only upon the question whether the company was liable for Beck's injury because of a breach of its duty as master to him as employee. Magie, C. J. The bills of exception show that the rulings in question were made by the learned judge because he deemed the contract between the company and an employee, member of the relief fund, to be void, as opposed to public pohcy. In the argument here the rulings are supported on that ground and also upon the further grounds that the contract lacks considera- tion; . . . that it is ultra vires the corporation and is forbidden by law. If the transaction between Beck and the company, included an enforceable contract on its part that in case of an injury to him for which the company would be liable acceptance of the benefits from the relief fund for such injury should operate as a release of all claims against the company for damages therefor, it is obvious that it was erroneous to exclude the evidence of the contract and of the ac- ceptance of benefits in this case and to submit to the jury the liabil- ity of the company for damages which such acceptance operated to discharge. This leads to the consideration of the transaction to discover if a contractual relation between the parties was estabUshed, and what contract, if any, arose thereon, and whether it is open to the objections urged against its validity. 226 POWERS — CONTRACT. [CHAP. I. [The court found that the agreement was not opposed to public policy ; that it did not lack consideration or mutuality.] But it is further contended that this contract on the part of the company is ultra vires. This objection could be properly disposed of by pointing out that the company in question is not a corporation of this state of whose corporate powers we may take judicial notice, but a corporation of the State of Pennsylvania. Its charter, conferring such corporate powers as it possesses, has not been put in evidence. We are there- fore not in a. position to say that the company did not acquire thereby the power to make such a contract as appears in the case. The ob- jection might also be met by the fact disclosed in the case that Beck has accepted the benefits arising under the contract and ,yet retains what he received thereby. But I am not incHned to dispose of this objection upon either of these grounds. I will assume that the company was created to- build, maintain and operate a railroad in the State of Pennsylvania,, and obtained corporate powers sufficient to enable it to carry out that purpose. We know that it has acquired power in our own state to lease and operate railroads in extension of its system. Upon such assumption and knowledge we must recognize that it has either express or implied power to engage the services of many men, and contract with them as to the compensation they shall receive for their services. Each of such employes is engaged in an employment which subjects him to the hazard of injury and the danger of death. Each is possessed of the liberty to contract with the employer re- specting his compensation. A contract by which the employe permits such an employer to create a fund in part out of his wages, supplemented by a contribution by the employer when necessary, out of which rehef for sick and injured employes is provided, and by which the employer imdertakes to manage the funS and furnish the agreed-on rehef is, in my judgment, within the implied powers of the employer, if a corporation. On the part of the employer, such a scheme may be deemed hkely to increase the efficiency of the force it employs, and on 'the part of the employe it may tend to reheve from anxiety as to support if injured by any of the many dangers to which he is daily and hourly exposed. As incidental to the contract of employment and compensation, therefore, it is not ultra vires. * * * * , * * * The judgment must therefore he reversed.'- 1 Accord : Harrison v. Alabama Midland R. R. Co., 144 Ala. 246. InBankof Columbia «. Patterson, 7 Craneh (U. S.) 299, Stort, J. said: "The tech- nical doctrine, that a corporation could not contract, except under its seal, or, in other words, could not make a promise, if it ever had been fully settled, must have been pro- ductive of great mischiefs. Indeed, as soon as the doctrine was established that ita SECT. 2.] PEOPLE V. Pullman's palace car company. 227 Section 2. — To Acquire and Alienate Property. PEOPLE V. PULLMAN'S PALACE CAR COMPANY.^ 175 lU. 125. Information in the nature of a quo warranto setting out the charter of defendant, alleging several usurpations of its powers thereunder, and praying forfeiture of the charter. To defendant's pleas, the Attorney General demurred. Defendant was incorporated in 1867 by a special act of the legis- lature of Illinois, which provided inter alia "Sec. 4. The said corporation shall have power to manufacture, construct and purchase railway cars with all convenient appendages, and supphes for persons traveling therein, and the same may sell or use, or permit to be used, in such manner and upon such terms as the said company may think fit and proper." "Sec. 6. It may be lawful for the company hereby incorporated to purchase, acquire and hold such real estate as may be deemed necessary for the successful prosecution of their business, and may have power to sell and convey the same." BoGGS, J. A corporation in our State has its existence by virtue of the enactment, general or special, of the law-making power. The only difference between a corporation organized under a general law and one created by a special statute is, "that in the former we look to the certificate of the promoters, while in the latter we look to the special statute to ascertain the scope of the powers of the regularly appointed agent could contract in their name without seal, it was impossible to support it ; for otherwise the party who trusted such contract would be without remedy against the corporation. Accordingly it would seem to be a sound rule of law, that wherever a corporation is acting within the scope of the legitimate purposes of its institution, all parol contracts made by its authorized agents are express promises of the corporation ; and all duties imposed on them by law, and all benefits conferred at their request, raise implied promises, for the enforcement of which an action may, well lie." In a note to the case of White v. Tryon, 20 L. R. A. 291, the liabilities of a corpora- tion upon contracts implied in law are thus summed up: " Manifestly the essentials of an implied contract by a corporation are the same as in case of such a contract 'by an individual, except as the question may be affected by limitations of the power of the corporation to make express contracts on the matter involved or by limitations of thd authority of its officers or agents' whose acts or silence may be an element in the asserted contract by implication. In other words, the true rule would seem to be that a corpora- tion is bound by an implied contract in case an individual would be bound in the same circumstances, provided the subject-matter of the contracts is not ultra virea' and the officers or agents whose knowledge, acts or conduct is made the bases of the contract to be implied had authority to represent the corporation in respect to such subject- matter." ' Facts restated ; portions of opinion omitted. 228, POWERS — PROPERTY. [CHAP. I. corporation." The rule for construing the instruments must neces- sarily be the same, viz., the powers specifically enumerated, and such other powers as are incidental or necessary to carry those powers into effect, but none others may be exercised by the corporation. Rockhold V. Canton Masonic Benevolent Society, 129 111. 440. The enactment creating the appellee corporation is the full measure of its power. In order to enable it to carry into execution the powers thus conferred it may exercise other powers, known to the law as incidental or implied powers. Implied powers exist only to enable a corporation to carry out the express powers granted, — that is, to accomplish the purpose of its existence, — and can in no case avail to enlarge the express powers, and thereby warrant it to devote its efforts and capital to other purposes than such as its charter ex- pressly authorizes, or to engage in collateral enterprises not directly but only remotely connected with its specific corporate purposes. A power which the law will regard as existing by implication must be one in a sense necessary, — that is, needful, suitable and proper to accomplish the object of 'the grant, and one that is directly and immediately appropriate to the execution of the specific powers, and not one that has but a slight, indirect or remote relation to the specific purposes of the corporation. Keeping these definitions as to implied powers in view, we may proceed to determine whether the acts set forth in the pleas are within or beyond the measure of power possessed by the appellee company. ■ The information charges that the defendant owns and controls within the city of Chicago a large ten-story business block, together with the ground on which said building stands, worth $2,000,000; that the defendant occupies a portion, only, of said building for purposes of its own corporation business, and that it leases about three-fourths of the building to pther persons, firms or corporations, and receives a large consideration from the occupants" thereof as rentals; that said block was built by the defendant as an invest- ment, and charges that the said building was erected without war- rant or authority of law. The defendant sets up by way of induce- ment in its plea, that it has had, ever since its organization, its general offices near the business center of the city of Chicago, and that it is necessary and proper to do so ; that it became impossible to rent proper general offices, and that the rentals charged for poor offices were high and exorbitant ; that thereupon, in 1880, it pur- chased a lot of land, 75 by 170 feet, at ihe corner of Michigan avenue and Adams street, and erected thereon a building, in which it ever since has kept its general offices and some store rooms ; that the said land was valuable, and could not, without great loss, be utiUzed for erecting a building other than a high building, and such as is in keepmg with and equal to the surrounding buildings ; that there- upon defendant erected thereon a nine-story building, of which it SECT. 2.] PEOPLE V. PULLMAN'S PALACE CAR COMPANY. 229 now uses nearly one-half, and that if its business continues to in- crease as it has in the past, it will soon also use it all for its general oflBices ; that in the meantime it rents to different parties such offices as it is not at present using ; that erecting such buildings is in keep- ing with the usual practice of other large corporations doing kindred business, and that it could not now rent such general offices as it requires, in the business center of Chicago, for a rental as low as five per centum per annum on the amount which said building and the land on which it stands cost defendant. The plea avers it was necessary and proper the general offices of the appellee should be maintained near the business center of the city of Chicago, and that such offices have always been maintained in that locality ; that it became impossible to rent suitable general offices there, and even insufficient and undesirable offices could only be obtained at high and exorbitant rentals ; that the business of the company was large and rapidly increasing, and that good busi- ness judgment dictated the company should provide its own offices, and that in view of the fact that desirable ground was very valuable, and that more office room would be needed in the future .tOraceom- modate the growing business of the company, it was determined to construct a larger bvdlding than was at the time actually needed and necessary and to rent such offices as were not at the present needed, and that, moved by such consideration, the building was erected ; that if the business of the corporation continues to increase as it has in the past, the entire building will soon be devoted to the uses of the company. We think the plea presented a good defense to the charges pre- ferred in the information with reference to this building. The ri^t of the appellee to construct an office building is indisputable, as so, also, is the right to select the most eligible and desirable site. It would be but a narrow and wholly unjustffiable view of this power to insist that in planning and constructing the building the corpora- tion should leave out of consideration its probable prospective re- quirements, and should erect a building containing only as many rooms and offices as its present business might demand. The cor- poration had the right, as we think, to look to and prepare for the future. It was but true economy to do so, and if it proceeded in good faith, as we are to assume from the conceded averments of the plea it did, no reason is perceived why it should be deemed bound by law to permit such parts of the building as are not for the present required for the accommodation of its business, to remain vacant, but, on the contrary, that it might lawfully obtain such income from the rents of such rooms as might be possible until the growth or increase of its business demanded the additional rooms or offices. A corporation could not be permitted, under mere color and pre- tense of furnishing accommodations for the transaction of its own 230 POWERS — PKOPEETT. [CHAP. T. affairs, to construct houses or rooms for the purpose of renting the same, and engage in renting such houses or rooms as a business, if such pursuit was, as it here clearly is, beyond and distinct from that it was created to pursue and accomplish. But the averments of the plea do not justify the imputation that the acts of the com- pany under consideration are but colorable, and in this investigation the averments stand confessed by the State. It seems perfectly clear the charter of the corporation did not clothe it with express power to purchase the real estate upon which the town or city of Pullman is built, or to construct the buildings in said town or city, or to engage in the business of renting dwellings, store rooms, market places, etc. Nor is express power to authorize such acts relied upon, but the contention is they were fully war- ranted by the powers derived from the implications of the law. What powers are to be implied by law must, as a matter of course, depend largely upon the surrounding circumstances. With a view of showing that the situation at the time justified the course pur- sued by the company and was sufficient to invest it with the legal right to pursue such course, the appellee company filed pleas averring, in substance, as follows : That after it had been for several years in the exercise of the powers conferred by its charter, its business in- creased to such an extent that it became necessary for it to build large' and extensive shops in which to manufacture cars; that a large amount of land was necessary on which to locate such shops ; that it found that it could not acquire a sufficient amount of land upon which to erect said shops within the city of Chicago on account of the high price of land in said city; that after dihgent and careful inquiry as to the price of land and the means of access thereto it decided to build its shops where they are now situated; that it, about the year 1880, purchased a tract of about three hundred and forty-three acres, being unimproved land, not included in any munici- paUty ; that at the time of said purchase and of the planning of the manufacturing plant of defendant there were not more than twenty- five dwelhng houses within a radius of two miles of said land ; that it was impossible to get good, skilled workmen to come and work unless they could obtain homes in the immediate vicinity ; that to get workmen and other employees, the defendant was obUged to build and erect a sufiicient number of houses to accommodate as many as possible of its employees, and that in order to attract to said manufactory the best class of skill and labor, it erected upon a part of said lands twenty-two hundred houses and tenements ; that the same were only built for the purpose of so accommodating the defendant's employees, were not built for any profit or income therefrom, but that the defendant might be able to obtain good, skilled labor in its manufactory ; that they are not a profitable in- vestment, and were and are only built and held by the defendant SECT. 2.] PEOPLE V. PULLMAN's PALACE CAR COMPANY. 231 because the same are "necessary for the successful prosecution of its business." Defendant alleges also in its pleas, as inducement, that in order to obtain a better class of skilled employees, especially those with families, to work in its manufactory, it was absolutely necessary that there should be provided near their homes proper educational facilities ; that to meet the said demand, defendant erected several school houses near the said dwellings ; that said buildings are all now within the Umits of the city of Chicago and said school houses are rented to the board of education of said city, which has the sole control and charge of the said buildings; that it became and was necessary that certain places for divine worship should be provided hear the said dwellings of defendants' employees, and to meet that demand a church was erected and fiu-nished to a congregation using it, at a pi^rely nominal rental ; that on this tract of land, and near said dwelling houses, defendant erected a building called the "Arcade Building"; that on the first floor thereof are rooms rented by de- fendant to storekeepers, because when the town of Pullman was built there were no stores within a reasonable distance at which the company's employees could buy the ordinary necessities of life; that defendant has not, and never has had, any interest in the said stores or the profits derived therefrom; that the said stores are Tented at a very low rate, and that said building was not built for profit but only for the convenience of said employees ; that on the second and third floors thereof is a public library for the use of said employees and their families, for which no rent is charged, and two large halls used for religious worship for the use of said em- ployees and their families, and which are furnished by defendant "to congregations of its employees at a nominal rental; that no theatrical entertainments are given in said building by defendant, but the same is furnished for use to said employees or associations ■of them, and it is largely used by them for entertainments given by themselves and for a place in which they may practice music ; that on said land near its manufacturing plant defendant erected a small building which was used as a hotel, for the purpose of furnish- ing accommodations to intending purchasers of defendant's cars, their agents and inspectors ; that said hotel was and is a necessary part of defendant's manufacturing plant ; that in order to properly operate its manufacturing plant it became and was necessary to «rect a gas plant, from which it furnishes light through all its manu- facturing buildings, and has, upon their request, furnished gas at a fair and reasonable price to certain of its employees occupying some of its houses, but that the gas so furnished said employees does not amount to ten per cent, of the gas produced by said gas plant and used in defendant's shops ; that at the time of the erection of said manufacturing plant there were no water-works at or near said 232 POWEKS — PROPERTY. [CHAP. I. lands, and defendant erected a water tower and plant upon its premises principally for supplying water throughout its shops, and contracted with the village of Hyde Park for the furnishing to the defendant of large amounts of water through the water mains of the said village ; that most of the water passing through said water mains and through said water tower is used in the shops of defendant,, but a small percentage thereof is furnished to said employees in their homes ; that said water is furnished to said employees at a very low rate and at less than the cost thereof to defendant, and because said employees cannot in any other way procure a supply of water ; that when said manufacturing plant was built defendant put in a very large system of boilers for generating steam ; that said boilers and steam capacity probably will all be required for use in operating said shops, but up to this time there has been a surplus of steam generated, and at the request of said employees steam-pipes have, in a few instances, been run into their said houses and dwellings, and through said steam-pipes some of said houses and dweUings have been heated ; that in like manner it has furnished for a money consideration part of its present surplus steam and engine power to the Allen Paper Car- Wheel Company, whose shops adjoin the property of defendant ; that in connection with said manufacturing plant and dwelling houses defendant set apart eighteen acres of land as recreation grounds for the use of its said employees; that defendant has established and maintained the same only for the purpose of attracting to its works the best class of skilled workmen. It further appears from the plea the corporation at once, after the buildings composing the town of Pullman and its streets and alleys were completed, rented the dwellings, tenements, business, rooms, church, theater room, school rooms, etc., and for a com- pensation undertook to supply the inhabitants of th^ town with water, Hght and heat, and that it has since continued to perform such acts, and was pursuing the same course when the information was filed. The location selected by the corporation for the new ' site of its plant was within a few miles of the populous and wealthy city of Chicago, upon a line of railway which furnished adequate and speedy means of transportation to and from the city, so that the plant and its surroundings in fact were within the suburbs of the city. The averment of the plea the corporation was obliged to construct, such houses and tenements is but the statement of a conclusion, and we find the facts pleaded do not justify such a deduction. No reason existed, nor do we find in the pleas even a suggestion that there was reason or ground, for the apprehension that individual enterprise and private capital would not at once, after the purpose and mtention of the corporation became known, provide all neces- sary dweUings and tenements for the accommodation of the work- SECT. 2.] PEOPLE V. PULLMAN's PALACE CAR COMPANY. 233 men, or that the wants of the community composed of such'^workmen would not at once be met by the location in its midst of schools, churches, dry goods and grocery stores, meat markets, etc., or that the necessary streets, a;lleys and public ways would not be provided without any intervention whatever on the part of the corporation. The public laws of the State would have suppUed the requisite school houses and teachers, and the inclinations of the individual members of the community could have been safely reUed upon to provide church .houses and rooms for imparting religious instruction. It is idle to argue that it became in any sense necessary or directly appropriate to the accomplishment of the lawful and chartered purposes or objects of the corporation it should engage its efforts or capital in the construction of dwellings, tenement houses, store houses, streets, alleys, theaters, hotel, churches, school houses, water-works, a system of sewers, etc. Workmen, if they have families, must have homes, or if unmarried must be accommodated with boarding and places of lodging. Homes, groceries, vegetables, bread, meat, clothing, furniture, light, heat, water, school books, medicine, the services of physicians, dentists and other professional men, and many other things, become necessary to the health, com- fort or convenience of such workmen and their families ; but the right and power to supply such wants had, in this instance, so far as the pleas show, no direct relation or connection with the successful prosecution of the specific object of the appellee corporation. The relation was but remote, indirect and mediate, — not direct and immediate. ImpHed power cannot be invoked to authorize a cor- poration to engage in collateral enterprises but remotely connected with the specific purposes it was created to accomplish. A power which a corporation may exercise by implication must be bounded by the purposes of the corporate existence and the terms and inten- tion of the charter, and acts which tend only remotely and by in- direction to promote its interest and chartered objects can not be justified by implication of law, but are ultra vires. Cases cited holding corporations operating mines or mills engaged in sawing lumber had implied power to construct dwellings and boarding houses for their employees can have little or no influence upon the question here presented. In those cases the fact the works or mills of the corporations were necessarily located at mines or near large forests, and other circumstances peculiar to the respective cases, were deemed sufficient to justify the corporations in arrang- ing^ for the lodging or boarding of their workmen or in building homes to shelter them and their families. The circumstances in each of such cases as can be accepted as having been well considered, were such it became, in a legal sense, necessary to the accom- plishment of the chartered purposes of the corporation that it should exercise such power as was accorded it by implication of law. 234 POWERS — PROPEKTY. [CHAP. I. Exceptioi»al circumstances or extraordinary conditions may make it. necessary to the proper prosecution of the business of a corporation: that it shall be accorded implied power to perform acts beyond it» express power, and which, except for the prevaihng conditions,, would be wholly unwarranted. But in the case in hand the appellee corporation voluntarily assumed to devote its corporate capital and power to that which, to say the least, but remotely and indirectly tended to aid the acpomplishment of the purposes it had the right to pursue under conditions and circumstances which were neither rare nor unusual. The argument of counsel for appellee that the construction of the manufacturing plant involved, not the expediency, simply, but the necessity, of providing places suitable for the occupancy of those who were to do its work, "and that in view of this the company determined to undertake, and did undertake, to construct its works, and dwelling places for its workmen at the same time and as a part of a single harmonious plan," is fallacious. It ignores the palpable fact that no duty of providing houses for its workmen was pressed upon the company by surrounding conditions or circumstances as a necessity,, but was adopted as a matter of choice, based, it may have been, upon motives which were, in part, benevolent or chari- table in their nature. Had it purchased only that quantity of ground needful for its proper corporate uses, and restricted its efforts and. expenditures to the construction of such buildings as would have answered its corporate wants, there appears to us no reason to be- lieve that the question of homes for its workmen, market places or stores where such workmen could purchase suppUes, or school rooms where their children could receive instruction, or the making of streets and alleys, would ever have demanded the thought or atten- tion of its governing body. It is beyond reason to conclude that, had the way been left open, private capital and individual enterprise would have overlooked this desirable field of operations, or that merchants, tradesmen, butchers and other classes of business mea would, not have appeared and entered into business rivalry for the custom of the workmen and their families, and that the prosecution of the business of the corporation would have suffered because its workmen could not find homes or places where the articles necessary to supply their wants and add to their comfort could be purchased, — and yet it is upon this ground it is sought to justify the acts of the corporation which are now under consideration. We think the averments of the plea in response to the allegations, of the information under consideration were insufficient to present a legal defense. The information charges that the defendant owns fifty-five acres of vacant and unoccupied land north of its shops, and that it also owns other vacant and unoccupied land at Pullman to the extent of. SECT. 2.] V. S. BREWING CO. V. DOLESE & SHEPARD CO. 235 sixteen acres. The defendant's plea avers, as to said , fifty-five acres, that they are now in actual, constant and necessary use by it for dumping thereon cinders and other refuse from its shops, and will, in the near future, be necessary for further extensions of de- fendant's manufacturing plant. It clearly appears, the allegations of the plea being taken as true, that this tract of* land of fifty-five acres is devoted to legitimate corporate purposes. Whether so actually, constantly and necessarily used is a question to be deter- mined on the trial of the issue. The allegation that the appellee company furnishes the Allen Paper Car-Wheel Company with steam power to operate the ma- chinery of the latter company, and receives a large income there- from, is fully met by the averments of the plea. It is entirely com- petent and proper for a corporation to keep in view its probable futiure wants and necessities, and iii constructing its buildings and purchasing machinery to anticipate and provide for that which sound practical judgment and wise forethought indicate will be required by the growth of its business and the extension of the volmne of its operations. It being lawful to purchase boilers having a capacity to generate more steam than the immediate needs of the company required, the law has no rule which would require that the excess of steam so provided should not be utilized but should be allowed to go to waste. It was but true economy, and in no sense a usurpation of power, to dispose of the excess of steam so produced to the Allen Paper Car- Wheel Company. The judgment must' be reversed and the cause remanded, with directions to the circuit covirt to sustain the demurrer to the pleas as hereinbefore indicated and in other respects to overrule the same, and to proceed further as may be in conformity with this opinion. Reversed and remanded. Chaig, Wilkin and Cartweight, JJ., dissenting. THE UNITED STATES BREWING COMPANY v. THE DOLESE & SHEPARD COMPANY. 259 lU. 274. 1913. Mr. Justice Farmer delivered the opinion ^ of the court : Plaintiff in error (hereafter called plaintiff) brought this action of assumpsit in the municipal court of the city of Chicago against defendant in error (hereafter referred to as defendant) for the re- covery of $10,000 alleged to be due plaintiff from defendant. Plaintiff ' Portions omitted. 236 POWERS — PHOPERTY. . [CHAP. I. is a corporation organized tinder the laws of Illinois "to manufacture and sell all kinds of beer, ale and porter, to buy and sell all kinds of brewer's materials and supplies, and to carry on a general brewer's business in all its branches." Defendant is a corporation organized "to quarry stone, sand, clay, earth and gravel; to manufacture and deal in stone, brick, lime and cement, and deal also in sand, clay, earth, gravel, sewer and water pipe, stucco, lumber and building materials of all kinds, coal and ice, and to contract for, make and construct pubUc and private improvements in which any such ma- terials are employed, including roads and bridges." Defendant's quarries were near the village of Gary, (or Hodgkins,) in Lyons township. Cook county, about fifteen miles from the business dis- trict of the city of Chicago. The village is situated on the Atchison, Topeka and Santa Fe railroad and is about three-quarters of a mile from the quarries. In 1905 there were but few houses in the neigh- borhood where employees of defendant could live and the transpor- tation facilities for conveying workmen to and from the quarries were inadequate and inconvenient. Defendant employed between one hundred and two hundred workmen, and' in 1905 it employed an architect and caused plans to be prepared for a bxiilding it pro- posed to erect for a boarding house to acconamodate its employees. Before any work was done by defendant on the building, negotiations were entered into by it with plaintiff for the construction of the build- ing by plaintiff. "These negotiations resulted in an agreement being reached by which plaintiff was to erect the building, part of it to be used as a saloon. On November 5, 1905, defendant leased to plaintiff, for a term commencing January 1, 1906, and ending De- cember 31, 1930, a tract of land described, one hundred feet wide by two hundred feet deep, upon which plaintiff agreed to erect at its own expense and maintain for the term of the lease, unless sooner terminated under the provisions thereof, "a certain building, and to use and operate the same continuously for the entire term afore- said, as a saloon and boarding house, said building to cost the sum of $6700." Plans and drawings for the building were made part of the agreement. The portion of the building devoted to use for boarding house purposes consisted of a kitchen, twenty-four feet by twenty-four feet; a dining room, twenty-four feet by eighty feet; forty-three double bed-rooms, and an apartment for the tenant. The part of the building devoted to saloon purposes was twenty-four feet by thirty feet. The lease contained provisions concerning its termination by defendant upon notice, and for the appointment of appraisers to value the building and make an award for the payment therefor by defendant if it elected to terminate the lease before its expiration, but those provisions are not here involved. The lease provided that " should the district within which the premises herein demised are located become a prohibition or local option dis- SECT. 2.] U. S. BKEWING CO. V. DOLESE & SHEPAKD CO. 237 trict, so that on account thereof it shall be necessary to suspend the saloon business on said premises within three years from the: date of this contract, then no such -appraisement shall be made, but said first party [defendant] shaU pay to the said second party [plaintiff] the cost price of the building and improvements on said premises, such cost price not to exceed, however, the.sum of $10,000." The lease authorized plaintiff to sublet the building, and after its completion plaintiff leased it at a monthly rental of $200, with a provision that if the lessee or his assigns purchased from plaintiff all beer sold on the premises, a deduction or rebate would be allowed of $120 on each month's tent. The building was conducted as a boarding house and saloon from the time of its completion. At the township election held April 7, 1908, the township of Lyons became prohibition or anti-saloon territory, and on April 9 plaintiff notified defendant, in writing, of that fact, demanded the payment of $10,000, and offered to surrender the building immediately upon payment. Defendant did not make the payment and appears to have ignored the demand. This suit was begun for the recovery of $10,000 on August 4, 1908. The declaration consisted of a special count on the contract and the common counts. Defendant pleaded the general issue and a special plea that the contract declared on in the special count was ultra vires. Plaintiff relies upon the rule announced in a number of cases that it is within the power of a corporation to adopt any proper and convenient means tending directly to accomplish the purposes for which it was organized, not amounting to the transaction of .a sepa- rate, unauthorized business. Among other similar cases, reliance is placed upon Heims Brewing Co. v. Flannery, 137 111. 309, and Kraft ». West Side Brewery Co., 219 id., 205. In the Heims Brewing Co. case the corporation was organized with power "to acquire, own and use all necessary property and means to prosecute and conduct the business of brewing and disposing of beer, with all such powers as shall be essential and incident to the convenient and successful operation of a brewery." It leased a building for a period of five years for saloon purposes. Before the term expired it abandoned the premises and refused to pay the rent. When suit was brought it defended on the ground that the contract was ultra vires. A part of the contract with the .owner of the building was, that the owner would not engage in the saloon business during the period of the lease nor rent other property owned or controlled by him in the block for saloon purposes. The object of the contract and lease was to promote the business for which the brewery was organized by increasing the sale and consumption of beer manufactured by it, and it was held the contract was within the powers of the cor- poration and was valid and binding. In the Kraft case the brewery loaned Kraft money to erect a building for a saloon, living apart- 238 POWERS — PROPERTY. [CHAP. I. ments for the owner, and for a hall in the upper story. The brewery was to be given a lease upon the premises and no other beer than that manufactured by it was to be sold thereon during the term of the lease. A mortgage was given the brewery to secure the pay- ment of the loan, and when it instituted proceedings to foreclose the mortgage the defense of ultra vires was interposed. This court held that the loan was made for a purpose not too remotely con- nected with the promotion of the business of the brewery and that it was within the implied powers of the corporation. We do not think the above cases, and others relied upon, sustain plaintiff's contention. It is probably true that the boarding house would be of benefit to the saloon because of increased patronage at the bar, but because a corporation like plaintiff might do some things under its implied powers to promote its business, it does not follow that it may engage in any line of business or occupation not authorized by its charter powers because such business or oc- cupation would promote the business for which the corporation was organized. It would be rather a far stretch of corporate powers to say that a corporation organized to manufacture and sell beer, ale and porter and carry on a general brewer's business in all its branches, could estabUsh and operate boarding houses for the purpose of in- creasing the sale of its beer. This court said in Fritze v. Equitable Building and Loan Society, 186 111. 183: "By an implied power is meant one that is directly and immediately appropriate to the exe- cution of the specific power granted, and not one that has slight or remote relation to it." In Best Brewing Co. v. Klassen, 185 111. 37, the court said: "Many acts can be suggested which, though beneficial to the business of a corporation, are too remote from its general purposes to be deemed reasonably within its implied powers. What is and what is not too remote must be determined according to the facts of each case. The rule has been stated to be : In exer- cising powers conferred by its charter, a corporation 'may adopt any proper and convenient means tending directly to their accom- ' plishment, and not amounting to the transaction of a separate, un- authorized business.' " Here, more than three-fourths of the building and of the investment for its construction was for boarding house purposes, which was a business plaintiff had no power, either express or implied, to engage in. If it did have such power, we cannot see wherie the line could be drawn against its engaging in any business in connection with its manufacture and sale of beer that would pro- mote that object. In our view of the case no action could be sus- tained upon the contract. SECT. 2.] LANCASTER V. AMSTERDAM IMPROVEMENT CO. 239 LANCASTER v. AMSTERDAM IMPROVEMENT CO.i 140 N. Y. 576 ; 24 L. R. A. 322. 1894. Cross appeals from a judgment of the General Term of the Supreme Court to which was submitted the question upon agreed facts : Whether the defendant, a corporation organized under the laws of New Jersey, but transacting its business, of buying and selling land, solely in New York, possessed and has conveyed to the plaintiff, Lancaster, a good and sufficient title to certain premises situated in New York. Gray, J. Before approaching the discussion of the principal question in this case, certain questions of subordinate importance may be disposed of, which have been raised upon the argument. One of them relates to the right of this corporation to recognition in oin- courts, as affected by the fact that the incorporators are, Tvith one exception, citizens and residents of this state. Whatever inferences can be drawn as to the motives which took them into a foreign jurisdiction to organize a corporation under its laws, I agree with the General Term that any such question has been once and for all settled by our recent decision in the case of Demarest v. Flack (128 N. Y. 205). It appeared in that case that citizens of this state incorporated under the laws of West Virginia to carry on a certain business; with the principal office of the company in New York city, where only it had been conducting its operations. It was claimed that these facts invaUdated! the corporation, and that there was a manifest evasion of, and fraud upon, the laws of the state. But it was held that they constituted no reason for refusing recog- nition to the corporation; that there was no essential difference between a corporation formed under the laws of a foreign state, the members of which were its own citizens, and one so formed, the members of which were citizens of our own state. If our citizens are attracted to other jurisdictions for purposes of incorporation, because of more favorable corporation or taxation laws, I cannot see in that fact, however, and in whatever sense, to be deplored, any reason that they should be prevented from employing here the corporate capital in the various channels oif trade or manufacture. That, as it seems to me, would be a rather hurtful policy and one not to be attributed to the state. Another question relates to the regularity of the proceedings for the incorporation of the defendant company under the laws of the • Statement of facts condensed and rewritten. Further facta are sufBciently stated, in the opinion. 240 POWERS — PKOPERTY. [CHAP. I. state of New Jersey. I am unable to perceive any defect therein. I should say there had been a compHance with its statutes. But if there could be pointed oiit some irregularity, it could not be made the subject of an objection to the defendant's title.^ It was a cor- poration de facto. Its incorporators had filed their certificate of incorporation, as required by the laws of New Jersey, and a certificate had been filed in the office of the secretary of state of this state, as required by our laws of a foreign corporation. It was exercising a franchise attempted to be conferred upon it by the laws of New Jersey, and any question affecting its right to transact business, because of alleged irregularities in organization, is a matter for the government of that state to inquire into. [The court reviewed the de facto doctrine and held it equally applicable to foreign corpora- tions, citing Bank of Toledo v. International Bank, 21 N. Y. 542. It construed the New Jersey laws to authorize incorporation for the purpose of acquisition, improvement, and sale of land.] But, if any doubt might be entertained upon the correctness of our con- struction of this foreign statute, I do not think the doubt affects the question here. If to engage in the business of buying and of selling^ real property is to act in excess of the powers conferred upon the corporation by the statute of New Jersey, it is for that government to inquire into the exercise by its creature of corporate powers. It is not a question which the party dealing with it can raise. As a corporation de facto, possessing some capacity to acquire and convey real property, its conveyance is unimpeachable upon any ground of an excess or of an abuse of powers conferred, and unless in the laws of this state we are able to find a prohibition, expressed herein, or to be implied therefrom, which disabled this corporation from ac- quiring the land and from conveying it, the plaintiff would obtain a valid title to the premises conveyed. The principal question for our consideration is one of great im- portance; for upon its decision not only depend large interests, but a judicial definition of state policy. That question may be thus succinctly stated : Under our laws, can a foreign corporation, in- corporated for the purpose of dealing in the purchase and sale of real property, come into this state and transact here such kind of corporate business? The General Term put the question in some- what different form: Whether it may "purchase and hold lands within this, state which are not necessary for its business and which have not been acquired in securing the payment of a debt due to it." That is hardly exact, as applied to the case of this corporation. As I have shaped it, the question is certainly made broad enough. The opinion of the General Term was delivered by Mr. Justjce FoLLETT, whose opinions are entitled to the highest respect, and he negatives the proposition embodied in the question; upon the.- ' See note 1, page 116, ante. SECT. 2.] LANCASTER V. AMSTERDAM IMPROVEMENT CO. 241 ground, in substance, that from certain general statutes of this state, which relate to the right of foreign corporations to purchase, or acquire, and to convey real property, and from numerous special acts, passed to authorize them to acquire lands, it is to be inferred that "it is contrary to the policy of this state to permit such cor- porations to take, hold and convey lands in this state, without being specially authorized so to do." The general statutes to which he refers are chapter 158 of the Laws of 1877 and chapter 450 of the Laws of 1887, and he considers that to their declarations is to be referred, solely, the question of the right of foreign corporations, generally, to acquire, hold and convey lands ; for they alone recog- nize their right in such respects. The act of 1877 authorized a foreign corporation to pin-chase at a sale under the foreclosure of a mortgage or under a judgment held by it ; to hold the land purchased for not exceeding five years, and to convey it, etc., etc. The act of 1887 authorized a foreign corporation, doing business in this state, to acquire such real property as might be necessary for its corporate purposes in the transaction of its business here. Both provisions were re-enacted in the "General Corporation Law" of 1892 (Chapter, 687, Laws 1892), as sections 17 and 18. In order to uphold the validity of the conveyance in question here, I think we might very safely rest our conclusion upon the enactment of 1887, if other grounds were lacking. We might, without doing violence to any rule of law, say that that act was such sufficient .authority, as to make the title to thejand conveyed by the foreign corporation quite indefeasible in its grantee. The General Term thought it was not broad enough; but there would not be much stress in reasoning that the foreign corporation being authorized to do business here, the authorization of the act of 1887 "to acquire such real property as may be necessary for its corporate purposes in the transaction of its business in this state," even though we were disposed to define it as comprehending merely property for proposed use as an office, a warehouse or factory, etc., would, nevertheless, be insufficient to enable the corporation in possession of land by its conveyance to vest in the grantee a good title to it. It is not for the party contracting for the conveyance of its land to raise the question of how far his grantor may have exceeded the authority given by the statutes of this state, any more than he might with respect to an alleged abuse of the powers conferred by its home charter.^ Those are questions between the corporation and the government. The presumption mihtates in favor of the vaUdity of the transaction, and the right of interference by the state does not extend to any forfeiture of the property held by the corpo- ration. (In re McGraw, 111 N. Y. 66, 96.) In Cowell V. Springs Co. (100 U. S. 55) the objection was that the ' These questions are treated infra in Book III, Chap. 2, Sec. 2. 242 POWEES — PROPERTY. [CHAP. I. National Land & Improvement Company, a Pennsylvania corporate tion which granted certain lands in Colorado to the spnngs com- pany, was not empowered to acquire a right to the lands, for the reason that they were not necessary to enable it to carry on its business; to which extent corporations in Colorado were liinited, because of restrictions upon the legislative power in the creation of corporations. It was held that "whether the particular premises in controversy are necessary for that business is not important; that is a matter between the government of the state and the cor- poration, and is no concern of the defendant." But we are not confined to any such narrow ground as a construc- tion of the particular acts referred to. Our general laws are such as to evidence a state pohcy, which makes no invidious distinction against foreign corporations, coming within our boundaries to ex- tend the area of their lawful operations. The answer to the ques- tion is not to be found in the acts to which the learned General Term justices refer. If they have not overlooked they have failed, in my judgment, to give due weight and significance to other pro; visions upon our statute books. The General Corporation Law, passed in 1892, contains these further provisions as to foreign corporations : ' "Section 15. No foreign stock corporation other than a monied corporation shall do business in this state without having first pro- cured from the secretary of state a certificate that it has compUed with all the requirements of law to authorize it to do business in this state, and that the business of the corporation to be carried on in this state is such as may be lawfully carried on by a corporation incorporated under the laws of this state for such or similar pur- poses. . . . The secretary of state shall deliver such certificate to every such corporation so complying with the requirements of law. No such corporation now doing business in this state shall do business herein after December 31, 1892, without having pro- cured such certificate from the secretary of state. . . . No foreign stock corporation doing business ^ in this state without such certifi- > CJ. American Smelting &c. Co. v. Colorado, ante, page 190. * A foreign corporation does not incur the penalty of inability to maintain actions in the domestic forum upon contracts made in the latter state, unless it is "doing busi- ness" therein. What constitutes doing business' within the state, is the same question, -whether viewed from the standpoint of barring suits brought by it, Vermont Farm &c. Co. t). Hall, 156 Pac. Rep. (Oregon, 1916), 1073, or from that of its liability to actions against it in the domestic state (c/. note page 49, areJe) , Smithson ». Roneo, 231 Fed. 349. "Doing business" does not mean a single or isolated transaction within the state. Delaware & Hudson Canal Co. w. Mahlenbrock, 63 N. J. L. 281 ; Ozark Cooperage 6o. V. Quaker City Cooperage Co., 98 N. Y. Supp. 113 ; Cooper Manufacturing Co. ji. Fer- guson, 113 U. S. 727. It does mean the general prosecution of its ordinary business. Von Seyfried ». VoUers, 75 N. J. L. 405 ; it does include the maintaining of an office and having capital invested and conducting a regular business. New York &c. Terra Cotta Co. I. Williams, 102 A. D. 1, (semWe — strong discussion) affirmed 184 N. Y. 579; it does cover transactions In Kansas by which a correspondence school in Pennsylvania SECT. 2.] LANCASTER V. AMSTERDAM IMPROVEMENT CO. 243 cate shall maintain any action' in this state upon any contract* secured applications for scholarshipa therein, through soliciting agents employed in Kansas who there received and forwarded tuition fees. Such transactions "were not single or casual transactions, such as might be deemed incidental to its general business as a foreign corporation, but were parts of its regular business continuously conducted in many States for the benefit of its correspondence schools." International Text Book Co., V. Pigg, 217 U. S. 91. While the state so far as intra state commerce is concerned may absolutely exclude a foreign corporation from transacting business therein, because it depends for its recog- nition and enforcement of its contracts upon the grace of the domestic state, Paul v. Virginia, 8 Wall. (U. S.) 168, and such state may admit it upon such terms as it chooses to impose, Ashley v. Ryan, ante, page 73, still it may not in any form or under any guise impose burdens upon interstate commerce. To caiTy on interstate commerce is not a franchise granted by the state but a right secured by the Federal Constitution ; and the accession of mere corporate facilities as a means of transacting such commerce can- not impair that right. Crutcher v. Kentucky, 141 U. S. 47. While such commerce may be regulated by Congress, it is beyond the province of the state. Ibid. "The case is entirely different from that of foreign corporations seeking to do a business which does not belong to the regulating power of Congress. The insurance business, for ex- ample cannot be carried on in a State by a foreign corporation without complying with all the conditions imposed by the legislation of that State. So with regard to manufacturing corporations, and all other corporations whose business is of a local and domestic nature, which include express companies whose business is confined to points and places wholly within the State." IMd. Hence, the state cannot require a foreign corporation, if engaged in interstate commerce, to file a certificate as a condi- tion precedent to carrying on such commerce in that state. International Text Book Co. V. Pigg, supra; Bucks Stove &c. Co. v. Vickers, 226 U. S. 205. Cf. County of San Mateo V. S. P. Ry. Co., in note 1 page 209 at page 210 ante. It is primarily a question of fact whether the foreign corporation is merely doing business within the state as distinguished from commerce between the states. Vermont Parm &c. Co. ■». Hall, supra. Under the Federal Corporation Tax Law of 1909, a corporation is not "carrying on or doing business" and hence not subject to the tax, where, incorporated to construct and operate a railroad, it had leased same for 999 years (. Sohmer, Comptroller, 217 N. Y. 443. But otherwise where the corporation is doing the very business for which it was organized, Rio Grande Junction &o. Co. ^. United States (not yet officially reported — U. S. Court of Claims, May 29, 1916). ' This denial of the privilege of suit in the courts of the domestic forum is merely a penalty. The statute does not render the business illegal. The contract is not void ; it may be enforced in other jurisdictions. David Lupton's Sons Co. v. Automobile Club of America, 225 U. S. 489. It is valid in all other respects. Mahar D. Harrington Park Villa Sites, 204 N. Y. 231. "In aid of the legislative policy so declared the courts of a state will refuse to entertain suits to enforce obligations that have arisen in the course of transactions thus reprobated. To this extent such obligations lack the sanction of law, but to designate them as void in the sense that immoral or prohibited acts are void is an inexact use of terms." Garrison, J. in Alleghany Co. <). Allen, 68 N. J. L. 68, affirmed 69 N. J. L. 270. The statute is a penalty against the corporation and ia not to be invoked by the corporation as a defense. Gaul v. Kiel & Arthe Co., 199 N. Y. 472. ^ The penalty applies only to suits on contracts, and hence does not inhibit a creditor's suit to set aside a fraudulent conveyance, Joseph Schlitz Brewing Co. ». Ester, 86 Hun 22, affirmed 157 N. Y. 714 ; nor replevin actions, for they are ex delicto, American Type- founders Co. V. Conner, 26 N. Y. Supp. 742 ; nor actions to recover for conversion of property, for the same reason, Dominion Fertilizer Co. v. White, 96 Atl. Rep. (Maine, 1916) 1069 ; nor mechanic's liens, N. Y. &c. Terra Cotta Co. v. Williams, 102 A. D. 1. affirmed 184 N. Y. 679. 244 POWERS — PROPEKTY. [CHAP. I. made by it in this state ' untiP it shall have procured such cer- " Section 16. Before granting such certificate the secretary of 1 The penalty is only imposed when the foreign corporation is "This exception is supposed to rest on a necessity which arises in order to avoid loss." Coppin V. Greenlees, &c. Co., 38 Ohio St. 275. "It is, of course, because of the necessity of avoiding loss, and not because it is for the satisfaction of a debt, that the exception is recognized. If the same or a like necessity of avoiding loss should arise in any of the transactions of the company, it could not, with any show of reason, be con- tended that the application of this principle of necessity should be limited by any iron SECT. 3.] HOLMES &C. MFG. CO. V. HOLMES &C. METAL CO. 271 The doctrine that the capital stock of a corporation is deemed a trust fund for the payment of its debts has been recognized by this court. Hightower v. Thornton, 8 Ga. 500 (52 Am. D. 412) ; Robinson v. Bank of Darien, 18 Ga. 86, 87 ; Schley v. Dixon, 24 Ga. 273 (71 Am. D. 121) ; Reid V. Eatonton Mfg. Co., 40 Ga. 102 (2 Am. R. 563) ; Moses v. Eagle & Phenix Mfg. Co., 62 Ga. 456. We know of no case wherein it is held that an insolvent corporation has the power to purchase its own shares of stock. Without regard to what is the sounder view as to the power of a corporation, in the absence of statutory prohibition, to purchase its own stock, it must certainly be true that if the cor- poration at the time of making such purchase is in an insolvent condi- tion, and therefore the purchase is to the prejudice of its creditors by diminishing their chances of collecting their claims, the transaction can not be sustained, and the selhng stockholder who thus receives a portion of the capital holds the same subject to the superior equities of creditors. In the present case, at the time Fitzpatrick conveyed his stock to the bank he was solvent (and of course there was no neces- sity for taking his stock to save the debt, nor did the auditor find that such a necessity existed), the bank was insolvent, and Fitzpatrick received in return for his stock a portion of the bank's capital by way of having his note, held by the bank, credited with the amount of the supposed value of his stock, thereby decreasing the capital to which the creditors of the bank had the right to look for the satisfaction of their claims ; and we have no hesitancy in ruling, especially in view of our statutes prohibiting banks from applying their capital stock to the purchase of their own shares, that Fitzpatrick held the money or credit so received subject to the superior equity of the creditors, although he acted in good faith and without actual knowledge of the bank's insolvency. Affirmed.^ • HOLMES AND" GRIGGS MANUFACTURING COMPANY V. HOLMES AND WESSELL METAL COMPANY ET AL. 127 N. Y. 252. 1891. Haight, J.^ This action was brought to recover the amount of a promissory note bearing date December 1, 1884, executed by the defendant, The Holmes & Wessell Metal Company, and indorsed by rule to the case of taking stock for an otherwise hopeless debt." Morgan v. Lewis, 46 Ohio I. See Schulte v. Boulevard Gardens &c. Co., 164 Cal. 464. ' By a parity of reasoning, a corporation may not, to the prejudice of its creditors, release unpaid subscriptions to its capital stock. See Book IV, Chap. 1, Sec. 2 infra. ' Portion of opinion omitted. 272 POWERS — ACQUISITION OF STOCK. [CHAP. I. the defendants Morse and Shonnard. The defenses were ultra vires, no consideration, and a non-tender of certain stock for the purchase- price of which the note was given. The plaintiff is a manufacturing corporation organized under the general act of 1848 for the purpose of manufacturing sheet and rolled brass wire, tubing and other articles composed wholly or in part of metal, in the city of New York. Its president was Charles E. L. Holmes, and its secretary and treasurer was George C. Edwards. On the 12th day of July, 1881, Holmes and Sdwards entered into an agreement with the defendants Shonnard, Morse and one Charles Wessell to organize a new company for the man- ufacture of brass, nickehne alloys and other composite metals, under the corporate name of the Holmes & Wessell Metal Company. The capital stock of such company to be $100,000, the whole amount to be issued and paid up in cash ; three-fourths thereof to be subscribed and paid by Holmes and Edwards, and the remaining one-fourth by the other parties to the agreement. The agreement, in its preamble, recites that Holmes and Edwards propose to transfer the rolhng mill belonging to the plaintiff, including all of the machinery, tools and appliances connected therewith, together with the lease of the prem- ises occupied by the plaintiff, for the sum of $50,000. Subsequently and at an annual meeting of the plaintiff's stockholders held on the 20th day of July, 1881, the president and secretary were instructed to sell to the Holmes & Wessell Metal Company the entire machinery and plant owned by the plaintiff, for the sum of $50,000 ; and also authorized them to sell to the same company all the material manu- factured, unmanufactured and in process of manufacture owned by the plaintiff, and to also subscribe for 3,000 shares of the capital stock of the company, and to pay for the same out of the proceeds of the sale of the mill and materials. It further appears that the Holmes & Wessell Metal Company was incorporated on the 15th day of July, 1881, and that Charles E. L. Holmes subscribed for two thousand shares and George C. Edwards one thousand shares of the capital stock. Thereafter and on the 23d day of July, 1881, the new company at a meeting of its stockholders, authorized the purchase from the plaintiff of its plant and machinery, and to pay therefor the sum of $50,000, and for the entire stock of materials manufactured and unmanufactured owned by the plaintiff the sum of $31,333.96 ; and, on the first day of September thereafter, such sale was completed by the transfer of the plaintiff company ta the defendant company of its entire plant, machinery, etc., and, in payment therefor, the defendant company issued to George C. Edwards, trustee, the stock subscribed for by Holmes and Edwards,, amounting to $75,000, and the balance, $6,333.96, was paid in cash. After such transfer, the plaintiff discontinued its business. On the 1st day of December, 1884, the plaintiff entered into a con- tract with the defendants, Morse, Shonnard and said Charles Wessell,. SECT. 3.] HOLMES &C. MFG. CO. V. HOLMES &C. METAL CO. 273 in which the plaintiff agreed to sell to the other parties thereto 1,440 shares of the stock of the defendant company, standing in the name of Edwards, as trustee, for the sum of $30,000, payable, $5,000 in cash and the balance by certain promissory notes, of which the note in suit is one. The agreement further provided that the stock should remain in the name of Edwards, or some other officer of the plaintiff, as trustee; that it might be voted upon by him until delivered as specifically provided in the contract. It is doubtless true that a corporation cannot purchase, or deal in stocks of other corporations unless expressly authorized by law so to do.i (Talmage v. Pell, 7 N. Y. 328 ; Berry v. Yates, 24 Barb. 200 ; Milbank v. N. Y., L. E. &. W R. R. Co., 64 How. Pr. 20 ; Mechanics' Mut. Savings Bank v. Meriden Agency Co., 24 Conn. 156 ; Central R. R. Co. V. Pennsylvania R. R. Co., 31 N. J. Eq. 475 ; Hazlehurst v. Savannah R. R. Co., 43 Ga. 57 ; Valley R. Co. v. Lake Erie Iron Co., 18 Northeastern Rep. 486 ; People ex rd, v. Chicago Gas Trust Co.,^ 1 Accord: Franklin Bank v. Commercial Bank, 36 Ohio St. 350. ("There would seem to be little doubt, either upon principle or authority, and independently of ex- press statutory prohibition of the same, that one corporation cannot become the owner of any portion of the capital stock of another corporation, unless authority to become such is clearly conferred by statute. . . . Were this not so, one corporation, by buying up the majority of the shares of the stock of another, could take the entire management of its business, however foreign such business might be to that which the- corporation so purchasing said shares was created to carry on.") The power is not derivable from the express power to "maintain"' a railroad, although alleged to be "necessary for self-preservation." A railroad cannot thus justify acquisition of a controlling interest in its competitor to prevent ruinous com- petition. Central R. R. Co. v. Collins, 40 Ga. 582. "A corporation has no powers except those expressly granted by its charter, and such as are necessary to the declared objects of the grant ; . . . the charter is to be strictly construed, and . . . the capital ... to be used solely for the purposes and objects of the charter. . . . The power to do acts and make contracts necessary to enable a corporation to answer the ends of its creation, like the express grants of power, is also to be strictly construed, and is limited . . . with this qualification, that even for this purpose it cannot engage in any new and distinct enterprise, involving new risks to its stockholders, and not fairly within the terms of the original grant. . . . The purchase of stock in another railroad com- pany with intent to hold it, and especially, as^is admitted by the answer in this case, with intent to use the power thus acquired to secure an interest in the management, either for good or evil, of the road," is lUtra mres. Ibid. * In this case, a corporation was organized, under the general incorporation law of Illinois, to erect and operate works for the manufacture, sale, and distribution of gas and electricity. That law was silent as to the power of corporations organized there- under to purchase stock in other corporations. The certificate of organization stated that the corporation should have such power in respect to the stock of any gas or elec- tric companies in Illinois. The question was — "Can a corporation organized under that law be clothed with such a power by merely naming it in the statement filed with the secretary of state?" Held inter alia (1) Such power is not incidental to manufacturing gas. (2) Not being derivable from the powers expressly granted, the power to be justified must be the subject of legislative grant. The enabling law and not the certificate of organization must determine what powers can be exercised. That law being silent, there was no such power. (3) The action of the secretary of state in issuing license, upon filing such certificate, was merely ministerial and hence not conclusive but subject to review by the court. As to the latter ruling, cf. People v. Selfridge, page 96, ante: also Society Perun ». Cleveland, page 120, ante. Enabling statutes sometimes do confer such power. See note 1, page 281, infra. 274 POWERS — ACQUISITION OF STOCK. [CHAP. I. 130 111. 268-284 ; Franklin Co. v. Lewiston Institution for Savings/ 68 Me. 43 ; Hill v. Nisbet,^ 100 Ind. 341-349.) I The court said : " If a corporation can purchase any portion of the capital stock of another corporation it can purchase the whole, and invest all its funds in that way, and ■thus be enabled to engage exclusively in a business entirely foreign to the purposes for which it was created. A banking corporation could become a manufacturing corpora- tion, and a manufacturing corporation could become a banking corporation. This the law will not allow." The rule applies, however, even though the corporations are engaged in a similar business. Buckeye Marble &c. Co. 11. Harvey, 92 Tenn. 115. ("The purpose and in- tent in granting a charter is, that the corporation shall carry on its business through its own agents, and not through the agency of another corporation. The public policy of this state will not permit the control of one corporation by another.") Cf. Whitten- ton Mills V. Upton, page 220, ante: also Stevens v. Rutland R. R. Co., page 167, ante. ' And see People v. Chicago Gas Trust Co., analyzed in preceding note. ' The court, adverting to the general rule that "the purchase of stock in one cor- poration by another amounts to engaging in a business other than that authorized," said : "Such purchase is ultra vires, and this is so, not because the purchase is stock but because the business is outside the scope of its charter." It therefore held such power to exist, since the corporation in question had power to consolidate and was, in words, authorized to acquire real and personal property "necessary to accomplish the objects for which the corporation is created." Cf. Pearson v. Concord R. R. Corporation, 62 N. H. 537. ("Certain classes of cor- porations, such as religious and charitable corporations, and corporations for literary purposes, may rightfully invest their moneys in the stock of other corporations. The power, if not expressly mentioned in their charters, is necessarily implied, for the pres- ervation of the funds with which such institutions are endowed, and to render their funds productive. So an insurance company or savings bank may rightfully invest its capital or deposits in the stocks of railroad companies, banks, manufacturing compa- nies, and similar corporations. The power is necessary to enable them to engage in the business for which they are organized, and hence is implied, if not expressly granted, in their charters. Such investments are in the line of their business. On the other hand, a manufacturing or railroad corporation is incorporated to do the business of manufac- turing or transporting passengers and merchandise. Investing their funds in that of other corporations is not in the line of their business.") See also Hodge v. New England Screw Co., 1 R. I. 312. A railroad company may acquire stock in coal and elevator companies when the real purpose is to facilitate its chartered business. "The court will take judicial notice of the fact that coal for fuel is a necessity in the operation of a steam railroad and that an elevator, although not an absolute necessity, is an assistance in the hand- ling and shipping of grain." Although the railroad, by ownership of a majority of the stock in those companies, may dictate their business methods through their directorates, and thereby indirectly conduct such business, the law will not presume that the busi- ness is conducted in the interest alone of a stockholder who elected those directors and to the injury of the other stockholders or to that of the public in general. State v. Missouri Pacific Ry. Co., 237 Mo. 338. Cf. United States v. Lehigh Valley R. R. Co., ante, page 65. But the court may examine the motive to ascertain whether such transactions "be done bona fide, and with no sinister or unlawful purpose." Booth v. Robinson, 65 Md. 419. Thus, the transaction may be ultra vires in the secondary sense that it is opposed to public policy, although otherwise intra vires e.g. where the acquisition of stock is de- signed to hide an unlawful usurpation of powers via rendering the purchased corpora- tion incapable of discharging its functions and duties or establishing monopoly or suppressing competition. Such a transaction may be restrained by the minority stock- holders of either corporation or may be impeached by the state. Farmers' Loan &o. Co. V. New York &c. R. R. Co., 150 N. Y. 410 ; Dunbar v. American Tel. &c. Co., 224 111. 9 ; Northern Securities Co. v. United States, 193 U. S. 197. See People v. N. R. Sugar Refining Co., infra, Book VI, Chap. 2. Where such restraint is invoked by a minority stockholder, his acquiescence, while not vahdatmg the transaction, wUl prevent his dUatory challenge thereof. Alexander n. Searcy, 81 Ga. 536. SECT. 3.] HOLMES &C. MFG. GO. V. HOLMES &C. METAL CO. 275 It is equally true, however, that it may do whatever may be necessary in the exercise of its corporate franchises. The selling of property and collection of debts is among the powers given ; and hence, it may take title to all kinds of property, even the stock of another company, in the payment of a debt.^ (Talmage v. Pell, supra, and cases above cited.) The statute " under which the plaintiff was incorporated provides that "it shall not be lawful for such company to use any of their funds in the purchase of any stock in any other corporation." (Laws 1848, chap. 40, § 8.) The funds here spoken of evidently mean the money of the company, and the statute was not intended to limit the powers of the corporation beyond that already indicated. The plaintiff was a private manufacturing corporation. It exer- cises no powers of a public nature, and has attempted no combination by which the public may in any manner be prejudiced. There are, consequently, no questions affecting public policy to be considered. The purpose of the company is expressed in a preamble to the resolu- tions adopted authorizing the sale of its plant and stock of materials on hand to the defendant company. It was, in short, to increase the business of the stockholders by adding to the manufacture of brass that of German silver and nickel alloys. The scheme adopted was the organization of a new corporation, bringing in some other persons with additional capital. The stock in the new company was subscribed for by Holmes and Edwards individually, and the stock, when finally issued, was issued to Edwards. It is true, he takes it as trustee and holds it as such for the plaintiff, but this we do not regard as neces- sarily ultra vires. The plaintiff had the right, with the consent of its stockholders, to sell its plant and retire from business ; and it appears from the evidence in this case that the consent of all the stockholders was given to the sale that was made. In Kent v. Quicksilver Mining Co. (78 N. Y. 159-18&), Folgek, J.^ in deUvering the opinion of the court says that "A corporation may Irrespective of the interest of the state and any question of ultra vires, such purchas- ing corporation may not, by virtue of its stock control, infringe upon the minority's lights, any more than a natural person holding majority stock. Farmers' Loan &C Co. V. N. Y. &o. R. R. Co., supra. See also cases in Book IV. Chap. 3, Sec. 4. • Or accept it as security therefor. Westminster National Bank o. New England Electric Works, 73 N. H. 465. Or, if authorized to loan money, accept it as collateral, and, by the enforcement of its rights as pledgee, become the owner thereof and hence subject to Uability as other stockholders : Germania National Bank v. Case, 99 U. S, 628 ; Westminster &e. Bank v. New England &o. Works, supra. Or accept it in bona fide compromise of an outstanding claim with a view to ultimate protection against an impending loss : Charlotte First Nat. Bank ». National Exchange Bank &c., 92 U. S. 122. But not where the plan of adjustment required a bank to participate in the or- ganization of a new corporation to take over the assets of the bank's debtor, which is Iield to be a new and speculative venture : Ottawa First National Bank v. Converse, 200 U. S. 425. Cf. note 1, on page 270, ante. ' The New York statute now expressly permits such purchase when certain condi- tions obtain. See note 1, page 281, infra. 276 POWERS — ACQUISITION OF STOCK. [CHAP. I. not do acts which affect the pubHc to its harm, inasmuch as they are per se illegal, or are malum prohibitum. Then no assent of stock- holders can validate them. It may do acts not thus illegal, though there is want of power to do them, which affect only the interests of the stockholders. They may be made good by the assent of the stock- holders, so that strangers to the stockholders, dealing in good faith with the corporation, will be protected in a reliance upon those acts." In Hodges v. New England Screw Co. (1 R. I. 312-347), the facts were, in many respects, similar to those under consideration. Greene, Ch. J., says : "Nor have we any doubt that the screw company might have rightfully taken this stock in the iron company in payment for their rolling-mill, if it had been taken with a view to sell it again, and not permanently hold it. Again, it is to be observed the directors were not investing the funds of the screw company in the stock of the iron compiany. They had on hand an unsalable rolling-mill, and they owed a heavy debt for it, and one great object in taking the stock in the iron company was to realize for the rolling-mill, and in part pay thereby the debt." The plaintiff has sold its rolling-mill, machinery, etc., to the defendant. It has taken stock in the latter company in payment therefor. Inasmuch as this was done with the consent of all of the stockholders, it being the act of a private corporation, not in any manner harming the public, we see no reason for condemning its title to the stock so obtained. (Palmer v. Cypress Hill Cemetery, 122 N. Y. 429-435.) But, assuming the transaction to have been ultra vires, the de- fenses interposed would still be unavailable.' The plaintiff has the stock and has paid for it. It cannot be recovered back by the defendant, for the transaction is completed and closed. Whilst the contract remained executory, if it was unauthorized, a stockholder or person interested might have interfered by injunction, and pre- vented the transfer of the property of the plaintiff to the defendant. But the contract having become executed, the title of the stock* now vests in the plaintiff, and it has the power to sell and dispose of the same. (Sistare v. Best, 88 N. Y. 527-543 ; Millbank v. N. Y., L. E. & W. R. R. Co., supra.) The contract under which the note in suit was given was made in December, 1884, nearly four years after the plaintiff became the owner of the stock. No claim is made that that contract is for any reason illegal or void. Numerous cases are found in which the courts have refused to execute contracts that were ultra vires, but this action is not based upon such a contract. The coiirts will not permit the plea of ultra vires to prevail whether interposed for or against a corporation, where it would not advance justice, but would ' The legal effect'to be attributed to ultra virea transactions is more fully considered in tne cnapter next following. SECT. 3.] SCHWAB V. POTTER CO. 277 accomplish a legal wrong. (Rider Life Raft Go. v. Roach, 97 N. Y. 378-381 ; Whitney Arms Co. d. Barlow, 63 id. 62.) To hold that the plaintiff could not dispose of the stock would deprive it of the consideration received for the transfer of its roUing- mill and material, thus accomplishing a wrong and not advancing justice. Our conclusions are that it had title to the stock and that, conse- quently, there was a valuable consideration for the note in suit. The question raised in reference to the non-tender of the stock was properly disposed of by the General Term. The judgment should be affirmed, with costs. All concur. Judgment affirmed. SGHWAB V. POTTER GO. 194 N. Y. 409. 1909. The case rriade by the complaint is substantially as follows : The defendant, "E. G. Potter Gompany," is a domestic corporation organized in 1905 for a purpose not disclosed, with a capital stock of $350,000, divided into 3,500 shares of the par value of $100 each. Three thousand shares have been issued and are outstanding, but the remainder have not been issued. On the 31st of December, 1907, said company owned a parcel of real estate in the city of New York known as 477 Fifth avenue, with an office building thereon six stories in height. Said property, being all the real estate owned by the company, was subject to a mortgage thereon of $350,000, but was otherwise free from incumbrance. On the day last named "said company, at a special meeting of its stockholders called for the purpose . . . passed a resolution" the material portions of which are as follows: "Resolved, that the board of directors of this company be and they hereby are authorized, empowered and directed to cause to be organized a corporation at the expense of- this company under the laws of the State of New York, with a capital stock of $100,000, with the name 'Library Realty Gompany,' or such other name as may be satisfactory to the officers of this company, for the purpose of acquiring the real estate of this company. No. 477 Fifth Avenue, in consideration of the issuance to this company of all the capital stock of said new corpora- tion; . , . That the board of directors be and they are hereby authorized, empowered and directed to transfer to said new corpora- tion when formed, the equity in the real estate of this company known as 477 Fifth Avenue, subject to the existing mortgage thereon 278 POWERS — ACQUISITION OF STOCK. [CHAP. I. amounting to $350,000 and to receive in exchange for said equity in said real estate all the capital stock of said new corporation to be formed, viz. : capital stock of the par value of $100,000 > . . . That the board of directors of this company be and they hereby are authorized, empowered and directed to cause the said $100,000 par value of. stock of said new corporation when acquired by this company to be offered by proper notice to the stockholders of this company for subscription at par, each stockholder of this company to have the right to subscribe for an amount of the stock of the new corporation at par equal to one-third of the par value of said stock- holders' holdings of this company, each stockholder not wishing to subscribe to have the right to assign his rights to so subscribe, and, in the event of failure of any stockholder or his assignee to so subscribe, his rights to subscribe to terminate and the company to have the right ifO receive subscriptions for all or any part of such unsubscribed for stock in the new corporation from the stockholders of this company or from outside parties, the time in which to subscribe to be limited as the directors may deem best and the said subscription to be in cash as follows. . . . That the board of directors be and they hereby are authorized, empowered and directed to do or cause to be done all acts that may be necessary, convenient or desirable in order to carry out the foregoing resolutions and to properly safeguard the rights of this company and of the stockholders to the stock of the new company." This resolution was adopted by a vote of 2,450 shares in favor as against 550 opposed, after the stockholders in attendance at the meeting had been furnished with a statement of the assets and liabil- ities of the company in which said real estate is valued at the sum of $498,301.90, less $350,000, the amount of the mortgage thereon. The plaintiff subsequently had the property appraised by competent and reputable real estate dealers familiar with the values of real property in the locality in question, who reported it worth the sum of $525,000, said sums being respectively $48,000 and $75,000 "in excess of the prices at which it is proposed to convey the same to the corporation." The rest of the assets, valued at about $100,000, were described in said statement as "merchandise in store, fixtures in store, labor on contracts in progress, etc." The bills and accounts owing by the corporation amounted to $98,199.23, and while a surplus of $1,642.97 was reported, unless the equity in the real estate was worth more than $100,000, the sum at which it was proposed to sell it, there was not only no surplus, but the capital was impaired to the extent of $46,658.03. The plaintiff was one of the original corporators of the defendant company and has owned 100 shares of its capital stock from the outset, having paid $10,000 in cash therefor. He voted and pro- SECT. 3.] SCHWAB V. POTTER CO. 279 tested against the adoption of said resolution, and, alleging that $100,000 is an inad-equate price for the equity in the real estate, he brought this action in behalf of himself and the other dissenting stockholders, to restrain the company, its directors and- officers from taking the proposed action, upon the ground that it "is illegal and calculated to injuriously affect the rights of" the minority. The complaint contains no express allegations of fraud or bad faith. It alleges that the directors all favor the plan and' that they are about to carry it into effect. The defendants answered, and the following is a copy of their second and third separate defenses: "Second, That it was neces- sary to sell the property at said sum of $450,000, or even less, if said price could not have been olstained, to conserve the interests of the stockholders of the defendant company." "Third. That the agreement to sell the property pursuant to the resolution marked in the complaint 'Exhibit A,' was ratified and confirmed by stock- holders representing over two-thirds of the capital stock of the company." To these defenses the plaintiff demurred on the ground that each is insufficient in law upon the face thereof. The court at Special Term overruled the demurrer, holding that the answers were good only because the complaint was bad, but the Appellate Division, by a vote of three to two, reversed the interlocutory judgment and sustained the demurrer upon the ground that the complaint was good and the answers bad. The defendants appealed to this court by permission of the Appel- late Division, which certified the following question for decision : "Does the complaint state facts sufficient to constitute a cause of action?" Vann, J.^ The main question presented by this appeal is whether the proposed transaction is beyond the powers of the defendant corporation, for it is well estabhshed that in the absence of fraud or bad faith courts have nothing to do with the internal management of business corporations, provided they keep within their corporate powers. (Gamble v. Queens County Water Co., 123 N. Y. 91 ; Flynn v. Brooklyn City R. R. Co., 158 N. Y. 493, 507.) The complaint does not disclose the purposes for which the de- fendant corporation was organized, nor set forth its corporate powers except as it may be inferred from the statement of assets and liabili- Ities that it carries on a manufacturing business, while the new cor- 'poration apparently was to be a "realty" company. If, however, no corporation in this state is authorized to organize another, divide its assets with it and take in exchange its entire capital stock, then the proposed plan is ultra vires and the execution thereof may be restrained by injunction. > Portion of opinion omitted. 280- POWERS — ACQUISITION OF STOCK. [CHAP. I. Corporations are created by statute and have no powers except those conferred by statute, directly or indirectly. (L. 1892, ch. 687 ; L. 1895, ch. 672, § 10.) There is no statute in this state which directly authorizes one corporation to organize another and, as we think, such action is not indirectly authorized by any reasonable inference from the most extensive powers committed to any class of corporations known to our law. Corporations are organized by natural persons, acting under the direction of a statute, _ arid they only can become corporators, directors or officers. "Artificial per- sons," without brain or body, existing only on paper through legis- lative command and incapable of thought or action except through natxn-al persons, cannot create other "artificial persons," and those, others still, until the line is so extended and the capital stock so duphcated and reduphcated, as to result in confusion and fraud. If, in the case before us, the proposed plan is carried into effect, the old corporation will be the only stockholder of the new corporation when it comes into being, which is the time to test its legality, and the entire capital stock of the latter will have been taken from the assets of the former. After the old corporation has thus split itself into two corporations, both together will have only the capital that the old corporation had before. Not a dollar of new capital will have been contributed either in money or property and only when the old corporation sells to subscribers or outsiders, — and it is not alleged that it will be able to sell to either, — all or a part of the shares of stock, issued to it by the new, can any money come from the transaction. This shows that the purpose of the strange action proposed is to increase the capital stock of the old company without complying with the provisions of the statute governing the subject. The increase is to be obtained by what is in effect a forced assess- ment upon the full paid and non-assessable shares of the stockholders, for unless they take new stock they lose a material part of their investment, although something they do not want is given in ex- change. Thus they are virtually compelled by an unlawful scheme to enter into new contractual relations with strange parties. (Mason V. Pewabic Mining Co., 133 U. S. 50.) This would be an obvious evasion of the law which the courts will restrain when appUed to by the proper party. As was well said by the presiding justice below in a useful opinion: "But it is evident from the allegations of this complaint and from the inferences that fairly may be drawn from such allegations that what was in the contemplation of the directors and majority stockholders of the defendant corporation was not to have that corporation make an actual sale of the real estate to another corporation and receive shares of stock as the consideration therefor, but to resort to a device by which to increase its capital by dis- membering itself and organizing another corporation of which it should be the only stockholder, and thus evade the provisions of the SECT. 3.] SCHWAB V. POTTER CO. 281 statute relating to the increase of the capital stock of a corporation. The defendant corporation, by the resolution, is authorized and directed to create a new corporation at the expense of the old one. What it is to do, therefore, is to be a corporate act done in its capacity as a corporation. Instead of increasing its capital stock in the manner provided by law, it is to separate its assets, deliver one portion of them to its own creature, capitalize that portion at a fixed valua- tion, and receive back all the shares of stock issued by its creature ; and there that transaction really ends. Affording an opportunity to the stockholders of the old corporation to subscribe to the stock of the new one is merely an offer to them to buy from the old corpora- tion this new stock after it comes into the possession of the old cor- poration." (129 App. Div. 36, 40.) We cannot assume from the allegations of the complaint that the old corporation will be able to sell the shares of new stock when issued as fully paid and dehvered to it. Apparently it has not been able to sell all its own stock, for 500 shares of the amount authorized have not been issued. It is possible, therefore, that the old corpora- tion will be compelled to permanently hold a part at least of the new shares, while the new corporation will have no individual stock- holders to act as officers or directors. The law permits no such anomaly as one corporation organized by another corporation, which furnishes all its capital, takes all its shares of stock and holds them for sale. The new organization could never have a valid existence, for the disposition of the shares by the old corporation would not validate an illegal charter. Section forty of the Stock Corporation Law does not aid the de- fendants. That statute authorizes a stock corporation, if permitted by its charter, to acquire, hold and dispose of shares of stock issued by another corporation, and in any case * to acquire, hold and dis- ' This alternative permission as now found in Stock Corporation Law of 1909, Sec. 52, reads : "Or if the corporation whose stock is so purchased, acquired, held or dis- posed of, is engaged in a business similar to that of such stock corporation, or engaged in the manufacture, use or sale of the property, or in the construction or operation of works necessary or useful in the business of such stock corporation, or in which or in connection with which the manufactured articles, product or property of such stock cor- poration are or may be used, or is a corporation with which such stock corporation is or may be authorized to consolidate. When any such corporation shall be a stockholder in any other corporation, as herein provided, its president or other officers shall be eligible to the office of director of such corporation, the same as if they were individually stockholders therein and the corporation holding such stock shall possess and exercise in respect thereof, all the rights, powers and privileges of individual owners or holders of such stock." Referring to this statute, the majority of the court in Venner v. N. Y. Central &c. R. R. Co., 160 A. D. 127, affirmed 217 N. Y. 615, said : " There is no limit to which one stock corporation may purchase and hold the stock of another stock corporation, no limit to the extent to which the corporation as such stockholder may intrude its officers into the directorate of the company whose stock is thus purchased, and this is an entirely reasonable provision of law, for the stock- holders are the equitable owners of the corporation, and where one corporation pur- chases a majority of the stock of another such purchasing corporation would naturally 282 POWERS — ACQUISITION OF STOCK. [CHAP. I. pose of shares of stock issued by certain classes of corporations, including those engaged in a similar business and those with which it might be consolidated. (L. 1892, ch. 688, § 40.) It does not be entitled to control the affairs of the corporation in which it had become the owner ; but such control would have to be consistent with the purposes for which the corpora- tion was created. (Central Transportation Co. ». Pullman's Car Co., 139 U. S. 24, 50, 51, and authorities there cited.) If we are right in this position, one of the franchises of the New York Central and Hudson River Railroad Company is to purchase. the stock and control any other company, domestic or foreign, which may !)e engaged in a similar line of business with itself ; it may add the tangible assets and franchises of a second company to itself, through the purchase of the stock of such corporation, subject to the duty of performing the service for which such corporation was organized, and if it may practically take over the management of such corporation it may properly use its assets thus augmented in performing the obligations of the company whose control has thus passed to itself. ... If the New York Central and Hudson River Railroad Company was merely authorized to purchase the stock as an investment it would have no other rights, but when the statute adds to the power of purchase the right to actively participate in the choice of directors, and makes the officers of the purchasing company eligible to the board of directors, without limitation, it necessarily imposes upon the purchasing corporation the duty of maintaining the company thus surrendered to its care in a position to discharge its duties to the public, and, as the purchasing company's resources are increased to the value of the stock ■thus purchased, it is in duty bound to make use of its resources, where necessary, to perform the obligations of the company whose stock it holds, this being dictated by the welfare of the purchasing company, in harmony with the duty suggested." Held : A joint contract, by that railroad and others in which it was interested through majority stock ownership, to purchase eqtaipment for the respective roads, by which contract it was agreed that if one of the companies made default in its obligation under the equipment trust lease, any of the others could step in and take the equipment allotted to the defaulting company by making gooil the rent in arrears, was not ultra vires, nor did it constitute a guaranty of a debt but was a valid contract of conditional purchase. Ibid,. New Jersey earned the sobriquet — "Mother of Trusts" — through its early legis- lation, found in the General Corporation Act of 1896. Section 51 thereof conferred plenary powers upon corporations to purchase and hold shares of stock of any other cor- poration or corporations of that or any other State, and while owner of such stock to exercise all privileges of ownership. Many of the great "holding" companies, including the world's largest combination of capital, the United States Steel Corporation, were 'organized under this statute. Several states have since enacted similar liberal legis- lation with satisfactory results in increased incorporation fees. A limitation upon what otherwise would have been in effect "a blind pool subject to the uncontrolled will of the majority" was engrafted by construction upon this statute in State v. Atlantic City &c. R. R. Co., 77 N. J. L. 465, in which it was held that Section 51 was merely an enabling act, to be availed of only by those corporations whose certificates of organization ex- pressly appropriated to themselves this legislative permission, unless, of course, such power was derivable, the objects of the particular corporation considered. Unless this •construction was pronounced, its articles of association would enable it to participate "in any conceivable business or speculation in any part of the civihzed world," but would afford no evidence to the State, or to intending purchasers of its shares, as to the actual scope of its activities, nor assurance to investors that its capital would not be diverted into schemes which they had no means of foreseeing. "There would be an ■end at once of all practical force of the doctrine that a certificate of incorporation evi- dences a contract between the State and the corporation, or between the corporators or stockholders themselves. For an agreement imports an obligation to do some things and to refram from domg other things. Without defining terms and bounds there can oe no agreement." Ibid. Cf. People V. Chicago Gas &c. Co., ante, page 273, note 2 ; also Ripiu ». U. S. Woven Label Co., ante, page 180. By subsequent legislation, however. New Jersey has radically changed front and jnea,Burably curbed the powers, in this respect, of corporations to be thereafter or- gamzed, and further exercises thereof by those then in existence. Instead of an affirma- SECT. 3.] SCHWAB V. POTTEE CO. 283 permit one corporation to create another, endow it with capital from its own assets and take all its shares of stock in exchange. Moreover, it is not alleged in the complaint that the defendant company is authorized by its charter to acquire stock in another corporation, or that it is engaged in a business similar ^ to that of the corporation it proposes to organize. Corporations cannot resort to ingenious and original methods of action with the freedom of individuals, for they are confined to those expressly authorized by statute and such as are incidental thereto and necessary to carry them into effect. If the purpose of the old corporation was to increase its capital stock, the object was lawful but the method was unlawful and this is true if its object was merely to sell its real estate. Whatever the purpose may have been, the plan was unlawful, because it would have caused an increase of the capital stock of the corporation by an unauthorized method. While the majority stockholders, or the directors, acting as individuals, could have organized the new corporation, they could not use the real estate of the old corporation to provide it with capital stock, for that was not their property. According to the scheme adopted, however, the majority stockholders were not to effect the new or- ganization, but the board of directors, acting as such, were "author- ized, empowered and directed to cause" the new corporation to be organized, "at the expense of the old" and by a division of its assets. This was beyond the powers of the corporation, its stockholders and directors. Whatever is done by a corporation without authority is done in violation of law, for all action, not authorized directly or indirectly, is prohibited. (General Corporation Law [L. 1890, ch. 563, as amended], § 10.) Any minority stockholder who opposed the scheme was entitled to an injunction, even without alleging actual injury, or the certainty thereof in the future, for he is entitled to stand on his legal rights and may refuse to accept "something better" in exchange. His legal right was to continue a member of one cor- poration and not to be forced into the membership of a second corporation, all the capital of which was to be taken from the assets of the former. The plaintiff is now the equitable owner of one- thirtieth of the assets of the defendant company. By the proposed plan he will be deprived of his one-thirtieth interest in the real estate and either lose it altogether or be forced to buy stock in another company, organized without the sanction of law, in order to save himself. That would in effect be a forced sale by the corporation to its own stockholders,^ and would result in an increase of the capital stock by an unauthorized method. tive penniasion as theretofore, the section is now amended to read as an express prohi- bition, saving, however, certain defined exceptions. See Laws of 1915, page 181. This amendment, so far as it is prohibitory, received a strict construction in Island heights cfec. Co. v. Brooks & Brooks Corp., 97 Atl. Rep. 267 (1916). ' Cf. note 1, page 274, ante. ' Cf. Stokes V. Continental Trust Co. infra, Book IV, Chap. 4, Sec. 4. 284 POWERS — ACQUISITION OF STOCK. [CHAP. I. If we have reasoned correctly thus far, it is obvious that the allegations in the second and third divisions of the answer constitute no defense. Even if a sale of the real estate was "necessary," as alleged in the second defense, that did not permit the organization of a corporation without authority, nor justify the spoliation of the defendant company in order to give it capital ; and, if the agreement to sell was "ratified" by two-thirds of the stockholders, as alleged in the third defense, that did not validate the method of selling, as to any stockholder who objected. Ratification may confirm a void- able act, but not one utterly void. We think that the complaint sets forth a good cause of action and that the answer, so far as before us, sets forth no defense. The order appealed from should be affirmed, with costs, with leave to the defendants to plead over within twenty days on payment of costs, and the question certified answered in the affirmative. Order affirmed. SECT. L] ASHBUBY RAILWAY &C. CO. ». KICHE. 285 CHAPTER II. ULTRA VIRES TRANSACTIONS. Section 1. Contracts. ASHBURY RAILWAY CARRIAGE AND IRON COMPANY (LIMITED) V. RICHE.i L. R. 7 H. L. 653. 1875. Plaintiff in error was a limited company incorporated under the Companies Act of 1862, by which any seven or more persons as- sociated for any lawful purpose, may, by subscribing their names to a memorandum of association, form an incorporated company with or without hmited UabiUty. The company purchased a concession to construct a railway in Belgium and employed Riche to do the construction work, it agreeing to supply the funds therefor. Later, the stockholders insisting the contract with Riche was ultra vires and denying ratification of their directors' acts in making it, the company repudiated the coiitract, whereupon Riche brought this action for damages for breach of the contract and recovered judgment in the court below. The Lord Chancellor (Lord Cairns) : The purposes for which a company, established under the Act of 1862, is formed, are always to be looked for in the Memorandum of Association of the company. According to that Memorandum, the Ashbury Railway Carriage and Iron Company, Limited, is formed for these objects — "to make and sell, or lend on hire, railway car- riages and waggons, and all kinds of railway plant, fittings, machinery, and rolling stock; to carry on the business of mechanical engineers and general contractors; to purchase, lease, work, and sell mines, minerals, land, and buildings;" . . . Part of the argument at your Lordships' Bar was as to the meaning of two of the words used in this part of the memorandum — the words "general contractors." ' Statement of facts condensed and rewritten ; portions of opinion and all concurring opinions omitted. 286 ULTRA VIRES — CONTRACTS. [CHAP. 11. My Lords, as it appears to me, upon all ordinary principles of con- struction those words must be referred to the part of the sentence which immediately precedes them. The sentence which I have read is divided into classes of works. First, "to make and sell or lend on hire railway carriages and waggons and all kinds of railway plant, fittings, machinery, and rolling stock." That is an object sui generis and complete in the specification which I have read. The second is "to carry on the business of mechanical engineers and general con- tractors." That, again, is the specification of an object complete in itself; and, according to the principles of construction, the term "general contractors" would be referred to that which goes im- mediately before, and would indicate the making generally of con- tracts connected with the business of mechanical engineers — such contracts as mechanical engineers are in the habit of making, and are in their business reqmred, or find it convenient, to make for the purpose of carrying on their business. The third is, "to purchase, lease, work, and sell, mines, minerals, land, and buildings." That is an object pointing to the working and the acquiring of mineral property, and the generahty of the last two words, "land and build- ings," is limited by the purpose for which land and btiildings are to be acquired, namely, the leasing, working, and selUng, mines and minerals. My Lords, if the term "general contractors" were not to be inter- preted 1 as I have suggested, the consequence would be that it would stand absolutely without any limit of any kind. It would authorize the making, therefore, of contracts of any and every description, and the memorandum in place of specifying a particular kind of business would virtually point to the carrying on of business of any kind what- ever, and would therefore be altogether unmeaning. My Lords, that being the object for which the company professes by the memorandum of association to be incorporated, I now turn to examine the contract upon which the present action is brought. My Lords, a contract of this kind was not within the words of the memorandum of association. In point of fact it was not a contract in which, as the memorandum of association implies, the limited company were to be the employed, they were the employers. They purchased the concession of a railway — an object not at all within the memorandum of association ; and having purchased that, they employed, or. they contracted to pay, as persons employing, the Plaintiffs in the present action, as the persons who were to construct it. That was reversing entirely the whole hypothesis of the memo- randum of association, and was the making of a contract not included within, but foreign to, the words of the memorandum of association. Those being the results of the documents to which I have referred, I will ask your Lordships now to consider the effect of the Act of ' ' Cf. note 1, page 95 ante. SECT. 1.] ASHBUBY BAILWAY &C. CO. V. EICHE. 287 Parliament — the Joint Stock Companies Act of 1862 — on this state of things. The provisions imder which that system of limiting liability was inaugurated, were provisions not merely, perhaps I might say not mainly, for the benefit of the shareholders for the time being in the company, but were enactments intended also to provide for the in- terests of two other very important bodies ; in the first place, those who might become shareholders in succession to the persons who were shareholders for the time being; and secondly, the outside public, and more particularly those who might be creditors of com- panies of this kind. And I will ask your Lordships to observe, as I refer to some of the clauses, the marked and entire difference there is between the two documents which form the title deeds of companies of this description — I mean the Memorandum of Association on the one hand, and the Articles of Association on the other hand. With regard to the memorandum of association, your Lordships will find, as has often already been pointed out, although it appears somewhat to have been overlooked in the present case, that that is, as it were, the charter, and defines the limitation of the powers of a company to be established under the Act. With regard to the articles of as- sociation, those articles play a part subsidiary to the memorandmn of association.* They accept the memorandum of association as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, the rights and the powers of the governing body as between themselves and the company at large, and the mode and form in which the business of the company is to be carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made. With regard, therefore, to the memorandum of association, if you find anything which goes beyond that memorandum, or is not warranted by it, the question will arise whether that which is so done is ultra vires, not only of the directors of the company, but of the company itself. With regard to the articles of association, if you find anything which, still keeping within the memorandmn of association, is a Adolation of the articles of association, or in excess of them, the ques- tion will arise whether that is anything more than an act extra vires the directors, but intra vires the company.* ' As to the scope and operation of by-laws, see infra. Book IV, Chap. 2, Sec. 2. * "The term ultra vires . . . is . . . used in different senses. An act is said to be ultra vires when it is not within the scope of the powers of the corporation to per- form it under any circumstances, or for any purpose. An act is also, sometimes, said to be ultra vires with reference to the rights of certain parties, when the corporation is not authorized to perform it without their consent ; or with reference to some specific purpose, when it is not authorized to perform it for that purpose, although fully within the scope of the general powers of the corporation, with the consent of the parties interested, or for some other purpose. And the rights of strangers dealing with cor- porations may vary, according as the act is ultra vires in one, or the other, of these senses." Miners' Ditch Co. v. ZeUerbaoh, 37 Cal. 543. 288 ULTRA VIEKS — CONTRACTS. [CHAP. 11. The clauses of the statute to which it is necessary to refer are four : in the first place, the sixth clause. That provides that "Any seven or more persons associated for any lawful purpose may, by subscrib- ing their names to a memorandum of association, and otherwise complying with the requisitions of this Act in respect of registration, form an incorporated company, with or without limited liability." My Lords, this is the first section which speaks of the incorporation of the company ; but your Lordships will observe that it does not speak of that incorporation as the creation of a corporation with in- herent common law rights, such rights as are by common law possessed by every corporation, and without any other limit than would by common law be assigned to them, but it speaks of the company being incorporated with reference to a memorandum of association; and you are referred thereby to the provisions which subsequently are to be found upon the subject of that memorandum of association. The next clause which is material is the eighth : "Where a com- pany is formed on the principle of having the UabiUty of its members Hmited to the amoimt unpaid on their shares, hereinafter referred to as a company limited by shares, the Memorandum of Association shall contain the following things" (I pass over the first and second, and I come to the third item which is to be specified) : "The objects for which the proposed company is to be established." That is, there- fore, the memorandum which the persons are to sign as a preUnainary to the incorporation of the company. They are to state " the objects for which the proposed company is to be established ; " and the exist- ence, the coming into existence, of the company is to be an existence and to be a coming into existence for those objects and for those ob- jects alone. Then, my Lords, the 11th section provides: "The memorandum . . . shall, when registered, bind the company and the members thereof to the same extent as if each member had subscribed his ■ name and affixed his seal thereto, and there were in the memorandum contained, on the part of himself, his heirs, executors, and adminis- trators, a covenant to observe all the conditions of such memorandum, subject to the provisions of this Act." Your Lordships will observe, therefore, that it is to be a covenant in which every member of the company is to covenant that he will observe the conditions of the memorandimi, one of which is that the objects for which the com- pany is established are the objects mentioned in the memorandum, and that he not only will observe that, but will observe it subject to the provisions of this Act. Well, but the very next provision of the Act contained in the 12th section is this: "Any company hmited by shares may so far modify the conditions contained in its memorandum of association, if authorized to do so by its regulations as originally framed, or as altered by special resolution in manner hereinafter mentioned, as to increase its capital by the issue of new SECT. 1.] ASHBURY RAILWAY &C. CO. V. RICHE. 289 shares of such amount as it thinks expedient, or to consolidate and divide its capital into shares of larger amount than its existing shares, or to convert its paid-up shares into stock, but, save as aforesaid, and save as is hereinafter provided in the case of a change of name, no alteration shall be made by any company in the conditions con- tained in its memorandum of association." The covenant, there- fore, is not merely that every member will observe the conditions upon which the company is estabUshed, but that no change shall be made in those conditions ; and if there is a covenant that no change shall be made in the objects for which the company is estabHshed, I apprehend that that includes within it the engagement that no object shall be pursued by the company, or attempted to be attained by the company in practice, except an object which is mentioned in the memorandum of association-. Now, my Lords, if that is so — if that is the condition upon which the corporation is established — if that is the purpose for which the corporation is established — it is a mode of incorporation which con- tains in it both that which is affirmative and that which is negative. It states affirmatively the ambit and extent of vitality and power which by law are given to the corporation, and it states, if it is neces- sary so to state, negatively, that nothing shall be done beyond that ambit, and that no attempt shall be made to use the corporate hfe for any other purpose than that which is so specified. Now, my Lords, with regard to the articles of association, observe how completely different the character of the legislation is. The 14th section deals with those articles: "The memorandum of as- sociation may, in the case of a company Umited by shares, and shall, in the case of a company limited by guarantie, or unhmited, be ac- companied, when registered, by articles of association, signed by the subscribers to the memorandum of association, and prescribing such regulations for the company as the subscribers to the memorandum of association deem expedient." They are to be the masters of the regulations which (always keeping within the Umit allowed by law) they may deem expedient for the internal regulation of the company. But your Lordships must take, in connection with that, the 50th section of the Act. That provides that "subject to the provisions of this Act, and to the conditions contained in the memorandum of association, any company formed under this Act may, in general meeting, from time to time, by passing a special resolution in manner hereinafter mentioned, alter all or any of the regulations of the com- pany contained in the articles of association, ... or make new regulations to the exclusion of, or in addition to, all or any of the regulations of the company." Of the internal regulations of the company the members of it are absolute masters, and, provided they pursue the course marked out in the Act, that is to say, holding a general meeting and obtaining the consent of the shareholders, they 290 TJLTEA VIRES — CONTRACTS. [CHAP. II. may alter those regulations from time to time ; but all must be done m the way of alteration subject to the conditions contained in the. memorandum of association. That is to override and overrule any provisions of the articles which may be at variance with it. The memorandum of association is, as it were, the area beyond which the action of the company cannot go ; inside that area the shareholders may make such regulations for their own government as they think fit. My Lords, that reference to the Act will enable me to dispose of a provision- in the articles of association in the present case which was hardly dwelt upon in argument, but which I refer to in order that it may not be supposed to have been overlooked. It appears that there has come into the articles of association of this company one which is in these words : "An extension of the company's business beyond or for other than the objects or purposes expressed or impKed in the memorandum of association shall take place only in pursuance of a special resolution." In point of fact, no resolution for the ex- tension of the business of the company was in this case come to; but even if it had been come to, it would have been entirely inept and inefiicacious. There was, in this 4th article, an attempt to do the very thing which, by the Act of ParHament, was prohibited to be done — to claim and arrogate to the company a power under the guise of internal regulation to go beyond the objects or purposes expressed or implied in the memorandum. Now, my Lords, bearing in mind the difference which I have just taken the liberty of pointing out to your Lordships between the memorandum and the articles, we arrive at once at all which appears to me to be necessary for the purpose of deciding this case. I have used the expressions extra vires and intra vires. I prefer either ex- pression very much to one which occasionally has been used in the judgments in the present case, and has also been used initOther cases,, the expression "illegahty." * In a case such as that which your Lordships have now to deal with,, it is not a question whether the contract sued upon involves that which is malum prohibitum or mnlum in se, or is a contract contrary- to public policy, and illegal in itself. I assume the contract in itself to be perfectly legal, to have nothing in it obnoxious to the doctrine involved in the expressions which I have used. The question is not as to the legahty of the contract ; the question is as to the com- petency and power of the company to make the contract. Now, I am clearly of opinion that this contract was entirely, as I have said, beyond the objects in the memorandum of association. If so, it was thereby placed beyond the powers of the company to make the contract. If so, my Lords, it is not a question whether the contract ever was ratified or was not ratified. If it was a contract void at its beginning, it was void because the company could not make the ' C/. Alleghany Co. v. AUen, cited in note 1, page 243, ante. SECT. 1.] ASHBURY RAILWAY &C. CO. V. RICHE. 291 contract. If every shareholder of the company had been in the room, and every shareholder of the company had said, "That is a contract which we desire to make, which we authorize the directors to make, to which we sanction the placing the seal of the company," the case would not have stood in any different position from that in which it stands now. The shareholders would thereby, by unanin»ous consent, have been attempting to do the very thing which, by the Act of ParUament, they were prohibited from doing. But, my Lords, if the shareholders of this company could not ab ante have authorized a contract of this kind to be made, how could they subsequently sanction the contract after it had, in point of fact, been made. I endeavoured to follow as accurately as I could the very able argument of Mr. Benjamin, at your Lordships' Bar on this point ; but it appeared to me that this was a difficulty with which he was entirely unable to grapple. Efe endeavoured to con- tend that when the shareholders had found that something had been done by the directors which ought not to have been done, they might be authorized to make the- best they could of a difficulty into which they had thus been thrown, and therefrom might be deemed to possess power to sanction the contract being proceeded with. My Lords, I am unable to adopt that suggestion. It appears to me that it would be perfectly fatal to the whole scheme of legislation to which I have referred, if you were to hold that, in the first place, directors might do that which even the whole company could not do, and that then, the shareholders finding out what had been done, could sanction, subsequently, what they could not antecedently have authorized. My Lords, if this be the proper view of the Act of ParUament, it reconciles, as it appears to me, the opinion of all the Judges of the Court of Exchequer Chamber ; because I find Mr. Justice Blackburn, whose judgment was concurred in by two other Judges who took the same view, expressing himself thus * : "I do not entertain any doubt that if, on the true construction of a statute creating a corporation it appears to be the intention of the Legislature, expressed or im- pKed, that the corporation shall not enter into a particular contract, every Court, whether of law or equity, is boimd to treat a contract entered into contrary to the enactment as illegal, and therefore wholly void, and to hold that a contract wholly void cannot be ratified." My Lords, that sums up and exhausts the whole case. In my opinion, beyond all doubt, on the true construction of the statute of 1862, creating this corporation, it appears that it was the intention of the Legislature, not impHed, but actually expressed, that, the 'corpora- tion should not enter, having regard to its memorandum of associa- tion, into a contract of this description. If so, according to the words of Mr. Justice Blackburn, every Court, whether of law or of 1 Law Rep. 9 Ex. 262. 292 ULTRA VIBES — CONTRACTS. [CHAP. 11. equity, is bound to treat that contract, entered into contrary to the -enactment, I will not say as illegal, but as extra vires, and whoUy null and void, and to-hold also that a contract wholly void cannot be ratified. My Lords, that reUeves me, and, if ypur Lordships agree with me, relieves your Lordships from any question with regard to ratification. This contract, in my judgment, could not have been ratified by the imanimous assent of the whole corporation. My Lords, for the reasons which I have thus endeavoured to ex- press, I submit to your Lordships and move your Lordships that the judgment in the present case should be reversed, and judgment entered for the Defendants. Ordered accordingly 1 LONG V. GEORGIA PACIFIC RAILWAY CO. 91 Ala. 519. 1890. McClellan, J. — The ease made by the amended bill is this : On April 23, 1883, the complainant, B. M. Long, and his wife, Amanda C. Long, executed to the Georgia Pacific Railway Co. a deed upon valuable consideration presently paid, to and of the iron, coal and oil interests and properties in and pertaining to certain tracts of land, aggregating about four thousand acres ; the said Long retaining the fee to said lands, except in respect to said mineral interests, and continuing in possession thereof. The grantee is a corporation, and was and is without power to purchase and hold said land, or the mineral interests in the same. The bill seeks to have the deed de- clared void, because of this incapacity of the corporation, and to ' Accord': East Anglian Ry. Co. v. Eastern &o. Ry. Co., 11 C. B. 775. ("If the contract is illegal, as being contrary to the act of parliament, it is unnecessary to con- sider the effect of dissentient shareholders ; for, if the company is a corporation only for a limited purpose, and a contract like that under discussion is not within their authority, the assent of all the shareholders to such a contract, though it may make them all personally liable to perform such contract, would not bind them in their corporate capacity or render liable their corporate funds.") As to individual liability of stockholders upon ultra vires contracts, see Seefierger ». McCormick, 178 111. 404. (Not liable as partners in supposed analogy to the de facto doctrine, ante. "The principle on which individuals so associated are held as partners is not in causing the corporation to exceed its powers, but in acting for and in the name of a presumed corporation which has no coi;porate existence.") As to, the liability of officers upon such contracts, see, as regards the corporation itself, Efpok IV, Chap. 3, Sec. 5, infra, and, as regards third parties dealing with it, Seebergef v. McCormick, supra: Linkauf v. Lombard, 137 N. Y. 417; Thilmany, v. Iowa Paper Bag Co., 108 Iowa 357. And cf. Hall's Safe Co. v. Herring-Hall-Marvin Safe Co., cited in note 1, page 34, ante. As toliabilities when the corporation is formed for a fraudulent purpose, see Bar- tholomew II. Bentley, 15 Ohio 659 ; MoGrew v. City Produce Exchange, 85 Tenn. 572 ; Donovan v. Purtell, 216 111. 629. SECT. 1.] LONG V. GEORGIA PACIFIC RAILWAY CO. 293 have the same cancelled as a cloud upon complainant's title. The bill was demurred to on several grounds, and the demurrer was sus- tained generally, the decree to that end being now assigned as error. Only those groimds of error which present the question, whether a vendor who has sold,' received payment for, and conveyed land to a corporation, which had no power to hold the same, can have any relief in respect to the transaction, are discussed in argument ; . and to these our consideration will be confined, since it is manifest that the determination of this question, in line with the decree below, as we think it must be determined, will be fatal, not only to the present appeal, but to complainant's cause of action. It is thoroughly well settled law, that a party to an ultra vires executory contract made with a corporation is not estopped to set up the want of corporate capacity in the premises, either by the fact of contracting, whereby the power to contract is, in a sense, admitted or recognized, or by the fact that the fruits or issues of the contract have been received and enjoyed ; and this, though the assault upon the transaction comes from the corporation itself.' — Marion Savings Bank v. Dunklin, 54 Ala. 471 ; Chambers v. Falkner, 65 Met. 448 ; Sherwood v. Alvis, 83 Ala. 115 ; Chewacla Lime Works v. Dismukes, 87 Ala. 344. But, where the contract is fully executed — where what- ever was contracted to be done on either hand has been done — a different rule prevails.* In such case, the law will not interfere, at ' In Bowman Dairy Co. o. Mooney, 41 Mo. App. 665, the court said : "So long as such a contract is executory, that is, when it has not been fully performed by either party the courts will not sustain any kind of action based upon it. The reason is that the enforcement of such a contract would be against pubUc policy, and in direct violation of law. As was said by Judge Miller in Case v. Kelly, 133 U. S. 28 : 'While a coiu-t might hesitate to declare the title to lands already received, and in the pos- session and ownership of the company, void on the principle that they had no authority to take such lands, it is very clear that it will not make itself the active agent in behalf of the company in violating the law and enabling the company to do that which the law forbids.' " Thus specific performance will not be decreed of a contract for £he sale of landSr the purchase of which is ultra vires the plaintiff corporation. Kohlruss v. Zachery, 139 Ga. 625 ; Wilks v. Georgia Pacific Ry. Co., 79 Ala. 180. But see Harris v. Independence Gas Co., 76 Kan. 750. (" It certainly seems against conscience that one who has entered into a contract in the expectation of deriving a profit from it may upon discovering the probability of a loss repudiate it and escape responsibiUty by raising the question of want of corporate capacity. Parties to a contract who deal with each other upon the assumption that one of' them is a cor- poration are ordinarily precluded from questioning the validity of its organiza- tion. . . . The question whether a corporation has power under its charter to. engage in a particular business is so like the question whether a body has capacity to act as a corporation at all as to afford good ground for arguing that whatever cir- cumstances work an estoppel to raise the one have the same effect with respect to the other. . . . The doctrine that only the state can challenge the validity of acts done under color of a corporate charter, if accepted, must necessarily protect an exec- utory contract from collateral attack equally with one that has been executed. The court is convinces of the soundness of the view that in the absence of special cir- cumstances affecting the matter neither party to even an executory contract should be allowed to defeat its enforcement by the plea of ultra vires,") ' As illustrated in Holmes &c. Mfg. Co. u. Holmes &c. Metal Co., ante, page 271. 294 ULTRA VIRES — CONTRACTS. [CHAP. II. the instance of either party, to undo that which it was originally unlawful to do, and to the doing of which, so long as the contract to that end remained executory, neither party could have coerced the other. As declared by Mr. Bishop, "the parties voluntarily doing of what they have unlawfully agreed, places them, in effect, in the same position as if the contract had been originally good ; neither caa recover of the other what was parted with. The reason for which is, that, since they are equally in fault, the law will help nei- ther." — Bishop on Contracts, § 627. The former decisions of this court are in Une with this doctrine, and fully recognize the distinction between executory and executed void contracts, to the effect that, while suits to enforce the fornier may always be defended on the ground of their invaUdity, no relief prayed upon such groimd can be granted with respect to the latter. — Morris v. Hale, 41 Ala. 510 ; IngersoU v. Campbell, 46 Ala. 282 ; Sherwood ■». Alvis, 83 Ala. 115; Dudley v. ColUer, 87 Ala. 431; Craddock v. Mortgage Co., 88 Ala. 281. And this is the doctrine generally declared by other courts. — Thomas v. Railroad Co., 101 U. S. 71 ; Day v. S. S. B. Co., 57 Mich. 146 ; s. c, 52 Amer. Rep. 352 ; Parish v. Wheeler, 22 N. Y. 494 ; Miners' Ditch Co. v. Zeller- bach, 37 Cal. 542, 606 ; Terry v. Eagle Lock Co., 47 Conn. 141. There is no question but that the case presented by the bill in- volved a contract on the part of the railway company to buy, and on the part of the complainant to sell, certain interests in the land described. It is equally clear that the payment of the agreed price on the one hand, and the execution of the conveyance on the other, fully executed this contract on both sides, left nothing to be done by either party in the premises, and bring the transaction within the ■principle we have been considering, which denies to the complainant any relief in respect to it. » The same conclusion is reached by another well established prin- ciple. It is, that when a party sells and conveys property to a cor- poration, which is without power to purchase and hold the same, and receives compensation therefor, there being no fraud in the transac- tion, he is in no sense injured or prejudiced by the incapacity of the corporation, nor can he be heard to complain of it ; but the question becomes one between the corporation and the State, the sovereign alone having the right to impeach the transaction; and until it supervenes for this purpose, the corporation is vested with perfect title against all the world, defeasible only on office found.' — R. & B. Railroad Co. v. Proctor, 29 Vt. 93; Leazure v. Hillegas, 7 Serg. & Rawle, 313; Goundie v. Northampton Water Co., 7 Pa. St. 233; Baird v. Bank of Washington, 11 Serg. & Rawle, 411 ; Lathrop v. Bank, 8 Dana 114, 129; Hough v. Cook County Land Co., 73 111. 23 ; s. c, 24 Amer. Rep. 230 ; Cowles v. Springs Co., 100 U. S. 55 ; • See See. 2, infra. Cf. note 1, page 116, ante. SECT. 1.] MONUMENT NATIONAL BANK V. GLOBE WORKS. 295 Heynolds v. Crawfordsville Bank, 112 U. S. 405, 413; 2 Mor. Corp § 710. . . . Affirmed. MONUMENT NATIONAL BANK v. GLOBE WORKS. 101 Mass. 57. 1869. Hoar, J. The single question presented for our decision in this «ause, all others which arise upon the report having been waived, is, whether the note of a naanufacturing corporation, in the hands of a holder in good faith for value, who took it before maturity, and without any knowledge that the makers had not received the full consideration, cannot be enforced against them, because it was in^ fact made as an accommodation note. The argument for the defendants takes the groimd that to issue an accommodation note is not within the powers conferred upon the •corporation ; and that, as any persons taking it had notice * that it I In St. Louis, Vandalia &c. R. R. Co. v. Terre Haute &c. R. R. Co., 145 U. S. 393, a bill in equity, filed by the lessor corporation to set aside and cancel an ultra vires lease of its railroad to the defendant corporation for the term of 999 years, was dis- missed. The court determined that the contract was beyond the corporate powers of ■defendant, and therefore found it unnecessary to decide whether it was beyond the plaintiff's powers, because "a contract beyond the corporate powers of either party is as invalid as if beyond the corporate powers of both." Therefore, the court said, it "did not bind either party, and neither party could have maintained a suit upon it, at law or in equity, against the other. It does not, however, follow that this suit to set aside and cancel the contract can be maintained." For, according to this decision, ".if it was beyond the defendant's power, it was therefore unlawful and void, ■of which the plaintiff was bound to take notice." And, as the plaintiff contended "if the contract was also beyond its own corporate powers, it is certainly in no better position. In either aspect of the case, the plaintiff was in pari delicto with. the de- fendant." The court stated "the general rule, in equity as at law, is In pari delicto -potior est conditio defendentis; and therefore neither party to an illegal contract will be aided by the court, whether to enforce it or to set it aside," and illustrated the rule by instances of property conveyed pursuant to a contract made in consideration of the •compounding of a crime, and the stifling of a criminal prosecution ! The court con- cluded that "plaintiff considered as a party to the unlawfiil contract, has no right to invoke the assistance of a court of equity to set it aside." Prof. E. H. Warren, in an illuminating article in 23 Harv. Law Rev. 495 entitled ^'Executed Ultra Vires Transactions," justly characterizes the doctrine of the Terre Haute case as "ferocious." ^ Cf. Denver Fire Ins. Co. •». McClelland, 9 Col. 11. ("The point was strongly insisted upon by counsel for appellant in argument, that one dealing with a corpora- tion is bound to know the extent of its powers to contract, that the corporate name itself indicates the scope of its business, and the record of its charter or articles of incorporation furnishes notice of the extent and limitation of its corporate powers and authority to contract. "While as a general proposition this is true, yet it must be conceded that this con- structive notice is of a very vague and shadowy character. Every one may have access to the statutes of the states affecting companies incorporated thereunder, and to their articles of incorporation, but to impute a knowledge of the probable con- struction the courts would put upon these statutes and articles of incorporation to ■determine questions raised upon a given contract proposed, is carrying the doctrine 296 ULTKA VIBES — CONTRACTS. [CHAP. II. was the note of the corporation, they had notice that it was of no vahdity unless issued for a purpose within the scope of the corporate powers, and were therefore bound to ascertain not only that it was executed by the officer of the corporation who had the general author- ity to sign the notes which they might lawfully make, but that the purpose for which it was issued was such as the charter authorized them to entertain and execute. The court are all of opinion that this position is not tenable, and that the defence cannot be maintained. It has long been settled in this Commonwealth that a manufactur- ing corporation has the power to make a negotiable promissory note. Narragansett Bank v. Atlantic Silk Co. 3 Met. 282. And it was held in Bird v. Daggett, 97 Mass. 494, ^s a just corollary to that proposi- tion, that such a note in the hands of a holder in good faith for value is binding upon the maker, although made as an accommodation note. The question was not discussed, nor the reasons for the de- cision fully stated, in Bird v. Daggett ; but it was assumed that the doctrine announced was clear and undoubted law. The doctrine of ultra vires has been carried much farther in Eng- land than the courts in this country have been disposed to extend it ; but, with just hmitations, the principle cannot be questioned, that the limitations to the authority, powers and liability of a corporation are to be found in the act creating it. And it no doubt follows, as claimed by the learned coimsel for the defendants, that when powers are conferred and defined by statute, every one dealing with the cor- poration is presumed to know the extent of those powers. But when the transaction is not the exercise of a power not con- ferred on a corporation, but the abuse of a general power in a par- ticular instance, the abuse not being known to the other contracting party, the doctrine of ultra vires does not apply. As was said by Selden, J., in Bissell v. Michigan Southern & Northern Indiana Railroad Co. 22 N. Y. 289, 290 : "There are no doubt cases in which a corporation would be estopped from setting up this defence, although its contract might have been reaUy unauthorized. It would not be available in a suit brought by a bona fide indorsee of a negotiable promissory note, provided the corporation was authorized to give notes for any purpose ; and the reason is, that the corporation, by giving the note, has virtually represented that it was given for some legitimate purpose, and the indorsee could not be presumed to know the contrary. The note, however, if given by a corporation ab- solutely prohibited by its charter from giving notes at all, would be of notice to an extent which can only be denominated preposterous. It was in answer to the same point that Chief Justice Comstock observed, in his opinion in a leading case Bissell ». Michigan etc. R. R. Co., 22 N. Y. 258] upon this question, that 'a traveler from New York to Mississippi can hardly be required to furnish himself with the charters of all the railroads on his route, or to study a treatise on the law of corporations. ) SECT. 1.] MONUMENT NATIONAL BANK V. GLOBE WORKS. 297 voidable not only in the hands of the original payee, but in those of any subsequent holder ; because all persons dealing with a corpora- tion are bound to take notice of the extent of its chartered powers.' The same principle is appKcable to contracts not negotiable. When the want of power is apparent upon comparing the act done with the terms of the charter, the party dealing with the corporation is presumed to have knowledge of the defect, and the defense of ultra vires is available against him. But such a defence would not be permitted to prevail against a party who cannot be presumed to have had any knowledge of the want of authority to make the con- "tract. Hence, if the question of power depends not merely upon the law under which the corporation acts, but upon the existence of cer- tain extrinsic facts, resting peculiarly within the knowledge of the corporate officers, then the corporation would be estopped from denying that which, by assuming to make the contract,' it had vir- tually affirmed." " This doctrine seems to us sound and reasonable ; and in conformity with it, it was held in Farmers' & Mechanics' Bank v. Empire Stone Dressing Co. 5 Bosw. 275, that an accommodation acceptance by an officer of a manufacturing corporation, on behalf of the company, was not binding, unless the consideration had been advanced upon the faith of the acceptance ; but that if the consideration was paid in good faith after the acceptance, and upon the credit of it, it could be enforced. So it was said by Lord St. Leonards that he. felt a disposition "to restrain the doctrine of ultra vires to clear cases of excess of power, with the knowledge of the other party, express or implied from the nature of the corporation, and of the contract entered into." East- ern Counties Railway Co. v. Hawkes, 5 II. L. Cas. 331, 373. The cases on which the defendants rely are cases against municipal ' Cf. Denver Fire Ins. Co. u. McClelland, supra. ("Where a certain act is pro- Wbited by statute, its performance ia to be held void because such is the legislative ■will. So where the consideration of a contract is by law illegal, as where the cause of action arises ex turpe.") ? Accord : Miners' Ditch Co. u. Zellerbach, 37 Cal. 543. ("The question, as be- tween stockholders and the corporation, is a very different one from that which arises between the corporation itself, and strangers dealing with it, and the principle es- tablished, where the contest arises between strangers and the corporation is, whether the act in question is one which the corporation is not authorized to perform under any circumstances, or one that may be performed by the corporation for some pur- poses, but may not for others. In the former case the defense of ultra vires is avail- able to the corporation as against all persons, because they are bound to know from "the law of its existence, that it has no power to perform the act. But in the latter case the defense may or may not be available, depending upon the question whether -the party dealing with the corporation ia aware of the intention to perform the act for an authorized purpose, or under circumstances not justifying its performance. And the test as between strangers having no knowledge of an unlawful purpose and the corporation, is to compare the terms of the contract with the provisions of the 'law from which the corporation derives its powers, and if the Court can see that the act to be performed is necessarily beyond the powers of the corporation for any pur- pose, the contract cannot be enforced, otherwise it can.") 298 ULTRA VIRES — CONTRACTS. [CHAP. II. corporations, in respect to which the rule is much more rigid, or for. the most part those in which the other contracting party had notice upon the face of the transaction of the want of corporate power. _ There can be no doubt that it is very often true that a corporation may be responsible for the unauthorized, and even for the unlawful acts of its agents, apparently clothed with its authority.^ No cor- poration is empowered by its charter to commit an assault and bat- tery ; yet it has frequently been held accountable, in this Common- 1 CoMSTOCK, C. J. in BisseU ». Michigan &c. R. R. Co., 22 N. Y. 258 said: "The doctrine has certainly been asserted on some occasions, that, in all cases where the contracts and dealings of a corporation are claimed to be invalid for want of power to enter into the same, a comparison must be instituted between those contracts and dealings and the charter, and, if the charter does not appear to embrace them, then that they must be adjudged void to ail intents and purposes, and in all conceivable circumstances. The reasoning on which this doctrine has been usually claimed to rest denies, in effect, that corporations can, or ever do, exceed their powers. They are said to be artificial beings, having certain faculties given to them by law, which faculties are limited to the precise purposes and objects of their creation, and can no more be exerted outside of those purposes and objects than the faculties of a natural person can be exerted in the performance of acts which are not within human power. In this view these artificial existences are cast in so perfect a mould that transgressioit and wrong become impossible. The acts and dealings of a corporation, done and transacted in its name and behalf by its board of directors, vested with all its powers, are, unless justified by its charter, according to this reasoning, the acts and dealings, of the individuals engaged in them, and for which they alone are responsible. But such, I apprehend, is not the nature of these bodies. Like natural persons, they can overleap the legal and moral restraints imposed upon them ; in other words, they are capable of doing wrong. To say that a corporation has no right to do unauthorized acts is only to put forth a very plain truism ; but to say that such bodies have no power or capacity to err is to impute to them an excellence which does not belong to any created existences with which we are acquainted. The distinction between, power and right is no more to be lost sight of in respect to artificial than in respect to natural persons. . . . One of the sources of error in reasoning upon legal as well as other questions is inexactness in the use of language, or, perhaps, in the imperfect- ness of language, to express the varieties of thought. It is a self-evident truth, that a natural person cannot exceed the powers which belong tp his nature. In this prop- osition we use words in their literal and exact sense. In the same sense it is a truth equally evident that a corporation cannot exceed its powers ; but this is only assert- ing that it cannot exercise attributes which it does not possess. As an impersonal being, it cannot experience religious emotion, or feel the moral sentiments. Corpora- tions are said to be clothed with certain powers enumerated in their charters or in- cidental to those which are enumerated, and it is also said they cannot exceed those powers ; therefore, it has been urged that all attempts to do so are simply nugatory. The premises are correct when properly understood; but the conclusion is false,, because the premises are misinterpreted. When we speak of the powers of a cor- poration, the term only expresses the privileges and franchises which are bestowed in the charter ; and when we say it cannot exercise other powers, the just meaning of the language is, that as the attempt to do so is without authority of law, the per- formance of unauthorized acts is a usurpation which may be a wrong to the State or perhaps, to the shareholders. But the usurpation is possible. In the same sense natural persons are under the restraints of law, but they may transgress the law, and when they do so they are responsible for their acts. From this consequence corpora- tions are not, in my judgment, wholly exempt. The privileges and franchises granted are not the whole of a corporation. Every trading corporation aggregate include* an association of persons having a collective will, and a board of directors or other agency in which that will is embodied, and through which it may be exerted in modes of action not expressed in the organic law. Thus, like moral and sentient beings, they may and do act in opposition to the intention of their Creator, and they ought to ba accountable for such acts." SECT. 1.] NATIONAL HOME B. & L. ASS'n. 1>. SAVINGS BANK. 299 wealth, for one committed by its servants. Bills of a bank issued without consideration, and even stolen, are good in the hands of an innocent holder for value. Many other illustrations might be given, but enough has been said to show, the principle on which our decision rests. Judgment for the plaintiffs. THE NATIONAL HOME BUILDING AND LOAN ASSOCIA- TION V. THE HOME SAVINGS BANK ET AL. 181 lU. 35 ; 64 L. R. A. 399. 1899. Mr. Chief Justice Caktweight delivered the opinion ^ of the court: In November, 1893, Flora D. Bishopp made a trade of lots in the city of Chicago with the National Home Building and Loan Associa- tion, appellant, in pursuance of which appellant conveyed to her lot 10 in Lee Bros.' addition to Englewood, lots 15 and 16 in block 60 in Chicago University subdivision, and lot 36 in block 2 in Herring's subdivision. In exchange for these lots said Flora D. Bishopp and Jonathan D. Bishopp, her husband, conveyed to the building and loan association lots 5 and 6 in block 2 in Johnson & Clement's sub- division, and in the deed of the same it was agreed that the building and loan association should assume and pay an encumbrance on said lot 5 in the form of a trust deed executed by said Flora D. Bishopp and husband to Charles T. Page, trustee, to secure a note for $3000 and interest. The trade was negotiated and carried out on the part of the association through J. 0. Duncan, agent, who was employed by the association to negotiate loans and examine abstracts for it in Chicago, and he acted under the direction of the secretary of the association. After the exchange the association paid a mortgage of $600 on said lot 5 and the dehnquent interest on the mortgage as- sumed in the conveyance. On May 14, 1895, the board of directors passed a resolution that the assumption clause in the deed was made without authority of the association, and directed the execution and tender of a quit-claim deed of the lot to Flora D. Bishopp. The deed was made and tendered unconditionally, and the association thereby offered the lot to her without a return of the consideration or any other condition. The note for $3000, secured by the trust deed, was transferred to the Home Savings Bank, one of the appellees, and it filed its bill in the superior court of Cook cotmty to foreclose the same, asking for a decree against Flora D. Bishopp, a sale of the ' Portiona omitted. 300 ■ ULTRA VIEES — CONTRACTS. [CHAP. II. mortgaged premises, and a decree against the bmlding and loan association for such deficiency as might exist. The building and loan association answered that the trade was consummated by direc- tion of its president and secretary, but the clause assuming the mort- gage was inserted without their loiowledge or authority and without the knowledge and authority of its board of directors, that such an agreement was ultra vires the corporation, and that it had tendered a quit-claim deed of the lot to the said Flora D. Bishopp. The bill was answered by Flora D. Bishopp and her husband, who admitted its material allegations and filed their cross-bill, alleging the agree- ment for an exchange of the properties and the conveyances and asking for a deficiency decree against the association. The building and loan association answered the cross-bill, setting up the same defense as before, and the cause was referred to a master, who re- ported in favor of a foreclosure and sale and a decree against the building and loan association for any deficiency in the payment of the debt, interest, fees and costs. Exceptions to the report were overruled and a decree was entered in accordance with it, which has been affirmed by the Appellate Court. No objection is made to the foreclosure of the trust deed or the sale of the premises, and the only question involved in this appeal is whether the contract inserted in the deed, by which the defendant, the National Home Building and Loan Association, agreed to as- sume and pay the debt, is binding upon it. This defendant, which denied the binding force of the agreement, is a corporation organized under the provisions of an act entitled "An act to enable associations of persons to become a body corporate to raise funds to be loaned only among the memjbers of such association," in force July 1, 1879. (Laws of 1879, p. 83.) The purpose of this corporation is the raising of funds to be loaned to its members upon the security of its stock and unencumbered real estate. Manifestly the business 'of trading in real estate or acquiring the same, except as incidental to their legitimate business, is wholly foreign to the purpose for which the State has created such corporations and conferred upon them cor- porate powers. They have no power to take and hold real estate, and contracts made for the purchase of it are not enforceable. (End- hch on Building Associations, sees. 305-308.) But for the purpose of coUectmg debts it is essential that they should have some power with respect to the real estate mortgaged to them, and for that pur- pose section 13 of the act for their incorporation provides as follows : Any loan or buildmg association incorporated by or under this act as hereby authorized and empowered to purchase at any sheriff's or ' other judicial sale, or at any other sale, pubHc or private, any real estate upon which such association may have or hold any mortgage lien or other encumbrance, or in which said association may have an interest, and the real estate so purchased, to sell, convey, lease or SECT. 1.] NATIONAL HOME B. & L. ASS'n. V. SAVINGS BANK. 301 mortgage at pleasure to any person or persons whatsoever." Such corporations are not authorized, either by their charters or as an in- cident to their existence, to acquire or hold any real estate, except such as has been mortgaged to them or which they may have an interest in. If a building and loan association were permitted to invest its money in the purchase of real estate or to traffic or trade in such property instead of keeping within the powers conferred upon it by loaning such money and collecting it, it would not only be exercising powers not granted, but it would be carrying on a busi- ness inconsistent with the purpose of its creation and against the fixed and uniform policy of the State. In People ex rel. v. Chicago Gas Trust Co. 130 111. 268, it was said (p. 292) : "The word 'unlaw- ful ', as apphed to corporations, is not used exclusively in the sense of malum in se or malum prohibitum. It is also used to designate powers which corporations are not authorized to exercise, or con- tracts which they are not authorized to make, or acts which they are not authorized to do, — or, in other words, such acts, powers and contracts as are ultra vires." It is also urged that the building and loan association is estopped to raise the question whether the contract was ultra vires because it has received the benefit of the contract by the conveyance of property to it. That depends, as we think, upon the sense in which the term ultra vires is used. It has been applied indiscriminately to different states of fact in such a way as to cause considerable con- fusion. When used as applicable to some conditions, it has been frequently said that a corporation is estopped to make such a defense where it has received the benefit of the contract. For example, the term has been appfied to acts of directors or oflBcers which are outside and beyond the scope of their authority, and therefore are invasions of the rights of stockholders, but which are within the powers of the corporation. In such a case the act may become binding by ratifica- tion, consent and acquiescence, or by the corporation receiving the benefit of the contract. Again, it has been applied to cases where an act was within the authority of the corporation for some purposes or under some circumstances, and where one dealing in good faith with the corporation had a right to assume the existence of the coa- ditions which would authorize the act. Where an act is not'vitra vires for want of power in the corporation but for want of power in the agent or officer, or because of the disregard of formaUties which the law reqxiires to be observed, or is an improper use of one of the enumerated powers, it may be valid as to third persons. In the more proper and legitimate use of the term it appUes only to acts; which are beyond the purpose of the corporation, which could not be sanctioned by the stockholders. There would, of course, be no power to confirm or ratify a contract of that kind, because the power to enter into it is absolutely wanting. If there is no power to make 302 ULTRA VIRES — CONTRACTS. [CHAP. II. the contract there can be no power to ratify it, and it would seem clear- that the opposite party could not take away the incapacity and give the contract vitality by doing something under it. It would be contradictory to say that a contract is void for an absolute want of power to make it and yet it may become legal and vaUd as a con- tract, by, way of estoppel, through some other act of the party tmder such incapacity, or some act of the other party chargeable by law with notice of the want of power. The powers delegated by the State to the corporation are matters of pubhc law, of which no one can plead ignorance. A party deahng with a corporation having hmited and delegated powers conferred by law is chargeable with notice of them and their limitations, and can not plead ignorance in avoidance of the defense. Frankhn Co. v. Lewiston Institution for Savings, 68 Me. 43 ; - New Orleans, Florida and Havana Steamship Co. v. Ocean Dry Dock Co. 28 La. Ann. 173. In Dm-kee v. People, 155 111. 354, the same rules were laid down, and it was pointed out that the cases where a corporation is estopped from asserting that a contract is ultra vires when it has received a benefit under the contract is where the making of the contract is within the scope of the franchise, and the contract is sought to be avoided because there was a failure to comply with some regulation or the power was improperly exercised. The following was there quoted from the opinion in Davis v. Old Colony Railroad Co. 131 Mass. 258 : "There is a clear distinction, as was pointed out by Mr. Justice Campbell in Zabriskie v. Cleveland, Columbus and Cincinnati Railroad Co., by Mr, Justice Hoar in Monument Bank v. Globe Works, and by Lord Chancellor Cairns and Lord Hatherley in Ash- bury Railway Carriage and Iron Co. v. Iliche, between the exercise by a corporation of a power not conferred upon it, varying from the objqcts of its creation as declared in the law of its organization, of which aU persons deahng with it are bound to take notice, and the abuse of a general power or the failure to comply with prescribed formalities or regulations in a pecuhar instance, when such abuse or failure is not known to the other contracting parties." In this case the transaction was beyond the corporate powers and -ultra vires in the strict and legitimate sense, and against, pubhc pohcy. It could not be ratified or become vaUd by acquiescence, since there was no power to make it. Flora D. Bishopp, who dealt with the corporation, was chargeable with notice of its powers and their limitations and its inability to enter into the contract. She could not make the void contract vahd by acting under it. No action can be maintained upon the unlawful contract, and in such cases, if the courts_ can afford any remedy, it cannot be done by affirming or enforcing the contract, but in some other manner. The decree of the superior court against the National Home Build- ing and Loan Association for any deficiency that may exist, and for .SECT. 1.] CENTRAL TEANSPORTATION CO. V. PULLMAN-S CO. 303 execution to collect the same, and the judgment of the Appellate Court affirming said decree in that respect, are each reversed. Judgment reversed. Mr. Justice Carter, dissenting : I do not agree to the doctrine announced in the decision of this case, that a corporation may not be estopped from pleading its own lack of corporate power. As I imderstand the decisions, it has long been the settled doctrine of this court that where the contract has been wholly executed and the corporation has received the benefit of it, it will be estopped from setting up in defense of payment its own lack of power, imder its charter, to enter into the contract, where the contract is not one either malum in se or malum prohibitum. I do not understand that the application of the doctrine of estoppel is confined to those cases where the contract is within the powers of the corporation, but only beyond the mere authority of its officers or agents. The doctrine of estoppel ^ does not rest upon the principle of agency that there may be a ratification of the unauthorized acts of agents. It has been held, not only by this court but by many others, that in many cases the question of ultra vires can only be raised in a direct proceeding by the State to oust the corporation of its assumed and usurped powers. Bradley v. Ballard, 55 111. 413; Kadish v. Garden City Building' Ass., 151 id., 531 ; McNulta v. Corn Belt Bank, 164 id., 427 ; Eckman v. Chicago, Burlington and Quincy Eailroad Co., 169 id., 312 ; Darst v. Gale, 83 id., 136. CENTRAL TRANSPORTATION COMPANY v. PULLMAN'S PALACE CAR COMPANY.^ 139 U. S. 24. 1891. This was an action of covenant by the Central Transportation Company, a corporation of Pennsylvania, against Pullman's Palace Car Company, a corporation of Illinois, to recover the sum of $198,000, due for the last three quarters of the year ending July 1, 1886, ac- cording to the terms of an indenture of lease from the plaintiff of all its personal property to the defendant, dated February 17, 1870. The defendant filed several pleas, one of which was "that said indenture of lease was void in law as between the parties thereto, for the want of authority and corporate power on the part of the parties '~ ' A discussion of this term in respect to ultra vires acts is found in note 1, page 321, ihfra. See explanation of the lUinoia cases, relied upon by the dissenting judge, in Leigh I). American Brake Beam Co., 205 111. 147, cited in note 1, page 315, infra. * Statement of facts condensed ; portions of opinion omitted. 304 ULTRA VIRES — CONTRACTS. [CHAP. lU thereto to make and enter into said indenture of lease ; and for that- the same was in excess and in violation of the charters conferring: the corporate powers on said plaintiff, and of the purpose of their incorporation." The plaintiff filed a rephcation, traversing the aver- ments of this plea. The plaintiff was originally incorporated December 26, 1862, by a, certificate filed as required by the general laws of Pennsylvania, which authorized companies to incorporate themselves, by volun- tary act of the associates, "for the purpose of carrying on the manu- facture of woollen, cotton, flax or silk goods, or of iron, paper, lumber or salt," or "for the manufacture of articles from iron and other metals, or out of wood, iron and other metals," within the State,, for a term not exceeding twenty years. In accordance with the requirements of those statutes, the plaintLEf 's certificate of incorporation stated the object for which it was formed,, "the transportation of passengers in railroad cars constructed and to be owned by the said company in accordance with the several letters patent," four in all, described by numbers and dates ; the amount of its capital stock, $200,000 ; and its term of continuance, twenty years, the extreme limit allowed by the statutes. By a special act of the legislature of Pennsylvania of February 9,. 1870, c. 94, the plaintiff's charter was extended for ninety-nine years from its expiration; and "said company are hereby empowered to enter into contracts with corporations of this or any other State for the leasing or hiring and transfer to them, or any of them, of their railway cars and other personal property," as well as "to increase^ their present capital stock two hundred thousand dollars." On February 17, 1870, eight days after the passage of that act, the indenture sued on was made by and between the plaintiff and the defendant, which had been incorporated by a special act. of the legis- lature of Illinois of February 22, 1867, "to manufacture, construct and purchase railway cars, with all convenient appendages and supplies for persons travelHng therein, and the same" to "sell or use, or permit to be used, in such manner and upon such terms as the said company may think fit and proper." The indenture recited that the parties (professing to act under the powers conferred upon them respectively by the special acts of the legislatures of Pennsylvania and of Illinois, above mentioned,) had. agreed that the plaintiff should demise, transfer and set over to the defendant, and the defendant should take, all the plaintiff's railway cars, contracts, patent rights and personal property. By that indenture, accordingly, the plaintiff "granted, demised> transferred and set over" one hundred and nineteen railway sleeping cars with their equipment, its contracts with sixteen railroad* com- panies, a,nd all its "personal property, rights, credits, moneys and effects, rights of action, money due and to become due from hcenses. SECT. 1.] CENTRAL TRANSPORTATION CO. V. PULLMAN'S CO. 305 heretofore granted," to the defendant, its successors and assigns, "to have and to hold the above demised property, and all income, revenue and profit to be derived therefrom," for the term of ninety- nine years from January 1, 1870, except so far as the contracts, patents and licenses should expire sooner ; and the plaintiff expressly covenanted that it would use its influence to obtain renewals or new contracts in the defendant's name from the railroad companies ; and that it "shall and wiU not engage in the business of manufacturing, using or hiring sleeping cars, while this contract remains in full force and effect." The defendant, on its part, covenanted to pay to the plaintiff annually the sum of $264,000, in equal quarterly instalments, "dur- ing the entire term of ninety-nine years," unless, upon a diminution of the revenue received from the raUroad companies, the indenture should be declared void by the defendant, or the annual sums payable by the defendant be reduced, as therein provided ; also to pay all the plaintiff's debts up to January 1, 1870, according to a schedule an- nexed ; to continue and carry on the business as authorized by its charter, during the existence of the assigned contracts or other hke contracts with the same railroad companies; to keep in repair the cars and their equipment, and to renew and reconstruct them when needful; not to assign the indenture without the plaintiff's assent, nor to create any lien or mortgage upon the property that should impair the plaintiff's rights under the indenture; that, upon the defendant's failure to make any quarterly payment for thirty days after due, the plaintiff might avoid the indenture, and thereupon the defendant should surrender the cars and equipment, assign to the plaintiff the contracts with the railroad companies and any unexpired patent rights, and cease to run or employ cars on the same hues of railroad ; and, at the end of the ninety-nine years, to deliver to the plaintiff the cars and equipment in good order, and assign to the plaintiff any unexpired contracts with those railroad companies. At the trial, in May, 1888, the plaintiff offered in evidence its original charter, the statute of Pennsylvania of February 9, 1870, and the indenture of February 17, 1870; as well as evidence tending to show that the defendant, imder that indenture, entered into pos- session of the plaintiff's property, and continued in possession during the period covered by the declaration. To the admission of all this evidence the defendant objected, "on the ground that it was beyond the power of either corporation to make the contract ; and also because it was null and void by reason of its being in restraint of trade and against public pohcy as prevent- ing competition." The court sustained the objection, and excluded the evidence ; and the plaintiff excepted. The plaintiff then offered to prove, in addition to the above evi- dence, that in pursuance of the indenture of February 17, 1870, the 306 ULTRA VIRES — CONTRACTS. [CHAP. 11. plaintiff's cars, contracts and patent rights were delivered to the defendant, and continued in its possession under the indenture, and the defendant insisted on retaining them, until July 1, 1886, and the defendant then for the first time tendered them to the plaintiff and declared the indenture void, in accordance with its provisions. The defendant objected to this evidence ; the court sustained the objec- tion, and excluded the evidence ; and the plaintiff excepted.. The defendant thereupon moved for a nonsuit, and the court granted the motion, and ordered a nonsuit, and refused a motion of the plaintiff to take it off ; and the plaintiff again excepted. A judgment of nonsuit was entered accordingly; and the plaintiff tendered a bill of exceptions, which was allowed by the court, and sued out this writ of error. Mr. John G. Johnson for plaintiff in error : ' It does not require an act of Assembly to permit a railroad cor- poration to sell such of its real and personal property as is not neces- sary for the exercise of its franchises. None of the property acquired by a manufacturing company is necessary to the exercise of its power to manufacture ; because it may locate other property at any point which may please it, and may thete carry on its business. A rail- road corporation, however, is only authorized to locate a road between certain termini. After it has located the same, its power further to locate is at an end. Its right of way, therefore, becomes absolutely necessary to the continuance of its railroad. There is, therefore, a very obvious reason for requiring that such property, so necessary to the exercise of the quasi public franchise, shall not be disposed of. The Central Transportation Company, though called a "trans- portation company," was a manufacturing corporation, with no right to transport, saving as the same resulted from its right to use the cars which it might manufacture. Further, the lease was not ultra vires in view of the act of February, 1870. This act antedates the lease by but a few days, and we may fairly infer that it was passed to set at rest any doubt which might possibly be raised as to the validity of what must then have been imder contenaplation. The lease, made within a few days after the passage of this act, has continued to be acted upon, without question as to its vahdity, for sixteen years. By virtue of this lease the Pull- man Company has possessed itself of all the property and business of the plaintiff. If the decision of the court below is sustained, it will retain everything that is valuable, and which it could never have acquired but for this lease, and will be obliged to return nothing but worthless cars. The act of 1870 conferred power to lease or hire and transfer all the cars and personal property of the plaintiff. Is it possible to 1 Argiiment abridged. SECT. 1.] CENTRAL TRANSPORTATION CO. V. PULLMAN'S CO. 307 confer in clearer language a more unlimited power to lease ? To lease not a part, but the whole, of the assets of the company. We can hardly believe that the decision of this court in Railroad Co. V. Thomas would have been rendered if an act of the legislature of New Jersey could have been foimd, approximating in liberality to the acts empowering the Central Transportation Company. A legislative power to lease all the property of a corporation carries with it the right to do whatever will induce a person to become the lessee, especially to agree not to do what, if done, would render the lease worthless. The contract was so executed on the first day of July, 1886, as to entitle the plaintiff to sue for the rent which fell due up to that day, even if the contract was contrary to pubhc policy. In the present case the suit is not for damages for an unexecuted contract, but to recover the consideration agreed to be paid for a lease of property which ended on the first day of July, 1886. If the contention of the defendant that it had a right then to terminate the lease was well foimded, nothing more remained to be done by either party. It is impossible to see that the defendant lost anything by reason of the non-enforcible character, if it had such a character, of the covenant not to manufacture other cars ; because after the first day of July, 1886, the plaintiff was at hberty to do what it pleased. Until that day the Pullman Company had retained possession of all the plaintiff's property. Why was it not obhged to pay what it had agreed to pay for a consideration which was then fully performed ? Why ought not that company which agreed to pay a certain sum that it had the legal right to agree to pay, be estopped from setting up against the plaintiff, which may not have had the right to covenant that it would not engage in the business of manufacturing cars, but which had not engaged in that business, and whose property had been used, the fact that it had made an illegal contract to do some- thing which in fact it had not done? How will public poHcy be pro- moted by permitting the defendant, which has received the considera- tion for the contract, to ignore the compensation it agreed to pay? The contract, so far as concerned the covenant to pay rent up to the first of July, 1886, had been fully executed by the plaintiff. The learned judge below thought that because it had no right to bind itself not to engage in the business of manufacturing cars it ought not to recover the full rental stipulated for. To this we reply that up to the first day of July, 1886, the defendant had received the full consideration for the agreed-upon rental which it had bound itself to pay quarterly. If the learned judge, however, was right in his theory, he forgot that on the first day of July, 1886, the defendant had tendered to the plaintiff its property and had announced the lease as ended. It was not entitled, after the termination of the lease, to object to their 308 ULTRA VIEES — CONTRACTS. [CHAP. II. right because of the non-enforcibiUty. There should have been no allowance to it of a deduction because of this covenant, when it had never been broken and when the right'to insist upon it had terminated by expiration of time. In conclusion, we urge upon the court that the decision of the court below leaves the plaintiff in a most deplorable condition. Its con- tracts, which were valuable, are gone. The defendant under the lease is now in possession of all the contracts which were formerly owned by the plaintiff. It has been denied a right to recover the sum agreed to be paid in the lease because of the contract being against pubHc pohcy. If it cannot recover upon the contract, how can it recover upon a quantum meruit f If it has no action at law, how can it obtain any relief in equity ? Mr. Justice Gray delivered the opinion of the court. The principal defence in this case, duly made by' the defendant, by formal plea, as well as by objection to the plaintiff's evidence, and sustained by the Circuit Court, was that the indenture of lease sued on was void in law, because beyond the powers of each of the corpora- tions by and between whom it was made. It was therefore rightly assumed by the counsel of both parties at the argument that the only question, to be determined is of the cor- rectness of the ruling sustaining the defence of ultra vires, inde- pendently of the form in which that question was presented and dis- posed of. Upon the authority and the duty of a corporation to exercise the powers granted to it by the legislature, and those only ; and upon the invalidity of any contract, made beyond those powers, or providing for their disuse or ahenation ; there is no occasion to refer to decisions of other courts, because the judgments of this court, especially those delivered within the last twelve years by the late Mr. Justice Miller, afford satisfactory guides and ample illustrations. [The court analyzed the following cases : York &c. R. R. v. Winans, 17 How. 30; Pearce v. Madison &c. R. R., 21 How. 441 ; Zabriskie* V. Cleveland &c. R. R., 23 How. 381 ; Thomas v. R. R. Co., 101 U. S. 71 ; Branch v. Jesup, 106 U. S. 468 ; Pennsylvania R. R. v. St. Louis &c. R. R., 118 U. S. 290; Salt Lake City v. HoUister, 118 U. S. 256; Willamette Co. v. Bank of British Columbia, 119 U. S. 191 ; Green Bay &c. R. R. v. Union Steamboat Co., 107 U. S. 98 ; Pittsburg &c. Ry. V. Keokuk &c. Bridge, 131 U. S. 371 ; Oregon Ry. v. Oregonian Ry., 130 U. S. 1.] The clear result of these decisions may be sunamed up thus : The charter of a corporation, read in the light of any general laws which are appKcable, is the measure of its powers, and the enumeration of those powers implies the exclusion of all others not fairly incidental. All contracts made by a corporation beyond the scope of those powers are unlawful and void, and no action can be maintained SECT. 1.] CENTRAL TKANSPOETATION CO. V. PULLMAN's CO. 309 upon them in the courts, and this upon three distinct grounds : the obhgation of every one contracting with a corporation, to take notice of the legal limits of its powers ; the interest of the stockholders, not to be subjected to risks which they have never undertaken; and, above all, the interest of the public, that the corporation shall not transcend the powers conferred upon it by law. A corporation can- not, without the assent of the legislature, transfer its franchise to another corporation, and abnegate the performance of the duties to the pubhc, imposed upon it by its charter as the consideration for the grant of its franchise. Neither the grant of a franchise to trans- port passengers, nor a general authority to sell and dispose of prop- erty, empowers the grantee, while it continues to exist as a corporation, to sell or to lease its entire property and franchise to another corpora- tion. These principles apply equally to companies incorporated by special charter from the legislature," and to those formed by articles of association under general laws. By a famihar rule, every public grant of property, or of privileges or franchises, if ambiguous, is to be construed against the grantee and in favor of the public ; because an intention, on the part of the government, to grant to private persons, or to a particular corpora- tion, property or rights in which the whole public is interested, cannot be presumed, unless unequivocally expressed or necessarily to be im- phed in the terms of the grant. This rule applies with peculiar force to articles of association, which are framed under general laws, and which are a substitute for a legislative charter, and assume and define the powers of the corporation by the mere act of the associates, with- out any supervision of the legislature or of any pubhc authority. Oregon Railway v. Oregonian Railway, 130 U. S. 26, 27. The plaintiff was not an ordinary manufacturing corporation, such as might, like a partnership or an individual engaged in manufactures, sell or lease all its property to another corporation. Ardesco Oil Co. «. North American Oil Co., 66 Penn. St. 375; Treadwell s.Sahsbury Manuf. Co., 7 Gray, 393. But the purpose of its incorporation, as defined in its charter, and recognized and confirmed by the legislature, being the transportation of passengers, the plaintiff exercised a public employment, and was charged with the duty of accommodating the public in the line of that employment, exactly corresponding to the duty which a railroad corporation or a steamboat company, as a carrier of passengers, owes to the public, independently of possessing any right of eminent domain. The public nature of that duty was not affected by the fact that it was to be performed by means of cars constructed and of patent rights owned by the corporation, and over roads owned by others. The plaintiff was not a strictly private, but a quasi public corporation ; and it must be so treated as regards the validity of any attempt on its part to absolve itself from the per- formance of those duties to the public, the performance of which by 310 ULTEA VIBES — CONTRACTS. [CHAP. II. the corporation itself was the remuneration that it was required by- law to make to the public in return for the grant of its franchise. Pickard v. Pullman Southern Car Co., 117 U. S. 34; York & Mary- land Railroad v. Winans, 17 How. 30, 39 ; Railroad Co. v. Lockwood, 17 Wall. 357 ; Liverpool & Great Western Steam Go. v. Phenix Ins. Co., 129 U. S. 397. ■ The evident purpose of the legislature, in passing the statute of 1870, was to enable the plaintiff the better to perform^ its duties to the public, by prolonging its existence, doubling its capital, and con- firming, if not enlarging, its powers. An intention that it should immediately abdicate those powers, and cease to perform those duties, is so inconsistent with that purpose, that it cannot be implied, with- out much clearer expressions of the legislative will looking towards that end, than are to be found in this statute. The provision of this statute, by which the plaintiff is empowered to contract with other corporations "for the leasing or hiring and transfer to them, or any of them ", of its "railway cars and other personal property ", is fully satisfied by construing it as confirming the plaintiff's right to do as it had been doing, to "lease" or. "hire" (which are equivalent words) to other corporations in the regular course of its business, and to "transfer" under such leasing or hiring, its "railway cars ", and "other personal property ", either connected with the cars, or at least of the same general nature of tangible prop- erty. It can hardly be stretched to warrant the plaintiff in making to a single corporation an absolute transfer, or a long lease, of all that might be comprehended in the words "personal property" in their widest sense, including not only goods and chattels, but moneys, credits and rights of action. In any view, it would be inconsistent , alike with the main purpose of the statute, and with the uniform course of decision in this court, to consttue these words as ajithorizing the plaintiff to deprive itself, either absolutely, or for a long period of time, of the right to exercise the franchise granted to it by the legis- lature for the accommodation of the pubhc. Considering the long term of the indenture, the perishable nature of the property transferred, the large sums to be paid quarterly by the defendant by way of compensation, its assumption of the plaintiff's debts, and the frank avowal, in the indenture itself, of the intention of the two corporations to prevent competition and to create a monopoly, there can be no doubt that the chief consideration for the sums to be paid by the defendant was the plaintiff's covenant not to engage in the business of manufacturing, using or hiring sleeping cars ; and that the real purpose of the transaction was, under the guise of a lease of personal property, to transfer to the defendant nearly the whole corporate franchise of the plaintiff, and to continue the plaintiff's existence for the single purpose of receiving compensa- tion for not performing its duties. SECT, 1.] CENTRAL TRANSPORTATION CO. V. PULLMAN'S CO. 311. The necessary conclusion from these premises is, that the contract sued on was unlawful and void, bscause it was beyond the powers conferred upon the plaintiff by the legislature, and because it in- volved an abandonment by the plaintiff of its duty to the public. The contract sued on being clearly beyond the powers of the plaintiff corporation, it is unnecessary to determine whether it is also ultra vires of the defendant,- because, in order to bind either party, it must be within the corporate powers of both. Thomas v. Railroad Co., Pennsylvania Raih-oad v. St. Louis &c. Railroad, and Oregon Rail- way V. Oregonian Railway, above cited. It was argued in behalf of the plaintiff that, even if the contract sued on was void, because ultra vires and against pubhc policy, yet that, having been fully performed on the part of the plaintiff, and the benefits of it received by the defendant, for the period covered by the declaration, the defendant was estopped to set up the invalidity of the contract as a defence to this action to recover the compensation agreed on for that period. But this argument, though sustained by decisions in some of the states,' finds no support in the judgments of this court. The passages cited by the plaintiff from Railway Co. v. McCarthy, 96 U. S. 258, 267, and San Antonio v. Mehaffy, 96 U. S. 312, 315, are no more than a passing remark that "the doctrine of ultra vires, whea invoked for or against a corporation, should not be allowed to prevail when it would defeat the ends of justice or work a legal wrong," and a repetition, in substance, of the same remark, adding "if such a re- sult can be avoided." In Thomas v. Railroad Co., already cited, Mr. Justice Miller, while admitting in general terms that "in many instances, where an invalid contract, which the party to it might have avoided or refused to per- form, has been fully performed on both sides, whereby money has been paid or property changed hands, the courts have refused to sustain an action for the property or the money so transferred," and that "the executed dealings of corporations must be allowed to stand for and against both parties when the plainest rules of good faith re- quire it," yet in the same connection, and ig the most emphatic words, said that in the case before the court, of a contract forbidden by pubhc policy and beyond the powers of the defendant corporation, it was its legal duty, a duty both to its stockholders and to the pubhc, to rescind and abandon the contract at the earhest moment, and the performance of that duty, though delayed for several years, was a rightful act when done, and could give the other party no right of action; and that to hold otherwise would be "to hold that any act performed in executing a void contract makes all its parts vaUd, and that the more that is done under a contract forbidden by law, the stronger is the claim to its enforcement by the courts." 101 U. S. 86. '■ See Bath Gas Light Co. v. Claffy and notes thereto, infra. 312 ULTRA VIEES — CONTRACTS. [CHAP. 11. In an earlier part of the same opinion, and again in Oregon Rail- way V. Oregonian Railway, he referred with approval to the decision of the House of Lords in Ashbury Railway Carriage & Iron Co. v. Riche, L. R. 7 H. L. 653, by which, as he observed, "the broad doc- trine was estabhshed that a contract not within the scope of the powers conferred on the corporation cannot be made vaHd by the assent of every one of the shareholders, nor can it by any partial performance become the foundation of a right of action." 101 U. S. 83 ; 130 U. S. 22. The distinction is clearly brought out in Pennsylvania Railroad ». St. Louis &c. Railroad, , above cited, in which it was argued, sub- stantially as in the present case, that, although the contract of lease might be void, so that no action could originally have been main- tained upon it, yet there had been for years such performance of it, in the use, possession and control by the defendants of the plaintiff's road and franchise, that they could not now be permitted to repudiate or abandon it ; and that the case came within that class in which it had been held that, where a contract has been so far executed that property has passed and rights have been acquired under it, the courts will not disturb the possession of such property, or compel restitution of money received under such a contract. In answering that objection, Mr. Justice Miller, speaking for the com-t, said : "Undoubtedly there are such decisions in courts of high authority, and there is such a principle, very sound in its apphcation to appro- priate cases. But we understand the rule in such cases to stand upon the broad ground that the contract itself is void, and that neither what has been done under it, nor the action of the court, can infuse any vitahty into it. Looking at the case as one where the parties have so far acted under such a contract that they cannot be restored to their original condition, the court inquires if reUef can be given independently of the contract, or whether it will refuse to interfere as the matter stands." And whether, in the case then before the court, the lessee might be hable to the lessor, as on a quantum meruit, » for the use of its road, was not decided, because not presented. 118 U. S. 316-318. In Salt Lake City v. Hollister, above cited, it was said that, in cases of contracts upon which corporations could not be sued because they were ultra vires, "the courts have gone a long way to enable parties, who had parted with property or money on the faith of such contracts, to obtain justice by recovery of the property or the money specifically, or as money had and received to the plaintiff's use " 118 U. S. 263. The true ground of rehef in such cases is clearly shown in a line of opinions, two of which were cited by Mr. Justice Miller in support of the proposition just quoted, in which municipal corporations, having received money or property under contracts so far beyond their SECT. 1.] CENTRAL TRANSPORTATION CO. V. PULLMAN's CO. 313 powers as not to be capable of being enforced or sued on according to their terms, have been held, while not liable to pay according to the contracts, to be bound to account for the money or property which they had received. Thus, in Hitchcock v. Galveston, 96 U. S. 341, 350, where a city was sued for damages for putting an end to a contract with the plain- tiffs for the improvement of its sidewalks, the only invahd part of which was its promise to pay in bonds, which it was beyond its powers to issue, it was decided that the invaUdity of that promise was no reason why the city should not pay for the benefits which it had re- ceived from the plaintiff's performance of the contract, Mr. Justice Strong, in behalf of the court, saying: "It matters not that the promise was to pay in a manner not authorized by law. If payments cannot be made in bonds, because their issue is ultra vires, it would be sanctioning rank injustice to hold that payment need not be made at all." So in Louisiana v. Wood, 102 U. S. 294, 299, a city, which had re- ceived money for bonds issued by it without authority and at an illegal rate of interest and purchased by the plaintiff, was held liable, not on any contract of purchase, nor on any express contract what- ever, but on a contract implied from its receipt of the money, Chief Justice Waite saying: "There was no actual sale of bonds, because there were no valid bonds to sell. There was no express contract of borrowing and lending, and consequently no express contract to pay any rate of interest at all. The only contract actually entered into is the one the law implies from what was done, to wit, that the city would, on demand, return the money paid to it by mistake, and, as the money was got under a form of obligation which was apparently good, that interest should be paid at the legal rate from the time the obligation was denied. That contract the plaintiffs seek to enforce in this action, and no other." Again, in Parkersburg v. Brown, 106 U. S. 487, 503, where in- dividuals, in consideration of bonds issued to them by a city for a purpose beyond its powers, executed to the city a trust deed, in the nature of a mortgage, to secure the payment of the bonds and interest, it was held that the bonds could not be enforced against the city, but that the mortgagors had a right to reclaim the property and to de- mand an account of the city ; and Mr. Justice Blatchford, in deliver- ing judgment, said : " The enforcement of such right is not in affirm- ance of the illegal contract, but is in disaffirmance of it, and seeks to prevent the city from retaining the benefit which it has derived from the unlawful act. There was no illegality in the mere putting of the property by the O'Briens [the mortgagors] in the hands of the city. To deny a remedy to reclaim it is to give effect to the illegal contract. The illegality of that contract does not arise from any moral turpitude. The property was transferred under a contract which was merely 314 ULTRA VIRES — CONTRACTS. [CHAP. II. malum prohibitum, and where the city was the principal offender. In such a case, the party receiving may be made to refund to the person from whom it has received property for the unauthorized purpose, the value of that which it has actually received." In Pittsburgh &c. Railway v. Keokuk & Hamilton Bridge, it was stated, as the result of the previous cases in this court, that "a con- tract made by a corporation, which' is unlawful and void because beyond the scope of its corporate powers, does not, by being carried into execution, become lawful and valid, but the proper remedy of the party aggrieved is by disaffirming the contract and suing to re- cover, as on a quantum meruit, the value of what the defendant has actually received the benefit of." 131 U. S. 371, 389. The view which this court has taken of the question presented by this branch of the case, and the only view which appears to us con- sistent with legal principles, is as follows : A contract of a corporation, which is ultra vires, in the proper sense, that is to say, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers conferred upon it by the legislature, is not voidable only, but wholly void, and of no legal effect. The objection to the contract is, not merely that the corporation ought not to have made it, but that it could not make it.' The contract cannot be ratified by either party, because it could not have been authorized by either. No performance on 1 This statement epitomizes the doctrine of the Federal Courts, as to the legal •effect to be accorded an ultra vires transaction. It is founded on the premise that corporations lack the capacity to perform any act except it be authorized. The case of California Bank ». Kennedy, 167 U. S. 362 illustrates the federal view. A bank purchased shares of stock in another corporation which subsequently became insolvent. Its creditors sought to pursue their remedies against the bank as a stock- iolder. The bank set up its purchase was vZtra vires. The court found accordingly. Not until this point is reached, does the ultra vires doctrine begin. Then the question arises — What is the court going to do about it ? The court dodged the problem, deciding that since the purchase was made without right, ergo it did not purchase. ("There was a total want of power by any act to assume the liability. . . . The transaction being absolutely void, could not be confirmed or ratified.") Yet the fact remains that the bank did acquire the stock ! The quarrel is not so much with the result (i.e. that the bank was not liable to the creditors of the corporation) but with the non seguitur by which it was reached. It is submitted that the federal doctrine not only blinds itself to the tacts, but is also illogical in theory, for a conclusion as to power, i.e. capacity, is not a true deriva- tive from a premise of rights. While capacity is comprehensive of rights, the con- verse is not true. The concepts are different in kind. C/v Departure in common-law pleading. Perhaps, in this sense, the title of this Book — The Powers of a Corporation — is misleading. It is not the power per se which is considered, but rather the right to exercise it in given instances. Consuetude alone dictated the caption. Cf. CoMSTOCK, J. in Bissell case, ante, page 298, note 1. California has necessarily yielded to the federal view, as to the liability of a national bank for its ultra vires acts. Chemical National Bank v. Havermale, 120 Cal. 601. The federal courts, however, have not been consistent in their decisions. See National Bank v. Matthews, cited in note 1, page 338, infra. Also the article cited in note, 1, page 295, ante. Students may profitably supplement their study of this article by reference to another by the same author in 24 Harv. Law Rev. 534 entitled "Executory Ultra Vires Transactions." SECT. 1.] CENTRAL TRANSPORTATION CO. V. PULLMAn's CO. 315 either side can give the unlawful contract any validity, or be the foundation of any right of action upon it. 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 formaUties which are prerequisites to its existence or to its action, because such requisites might in fact have been com- plied 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. The doctrine of the common law, by which a tenant of real estate is estopped to deny his landlord's title, has never been considered by this court as applicable to leases by railroad corporations of their joads and franchises. It certainly has no bearing upon the question whether this defendant may set up that the, lease sued on, which is not of real estate, but of personal property, and which includes, as inseparable from the other property transferred, the inahenable franchise of the plaintiff, is unlawful and void, for want of legal capacity in the plaintiff to make it. A contract ultra vires being unlawful and void, not because it is in itself immoral, but because the corporation, by the law of its creation, is incapable of making it, the courts, while refusing to maintain any action upon the unlawful contract, have always striven to do justice between the parties, so far as could be done consistently with adher- ence to law, by permitting property or money, parted with on the faith of the unlawful contract, to be recovered back, or compensation to be made for it. In such case, however, the action is not maintained upon the un- lawful contract, nor according to its terms ; but on an implied con- tract of the defendant to return, or, failing to do that, to make com- pensation for, property or money which it has no right to retain. To maintain such an action is not to affirm, but to disaffirm, the un- lawful contract.* > The distinction is maintained in Buckeye Marble &c. Co. v. Harvey, 92 Tenn. 115. In Leigh v. American Brake Beam Co., 205 III. 147, although the loaning of money by the corporation was decided to be ultra vires, and therefore, according to the Illinois rule, no remedy could be enforced on the contract itself, a recovery was sustained under the common counts. The court said: "Although a party is not liable to pay according to a contract which is ultra vires, that fact is not permitted to work injustice where the law can afford a remedy without enforcing the illegal contract, and the courts will give relief where it can be given independently of the contract. It would be unjust to hold that one who has received money or property under a contract which ' is ultra vires need not account for it because the contract was illegal, but the law im- plies a contract to return what has been received. Where a contract is not rncUum in ■se or malum prohibitum, and it has been executed or benefits have been received, the party benefited, whether the corporation or individual, will not be permitted to retain the fruits of the transaction without compensation. It has sometimes been said that where the contract has been in good faith fully performed by one party, the other 316 ULTRA VIBES — CONTRACTS. [CHAP. II. The ground and the limits of the rule concerning the remedy, in the case of a contract ultra vires, which has been partly performed, and under which property has passed, can hardly be summed up better than they were by Mr. Justice Miller in a passage already quoted, where he said that the rule "stands upon the broad ground that the contract itself is void, and that nothing which has been done under it, nor the action of the court, can infuse any vitality into it ; " and that "where the parties have so far acted under such a contract that they cannot be restored to their original condition, the court inquires if relief can be given independently of the contract, or whether it will refuse to interfere as the matter stands." Pennsylvania Railroad v. St. Louis &c. Railroad, 118 U. S. 317. Whether this plaintiff could maintain any action against this party, who has had the benefit of the performance of the contract, will be estopped to plead its invalidity. (Bradley v. Ballard, 55 111. 413 ; Darst v. Gale, 83 id., 136 ; Kadish v. Garden City Building Ass'n, 151 id., 531.) Although this has been said in cases where the contract was not ultra vires in the proper sense, and the language was not, perhaps, strictly accurate, it was intended to declare the sound and whole- some doctrine that a party can not retain the benefits, money or property received under a contract which is void merely for want of power to enter into it, without making compensation therefor. Where a contract is ultra vires, and a corporation has received money under it which in equity and good conscience belongs to another and which it ought to pay over, it is liable for it in an action for money had and re- ceived, with interest after demand. (Brennan v. Gallagher, 199 III. 207.) The con- verse of the proposition is equally true, and an action for the recovery of the money "would not enforce or affirm the original contract but would disaflSrm it." So, in U. S. Brewing Co. v. Dolese, ante, page 235, the plaintiff was allowed to re- cover under the common courts the reasonable worth of the building. Recovery to the extent of the actual sum received by a bank, under a transaction which it requested and guaranteed, was allowed against it, not on its ultra vires con- tract of guaranty but on the implied contract which made it the duty of the bank to account for the money obtained from the plaintiff pursuant to that guaranty. Citizens Central &c. Bank v. Appleton, Receiver &c. 216 U. S. 196. The federal courts will not, in their endeavor to do justice, permit any recovery which will weaken the rule that disaflBmiance of the contract is the basis and exclusive ground therefor. Thus in Pullman's Palace Car Co. v. Central Transportation Co., 171 U. S. 138, a continuation of the litigation of the instant case, while the Central Company was allowed to recover the value of the property which actually passed under the lease, it was not entitled to compensation for the patents and contracts' assigned wliich had since expired by efflux of time, and for the use of which it had been paid so long as the lease was observed by both parties. " There is no implication of a promise to make any further compensation for such a species of property than is made by paying for its use while it remained in legal existence. When that tiiue ex- pired the value was gone, and while it lived it had been paid for." Nor was the Pull- man Company liable to account for the earnings of the property which it realized by putting such property to the very use which the lease provided. "As to- the claim of the lessor that its business has been broken up, its contracts with railroads terminated and the corporation left in a condition of inability to again take up its former plans, and that all this should be regarded in the measure of the relief to which it should be entitled, the same considerations which we have already adverted to must be enter- tained. These are results of the illegality of the contract entered into between these parties, and its subsequent repudiation on that ground. ... To grant relief based upon these facts would be so clearly to grant relief to one of the parties to an illegal contract, based upon the contract itself or upon alleged damages arising out of its non-fulfilment, that nothing more need be said upon that branch of the subject. It is emphatically an application of the rule that in such a case the position of the defendant IS the better. SECT. 1.] BATH GAS LIGHT CO. V. CLAFFY. 317 defendant, in the nature of a quantum meruit, or otherwise, inde- pendently of the contract, need not be considered, because it is not presented by this record, and has not been argued. This action, according to the declaration and the evidence, was brought and prosecuted for the single purpose of recovering sums which the de- fendant had agreed to pay by the unlawful contract, and which, for the reasons and upon the authorities above stated, the defendant is not hable for. Judgment affirmed. BATH GAS LIGHT CO. v. CLAFFY. 151 N. Y. 24;36L. R. A. 664. 1896. Appeal from a judgment of the General Term of the Supreme Court which affirmed a judgment in favor of plaintiff entered upon a decision of the court on trial at Circuit, a jury having been waived. Andrews, C. J.' A brief statement of the material facts will pre- sent the important question arising upon this appeal. The plaintiff is a Maine corporation created under a special law of that state, passed in 1853, for the purpose of supplying gas for the lighting of the streets and buildings in the city of Bath. The United Gas, Fuel and Light Company is also a Maine corporation, organized in 1888, under a general law, by the execution and fihng of a certificate, which in pursuance of the law of Maine was first submitted to and approved by the attorney-general, who certified that it was conform- able to the Constitution and laws of that state. The certificate^ among other things, specified that the corporation was organized to "manufacture, lease, purchase and otherwise acquire, deal in, manage, use and sell any and all machinery, fixtures, appurtenances, appliances and plants for using and furnishing light, heat and power, and for any and all purposes for which gas is now used." The plaintiff under its charter established a plant, and at the time of the execution of the lease now to be mentioned was engaged in supplying the streets and buildings in Bath with gas for lighting and other purposes. On the 10th day of November, 1888, it executed to the United Gas, Fuel and Light Company a lease of its property and franchises for the term of twenty-five years from November 1, 1888, at an annual rent of $2,500, which the lessee covenanted to pay in semi-annual pay- ments on the first day of May and the first day of November in each year, and also the taxes assessed during the term. Provision was made for the payment by the lessor to the lessee, at the expiration of the term, of the value of any improvements or extensions made by the lessee, and it was also provided that the lessee should give to the 1 Portions of opinion omitted. 318 ULTRA VIBES — CONTRACTS. [CHAP. II. lessor a satisfactory bond for the faithful performance by the lessee of its covenants in the lease. In pursuance of the provision last mentioned, the United Gas, Fuel and Light Company, on the same day, executed a bond with the defendants John Claffy and John T. Rowland as sureties, conditioned for the faithful performance by the company of the covenants in its behalf contained in the lease, which bond was delivered to and accepted by the plaintiff. The sureties were interested in the United Gas, Fuel and Light Company as stock- holders, and Claffy (the appellant) was also a director. The lessee, immediately, upon the execution of the lease, entered into possession of the demised property and paid the rent up to the 1st day of Novem- ber, 1889, but defaulted in the semi-annual payment due May 1st, 1890, and on the 2d day of August, 1890 (the rent remaining unpaid), the plaintiff re-entered and took possession of the demised property under a provision of the lease which authorized the lessor to enter and expel the lessee on faihng to pay rent. The entry also was, as may be inferred, with the consent and, indeed, at the suggestion of the officers of the lessee. This action was brought on the bond against the lessee and the sureties to recover as damages the rent which fell due May 1, 1890, and the proportionate rent from that date up to August 2nd, 1890, and taxes which had been assessed against the property during its occupation by the lessee, which it had failed to pay. The defendant Claffy alone appeared and defended the action. His sole defense to the general claim is that the lease was ultra vires, illegal and void, because (as is conceded) it was made without legis- lative sanction. If the court is compelled to accede to this contention by force of controlling authority, or from considerations of public poUcy which overbear in the particular case the rules of ordinary- justice, it will be our duty so to declare and to say that, although the United Gas, Fuel and Light Company received and enjoyed the undisturbed possession of the demised property under the lease until the re-entry, and accepted and appropriated the benefit of the con- tract, nevertheless, when called upon to pay the rent which accrued • during its occupation, it may defend itself on the ground that the plaintiff, in making the lease, exceeded its power and escape the per- formance of its obligation, and, further, that the defendant Claffy may, for a like reason, avoid his guaranty. The modern and reasonable doctrine that contracts into which corporations may lawfully enter are such only as are expressly or im- pliedly authorized by their charters, is nevertheless frequently dis- regarded in practice, and when this is done and a corporation enters into a contract beyond its chartered powers, the question arises which has been the subject of debate and of much difference of opinion, how shall such a contract be treated by the courts, and whether the con- tract can create any rights as between the parties which the courts will enforce. There are some propositions pertaining to the general SECT. 1.] BATH GAS LIGHT CO. V. CLAFFY. 319 subject which are beyond dispute. One is, that a contract by a cor- poration to do an immoral thing, or for any immoral purpose, or, to use a convenient expression, a contract malum in se, is void and gives no right of action. The doctrine, however, is not peculiar to con- tracts of corporations. It has its root in the universal principle that persons shall not stipulate for iniquity. Another principle of general recognition is that a corporation cannot enter into or bind itself by a contract which is expressly prohibited by its charter or by statute, and in the application of this principle it is immaterial that the con- tract, except for the prohibition, would be lawful. No one is per- mitted to justify an act which the legislature within its constitutional power has declared shall not be performed. The series of cases in this state, known as the Utica insurance cases, afford an apt illus- tration. It was held that the restraining acts which prohibited the exercise of banking powers, including the discount of paper, by other than banking corporations, rendered void securities taken on such discoimt by corporations not possessing banking powers, and this, although the object of the restraining laws seems to have been the protection of the chartered banks in the monopoly of banking. But ia not infrequent instances corporations enter into unauthorized contracts, which are neither mala in se nor mala prohibita, or when the only prohibition or restriction is imphed from the grant of specified powers. It is this class of cases which open the field of controversy. Is such a contract performed by one party, but not performed by the other, void as between them to all intents and purposes, so that no recovery can be had under it against the party who has received the consideration for his promise, but neglects or refuses to perform it, or is it so tainted with illegaUty that the courts must refuse to recog- nize it under any circumstances or enforce its obligation, whether as to past or future transactions ? There are certain English cases which are relied upon by those who maintain the strict view that contracts of corporations M^ira vires are under no circumstances enforceable in the courts. The principal of these cases are The East Anglian Railways Co. v. The Eastern Counties Railway Co. (11 C. B. 775) ; Macgregor v. The Dover & Deal Railway Co. (18 Ad. & El. 618), and The Ashbury Railway Carriage Co., Limited, v. Riche (L. R. [7 Eng. & Ir. App.] 653). Without questioning these cases, it is quite apparent that they stand in justice upon a very different basis from the action in this case, which is brought by * the corporation to enforce a contract, the enforcement of which will indemnify the plaintifif and its stockholders for the deprivation of the use of the property of the corporation, during its possession by the defendants,: under the unauthorized lease. The Supreme Court of the United States seems to be committed to a construction of the doctrine of '■ This does not distinguish the American cases hereinbefore reported or cited. The defense does not depend upon whether the corporation is plaintiff or defendant. 320 ULTRA VIRES — CONTRACTS. [CHAP. 11. ultra vires which would sustain the defense in the case now before us. Several cases have arisen in that court upon leases of railroads made without legislative sanction, in which it has been held that such leases are void as between the parties, and that no action can be maintained thereon to recover the rent reserved, even during the occupation by the lessee under the lease. We concede that a railroad or other corporation invested with powers in the exercise of which the public have an interest, and em- powered by reason of its quasi pubhc character to do acts and exercise privileges peculiar and exceptional to enable it to discharge its pubhc duties, cannot, as against the pubhc, abdicate its functions or absolve itself from the performance of such duties through an unauthorized transfer of its property and franchises to another body or corporation. ,We have so held in the case of Abbott v. The Johnstown, etc., Rail- road Co. (80 N. Y. 27), where it was decided that a railroad corpora- tion which, without legal sanction, had leased its road, was not thereby exempted from liability as carrier to a passenger injured by negligence during the operation of the road under the lease. There are obvious reasons of propriety and public pohcy, the pre- vention of monopohes, among others, aside from the mere question of capacity under their charters, which enforce the now well-settled doctrine, that leases by such qvusi public corporations, to be valid and effectual, must be authorized by statute. But where, as in the present case, such an unauthorized lease has been made, and the lessee has received and enjoyed the possession of the property under the lease, is there any public pohcy which requires that the lessee should be permitted to escape the obligation imposed by the contract to pay the rent reserved during the enjoyment of the property? It is doubtless true, as has been suggested, that the corporation in such cases cannot, without the consent of the state, change its obUgations to the state or the pubhc, and discharge itself from its public duties. But the law affords ample remedy for the usurpation by corporations of un- authorized powers, through proceedings by injunction or for the for- ' feiture of their charters. If a lease by a corporation, made in excess of its powers and without legislative sanction, is illegal in the ordinary and proper sense of the term, it may be properly conceded that no action could be maintained upon it. The lessee, when sued for the rent, could set up the illegality of the contract, and the defense would prevail, however inequitable the defense might be. But the term "illegal", which is frequently used to describe a contract made by a corporation in excess of its corporate powers, in most cases means simply that the contract is unauthorized, or one which the corpora- tion had no legal capacity to make. Such a contract may be illegal in the true and proper sense, but it may also be one involving no moral turpitude and offending against no express statute. The in- exact and misleading use of the word "illegal", as appUed to contracts SECT. 1.] BATH GAS LIGHT CO. V. CLAFFT. 321 of corporations, ultra vires only, has been frequently alluded to. (COMSTOCK, C. J., Bissell v. M. S. Railroad Co., 22 N. Y. 268 ; Archi- bald, J., Riche V. Ashbury Railway Carriage Co.* L. R. [9 Exch.] 293 ; Lord Cairns, S. C. on appeal, L. R. [7 Eng. & Ir. App.] 672.) The lease now in question was not in any true sense of the word illegal. It was undoubtedly void as against the state. The parties to the lease assumed it to be valid. It was contemplated, as the provisions of the lease show, that the lessee would continue and extend the business before carried on by the plaintiff, and it is not suggested that it did not, during its occupation, discharge all the obhgations to the pubKc which rested upon the plaintiff. The state has not inter- vened, and the possession of the property has now been restored to its original proprietors. The contract has been terminated as to the future, and all that remains undone is the pajonent by the lessee of the unpaid rent. We think the demands of pubHc poUcy are fully satisfied by holding that, as to the public, the lease was void, but that, as between the parties, so long as the occupation under the lease continued, the lessee was bound to pay the rent, and that its recovery may be enforced by action on the covenant. Public policy is promoted by the discouragement of fraud and the maintenance of the obligation of contracts, and to permit a lessee of a corporation to escape the payment of rent by pleading ^ the incapacity of the cor- > The only justification for the reception of a plea of ultra vires by an individual sued Tipon a contract with a corporation is that the obligation is not mutual. Whitney Anns Co. v. Barlow, 63 N. Y. 62. Performance by the corporation cures the lack of mutuality. Bowman Dairy Co. v. Mooney, 41 Mo. App. 665. But the contract, while performed by the plaintiff, is still executory as to the de- fendant. And the oases agree that courts ought not, in general, to lend their aid in enforcing executory contracts. See note 1, page 293, ante. Are there any excep- tions? If so, the executory obligation will be enforced simply because the court will not tolerate or listen to the plea of ultra vires under the circumstances. Thus in Denver Fire Ins. Co. v. McClelland, 9 Colo. 11, under circumstances analogous to those in the instant case, the court holds a plea of ultra vires "an unconscionable defense which may not be set up." In Camden &c. R. R. Co. v. Mays Landing &o. R. R. Co., 48 N. J. L. 530, Van Stckbl, J. said: "The law recognizes the obligation; it precludes or estops the attempt to evade it. Apply to it what legal phrase you may, the under- lying principle is that the corporation caimot set up its own infirmity when it is un- conscionable to do so. The law forbids the defense on account of the flagrant injustice which would otherwise be done. The question of corporate power is not enter- tained. . . . There can be no dissent from the assertion that good faith and honest dealing unite in forbidding that the defense here set up shall be successfully inter- posed." Held that the "estoppel" to plead ultra vires arises where the contract has been ' executed on the one side, and the party performing cannot, upon rescission, te restored to his former status. Ibid. So in Mutual Life Ins. Co. v. Stephens, 214 N. Y. 488, a corporate tenant, under a lease with option of purchase, was not denied iSpecific performance of the option although the purchase was ultra vires. Miller, J. said : "It has been so far executed that it is impossible to restore the parties to their -original situation. Improvements have been made on the faith of the agree- ment. . . . They [defendants] should not now be permitted to plead its ultra vires acti to avoid performing their part of the agreement." Cf. equitable doctrine of "part performance" of oral contracts for the sale of lands, as and when taking the contract out of the Statute of Frauds. See also note 1, page 326, infra. In Harris v. Independence Gas Co., 76 Kan. 750, Mason, J. said : In many juris- 322 ULTRA VIRES — CONTRACTS. [CHAP. II. poration to make the lease, although he has had the undisturbed en- joyment of the property, would be, we think, most meqmtable and unjust. It has been suggested, to avoid the apparent mjustice which would result from holding that there could be no recovery on the contract for past-due rent, that there might be a remedy on an im- plied contract to pay the value of the use of the property. But if the express contract was illegal in a proper sense, and the parties to the lease were guilty of a pubUc wrong, so as to preclude a court of equity to entertain jurisdiction on the apphcation of a lessor to be relieved from the lease and to be restored to the possession of the- leased property, as was held in the case of The St^Louis V- & T H - Raihoad Co. v. Terre Haute & I. Railroad Co. (145 U. S. 393), then surely it would be a mere evasion and would be inconsistent with legal principles for the court to imply a contract from the occupation under the illegal lease to relieve the wrongdoer from the dilemma into which he had voluntarily placed himself. We think the rule which should be applied is that the lessee is bound by the contract so long as he remains in possession. ' It is unnecessary now to determine whether a lessee under an ultra vires lease may reUeve himself from liability in the future by abandoning the possession and restoring, or offering to restore, it to +v»p Ipssor The courts in this state from an early day, commencing as far back as the Utica Insurance cases, have sought to regulate and restrict the defense of ultra vires so as to make it consistent with the obUga- tions of justice. (Utica Ins. Co. v. Scott, 19 John. 1 ; Curtis v. Leavitt, 15 N. Y. 9 ; Bissell v. M. S. Railroad Co., 22 id., 260, Op. CoMSTOCK, C. J. ; Parish v. Wheeler, id., 495 ; Whitney Arms Co. v. Barlow, 63 id., 62 ; Pratt v. Short, 79 id., 437 ; Woodruff v. Erie Rail- way Co., 93 id., 609; Starin v. Edson, 112 id., 206.) .The case of Woodruff V. Erie Railway (supra) is very much in point in the present dictions, "the courts concede that a corporation has no power to make a contract. ' except such as is conferred by its charter, expressly or by necessary implication. But they hold that as it must have some discretion in the manner of carrying out the purposes of its creation — some freedom of action — it is amenable to the rules of conduct as a natural person, and may estop itself to question the validity of an agree- ment it has assumed to make, or may acquire the right to invoke a similar estoppel in its own behalf. Where this theory is accepted recovery may be had upon a con- tract which is in fact void, simply because its validity cannot be put in issue. . . . These cases have been criticised for the use they make of the word 'estoppel' as de- scriptive of the principle upon which they are based. It is argued that as a corporation must know the terms of its own charter, and as one dealing with it is charged with ' like knowledge, neither party to an ultra vires contract can be misled in that respect, and therefore there must always be lacking an essential element of what could with technical accuracy be called estoppel. This, however, is a mere question of terminol- ogy. The requirement that one shall be consistent in conduct — shall not occupy contradictory positions — shall not retain the advantages of a transaction and reject its burdens — is often spoken of as a form of estoppel. The term is convenient, and,, if inaccurate, is not misleading. This rule of estoppel affords a good working hypothesis- to accomplish just results." SECT. 1.] Hi REMINGTON & SON PULP AND PAPER CO. V. CASWELL. 323 controversy. It was there held that the lessee of a railroad could not resist the payment of rent which accrued during its occupation under the lease on the ground that the lessor's title was derived under an ultra vires transaction. Finding no error in the record the judgment should be affirmed. Vann, J. (dissenting) .1 H. REMINGTON & SON PULP AND PAPER CO. v. CASWELL." 126 App. Div. (N. Y.) 142. 1908. Plaintiff and The Watertown Paper Co. are domestic corporations, occupying the same oflBce and their clerical business being transacted by the same clerks. Two sets of books were used, however, and their corporate entities and property rights maintained separately, notwithstanding they had the same directors and substantially the same officers. Plaintiff manufactured wood pulp and sold its output to The Watertown Paper Co. The latter became insolvent in October 1905, owing the plaintiff over $50,000 and the defendant, the Aldrich Paper Co., on notes over $10,000 and also about $1000 on open account, and the defendant Caswell, the treasurer of the Aldrich Co. $500 on notes endorsed by plaintiff. October 27, 1905, the directors of the plaintiff adopted a resolution authorizing the company to "borrow for the purposes of its business," $11,500 on its notes. Notes of the plaintiff aggregating that amount were then executed and deUvered together with certain collateral, to Caswell, who paid the Aldrich Co. its obligations against the Watertown Co. and satisfied his own. Both Caswell and his com- pany knew at the time that the Watertown Co. was insolvent. No consideration moved to the plaintiff. This action is to compel the surrender and cancellation of the notes and the re-transfer of the collateral therefor to the plaintiff. In November 1905, before the institution of this suit, one John. B. Taylor, purchased all the shares in the plaintiff company at fifty-one cents on the dollar and the shares of the Watertown Co. were trans- ferred to him without any additional pajnnent. All of these shares were transferred to him, except eight, four of which were transferred to E. R. Brown and a like number to G. H. Babcock, at the direction and for the benefit of Taylor to enable him to reorganize the direc- torate of the two companies, which he did. Taylor understood fully the indebtedness to Caswell on these notes and the transaction ' Dissenting opinion omitted. " Statement of facts rewritten from the opinion ; portions of latter omitted. 324 ULTRA VIR?S — CONTRACTS. [CHAP. II. whereby the Aldrich Company had been paid the indebtedness which it held against the paper company. In the agreement which he made whereby he acquired the stock, these notes were taken into con- sideration and in estimating the habilities of the company he com- puted these obligations. The property all through the negotiations was unvaryingly estimated to be worth $150,000, and its value in the purchase by Taylor was ascertained by deducting from that sum the amount of its debts, which included those due to Caswell, and apparently the claim against the paper company was not appraised at all. Several of the stockholders of the plaintiff did not know of the transaction with Caswell at the time it was completed, but all of them were cognizant of the method adopted by Taylor for determining the value of the property and fixing the percentage aforesaid paid to them fpr their shares. On tiie 16th of November, 1905 a proceeding was commenced in the Supreme Court for the voluntary dissolution of the paper com- pany. The petition, verified by Brown and Babcock, who, with Taylor, composed the directorate of the company, contained a sched- ule of the liabilities of the company and which included the indebted- ness to the plaintiff of $11,500, by reason of the payment of its notes to the defendants by money received from Caswell. A temporary receiver was appointed in that proceeding and early in December in involuntary bankruptcy proceedings a trustee was appointed. Taylor, as treasurer of the plaintiff, presented and filed with the referee in bankruptcy a verified claim of its indebtedness against that company which included the account of $11,500 by reason of the Caswell notes. The plaintiff concedes that it cannot recover against Caswell, for it was contingently liable to pay the obligations which he surrendered. Spring, J. : We have, therefore, a suit in equity by the plaintiff, a corporation whose property is in effect all owned by Taylor, re- pudiating a transaction the benefits of which have already accrued to " him and the nature of which he fully comprehended when he acquired the stock. I assume if Edward Remington had been the sole stock- holder of the plaintiff at the time of the transaction with Caswell he cou|d not thereafter use the corporate name in an action for its disaffirmance. There is no sanctity hedged about a corporation. If it resorts to a court of equity it must appear that justice demands the relief which it seeks. The stockholders of a corporation may fatify and affirm the unauthorized acts of its directors and officers,' and when they do so their adoption of these acts is effective to bind the corporation, unless they offend against the public or the rights of creditors are impaired. (Kent v. Quicksilver Mining Co., 78 N. Y. ISO', 185 et seq.; Skinner v. Smith, 134 id., 240, 249 ; Vought « E B & L. Assn., 172 id. 508, 517 ; Eastern Building & Loan Assn v SECT. 1.] H. REMINGTON & SON PULP AND PAPER CO. V. CASWELL. 325 Williamson, 189 U. S. 122, 128 ; Bath Gas Light Co. v. Claffy, 151 N. Y. 24.) The general principle is well stated in 78 New York (supra), at page 185 : "In the application of the doctrine of idtra vires, it is to be borne in mind that it has two phases : one where the pubhc is concerned ; one where the question is between the corporate body and the stock- holders in it, or between it and its stockholders, and third parties dealing with it and through it with them. When the public is con- cerned to restrain a corporation within the limit of the power given to it by its charter, an assent by the stockholders to the use of im- authorized power by the corporate body will be of no avail. When it is a question of the right of a stockholder to restrain the corporate body within its express or incidental powers, the stockholder may in many cases be denied, on the groimd of his express assent or his intelhgent though tacit consent to the corporate action. If there be a departure from statutory direction, which is to be considered merely a breach of trust to be restrained by a stockholder, it is per- tinent to consider what has been his conduct in regard thereto. A corporation may do acts which affect the pubhc, to Jtst^ harm, .inas- much as they are per se illegal or are malum prohibitum. Then no assent of stockholders can vahdate them. It may do acts not thus iUegal, though there is want of power to do them, which affect only the interest of the stockholders. They may be made good by the assent of the stockholders, so that strangers to the stockholders dealing in good faith with the corporation will be protected in a reliance upon those acts." It is not, therefore, very important whether the original transaction with Caswell was ultra vires. The interposition of that doctrine will not be permitted to enable a stockholder to disavow a transaction which he has affirmed, or when it will operate imjustly. (Whitney Arms Co. v. Barlow, 63 N. Y. 62, 69 et seq.) When Taylor purchased the stock of these two corporations the contract had been fuUy executed. The defendants had surrendered their notes. The transactions had been entered upon the books of the various companies. If any benefit is to inure to any one by re- quiring the surrender of these bonds and the cancellation of the notes, Taylor will be the sole beneficiary. His interest cannot be obscvu'ed because the corporation is the nominal plaintiff. He has been once benefited by this transaction and ought not to be twice paid. The principle which should obtain is akin to that prevailing which estops a grantee to impeach the validity of a mortgage, the pajanent of which he has assumed as part of the purchase price of land. (Hartley v. Harrison, 24 N. Y. 170; Freeman v. Auld,i 44 ' In this, a foreclosure suit, the defendant, a grantee of the mortgagor, set up that the plaintiff, the mortgagee, had not actually advanced all the money named in the mortgage to the mortgagor. Held it was none of the defenda,nt's business, as he had 326 ULTRA VIRES — CONTRACTS. [CHAP. 11. id., 50 ; Parkinson v. Sherman, 74 id., 88 ; Cottle v. Coitnty of Erie, 57 App. Div. 443, 449; affd., 173 N. Y. 591.) It is true that ordinarily whatever right of action the transferrer possesses passes to the transferee. In this instance the corporate entity remains unchanged and Taylor, as already stated, ratified the transaction out of which the alleged cause of action arose. The stockholders who transferred their stock to Taylor could dis- avow or ratify the deal with Caswell. If they confirmed it Taylor could not override their approval. When they dealt with Taylor they permitted the notes of Caswell to be treated as obKgations of the plaintiff and the sale to Taylor was in confirmation of this in- debtedness. This acquiescence on their part with the knowledge and approval of Taylor should forever set at rest his right to im- peach the transaction. After all these stockholders had deHberately ratified the trans- action, originally imauthorized though it was, they should not be permitted to use the corporate name to repudiate it. Taylor is in no better situation than they were. In fact his equities are not on a parity with those of his transferrers for he has been allowed by them the full benefit of this indebtedness as already shown. The judgment should be affirmed, with costs.^ been allowed to deduct the full amount named in the mortgage from the purchase pnce he had agreed to pay. "The purchaser taking title subject to it [the mortgage] IB estopped from questioning its validity." See also Horton v. Davis, 26 N. Y. 495. ("Defendants as purchasers were es- topped from denying the validity of the mortgage. They could not purchase the vessel subject to the mortgage for a triffing sum and then turn round and treat the mortgage as a nullity. ) The same result was reached in Warwick v. Dawes, 26 N. J. Eq. 548 The court did not employ -the term "estoppel," but held that equitable principles "preclude Mie appellee from maintaining successfully so unfair a position." Cf. note 1, page 321, ante. ^J ^J^'^' Camden Safe Deposit &c. Co. y>. Citizens &c. Storage Co., 71 N J Eq 221. (Foreclosure. The Receiver of a corporate mortgagor had sold the premises to defendant subject to complainant's mortgage. Defense that the mortgage was u^^raMves and void, or if not wholly void, was a vaUd obligation only to the extent of the amount actually received for the bonds it secured. The Court of Chancery held these defenses were not open to defendant who appealed. The Court of Errors ninr.1;r° / ^™«4; ^^yi°g; "It is equally apparent that the Penn Iron Works Co. mortl Ti?^ ' f^^""'^^'' ^^ purchasing the premises subject to the compMnanfs mortgage got them for a sum less, by just the amount of the mortgage, than it would thTsum wMoh wo^nn ^^ been made free from its lien, and reduced'by thTs amount tors Tt^^ ^nJr^ otherwise have been raised to satisfy the debts due to the oredi- mult condemn it!^T ''°'^°^^*""- ^''^ '"^^^-^ °' -<=•> ^ ''I-- - it now, sets up SECT. 1.] MCCAKTER V. FIREMEn's INS. CO. 327 McCARTER, ATTORNEY GENERAL v. FIREMEN'S INSURANCE COMPANY, ET AL.i 74 N. J. Eq. 372. 1909. Appeal from a decree dismissing an information, filed by the attorney-general against 8 domestic and 113 foreign fire insurance companies, praying for a decree adjudging a certain written agree- ment made by defendants to be void as an ultra vires act injurious ■to the public, and that the said companies be enjoined from continu- ing to act under such agreement. The agreement provided inter alia that the premium rates to be ■charged by the constituent companies shall be fixed by a central association through an executive committee of five of its members, such central association being composed of a single representative of each constituent company, and such executive committee including uniformly one member representing all of the domestic companies; second, that no member of the exchange shall write policies at any other rate than that fixed by the exchange. The information charged that this contract rendered it practically impossible to obtain fire insurance within the covered territory save from the companies that had subscribed to such contract, and at the premium rates ^xed in accordance with its terms, and that the rates so fixed are sixty per cent, higher than the rates that prevailed in the same territory prior to the making of this contract and that now prevail in the immediately adjacent territory not covered by the contract. The relief prayed by the information was that the de- fendants be enjoined from continuing or doing any act under said contract that tended to fix the rates to be charged for fire insurance ■or to prescribe the persons through whom insurance may be placed or the mode of payment therefor. A mass of testimony substantiating on the one hand the averments of the information and justifying on the other hand the propriety of the rates fixed and the methods employed by the exchange was taken and the case thus made brought to final hearing before the vice- chancellor, who advised that the information be dismissed, not be- cause its charges and averments had not been proven, but because, assuming that they had been proved, the contract in question, while one that a court of equity would not aid a party to such contract in enforcing against another party to it, was not one that a court of equity, at the instance of the state, would restrain the defendants from entering into or continuing to the pubHc injury. Precisely 1 Facta restated ; portions of opinion omitted. 328 ULTRA VIBES — CONTRACTS. [CHAP. II. what was decided is thus abstracted in the head-notes to the vice- chancellor's opinion : " 1. The common law does not treat agree- ments in restraint of trade as being illegal in the ordinary sense of the word, but merely as being unenforceable. 2. In the absence ' of a statute authorizing it, the attorney-general may not maintain a suit to enjoin insurers against carrying out an agreement regulating rates, though against public policy, as in restraint of trade, and the fact that the insurers are corporations makes no difference." Gakrison, J. The learned Vice-Chancellor, who advised that the information filed by the attorney-general be dismissed on the ground that the court of chancery could not give rehef in such a suit, said at the conclusion of his opinion : "If those corporations were pubhc or quasi-public bodies, and if the attorney-general were here asking to enjoin them from doing ultra vires acts to the public injury as in Attorney-General v. Central Railroad Co., 50 N. J. Eq. (5 Dick.) 52, the case would be different." We agree with the learned Vice-Chancellor as to the class of cor- porations and of corporate acts to which the rule of Attorney-General V. Central Railroad Co., applies, but we do not agree with him that the defendants are not within such class. The pertinent language of Chancellor McGill in Attorney-General v. Central Railroad Co., is : "Where a corporate excess of power tends to the pubhc injury or to defeat pubhc pohcy, it may be restrained in equity at the suit of the attorney-general." . . . In Attorney-General v. Delaware and Bound Brook Railroad Co., 27 N. J. Eq. (12 C. E. Gr.) 631, Mr. Justice Dixon, speaking for this court, said : "In equity as in the law court the attorney-general has the right in cases where the property of the sovereign or the interests of the pubhc are directly concerned to institute suit by what may be called civil information for their protection." Professor Pomeroy (section 1093) states the rule thus : "When the managing body are doing or about to do an ultra vires act of such a nature as to produce pubhc mischief, the attorney-general, as the representative of the people and of the government, may maintain an equitable suit for preventative rehef." The rule illustrated by all of those cases and the one that we should adopt, if we have not aheady done so, is that if a corporation, engaged in a business that is affected with a pubhc interest, contracts to enter upon a hne of conduct in respect to such business that tends to affect such public interest injuriously and is contrary to pubhc pohcy, such contract IS wZtm vires such corporation, and may be restrained in eqmty at the suit of the attorney-general without regard to whether or not actual mjury has resulted to the pubhc.i The expression Gal l"co.: 1^9t^2:6.'"T&^rs tL?:? ''' ^'^ ''P '^^''•-° ^ "^^^^^^ SECT. 1.] MoCARTER V. FIREMEN's INS. CO. 329 "corporation affected with a public interest" is to be preferred to the term "quasi-public corporation" as tending, in some measure at least to characterize the class of corporations indicated, whereas the term "gwasi-public" is characterized only by its unmeaning vagueness. In the discussion, and still more in the application of this rule, it will, of course, be necessary to amplify the expression "affected with a public interest" to the extent of stating just what is meant by that term, and also to discriminate between acts that are ultra vires a corporation and those that are merely illegal, and also to make clear what "tends" to pubhc injury, for it is upon the con- currence of these three factors that the applicability of the rule in question depends. Upon this branch of the present inquiry, therefore, the pertinent questions are : First. Are the defendants engaged in a business affected with a public interest? Second. Is the contract into which they have entered one that is ^Itra vires such corporations ? and Third. Does such contract tend to affect such public interest in- juriously? [The court finds that the business of defendants is in fact one that directly affects the interest of the public, and that in point of law the l)usiness of the defendants is affected with a public interest.] Second. We have next, therefore, to consider whether or not the contract by which the defendants have agreed that their several corporations shall be bound is ultra vires such corporations. In this Tegard, the eight domestic companies stand in one respect in a posi- tion different from the hundred and odd foreign defendants. These Central R. R. Co., 60 N. J. Eq. 52; Attorney-General ». Railroad Companies, 35 "Wis. 524. ("The equitable jurisdiction precludes the objection that there is an ade- ' quate remedy at law. It admits the remedy at law, but administers its own remedy in preference, when the state seeks it in preference. It seems to proceed on the pre- sumption that it may better serve the public interest to restrain a corporation, than to punish it by penal remedies or to forfeit its charter ; and that, in that view, *the proper officers of the state should have an election of remedies. And we may as well say in this connection, that the jurisdiction to entertain these informations is wholly independent of an adequate remedy at law ; and that, were that otherwise, we could not consider the informations in the nature of a guo warranto, pending in this coiirt against these defendants, as an adequate remedy at law, which could be a substitute for or bar to the injunctions asked. Judgments of ouster on those informations might not only be of far more grave consequence to the defendants, but might be far less beneficial to the state, and less accordant with its policy, and altogether less equitable and proper, than the injunctions sought to restrain the defendants from doing what is alleged to work a forfeiture of their charters.") The distinction is not between private and public (or quasi public) corporations but whether the ultra vires act complained of effects or tends to result in a public in- jury. If not, preventive relief at the suit of the state will be denied. Attomey- ■General ». Tudor Ice Co., 104 Mass. 239 ; Trust Co. of Georgia v. State, 109 Ga. 736. The right of a stockholder to prevent an vltra vires act is not thus qualified. It lias been hereinbefore considered in EUerman d. Chicago Junction Rys. &c. Co., onte, page 152. See also Book IV, Chap. 4, Sec. 7, infra. 330 ULTEA VIBES — CONTRACTS. [CHAP. II. domestic companies received their charters from this state in order that they might transact legitimately a business in which, as we have seen, the pubhc is interested. To this end all general provisions essential to the lawful government of corporations are deemed to-be written into their respective charters. Among these general provi- sions is that "the business of every corporation shall be ma,naged by its directors" either by force of the express mandate of section 12 of the General Corporation act of 1896 or because such is an imperative implication of the law of corporations. We cannot agree with the views of the respondents' counsel as expressed in their brief, viz., that "the provision that the company shall be managed by a board of directors is simply intended to show where the powers which may be exercised by the company shall as between the shareholders and those whp deal with the company, reside," or that "the provision in section 12 of the act of 1896 was not intended for the protection of the general public, and failure on the part of the directors to perform their duty in the management of the affairs of the company concerns only the shareholders and the policyholders." The statute says all that counsel say it means, but it also says more, and we take it that a statute means all that it says. We do not concede or believe that the sole object of section 12 was to inform stockholders of what they already know, viz., that the business of their corporation was to be managed by the officers selected by them for that purpose rather than by somebody else. Neither do we be- lieve that a corporation affected with a pubhc interest could insert m Its certificate of incorporation a frank avowal i that its business was not to be managed by its own directors, and then «successfully set up as against the state the argument now advanced in justifica- tion of the respondents' construction of the statute. Counsel con- fuses, It seems to us, the force to be given to the statute with the occasions upon which such force is to be given to it. Where the question cannot be raised the meaning of the statute is immaterial. It IS for instance, immaterial to the pubhc and to the state represent- ing the public whether the business of a company organized to manu- facture bicycles or to make wall paper is managed by its directors or by Its office boys.^ That is not the case here. These domestic ' Cf. Jackaon v. Hooper, ante, page 29 directorsTcontarJ''t^f'" ^^''^Iders to create, elect and mamtain "dummy" directors is contrary to law and unenforceable. Jackson v. Hooper su-wa r^h^ SECT. 1.] McCARTER V. FIKEMEN'S INS. CO. 331 companies were chartered to insure the property of citizens of this state under legitimate conditions. One of the most important and responsible duties that devolved upon the managers of these com- panies was, therefore, the fixing of the rates to be charged the citizens therefor. A contract by which the directors of such corporations in conclusive form abdicate their duty of management in this respect and turn it over to an aUen body is in direct violation of the words and meaning of the statute and is as typical an instance of an ultra vires act as can well be" imagined.' To do so in a given instance would be an illegal act, but the act of binding the corporation by contract to a settled pohcy of illegal acts is beyond the power of the corporation, i.e., is ultra vires. That this is no academic criticism appears clearly from the fact that the Central association erected by the contract by which, through a sub-committee of five, rates are fixed consists of but one representative of each constituent company. Hence in a body of one hundred and twenty-one the New Jersey companies have but eight votes, and in the sub-committee they have but one vote to four cast by foreign corporations. It is inevitable, therefore, that the influences affecting such foreign corporations, the losses they may have sustained, the expenses they have incurred, the salaries they design to pay, the dividends they desire to declare, will all be reflected and asserted in the fixing of the rates to be charged for insurance to the citizens of this state. These rates, and these only, the New Jersey companies by the contract in question bind themselves to charge, although such rates may be greatly in excess of anything required or justified by local conditions or by the business of such domestic companies if managed by their own directors. Pro tanto this amounts to a merger of corporate management accomplished by means other than those sanctioned by law.^ It also places it out of the power of the domestic companies to manage an important ' feature of their business with respect to the public interest with.which it is affected. While these considerations apply directly to the-New Jersey companies only, they apply indirectly to the foreign companies also which have used their privilege to do business in this state to render feasible a contract scheme that is ultra vires the New Jersey companies. Foreign corporations are permitted to do business in states other than that of their incorporation by comity, not of right. It is fundamental that such corporations have no other or greater powers than do corporations organized under the laws of such state. It would be, therefore, a total subversion of law and reason to hold that a foreign corporation had in this state the power to make with corporations of this state a contract affecting a matter of pubhc interest that such corporations of this state had not themselves the power to make. Comity does not extend to a permission to combine • Cf. Whittendon Mills ». Upton, ante, page 220. 'i See Book VI, Chap. 2, infra. 332 ULTRA VIRES — CONTRACTS. [CHAP. 11. with domestic corporations in a way that tends to public injury.^ A court of equity would be short-sighted indeed that did not see this, and short-armed if it could not reach out to prevent it. We have, therefore, no hesitation in concluding that the ultra vires quality of the corporate contract by which the Newark Fire Insurance Exchange was brought into existence is attributable to all of the corporations that subscribed to such contract, the foreign as well as the domestic. It is said that a com-t of equity will not take notice of the ultra vires nature of the contract into which these defendants have entered, for the reason that such contract being in restraint of trade is one that they cannot be forced to observe and this had conclusive weight with the court below. For present purposes the plenary answer is that the test of ultra vires is the power of a corporation to make a contract, not its power to break it. Third. Upon the question whether the contract that resulted from these ultra vires acts tends to affect the public interest inju- riously, little remains to be said, and that Httle can be better said under the second branch of this appeal, which we shall now proceed to consider. Upon the first branch our conclusion is that because the business of the defendants is affected with a pubKc interest a court of equity should restrain their ultra vires acts at the instance of the attorney-, general, if such acts tend to pubUc injury, without regard to whether public injury had in fact, resulted, and that the contract in question does so tend. Under the second branch of the case we shall assume that the business of the defendants is not, in the general sense, affected with a public interest and that the attorney-general must show that actual public injury has resulted from an unlawful combination in restraint of trade and is therefore ultra vires the contracting companies. As this was the point of view from which the learned vice-chancellor regarded the case in advising that the information be dismissed, it is necessary at this stage to determine whether the reasoning that led the court below to apply to the attorney-general, seeking to avoid a ' contract repugnant to pubUc policy, the same rule that obtains in that court when a party to such contract is seeking to enforce it, is sound. Upon this point the court below laid down two propositions — first, that the attorney-general could not maintain a suit to enjoin parties to an agreement regulating rates though against pubhc poUcy as in restraint of trade, and second, that the fact that the parties to such agreement were corporations made no difference. As to the first of these propositions, it is, perhaps, only necessary that we should withhold our assent, but as to the second, we must record our express dissent. ' See note 1, page 246, arOe. SECT. 1.] McCABTEK V. FIREMEN's INS. CO. 333 Before leaving the first of these propositions, however, we should say that the fault we find with the vice-chancellor's conclusion is not in the soundness of the rule of mere unenf orceabihty as applied to the class of cases in which it properly obtains, but in the extension of such rule to a subject not properly or at all within its purview, viz., the right of the state to preventive relief in aid of pubhc poHcy. There is something starthng, not to say appalhng, in the proposition that the state is to be met in its courts with a denial of its right to rehef upon the ground that the rule of non-intervention that is applied to the violators of such pubhc poUcy must also be apphed to the pubhc that is injured by such violation. The rule in question is itself an apphcation of the maxim in pari delicto, &c, and hence is in strict analogy with the judicial policy by force of which courts dechne to aid in the distribution of plundered property, but it is quite illogical to say to the man who has been despoiled, " Because we refused our aid to those who despoiled you, therefore we must dechne to aid you." Yet this or something very hke it is what we are asked to say. Laying aside, therefore, the rule apphcable to individuals who have entered into an agreement contrary to pubhc poUcy, in that it is in restraint of trade, and taking up a question that could by no possibil- ity be involved in or decided in such a case, viz., the corporate power to enter into or continue imder such an agreement, we perceive at once that such question hes entirely outside of the rule that was deemed in the court below conclusively to foreclose it. That such contracts are contrary to pubhc poUcy is admitted upon all sides, in fact, it is precisely because of their contravention of pubhc policy that the courts refuse to countenance them. In the creation of its corporations no state, I suppose, confers upon them in express terms the power to make contracts that violate its pubhc poUcy. Where such a power is not expressly given, it will certainly not be deemed by a court of equity to exist by imphcation. A contract that a corporation has neither the express nor the implied power to make is one that is beyond its power to make, i.e., ultra vires. The circumstance that a corporation makes such a contract, relying upon the non-intervention of the courts, does not clothe the, eorporib- tion with the needed power that it lacked to make such contract ; it merely shows the inducement to niake it, and how such violator of pubhc pohcy will, under such rule, be protected from pubhc redress by the very agreement by which the public is injiu-ed. The rule of mere unenforceabihty thus rehed upon makes, however, an excep- tion even as to the parties in pari delicto, which is thus stated by Ju<^ge Story: "In cases where the agreements or other transactian» are repudiated on account of their being against pubhc pohcy, the chr- cumstances that the rehef is asked by a party who is particeps criminis, is not in equity material. The reason is, that th^ public interest 334 ULTRA VIRES — CONTRACTS. [CHAP. 11. requires that relief should be given; and it is given to the public through the party." 1 Story Eq. § 298 : Cone v. Russell, 48 N. J. Eq. (3 Dick.) 217. , , '■ It would seem, therefore, that the rule enforced by the learned vice-chancellor applies to actions based on the repudiated contract, but not to those in which its repudiation may be assumed by the court, whether as fact or as fiction. The fiction of acting for the public by which relief is granted to a party in -pari delicto, must a fortiori apply to the public itself when actually acting in its own interests. The fundamental principle recognized by this Hne of cases is that one who has entered into a con- tract that contravenes public poUcy owes to the pubUc the continuous duty of withdrawing from such contract. A duty thus owing to the public is, upon famiUar principles, presumed by courts to be per- formed, and such presumption should be indulged in by the courts whenever necessary to give to the pubhc, acting through its official representative, the same standing that the actual performance of such duty gives to one in pari delicto to act for the public. It would be inconceivably absurd that the defendants, in rebuttal of this presumption, should be heard to say that because to their original violation of public poHcy they had superadded a violation of another public duty — they were immune from ordinary judicial control. Yet such is the state of our jurisprudence under the rule enunciated in the court below unless such presumption or legal fiction is invoked in aid of violated public poHcy. Spealdng for myself, the extension of the rule of nonenforceability, based as it is upon the inaxim in pari delicto, to the case of the state seeking to prevent public injury, seems to be without the slightest foundation in sound logic or justification in right reasoning. Be this as it may, the fact is that, if upon neither of these grounds preventive relief may be had by the state, no combination can be so hostile to the public interests or so flagrant in its defiance of public policy but that it may effectively 'shield itself from such interference on behalf of the public by the * simple device of casting its proposed violation of public policy in the form of a contract for a self-imposed restraint of trade. I cannot believe that this is the actual state of our jurisprudence on this vitally important subject. Concludiiig, as we do, that the line of reasoning that limits the court . of chancery in aU cases involving contracts in restraint of trade to the ■ single policy of their non-enforcement is fundamentally at fault, and that the defendants have not by their violation of pubHc policy ■ effectually entrenched themselves outside of the pale of preventive law, it remains to be considered whether certain facts that were merely assumed in the court below, viz., that the contract in question is one that fixes rates and stifles competition and is detrimental to the public, are sustained by the testimony. If they are, and if injury has SECT. 1.] McCARTER V. FIREMEN'S INS. CO. 335 thereby resulted to the public, the duty of a court of equity to enjoin the defendants from continuing to act under such ultra vires contract is clear. [The court finds that the increase in price wrought by the combina- tion has not been justified ; that such increase works actual injury to the public ; that the contract is in restraint of trade, and repugnant to public poUcy, and that it is vmreasonable in that it transcends the legitimate purposes for which the defendants were created or licensed ; that the corporate acts by which such contract was entered into and such combination effected and its continuance perpetuated are ultra mres; and holds that the defendants should be enjoined from such continuance.] The result reached upon either branch of the present appeal is that the decree brought up by it should be reversed and the case remitted to the court of chancery to the end that an injunction may issue in accordance with the specific prayers of the information and the views herein expressed. SwAYZB, J. (dissenting). The contract is said, however, to be ultra vires because it amounts to a delegation by the board of directors of the right and duty to manage the affairs of the corporation. I think it is unnecessary to discuss the general question as to the extent to which the board of directors may delegate to others the execution of acts for the corpora- tion. Obviously, a very large portion of the acts of a corporation must necessarily be done by subordinate agents, and I tmderstand that the rule is that the duty of the directors is only 'to exercise a general supervision and direction of the affairs of the corporation. Morawetz Corp. § 536. This case does not amount to a delegation of authority at aU. It is merely an agreement by the constituent companies that they will not issue insurance in Newark at less than the rates esta;b- lished by the exchange. I know of no provision of law, nor is any pointed out in the opinion, which requires any one of these insurance companies to issue any insurance whatever in the city of Newark. As far as appears, all of them are at Uberty to decline risks in the terri- tory covered by the exchange. Certainly the foreign companies are under no legal obligation to issue insurance in that locality. If they are free to refuse to issue insurance at all, they must a fortiori be free to refuse to issue except at certain rates. By the agreement the constituent companies do not bind themselves to issue insurance policies at the rates fixed by the exchange, but merely not to issue them at any lower rates. The power of the directors to manage the afiairs of the company, no doubt, includes the determination of the question whether or not the company will issue any particular policy or assume any particular risks, or vdll do business in any particular 336 ULTRA VIBES — PROPERTY. [CHAP. II. place, and it is no abdication of power to decline the business except upon certain terms. It is rather an exercise of the power of general supervision and direction. It is no more an abdication or delegation of power to refuse to issue poUcies in Newark except at certain rates, than it would be to refuse to issue policies at all in San Francisco. Since the companies are free to dechne all risks, I do not see any logi- cal reasons why they may not agree in advance upon the rates at which they will accept the risks. In substance, what the insurance companies say is this: "The exchange will estabhsh rates;, if- we choose to do business in Newark at all, we will do business at those rates, but it is still open to the companies to accept or decline any particular poUcy." But for the respect which I entertain for my brethren, I should think it absurd to say that an agree- ment not to do, except upon certain conditions, what they are at hb- erty not to do at all, amounts to a merger of the companies. In fact, as the insurance business is conducted, the question of premium rates must necessarily be left to skilled underwriters familiar with the condi- tions in the particular locahty. ... It must be that companies have the right to agree upon the rate on such risks, and if they have the right to agree, they certainly have the right to agree to insure at. a rate to be fixed by a skilled underwriter, for a whole city. This is no delegation of tlae actual function of the directors, which is to make contracts, and not to determine rates. The agreement does not give to any one company any control over the assets and management of another. It merely estabhshes a convenient way by which uniform rates may be determined, leaving each company free to accept or dechne the risk as it chooses, and to manage its own affairs. Section 2. Property. KERFOOT V. FARMERS' AND MERCHANTS' BANK. 218 U. S. 281. 1910. Mr. Justice Hughes dehvered the opinion of the court. This action was brought in 1894, in the Circuit Court of Grundy County, State of Missouri, to set aside a deed of real property made-by James H. Kerfoot to the First National Bank of Trenton, Missouri, and also a deed by which that bank purported to convey the same property to the defendants Hervey Kerfoot, Alwilda Kerfoot and Lester R. Kerfoot, and for the recovery of possession. The plaintiffs in the action, which was brought shortly after the death of James H. Kerfoot, were Homer Hall, administrator of his estate, and Robert. SECT. 2.] KEEFOOT V. FAKMEES' AND MEECHANTS' BANK. 337 Earl Kerfoot, his infant grandson, who claimed to be his only heir at law and sued by Homer Hall as next friend. The petition contained two counts, one in equity, the other in ejectment. Upon the trial the Circuit Court found the issues for defendants and the judgment in their favor was affirmed by the Supreme Court of Missouri. 145 Missoiui, 418. On his coming of age Robert Earl Kerfoot sued out this writ of error. The plaintiff in error challenges the conveyance made by James H. Kerfoot to the bank, upon the ground that under § 5137 of the Revised Statutes of the United States, relating to national banks, the bank was without power to take the property, and hence that no title passed by the deed, but that it remained in the grantor and descended to the plaintiff in error as his heir at law. It appears that the deed, which was absolute in form, with warranty and expressing a substan- tial consideration, was executed in pursuance of an arrangement by which the title to the property was to be held in trust to be conveyed upon the direction of the grantor ; and the Supreme Court of Missouri decided that a trust was in fact declared by the grantor in favor of Hervey, Alwilda and Lester R. Kerfoot, to whom ran a quitclaim deed, which he prepared and forwarded to the bank to be signed and acknowledged by it and then returned to him. But while the purpose of this transaction was not one of those described in the statute for which a national bank may purchase and hold real estate, it does not follow that the deed was a nullity and that it failed to convey title to the property. In the absence of a clear expression of legislative intention to the contrary, a conveyance of real estate to a corporation for a purpose not authorized by its charter, is not void, but voidable, and the sover- eign alone can object. Neither the grantor nor his heirs nor third persons can impugn it upon the ground that the grantee has exceeded its powers. Smith v. Sheeley, 12 Wall. 358 ; National Bank v. Mat- thews, 98 U. S. 621 ; National Bank v. Whitney, 103 U. S. 99 ; Rey- nolds t)..Crawfordsville Bank, 112 U. S. 405; Fritts v. Palmer, 132 U. S. 282 ; Leazure v. Hillegas, 7 Serg. & R. (Pa.) 313. Thus, although the statute by clear implication forbids a national bank from making a loan upon real estate, the security is not void and it cannot be suc- cessfully assailed by the debtor or by subsequent mortgagees because the bank was without authority to take it ; and the disregard of the ' provisions of the act of Congress upon that subject only lays the bank open to proceedings by the Government for exercising powers not con- ferred by law. National Bank v. Matthews, supra; National Bank v. Whitney, supra; Swope v. LeffingweU, 105 U. S. 3. In National Bank v. Matthews, supra, viewing that case in this aspect, the court said : "The opinion of the Supreme Court of Missouri assumes that the loan was made upon real-estate security within the meaning of the 338 ' ULTRA VIEES — PROPEETT. [CHAP. II. statute, and their judgment is founded upon that view. These things render it proper to consider the case in that aspect. But, con- ceding them to be as claimed, the consequence insisted upon by no means necessarily foUows. The statute does not declare such a security void. It is silent upon the subject. If Congress so meant, it would have been easy to say so ; and it is hardly to be beheved that this would not have been done, instead of leaving the question to be settled by the uncertain result of litigation and judicial decision. Where usurious interest is contracted for, a forfeiture is prescribed and explicitly defined. ******* "Where a corporation is incompetent by its charter to take a title to real estate, a conveyance to it is not void, but only voidable, and the sovereign alone can object. It is vaUd until assailed in a direct proceeding instituted for that purpose. Leazure v. Hillegas, 7 Serg. & R. (Pa.) 313 ; Goundie v. Northampton Water Co., 7 Pa. St. 233 ; Hunyon v. Coster, 14 Pet. 122 ; The Banks v. Poitiaux, 3 Rand. (Va.) 136 ; Mclndoe v. The City of St. Louis, 10 Missouri, 575, 577. See also Gold Mining Co. v. National Bank, 96 U. S. 640." ^ This rule, while recognizing the authority of the Government to which the corporation is amenable, has the salutary effect of assuring the security of titles and of avoiding the injurious consequences which would otherwise result. In the present case a trust was declared and this trust should not be permitted to fail and the property to be diverted from those for whom it was intended, by treating the con- veyance to the bank as a nuUity, in the absence of a clear statement of legislative intent that it should be so regarded. The cases in this court, which are rehed upon by the plaintiff in error, are not applicable to the facts here presented and are in no way ' In the Matthews case, the court also said: "We cannot believe it was meant that stockholders, and perhaps depositors and other creditors, should be punished and the borrower rewarded, by giving success to this defense whenever/the offensive fact shall occur. The impending danger of a judgment of ouster and dissolution was, we think, the check, and none other contemplated by Congress. "That has been always the punishment prescribed for the wanton violation of a charter, and it may be made to follow whenever the proper public authority shall see fit to invoke its application. A private person cannot, directly or indirectly, usurp the function of the government." See also Lancaster ». Amsterdam Improvement Co., ante, page 239, and Long v. Georgia Pacific Ry. Co., ante, page 292. Cf. note 1, page 314, ante: also note 1, page 116, ante. If the ultra vires contract for the purchase of lands be wholly executory, specific performance will be denied. Kohlruss v. Zachery, 139 Ga. 625 ; Wilks v. Georgia Pacific Ry. Co., 79 Ala. 180 ; Case v. Kelly, 133 U. S. 21. Otherwise if so far executed that it is impossible to restore the parties to their original situation. Mutual Life Ins. Co. i. Stephens, 214 N. Y. 488. And see Harris v. Independence Gas Co., cited in note 1, page 393, ante. To the Kohlruss ease, supra, as reported in 46 L. R. A. (N. S.) 72, ia an exhaustive note entitled : "Right of private persons to contest the power of a corporation to take or hold property." SECT. 2.] HUBBARD V. WORCESTEE ART MUSEUM. 339 inconsistent with the doctrine to which we have referred. Mc- Cormick v. Market Bank, 165 U. S. 538 ; California Bank v. Kennedy, 167 U. S. 362 ; Concord First National Bank v. Hawkins, 174 U. S. 364. ... Assuming that the deed was accepted by the bank, it was effective to pass the legal title, and the plaintiff in error as heir at law of the grantor cannot question it. Judgment affirmed.^ HUBBARD V. WORCESTER ART MUSEUM. 194 Mass. 280 ; 9 L. R. A. (N. S.) 689. 1907. Knowlton, C. J. This is a petition brought by the heirs of Stephen SaUsbury, late of Worcester, deceased, for leave to file an information in the nature of a quo warranto against the respondent, under the R. L. c. 192, §§ 6-13. The Worcester Art Museum is a corporation, estabUshed under the provisions of the Pub. Sts. c. 115 (R. L. c. 125), "for the purpose," as set forth in its certificate of incorporation, "of founding an institution for the promotion of art and art education in said Worcester ; erecting and maintaining buildings for the preserva- tion and exhibition of works and objects of art ; making and exhibiting collections of such works, and providing instruction in the industrial, liberal and fine arts ; for holding real and personal estate in the f ur- theraHce of this purpose ; and for the holding and administering funds acquired by the corporation for these and kindred objects in accord- ance with the will of the donors. All of said property and funds of the corporation, however, are to be held solely in trust for the benefit of all the people of the city of Worcester." By the will of Mr. Salisbury ■this corporation is made his residuary legatee, and if the intention of the testator is carried out, it will receive, under the will, real and personal estate amounting in value to between $2,000,000, and $3,500,000. By the R. L. c. 125, § 8, such corporations are authorized to "hold real and personal estate to an amount not exceeding one mil- lion five hundred thousand-dollars." By the St. 1906, c. 312, enacted after the probate of the will, the right of this respondent to hold real and personal estate was enlarged to an amount not exceeding $5,000,000. The petitioners contend that, by reason of the limitation in the statute, the gift was void ; that, as heirs at law of the testator, their rights in this part of his estate became vested on the probate of the will ; that the St. 1906 is prospective in its operation, and does not affect the right of the respondent to hold property under this will, ' The state alone can question the right of foreign corporations to hold land con- trary to the provisions of a domestic statute. American Mortgage Co. v. Tennille, S7 Ga. 28. Lancaster v. Amsterdam Improvement Co., ante, page 239. 340 ULTRA VIRES — PROPERTY. [CHAP. II. and that, if it were construed as applying to property devised by this will, it would be unconstitutional and void. The statute under which the petition is brought has been considered in Goddard v. Smithett, 3 Gray, 116, in Hartnett v. Plumbers' Supply Association, 169 Mass. 229, and in other cases. We will assume in favor of the petitioners, without deciding, that if they were right in their view of the questions of substantive law involved, it would be available to give them the remedy which they seek. We come directly to the effect of the residuary clause in the will. The attack upon its validity may be considered from two points of view : first, in reference to the rights of testators, as against their heirs, to dispose of their property for charitable or other purposes ; secondly, in reference to the provisions of the law giving this kind of corporations a right to hold property to an amount not exceeding a certain sum. From the first point of view this gift is perfect and complete. Ex- cept for the protection of the statutory rights of a husband or wife, the power of a testator in this Commonwealth to dispose of his estate by a will is unhmited. There is nothing in our law to restrain one from giving free course to his charitable inclinations, up to the last moinent of his possession of a sound, disposing mind. Making chari- table gifts in this Commonwealth is not against public policy, and we have no legislation, such as has long existed in England and in New York and some of the other American States, putting obstacles in the way of such testamentary acts. The only ground of objection to this part of the will is not from the point of view of the testator or of his heirs, but on account of the provision of the statute regulating the rights of corporations as to the holding of property. We must, there- fore, determine the meaning and effect of this statute on which the petitioners rely. They contend that it is by implication an absolute prohibition against the holding, at any time, in any form, for any purpose, of a greater amount of property than that stated, and that any attempt of a corporation to hold more, or of any person to put more into the ownership of a corporation, is illegal and absolutely void. The respondent contends that this implied limitation of the right to hold is made on grounds of pubhc policy ; that it is a provision only in favor of the State, which the State may enforce or not, as it chooses ; that grants or devises in excess of the amounts stated are not void, but only voidable ; that third persons cannot question- the validity of such grants or devises, but that they are legal so long as the State leaves them undisturbed, and that the State may at any time, by a legislative act or in some other proper way, completely waive its right of enforcement. In interpreting the act the history of earlier kindred provisions, may be helpful. At common law, corporations were authorized ta SECT. 2.] HUBBARD V. WOltCESTEE AKT MUSEUM. . 341 acquire and hold both real and personal property without limit. In re McGraw's estate, 111 N. Y. 66, 84. "The creation of a corpo- ration, gives to it, amongst other powers, as incident to its existence and without any express grant of such powers, that of buying and selling." Bank v. Poitiaux, 3 Rand. 136. "A corporation has, from its nature, a right to purchase lands, though the charter con- tains no Ucense to that pm-pose." Leazure v. Hillegas, 7 S. & R. 313. See also Page v. Heineberg, 40 Vt. 81 ; Mallett v. Simpson, 94 N. C. 87, 41. Under the feudal system, when land was given to a corporation, the chief lords of whom the land was held, and the king as ultimate chief lord, lost their chances of escheat, and various other rights and incidents of military tenure. During the middle ages, the accumu- lation of land in the ecclesiastical corporations was so great as to be thought a national grievance. Hence the English mortmain acts, which go back for their origin to Magna Charta, St. 9 Hen. Ill . c. 36, and which have continued with various modifications to this day. See 7 Edw. I c. 2 ; 15 Rich. II. c. 5 ; Shelford on Mortmain, 2, 6, 8, 16, 25, 34, 39, 809, 812 ; Tyssen on Charitable Bequests, 2, 383. Under these acts the alienations were not void, so as to let in the grantors and their heirs ; but they merely operated as a forfeiture which gave a right to the mesne lord and the king to enter after due inquest. This right to enter was often waived by a license in mortmain. See citations above, and Tyssen on Charitable Bequests, 383 ; St. 7 «& 8 Will. III. c. 37. In form these licenses commonly authorized a holding of property "not exceeding" a certain value. In later years this authority some- times has been inserted in the charter, and this limited power of pur- chase has, it is said, been exceeded by almost all corporations. Shel- ford on Mortmain, 55. See also pages 10, 44, 49, 56, 891 ; Tyssen on Charitable Bequests, 393, 394, 396. Another act, St. 9 Geo. II. c. 36, which is usually called "The Mortmain Act" but is called by Tyssen the "Georgian Mortmain Act," is of a very different nature. One of its purposes, as declared in the preamble, is to avoid "improvident ahenations or dispositions made by languishing or dying persons, or by other persons, to uses called charitable uses, to take place after their deaths, to the dis- herison of their lawful heirs." Considered in reference to its purposes, it is not properly called a mortmain act. It applies only to gifts for charitable uses ; and imder it all such gifts, unless made as the statute allows, are absolutely void. We never have had any real mortmain acts in Massachusetts. The nearest approach to one was the Prov. St. 1754-5, c. 12 ; 3 Prov. Laws (State ed.) 778. This made deacons a corporation to take gifts for charitable purposes, limited the grants to such as would produce an income not exceeding three hundred pounds a year, and provided that they should be made by deed, three months before death, and 342 ULTRA VIRES — PROPERTY. [CHAP. II. that all bequests, devises or later grants should be void. This statute related only to gifts to deacons, and was repealed by St. 1785, c. 51 (February 20, 1786), which re-enacted a part of the law, but omitted the provision that gifts not authorized by the act should be void. Bartlet v. King, 12 Mass. 537, 545. See R. L. c. 37, § 1. The significance of this reference to English law and to our legis- lation is, first, that, except for this short period, we have never had in Massachusetts any legislation prohibiting charitable gifts to trustees or corporations, or providing that any kind of conveyances, devises or bequests to corporations shall be void. On the other hand, the policy of the Commonwealth, as expressed both by legislation and the decisions of its courts, has been exceedingly liberal, to testators and public charities. Sanderson v. White, 18 Pick. 328, 333, 334. American Academy v. Harvard CoUege, 12 Gray, 582, 595, 596. Saltonstall v. Sanders, 11 Allen, 446. Jackson v. Phillips, 14 AUen, 539, 550. Secondly, the impHed hmitations upon the power of cor- porations to hold property, which appear in numerous enactments, have been made, not in the interest of grantors or devisors or their heirs, but in the interest of the State, on considerations of pubUe pohcy. The general form of these limitations, which appears in the statute before us, and with sUght variations in' special charters, (a list of which, two hundred and seventy-four in number, granted in this State before 1850, has been fiu-nished us through the industry of counsel,) corresponds with the form of hcenses granted by the Crown in England under the old mortmain acts, and sometimes em- bodied in charters granted by Parliament. Under these English acts, grants or devises to a corporation to hold property without a license, or in excess of the amount Hcensed, were not void, but only voidable by the mesne lord or the king, upon entry, after inquest according to law. In view of the close relations between Massachusetts and the rnother country in early times, this justifies an argument, of con- siderable strength, that the imphed limitations in our statutes were mtended to have no greater force than the old mortmain acts of Eng- land, as distinguished from the Georgian mortmain act. We start with the inherent right, already referred to, of every cor- poration to take and hold property at common law, by virtue of the act of Its creation. This right is recognized in our statutes by im- ph cation, without express mention. E. L. c. 109, §§ 4-6 What force is to be given to the words, "may hold real and personal estate to an amount not exceeding one milhon five hundred thousand dol- lars f The respondent contends that their meaning is as if words were added as follows: "and beyond that amount it shall have no right as agamst the Commonwealth; and the Commonwealth may take proper measures, through action of the Attorney General or otherwise, to prevent or ..terminate such larger holding." According to the argument, a taking and holding by a corporation, above the SECT. 2.] HXJBBAKD V. WORCESTER ART MUSEUM. 343 prescribed amount, is under its inherent right. As between it and the State as the guardian of the public interest, a provision as to amount is made, which does not affect its right as to third persons. As to the general legality of the holding, except when the State chooses to enforce the law for its own benefit, the condition is similar to that resulting from a statutory provision which is merely directory. It is not very unhke the old law as to conveyances to aliens. Such con- veyances, whether by grant or devise, were good against every one but the State, and could be set aside only after office found. Fox v. Southack, 12 Mass. 143. Waugh v. Riley, 8 Met. 290. Judd v. Lawrence, 1 Gush. 531. Kershaw v. Kelsey, 100 Mass. 561. That this is the effect of such limitations in statutes of this kind where the title of the corporation is under a grant, as distinguished from a devise, seems to be the universal rule. Vidal v. Girard, 2 How. 127, 191. Runyan v. Coster, 14 Pet. 122. National Bank v. Matthews, 98 U. S. 621. Gowell v. Springs Co., 100 U. S. 55, 60. Jones V. Guaranty & Indemnity Co., 101 U. S. 622. National Bank V. Whitney, 103 U. S. 99. Fritts v. Palmer, 132 U. S. 282. Leazure V. Hillegas, 7 S. & R. 313. Chambers v. St. Louis, 29 Mo. 543. Bank V. Poitiaux, 3 Rand. (Va.) 136. Fayette Land Co. v. Louisville & Nashville Railroad, 93 Va. 274. Mallett v. Simpson, 94 N. C. 37. Gilbert v. Hole, 2 So. Dak. 164. Barrow v. Nashville & Charlotte Turnpike Co., 9 Humph. 304. Hough v. Cook County Land Co., 73 111. 23. Alexander v. ToUeston Club, 110 111. 65. Barnes v. Suddard, 117 111. 237. Hamsher v. Hamsher, 132 111. 273. Baker v. Neff, 73 Ind. 68, 70. This is a fair deduction from the decisions in this Com- monwealth. Heard v. Talbot, 7 Gray, 113. Commonwealth v. Wilder, 127 Mass. 1, 6. Davis v.' Old Colony Railroad, 131 Mass. 258, 273. West Springfield v. West Springfield Aqueduct Co., 167 Mass. 128. Slater Woollen Co. v. Lamb, 143 Mass. 420. Prescott National Bank v. Butler, 157 Mass. 548. Nantasket Beach Steam- boat Co. V. Shea, 182 Mass. 147. National Pemberton Bank v. Por- ter,' 125 Mass. 333. Atlas National Bank v. Savery, 127 Mass. 75. Bowditch V. New England Ins. Co., 141 Mass. 292. Chaffee v. Middlesex Railroad, 146 Mass. 224. The counsel for one of the petitioners says in his brief, "It is fully conceded at the outset that where a corporation takes and holds property by conveyance, or by executed gift inter vivos, contrary to its charter rights, no one but the State can complain. This is settled by a practically unbroken line of decisions in all the States," etc. But if the statute were a prohibition that renders the holding utterly void, and the taking also void, as is argued in the opinion in In re McGraw's estate. 111 N. Y. 66, anybody interested could take advantage of the violation of law, unless he was precluded by estoppel. Most of the cases which we have cited do not put their decision on the ground of estoppel. Often the question might arise when there 344 ULTRA VIRES — PROPERTY. [CHAP. II. was no estoppel. The ground on which most of the cases go is that the impHcation is not an absolute prohibition, but only a condition affecting the rights of the corporation as between it and the State. If the holding were an illegaUty which was utterly void, the condition would be the same whether the taking was by grant or devise, and a variety of unfortunate consequences might follow. The property might greatly increase in value after its acquisition, as was the case in EvangeHcal Baptist Society v. Boston, 192 Mass. 412. In that case, although the property of the corporation largely exceeded in value the amount authorized by the statute, there was no intimation that the holding was illegal, so long as the State did not interfere. See also Humbert v. Trinity Church, 24 Wend. 587, 605. As to all interests of private persons, in the absence of interference by the State, the cases generally treat titles to property held by corporations in excess of the specially authorized amounts as good. They allow the corporations to give good titles to purchasers of such property." Some judges, in holding that such titles cannot be taken under wills, endeavor to found a distinction upon the executed character of a title by grant, and suggest that a devise or bequest is executory. It seems to us that there is no good reason for the distinction. When a will is proved and allowed, it takes effect immediately to pass all property affected by it. The provision in the law against large holdings by corporations has no relation to the probate of the will. The act of the testator in executing the will is confirmed and given effect as a complete and executed disposition of the property, by the allowance of the will. In this respect a recorded will does not materially differ from a delivered deed. The heirs at law are bound by one as well as by the other. The decisions upon the precise point at issue are conflicting. Ih Jones V. Habersham, 107 U. S. 174, a case similar to that now before us, it was held by the court, in an opinion by Mr. Justice-bray, that, "restrictions imposed by the charter of a corporation upon the amount of property; that it may hold cannot be taken advantage of collaterally by private persons." In the same case in the Circuit Court the question had been considered previously, and the same result was reached, in an opinion by Mr. Justice Bradley of the Supreme Court of the United States, which is 'found in 3 Woods, 443, 475. The same rule is established in Maryland. Hanson v. Little Sisters of the Poor, 79 Md. 434. In re Stickney's will, 85 Md. 79, 104. DeCamp v. Dobbins, 2 Stew. (N. J.) 36, 40, was decided by the Chancellor on this ground. The decree was affirmed on another ground m the Court of Errors and Appeals, 4 Stew. (N. J.) 671, 690, m an opinion by Beasley, C. J., which contains a dictum disapproving 7nK J^^^ °^ *^® Chancellor. In Farrington v. Putnam, 90 Maine, 405 the court, m a very elaborate opinion, in a case identical in its leading features with that now before us, held that the gift was good SECT. 2.] HUBBARD V. WORCESTER ART MUSEUM. 345 The same doctrine is stated in Brigham v. Peter Bent Brigham Hospital, 126 Fed. Rep. 796, 801 ; b. c. 134 Fed. Rep. 513, 527. It is also stated in text books. Beach, Corp. (Purdy's ed.) § 825. Thomp- son, Corp. §§ 5795, 5797. . The leading case which presents the opposite view is In re McGraw's estate. 111 N. Y. 66. Although the decision necessarily puts a con- struction upon a statute of that State, this construction seems to be materially affected by the policy of New York in reference to charities. Said Judge Peckham, who delivered the opinion, " We have a decided mortmain policy. It is found in our statute in relation to wills, prohibiting a devise to a corporation unless specially permitted by its charter or by some statute to take property by devise." In Chamberlain v. Chamberlain, 43 N. Y. 424, the court refers to the prohibition of devises, and to the N. Y. St. 1860, c. 360, still in force, which makes void all bequests or devises to charity in excess of one- half the testator's property, where he leaves relatives. Other statutes have been passed, limiting the amount that can be devised to certain corporations by one testator, forbidding a devise or bequest to chari- ties, by a person leaving relatives, of more than one fourth of his es- tate, and making void such gifts where the will was executed within two months before the death of the testator. Gen. Laws of N. Y. 1901, (Heyd. ed.) 4885, 4891, 4892. The policy of that State in re- gard to charities has been very unfavorable. See Allen v. Stevens, 161 N. Y. 122, 139, 140 ; People v. Powers, 147 N. Y. 104 ; Fosdick v. Hempstead, 125 N. Y. 581. The doctrine of the New York court is stated as the law in David- son College V. Chambers, 3 Jones Eq. 253, and adopted in Wood v. Hammond, 16. R. I. 98, 115, and House of Mercy v. Davidson, 90 Tex. 529. 'In the case in North CaroKna the decision was by two of the three judges of the court, the Chief Justice giving an able dissent- ing opinion. The courts in Kentucky and Tennessee have expressed approval of the McGraw case in New York, but in terms that do not leave the grounds of their decisions entirely clear. Cromie v. Louis- ville Orphans' Home Society, 3 Bush, 365, 383. Heiskell v. Chicka- saw Lodge, 87 Tenn. 668, 686. In reference to supposed errors in the opinion in the last case, see Pritchard on Wills, § 153, note, and Farrington v. Putnam, 90 Maine, 405, 433. In the construction of our statute, when the question a,rises whether a different rule shall be established in regard to the taking and holding by a corporation under a will from that which is vmiversally laid down in regard to a holding under a deed, we are much influenced by the policy of our law as to devises and bequests for charitable purposes. We are of opinion that, under the R. L. c. 125, § 8, a gift to a cor- poration under a will, to an amount in excess of the sum specially' authorized, should be held no less valid than a similar acquisition of title under a deed. It is good as against every one but the Common- 346 ULTRA VIEES — TORTS. [CHAP. II. -wealth. It follows that the St. 1906, c. 312, operated as a waiver of -the Commonwealth's right to terminate the holding, and a legislative declaration of the entire validity of the provision in the will. If we are wrong in this conclusion, the petition must be dismissed on an independent ground. The gift was to a pubhc charity. The purposes of the Worcester Art Museum, as set forth in the agree- ment for its organization from which we have quoted, show the charitable uses to which all property held by it must be put. It is all held "solely in trust, for the benefit of all the people of the city of Worcester." We have no doubt that the property was given under the testator's will with a general charitable intent, with which the Worcester Art Museum, as a corporation, had no other connection than as an instrument to carry out the general purpose of the testator. In other words, the gift was not to the Worcester Art Museum as a corporation, apart from the charitable work in which it was engaged, nor on account of anything essential or peculiar in its performance of the charitable work described in its instrument of organization. The general charitable purpose was predominant in the mind of the tes- tator, and not a desire to give to a particular corporation. . . . In such a case, if for any reason the donee named is incapable of executing the trust, the court will not allow the gift to fail for want of a donee. . . . If the corporation, at the time of the probate of the will, was in- capable of taking the property and carrying out the general charitable intent of the testator, the court, applying the doctrine of cy pres, ' would appoint a trustee to act in its place. . . . In no view of the case have the petitioners any private right or interest which has been injured by the respondent, such as brings them within the provisions of R. L. c. 192, § 6; Petition' dismissed. Section 3. Torts. SOUTHWESTERN TELEGRAPH & TELEPHONE CO. v. LONG. ■ 183 Southwestern Reporter (Texas) 421. 1916. T i^^^^^' ■^•' ^^^^ '® ^ ^"^* ^y ^'a I^ong' suing by her next friend, J. M. Long agamst C. M. Dold and the Southwestern Telegraph & i elephone Company, to recover damages by reason of alleged slander, uttered by said Dold. Appellee, a young lady, aged 19 years, was ' Portions of opinion omitted. SECT. 3.] SOUTHWESTERN TELEGRAPH & TELEPHONE CO. V. LONG. 347 enjployed by the appellant as a telephone operator in its office at Lockhart, Tex. C. M. Dold was the manager of appellant at said office, with authority to discharge employes, and to prevent improper persons from loitering in the office building of said telegraph com- pany. Appellee and Miss Sadie Wilkins, another employ^ of appel- lant, were rooming at the residence of Dold, and using his kitchen and dining room for the purpose of Ught housekeeping. On the morning of September 9th, Dold had a conversation with Miss Wilkins in his dining room in the presence of his wife, in which he used language substantially the same as he subsequently used to both appellee and Miss Wilkins. He came to the door of their room, just across from the dining room, and told them that they were discharged ; that the company did not allow girls to work for it who were not ladies ; that they had had men in their room at night. He told them that they must leave his house at once, that he would give them 15 minutes in which to leave, and that if they did not do so, he would have the sheriff put them out. Subsequently, on the morning of the same day, appellee, accompanied by Miss Wilkins, went to the telephone office for the purpose of talking to her sister in San Marcos. After finish- ing the conversation, both of the young ladies were in the rest room of the telephone office, when Dold entered and called them into the hall. He there said to them : "Why haven't you girls left town like I told you?" One of them replied that they didn't have to leave town. Dold said that if he had done what they did he would be ashamed to be seen on the streets of Lockhart, let alone in people's houses. He told them to get out of there at once ; that the telephone company did not allow girls who were not ladies to hang around the office. Miss Wilkins replied that she was as pure a lady as his wife, and more so, after what she had accused them of. Dold said, "If you were a man I would slap you down stairs." Miss Wilkins repUed that she was a lady, and that he could knock her down stairs if he wanted to. During this conversation Miss Addie Paige, another employ^ of appellant, passed slowly by near enough to have heard what was being said. The jury returned a verdict in favor of appellee, assessing her damages at $20,000, and judgment was entered accordingly. The telephone company only has appealed. Appellant's first assignment of error relates to the refusal of the court to peremptorily instruct the jury to return a verdict for ap- pellant. The substance of appellant's first proposition under this assignment is that a corporation is not Hable for a slander uttered by one of its employes, unless it expressly authorized, or subsequently ratified, the same ; and, as in this case there is no proof of express authority to utter the slander, and as ratification of the same is neither pleaded nor proven, a peremptory instruction should have been given to return a verdict for the defendant, appellant herein. As to the 348 ULTEA VIRES — TORTS. [CHAP. II. necessity of showing express authority, neither reason nor the authqri- ties differentiate corporations from individuals in this respect. "Private corporations are hable for their torts committed under such circumstances as would attach Uability to natural persons." Sawyer v. Railway Co., 142 N. C. 1, 54 S. E. 793, 115 Am. St. Rep. 716, 9. Ann. Cas. 440. , In Hypes v. Railway Co., 82 S. C. 315, 64 S. E. 395, 21 L. R. A. (N. S.) 873, 17 Ann. Cas. 620, the court said : "It is established that corporations, as well as natural persons, are liable for the willful tort of an agent acting within the general scope of his employment, without previous express authority or subsequent ratification." Rucker v. Smoke, 37 S. C. 377, 16 S. E. 40, 34 Am. St. Rep. 758 ; WiUiams v. Tolbert, 76 S. C. 217, 56 S. E. 908 ; Schumpert V. Railway Co., 65 S. C. 332, 43 S. E. 813, 95 Am. St. Rep. 802 ; Gard- ner V. Railway Co., 65 S. C. 342, 43 S. E. 816 ; Riser v. Railway Co., 67 S. C. 419, 46 S. E. 47; Dagnall v. Railway Co., 69 S. C. 115, 48 S. E. 97 ; Fields v. Cotton Mills, 77 S. C. 549, 58 S. E. 608, 11 L. R. A. (N. S.) 822, 122 Am. St. Rep. 593.' It is but just to the learned counsel for appellant to say that they have not suggested in their able brief herein that a corporation may not be held liable for other torts committed by their agents by im- plied authority, but their contention is that this legal principle does not apply to slander. If it appears that there is no sound reason for this' distinction, then the exception fails, and slander is governed, in this regard, by the general principle above announced. There are decisions which support appellant's contention. These rely prin- cipally upon grounds : (1) That as malice is a necessary ingredient of slander, a corporation, having no mind, cannot entertain malice, and therefore cannot be guilty of slander ; (2) that slander is usually the voluntary act of the speaker, committed under the immediate • In Nims v. Mount Hermon Boys' School, 160 Mass. 177, the plaintiff sued to re- cover damages for an injury received through the negligence of a ferryman in manag- ing a boat on which he was a passenger and which defendant was using as a public ferry, carrying passengers for hire. Defendant claimed such business was ultra vires and therefore it was not liable for negligence. Knowi/ton, J. said : "The only plau- sible ground on which the defendant in the present case can contend that it should be exempt from liability for the negligence of its servant in managing the ferry-boat is that the contract to carry the plaintiff was ultra vires, and therefore invalid, and that the duty for neglect of which the plaintiff sues arose out of the contract, and dis- appears with it when the contract appears to be void. The defendant may argue that the plaintiff cannot maintain an action for a breach of the contract to use proper care to carry him safely, and that he stands no better when he sues in tort for failure to do the duty which grew out of the contract." His answer was: "Its maintenance of such a ferry was ultra vires, but its acts in that respect were not different in kind from the ordinary acts of corporations in excess of the powers given them by their charter. We are of opinion, therefore, that if the defendant while running the ferry-boat accepted the plaintiff as a passenger to be transported for hire, and undertook to carry him across the river, he was in the boat as a hcensee, it owed him the duty to use proper care to carry him safely, and, whether an action could be maintained for a breach of the contract or not, it is Uable to the plaintiff m an action of tort for neglect of that duty." SECT. 3.] SOUTHWESTERN TELEGRAPH & TELEPHONE CO. V. LONG. 349 influence of sudden passion, and therefore the law ascribes it to the personal malice of the agent, rather than to an act performed in the course of his employment, and in furtherance of the business of the employer. As to the ground that a corporation has no mind : It is true that for many purposes a corporation is held to be a separate entity from the natural persons who compose it, yet it is, in fact, but the aggrega- tion of such persons, and the mind of such of them as are chosen to manage its affairs is^its mind. "The old doctrine that a corporation, having no mind, cannot be liable for acts of agents involving malice has been completely ex- ploded in modern jurisprudence." Hypes v. Railway Co., supra. "It is well settled * * * that a corporation may, to the same extent as a natural principal, be held liable for the maUcious wrongs of its officers or agents, if committed in the course of a transaction which is within the scope of their authority." Sawyer v. Railway Co., supra. • No one who has the slightest knowledge of law would assert that a corporation could not be guilty of libel, and libel necessarily involves malice. Nor would it be denied that a corporation may be guilty of malicious prosecution or false imprisonment. The admission implied in appellant's proposition that a corporation may be held liable for slander where it expressly authorizes the same is itself an answer to the doctrine that a corporation cannot be held liable for malice ; for a corporation, being an incorporeal entity, must necessarily act through agents where it expressly authorizes such action. In such case it is held to be immaterial that the authorized act was ultra vires, as not Jjeing in the scope of its corporate powers. Hussey v. Norfolk S. R. Co., 98 N. C. 34, 3 S. E. 923, 2 Am. St. Rep. 312. The doctrine of ultra vires, in so far as it relates to private cor- porations, is applicable only to matters ex contractu. A tort is neces- sarily ultra vires because no corporation is authorized by its charter to commit a wrong. As to the second proposition that slander is the voluntary act of the speaker, committed imder immediate influence of sudden passion, the same may be said, in some instances, of libel. A slander may be, and in some instances undoubtedly is, uttered with deliberate and precon- ceived malice, while the publication of a libel may be, and in some in- stances imdoubtedly is, made under the influence of sudden passion. If this distinction should be recognized it would not be true, as a matter of law, that a corporation could not be held liable for the ut- terance of a slander, but its liability would depend upon the degree of malice Which actuated the agent in uttering the defamatory words. If defamatory words are falsely uttered with malice, it is slander, regardless of whether the same be done with express or implied malice, and the same is true of libel. 350 ULTRA VIRES — TORTS. [CHAP. II. In Hypes v. Railway Co., supra, the court said : . , • "The liability of a corporation for malicious hbel, pubUshed by its agent in the course of his employment, is generally recognized. Phila. W & B R. Co. V. Quigley, 21 How. 202, 16 L. Ed. 73 ; Johnson v. Dis- patch Co., 65 Mo. 539, 27 Am. Rep. 293; Bacon v. Michigan C. R. Co., 55 Mich. 224, 21 N. W. 324, 54 Am. Rep. 372 ;. Maynard v. Fire- man's Fund Ins. Co., 34 Cal. 48, 91 Am. Dec. 672 ; Fogg v. Boston & L. R. Corp., 148 Mass. 513, 20 N; E. 109, 12 Am. St. Rep. 583 ; M. & P. R. Co. V. Richmond, 73 Tex. 568, 11 S. W. 555, 4 L. R. A. 280, 15 Am. St. Rep. 794 ; 10 Cyc. Law & Proc. p. 1215 ; 18 A. & E. Ency. Law, p. 1058. We do not regard the distinction between written and unwritten slander to be of sufficient importance to warrant the appli- cation of a different rule." In Payton v. Credit Co., 136 Mo. App. 577, 118 S. W. 531, the court said : "That a corporation maybe held responsible for a slander uttered by an officer or agent within the scope of his employment is no longer a debatable question." The cases principally rehed upon by appellant to sustain its conten- tion now under discussion are Behre v. Register Co., 100 Ga. 213, 27 S. E. 986, 62 Am. St. Rep. 320 ; Distributing Co. v. Greenbaum Bros., 135 Ky. 182, 121 S. W. 1026, 24 L. R. A. (N. S.) 955, 21 Ann. Cas. 481 ; Mfg. Co. v. Taylor, 150 Ala. 574, 43 South. 210, 9 L. R. A. (N. S.) 929, 124 Am. St. Rep. 90 ; Eichner v. Bank, 24 App. Div. 63, 48 N. Y. Supp. 978 ; Comerford v. Railway Co., 164 Mass. 13, 41 N. E. 59 ; Kane v. Ins. Co., 200 Mass. 265, 86 N. E. 302 ; Flaherty v. Max- well Motor Co. (Mich.) 153 N. W. 45. The Behre Case, supra, rests upon the. exploded doctrine that a corporation has no mind, and therefore "has not the capacity to commit that wrong" (slander). The case of Distributing Co. v. Greenbaum, supra, was before the court on appeal from a judgment sustaining a demurrer to plaintiff's petition, the allegations of which showed that 'Greenbaum's agent, when he uttered the slanderous words, was not acting as the agent of his employer, and that the words uttered had no connection with his employer's business. The court ' held, and very properly so, that the petition showed no cause of action. The decision in Mfg. Co. v. Taylor, supra, quotes with approval an excerpt from Jordan v. Railway Co., 74 Ala. 85, 49 Am. Rep. 800, that: "The current of authority now is that corporations are responsible civilly, the same as natural persons, for wrongs committed by their officers, servants, or agents while in the course of their employment." That is to say, upon implied as well as direct authority, but it makes an exception as to slander, upon the ground that "slander is the vol- untary tortious act of the speaker, and is more likely to be the expres- sion of momentary passion of excitement of the agent", which, as SECT. 3.] SOUTHWESTERN TELEGRAPH & TELEPHONE CO. V. LONG. 351 we have said, is not sound, and is against the. weight of authority. The court cites in support of its opinion Cooley on Torts, 124. The citation is not apropos. The court also cites 10 Cyc. 1216. The only authority cited to sustain the text of this usually reliable work is Redditt v. Mfg. Co., 124 N. C. 100, 32 S. E. 392. That case not only does not support the text, but is authority against it. The doctrine there announced and concurred in by all members of the court is : "That a corporation, contrary to the early cases, is now liable to civil and criminal actions under the same conditions and circumstances as natural persons are * * * if they act under the express or impUed authority." We quote further from the Redditt Case as follows : "The principle which we approve is well stated in State v. Railroad, 23 N. J. Law. 360 : ' If a corporation has itself no hands with which to strike, it may employ the hands of others ; and it is now perfectly well settled, contrary to the ancient authorities, that a corporation is liable dviliter for all torts (itaUcs ours) committed by its servants or agents by authority of the corporation, express or implied.' " The Redditt Case was a suit for slander. No distinction between slander and other torts was attempted to be drawn. The case was reversed, as shown by the concin-ring opinion of the majority of the judges, upon theground that the evidence was not sufficient to show implied authority on the part of the agents to utter the slanderous words. Neither Comerford v. Railway Co., supra, nor Kane v. In- surance Co., supra, is in point. The former case went off on the point that the allegata and probata did not agree, and the latter case upon the point that : "There was no offer to prove that what was said by either of the soUcitors was said in the course of his employment, or while acting in the apparent scope thereof." In Eichner v. Bank, supra, the court cites no authority, except Townshend on Slander and Libel and Odgers on Slander and Libel. The citation from Townshend is section 265, wherein it is said that a corporation cannot be guilty of slander because there can be "no agency in slander", which the Supreme Court of Mississippi, in Rivers V. Railway Co. [90 Miss. 196], justly characterizes a ridiculous expres- sion, and because a corporation has not the "capacity" to commit sla,nder, which, if not quite so ridiculous, is as thoroughly exploded. Townshend cites no authority except Maloney v. Bentley, 3 Comp. 210, which does not tend to support his text. That case was a suit against an individual for a libel, and neither slander nor the respon- sibility of a corporation was involved. Text-books are, at best, only secondary authority, and their value depends upon the care with which their authors examine the cases cited and their ability to (^raw correct conclusions therefrom. Odgers' statement that a corporation cannot 352 ULTRA VIRES — TORTS. [CHAP. II. be held Uable for slander, because "slander is the voluntary act of the speaker", rests upon his own ipse dixit. He cites no authority to sustain his text, and none is cited in the notes to the American edi- tion. The case of Flaherty v. Motor Car Co., supra, rests upon the doctrine announced in the Behre Case, supra, that a corporation has no mind, and repeats the inconsistency, found in all cases affirming this doctrine, that a corporation has sufficient mind to be gmlty of slander through the medium of an. agent, if it directly authorizes or subsequently ratifies such slander. The appellant insists that the. words uttered by Dold were not within the scope of his authority, for though the appellant had au- thorized him to discharge appellee, it did not authorize him to slander her. This is but a concrete statement of the doctrine hereinbefore dis- cussed that in slander a corporation cannot be held hable for implied maUce, and that in the absence of direct authority to utter the slander, which would be proof of express mahce, the slander is to be attributed solely to the maUce of the agent who utters it. It is true that the appellant corporation did not expressly authorize Dold to slander appellee, and had no desire that he should do so, but it did authorize him to discharge appellee, and to protect its office fropa the intrusion of improper persons, and it is responsible for the wrongful manner in which he discharged this duty. A distinction must be drawn between doing a thing merely contemporaneously with something done within the scope of the agent's authority and something wrongfully done as a part of the act within the scope of such authority. In the instant case Dold was authorized to discharge appellee, and his employer, who clothed him with that authority, is responsible for the manner in which he executed his commission. Levi v. Brooks, 121 Mass. 501 ; Geraty v. Stern, 30 Hun (N. Y.) 426 ; Dillingham v. Russell, 73 Tex. 51, 52, 11 S. W. 139, 3 L. R. A. 634, 15 Am. St. Rep. 753 ; Railway Co. V. Bender, 57 S. W. 574. __ Reversed (on another point) and remanded} > Accord: Fensky v. Maryland Casualty Co., 264 Mo. 154; KJiaras ». Barron C. Collier, Inc., 157 N. Y. Supp. (N. Y. App. Dlv. — 1916) 410, unanimously overruling Eichner v. Bowery Bank, 24 A. D. 63. ("It would thus appear that the decision of this court in Eichner ». Bowery Bank supra wag based upon the archaic doctrine that a corporation was an artificial being, invisible, intangible, and existing only in the contemplation of the law. Having no physical powers, it could not act ; having no mind, it could not form an intent ; having no mouth, it could not speak ; and there- fore those who acted, schemed, devised, or spoke for it were responsible, and not the intangible being in whose business they were engaged. This doctrine long has since been repudiated by the courts. . . . The true rule, in my opinion, is that a cor- poration is liable for torts committed by its officers or agents when acting within the actual or implied scope of their employment, or by ratification may become responsible for such acts when committed in excess of their authority. Within the content of this rule a corporation may be held liable for a slander. The case of Eichner ». Bow- ery Bank, supra, holding the contrary, should be overruled.") To justify recovery against the corporation, the tort must, of course, be within the scope of the servant's employment. Cases supra; also Case ». Steele Coal Co., 162 Ky. 68. (Corporation not liable for loathsome joke written by its bookkeeper in stating an account with plaintiff.) SECT. 4.] NEW TOKK CENTRAL &C. B. R. CO. V. V. S. 353 Section 4. Crimes. NEW YORK CENTRAL AND HUDSON RIVER R. R. CO. v. UNITED STATES. 212 U. S. 481. 1908. Mr. Justice Day delivered the opinion ^ of the court. This is a writ of error to the Circuit Court of the United States for the Southern District of New York, sued out by the New York Central and Hudson River Railroad Company, plaintiff in error. In the Cir- cuit Court the railroad company and Fred L. Pomeroy, its assistant traffic manager, were convicted for the payment of rebates to the American Sugar Refining Company and others, upon shipments of sugar from the city of New York to the city of Detroit, Michigan. The indictment was upon seven counts and was returned company, its genera l traffic manager and its assistant t raffic manager. 'i'he hrsL codilL W&A winidrawn from the jury by the district attorney. The second count charges the making and publishing of a through tariff rate upon sugar by certain railroad companies, including the plaintiff in error, fixing the rate at twenty-three cents per 100 pounds from New York city to Detroit, and charges the railroad comp any s general traffic manager and assistant tramc manager with entering" into an unlawful agreement and arrangement with the shippers, iihe /^rfr^prina.n Sn frir-jt^niQs; Company of New York and the American Sugar Kefiniif^Company ot JNew Jersey, and the consignees of the sugar, W. H. Edgar & Son, of Detroit, whereby it was agreed that for sugar shipped over the line, the full tariff rate being paid thereo n, the railroad company should g ivea re bate of fi ve cents for each 100 'pounds. This COUiit charges tBatOTmgXTiemOnths of April and May, 1904, shipments were made under this agreement and the regular tariff rates paid thereon. On July 14 of that year a claim for a rebate in the sum of $1,524.99 was presented by t he agents of the shipper and consignees a nd paid o n the thirty-iirst day of August to Lowell M. Palmer, agent'of the sugar company, for the benefit of the shippers and consignees. In each of the counts, except the sixth, the lawful rate is charged to have been 23 cents per 100 pounds. During the month of June, 1904, the same was reduced to 21 cents per 100 pounds, and the rebate agreed to and paid being 3 cents per 100 pounds. The second count covers the shipments of April and May, 1904 ; the third coimt, the shipments for July and August, 1904; the fourth for 1 Portions omitted. 354 XILTRA VIRES — CRIMES. [chap. II, September, 1904; the fifth for October, 1904; the sixth for June, 1904, and the seventh for April and May, 1904. I n each of these counts there is an allegation of t he payment of the published ^atp., th^ p^Sgn tarRon of the claira'tor lh g - lHlmtb;aii J Hib e« tet6TSeniE of a specific su m allowed and paid on a cnmiiii;;~iLberp,n^'. ^ ^^ — tJpon the trial there was a conviction upon all of the six counts, two to seven inclusive. The assistant traffic manager was sentenced ta pay a fine of $1,000 upon each of the counts; the present plaintiff in error to pay a fine of $18,000 on each count, making a fine of $108,000 in all. Numerous objections and exceptions were taken at every stage of the trial to the vahdity of the indictment and the proceedings there- under. The principal attack in this court is upon the""c5iEtit'u4;ional vahdity oF certamTeaHreTorTEOir^i'lict^ 847. TEat act, among other tlmigs, prbviaes : _ "(1) That 3-n ytlung dQneoramitt& common caiTitJjjjBlTiSffD^^^ic^^egalaEe^ommereer^^ne acts amendatory - ihprpnf^ ^KhT^^JtT'iinrmnrnrTn^i.tpr] t.n hp f^nnf^ hy a.nv director or officer thereof, or any receiver, trustee, lesse.e, agent or pprgnn i^fi ting for or employ ed by such corporation, would constitute a mis denaeanor undCT'saicTacts, or under this act, shall also be held to DC a m^sHpmpannr cpmTinit.t.pH hy siinh f^nr pnrfl.tinn, g nrl npnn i:(\i\v\0.=~ tiOinKereorit shall be subject to like penalties as are prescribed in said acts, or by this act, with reference to such persons, except as such penalties are herein changed. "I I " In construing and enforcing the provisions of this section, the act,, , /I omission or fail ure of any officer, a^ent or othe^ ^ person actingTSF^r \ j jtimpluybd by any common carrier, acting within the scope ot'_h i"s^' )[( empl UjimetrtTshall in everv case be also rieemerf to be the act, omiggtelT "' or'Hilure._QLsua£Zamai;-ASjidI^ person." I "TTiscontended that these provisions of the law are unconst ituti onal because Cougreaalias^lQ] HittiimivmrtuiibitKjiifi II E _ _ . . racbrporatio n the com- mission ot criminal olfen ses, or to s ubject a corpoiaUon Lu a (iriiumal.- proBfeciition by reason <5ftfae thinis charged. The argument is that to thus punish the corporation is in reahty to punish the innocent stock- holders, and to deprive them of their property without opportunity to be heard, consequently without due process of law. And it is further contended that these provisions of the statute deprive th& corporation of the presumption of innocence, a presumption which is part of due process in criminal prosecutions. It is ur^ed that as there is no authority shown by the board of directors or tWe stock- hoig"e£s for the. crimi nal acts of the agents of the c^Hlp f^in y, Jr^^^r;— ^^^^^^lSL.^^i:i^i..^^^ ^^^^r^^^--' ^'^^^^ "0^ be lawfully charged agaiSsrt&^,fiQ£po,ra.ti null As no action of theToard of directors. SECT. 4.] NEW TOEK CENTRAL &C. R. R. CO. V. V. S. 3§5 could legally authorize a crime, and as indeed the stockholders could not do so, the argiunents come to this : that owing to the nature and character of its organization and the extent of its power and authority, a corporation cannot commit a crime of the nature charged in this case. Some of the earlier writers on c ommon law held the law to be that a co rporation could not, commit a crim e. It is said to nave been held by Lord Uhief Justice Holt (Anonymous, 12 Modern, 559) that "a corporation is not indictable, although the particular members of it are." In Blackstone's Commentaries, chapter 18, § 12, we find it stated : "A corporation cannot commit treason, or felony, or other crime in its corporate capacity, though its members may in their dis- tinct individual capacities." The modern au thority, imiversally, go far as we know, is the other way, in consiaermg tne subject, BSKop''g IN ew Criminal Law, § 417, devotes a chapter to the capacity oFcoiporations to commit crime, and s tates the law to be : "S mcea corporation acts by its offi cers and agents their purposes , motives^, and illt6&t"are lust as mucn tnose of the corporation as are tne things q -^one. it , for example, the invisibl e, intangible es sence of air, whie h w e term a corporation, can level naountams, nil up valleys, lay doWn iron tracks, and run railroad cars on them, it can inter H ^.n Hn it^nrl can act tb '^^'pi" as wpn vini nusly as virtuously." Without citing the s&e cases holding the same view, we may note Telegram Newspaper Company v. Commonwealth, 172 Massachusetts, 294, in which it was held that a corporation was subject to punishment for criminal con- tempt, and the court, speaking by Mr. Chief Justice Field, said : " We . think that a corporation may be liable criminally for certain offenses of which a specific intent may be a necessary element. There is no more difficulty in imputing to a corporation a specific intent in crim- inal proceedings than in civil. A corporation cannot be arrested and imprisoned in either civil or criminal proceedings, but its property may be taken either as compensation for a private wrong or as punish- ment for a pubUc wrong." It is held in England that corporations may be criminally prosecuted for acts of misfeasance as well as non- feasance. Queen v. Great North of England Railway Company,, 9 Queen's Bench, 315. It is now well established that in actions for tort the corporation may be held responsible for damages for the acts of its agent within the scope of his employment. Lake Shore & Michigan Southern R. R. V. Prentice, 147 U. S. 101, 109, 111. And this is the rule when the act is done by the agent in the course of his employment, although done wantonly or recklessly or against the express orders of the principal. In such cases the Kability is not imputed because the principal actually participates in the malice or fraud, but because the act is done for the benefit of the principal, while the agent is acting within the scope of his employment in the 356 ULTRA VIRES — CRIMES. [CHAP. II. business of the principal, and justice requires that the latter shall be held responsible for damages to the individual who has suffered by such conduct. Lothrop v. Adams, 133 Massachusetts, 471. A corporation is held responsible for acts not withm the agent s corporate powers strictly construed, but which the agent has assumed lio perform for the corporation when employing the corporate powers actually authorized, and in such cases there need be no written au- thority under seal or vote of the corporation in order to constitute the agency or to authorize the act. Washington Gashght Co. v. Lansden, 172 U. S. 534, 544. In this case we are t o consider the criminal responsi bihtv of a cor- vofmmT mwa 'actTConTwinielSrES^ ho rized agent of the CQ taBa&y is Bxei ' UiijUlT the aut honty cont'errefl upon'Eimr " It was admitted by ' t h r defeudaiit a ' U E&lnanEarali the time mentioned in the indictment the g enferal^freight traffic ma nager andt he assistant freight traffic m anagef were authorized to esTabllBh rgtes'at which freight shou l d be -caj ngi^ "v ftt- the line of the New York Central and Hudson Rivera t^^pany, and were aut horized to unite, with other companies in the es tabhshing^llIn g'jgdpubnsEmglnf -tihrn^^^^ including; fee- ; THrnuarh ra,te or rat es between New York and Detroit reterred Lu m f,h £indictment. 'I'hus the sub.iect-nifi itit"^"f ma.Vin^y and tixin^ ra^ AvS 'witliinrthe scope of the authority and emplo;vment of the agents rtfg ie company. whos'eaHs'in this conheciioh are sou ght to be-^najge d S pon the ciMnpanv. Thus clothed with authority, the agents were boMd to respect the regulation of interstate commerce enacted by Congress, requiring the filing and pubhcation of rates and punish^g departures therefrom. Applying the principle governing civil Ha- bility, we go only a step farther in holding that t he act of the age nt, while exercising the authority delegated to him to make ratSf^ transnortation, may be controlled, in the intere g^jgL gu-blic policy, "Toy impu ting hiTact to his emoES La Qd imposing penalti es upon^j^e" titffp ^aSoii for w h icB 'tiejisIaltLl g in the premises. "TTis'true that there are some cnme^, WlllCll lu t heir n ature cannot ^ ^ ' ^ III! ii ii n ^e commit ted by corporations.' l iut there is a large class of offenses, ofwnicn rebating under the Federal statutes is one, wherei p the crime \ consists in purposely doi ng t.^g thing' s prohibif t'rl h^ afgtute. In" ~ ^at cTass of crimes we see no good reason why corporations mav not ' bfelield responsible for and charged witl;i t.he'Ehowledge and purpose s ofthftir agen^a-^tir^p;, within the a.utj hontv conferred upon th^T '2 iVlOTawetz on Corporations, § 733 ; Green's Brice oii Ultra Vires, 366. If it were not so, many offenses might go unpunished and acts • Under the statutory definition of homicide in force in New York, a corporation could not be guilty thereof. But this result followed from the definition and not because of corporate incapacity to be charged criminally, even for homicide. People 1). Roehester Railway &o. Co., 195 N. Y. 102. Cf. United States v. Van Schaick, 134 Fed. 592. And see note following. SECT. 4.] NEW YORK CENTRAL &C. R. R. CO. V. V. S. 357 be committed in violation of law, where, as in the present case, the statute requires all persons, corporate or private, to refrain from cer- tain practices forbidden in the interest of public poKcy. It is a part of the pubhc history of the times that statutes against rebates could not be effectually enforced so long as individuals only were subject to punishment for violation of the law, when the giving of rebates or concessions enured to the benefit of the corporations of which the individuals were but the instruments. This situation, developed in more than one report of the Interstate Commerce Com- mission, was no doubt influential in bringing about the enactment of the Elkins Law, making corporations criminally liable. We see no valid ob jection in law, and every re ason in public policy, why the corporation which profits b y the tranSaction, and can only . a^Jlirougli lis ageuLh auJ ~oifacers, snau be held pu niRh;^];; )lP| \)j fino- j ecauseCT the kn owledge ana intent' of its ag^ents towh^c ; )^ it )ias int'rustea autnority to act m tne su bject-matier oTmaking and fixing rates of transportation, ana whose Jmowiedge and purposes mav well. % attributed to the corporation tor which the agents act. While t&e law should have regard to the rights ot all, ana io tiiose of cor- porations no less than to those of individuals, it cannot shut its eyes to the fact that the great majority of business transactions in modern times are conducted through these bodies, and particularly that inter- state commerce is almost entirely in their hands, and to give them im- munity from a lLa uniohm c Dt bep Ru se of the old and exploded doctrine that a corporation cannot commit a crime would virtuall y take away th6 only me ans of efffectuaiiy controlling the subject-naiStter and cor- r ecting tne aouses aim ed at. 'There can be no question oi the power of Congress to regulate inter- state commerce, to prevent favoritism and to secure equal rights to all engaged in interstate trade. It would be a distinct step backward to hold that Congress cannot control those who are conducting this interstate commerce by holding them responsible for the intent and purposes of the agents to whom they have delegated the power to act in the premises. Affirmed.^ ' The oases that accord are numerous and range from nonfeasance to misfeasance and from crimes in which specific criminal intent is immaterial to those in which it is an essential ingredient. In Commonwealth v. Illinois Central R. R. Co., 152 Ky. 320 (1913), the court, adopting the language of Commonwealth v. Pulaski County &c. Ass'n., 92 Ky. 197, said: "Experience showed the necessity of modifying the old rules, and the decided tendency of modern decision has been to extend the applica- tion of all legal remedies, both civil and criminal, to corporations, and subject them thereto as^in the case of individuals, so far as is possible. It is therefore well settled in the- courts of this country, as well as in England, that theyare indictable for mis- feasance as well as a nonfeasance of duty unlawful in itself and injurious to the public. It has therefore been held that they may be indicted for a nuisance, whether arising from misfeasance or nonfeasance, or for an injury otherwise to the public, unlawful in itself and arising either from commission or the omission to perform a legal duty. They may be indicted for erecting and continuing a building, for leaving railroad cars 358 TTLTKA VIKES — CREWES. [CHAP. II. in the street, for neglecting to repair a highway, for permitting stagnant water to remain on their premises, for libel, for 'Sabbath breaking' by doing work on Sunday in violation of a statute, and in many other instances. It is true there are crimes of which, from their very nature, as perjury, for example, they cannot be guilty. There are crimes to the punishment for which, for a like reason, they cannot be sub- jected, as in the case of a felony ; but wherever the offense consists in either a mis- feasance or a nonfeasance of duty to the public, and the corporation can be reached for punishment, as by a fine and the seizure of its property, precedent authorizes and pubhc policy requires that it should be liable to indictment.". SECT. 1.] VAN HUMMELL V. INTERNATIONAL GUARANTEE CO. 359 BOOK IV. THE INTERNAL MECHANISM OF A CORPORATION. CHAPTER I. ORGANIZATION. Section 1. Promotion. VAN HUMMELL v. INTERNATIONAL GUARANTEE CO. 23 Western Law Reporter 248. Manitoba, 1913. The plaintiff in this action claimed compensation for services rendered in and about the organisation of the defendant company, and for moneys expended in connection therewith, and against the personal defendants for damages for breach of an agreement, al- leged by him to have been given and made by those defendants, that he, the plaintiff, should be employed as general manager of the defendant company, for a period of not less than three years, at a salary of not less than $12,000 per year, and that he should further be given the exclusive right of selling, for a reward, the whole of the authorised capital stock of the company, amounting to $2,500,000, at a premium of $20 per share. Macdonald, J. : — After hearing all the evidence on behalf of the plaintiff, I granted a motion for nonsuit as against all the per- sonal defendants, with the exception of the defendant Robinson, and reserved judgment as against him and the company. The plaintiff was a company promoter, and enlisted the support of the personal defendants in the proposal of establishing in this coimtry a company known as the International Casualty Company of Spokane, and secured their subscriptions to an amount aggregat- ing $64,500. The defendant Robinson paid $1,000 on account of his stock, and the defendant Atchison paid $1,250. The other sub- scribers gave their notes. Shortly after this, the subscribers, because of a reported arrange- 360 OKGANIZATION — PROMOTION. [CHAP. I. ment between this casualty company and another American com- pany, of which they knew nothing, and of which the plaintiff knew nothing at the time of subscribing for stock, became dissatisfied, and sent for the plaintiff, and expressed their intention of withdraw- ing their subscriptions. The defendant Robinson then suggested the organisation of the defendant company. This was followed by the plaintiff severing his connection with the casualty company and undertaking the organisation of the defendant company. The compensation to be allowed the plaintiff was mentioned on several occasions, the first occasion being with the defendant Robinson. The plaintiff suggested being paid by way of commission, to which this defendant objected, and suggested, instead, payment by way of bonus, in the same manner that the Alexanders, a firm of company promoters, were compensated. This was followed by a conversa- tion with the defendants Hudson and Ormond, in which the com- pensation received by the Alexanders was discussed, and satisfaction with such compensation expressed by the plaintiff, who thereupon ■ entered upon the work of the formation of the new company. The stock issued to the subscribers to the casualty company was deliv- ered up, and the notes given in payment returned, on the above understanding, and, as the plaintiff says, in consequence of the new company. The plaintiff started a stock subscription canvass, the defendant Robinson being the first subscriber, the plaintiff hunself subscribing for a number of shares equal to that of the defendant Robinson. The company was duly incorporated through the guidance and instrumentality of the plaintiff, and its first meeting was held on the 1st April, 1912. At this meeting, the defendant Robinson was elected president, the defendant Boyd vice-president, and the plain- tiff second vice-president and general manager. A meeting of the executives was held on the 9th April, at which the plaintiff was authorised to complete the organisation by securing offices and office furniture and supplies, including printed matter, and make out and publish a prospectus, to all of which the plaintiff gave faithful and satisfactory attention. Up to the 8th May nothing had been said or done with reference to the plaintiff's compensation, other than as stated, and up to this point there was no liability incurred by any one for the plaintiff's services > On the 8th May, a meeting of the directors was held, at which the question of remuneration was discussed, and the following reso- lutions were passed : — "Moved by Mr. Bull, and seconded by Mr. Bawlf, that Mr. Van Hummell be authorised to spend $6 per share for sale of stock, and he be paid $500 per month as salary to start from the 1st November, 1911. Carried." SECT. 1,] VAN HUMMELL V. INTERNATIONAL GUARANTEE CO. 361 "Moved by Mr. Bull, seconded by Mr. Boyd, that the sense of this meeting is, that, if the sale of stock under the direction of Mr. Van Hummell is satisfactory to the board, they will vote him a bonus additional. Carried." The bonus addition the plaintiff understood to be whatever amount he could make out of the $6 per share allowed for selling stock, although there was no reference to this at the meeting ; the plaintiff asserts that this was his understanding with the defendant Robinson after the meeting ; but he was uneasy in mind and not satisfied with the assurance he had, and was advised by one of the directors to learn the meaning of this resolution, and he then called upon several other shareholders and directors, and they individually agreed that the additional compensation should be as desired by the plaintiff. He then called upon the defendant Robinson, who expressed his disapproval of his conduct in the interviews mentioned, and at a naeeting of the directors on the 20th May the following resolution was passed: "Moved by Mr. Persse, and seconded by Mr. Boyd, that that portion of the minutes of the previous meeting re remunera- tion for sale of stock be rescinded and the following substituted : That Mr. Van Hummell be engaged as manager at a salary of $500 per month, to date from the 1st November, 1911, and that the sale of stock be proceeded with, and that the manager consult with the president and vice-president as to the details of same. Carried." On the 23rd May, the plaintiff, by letter to the president and board of directors, rejected the proposition contained in the above resolution, and made counter-proposals, which were in turn rejected hy the defendants, and the following resolution passed: "That the resolution of the directors passed at the meeting held on the 20th May inst. as to the acknowledgment and remuneration of Mr. Van Hiumnell be rescinded, he having refused to accept same." From these facts it is clear that the plaintiff was not engaged by the company after its incorporation, unless the resolution of the 8th May has that effect. But the question arises, who is responsible for compensation for his services prior to the 5th May? I fail to find any liability on the part of any of the personal defend- ants. True, there were a number of interviews with some of those defendants, and the (Question of remuneration discussed ; but there never was any pretence of any undertaking by any one of them to become personally liable. The discussions were all as to what would be done by the company ; and, as the company was then controlled by these defendants, much was taken for granted. I grant a nonsuit as to all the personal defendants, and, enter a verdict for the defendant Atchison on his counterclaim for $1,250, "with interest at five per cent, per annum, and for the defendant Rob- inson on his counterclaim for $1,000, with interest at the same rate. I refuse the nonsuit as to the defendant company. 362 ORGANIZATION — PROMOTION. [CHAP. I. On hearing further evidence and argument as to the hability of the defendant company for wrongful dismissal and breach of con- tract, I think that there can be no liability, as the contract submitted by the company was rejected by the plaintiff, and none other was made. The liability for payment for his services in promoting the company and securing stock subscriptions, with his claim to wages for the time he was in the employ of the company, are the only points re- maining for consideration. The law seems clear that a promoter has no right of indemnity against the company which he promotes in respect of any obligation undertaken on its behalf before its incorporation, nor can he claim upon any agreement made in its behalf by an agent or trustee before incorporation. "Nor is the promoter or person employed by him entitled to sue the company in respect of any payment for services rendered or expenses incurred before its incorporation in promoting it, unless after its incorporation it expressly agrees with him to make such payment, or from other facts the Court can infer a new contract to reimWse him. Nor is a company bound in equity to pay the preliminary expenses because it has adopted and derived benefit from services previous to its incorporation:" Halsbury's Laws of England, vol. 5, p. 56. "A promoter cannot claim from the company he promotes any pajTnent for his services or expenses in promoting it, unless, in the case of a company incorporated by special Act or charter, the Act or charter so provides, or unless the company after its incorporation agrees with him to make such payment, or, semble, takes the benefit of his services or expenditure :" Hamilton's Company Law, p. 69. The Act incorporating the defendant company makes no provision for payment of these expenses, nor is this a case in which the company could be held because of its acceptance of the benefits of the services rendered ; and, therefore, an equitable liability falling upon it : In re National Motor Mail Coach Co., Clinton's Claim, [19081 2 Ch. 515. The personal defendants, as well as the plaintiff, were the projec- tors of the company, and in a sense the promoters. None of them undertook personally any liability other than as subscribing share- holders. "In the absence of an express contract, one of several promot- ers cannot sue another for remuneration for promoting services:" Holmes v. Higgins (1822), 1 B. & C. 74. It was the intention that the expenses connected with the incor- poration would be paid by the company after its incorporation; and, if things had gone on smoothly and the company entered upon business, no doubt they would have been ; but the company did not commence business, stock subscriptions were not paid, nor any part SECT. 1.] VAN HUMMELL V. INTERNATIONAL GUARANTEE CO. 363 of them, and the trouble with the plaintiff, it would seem, contributed to these results. The plaintiff relies on the resolutions of the 8th and 20th May as an adoption by the company of the understanding with the pro- moters to compensate him and as constituting an agreement to do so. A company cannot ratify ^ a contract which was made by its pro- moters when the company was not in existence : In re Empress Engi- neering Co., 16 Ch. D. 125. But an agreement entered into between certain individuals be- fore a company is formed can be adopted ^ by the company after it is formed : Spiller v. Paris Skating Rink Co., 7 Ch. D. 368 ; Touche V. Metropohtan Railway Warehousing Co., 6 Ch. D. 671. In the latter case the articles of association provided for promotion ex- penses, and the company, when incorporated, agreed to the payment for such expenses. Without the resolutions referred to, there is nothing to evidence an adoption, nor do I think that these resolutions can have that effect so as to make the company liable to the plaintiff for promoting expenses. It is to secure his services as manager of the company, and in consideration of securing him as such, that they provide for his salary dating back in order to compensate him for his previous services. It is not likely that the company would so compensate the plaintiff if they were not securing a continuation of his services, as the success of the undertaking was largely dependent on him, and his refusal to accept the proposition made would justify the company in rescinding the resolutions and dispensing with his fur- ther services. He was engaged, however, as general manager on the 1st April, 1912, and continued as such until the 29th May, and during that • In McArthur v. Times Printing Co., 48 Minn. 319, Mitchell, J. said: " Although the acts of a corporation with reference to the contracts made by promoters in its behalf before its organization are frequently loosely termed 'ratification', yet a 'ratification', properly so called, implies an existing person, on whose behalf the contract might have been made at the time. There cannot, in law, be a ratification of a contract which could not have been made binding on the ratifier at the time it was made, because the ratifier was not then in existence. In re Empress Engineering Co., 16 Ch. Div. 128 ; Melhado v. Porto Alegre, N. H. & B. Ry. Co., L. R. 9 C. P. 505 ; Kelner v. Baxter, L. R. 2 C. P. 185. What is called ' adoption,' in such cases, is, in legal effect, the making of a contract of the date of the adoption, and not as of some former date." ^ If the corporation does adopt a contract, it then becomes liable on the contract it- self, and not merely in quasi contract for benefits received. Tuttle ». George A. Tuttle Co., 101 Me. 287. The English and American courts, conceding the principle, differ in view as to what corporate acts are requisite or equivalent to an adoption. The chief point of divergence is the effect to be attributed to receipt by the corporation of the benefits of the original contract, i.e. whether such actual or physical receipt constitutes mental acceptance or evinces assent to be bound. The question, then, is essentially one to be solved by the Law of Contracts. The cases are collected and distinguished in an acute article by Dean H. S. Richards in 19 Harv. Law Rev. 97, entitled "The Lia- bility of Corporations on Contracts made by Promoters." See Moriarity v. Meyer, 157 Pac. (New Mex., 1916) 652. 364 ORGANIZATION — PROMOTION. [CHAP. I- time he worked for the company, and is entitled to compensation for that time. It is well established that a director cannot take the benefit of a contract entered into between himself and the company, in such cases as that of Albion v. Martin, 1 Ch. D. 580, cited by counsel for the defendant company ; but the principle in such cases is not apph- cable here.^ The case of Birney v. Toronto Milk Co., 5 0. L. E. 1, is strongly relied upon by the defendant company. That case is, however, governed by the Ontario Companies Act, ch. 191, R. S. O. 1897, sec. 47, which provides that a contract such as the engaging of a manager must be by by-law. There is no such provision applicable here. I do not think the circumstances of this case to be within the mischief to which the principle of law was intended to be applied. It seems to me that the appointment of one of the directors as manager of the company is more in the interests of the company than the appointment of some one having no interest in it. There will be judgment against the defendant company for $1,000, together with costs, and judgment for the personal defendants for $3,064.60, being the amount assigned to them by the Northern Crown Bank as representing the plaintiff's indebtedness to the bank, also with costs.^ ' Contracts by a corporation with its own directors are considered infra Book IV, Chap. 3, Sec. 4. > ^ Accord: Weatherford &c. Ry. Co. ». Granger, 86 Tex. 350. (Corporation not liable on contract made by plaintiff, a lawyer, with a promoter for legal services in advising as to articles of incorporation, and in preparing this paper, although that promoter was the general manager of the project and became the majority stockholder upon its organiza- tion. "Such services are usually necessary, and it would seem "that the corporation should pay for them. Such payment is frequently provided for in the act of incorpora- tion, or in the articles when the incorporation is effected under a general law. When such is the case, persons who take stock in the company are chargeable with notice that a liability for this purpose has already been created, and it is proper for the corporation to discharge it. But in the absence of such provision in the statute or in the articles, it may be unjust to shareholders to charge the corporation with liabilities of which they had no actual knowledge at the time they accepted the shares. We therefore hold, with some hesitation, that claims for the necessary expenses of the organization, under our statute, should not be excepted from the general rule applicable to contracts made before the corporation has come into legal existence.") Cf. Farmers' Bank &c. v. Smith, 105 Ky. 816. (Corporation by an implied contract is liable for such services rendered for its use as are necessary to its formation or to be done by it, after its incorporation, in furtherance of its corporate business. ' ' Any other rule would render it difficult to organize any corporation, however necessary. No per- son would render the services, or pay another to do so, however essential it be to the or- ganization, if there was no obligation to pay by the corporation after it is brought into existence."). And see Lindenberger Cold Stor. &c. Co. v. Lindenberger, 235 Fed. 542. Although the promoter may contract in the name of the corporation to be formed, he is personally liable on that contract because there is no principal who can authorize «r ratify it. Weatherford &c. Ry. Co. v. Granger, supra ; Strause v. Richmond Wood- workmg Co., 109 Va. 724. Otherwise if agreement is made to look to the corporation ■exclusively. Shields v. Clifton &c. Land Co., 94 Tenn. 123. He is likewise personally liable to those injured, if he knowingly issues or sanctions SECT. 1.] OLD DOMINION COPPER CO, V. LEWISOHN. 365 OLD DOMINION COPPER MINING AND SMELTING COMPANY V. LEWISOHN. 210 U. S. 206. 1908. Mr. Justice Holmes delivered the opinion of the court. This is a bill in equity brought by the petitioner to rescind a sale to it of certain mining rights and land by the defendants' testator, or in the alternative to recover damages for the sale. The bill was demurred to and the demurrer was sustained. 136 Fed. Rep. 915. Then the bill was amended and again demurred to, and again the demurrer was sustained, and the bill was dismissed. This decree was affirmed by the Circuit Court of Appeals. 148 Fed. Rep. 1020 ; 79 C. C. A. 534. The ground of the petitioner's case is that Lewisohn, the deceased, and one Bigelow, as promoters, formed the petitioner that they might sell certain properties to it at a profit, that they made their sale while they owned all the stock issued, but in con- templation of a larger further issue to the public without disclosure of their profit, and that such an issue in fact was made. The Supreme Judicial Court of Massachusetts has held the plaintiff entitled to recover from Bigelow: upon a substantially similar bill. 188 Massa- chusetts, 315. The facts alleged are as follows : The property embraced in the plan was the mining property of the Old Dominion Copper Company of Baltimore, and also the mining rights and land now in question, the latter being held by one Keyser, for the benefit of himself and of the executors of one Simpson, who with Keyser owned the stock of the Baltimore company. Bigelow and Lewisohn, in May and June, 1895, obtained options from Simpson's executors and Keyser for the purchase of the stock and the property now in question. They also formed a syndicate to carry out their plan, with the agreement that the money subscribed by the members should be used for the pur- chase and the sale to a new corporation, at a large advance, and that the members, in the proportion of their subscriptions, should receive in cash or in stock of the new corporation the profit made by the the circulation of a false prospectus naturally tending to mislead and induce the pur- chaseof corporate stock or securities. t)owney ». Finucane, 205 N. Y. 251. AH the pro- moters are liable for the fraud of an agent employed by them to effect such sales irre- spective of their own moral guilt or innocence. Hornblower v. Crandall, 78 Mo. 581. " The law would be helpless if its obligations could be avoided by this convenient igno- rance. Where the parties sought to be charged might have known and where it can fairly be inferred that they with the wrongdoers received the benefit of the contrivance, their ignorance cannot avail them." Ibid. But a director per se is not personally liable for the fraud of corporate agents employed to market its stock, unless he is at least charge- able with knowledge of their fraudulent acts. Arthur v. Griswold, 55 N. Y. 400 ; Rivea ■V. Bartlett, 215 N. Y. 33. Cf. Childs v. White, cited in note 1, page 620, infra. 366 ORGANIZATION — PROMOTION. [CHAP. I. sale. On May 28, 1895, Bigelow paid Simpson's executors for their stock on behalf of the syndicate, in cash and notes of himself and Lewisohn, and in June Keyser was paid in the same way. On July 8, 1895, Bigelow and Lewisohn started the plaintiff cor- poration, the seven members being their nominees and tools. The next day the stock of the company was increased to 150,000 shares of twenty-five dollars each, officers were elected, and the corporation became duly organized. July 11, pursuant to instructions, some of the officers resigned, and Bigelow and Lewisohn and three other absent members of the syndicate came in. Thereupon an offer was received from the Baltimore company, the stock of which had been bought, as stated, by Bigelow and Lewisohn, to sell substantially all its property for 100,000 shares of the plaintiff company. The offer was accepted, and then Lewisohn offered to sell the real estate now in question, obtained from Keyser, for 30,000 shares, to be issued to Bigelow and himself. This also was accepted and posses- sion of all the mining property was delivered the next day. The sales "were consummated" by delivery of deeds, and afterwards, on July 18, to raise working capital, it was voted to offer the remain- ing 20,000 shares to the public at par, and they were taken by sub- scribers who did not know of the profit made by Bigelow and Lewi- sohn and the syndicate. On September 18, the 100,000 and 30,000 shares were issued, and it was voted to issue the 20,000 when paid for. The bill alleges that the property of the Baltimore company was not worth more than $1,000,000, the sum paid for its stock, and the property here concerned not over $5,000, as Bigelow and Lewi- sohn knew. The market value of the petitioner's stock was less than par, so that the price paid was $2,500,000, it is said, for the Balti- more company's property and $750,000 for that here concerned. Whether this view of the price paid is correct, it is unnecessary to decide. ' Of the stock in the petitioner received by Bigelow and Lewisohn or their Baltimore corporation, 40,000 shares went to the syndicate as profit, and the members had their choice of receiving a like addi- tional number of shares or the repayment of their original subscrip- tion. As pretty nearly all took the stock, the syndicate received about 80,000 shares. The remaining 20,000 of the stock paid to the Baltimore company, Bigelow and Lewisohn divided, the plain- tiff believes, without the knowledge of the syndicate. The- 30,000 shares received for the property now in question they also divided. Thus the plans of Bigelow and Lewisohn were carried out. The' argument for the petitioner is that all would admit that the promoters ' (assuming the English phrase to be well applied) stood 1 Ip Bigelow D. Old Dominion Copper &o. Co., 74 N. J. Eq. 457, Pitney, C. said: "The term 'promoter' is a term not of law but of business. A promoter is one who seeks opportunities for making advantageous purchases and profitable investments in SECT. 1.] OLD DOMINION COPPEE CO. V. LEWISOHN. 367 in a fiduciary relation ^ to it, if, when the transaction took place, there were members who were not informed of the profits made and industrial or other enterprises, who interests men of means in such a project when found, organizes them into a corporation for the purpose of 'taking over' the project, and at- tends upon the newly-formed company until it is fully launched in business. He may be stockholder, director, officer, or none of these. His services begin before the com- pany is formed, and ordinarily are not concluded until some time after its formation. For what he does and for what he spends in seeking out and bringing together property or opportunity, on the one hand, and men with capital, on' the other, he is entitled to reasonable compensation and reimbursement by the new company. But it so often happens that promoters desire to make a profit exceeding mere compensation for their time and legitimate expenses, that what they thus get from the company has come to be called 'promoter's profits.' No rule of law or of equity prohibits such profits, provided they be allowed as the result of a fair agreement amongst all parties concerned. But promoters quite often desire to take their profit immediately upon the formation of the company, while in a practical sense, it is in the formative period, with directors and officers who are the mere employes and figureheads of the promoter. Equity recognizes that in such a state of affairs the company as a corporation cannot make a binding bar- gain with the promoter, because he, in his control of the directors, is acting as a fiduciary agent for the company, and is himself in that capacity making a bargain with himself in his individual capacity. Hence the rule that the burden of sustaining such a bargain i s upon the promoter, and t ha t it cannot stand unless he has seen to it that the company is' equipped witn an mdependent board of directors to represent the general body of shareh61d<)ra liiJ a^itmsL Lne interest of tne promoter nimseit and tnat full disclnaiji-R ia nt agg ' tu g UUU ' faUil J. Of, If mure He nat M JM^^enaSBt aaara, the re musi be unan i- mous consent of ai l tne snarehold'ers, given alter lull aisciosure. j'raud or misrepresen- - taawng«ITTOqmrea'TyBg^liQwnm'or'aer to disentitle the promoteFToT.he aecref, nrotit. . _■ ■^ ' ' Whfere a promoter's profit is taken in the lorm of shares that represent no invest- ment in money or in property, and exceed the reasonable services and legitimate ex- penses of the promoter, the shares are not deemed fully paid within the meaning of a statute that requires money or money's worth equivalent to the par value of the shares to be contributed by subscribers. And in such event the promoter who takes such shares ■by way of secret and undisclosed profit while he is acting in a fiduciary capacity to the company, while liable to refund the shares or the proceeds of sale of them to the com- pany on this account, will be also liable under the statute as for unpaid subscriptions. Of course, however, it is not a double liability. If he refunds the undisclosed profit, and thereby in effect satisfies his stock subscription, he cannot be held liable afterwards in an action upon the statute, and vice versa. I "On the other hand, the promoter who takes shares as an undisclosed profit may be liable as promoter, but under no liability for unpaid stock subscription. This might happen if he sold property to the company for no more than it was worth, but sold it at a price higher than his fiduciary duty to the company permitted; that is to say, at a secret profit to himself. "In many cases, promoters in anticipation of the formation of the company them- selves, buy property in order to make it over to the company upon formation. Whether the company in such cases is entitled to claim the benefit of the bargain made by the promoter is often a question of nicety, and may depend upon whether the promoter buys the property with his own money or with money that is in effect subscribed for the share capital. It may be thus in effect subscribed before the formation of the company, as is the case with many syndicates, in which event the promoter may be a trustee with respect to the property for the company thereafter to be formed, on the theory that the property was bought for the company. . . . ' ' The doctrine of promoter's liability is not the creature of statute ; it is ' judge-made ' law, in the sense that courts of equity everywhere, recognizing the obligations arising from the fiduciary relation, have applied to it the same principles of equity that obtain in all cases of trust." In Old Dominion Copper &c. Co. v. Bigelow, 203 Mass. 159, Rugg, C. J. said: " Not- ' See Chap. 3, Sec. 4 infra. Consideration of the instant case and its annotations may conveniently and profitably be postponed until the principles of the Section last mentioned have been mastered. 368 ORGANIZATION — PEOMOTION. [CHAP. I. who did not acquiesce, and that the same obligation of good faith, extends down to the time of the later subscriptions, which it was the promoters' plan to obtain. It is an argument that has commanded the assent of at least one court, and is stated at length in the deci- sion. But the courts do not agree. There is no authority binding upon us and in point. The general observations in Dickerman v. Northern Trust Co., 176 U. S. 181, were ohiter, and do not dispose: of the case. Without spending time upon the many dicta that were quoted to us, we shall endeavor to wfeigh the considerations on one side and the other afresh. The difficulty that meets the petitioner at the outset is that it- has assented to the transaction with the full knowledge of the facts. It is said, to be sure, that on September 18, when the shares were issued to the sellers, there were already subscribers to the 20,000 shares that the public took. But this does not appear from the bill, unless it should be inferred from the ambiguous statement that on that day it was voted to issue those shares "to persons who had subscribed therefor," upon receiving payment, and that the shares "were thereafter duly issued to said persons," etc. The words "had subscribed" may refer to' the time of issue and be equivalent to- "should have subscribed" or may refer to an already past event. But that hardly matters. The contract had been made and the property delivered on July 11 and 12, when Bigelow, Lewisohn and some other members of the syndicate held all the outstanding stock,, and it is alleged in terms that the sales were consummated before ■withstanding this fiduciary relation the promoter may sell property to the company ■which he is promoting. But in order that the contract may be absolutely binding he- must pursue one of four courses: (a) He may provide an independent board of officers in no respect directly or indirectly under his control, and make full disclosure to the cor- poration through them ; (6) He may make a full disclosure of all material facts to each original subscriber of .shares in the corporation ; (c) He may procure a ratification of the contract after disclosing its circumstances by vote of the stockholders of the completely established corporation ; (d) He may be himself the real subscriber of all the shares of the capital stock contemplated as a part of the promotion scheme. The defendant does not contend upon this report that either of the first t^wo courses was follo^wed. He does rest his claim chiefly upon the third and fourth courses. As applied to the facts of this case these two come to the same thing, for the reason that on the findings of the single justice the defendant and his associate were subscribers for only one hundred and thirty thou- sand shares out of a total one hundred and fifty thousand and in the light most favorable to them they held all the shares which had been issued at the time of the ratification, but not all which it was proposed to issue as a part of the scheme of promotion. The point to be determined, therefore, is whether the promoter is immune from liability if he and his associates are owners of all the issued stock at the time of the act complained of, although intending as a part of their plan the immediate issue of further stock to the public ■without disclosure.and whether, while a substantial portion of the stock intended to be issued to the public remains unissued, a vote of ratification of the breach of trust will protect him. "A review of the authorities seems to demonstrate that there is a liability of the promoter to the corporation when further original subscribers to capital stock contem- plated as an. essential part of the scheme of promoters came in after the transaction complained of, even though that transaction is known to all the then stockholders, that is to say, to the promoters and their representatives." SECT. 1.] OLD DOMINION COPPER CO. V. LEWISOHN. 3Q9 the vote of July 18 to offer the stock to the pubUc had been passed. At the time of the sale to the plaintiff, then, there was no wrong done to any one. Bigelow, Lewisohn and their syndicate were on both sides of the bargain, and they might issue to themselves as much stock in their corporation as they liked in. exchange for their conveyance of their land. Salomon v. Salomon & Co. [1897], A. C. 22 ; Blum v. Whitney, 185 N. Y. 232 ; Tompkins v. Sperry, 96 Mary- land, 560. If there was a wrong it was when the innocent public subscribed. But what one would expect to find, if a wrong happened then, would not be that the sale became a breach of duty to the cor- poration nunc pro tunc, but that the invitation to the public without disclosure, when acted upon, became a fraud upon the subscribers from an equitable point of view, accompanied by what they might treat as damage. For it is only by virtue of the innocent subscribers' position and the promoter's invitation that the corporation has any pretense for a standing in court. If the promoters after starting their scheme had sold their stock before any subscriptions were taken, and then the purchasers of their stock with notice had invited the public to come in and it did, we do not see how the company could maintain this suit. If it could not then, we do not see how it can now. But it is said that from a business point of view the agreement was not made merely to bind the corporation as it then was, with only forty shares issued, but to bind the corporation when it should have a capital of $3,750,000 ; and the implication is that practically this was a new and different corporation. Of course, legally speak- ing, a corporation does not change its identity by adding a cubit to its stature. The nominal capital of the corporation was the same when the contract was made and after the public had subscribed. Therefore what must be meant is, as we have said, that the corpora- tion got a new right from the fact that new men who did not know what it had done had put in their money and had become members. It is assumed in argument that the new members had no ground for a suit in their own names,' but it is assumed also that their position changed that of the corporation, and thus that the indirect effect of their acts was greater than the direct ; that facts that gave them no claim gave one to the corporation because of them, notwithstand- ing its assent. We shall not consider whether the new members had a personal claim of any kind, and therefore we deal with the case without prejudice to that question, and without taking advantage of what we understand the petitioner to concede. ' But, if we are to leave technical law on one side and approach the case from what is supposed to be a business point of view, there are new matters to be taken into account. ' See Chap. 4, Sec. 7, infra. 370 ORGANIZATION — PROMOTION. [CHAP. I. If the corporation recovers, all the stockholders, guilty as well as innocent, get the benefit. It is answered that the corporation is not precluded from recovering for a fraud upon it, because the party committing the fraud is a stockholder. Old Dominion Copper Mining and Smelting Co. v. Bigelow, 188 Massachusetts, 315, 327. If there had been innocent members at the time of the sale, the fact that there were also guilty ones would not prevent a recovery, and even might not be a sufficient reason for requiring all the guilty members to be joined as defendants in order to avoid a manifest injustice. Stockton w. Anderson, 40 N. J. Eq. 486. The same prin- ciple is thought to apply when innocent members are brought in later under a scheme. But it is obvious that this answer falls back upon the technical diversity between the corporation and its mem- bers, which the business point of view is supposed to transcend, as it must, in order to avoid the objection that the corporation has assented to the sale with full notice of the facts. It is mainly on this diversity that the answer to the objection of injustice is based in -New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73, 114, 122. Let us look at the business aspect alone. The syndicate was a party to the scheme to make a profit out of the corporation. Whether or not there was a subordinate fraud committed by Bigelow and Lewisohn on the agreement with them, as the petitioner believes,. is immaterial to the corporation. The issue of the stock was appar- ent, we presume, on the books, so that it is difficult to suppose that at least some members of the syndicate, representing an adverse interest, did not know what was done. But all the mernbers were engaged in the plan of buying for less and selling to the corporation for more, and were subject to whatever equity the corporation has against Bigelow and the estate of Lewisohn. There was some argument to the contrary, but this seems to us the fair, meaning of the bill. Bigelow and Lewisohn, it is true, divided the stock re- ceived for the real estate now in question. But that was a matter between them and the syndicate. The real estate was bought from Keyser by the syndicate, along with his stock in the .Baltimore company, and was sold by the syndicate to the petitioner along with the Baltimore company's property, as part of the scheme. The syndicate was paid for it, whoever received the stock. And this means that two-fifteenths of the stock of the corporation, the 20,000 shares sold to the public, are to be allowed to use the name of the corporation to assert rights against Lewisohn's estate that will enure to the benefit of thirteen-fifteenths of the stock that are totally without claim.'' It seems to us that the practical objection is as strong as that arising if we adhere to the law. > Cf. Provident Trust Co. ». Geyer, 248 Pa. 423. (Bill to declare a trust and for an accounting against directors for profits made by defendants in sale of plaintiff's treasury SECT. 1.] OLD DOMINION COPPER CO. V. LEWISOHN. 371 Let us take the business point of view for a moment longer. To the lay mind it would make little or no difference whether the 20,000 shares sold to the public were sold on an original subscription to the articles of incorporation or were issued under the scheme to some of the syndicate and sold by them. Yet it is admitted, in accordance with the decisions, that in the latter case the innocent purchasers would have no claim against any one. If we are to seek what is called substantial justice in disregard of even peremptory rules of • law, it would seem desirable to get a rule that would cover both of the almost equally possible cases of what is deemed a wrong. It might be said that if the stock really was taken as a preliminary to selling to the public, the subscribers would show a certain confidence in the enterprise and give at least that security for good faith. But the syndicate believed in the enterprise, notwithstanding all the profits that they made it pay. They preferred to take stock at par rather than cash. Moreover, it would have been possible to issue the whole stock in payment for the property purchased, with an imderstanding as to 20,000 shares. Of course, it is competent for legislators, but not, we think, for judges, except by a gitasi-legislative declaration, to establish that a corporation shall not be boimd by its assent in a transaction of this kind, when the parties contemplate an invitation to the public to come in and join as original subscribers for any portion of the shares. It may be said that the cfOrporation cannot be bound until the con- teniplated adverse interest is represented j or it may be said that promoters cannot strip themselves of the character of trustees until that moment. But it seems to us a strictly legislative determination. It is difficult, without inventing new and qualifjang established doc- trines, to go behind the fact that the corporation remains one and the same after once it really exists. When, as here, after it really exists, it consents, we at least shall require stronger equities than are shown by this bill to allow it to renew its claim at a later date because its internal constitution has changed. To sum up : In our opinion, on the one hand, the plaintiff cannot recover without departing from the fundamental conception embodied in the law that created it ; the conception that a corporation remains unchanged and unaffected in its identity by changes in its members. Donnell v. Herring-Hall-Marvin Safe Co., 208 U. S. 267, 273; Sal- omon V. Salomon & Co. [1897], A. C. 22, 30. On the other hand, if we should undertake to look through fiction to facts, it appears to us that substantial justice would not be accomplished, but rather stock. Held: Under the facts, shareholders of record, when the treasury stock was sold, were the only persons to participate in the profits recovered.) See article entitled "Promoters' Liability: Old Dominion v. Bigelow,'' in 30 Harv. Law. Rev. (Nov., 1916) 39, by Hon. R. D. Weston, the Master who heard the petitions filed by Bigelow, after the decision in 203 Mass. 159, for permission to file bills of review based on newly discovered evidence. 372 ORGANIZATION — PROMOTION. [CHAP. I. a great injustice done, if the corporation were allowed to disregard its previous assent in order to charge a single member with the whole results of a transaction to which thir teen-fifteenths of its stock were parties, for the benefit of the guilty, if there was guilt in any- one, and the innocent alike. We decide only what is necessary. We express no opinion as to whether the defendant properly is called a promoter, or whether the plaintiff h^s not been guilty of laches, or whether a remedy can be had for a part of a single transaction in the form in which it is sought, or whether there was any personal claim on the part of the innocent subscribers, or as to any other question than that which we have discussed. The English case chiefly relied upon, Erlanger v. New Sombrero Phosphate Co.,i 3 App. Cas. 1218, affirming s. c, 5 Ch. D. 73, seems to us far from establishing a different doctrine for that jurisdiction. There, to be sure, a syndicate had made an agreement to sell, at a profit, to a company to be got up by the sellers. But the company, at the first stage, •wa^s made up mainly of outsiders, some of them instruments of the sellers, but innocent instruments, and, according to Lord Cairns, the contract was provisional on the shares being taken and the company formed (p. 1239). There never was a mo- ment when the company had assented with knowledge of the facts. The shares, with perhaps one exception, all were taken by subscribers ignorant of the facts, 5 Ch. D. 113, and the contract seems to have- reached forward to the moment when they subscribed. . As it is put in 2 Morawetz, Corp. (2d ed.) § 292, there was really no com- pany till the shares were issued. Here thirteen-fifteenths of the stock had been taken by the syndicate, the corporation was in full life and had assented to the sale with knowledge of the facts before an outsider joined. There most of the syndicate were strangers to the corporation, yet all were joined as defendants (p. 1222). Here 1 Inthiscase Lord Caikns said : The promoters "have in their hands the creation and moulding of the company ; they have the power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin to act as a tradmg corporation If they are doing all this in order that the company may, as soon as it starts into hfe, become, through its managing directors, the purchaser of the property of themselves, the promoters, it is, in my opinion, incumbent upon the pro- moters to take care that in forming the company they provide it with an executive, that ih^ arf^I^S t^ K ""^ of directors, who shall both be aware that the property which ^tZT^^f f '' the property of the promoters, and who shall be competent-and rj^tw U»^^' °^ ? ^^^^^T *^^ purchase ought or ought not to be made. I do not tw »l^?v "^^'l °f P^Pf ty^inay not promote and form a joint-stock company, and ■ seritlotwZ'' *".?,*■ ^"tl^^° '^V^^' " ^^ '^°'' ^^ ^ b°""d t° t^ke care th^t he sells it to the company through the medium of a board of directors who can and do exer- uX^he b'el^fttrth'"*''""'^;* V"1^^°* °" *^^ transaction, and who are not let person 1 of^n lu 1"°'^'^^ ^^^°'^' ''°* *° *^^ promoter, but to some other not and ^o'uld notXn^l /T'^ ^ meeting at which two of the principal directors did not and could not attend, at which one who did attend and take part in the deliberations was at once a person buying and selling, where the legal adviser present and assMna wC"Srr.*^"f"'°'°-'."°'* "^^^u^ '"^^ *"° ^^-''°-^ directors are not shown tf SECT. 1.] OLD DOMINION COPPER CO. V. LEWISOHN. 373. the members of the syndicate, although members of the corporation, are not joined, and it is sought to throw the burden of their act upon a single one. Gluckstein v. Barnes ^ [1900], A. C. 240, cer- taialy is no stronger for the plaintiff, and in Yeiser v. United States Board & Paper Co., 107 Fed. Rep. 340, another case that was relied upon, the transaction equally was carried through after innocent subscribers had paid for stock. Decree affirmed.^ ^ In this case, Lord Robertson said: "In the normal case, where the directors are truly and not merely in name the executive of the company, it may be assumed that they ■will be vigilant and critical of the particula.rs of a bargain of such paramount importance as the purchase of the property to be traded with, and that, dealing at arm's length, they will examine into anjrthing bearing on that matter that does not tell its own story in its face. But, in the present case, the company was paralyzed so far as vigilance and criti- cism were concerned ; for the board-room was occupied by the enemy. Now, the ques- tripn whether adequate disclosure has been made to a company by a vendor bound to do 80 must necessarily depend upon the intelligence brought to bear on the information. And if, by his own act, the promoter has weakened, or, as here, has annulled the direc- torate, his case on disclosure becomes extremely arduous — for he has to make out such disclosure to shareholders as malces directors unnecessary. How this could be done we have no occasion to consider, for the appellant is not within sight of doing it. Indeed, the case is so clear that I do not think it is a case of inadequate disclosure, but of direct misrepresentation. ' ' 2 Contra : Old Dominion Copper &e. Co. v. Bigelow, 203 Mass. 159. Rugg, C. J. said: "This review of decisions seems to establish abundantly the proposition that promoters stand in a fiduciary position toward the corporation, as well when as a part of the scheme of promotion uninformed stockholders are expected to come in after the wrong has been perpetrated, as when at that time there are shareholders to whom no dis- closure is made. We find no authority opposed except the Lewisohn cases in the federal courts (210 U. S. 206). "If the question is examined on principle apart from authority, the same result ap- pears clear. The starting point is that a promoter is a fiduciary to the corporation. . . . The corporation is in the hands of the promoter like clay in the hands of the potter. It is to this person, absolutely helpless and incapable of independent initiative or uncon- trolled action, that the promoter stands as trustee. It is not necessary to inquire how far he may be trustee also for shareholders or associates. In the present case the inquiry relates wholly to his obligation to the corporation. The fiduciary relation must in rea- son continue until the promoter has completely established according to his plan the being which he has undertaken to create. His liability must be commensurate with the scheme of promotion on which he has embarked. If the plan contemplates merely the organization of the corporation his duties may end there. But if the scheme is more ambitious and includes beside the incorporation, not only the conveyance to it of property but the procurement of a working capital in cash from the public, then the obligation of faithfulness stretches to the length of the plan. It would be a vain thing for the law to say that the promoter is a trustee subject to all the stringent liabilities which inhere in that character and at the same time say that, at any period during his trusteeship and long before an essential part of it was executed or his general duty as such ended, he could, by changing for a moment the ftloak of the promoter for that of director or stockholder, by his own act alone, absolve himself from all past, present or future liability in his capacity as promoter. The plaintiff was fully organized and authorized to do business on July 8 and 11, 1895, when only $1,000 in capital stock had heen paid in. It would be an idle ceremony indeed to establish for promoters the obliga- tions of trustees, and at the same time hold that by their tools and with only $1,000 paid in, and that as a mere form (for it was soon after repaid to one of them) they could vote to themselves a wholly unwarranted profit of Sl,250,000, kept secret from other initial shareholders, because at that moment they were the only stockholders.' By such a course the law would be holding out apples of Sodom to the wronged corporation. Corporations can be formed through irresponsible agents with ease. If these agents can vote away a substantial part of the capital stock for property of comparatively 374 ORGANIZATION — SUBSCRIPTIONS. [CHAP. I. Section 2. Subscriptions to Stock. GALBRAITH v. McDONALD. 123 Minn. 208, L.R.A. 1915 A, 464. 1913. Action by the trustee in bankruptcy of the Washington County Co-operative Co. to recover $100 upon a promissory note made by defendant in favor of the bankrupt company. The answer alleged small value, and still with immunity to themselves and their principals receive from the uninformed public cash subscriptions for the rest of the capital stock, the organization and management of corporations might readily become a ' system of frauds.' Peabody s Flint, 6 Allen, 52, 55. It is answered that the plaintiff has assented to the transaction with full knowledge of the facts. "But it has not assented when it stood where it could act independently. The assent to the wrongful act of the promoters was given at the behest and by vote of the promoters themselves, while still occupying the position of protectors to their own creature, while it was bound hand and foot by them and pre- vented from taking any action except through them as a step in its further exploitation, and while their trust was uncompleted. The corporation although by law fully organ- ized was still in its swaddling clothes so far as the plans of the promoters were concerned. The value of their stock taken in return for their mining property was dependent in a substantial degree upon the corporation having $500,000 in oasli for a working capital. They could not perfect their plans nor reap their contemplated profit, except by retain- ing their hold upon the corporation until the public had made this contribution. In one sense it is true that the plaintiff was completely organized on July 11 and on September 20, 1895. It was fully competent to be bound by its contracts and ratification of con- tracts with those dealing with it at arm's length. But it was not free from its wardship to its promoters, whose scheme from the first looked forward to a corporation with treas- ury filled by subscriptions from the unenlightened public. The corporation was not dealing with these fiduciaries upon an independent ground. The plaintiff, although a legal corporation from July 8, leaned wholly upon its promoters, because they made it so to lean, until long after the events here in controversy. An assent under these condi- tions can be of no greater effect than the assent of a minor under guardianship to the breaches of trust of his guardian. "The situation is akin to the conveyance of property by a man solvent but in con- templation of insolvency. Such conveyance is not wrong until the contemplated in- debtedness is incurred which makes him an insolvent. Then the executed evil intent stretches back and invalidates the original conveyance. Here the conveyance to the corporation with the secret profits, when there are no uninformed subscribers to stock, if nothing more is ever done, is not an actionable tort. But the vicious intent looks for- ward to the procurement of money from the ignorant public by means of original sub- scriptions and the execution of this evil intent extends backward to contaminate the sale and its profit. "Stress has sometimes been laid upon the fact that the promoters were paid a part of their purchase price out of the public subscriptions. But there is no difference in principle between such a case and the present, where a substantial part of the value of the stock taken by the defendant and Lewisohn depended upon the cash subscriptions to be made by the public for the remaining shares not issued to the promoters. "But it is further argued that, the entire capital stock outstanding at the time being in the hands of the promoters, the sale of the property to the corporation was merely changing the form of title of the promoters from owners of real estate to that of shares of stock, and that, there being then no other shareholders, no wrong was done. It has been decided that where persons own the entire authorized capital stock of the SECT. 2.] GALBRAITH V. MCDONALD. 375 the execution of the note in payment for one share of stock in the company, but that neither plaintiff nor the Co-operative Co., prior to the commencement of the action, either tendered to or offered company and take it in payment for the conveyance of their property at a grossly exag- gerated price, nobody can be heard to complain. The leading English cases upon this point are In re Gold Co., 11 Ch. D. 701, In re Ambrose Lake Tin &o. Co., 14 Ch. D. 390, In re British Seamless, &o. Box Co., 17 Ch. D. 467, and Salomon v. Salomon [1897], A. C. 22. But these and many other like cases . . . are where the promoters owned all the outstanding capital stock and intended to remain the sole proprietors and did not pur- pose that there should be, as a part of the promotion plan, a substantial issue of stock for cash to the public. This is pointed out in London Trust Co. v. Mackenzie, 62 L. J. Ch. (N. S.) 870, 875. The distinction is clear between cases of that class and those like tha present, where the promoters took for themselves a large number of shares of stock without adequate consideration and without disclosure to the detriment of the corpora- tion and all its future shareholders, at the same time planning that there should be im- mediate public subscriptions. It is one thing to take all the shares of a corporation in payment for physical property conveyed. It does not much matter to the stockholders in such a case whether the total is one hundred and thirty thousand shares or one hun- red and fifty thousand shares. But it is a very different thing to take ' of 150,000 capital stock of a corporation whose assets consist of the same physical property, and iu addition $500,000 in money subscribed by others. The latter course affects the other stockholders and the corporation itself, and it gives the promoters something appreci- ably more valuable than what they contribute. It is true that in Salomon v. Salomon and in some other cases there was a part of the authorized capital stock which was not issued, but it was not proposed to be issued as a part of the scheme of promotion and the original shareholders intended to remain the only shareholders. It was to be issued or not in the remote future, as the exigencies of the corporation in the actual conduct of its business might require, but, in any event, it was not to be issued for the purpose of start- ing the corporation on its course. This circumstance materially affects the question here to be considered. Most, if not all, corporation laws provide in some form for an increase of capital stock. It is of no consequence upon such a point as this, whether the capital stock originally authorized is large but not all issued or whether it is at first small and subsequently an increase is authorized. This seems to be the view taken by the English courts, for it is said by James, L. J., in In re British Seamless Paper Box Co., 17 Ch. D. 467, ' If they [the promoters] were intending, although then constituting the whole company, that other people should come in afterwards to whom what had been done would be injurious, the court would feel no difficulty in sajdng as Lord Lapigdale did in Society of Practical Knowledge v. Abbott, 2 Beav. 559, that they intended to commit a fraud.' "The fundamental reasoning upon which these cases can rest is not that no wrong has been committed, but there is no one to enforce the remedy. All courts recognize the soundness of the doctrine that no man can be on both sides of the same bargain with justice to all interests. The principle that one cannot rightfully sell property, belonging to him in his private right, to himself in a trust capacity is universal. " If this aspect alone is looked at and the corporation is regarded as a distinct person, it cannot be said that the corporation is not wronged by such a breach of duty by pro- moters. It is only when the corporate personality is disregarded and its component elements as stockholders alone are considered that it can be said that no harm is done on the ground (as was said in Salomon v. Salomon [1897], A. C. at p. 57) that ' the company is bound in a matter intra vires by the unanimous agreement of its members.' But looking through the form of the corporation to the stockholders and treating them as the corporation is an exception to the otherwise firmly established universal rule that the corporation is a separate legal entity for all purposes, even though all its stock be held by a single interest and it be to all practical intents merely the instrument of the stock- holder. Conley v. Mathieson Alkali Works, 190 U. S. 406. Peterson v. Chicago, Rock Island & Pacific Railway, 205 U. S. 364, 390. We perceive no reason for extending this exception to a case like the present. "The real ground of the decisions of which Salomon v. Salomon is a type is that the corporation is estopped by the circumstance that all persons with financial concern i^ 376 ORGANIZATION — SUBSCRIPTIONS. [CHAP. I. to deliver to defendant the share of stock purchased by him. De- fendant's motion to dismiss the action was denied. Judgment was rendered in favor of plaintiff. From the order denying defendant's motion for a new trial, he appealed. the matter have assented with knowledge, and thus the lips of everybody are sealed. It is not that no wrong has been done, but that whatever wrong has been done has been condoned. The maxim ' Volenti non fit injuria' is invoked. This, however, is se;tting up confession and avoidance and not a bar to the main cause of action. "The theory upon which corporations are founded is that they are artificial persons distinct and separate from officers and stockholders. Corporate liabilities do not at- tach to the latter. The wrong which the defendant and his associate did in this case was in selling property worth intrinsically SI, 000, 000 and in the market at most 82,000,000 for $3,250,000 without revealing that they were making a secret profit. The wrong was done to the corporation. It affected all its shareholders, present and future alike. It is generally admitted that if there are existing stockholders ignorant of the wrong, redress may be had. But it is had through the corporation or for the benefit of the cor- poration and not by the stockholder in his own right. The wrong is not done to the shareholders as individuals, nor to the shareholders collectively, it is done to the corpora- tion as an independent beingi and thus indirectly the rights of those who are or who may become stockholders are affected. In buying the promoters' mine, the directors of the corporation acted for the corporation, as such, without regard to who were the then stockholders, or even if there were no stockholders. Whoever becomes an origina;lly contemplated shareholder coming in afterwards has as much right to say that the rights of the corporation were not protected and to insist that it should assert its remedy for the wrong done it, as one in at first but not informed. Subsequent subscriptions to original stock as a part of the scheme of promotion do not change the identity of the corporation, but remove an impediment to the enforcement of a remedy for a wrong previously done the corporation. The wrong is not done when the innocent public subscribes, but when the sale was made to the corporation at a grossly exaggerated price with secret profit. The occasion for complaining of this wrong comes when the pro- moters issue to the public the balance of the stock in order to provide the money neces- sary to set the corporation on its feet and to give thereby the contemplated value to the stock taken by themselves in payment for their mines. The exemption of the pro- moter from liability to the corporation for a sale without disclosure when he takes the entire issue of capital stock is an exception to the general rule imposing upon him the liabilities of a trustee. If this exception is to be extended to a case like the present, it leaves nothing of substantial value in the original rule. It might still reach small and grosser forms of want of fidelity to corporations, but would leave unharmed the vastly greater and more refined variety illustrated by the present case. It would point the way to general immunity for the wary. _ " It is also urged that the maintenance of this suit works an injustice to the defendant in requirmg a repayment to the corporation, which will result in a benefit to the thirteen fifteenths of the capital stock taken by the defendant and Lewisohn (who condoned the wrong) as well as to the two fifteenths subscribed for by the innocent public. The size of the rfepaymg which may be required of the defendant is due to the enormous profit taken at the outset. Apart from the unjust profit taken by the promoters, their interest in the plaintiff was only eight seventeenths, or, tested by the cost and intrinsic value of the property conveyed, four seventeenths. The true answer, however, is given by Jessel, M.R., in New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73, at p 114 'It is said that is not doing justice, and that the suit cannot be maintained in this form, be- cause It will not do justice. But that argument goes too far, because it would apply to a case of the grossest fraud.in every instance in which one or more of the actual share- holders of a company took part in that fraud. If the argument were once allowed to prevail, it would only be necessary to corrupt one single shareholder in order to prevent a company from ever setting the contract aside. It may be said you give to the share- holder, who was a party to the fraud, a profit, because he will take it in respect of his shares, and since as between co-conspirators there is no contribution, therefore his brother conspirators, who are made liable for the fraud, cannot make him repay his proportion. But the doctrine of this court has never been to hold its hand and avoid doing justice m favor of the innocent, because it cannot apportion the punishment fully SECT. 2.] GALBRAITH V. MCDONALD. 377 Holt, J. The only questiqn presented by the appeal is the right to recover upon a promissory note given to a corporation for a share of its stock when the only defense is a failure to deliver or tender a share certificate. amongst the guilty. A dozen parties to a fraud may be defendants, and one decree or judgment go against all, and if it is a fraud of such a character that none of them can bring an action for contribution, the plaintiff may at his will and pleasure enforce that judgment against any one of them, and perhaps pass over the most guilty of them ; still there is no remedy as between those who commit the fraud. It is one of the punish- ments of fraud that there is no such remedy, and that a guilty party, though not the most guilty, may suffer the greatest amount qi punishment. It is one of the deterrents to men to prevent their committinig fraud.' See also Stockton v. Anderson, 13 Stew, (N. J.) 486. "It is said further that the result reached is harsh from the business man's point of view. A discussion of this aspect of the case involves ethical considerations. Courts are constantly dealing with the various relations of the business world. Legal princi- ples are applied to these transactions, but such principles ' have almost always been the fundamental ethical rules of right and wrong.' Robinson ». MoUett, L. R. 7 H. L. 802, 817. Upon its distinctly moral side, there is little to the credit of the defendant and his associate: The offering by the defendant as promoter for public subscription for cash at par a substantial part of the capital stock of a corporation, the rest of whose capital stock had been issued for property conveyed to it under a law which permitted such stock to be issued only for the real value of property) was equivalent to a representation that no fictitious value had been placed upon the property so acquired. But the dis- tinct finding of the single justice is that the real value was less than one third the price for which the defendant and Lewisohn sold it. Nothing can be said in support of a business enterprise carried on by promoters, which involves the purchase by them of mines, costing and intrinsically worth $1,000,000, with money in substantial part solic- , ited from associates on representations that a corporation is to be formed ivith a capitalization of $2,500,000, of whose stock $2,000,000 is to be issued for the convey- ance to it by them of the mines, and the rest for cash ; the actual organization of the corporation under the laws of a State which permitted the issuance of capital stock for property conveyed only to the real value of the property, with a capital stock 6f $3,750,- 000, of which $3,250,000 is issued as fully paid for the conveyance of the mines ; the set- tlement with a very great majority of the associates on the basis of a sale for $2,000,000 of stock as at first represented, the promoters retaining $1,250,000 of shares as a secret profit, intending also to procure from the public subscriptions for $§00,000 of stock ia cash at par and actually carrying out this purpose, the promoters themselves during all these manipulations having entire control of all executive officers of the corporation. In the absence of compelling authority, we cannot set the seal of judicial ajjproval upon such business policies. . . . The mere fact that theSupreme Court of the United States has since decided the question differently is not alone a sufficient consideration for revers- ing our decisions. It is only when the reasoning of its decision is of convincing power and compels the conclusion that our cases were wrongly decided that it must command our support in other branches of the law then those where it is supreme under the Federal Constitution. With great respect to the decision in 210 U. S. 206, we are constrained to adhere to the law as laid down in the earlier cases [Hayward v. Leeson, 176 Mass. 310 and Old Dominion Copper &c. Co. s. Bigelow, 188 Mass. 315] in this Commonwealth." In Bigelow v. Old Dominion Copper &c. Co., 74 N. J. Eq. 457, Pitney, C. said: "It is, I think, erroneous to deal with the question of non-disclosure or of profits as if it af- fected only those stockholders who did not know the facts. The duty of faithfully exe- cuting the trust is a duty owing to the company ; the duty of disclosure is owing to the company. If there be a competent and independent board of directors, disclosure to them is disclosure to the company. But when the promoter stands on both sides of the bargain, by virtue of his control of the board of directors, there is in equity no disclosure to the company, and the profit cannot be retained unless there be unanimous consent of the shareholders. It is like any other irregular transaction affecting the interest of the company, which so far as not prohibited by law or not affecting the rights of credi- tors may be sanctioned by unanimous vote of all the stockholders. Breslin v. Fries- 378 ORGANIZATION — SUBSCRIPTIONS. [CHAP. I. The record discloses that the first meeting of the stockholders of the Washington County Co-operative Company, a corporation, was held in March, 1909. The corporation was organized to carry on a mercantile business at Stillwater. To promote the business the plan was to obtain patrons for the store by inducing farmers and others who lived within trading distance to become shareholders in the corporation. The defendant alleges that he was solicited to subscribe by a duly-authorized representative of the corporation and pursuant to such solicitation, he on June 24, 1909, bought one share/ and gave in payment the note in suit. The note was subsequently pledged but is now in the hands of the plaintiff as trustee in bank- ruptcy of the corporation. The defendant alleged that the note was executed upon the agreement that a share certificate should be de- livered concurrently with delivery of the note, but no attempt was made to prove such a contract.' The court found upon the uncon- tradicted testimony of defendant that he bought one share of stock in the corporation for which he gave the note in suit for $100, pay- able to the order of the corporation within one year from date, and at the same time he received a receipt so stating. It was also found that no certificate for the share so bought was issued by the cor- poration to defendant. Judgment was ordered for plaintiff. De- fendant appeals. Plaintiff contends that the transaction between defendant and the corporation amounted to a subscription to a share of stock; and defendant, that it was a contract of sale. There is no statute pre- scribing the mode in which a person may become a shareholder in a corporation. Previous to organization it is necessarily through subscription to shares of stock to be issued ; after incorporation it may also be by subscription, or by purchase from the corporation direct or from other owners of its stock.'' It might well be claimed Breslin Co., 70 N. J. Law (41 Vr.) 274, 282. It is, as I take it, likewise erroneous to treat the non-assenting stockholders as if they were damnified in their individual capa- city merely, rather than in their property rights. And equally erroneous to say that because no member of the syndicate and no original or subsequent stockholder is here complaining about any injury to their rights, the transaction is not open to question. Their successors in property interest are here in the form of the company ; the former etockholders may have recouped their individual damnum, or even turned it to. a profit, by selling out their stock in the market that Mr. Bigelow created." Cf. Yeiser v. United States &c.- Paper Co., 107 Fed. 340 ; Davis ». Las Ovas Co., 227 V. S. 80. ' Tender is necessary, if such an agreement, express or implied in fact, ia proven. Courtright u. Deeds, 37 Iowa 503 ; Summers v. Sleeth, 45 Ind. 598. « In Baltimore City &c. Ry. Co. v. Hambleton, 77 Md. 341, McShbkrt, C. J. dealing with a subscription to new stock authorized by an amendment to the charter increasing the capitalization, said: "The distinction between these two classes — between orig- inal or formative stock and subscriptions for new stock, which a corporation after its organization has been authorized to issue — is important. . . . When the subscrip- tion to formative stock precedes the creation of the body corporate which will ulti- mately issue the certificates, there is, of necessity, at the time such subscriptions are entered into, no corporation in existence with which a contract Could be made. The subscribers, as a consequence, and for the very purpose of effecting an organization,. be- SECT. 2.] GALBRAITH V. McDONALD. 379 that the transaction here under consideration was a subscription. Defendant alleged that his subscription was solicited. He gave the note and obtained the receipt showing him entitled to one share. A pronaissory note embodying a statement that stock of a corporation is to be issued to the maker, has been held to be a subscription con- tract. Goshen Turnpike Co. v. Hurtin, 9 Johns, 217, 6 Am. Dec. 273, and Wemple v. St. Louis, J. & S. R. Co., 120 111. 196, 11 N. E. 906. In the latter case it is said : "The rule is, when no formalities are prescribed, any agreement by which a person shows an inten- tion to become a shareholder upon the terms set forth in the com- pany's charter, is sufficient t8 constitute a contract of subscrip- tion." If a subscription, then it is settled by Columbia Ele. Co. v. Dixon, 46 Minn. 463, 49 N. W. 244, and Marson v. Deither,i 49 Minn. 423, 52 N. W. 38, that the fact that a certificate has not been delivered or tendered is no defense to a suit on the sub- scription. But, even if defendant was not a subscriber to the share of stock, we think his testimony and the findings make it clear that as be- tween him and the corporation he became a shareholder therein by the transaction. Defendant claims he bought one share of stock for which the corporation accepted his note in payment. It was not necessary that a certificate be issued. That is a mere indicia come stockholders by the mere act of subscribing if there are no conditions precedent prescribed, and they are thereby invested with the privileges and subjected to the lia- bilities incident to that relation. The subscribers, in the absence of any statutory re- strictions, acquire by such a subscription an interest in the body corporate and a right to participate in its organization. They all stand upon the same footing, incurring the risks and hazards of a failure of the enterprise or sharing its profits in proportion to their interests, and to give vitality to the artificial entity they must become stockholders im- mediately upon becoming subscribers, if no other method be provided in the charter. But the same reasons do not apply, and the same conditions do not obtain, in the case of new or additional stock authorized to be issued by an existing and completely organized corporation. A subscription to such new stock does not necessarily of itself make the subscriber a stockholder, because, generally speaking, it is a mere contract between the subscriber and the corporation. ... "To constitute a subscriber for new stock a stockholder something more than a mere subscription is requisite — payment is necessary. The subscription is but the contract ; payment, when called by the company and when made by the subscriber, constitutes him a shareholder whether a certificate has been issued or not. Fulgam v. Macon & Brunswick R. R. Co., 44 Ga. 597; Terwilliger v. G. W. Tel. Co., et al, 59 111. 249; Johnson v. Albany & Susq. R. R. Co., 54 N. Y. 416 ; Jay Gould v. Town of Oneonta, 71 N. Y. 298." 1 This case overruled the earlier case of St. Paul &o. R. Co. v. Robbins, 23 Minn. 439, which held that when a subscription was made after corporate organization, payment and issue of the stock were dependent and concurrent acts, and hence neither party could seek affirmative relief without first tendering performance on his part. The later ruling, while treating all subscriptions, whether made prior or subsequent to organization, alike so far as tender is concerned, does not apply to a contract of sale of stock, which is treated like other contracts for purchase of property. In Butler University v. Scoonover, 114 Ind. 381, Mitchell, C. J. said: "It is not essential that a certificate should have issued, in order to create the relation of stock- holder, provided a contract to take stock had been duly made, or provided the rights, privileges and emoluments of a stockholder had been enjoyed w\,th the consent of the corporation." 380 ORGANIZATION — SUBSCRIPTIONS. " [CHAP. I. of title to the share.' Randall Printing Co. v. Sanitas Mineral Water Co., 120 Minn. 268, 139 N. W. 606, 43 L.R. A. (N. S.) 706 ; Marson V. Deither, supra. The defendant did not insist on a certificate; at the time of the transaction, nothing was said as to when it should issue. Having thus left this matter in abeyance, he must at least make a demand for it before he can place the other party in default, or else he must show that a demand would have availed nothing. Plaintiff is not suing upon a contract of sale and purchase. If de- fendant instead of giving his note had paid cash and obtained the receipt he did obtain, could he possibly have any standing in court to recover back the money so paid by simply proving that he had paid it for a share of the stock, but no certificate had ever been de- livered or tendered to him? We think not. He would at least be under the necessity of proving a demand. He neither pleads nor proves any demand nor any excuse for failing so to do in this case. Text-books and decisions assert that there is distinction to be noted between sales of corporate stock and subscriptions thereto. That is undoubtedly true in respect to executory contracts of sale. But where an actual sale has been made and the title to the stock has passed, we fail to see any distinction between persons who are sub- scribers to stock and those who have actually bought it of the cor- poration. Both at some time become entitled to a certificate upon demand, both are entitled to dividends and both must bear risks as shareholders. Cases like Clark v. Continental Imp. Co. 57 Ind. 135 ; Nichols v. Reid, 109 Cal. 630, 42 Pac. 298 ; Bartlett v. Scott, 55 Neb. 477, 75 N. W. 1102, and others which might be cited, are not applicable, because according to the terms of the contracts in- volved payment was to be made upon delivery of the certificates. Craig Silver Co. v. Smith, 163 Mass. 262, 39 N. E. 1116, turned on the point that the certificates tendered were not the ones called for by the contract. ' Accord : Pacific National Bank v. Eaton, 141 U. S. 227. (" The case is not like that of a deed for lands, which has no force, and is not a deed, and passes no estate, until it is delivered. In that case everything depends on the delivery. But with capital stock it is different. Without express regulation to the contrary, a person becomes a stock- holder by subscribing for stock, paying the amount to the compay or its proper officer, and being entered on the stock book as a stockholder. He may take out a certificate or not, as he sees fit. Millions of dollars of capital stock are held without any certifi- cate; or, if certificates are made out, without their ever being delivered. A certifi- cate is authentic evidence of title to stock ; but it is not the stock itself, nor is it neces- sary to the existence of the stock. It certifies to a fact which exists independently of itself.") But a stockholder, by virtue of his membership, is entitled to have a certificate of stock issued to him by the corporation and for its refusal to discharge this duty, he may recover damages in an action of conversion treating such refusal as an exercise of un- lawful dominion over his stock and its legal incidents, or, waiving the tort, he may sue in gjiosi-oontract, or, in a proper case, he may compel specific performance of the duty. Mandamus, however, is not a proper remedy. His rjghts in respect to a certificate are m analogy to his rights to transfer his stock and are therefore considered under that subject in Chap. 4, Sec. 5 infra. And see St. Romes v. Levee Steam &c. Co., 127 U. S. 614 ; Snyder v. Charleston &o. Bridge Co., 65 W. Va. 1. SECT. 2.] BETANT's pond steam mill CO. V. PELT. ' 381 It has been suggested that there is a failure of consideration be- cause it appears that the corporation is now bankrupt. Of course if the rights of a shareholder passed to defendant by his purchase there was a consideration at the time. The mere fact that the value of this right may since have dwindled away does not constitute a defense to the note. The cases of Clark v. Turner, 73 Ga. 1, and Leigh V. Chattanooga R. & C. Ry. Co., 104 Ga. 13, 30 S. E. 381, are not applicable, for it there appeared that no certificate could be issued because no more stock remained. There is no evidence to support the allegations in the answer that the certificate cannot now be delivered, or that the share has now no value. Order affirmed. Brown, C. J., dissenting.' BRYANT'S POND STEAM MILL CO. v. FELT,^ 87 Me. 234 ; 33 L. B. A. 593. 1895. On REPORT. This was an action of assimipsit brought to recover of the defend- ant the sum of two hundred dollars as appeared by his alleged sub- scription upon an original subscription book, and upon the outer cover of which was the following writing, "Subscription for a steam mill to be erected at or near Bryant's Pond." The original agree- ment was as follows : "We, the undersigned, hereby agree to pay for the number of shares set opposite our names, said shares to be ten dollars each, and non-assessable, for the purpose of erecting suitable buildings, with steam power, for the manufacturing of the various kinds of wood to be used in the contract of one C. H. Adams, he paying three per cent annually as rent on all money so paid, said monies to be paid when needed for the purpose above named, providing the town will abate taxes on said buildings and stock for the term of ten years." Plea, general issue and the following statement of special matters of defense, to wit : that the signature of said defendant was pro- cured and affixed -to said paper declared on, if at all, on Sunday; that subsequent to the time his said name was affixed to said paper and prior to the commencement of this suit and prior to the organ- ization of this company this defendant revoked said subscription and notified the plaintiff and the solicitors for said stock that he should not accept the same, and requested his name stricken from ' Dissenting opinion omitted. ' Statement of facts condensed ; portions of opinion omitted. 382 ORGANIZATION — SUBSCRIPTIONS. [CHAP. I. the list of subscribers; that at the time the plaintiff company pre- tended to organize, this defendant was not recognized as a subscriber, did not participate in the organization, and is not named therem as one of the subscribers to the stock of the same. Walton, J. The only question we find it necessary to con- sider is whether a subscriber to the capital stock of an unorganized corporation has a right to withdraw from the enterptise, provided he exercises the right before the corporation is organized and his subscription is accepted. We think he has. Such a subscription is not a completed contract. It takes two parties to make a con- tract. A non-existing corporation can no more make a contract for the sale of its stock than an unbegotten child can make a con- tract for the purchase of it. The right of subscribers to the capital stock of a proposed corpo- ration to withdraw their subscriptions at any time before' the organ- ization of the corporation is completed has been affirmed in several recent and well considered opinions. The right rests upon the impregnable ground of the legal impossibility of completing a con- tract between two parties only one of which is in existence. There can be no meeting of the minds of the parties. There can be no acceptance of the subscriber's proposition to become a stockholder. There can be no mutuality of rights or obligations. There can be no consideration for the subscriber's promise. As said in one of our own decisions, it is a mere nudum pactum, — a promise without a promisee, — a contractor without a contractee. In fact, every element of a binding contract is wanting. If the subscriber's promise to take and pay for shares remains imrevoked till the organization of the proposed corporation is effected, and his promise has been accepted, then we have all the elements of a valid contract.^ Com- ' In Athol Music &c. Co. v. Carey, 116 Mass. 471, Wells, J. said. " T\e difficulty ia to ascertain the promisee, in whose name alone suit can be brought. The promise of each subscriber, ' to and with each other,' is not a contract capable of being enforced, or intended to operate literally as a contract to be enforcefl between each subscriber and each other who may have signed previously, or who shoul3 sign afterwards, nor be- tween each subscriber and all the others collectively as individuals. The undertaking is inchoate and incomplete as a contract until the contemplated organization is effected, or the mutual agent constituted to represent the association of individual rights in ac- cepting and acting upon the propositions offered by the several subscriptions. When thus accepted, the promise may be construed to have legal effect according to its purpose and intent, and the practical necessity of the case ; to wit, as a contract with the com- mon representative of the several associates. . . . "The corresponding agreements of the other subscribers, the organization of th» corporation, and the allotment to the defendant of the shares for which he subscribed, f uppish sufficient consideration for his promise to take and pay for those shares. Al- though his promise was originally voluntary, or in the nature of a mere open proposi- tion, yet having been accepted and acted on by the party authorized so to do, before he attempted to retract it, he has lost the right to revoke. His proposition has become an accepted mutual contract, and is binding upon him as well as upon the corporation." In Avon Springs &c. Co. v. Weed, 119 A. D. 560, a complaint, on demurrer thereto, was held good which alleged (1) a promise by defendant to pay for certain stock in a new company, to be formed under a designated name and for a specified purpose, as soon SECT. 2.] Bryant's pond steam mill co. v. felt. 383 petent parties. Mutuality of duties and obligations. A valid con- sideration, the promise of one party being a suflScient consideration for the promise of the other. A promisee as well as a promisor. A contractee as well as a contractor. In fact, all the elements of a valid contract are present, and the subscription has become binding upon both of the parties. But, till the corporation has come into existence, all these elements are necessarily wanting, and the sub- scriber's promise amoimts to no more than an offer, which, like all mere offers, may be withdrawn at any time before acceptance. When accepted, it becomes binding. Till accepted, it remains revocable. This conclusion is sustained by reason and authority. In Starrett v. Rockland Co., 65 Maine, 374, the plaintiff sought to recover a portion of the dividends of a successful insurance com- pany. He had subscribed for five shares of the stock before the organization of the company was effected; but the evidence of acceptance of his subscription by the corporation after its organiza- tion was not satisfactory'; and the court held that without such acceptance there was no completed or binding contract ; that the minds of the parties never met; that the plaintiff's subscription, being made before the corporation came into existence, amounted as the company was incorporated ; (2) subsequent organization of the plaintiff under the name and for the purposes aforesaid ; (3) acceptance by plaintiff after incorporation of defendant's subscription ; (4) tender of certificate of stock to defendant ; (5) his re- fusal to pay subscription. McLennan, P. J. dissented being of opinion that the complaint did not allege facts sufficient to constitute a cause of action. After adverting to the fact that defendant had not agreed to form the plaintiff corporation nor authorized anybody in that behalf, he said : "If two or more persons mutually agree to organize a corporation and each subscribes for stock therein to be paid for after its incorporation, such agreement is valid and may be enforced by any of the parties thereto or by the corporation after its forma- tion. In such case the corporation represents and acts for the parties to the agreement, is their agent. But, we think, it has never been held by the courts of this State that a subscription to the stock of a corporation could be enforced where there was no agree- ment to incorporate and where there were no parties between whom mutuality of agree- ment existed." After reviewing the precedents, he said: "It is concluded that in order to make a present subscription for stock in a corporation thereafter to be formed valid there must be an agreement between two or more parties to form such corporation, and that only after its formation by such parties or by some one authorized to act for them in that regard can their subscriptions to its capital stock be enforced by such corporation. "We think such rule is reasonable and will prevent the anomalous situation of strangers to a subscription agreement for stock in a corporation to be formed and to the party or parties thereto, organizing such corporation perchance without the knowledge or consent of such subscribers for its stock and then by action brought in its name com- pel payment of their subscriptions." The decision of the Appellate Division was reversed in 189 N. Y. 557 on the dissent- ing opinion aforesaid. See Nebraska Chicory Co. v. Lednicky, 79 Neb. 587, reviewing the cases and reaching a conclusion in accord with that of the Appellate Division, supra. Although the corporation may, be a stranger to defendant's subscription agreement, his acceptance of its certificate of stock is sufficient consideration for his check issued in payment therefor, and he is liable thereon, though he stop payment on the check and attempt to return the certificate. Avon Springs &c. Co. v. Kellogg, 125 A. D. 51, af- firmed 194 N. Y. 567. 384 ORGANIZATION — SUBSCRIPTIONS. [CHAP. I. to no more than a proposal to take so many shares, — a mere nudum pactum, — imposing no obligations and securing no rights. In Muncy Traction Engine Co. v. Green, 143 Pa. St., 269; 13 At. Rep. 747, decided in 1888, the defendant had been active in procuring subscribers to the capital stock of a proposed corporation, and had himself subscribed for twenty shares ; but he wrote to the chairman of the meeting for the organization of the corporation that, for reasons satisfactory to himself, he withdrew his subscrip- tion. The court ruled that the defendant had a right to withdraw his subscription at any time before the organization of the corpora- tion was completed ; and the jury having found as a matter of fact that the withdrawal was before the organization of the corporation was completed, a verdict for the defendant was affirmed, and judg- ment rendered thereon. In Hudson Real Estate Co. v. Tower, 156 Mass. 82 (1892), the action was foimded on a subscription to the capital stock of an unorganized corporation, and the defense was based on an alleged withdrawal of the subscription. The right to withdraw was con- troverted. The court held that at the time when the defendant signed the subscription paper declared on, it was not a contract, for want of a contracting party on the other side ; that while such a subscription may become sa contract after the corporation has been organized, still, until the organization is effected, and the subscription is accepted, it is a mere proposition or offer, which may be withdrawn, like any other unaccepted proposition or offer. It is urged by the counsel for the plaintiff corporation that such subscriptions create binding and enforceable contracts between the subscribers themselves, and are therefore irrevocable, except with the consent of all the subscribers ; and some of the authorities cited by him seem to sustain that view. But we find, on examination, that such views, when expressed, are in most cases mere dicta, and that the cases are very few in which such a doctrine has been acted upon. Reason and the weight of authority are opposed to such a view. Of course, subscription papers may be so worded as to create binding contracts between the subscribers themselves. But we are not now speaking of such subscriptions ; or of voluntary and gra- tuitous subscriptions to public or charitable objects, which, when accepted and acted upon, become binding. We are now speaking only of subscriptions to the capital stock of proposed business corpo- rations. With regard to such subscriptions, we regard it as settled law that they do not become binding upon the subscribers till the corporations have been organized and the subscriptions accepted ; and that, till then, the subscribers have a right to revoke their subscriptions. In the present case, an old man, upwards of eighty years of age, and now dead, was induced to subscribe for twenty shares of stock SECT. 2.] JONES V. DODGE. 385 in a proposed, but not then organized, manufacturing corporation; but after a little reflection, he determined to revoke his subscription and withdraw from the enterprise. He notified the agent of the promoters, through whom his subscription had been obtained, of his determination to withdraw, and requested him to take his name off the subscription paper. And he again sent word by his son to have his name taken off. And notice of his withdrawal, and of his request to have his name taken off of the subscription paper, was given to the other subscribers at one of their meetings, and before the corporation was organized. We think- his withdrawal was legal and complete, and that no action to recover the amount of his sub- scription is maintainable. Other grounds are urged in defense of the action, but it is un- necessary to consider them. Judgment for defendant. JONES V. DODGE. 97 Ark. 248 ; L. R. A. 1915 A 472. 1911. Fbauenthal, J.i This is an appeal from judgments that were recovered by the receiver of an insolvent corporation against the defendants below upon subscriptions made by them for shares of the stock of said corporation. The suits were instituted against the defendants severally upon notes executed by them to the cor- poration for the par value of the stock for which they had sub- scribed. On March 2, 1905, all the subscribers to the capital stock of the People's Fire Insurance Company met for the purpose of organizing said corporation in pursuance of the laws of Arkansas in that behalf provided for the "incorporation for manufacturing and other lawful business." On that day the articles of agreement for the incorporation of said company were duly signed and executed •by all the subscribers. All of the capital stock was subscribed, and the number of shares of stock subscribed for by each corporator was set out in said articles of association. The defendants duly signed and executed said articles after all other corporators had signed same and therein subscribed for forty shares each of said capital stock. The amount of the capital stock of said corporation was stated to be $100,000 in said articles, which also contained a provision stating that "fifty thousand dollars of said capital stock have been actually paid in by the subscribers hereto." The general nature of the business proposed to be transacted by said corporation was a " gen- eral insurance against loss by fire, wind storms, tornadoes and. cy- clones," to buy, sell and deal in real estate, and to contract and rent » Portions o£ opinion omitted. 386 ORGANIZATION — SUBSCRIPTIONS. [CHAP. I, buildings, "and to do everything necessary to its interest as an insurance company." Upon the same day the corporators held the: first meeting for organization and elected directors of the corporation, who elected the ofiicers thereof ; and the articles of association were then on the same day filed in the office of the Secretary of State and county clerk in manner provided bj'' law. Eight of the corporators of the insurance company subscribed for a large number of the shares of the capital stock, and executed to the corporation their note in the simi of $50,000 therefor. Thereupon application was made to the Aiiditor of State under section 4345 of Kirby's Digest for the issuance of a certificate entitling the insurance company to da business in the State of Arkansas. The statement made to the Auditor showed that the subscribed capital of the corporation amounted to $100,000, and that $50,000 thereof had been paid up by notes executed to the corporation. The Auditor declined to issue the certificate or license entitling the company to do business in the State for the reason that the company should have had $50,000 in cash, instead of notes representing its assets. Thereupon the in- surance company, by discounting the notes which it held and owned, obtained from a banking institution the sum of $50,000; and on March 8, 1905, presented to the Auditor the certificate of deposit- or deposit slip of said bank therefor, and the Auditor thereupon issued to the People's Fire Insurance Company a certificate or license en- titling it to do business in the State. The insurance company then began business, and continued to transact business from that date until January 19, 1907, when it failed, and a receiver was appointed to take charge of its affairs. During its existence the insurance company did quite an extensive business, and at the date of its failure it was indebted to creditors in a large amount. The defend- ants executed their several notes herein sued on to the corporation for the shares of stock subscribed for by them on March 15, 1905, about the time the company actively began its business, and the notes were made payable one year after date. In their answers the defendants pleaded that the notes were executed for their subscriptions to the capital stock of the cor- poration which was intended to be organized under the laws of the State for the purpose of doing a general fire insurance busi- ness, and that the subscriptions were "made upon the expectation and condition that such laws would be fully complied with, so that- the company would have a legal and effectual organization for the purpose of engaging in said business. That section 4335 of Kirby's Digest was never complied with, in that $50,000 of the capital stock was never at any tune paid up, and that the com- pany at no time had a legal right to do the business contemplated at the time of its organization;" and on this account they claimed and now urge that they are not liable upon said notes. SECT. 2.] JONES V. DODGE. 387 The defense that is thus made against a recovery upon these notes and the subscriptions which they represent is that the cor- poration had not complied with the laws of the State in its organ- ization, and therefore had no right to exist as a body corporate. The rightfulness of the existence of a body claiming to act, and acting, as a corporation cannot be questioned in actions between private individuals and such corporation ; the question as to whether or not the assumed corporation has a rightful existence can be raised only by the State, the sovereign by whom it is created.^ Such ques- tion cannot be litigated in a collateral proceeding, such as a , suit instituted by the corporation, or its legal representative, against. its alleged debtor. This principle is almost universally recognized, and has had uniformly the sanction of this court. In the case of Brown v. Wyandotte & Southeastern Ry. Co., 68 Ark. 134, it is said : "It is the doctrine of the Arkansas Supreme Court decisions that the existence of a corporation, once formed, can be questioned only by a direct proceeding, and that at the suit of the State." Ham- mett V. Little Rock, etc., R. Co., 20 Ark. 204 ; Mississippi, etc., R. Co. V. Cross, 20 Ark. 443 ; Searcy v. Yamell, 47 Ark. 269. The defendants contend that they are not liable for the sub- scription notes executed by them to the corporation because tihe insurance company had not complied with some provisions of the law which were essential to its organization and existence as a cor- poration. But the People's Fire Insurance Company had filed its articles of association in the manner provided by the statutes of this State for the incorporation of business corporations, and had received a certificate of incorporation from the proper official. It had made appliqation to the proper oflacial of the "insurance bureau" of the State, and from him had received license to do in- surance business. At the time of the execution of the notes sued on it was acting as a corporation, and for almost two years prior to the insolvency of the company it acted and did business as such corporation. If there was any irregularity in the organization of said corporation, it cannot avail defendants as a defense to this suit brought upon these contracts which they made with this cor- poration.2 ' See note 1, page 111, ante; also Kardo Co. v. Adams, 231 Fed. 950. (No defense- to infringer of patent that owner thereof, the plaintiff corporation, was not organized de jure.) Cf. Parkside Cemetery Ass'n o. Cleveland &o. Traction Co., 93 Ohio State 161. (A corporation, seeking to exercise the power of eminent domain, performed most of the mandatory conditions precedent to its organization, except that ten per cent, of the stock subscribed was not actually paid in by the subscribers. Held, owner of lands sought to be condemned may question the legal organization of that corporation col- laterally.) See note 1, page 128, ante. To the report of the instant case in L. R. A. is annotated a comprehensive note en- titled "Right to defeat stock subscriptions or stockholders' liability on the ground that corporation is not legally organized.", ' Cf. note 2, page 128, ante. 388 OEGANIZATTON — SUBSCRIPTIONS. [CHAP. I. This principle is applicable to the subscriber to the capital stock of the corporation on the further ground of estoppel. The sub- scriber has assisted in the organization of the corporation, and has thus aided in giving to it not only an existence but a credit by the ^ise of his subscription. The liability which he assumed when !ie subscribed for the stock of the corporation assisted in giving to it a standing and a credit. He should not therefore be permitted to escape the liability which he thus assumed to the creditors of the corporation on the ground that the company was not organized in strict conformity to the law. The requirement of the statute which the defendants allege the insurance company did not comply with was to have a paid-up capital of $50,000. If this allegation should be true, the failure to have such paid-up capital was caused partly by the defendants . themselves. They gave notes for the entire amounts of their subscriptions payable one year after date, and therefore paid no part thereof in cash. If therefore a portion of the subscriptions of the corporators should have been paid in cash before obtaining the license to do business, the defendants assisted in the failure of this insurance company to comply with that requirement. They should not now be heard to plead such a delinquency on their part to defeat a liability to the corporation and its creditors which they assumed by reason of the subscriptions they made to its capital stock. A person who has assisted in the organization of a corpora- tion cannot escape liability as a subscriber for its stock on the ground that it was not organized according to the requirements of the statute. Sehna & T. Rd. Co. v.Tipton, 5 Ala. 807 ; Central Plank Hd. Co. V. Clemens, 16 Mo. 365. The notes herein sued on were executed for shares of the capital stock of the corporation. The defendants assisted in the organ- ization of the company by voting as shareholders for the directors thereof, and thereby have held the company out to the world as legally incorporated. They have thus enabled it to do business and obtain credit. Upon the faith of these notes and of similar notes the public was induced probably to give credit to the company; and the defendants should not now be permitted to defeat the notes upon which these creditors were induced to rely as a part of the capital of the company. It is also claimed by the defendants that at the time of the organ- ization of the insurance company there was a secret agreement between the above eight corporators, who had made large subscrip- tions to the capital stock, that they should be liable only for one-half of the amount of the shares subscribed by each of them, and that such an agreement was a fraud upon the rights of defendants who were ignorant thereof. But such an agreement, if made, would not be valid, and would not release those subscribers from their liability to the corporation for the full amount of the shares for which they SECT. 2.] UPTON V. ENGLEHAET. 389 actually subscribed. The obligation of a corporator to pay the full amount of all the shares for which he has subscribed cannot be re- leased by the company or its officers.^ The attempt to do this could not be successful. Such an agreement would be void, and the status of such corporators and their liability would be and continue as if no such agreement had been made. The defendants could not be defrauded by such invalid agreement, and therefore could not have been injured thereby. Upton v. Tribilcock, 91 U. S. 45. Such an agreement, if made, would not be a defense against the liability incurred by the defendants by the execution of the notes sued on for their subscriptions to the capital stock. The above are the only defenses interposed by the defendants why recovery should not be had on said notes ; and we do not think that any of them is meritorious or legally well founded. The judgments are affirmed.^ UPTON V. ENGLEHART. 3 DiUon (U. S. Circuit) 496. 1874. On demurrer to second special defence pleaded in the answer. The action is by the plaintiff as assignee in bankruptcy of the Great Western insurance company of Chicago, to recover of the defendant the amoimt due on a contract by which the defendant in September, ' This is true, so far as creditors are concerned, even though all the shareholders con- sent. Cartwright v. Dickinson, 88 Tenn. 476. A partial release, as by reduction of the par value, is equally ineffective as against creditors. Cammack v. Levy, 120 La. 873. Cf. Fitzpatrick v. McGregor, ante, page 266. For full discussion, see Tiger v. Rogers Cotton &e. Co., 96 Ark. 1, as reported in Ann. Gas. 1912 B 488 and the exhaustive notes thereto. While a corporation which has released a subscriber may not enforce such subscrip- tion, its receiver represents creditors as well as the corporation, and, having in this re- spect similar powers and being under similar duties as those of a trustee in bankruptcy, he may maintain an action upon the subscription. Hundley v. Hewitt, 71 So. (Ala., 1916) 419. 2 An organic change in the charter discharges the obligation of a previous subscriber, unless he has expressly or impliedly assented thereto. Ashton v. Burbank, ante, page 166. He is not bound to enjoin action under the amended charter but may defend a recovery on his subscription. Ibid. Otherwise if the amendment be not fundamental. Banet v. Alton &c. R. R. Co. cited ante in note 1, page 170. Or, if fundamental, never- theless be contemplated. Nugent v. Supervisors, ante, page 175. Whether the power reserved by a legislature to repeal, alter, or amend charters brings the case within the latter rule, see note 1 page 209 ante: also Kenosha &o. R. R. Go. v. Marsh, 17 Wis. 13 dealing specifically with a stock subscription. But an ultra vires transaction of the corporation does not relieve the. subscriber. Cartwright v. Dickinson, 88 Tenn. 476. Nor negligent or fraudulent management thereof. Cravens v. Eagle Cotton Mills, 120 Ind. 6 ; Ghetlain v. Republic Life Ins. Co., 86 111. 220. " His remedy was against the corporation to restrain such alleged illegal action, or is against the agents personally, for any wrong and injury done him." Ltrn- TON, J., in Cartwright v. Dickinson, supra. See note 1 page 328 ante. 390 ORGANIZATION — SUBSCRIPTIONS. [CHAP. I. 1870, became, as it is alleged, the purchaser of five shares of stock in that company. The petition sets out that the contract to pur- chase stock was verbal and that the company delivered and the defendant accepted certificates for five shares thereof of $100 each ; that the company sustained heavy losses by the Chicago fire ; that on the 6th day of February, 1872, it was adjudicated a bankrupt by the United States district court, for the northern district of Illinois, which subsequently, July 5th, 1872, ordered that the assignee col- lect- the entire amount unpaid on the capital stock of the company. The plaintiff has accordingly brought in this court numerous actions against persons alleged to be stockholders in the company, residing in this state [Iowa], and they make substantially the same defences. Dillon, Circuit Judge} — Whoever becomes a stockholder in an incorporated company sustains a three-fold relation : First, to the artificial person called the corporation. Second, to the other stockholders in the same company, or in other words, his associates or partners, who by force of statute are clothed with corporate capacity. And third, to the creditors of the corporation. It is essential to bear these several relations in mind in determining the questions here presented. The capital is supplied by the share- holders, who alone participate in the gains or pecuniary advantages which may accrue from the carrying on of the corporate enterprise. The shareholders are the real parties in interest ; the incorporating -statute empowering them to contract and be contracted with through the medium of a corporate representative. In the case before us, the plaintiff sues as the assignee in bank- ruptcy of the corporation, and therefore can enforce not only the rights which the corporation could have enforced if insolvency or bankruptcy had not supervened, but the rights of general creditors as well. It appears by the pleadings, that the company was created by a charter of the state of Illinois. The section of the answer to which the demurrer under consid- eration relates, avers that the company sent an agent to Iowa to procure its stock to be taken, and sets forth the facts intended to show that this agent made false and fraudulent representations of- a material character to induce the defendant to agree to become a .stockholder therein. Among other representations one was that 3520 per share would be full payment for the stock and that the remaining eighty per cent was "non-assessable." But the certificate ot stock which the defendant received, though marked "non-assess- able , does not otherwise state that the stock is fully paid for or that no more than the twenty per cent therein mentioned is to be called m. ' Portions of opinion omitted. SECT. 2.] UPTON V. ENGLEHART. 391 The answer alleges that the purchase of the stock was induced by the fraudulent acts and representations of the agent of the company and that the "defendant is in no way bound thereby, and that he long ago repudiated said purchase by refusing to pay any more" of the. installments. And here the plea may be considered in a double aspect : First, does it set forth a sufficient answer if the action were one by the company before insolvency to enforce payment for the stock. (Sec- ond, does it set forth a sufficient answer to such an action when brought in the interest of creditors, of the company after it has failed. Assuming that the statements in the plea are true, it appears that the defendant was induced to agree to become a shareholder by false and deceptive statements of the agent, and even of the company itself as shown by the character of the certificate it issued. The effect of fraud practised to induce a contract to subscribe to stock or purchase shares is, as respects the company and the person deceived, the same as in other contracts, with the modifications aris- ing from the peculiar nature of the transaction as to repudiating or rescinding the contract, which will be adverted to further along. The rule sanctioned by the house of lords is that "where a person has been drawn into a contract to purchase shares belonging to a company by fraudulent misrepresentations or by fraudulent conceal- ment of the directors, and the directors seek to enforce the contract, or the person who has been deceived institutes a suit against the ■company to rescind the contract on the ground of fraud, the pur- chaser cannot be held to his contract, because a company cannot retain any benefit which they have obtained through the fraud of ■ their agent." Oakes v. Turquand, Law Rep. 2 H. L. 325, 344, 1867. The fraudulent misrepresentation or concealment must of course relate to material facts,* but if it does, and has induced a person using reasonable caution and judgment, to enter into a contract to purchase shares, it is ordinarily no answer to his claim to be relieved of the contract that by more vigilance he might have discovered the deception. This point is expressly adjudged by the house of lords in the Directors, etc. of the Central Railway Co. of Venezuela V. Kisch, Law Rep. 2 H. L. 99, 1867. In the case just cited, Kisch sought to be relieved of his contract to purchase shares in the railway company, and it was objected that he had "no ground of complaint because he had an opportunity of ascertaining the truth of the representations contained in the pros- pectus, of which he did not choose to avail himself ; that in his letter of application to purchase shares he agreed to be bound by all the ' To constitute a defense at law, or afford the basis of rescission in equity, fraud, in the legal sense, must be proven. Parker v. Thomas, 19 Ind. 213 ; Montgomery &c. Co. ■». Matthews, 77 Ala. 357 ; Weissinger Tobacco Co. i. Van Buren, 135 Ky. 759 ; St. Johns Mfg. Co. B. Munger, 106 Mich. 90. 392 ORGANIZATION — SUBSCRIPTIONS. [CHAP. I. conditions and stipulations contained in *he memorand^ and articles of association of the company, which, if he had examined would have given him all the information necessary to correct the Trrors and omissions in the prospectus." To this Pof ion the Lord Chancellor made answer: "But it appears to me that when it is once established that there has been any fraudulent misrepresenta- tion or wilful concealment by which a person has been induced to enter into a contract, it is no answer to his claim to be relieved from it to tell him he might have known the truth by proper inquiry. He has a right to retort upon his objector, "you, at least, [whoj have stated what is untrue, or have concealed the truth, for the purpose of drawing me into a contract, cannot accuse me of want of caution because I rehed implicitly upon your fairness and honesty. ihe same principle was announced in the same case by Lord Cranworth. L R 2 H. L. 121. See also Mead v. Bunn, 32 N. Y. 275, 280; Mcciellan v. Scott, 24 Wis. 81, 87. There seems to be some dif- ference m opinion, however, on the point whether as respects cred- itors the purchaser of shares is not bound to take notice of the pro- visions of the articles of association. Oakes v. Turquand, supra; Reese, etc. Mining Co. v. Smith, L. R. 4. H. L. 64, 72; Downes v. Ship, L. R. 3 H. L. 342. , , ^ . ^ . Considering that the transaction between the defendant and the company's agent set up in the plea took place in a state different from that in which the company was organized, and that its charter was on file in the auditor's office in Illinois, it is our opinion that it would be possible for the agent of the company to make fraudulent representations concerning the laws ^ of Illinois and the charter of the company, and that if he did represent that, by those laws and ' In Upton V. TribUcock, 91 U. S. 45, the court held that representations similar to those in the instant case, were immaterial. Hunt, J., said: "The representations relied upon as a defense, . . . were as to the legal effect of the defendant's subscription. It is alleged that the agent represented that by the laws of the state of Illinois, and by the charter of this company, the defendant might become a subscriber to the amount of $10,000, and, by means of a certificate to be given to him like that exhibited, he would really be liable, only to the extent of one-fifth of his said subscription, and that good lawyers had given their advice to this effect. "There was here no error, mistake or misrepresentation of any fact. The defendant made the subscription he intended to make, and received the certificate he had stipu- lated for ; and, as there is no evidence to the contrary, it is to be presumed the good lawyers advised as was stated ; but, in law, the defendant incilrred a larger liability than he anticipated. . . . That the defendant did not read the charter and byJaws, if such were the fact, was his own fault. It will not do for a man to enter into a contract, and when called upon to respond to its obligations, to say that he did not read it when he signed it, or did not know what it contained. If this were permitted, contracts would not be worth the paper on which they were written. But such is not the law. A con- tractor must stand by the words of his contract ; and, if he will not read what he signs, he alone is responsible for his omission. . . . That a misrepresentation or misunder- standing of the law will not vitiate a contract, where there is no misunderstanding of the facts, is well settled. ... A statement that the insurance company had consulted with good lawyers, and that their opinion was as stated, should have been clear proof to the defendant that a representation of the law was a matter of opinion only." SECT. 2.] UPTON V. ENGLEHART. 393 the charter, eighty per cent .of the stock was "non-assessable," and the defendant relied upon this, he is entitled, in the absence of laches and acquiescence, as against the company, to resist payment of this •eighty per cent. In this connection, it may be mentioned, that it is the duty of a person who has been fraudulently drawn into the purchase of shares to take prompt measures on discovering the fraud,/ to repudiate or rescind the contract. And the reason for this is two-fold : 1. Because his remaining in the company may mislead others into becoming members of it upon the credit of his name, when otherwise they would not do so. 2. Because it may likewise induce others to deal with it and give credit to it for the same reason. Directors, etc. v. Kisch, supra; Bwlch-y- Plwm & Co. L. R. 2 Exch. 326 ; Ashley's Case, L. R. 9 Eq. 262 ; Scholey v. Central Railway Co. of Venezuela (bill by shareholders against company), L. R. 9 Eq. 267, note, decided by Lord Chancellor Cairns. In the case last ■cited the Lord Chancellor said: "He certainly thought that the court would be most careful to see, in a company going on and "trading, in which the rights of shareholders and others varied from day to day, that a person coining to complain of misrepresentations of this kind, and coming to avoid a voidable contract came within the shortest limit of time which was fairly possible in such a case." It results ■ from the foregoing considerations that if this were an action by the company for calls, or a suit by the defendant against the company to rescind the contract for the purchase of stock, and the facts were as set out in the answer, the law would be with the present defendant, provided it appeared that he had been guilty of no laches ' in discovering the fraud, and thereupon promptly repu- diated the contract. How the contract may be repudiated or disaffirmed, see Bwlch-y-Plwm & Co. (sufficiency of plea), L. R. 2 Exch. 324 ; Ashley's Case, L. R. 9 Eq. 263 ; McNeill's Case, L. R. 10 Eq. 503 ; observations of Lord Chancellor Hatherley in Smith's Case, L. R. 4 H. L. 64, on p. 73 ; Lord Westbury in s. c. p. 77, 78 ; Lord Cairns, lb., p. 70, s. c. below, L. R. 2 Ch. App. 604; Oakes v. Turquand, supra, and cases cited infra. It remains to consider how far the foregoing principles are modified when the company has failed or become bankrupt and the rights of creditors, in addition to those of shareholders, are involved. As respects creditors "the stockholders are special partners, incorporated to carry on the business of the company, and the stock subscribed and secured by the several stockholders or partners constitutes the- capital or fund publicly pledged to all who deal with them," and the stockholders are debtors to the company for their unpaid stock. Ogilvie V. Knox Ins. Co. 22 How. 380, 387. Assuming this to be, as it unquestionably is, a correct view of the relation of stockholders to the company and to the public, the argu- 1 Accord : Upton v.. Tribilcook, 91 U. S. 45 ; Chamberlain ». Trogden, 148 N. C. 139. 394 ORGANIZATION — SUBSCRIPTIONS. [CHAP. I.i ment is made on behalf of the defendant, that if he was induced by the fraud of the company to agree to purchase its stock, he does not thereby become a stockholder, because an agreement obtained by fraud is void, and the person so injured has a right to repudiate it and. treat it as utterly invalid from the beginning, as regards the company, and that the company's creditors have in this respect no higher right than the company itself. In other words, if the company has no right to collect the subscription or purchase money, for the shares, its creditors, who are not creditors of the subscriber to the stock or the shareholder, must claim through it and can stand on no better ground, and the right of the assignee in bankruptcy as the represent- ative of creditors is simply the right to collect the assets of the com- pany, and if the person claimed to be a stockholder is not by reason of fraud entitled to be held as such by the company, this answers any possible right of the assignee to a recovery. But the proposition is not a sound one, that the right of a person who has been drawn into the purchase of stock by the fraud of a company or its agents to relief is as great against creditors as it would be against the com- pany. If the contest is with the company, it is essentially one with the alleged shareholder's own partners or associates, and if their corporate representative or its agents have practised a fraud upon him, he is entitled to relief against it. But if a person ha^ accepted a certificate of stock and becomes, to all external appearance, a stockholder, persons may have become creditors of the company on the faith of his membership and in law are presumed to do so, and as they cannot know the manner in which he was induced to become a stockholder, there is ground to maintain that as to them the man- ner is immaterial. Upon consideration of the adjudged cases, and upon principle, our judgment is that a contract to purchase shares induced by fraud- ulent representations or concealment is not void, but only voidable, which means, as the house of lords has decided, that it is valid until disaflarmed, and not that it is void until affirmed.* Oakes v. Tur- quand, sujyra; Reese, etc. Mining Co. v. Smith, L. R. 4 H. L. 64; s. c. below, L. R. 2 Ch. App. 604. This doctrine, it will be seen, gives to the purchaser of shares, though his purchase was induced by fraud, the right to hold on to them if it should be profitable to do so ; and as the rights of creditors may become involved, who can ordinarily know nothing of the fraud practised upon the shareholder, the law as a condition of relief to the latter requires that he shall be guilty of no laches in discovering the fraud and in repudiating the purchase. Speaking of this subject. Lord Romilly, in Ashley's Case, above cited, after referring to the course of decision, says; "The leading principle in all these cases is this : A man must not play fast and 1 Accord : Howard v. Turner, 1S5 Pa. St. 349. SECT. 2.] UPTON V. ENGLEHART. 395 loose ; he must not say ' I will abide by the company if successful, and I will leave the company if it fails ' ; and therefore when a mis- representation is made of which any one of the shareholders has notice, and can take advantage to avoid his contract with the com- pany, it is his duty to determine at once whether he will depart from the company or whether he will remain a member." L. R. 9 Eq. 262, 268 ; McNeill's Case, L. R. 10 Eq. 503, 1870. Under the English companies' act of 1862, though there has been such fraud as will enable a subscriber to defend against calls and though he has repudiated the contract within a reasonable time, yet there seems to be a tendency to hold that he is liable to creditors if he has not taken active steps to have his name removed from the register of shareholders before proceedings are taken to wind up the company for insolvency. Oakes y. Turquand, supra; explained and principles applied, Reese, etc. Mining Co. v. Smith, L. R. 4 H. L. 64, 1869 ; ^tna Ins. Co. etc. 6 Ir. Rep. Eq. 298 ; and see McNeill's Case, L. R. 10 Eq. 503 ; Henderson v. The Royal British Bank, 7 El. & B. 356 ; compare McNeill's Case, L. R. 10 Eq. 503. These decisions are doubtless in some degree influenced by the special provisions of the companies' act, particularly that of 1862, but the general course of reasoning therein is applicable to cases of insolvent or bankrupt corporations in this country. There is no register of stockholders in Illinois provided for, and it is possible that the decisions in England requiring active steps by bill in chancery to have one's name removed from the register might not be applicable in their full extent here. Indeed, I am inclined to the opinion that if a company has fraudulently misrepresented or concealed material facts and thus drawn an innocent person into the purchase Of stock, he at the time being guilty of no want of reasonable caution and judgment, and afterwards guilty of no laches in discovering the fraud, and he thereupon without delay notifies the company that he repudiates the contract and offers to rescind the purchase, these facts concurring, I am inclined to the opinion that the bankruptcy of the company subsequently happening will not enable the assignee to insist that the purchase of stock is binding upon him.^ But it is not necessary as the plea stands to rule the point. McNeill's Case, L. R. 10 Eq. 503, and cases supra. The plea is defective in that it does not show that the defendant made use of reasonable diligence to make himself acquainted with the matters of fact in respect of which the fraud is claimed, nor when or how he repudiated the contract, nor whether he offered to surrender the certificate of stock promptly on discovering the fraud. ^ Accord : Fear v. Bartlett, 81 Md. 435. Or he may, in equity, have his subscription abrogated, and obtain decree for the return of his money, not only against the cor- poration but against all the directors chargeable with the false representation. Vree- land V. New Jersey Stone Co., 2 Stew. Eq. (N.J.) 189, affirmed at page 651. 396 ORGANIZATION — SUBSCRIPTIONS. [CHAP. I. For these reasons the demurrer to the second special defense or plea is sustained. . Demurrer sustained.^ MATTER OF NEW YORK & WESTCHESTER TOWN SITE C0.2 145 A. D. 623. 1911. Appeal from an order of the Supreme Court at Special Term which set aside an election of directors of above named corporation. BuRK, J. : The New York and Westchester Town Site Company was mcorporated October 21, 1905, for the purpose of dealing in real estate. On April 15, 1908, its board of directors made a call for payment on account of subscriptions to the capital stock.' Such 1 Accord: Marion Trust Co. v. Blish, 170 Ind. 686; Gress v. Knight, 135 Ga. 60; Hinkley v. Sao Oil &c. Co., 132 Iowa 396. In Empire Life Ins. Co. v. Brown, 89 S. E. (Georgia, 1816) 1085, plaintiff, upon dis- covering the fraud by which his subscription was induced, promptly moved to rescind. Meantime corporate obligations had been incurred. Relief was denied because his right to rescind was held subservient to the right of creditors to be paid out of the assets of the insolvent corporation. Accord : Roe v. Oradell &o. Dairy Co., 85 N. J. Eq. 146. 2 Statement of facts rewritten ; portions of opinion omitted. • "Any call or assessment made upon the shares must be uniform and in ratable amounts." Cole, C. J. in Great Western &c. Co. v. Burnham, 79 Wis. 47. If the subscription is conditioned that calls may only be made upon the vote of a prescribed minimum of the directors, non-compliance with that condition affords a de- fense to the subscriber. Seymour v. Sturgess, 26 N. Y. 134. ("The importance of this condition to every stockholder is obvious. It secures a ratable call upon all the stock- holders and equalizes the burdens of the company. It also prevents a call except when the exigencies of the corporation may require it.") But it is no defense when the corporation becomes insolvent and the rights of credi- tors intervene. Hatch ii. Dana, 101 U. S. 205. (Subscription was payable "as called for by the company." Defense — The company had made no call and could not recover without making a previous call ; and equity will not enforce the contract differently from what was contemplated in the subscription. STROiiTG, J. said: "Assuming that auch a clause in the subscription meant more than an agreement to pay on demand, and that it contemplated a formal call upon all subscribers to the stock of the company, the subscriptions were still in the nature of a fund for the payment of the company's debts, and it was the duty of the company to make the calls whenever the funds were needed for such payment. If they were not made, the officers of the company violated their trust, held both for the stockholders and the company. And it would seem to be singu- lar if the stockholders could protect themselves from paying what they owe by setting up the default of their own agents. But in this case the company went out of business before the complainant obtained his judgment, and it does not appear that since that time it has had any officers who could make the calls. Before that time its president was dead. However this may be, it is well settled that a court of equity may enforce payment of stock subscriptions, though there have been no calls for them by the^ com- pany. In Henry v. R. R. Co., 17 Ohio, 187, a suit brought by a judgment creditor of a corporation to enforce payment by its stockholders of thei* unpaid subscriptions, for which calls had not been made, it was held that when a company ceases to keep up its organization, and abandons all action under the charter, a proceeding at the instance of the creditor becomes indispensable. It was further said: 'When a company, becoming insolvent, as in this case, abandons all action under its charter, the original mode of SECT. 2.] BE NEW YORK &C. TOWN SITE CO. 397 payment was to be made in four installments, on June 15, Septem- ber 15, December 15, 1908, and March 15, 1909, respectively. No- tice of this call was sent by mail to the stockholders on April 23, 1908. Palmer, Ferren and Pryer, three of the subscribers, failed to respond to the call. On July 8, 1908, three of the members of the board of directors concurred in a resolution directing the counsel of the company to take steps to forfeit the stock of delinquent sub- scribers and stockholders, and directing the secretary of the com- pany to "sign and serve upon, or mail to, each such stockliolder such notice as should be prepared for him by Counsel for the Com- pany." On July fourteenth a notice was sent to each stockholder referring to the action of the board on April fifteenth, and to the mailing of the notice of call for payment of subscriptions on April twenty-third. This notice also contained a recital that the parties to whom the notice had been sent had made default in the payment due June fifteenth, and notified them that unless such installment was paid at the office of the company "within sixty days from the service of this notice," the stock and all previous payments thereon would be forfeited. This notice was subscribed "By Order of the Board of Directors, L. D. Maltbie, Secretary." It does not appear that Palmer, Ferren or Pryer paid any attention to this notice. On September 14, 1908, at a meeting of the board of directors, a resolu- tion was adopted which recited the fact of the calls, that sundry stockholders had failed to pay the first installment due June 15, 1908; that under direction of the board statutory notice had been sent to each delinquent that, unless said installment was paid on or before sixty days from date, their stock would be forfeited, and that due proof of proper service of such notice had been made upon Harry Ferren owning6,900 shares ; M. J. Kraus, 1,100 shares ; Jacob Leitner, 6,375 shares; Owen T. Palmer, 25,000 shares, and Charles Pryer, 2,000 shares. The resolution thereupon provided that the shares of stock standing in the names of the foregoing persons should be and the same were thereby forfeited to the company. Notice of the passage of this resolution was served upon Ferren, Palmer and Pryer. It does not appear that either of these persons paid any attention to it. In 1910 efforts seem to have been made by the stockholders making calls upon the stockholders cannot be pursued. The debt, therefore, from that time must be treated as due without further demand.' This means, of course, as be- tween the debtor and the creditor of the corporation. After all, a cotapany call is but a step in the process of collection, and a court of equity may pursue its own mode of collec- tion, so that no injustice is done to the debtor.") It is a condition implied in law that no valid call can be made until all the shares are taken, unless otherwise provided. Hughes v. Antietam Mfg. Co., 34 Md. 316 ; Allman o. Havana, &o. R. R. Co., 88 111. 521. It is the province of the directors, and not of the subscribers, to judge the exigencies of the corporation and determine the necessity or expediency of making the calls. Visalia &c. R. R. Co. v. Hyde, 110 Cal. 632; Anglo-American Land &c. Co. ». Dyer, 181 Mass. 593. 398 ORGANIZATION — SUBSCKIPTIONS. [CHAP. I. who had responded to the calls to put the company on its feet, and at the election for directors in October of that year there was a fierce struggle for the control of the board. At this election 17,580 votes were cast for the individual defendants other than Ralph P. Buell as directors, and also for one George S. Graham. Graham subse- quently resigned, and defendant Buell was elected in his stead. Five hundred and eighty-four undisputed votes were cast for peti- tioners and three other persons as directors, and an unsuccessful attempt was made to vote upon the 25,000 shares of stock which had stood in the name of Pahner, the 6,900 shares which had stood in the name of Ferren, and the 2,000 shares which had stood in the name of Pryer. .These votes were rejected upon the groimd that the stock had been forfeited two years before. The first and most important question is, was this stock legally forfeited so that the holders thereof lost the right to vote at the election? "Subscriptions to the , capital stock of a corporation shall be paid at such times and in such installments as the board of directors may by resolution require. If default shall be made in the payment of any installment as required by such resolution, the board may declare the stock and all previous payments thereon forfeited iot the use of the corporation, after the expiration of sixty days from the service on the defaulting stockholder, personally, or by mail directed to him at his last-known post-office address, of a written notice requiring him to make payment within sixty days from the service of the notice at a place specified therein, and stating that, in case of failure to do so, his stock and all previous payments thereon will be forfeited for the use of the corporation." (Stock Corp. Law [Gonsol. Laws, chap. 59; Laws of 1909, chap. 61], § 54; revising Stock Corp. Law [Gen. Laws, chap. 36 ; Laws of 1892, chap. 688], § 430 Forfeitures are strictissimi juris, and parties who seek to enforce them must exactly pursue all that is necessary 'to enable them to exercise this strong power. (Clark v. Hart, 6 H. L. Gas. 633; Morris v. Metalline Land Co., 164 Penn. St. 326.) The stat- ute in express terms declares that the actual forfeiture of the stock must be by action of the board of directors. It also declares with equal precision that as a condition precedent thereto a notice of intended forfeiture must be given and sixty days must elapse after the service of such notice before final action may be taken. While the statute does not specifically state that the board must determine whether such notice shall be given and when, we think that this is the clear intent of the act for the reason that forfeiture is a corporate act involving the exercise of judgment and discretion. It cannot be considered a purely ministerial act in the ordinary conduct of the business of the corporation whi ch the secretary can perform . (Karsch V. Pottier & Stymus Mfg., etc., Co., 82 App. Div. 230; Portland Railroad Co. v. Graham, 52 Mass. 1.) None of the cases cited by SECT. 2.] BE NEW YORK &C. TOWN SITE CO. 399 defendant appellants seems to us to conflict with this view. The North Carolina statute, construed in Elizabeth City Cotton Mills V. Dunstan (121 N. C. 12), authorizes corporations to provide by their by-laws "the mode of selling shares for non-payment of assess- ments." The by-law of this corporation contained no provision requiring a warning notice to be given if the call notice is not obeyed. London & Brighton Railway Co. v. Fairclough (40 Eng. C. L. 800), and American Pastoral Co. v. Gurney (61 Fed. Rep. 41) were each actions on calls and not proceedings for forfeiture. In North Hallen- beagle Mining Co. (Knight's Case) (L. R. 2 Ch. App. 321) a call was made. Knight, a subscriber to the stock, failed to pay. A warning letter was sent to him in due form, and subsequently an entry was made in the books by the secretary, declaring a forfeiture. The company became financially embarrassed and thereafter the liquidating officer (corresponding to our receiver) sued Knight on his subscription. All that was really decided in that case was that, in the absence of proof one way or the other, the entry in the books by the secretary that the stock had been forfeited was evidence against the corporation of action by the directors declaring a forfeiture. In the case at bar it is conceded that there was no valid action of the board of directors of the town site company requiring the giving of the warning notice, for the reason that the three persons present at the meeting on July 8, 1908, did not constitute a quorum of the board. It so happens that these three persons were also members of the executive committee of the board and were a majority thereof. Defendants contend that the action taken may be deemed the action of the executive committee, arid in effect the action of the board. It is not necessary to decide whether the action of an executive committee of a board of directors of a corporation in relation to such a matter is equivalent to the action of the board itself, for the reason that it is apparent that the three persons named were not convened or acting as such executive committee on the said 8th day of July, 1908. The first evidence as to the character of the meeting appears in the minutes thereof. These are entitled "Minutes of a Special Meeting of the Board of Directors of the New York and Westchestei' Town Site Company." Second, the secretary in subscribing the notice of intended forfeiture expressly states that it was sent by authority of the board. Third, at the meeting on September 14, 1908, which concededly was a meeting of the board of directors, the minutes show, first, that the minutes of the special meeting of the ' board of directors held July 8, 1908, were approved, and, second, the adoption of a resolution of forfeiture which, among other things, contains a recital that "under direction from the Board statutory notice was sent to each of said delinquent subscribers." Fourth, at some time between July 8, 1908, and October 17, 1910, the min- utes of the meeting of the board of directors on July eighth were 400 ORGANIZATION — StIBSCEIPTIONS. [CHAP. I. fraudulently altered so as to make it appear that a fourth director, a Mr. Pattoiij was present, and if he had been, there would have been a quorum of the board in session and its action might have been legal. When it was subsequently proved that Patton was not present and that the minutes had been fraudulently altered in stat- ing such to be the case, the contention previously made that the meeting on July eighth was a lawful meeting of the board of direc- tors, was abandoned, and defendants for the first time asserted that the meeting was not a meeting of the board at all, but a meeting of the executive committee. So far as the corporation is concerned, we think that it would be estopped from claiming that the meeting of July eighth was a meeting of the executive committee. The notice of intended for- feiture contained a recital to the contrary. The minutes at that time pretended to show that the meeting was a meeting of the board, of directors. Non constat but that the defaulting stockholders knew that no meeting of the board had been held upon the day specified and believing the law to be, as we have held that it is, that action of the board was necessary to direct the sending of the warning- notice, paid no attention to such notice because of their knowledge of its invalidity. So far, then, as the proceedings to forfeit the stock are concerned, we think that the court properly held that such pro- ceedings were invalid ; that the holders of such stock were entitled to vote at the election held in October, 1910, and properly set such, election aside. Order affirmed.^ 1 C/. Moses 1). Tompkins, 84 Ala. 613. (Injunction issued to restrain de facto oflScers'. from disposing of plaintiff's stock for non-payment of calls.) Since the right to forfeit the shares of a subscriber is not inherent and if exercised by the corporation, must have been delegated to it, the power must be exercised in strict- est accord with the statute. Lewey's Island &c. Co. Ji. Bolton, 48 Me. 451 ; German- town Passenger &c. Co. c. Fitler, 60 Pa. St. 124. * The statutory remedy is merely cumulative, Troy &e. R. R. Co. v. Tibbits, 18 Barb. 297 ; Connecticut &o. R. R. Co. ■». BaUey, 24 Vt. 465 ; but when exercised is binding as an election and reheves the subscriber from further liability. Mills v. Stewart 41 N Y 389 ; Mandel v. Swan &e. Cattle Co., 154 111. 177. It Is the sale and not the declaration of forfeiture which effects the foreclosure, and hence the subscriber, like a mortgagor, may redeem at any time prior to sale. Mitchell ii. Vermont Copper &c. Co. 67 N. Y.. SECT. 3.] PEOPLE EX REL. UNION TRUST CO. V. COLEMAN ET AL. 401 Section 3. Capital and Capital Stock. PEOPLE ex rel. UNION TRUST CO. v. COLEMAN et al.^ 126N. Y. 433. 1891. Appeal from a judgment of the General Term of the Supreme Court affirming an order of the Special Term which dismissed a writ of certiorari to review an assessment of the relator's capital for the year 1889. The relator is a corporation doing business as a trust company. It furnished the commissioners of taxes and assessments a detailed and verified statement of its assets and liabilities and claimed that all its capital stock and surplus, being invested in United States securities, was exempt. The commissioners held that the capital stock, the actual value of which they were to assess, was the shares and they ascertained such value by multiplying the nominal capital by the market price of the shares and deducted therefrom ten per cent of the nominal capital, the assessed value of the real estate and the investments in United States securities. Finch, J. The relator has been assessed upon an "actual value" of its capital stock derived entirely from the market value of its shares. These are selling at the large premiimi of something over five himdred dollars for each share of one hundred dollars, and the assessors have concededly taken that valuation, or the principal part thereof, as the "actual value" of the company's stock liable to taxa- tion, instead of its own proved and established value. The relator challenges the assessment, and through all the proceeding has per- sistently raised and pressed the inquiry, not so much as to the mode or manner of ascertaining value, but rather as to what is the precise thing to be valued, whether the capital stock of the company or the capital stock held in shares by the corporators. If these are the same, or, in any just sense, equivalents, either might be valued without substantial error, but if they are not such, we must deter- mine which is to be valued before we can solve the problem of how to value it. Now, it is certain that the two things are neither identical nor equivalents. The capital stock of a company is one thing; that of the shareholders is another and a different thing. That of the company is simply its capital, existing in money or property, or 1 Statement of facts rewritten ; portions of opinion omitted. 402 ORGANIZATION — CAPITAL. [CHAP. I. both; while that of the shareholders is representative,. not merely of that existing and tangible capital, but also of surplus, of dividend earning power, of franchise and the good will of an established and prosperous business.! TJie capital stock of the company is owned and held by the company in its corporate character; the capital stock of the shareholders they own and hold in different proportions as individuals. The one belongs to the corporation; the other to the corporators. The franchise of the company, which may be deemed its business opportunity and capacity, is the property of the corporation, but constitutes no part or element of its capital stock ; while the same franchise does enter into and form part, and a very essential part, of the shareholder's capital stock. While the nominal or par value of the capital stock and of the share stock are the same, the actual value is often widely different.^ The capital stock of the company may be wholly in cash or in property, or both, which may be counted and valued. It may have in addition a sur- plus, consisting of some accumulated and reserved fund, or of un- divided profits, or both, but that surplus is no part of the company's capital stock, and, therefore, is not itself capital stock. The capital cannot be divided and distributed ; the surplus may be. But that surplus does enter into and form part of the share stock, for that represents and absorbs into its own value surplus as well as capital, and the franchise in addition. So that the property of every com- pany may consist of three separate and distinct things, which are its capital stock, its surplus, its franchise ; but these three things, several in the ownership of the company, are united in the owner- 1 In Burrall v. Bushwick R. R. Co., 75 N. Y. 211, Folgeb, J. said: "A share of the capital stock is the right to partake, aooording to the amount put into the fund, of the surplus profits of the corporation ; and ultimately, on the dissolution of it, of so much of the fund thus created as remains unimpaired, and is not liable for debts of the corpora- tion." The Public Service Commission of New York, second district, in an op&ion rendered July 21, 1908, in the matter of New York Central & Hudson River R. R. Co., through its chairman, Mr. Stevens, said: "A share of stock represents only a given fractional part of the assets of the corporation. If the entire capital stock is one hundred thousand dollars, divided into shares of one hundred dollars each, one share is in fact no more than the evidence of ownership of a one-thousandth part of the corporate assets upon final dissolution and division, and of a right to a one-thousandth part of any dividend which may be declared. It has not any direct proper value beyond these two rights. If no dividend can properly be declared, the stock has no value as evidence of a dividend right. This dividend right is simply an ownership .of a given part of the net earning power of the business. To say that stock is entitled to any given rate of dividend is a logical absurdity — a confusion in language — since it is only evidence of a right to another and vastly different thing, namely, the right to a prbportional part of the net earnings of the business. If once the public mind could be brought to regard shares of stock not as property in themselves, but as evidence of a right in property, we might hope to be nd of the deceptive notion that the par value of a share of stock is the slightest evi- . denoe of its real value, or is any evidence of the dividend returns to which the owner is entitled. » The following figures were quoted by the New York Evening Sun in respect to some of the New York City Trust Companies. They serve to emphasize the above remark of Pinch, J. SECT. 3.] PEOPLE EX KEL. UNION TRUST GO. V. COLEMAN ET AL. 403 ship of the shareholders. The share stock covers, embraces, repre- sents all three in their totality, for it is a business photograph of all the corporate possessions and possibilities. A company also may have no surplus, but, on the contrary, a deficiency which works an CaPITAIj SUBPLDS Sept. 20, 1916 Deposits Sept. 20, 1916 Book Sept. 20, 1916 Divi- dend Bid Astor Bankers Broadway Brooklyn Central Columbia Commercial Empire Equitable Farmers' Loan & Trust . Franklin Fulton Fidelity Guaranty Hamilton Hudson Kings County .... Lawyers' Title & Trust Lincoln Manufacturers . . . . Metropolitan . . . . Mutual Trust of West- chester New York Life Ins. & Trust New York People's Queens County . . . Title Guarantee & Trust Union Trust Company . United States .... U. S. Mortgage & Trust Westchester $1,250,000 10,000,000 1,500,000 1,500,000 5,000,000 2,000,000 500,000 1,500,000 3,000,000 1,000,000 1,000,000 500,000 1,000,000 20,000,000 500,000 500,000 500,000 4,000,000 1,000,000 1,000,000 2,000,000 300,000 1,000,000 3,000,000 1,000,000 600,000 5,000,000 3,000,000 2,000,000 2,000,000 300,000 $1,692,900 16,403,000 957,800 4,031,400 16,517,500 8,266,900 181,100 1,498,000 10,223,300 8,205,900 1,337,100 697,100 1,250,400 32,149,400 1,116,100 579,100 2,712,900 5,571,000 548,100 408,500 5,454,200 ■ 85,254 4,233,400 11,406,900 1,690,400 113,100 12,542,400 5,576,800 14,664,200 4,547,100 238,355 $31,418,200 233,226,600 26,348,300 36,671,000 165,963,200 86,137,800 4,629,800 41,335,000 149,123,000 170,082,700 21,779,100 9,848,300 11,407,700 425,616,800 8,989,400 5,564,400 26,061,400 23,193,800 15,098,600 13,352,500 65,415,700 1,846,539 32,739,700 80,937,000 24,848,600 2,616,800 33,270,000 86,053,500 65,179,800 73,668,400 3,503,391 235 264 164 369 430 513 136 200 440 920 233 239 225 260 323 216 642 239 155 141 373 128 523 480 269 119 351 286 833 327 179 16 20 6 30 24 28 io 24 50 12 10 18 20 12 6 20 5 6 24 45 32 14 20 16 50 24 7 460 474 146 560 785 620 110 285 495 1620 255 275 205 437 265 144 630 139 107 150 420 125 970 600 290 80 400 410 1008 440 130 In Commonwealth of Virginia v. State of West Virginia, 238 U. S. 202, Hughes, J. said : "Statements may be found to the effect that par value is prima facie actual value (Appeal of Harris, 12 Atl. Rep. 743 ; Moffitt v. Hereford, 132 Mo. 513) , but if such state- ments can be deemed to announce a comprehensive rule, to be applied in the absence of evidence as to the property and business of the corporation, we cannot regard it as well founded. There is no such presumption of law and common experience negatives rather than raises such an inference of fact. We took this view in Foggs. Blair, 139 U.S. 118, 127, when we criticized the supposition ' that the court, in the absence of averment or proof to the contrary, would assume that it (stock) was worth par, or had substantial value.' See also Griggs v. Day, 158 N. Y. 1, 23 ; Warren v. Stikeman, 84 App. Div. (N. Y.) 610 ; Beaty v. Johnston, 66 Arkansas, 529. Shares represent the proportionate interest of the shareholder in the corporate enterprise, and a rule that this interest, in the absence of all supporting evidence should be taken as actually worth the par of the shares would be wholly artificial. There is no exigency in the administration of justice which requires or justifies such an extreme assumption." 404 OKGANIZATION — CAPITAL. [CHAP. I. impairment of its capital stock. Its actual value is then less than its nominal or par value, while yet the share stock, strengthened by hope of the future and the support of earnings, may be worth its par, or even more. And thus the two things — the company's capital stock and the shareholder's capital stock — are essentially and in evfery material respect different. They differ in their charac- ter, in their elements, in their ownership and in their values. How important and vital the difference is, became evident in the effort by the state authorities to tax the property of the national banks. The effort failed, and yet the share stock in the ownership of indi- viduals was held to be taxable as against them. The corporation and its property were shielded, but the shareholders and their prop- erty were taxed. Now some degree of confusion and trouble have come in because these two different things are denominated alike capital stock, making the expression sometimes ambiguous. It is the important and decisive phrase in the law of 1857, under which the assessment here resisted was made, and requires of us to determine at the outset in which sense it was used. The section reads thus: "The capital stock of every company liable to taxation, except such part of it as shall have been excepted in the assessment-roll, or shall have been exempted by law, together with its surplus profits or reserved funds exceeding ten per cent of its capital, after deducting the assessed value of its real estate, and all shares of stock in other corporations actually owned by such company which are taxable upon their capi- tal stock under the laws of this state, shall be assessed at its actual value and taxed in the same manner as the other real and personal estate of the county." There are reasons in abundance for the conclusion that by the phrase "capital stock" the statute means not the share stock, but the capital owned by the corporation ; the fund required to be paid in and kept intact as the basis of the business enterprise, and the chief factor in its safety. One ample reason is derived from the fact that the tax is assessed against the corporation and upon its property, and not against the shareholders, and so upon their property. In theory every tax is charged against some person, natural or artificial, resident or non-resident, known or unknown. It is assessed not upon property irrespective of ownership, but against persons in respect to their property (23 N. Y. 215), and effects not merely a hen, but also a personal liability. On the assessment-rolls in this case appeared the name of the relator as the person assessed, and the amount of the tax became a charge against it. Of course, it could only be assessed and taxed in respect to its own property, that which in its corporate character it owned and possessed, and so it follows inevitably that the statute concerns the company's capital stock, that is its real and actual capital, and not in any respect the share SECT. 3.] PEOPLE EX EEL. UNION TRUST CO. V. COLEMAN ET AL. 405 stock which it does not own and whose possessors have not been assessed. Another reason is found in those terms of the statute which in- clude and exclude respectively specific kinds or classes of property in the corporate ownership. Thus the assessment is to be laid not merely upon the capital stock of the corporation, but also upon its surplus. No such explicit direction was necessary, except upon the assumption that by the words "capital stock" was meant simply "capital ", which would not include surplus, and so required that it be subjected by name to the valuation. If the share stock was meant its value would include surplus and make its specification not only needless but confusing. But while the statute includes surplus by specific mention, it excludes franchise by omitting it. The omission of franchise is emphasized by the careful inclusion of surplus. It is fully and definitely settled that the tax imposed by the statute is not upon franchise. (People v. Comrs. of Taxes, 2 Black. 620) But if that be so, it is not upon the share stock, for that repre- sents the value of the corporate franchise as a part of the total of the corporate property. And so, both by what it specifically includes and silently excludes,' the statute itself informs us that by "capital stock" it means and intends the company's actual capital paid in and possessed, and not at all or in any sense the share stock. The same thing becomes apparent from a study of the whole line of legislation which culminated in the law of 1857. It was traced in detail upon the argimient with great industry and wealth of illus- tration. We have verified it by traveling over the same track, and without taking pains to reproduce it, may assert the general result which it discloses and select out one or more illustrations. The investigation shows that the word "capital" and the phrase "capital stock" are used interchangeably and synonymously, and where the latter phrase occurs there is almost always something in the statute which stamps and labels it as referring to the actual capital of the company. Thus the law of 1825 (Chap. 262), after providing for the taxation of all persons owning or possessing property, proceeds to declare that corporations shall be deemed persons for the purpose of the act, and requires them to furnish a statement of the amount of "capital" actually paid in; and then, referring to turnpike and bridge companies, requires them to state "the amount of capital stock actually paid in or secured to be paid in." Both clauses refer to the same assets or fund, naming it indiscriminately "capital" and "capital stock." Again, in the law of 1825 (Chap. 254) the assessors, after putting the corporation by name on the assessment- roll, are required to add the amount "of its capital stock paid in or secured to be paid in," and to designate how much of it is in real and how much in personal property, and so no doubt is left that by 406 ORGANIZATION — CAPITAL. [CHAP. I. "capital stock" was meant simply the "capital" possessed in cash or invested in securities or real estate. The illustrations might be multiplied and fortified by reference to numerous acts relating to the formation or management of manu- facturing, railroad, business and telegraph companies in which the two forms of expression are used indiscriminately and as convertible terms; but I think quite enough has been said to require unhesi- tating assent to the proposition that, under the law of 1857, the thing to be taxed is the capital of the company and not the shares of the stockholders. If these conclusions are correct it will follow that the assessment complained of should be canceled. 'The corporation presented to the assessors a sworn statement of its assets and liabilities. If it be true, there was nothing subject to assessment. But its truth is not questioned, and there is not the least reason to doubt it. The assessors did not doubt it : they merely deemed it immaterial, and so testified when examined. In other words, knowing with certainty the value of one thing, they claimed the right to afiix to it the larger value of a different thiag. Authorized only to tax against the com- pany its capital and surplus, they assumed the right practically to tax it for the share stock held by individuals. They have not in terms claimed that the share stock is the subject of taxation, nor has the counsel who represented them on the argument, but both have maintained and defended what is the exact and complete equiv- alent. The right asserted is a discretion in the assessors at their free will to assess corporations upon and at the value of their capital and surplus, or upon and at the value of the share stock independently of established facts and whenever they please. The law gives them no such discretion. How it has been exercised and how destructively to the rights of taxpayers may be seen by comparing the action in this case with that in one of the cases which we have ^reviewed. Where the share stock was selling at ninety, and so below par, the assessors refused to take that value and went to the company's books in search of a larger one, which they found and adopted. Here, where the actual value of capital and surplus is established so that they frankly admit the fact, they calmly disregard it and fly to the larger value of the share stock. The statute has given them no such right. They are not lawless rovers, wandering among corporations at will, but regular officers bound by discipline and controlled by the law, and whose discretion exists within fixed and definite limits. It is said, and it is true, that large masses of personal property escape taxation, and the owners are persistent and artful and not over nice in their efforts to avoid a just share of the public burdens, and so we should uphold faithful assessors in every attempt to do their full duty. I think this court will not be immindful of the sit- uation, but before all we must first ascertain and then obey the law. SECT. 3.] GOODNOW 11. AMERICAN WRITING PAPER COMPANY. 407 If in that process evils result or are disclosed, the remedy must be sought elsewhere. It follows that the judgment and order of the General and of the Special Term should be reversed and the assessment against the relator vacated and canceled, without costs. Judgment reversed. GOODNOW V. AMERICAN WRITING PAPER COMPANY. 73 N. J. Eq. 692. 1908. SwAYZE, J. The appellant filed his bill to have a resolution for the payment of a dividend upon the preferred stock of the defendant declared unlawful, null and void, and to restrain payment thereof. The bill charges that the capital stock of the company was for the most part issued for property purchased, which included trade- marks and good will taken at a grossly excessive valuation, and that whatever the value of the property given in exchange for the stock may have been at the time of purchase, it now falls short of the ag- gregate of the debts and the par value of the stock ; that the op- erations of the company have been successful, and to some extent profitable, a considerable sum of money having been earned in excess of the interest upon the mortgage, and of the $100,000 required an- nually to be set aside as a sinking fund for the mortgage bonds, and of the cost of operating the company and keeping up its manufac- turing plant ; that the net annual gains as reported by the directors to the stockholders prior to 1906 were used in part to purchase the company's own bonds for its treasury and. for the sinking fund, and in part were set aside for working capital ; and that on July 1st, 1906, the balance sheet of the company showed accumulated profits to an amount several times the amount required to pay the proposed dividend ; that the dividend was authorized by resolution of October 2d, 1906 (1905 in the printed case seems to be a clerical error), which directed the treasurer to pay the dividend out of net profits on April 1st, 1907. The gravamen of the bill is that the payment of this dividend would constitute a division and withdrawal and payment to the holders of preferred shares of a part of the capital stock of the company, and would constitute an unlawful reduction of the capital stock in violation of the Corporation act. To this bill the defendant demurred, and the court of chancery allowed the demurrer. We think it imnecessary to discuss the question dealt with by the learned vice-chancellor as to the right of the stockholders to raise this question, or the question so thoroughly discussed at the 408 OKGANIZATION — CAPITAL. [CHAP. I. bar as to the meaning of net profits under our Corporation act as it stood prior to the enactment of chapter 143 of the laws of 1904. The question seems to us to involve only the construction of that act, and td turn upon the change introduced thereby. Cases cited from other jurisdictions are therefore of little assistance. The material language in the act of 1896 (P. L. 1896, p. 286) is as follows : "No corporation shall make dividends, except from the surplus or net profits arising from its business, nor divide, withdraw, or in any way pay to the stockholders, or any of them, any part of its capital stock, or reduce its capital stock, except according to this act." In the act of 1904 this section is changed so as to read as follows : "The directors of a corporation shall not make dividends except from its surplus, or from the net profits arising from the business of such corporation, nor shall it divide, withdraw, or in any way pay to the stockholders, or any of them, any part of the capital stock of such corporation, or reduce its capital stock except as authorized by law." 1 Under the act of 1896 there was room to contend that the words "net profits" were intended to be synonymous with the word "sur- plus"; the language used was "from the surplus or net profits." Under the act of 1904, this contention is no longer possible; the language used is "from its surplus, or from the net profits." The evident intent of the change is to point out two fimds from which dividends may be made. Although the change in language indicates that the legislature ' In Martin v. Zellerbach, 38 Cal. 300, Cbockbtt, J. speaking of a similar provision of the California statutes, said: "The policy which dictated that provision is obvious. Persons dealing with corporations do so upon the faith that its property and all its assets, of whatsoever nature, are vested in trustees or managers, to be held, by them as a fund which shall be primarily liable for its debts. Tor although the stockholders, and ia some events the trustees, may be individually liable to creditors, it is the property and capital of the corporation to which creditors chiefly look, and which give it credit in the community. To protect the rights of creditors and to guard against improvideilt or fraudulent conduct on the part of trustees and stockholders, the Legislature has wisely provided in the section we have quoted, that the capital, stock of the company shall re- main intact, and shall not be devoted to the stockholders, either in the shape of divi- dends, payments or withdrawal ; nor by way of a reduction of the capital stock (unless in the manner provided by law) , except on a dissolution of the corporation in the method prescribed by law, nor even then, until ' after the payments of all its debts.' Dividends can only be declared from ' the surplus profits arising from the business of the corpora- tion,' and it shall not be lawful 'to divide, withdraw, or in any way pay to the stock- holders, or any of them, any part of the capital stock of the company,' except after payment of all its debts, on a dissolution of the corporation. This language leaves no room for construction or doubtful interpretation. It is direct, explicit and unmistak- able. But it was not intended to interfere with the plenary power of the trustees over the legitimate business of the corporation. They may manage, control and alienate its property in the regular course of its business, but they cannot devote the proceeds, beyond the surplus profits, to the stockholders, either directly or indirectly, until after all its debts are paid." Cf. note 1, page 254 ante, at page 256. SECT. 3.] GOODNOW V. AMERICAN WHITING PAPER COMPANY. 409 made a distinction between surplus and net profits, it does not necessarily follow that net profits mean the difference between gross earnings and what may be called operating expenses. Such profits may be called annual profits, and it may be that by net profits the legislature meant the net profits upon the whole of the company's business from its organization. If either of these mean- ings is adopted, the declaration of the present dividend is justified. There was an excess of gross earnings over the operating expenses of the current year, and the value of the present assets exceeded the value of the actual assets with which the company began business. The complainant contends, however, that the term "net profits" is used in neither of these senses, but in the sense of an excess of the value of the present assets over the par value of the capital stock issued and outstanding ; and the claim is that siace that stock was issued for property at a gross overvaluation, there can be no divi- dend until the difference betweien the actual value of the property and the value at which it was taken over is made up. The argument is that the intent of section 30 is to prevent the capital stock being distributed in the form of dividends, and the words "capital stock" are supposed to be used in that section as synonymous with "share capital." The ambiguity in the term "capital stock" was noticed by this court in Wetherbee v. Baker, 35 N. J. Eq. (8 Stew.) 501. It may mean either the capital subscribed (the share capital) or the capital paid in, the actual assets with which the company does business. It seems to be used in both senses in this very section. When the legislature forbids the dividing, withdrawing or paying to the stock- holders any part of the capital stock it means the capital actually invested; when it forbids the reduction of capital stock it means the share capital subscribed, or the authorized capital. We are led to the conclusion that the words "capital stock" in the first instance mean capital aictually invested, by the fact that it is only actual assets that can be divided, withdrawn, or paid over. These words are not apt words to apply to nominal or share capital, which may be reduced, but can hardly be withdrawn, divided, or paid over. This capital actually invested does not include net profits arising from the business of the company, for the reasons that the language of the section itself makes a distinction between the declaration of dividends and of profits and the withdrawing of capital ; that another method of securing payment of the par value of the stock is provided in other sections of the act ; that the policy to be served by the prohibition of section 30 is to prevent the fritter- ing away of the actual assets with which the company is to do busi- ness, not the nominal assets which it has never received and for which it still has a claim against the subscribers for unpaid stock. The section distinguishes between surplus and net profits; but if the 410 ORGANIZATION — CAPITAL. [CHAP. i: complainant is correct in his contention that net profits mean only the excess above the share capital, we see no distmction m tact, but only in bookkeeping entries. It may not infrequently happen that stock is issued on which avowedly only a partial payment is made of the amount subscribed, which is therefore subject to further calls. We cannot think that in such a case, where the company prospers, there are no net prohts available for dividends until the earnings accumulate to an amount equal to the par value of the shares. The complainant's brief con- cedes this, and the concession seems quite fatal to his argument. The language of section 47 supports this view. It requires the directors, after reserving over and above its capital stock paid in such sum as shall have been fixed as a working capital, to declare a dividend of the whole accumulated profitg. Here the profits are clearly to be ascertained by reference to the capital stock paid in, and not to the nominal share capital. It would be quite inconsistent to require by section 47 a dividend out of profits to be ascertained with reference to capital stock paid in, and to forbid by section 30 a dividend, unless there were net profits over and above the amount of the nominal share capital. . . . The decree is affirmed, with costs.^ 1 Stockholders' rights to declared dividends and to compel declaration thereof are considered in Chap. 4, Sec. 3, infra. Before a dividend may be declared, however, there must be something to be divided. The word is used in two senses. Cooley, J. in Lockhart ». Van Alstyne, 31 Mich. 76, said: "A dividend to the stockholders of a corporation, when spoken of in reference to an existing organization engaged in the transaction of business, and not of one being closed up and dissolved, is always, so far as we are aware, understood as a fund which •the corporation sets apart from its profits, to be divided among its members. . . . This is the primary and universal understanding of a dividend on stock, except when made use of in respect to a final closing up and distribution of assets on the occurrence of in- solvency or in view of a dissolution." Unless, then, there are profits, no dividend can be made. Ibid. .- Mobile & Ohio R. R. Co. v. Tennessee, 153 U. S. 486 1 Smith v. Dana, 77 Ct. 543 ; Jorguson v. Apex Gold Mines, 74 Wash. 243. What, then, are profits ? Since they are derived from net earnings which in turn are made by employing the capital of the corporation in the business of the corporate enter- prise, and since such employment may impair that capital, it results that both elements must usually be considered in determining whether a dividend may be declared. "In a general sense, net earnings are the gross receipts less the expenses of operating the road to earn such receipts. But several kinds of charges must first come out of net «arnings before dividends are declared. The creditor comes in for consideration before the stockholder. The property of a corporation is a trust fund pledged for the payment of its debts. Therefore, if there is a bonded, funded, permanent or standing debt, the interest on it must be reckoned out of net earnings. If there is a floating debt, which is not wise and prudent to place in the form of a funded debt, or to postpone for later payment, that should also be paid. If the financial situation of the company is such as to render it expedient to commence or continue the scheme of a sinking fund for the ex- tinguishment of the company's indebtedness some day or other, an annual contribution out of the net earnings for that purpose would be reasonable. These deductions made from the net earnings, the balance will be the profits of the company distributable among stockholders." Peteks, C. J. in Belfast &c. R. R. Co. v. City of Belfast, 77 Me. 445. As to the necessity of deductions from earnings to replace depreciation in property see Whittaker s. Amwell National Bank, 52 N. J. Eq. 400. (Analysis of dividenda SECT. 3.] KNICKKRBOCKER IMPORTATION CO. V. STATE ASSESSORS. 411 KNICKERBOCKER IMPORTATION COMPANY v. STATE BOARD OF ASSESSORS et al. 74 N. J. L. 683 ; 9 L. R. A. (N. S.) 885. 1907. Dill, J. The prosecutor and defendant in error is a corporation under the "Act concerning corporations." The certificate of incor- poration, filed September 21st, 1903, declared its corporate purpose to be the importation and sale of wines and liquors, but contained no power or authority to purchase, to hold or to reissue the shares of its own capital stock, and fixed its authorized capital at $500,000. based on book instead of actual value.) See also Crawford v. Roney, 130 Ga. 515. As to non-allowanoe for depreciation in cases where the capital is invested in what might be termed "hour-glass" assets, i.e. those which are of a determinable character or which from their nature, are contemplated to be dwindled away or consumed, or to vanish with the efflux of time, such as mining properties, patent rights, contracts for transportation, and the like, see Excelsior &c. Co. v. Pierce, 90 Cal. 131 ; Lee ». Neuchatel Asphalt Co., 41 Ch. Div. 1 ; People ex rel. United Verde Copper Co. v. Roberts, 156 N. Y. 585 ; Mel- lon I). Mississippi Wire Glass Co., 77 N. J. Eq. 498 ; Note, 1 British Rul. Cas. 965. And ef. doctrine that time is of the essence, even in equity, when the subject matter of the contract is a life estate. Parkin v. Thorold, 16 Beavan 59. And cf. Pullman's Palace Car Co. V. Central Transportation Co. cited in note at page 316, ante. The capital of the corporation cannot be distributed as dividends under any guise. Shields v. Hobart, 172 Mo. 491. (But see preceding paragraph.) The instant case is not an exception. Its decision would be otherwise, however, if the statute, instead of affording a clear alternative, confined the making of dividends, as in New York, to "sur- plus profits." In such event, the term is equivalent to "surplus," and that means "over and above" the corporate capital. Thus in Williams v. Western Union Tel. Co., 93 N. Y. 162, Earl., J., speaking of similar (except the change above noted) statu- tory provisions, says : "All these provisions show that it was the purpose of the legisla- ture, by means of them, to create a property capital for the corporation, and then to keep that intact so as to secure the solvency of the corporation and its responsibility to its creditors. . . . By loss or misfortune, or misconduct, of the managing officers of a corporation, its capital stock may be reduced below the amount limited by its charter ; but whatever property it has up to that limit must be regarded as its capital stock. When its property exceeds that limit, then the excess is surplus. Such surplus belongs to the corporation and is a portion of its property, and, in a general sense, may be re- garded as a portion of its capital, but in a strictly legal sense it is not a portion of its capital, and is' always regarded as surplus profits. The very section we are considering contemplates that there may be a surplus, and that such surplus may be divided. The surplus may be in cash, and then it may be divided in cash ; it may be in property, and if the property is so situated that a division thereof among the stockholders is practicable a, dividend in property may be declared, and that may be distributed among stockholders. All such dividends diminish and deplete the property of the corporation, and that section was designed to prevent dividends of property which tended to deplete the assets of the company below the sum limited in its charter as the amount of its capital stock." The converse is equally true. Appreciation in assets is h, proper factor in deter- mining the existence of such surplus profits. Roberts v. Roberts- Wicks Co., 184 N. Y. 257. Gray, J. said : "Dividends, as the rule, are not payable out of the capital of a corporation ; but only from the surplus profits arising from the business carried on, and that was the contract here. When the property of a corporation has accumulated in excess of its chartered capital, the excess may be regarded and dealt with as constituting a surplus of profits." But a surplus, derived by reducing the capital stock, cannot be regarded as surplus profits arising from the corporate business, and hence is not applicable as such to the 412 OEGANIZATION — CAPITAL. [CHAP. t Upon the organization of the company,. September 26th, 1903, an agreement ^ was made between the prosecutor and the Cazanove Champagne Company, a corporation of New Jersey, by which the prosecutor was to take over the assets (specified only as the "rights and everything" of the Cazanove Champagne Company) and under- take the liabilities (neither specified nor described) of the latter company, and to issue, as the consideration therefor, its entire au- thorized capital stock, consisting of one thousand shares of preferred stock and four thousand shares of common stock, par value $100 each, which the Cazanove Champagne Company agreed to take and thus to pay for. As part of the same transaction, and provided for in one and the same contract, the Cazanove Champagne Company agreed to turn back at once, upon receipt of the issued stock, three hundred and fifty-nine shares of preferred stock and three thousand three hundred and fifty-nine shares of common stock, amounting at par to $371,800, for the expressed purpose of assisting the prosecutor in procuring the necessary working capital, the stock to be sold as treasury stock, full paid and non-assessable. The entire stock was accordingly issued in the name of and de- livered to the Cazanove Champagne Company in two certificates. These certificates were endorsed in blank by the Cazanove Champagne Company, returned to the prosecutor and new certificates for stock, amounting to $128,200, issued to the Cazanove Champagne Company. The prosecutor, by formal resolution, declared the whole issue of payment of arrears of dividends on preferred stock. Ibid. Such a surplus should be divided among all its stockholders without preference. It is in the nature of a final dividend on dissolution of the corporation. Such distribution neither needs nor con- flicts with statutory provisions. Ibid.; Strong v. Brooklyn &o. R. R. Co., 93 N. Y.426. To the limited extent of permitting dividends to be determined without reference to the nominal or par value of the share stock, the New Jersey statute meets the situation at which recent New York legislation (found in Laws of 1912, Chapter 351 and now em- bodied in the Stock Corporation Law as sections 19 to 23) was leveled. A concise sur- vey of that situation is found in an article in 26 Har v. Law Rev. 72 9 by Victor Mora - wete entitled, "Shares Without Nominal or Vat Value.", -" (Jarrymg capixal stock at its par amount is not Only the proper bookkeeping entry but also serves to emphasize the duty of the corporation to keep its capital stock unim- paired. Equitable Life Assur. Society v. Union Pacific R. R. Co., infra, page 607. In New York a corporation is annually taxed for the privilege of doing its chartered business, addition ally to the initial tax on the franchise of being a corporation. If it does no such business, it is not subject to the annual tax, which is computed on the dividends made and declared during the year. Hence, a corporation which has retired from the busmess for which it was organized is not subject to the annual tax, although thereafter It declares and pays dividends to its stockholders, derived from the collection of its as- sets and accrued interest thereon. The dividends contemplated by the tax statute are those declared from the surplus profits arising from the business of the corporation. Having ceased to do business, there could be no such surplus profits. Such dividends asit did declare were in reahty a division and distribution of its capital. People ex rel. Ridgewood Land &c. Co. v. Saxe, 160 N. Y. Supp. (App. Div., 1916) 752. See also People ex rel. Lehigh & N. Y. R. R. Co. t,. Sohmer and the other cases cited with it on page 243, ante. " Cf. arrangements made and consummated in Holmes &o. Mfg. Co. v. Holmes &c. Metal Co., ante, page 271. 3.] KNICKERBOCKER IMPORTATION CO. V, STATE ASSESSORS. 413 •00 full paid and npn-assessable, and so reported to the state, ivug the whole issue as fully paid. I $371,800 of stock was entered on the prosecutor's books as plus asset, designated as full-paid treasury stock, and the )00, the estimated value of the property thus purchased, was ed as against the $500,000 of stock issued. sequently, the prosecutor sold two hundred and fifty-eight 1 of the treasury stock. ! prosecutor filed its report with the state board of assessors, g, as of January 1st, 1904, that. its entire issue of $500,000 was paid, but that prior to January 1st, 1904, three thousand four ed and sixty shares had been returned to the treasury and ng that therefore only $154,000 of its stock was issued and mding on that day. ! state board of assessors fixed the franchise tax at one-tenth I per cent, upon $500,000 of stock issued. ! prosecutor insisted that the tax was illegal, "because stock has been issued and subsequently returned into the treasury ccepted by its board of directors as treasury stock cannot be lered as outstanding," and upon a writ of certiorari the Supreme held accordingly that the corporation was not taxable upon tares of its own stock thus acquired and held by it, and reduced anchise tax from $500 to $154. 44 Vroom 94. m the foregoing statement of fact it appears that there was, I first instance, a binding subscription by the Cazanove Cham- Company for the full authorized stock issue of $500,000. subscription fixed the basis of the franchise tax, irrespective of uestion of the regularity or validity of the issue. American •on Storage Co. v. State Board of Assessors, 27 Vroom 389. iause the entire authorized capital of $500,000 was issued and red to the Cazanove Champagne Company, the prosecutor 'taxable with respect to the amount of capital stock issued utstanding as a fixed factor,"without regard to the purpose for . the capital stock was issued or whether it was issued for value ;." Storage Battery Co. v. State Board of Assessors, 31 Vroom ; p. 69) ; affirmed, 32 Id., 289. ; answer of the prosecutor is that because the corporation cquired, by purchase or donation, all of the original outstanding of $500,000, excepting stock of the par value of $154,000, 'ore the corporation was only liable to be taxed in the sum of s position of the prosecutor is challenged upon two grounds ]t, that the prosecutor could not legally acquire its own stock i^rchase or donation for the purpose disclosed by the record, se it was not a "legitimate corporate purpose"; and second, stock once issued rema,ins outstanding and subject to the 414 ORGANIZATION — CAPITAL. [CHAP. I. franchise tax until retired and canceled in the method prescribed by our Corporation act for the reduction of capital stock. Under the Corporation act of 1896 there is an implied grant of power to corporations to purchase shares of their own capital stock, provided such purchase is required for legitimate corporate purposes, but not otherwise. Chapman v. Ironclad Rheostat Co., 33 Vroom 497 ; Berger v. U. S. Steel Corporation, 18 Dick. Ch. Rep. 809. Vice Chancellor Stevens succinctly summarizes the decisions and illustrates correctly the limitations of the rule. Oliver v. Rahway Ice Co., 19 Dick. Ch. Rep. 597. Therefore, the attempt of the prosecutor to acquire its own stock was ineffectual unless for a "legitimate corporate purpose," and the burden of demonstrating the legitimacy of its purpose is upon the prosecutor. 1 The proofs in this case fall short of such demonstration. The purpose of the prosecutor in acquiring this stock is manifest, because this purchase is but a part of an entire transaction. The organization of the prosecutor, the subscription by the Cazanove Champagne Company, the issuance of the stock and the return thereof were all provided for in the same contract — were concurrent transactions — the purpose of the whole undertaking being to create so-called treasury stock and dispose of it upon the representation that it was fully paid and non-assessable and at a price inferentially below par and out of the proceeds to provide working capital for the prosecutor. The Cazanove Champagne Company subscribed for $500,000 of the stock of the prosecutor. The prosecutor could not satisfy this obligation by accepting a less value, either in cash or property, and the Cazanove Champagne Company could not, even with the con- sent or the connivance of the prosecutor, discharge itself of the liability to pay its subscription in full by paying a less svim eijher in money or property. Our statutes expressly forbid it. There is no adequate proof of dollar for dollar value in the prop- erty received by the prosecutor for the stock issued therefor. The property is described as "the rights and everything" of the Cazanove Champagne Company. There is no other description of the property or competent proof of its tangibility or value. The allegations of assumption of liability by the prosecutor are not evidence and are of no assistance in determining the actual value received, because there is no proof as to the extent or substantiability of the liability. The transaction was practically this : The prosecutor issued $500,000 of its stock to the Cazanove Cham- pagne Company, receiving certain undescribed, indefinite rights ' See Book III, Chap. 1, Sec. 3 ante, as to the power of a corporation to acquire shares- of its own capital stock. >.] KNICKERBOCKER IMPORTATION CO. V. STATE ASSESSORS. 415 were placed upon the books of the prosecutor as an asset at ation of $500,000. As part of the same transaction, and sly provided for in the contract, the Cazanove Champagne ,ny forthwith returned $371,800 of this issue to the prosecu- iaining only $128,200 of stock. appears to have been the net consideration for the property irred. record lacks the facts essential to a judicial determination is $128,200 of stock was fully paid and non-assessable. Never- , if this be granted, the position of the prosecutor, that the irbocker Importation Company thus acquired a bona fide p capital of $500,000 and a surplus represented by $371,800 lue of full-paid stock, cannot be sustained. This $871,800 of ssets, capital and surplus, consist only of the property for which, !d of all indirection, the prosecutor paid $128,200 in stock, are not warranted by the evidence in finding that this growth 3,200 (into $871,800) of assets, a net increase of $743,600 in ion, was a legitimate transaction and one for the accomplish- )f which the prosecutor might lawfully acquire its own stock, icrease of assets was justified only by evidence of bookkeeping 1 and resolutions of the directors. her bookkeeping nor mere recitative language in resolutions lard of directors creating values can be accepted as the equiv- )f the proof of bona fide value required by our statute where is issued for property purchased. . ;ed by the rule either of "good faith" or "true value," as ible to stock issues, the proofs in this case do not satisfy us of ;ality of this transaction. ither the statute (Pamph. L. 1905, p. 501), to which we have eferred, has any application to such situation is not pertinent decision. are forced to the conclusion that the record does not demon- a "legitimate corporate purpose" ia the subscription, issue turn of this stock. The law, therefore, declares such trans- 3 invalid. Morawetz Corp. (2d ed.), § 112; Maryland Trust National Mechanics Bank, 63 Atl. Rep. 70. if we Md reached an opposite conclusion, the result would same. contention of the prosecutor is that the amendment con- in the act of 1892, by which, in the fourth section of. the act I, the words "issued and outstanding" were added to the words al stock," changed the law and enabled the corporation, by quisition of its shares by purchase or donation, to withdraw iares from the class of stock issued and outstanding and thus ice the amount of the franchise tax to the extent of the shares cquired. 416 ORGANIZATION — CAPITAL. .[CHAP. I. This has been otherwise determined, and we think correctly, by the Supreme Court. Justice Depue said: "By several acts passed in 1878, 1879 and 1885 (Rev. Sup., pp. 151, 152) incorporated companies were em- powered to increase or decrease their capital stock. In amending the fourth section of the act of 1884 by the act of 1892, the words 'issued and outstanding' were inserted after the words 'capital stock,' with a view to adapt that section more clearly to such changes in the capital stock of these corporations. This verbal change in expression made no material alteration in the meaning of the law." American Pig Iron Storage Co. v. Assessors, 27 Vroom 389 (at pp. 393, 394). The "Act concerning corporations" (Pamph. L. 1896, p. 277, §§ 27, 29, 30) provides for the method of retiring, reducing or de- creasing capital stock.i It throws certain safeguards about, and imposes certain restrictions upon, such changes and alterations in the corporate organization, requiring certain proceedings on the part of both directors and stockholders, and notice by publication, and expressly providing against the release from liability of stockholders for impaid stock, and against the release from obligations of the corporation to the state. In Siegman v. Electric Vehicle Co., decided at this term of this court (65 Atl. Rep. 910), Mr. Justice Pitney, speaking for this court and referring to the reduction of capital stock in connection with sections 27, 29 and 30 of the "Act concerning corporations" (Revi- sion of 1896), says : "Taking the three sections together, they are designed to make sure — first, that capital shall not be reduced by indirection nor without deliberate and considered action taken for that avowed purpose, first by the directors and afterwards by two-thirds in inter- est of the stockholders, each stockholder having reasonable notice of the meeting and of the purpose for which it is called ; and secondly, that formal written evidence of the action taken is to be lodged with the secretary of state and published in a newspaper, to the end that all the world may be apprised thereof." Irrespective of the prohibitions contained in section 30 of the Corporation act, the creation- by the legislature of a precise method by which, under certain conditions, stock may be retired and canceled, is a clear expression of an intention that such corporation shall ac- complish this same result in no other way. A parity of reasoning is found in those cases which hold that the effect of a separate act of the legislature providing for the organiza- tion of a class of corporations, or corporations with certain powers, in ways and under conditions inconsistent with or different from those prescribed by the "Act concerning corporations," is to prohibit their ' Creditors are bound to take notice of such provisions. See note 1, page 268, ante. 3.] KNICKERBOCKER IMPORTATION CO. V. STATE ASSESSORS. 417 lization under the "Act concerning corporations." i Richards )ver, 32 Vroom 400 ; Domestic Telegraph and Telephone Co. jwark, 20 Id., 344; Montclair Military Institute w. Assessors l, 516. e prosecutor could not avoid its liability to the state to pay a hise tax based upon the stock issue of $500,000 by corporate ying of its own stock. )ck once issued is and remains outstanding until retired and iled by the method provided by statute for the retirement and illation of capital stock; and the words "retirement" and cellation," wherever used in the Franchise Tax act or in the dment of that act in the laws of 1906, to which we have been red (Pamph. L., p. 31), must be interpreted to mean permanent sment and actual cancellation by the method and in full compli- with the provisions of the statute.* e original assessment by the state board of assessors was law- made and should be affirmed, and the judgment of the Supreme ' t should be reversed. Reversed.^ e note 1, page 95, ante: rule that general words of release are construed to be limited to the particular obligation or controversy mentioned in the recitals where there is nothing further V that anything more than the matters particularly specified were intended to be rged. Jackson v. Stackhouse, 1 Cow. 122; Texas &c. Ry. Co. v. Dashiell, 198 121 ;_ Van Slyke v. Van Slyke, 80 N. J. L. 382 ; Bassett v. Lawrence, 193 111. 494. to indirect decreases of capital stock, see note 1, page 267, ante. I indirect and hence unauthorized increase of capital stock is condemned, b V. Potter Co. ante page 277. Stock which is overissued is illegally issued and a ber who has paid therefor may recover his payment from the company. Spring my V. Knowlton, 103 U. S. 49 ; American Tube Works *. Boston Machine Co., ass. 5. In New York &c. R. R. Co. v. Schuyler, 34 N. Y. 30, Davis, J. said: "A a.tion with a fixed capital divided into a fixed number of shares can have no of its own volition, or by any act of its officers and agents to enlarge its capital or ;e the number of shares into which it is divided. The supreme legislative power State can alone confer that authority and remove or consent to the removal of tions which are part of the fundamental law of the corporate being ; and hence attempt of the corporation to exert such a power before it is conferred by any and express action of its officers is void ; and hence every indirect and fraudulent )t to do so is void ; for if such a result cannot be accomplished directly by the nachinery of the corporate powers, it is absurd to suppose that it can be produced covert or fraudulent efforts of one or more of the agents of the corporation. The [ Term was therefore right in holding that the spurious stock attempted to be 1 by Schuyler in excess of the capital formed no part of the capital stock of the ay, but was utterly invalid ; and it necessarily followed from the decision of this rhen the case was before it on demurrer, that the plaintiffs were entitled to haVe aficates and transfers which represented such spurious stock declared void and i to be canceled.". 418 BY-LAWS — VALIDITY. [CHAP. IX. CHAPTER II. BY-LAWS. Section 1. Requisites and Validity. TAYLOR -v. GRISWOLD. 14 N. J. L. 222. 1834. HoRNBLOWER, C. J.* ... The right of voting by proxy in this case is claimed under existing by-laws, or the usage and prac- tice of the company. The validity of this claim depends upon the answer which must be given to another question, namely : Whether this corporation, either incidentally, or in virtue of any thing con- tained in the charter, has a right to make such a by-law, or to adopt such usage? Let us then inquire, first, is the right to make such a by-law, one of the natural and incidental powers of a corporation? When the crown creates a corporation, it grants to it, by implica- tion, all powers that are necessary for carrying into effect the object for which it was created. This is according to the legal principle expressed in the maxim, "Qui concedit aliquid concedere videlur et id, sine quo res ipsa esse nonpotest." 11 Co. 52. It is, therefore, inci- dental to every corporation, to have the power of making by-laws, regulations and ordinances, relative to the purposes for which it was instituted. Sutton's Hosp. Case, 10 Co. 31, b; Norris v. Stapps,* Hob. 211 ; City of London v. Vanacker, 1 Ld. Raym. 496 ; Rex v. Westwood, 7 Bing. 1 ; s. c. 20 Eng. Com. Law Rep. 11, 59; Com- ' Only so much of the opinion is reported as relates to the power to enact by-laws and the limitations thereon. The court held invalid a by-law which permitted voting by proxy. The result is now generally changed by statute. See Chap. 4, sec. 1, infra. 2 In this case, Hobabt, J. said: "Though power to make laws is given by special clause in all incorporations, yet it is needless ; for I hold it to be included, by law, in the very act of incorporating, as is also the power to sue, to purchase, and the like. For as reason is given to the natural body for the governing of it, so the body corporate must have laws, as a politic' reason to govern it ; but those laws must ever be subject to the general law of the realm, as subordinate to it. And therefore, though there be no pro- viso for that purpose the law supplies it." 1-] TAYLOR V. GRISWOLD. 419 of Feltmakers v. Davis, 1 Bos. & Pul. 100 ; Rex v. Lyme Regis ;1. 158. t this incidental power of legislation is limited not only by the i of the charter, according to the maxim, "Expressum facit '6 taciturn," (Co. Lit. 210, a) but by the spirit and design of the er : ^ the purpose for which it was created, the object which rown or the legislature had in view, and the general principles policy of the common law.^ Angell & Ames on Corporations '. Lord Chancellor Caiens in Ashbury Ry. &c. Co. s). Riche, ante, page 285 : "I will ur Lordships to observe, as I refer to some of the clauses, the marked and entifie nee there is between the two documents which form the title-deeds of companies description, — I mean the memorandum of association on the one hand, and the s of association on the other hand. With regard to the memorandum of associa- our Lordships will find, as has often already been pointed out, although it appears 'hat to have been over-looked in the present case, that that is, as it were, the char- id defines the limitation of the powers of a company to be established under the With regard to the articles of association, those articles play a part subsidiary to smorandum of association. They accept the memorandum of association as the r of incorporation of the company, and so accepting it, the articles proceed to the duties, the rights, and the powers of the governing body as between them- and the company at large, and the mode and form in which the business of the com- s to be carried on, and the mode and form in which changes in the internal regula- : the company may from time to time be made." . People V. Chicago Live Stock Exchange, 170 111. 556, a by-law, prohibiting the jrment by members of the Exchange of non-member solicitors, and limiting imber of solicitors to be employed and fixing their salaries, was held unlawful. [PS, C. J. said: "By-laws must be reasonable and for a corporate purpose, and ! within charter limits. They must always be strictly subordinate to the Consti- and the general law of the land. They must not infringe the policy of the state hostile to public welfare. The by-law in this case is a restriction on freedom of and business. It trammels competition and prohibits an individual from con- ig and engaging in business, and from using such agencies and means he may de- it hostile to general law." See also BaUey v. Master Plumbers, 103 Tenn. 99; ukee Masons' &c. Assn. ». Neizerowski, 95 Wis. 129. Matthews v. Associated Press, 136 N. Y. 333, a by-law prohibiting members from ng or publishing regular news dispatches of any other news association, covering territory and organized for a like purpose, was upheld as a natural and reasonable nt upon the members of the association, the objects of their corporation con- 1. Contra: Inter-Ocean Pub. Co. v. Associated Press, 184 111. 438. Kent v. Quicksilver Mining Co., 78 N. Y. 159, Folger, J. said: " There is a power charter to alter, amend, add to, or repeal, at pleasure by-laws before made. It led from this that it was in the power of the corporate body, in due form and ir, to alter the by-law which had fixed the amount of the capital stock and the sr and relative value of the shares thereof. The power to make by-laws is to make s are not inconsistent with the Constitution and the law ; and the power te alter e same limit, so that no alteration could be made which would infringe a right y given and secured by the contract of the corporation. Nor was the power to x> the extent of affecting the contracted relative value of a share, reserved when ire was sold to the stockholder, so as to enter into and form a part of the contract, eration is a pro tanto repeal ; but no private corporation can repeal a by-law so mpair rights which have been given and become vested by virtue of the by-law ard repealed. All by-laws must be reasonable and consistent with the general )les of the laws of the land, which are to be determined by the courts, whenarcase lerly before them. Master, etc. v. Green, 1 Ld. Raym. 113. A by-law may regu- modify the constitution of a corporation, but cannot alter it. Rex v. Cutbush, '. 2204 ; R. Co. v: Allerton, 18 Wall. 233. The alteration of a by-law is but the g of another upon the same matter. If the first must be reasonable and in accord rinciples of law, so must that which alters it. If then the power is reserved to imend or repeal, and that reservation enters into a contract, the power reserved 420 BY-LAWS — VALIDITY. [CHAP. II. 184, and cases there cited. Sutton's Hosp. Case, 10 Co. 30 ; Child V. Hudson Bay Co., 2 Pr. Wms. 207 ; People v. Utica Insurance Com., 15 Johns. Rep. 383 ; Firemen's Insurance Com. v. Ely, 2 Cowen's Hep. 699 ; People v. Tibbits, et al., 2 Cowen's Rep. 358 ; People v. Kip, & al. 4 Cowen's Rep. 382, in note ; Angell & Ames on Corpora- tions 188, sec. 4. KATZ V. THE H.. & H. MANUFACTURING OOMPANY.i 109 A. D. 49. 1905. Appeal by the defendant from an order continuing a preliminary injunction theretofore issued in the action. LAUfeHUN, J. This is an action by a stockholder of a domestic business corporation to enjoin the election of directors of the corpo- ration "until the further order of the court in this action," and adjudging that an attempted amendment of the by-laws of the company by which a majority instead of ninety per cent of the stock is to pasa reasonable by-laws agreeable to law. But a by-law that will disturb a vested right is not such. See Gray i. Portland Bank, 3 Mass. 364 ; 3 Am. Dec. 156 ; Grant Corp. 91. And it differs not when the power to make and alter by-laws is expressly given to a majority of the stockholders, and that the obnoxious ordinance is passed in due form." In Rockwell i). Knights Templars &c. Assn., 134 A. D. 736, defendant issued its policy of life insurance to plaintiff providing for hia payment of assessmenta according to cer- tain of ita by-laws printed on the back of its policy, and referred to on its face, aa con- stituting part thereof. The policy waa issued in consideration of the representations Blade in plaintiff's application (including "I further agree, if accepted, to abide by the rules and .regulations of the Association"), acertain cash payment, "and such further sum or sums to be hereafter paid as is provided for in the by-laws of the Association cbpied on the back hereof." The by-laws contained no provision with re|erenoe to their amendment, although the statute under which defendant waa organized provided that it miight adopt and change by-laws. Subsequently defendant amended its by-laws, and adopted an entirely different table of assessments based upon a different plan. Held : The amendment of the by-lawa was nugatory so far as plaintiff was concerned. Kellogo, J. said: "The period and rate table indoraed upon plaintiff's policy became a part of it, and there is no suggestion in it, or in the policy itself, that that table may be chan^d. The by-laws deemed material by the defendant were made a part of the policy by indorsing them on the back thereof, and there is no suggestion therein that the defendant had the right to change its by-lawa, and in fact it had no by-law per- mitting such change. Every corporation has the right to make and change its by-laws in a manner not inconsistent with law, but such right does not give it the power to change its written contract, or impose upon a party contracting with it obligations which he never assumed. . . . There is no suggestion in the policy or in the by-lawa or the application that the by-laws or the policy may be changed ; the statement in the application that the inaured will abide by the rules and regulations of the associa- tion evidently means the rules and regulations already in existence, and particularly thoae which the company had deemed necesaary to make a part of the policy." Cf. Eeynolda ». Supreme CouncU Royal Arcanum, 192 Mass. 150. See igenerally upon the validity of by-lawa Supreme Commandery &c. v. Ainsworth, 71 Ala. 436. 1 Affirmed in 183 N. Y. 578. SECT. 1.] KATZ V. THE H. & H. MANUFACTURING COMPANY. 421 may reduce or increase' the number of directors be adjudged null and void, and that the officers and directors of the company be enjoined and restrained from acting under or pursuant to said amendment. The company was incorporated with only four directors. On the 13th day of February, 1902, at a special meeting of the stockholders, a resolution was adopted increasing the number of directors from four to five. The provisions of section 21 of the Stock Corporation Law requiring that a verified transcript of the minutes of a meeting of the stockholders at which the number of directors is increased or diminished should be filed in the offices where the original certificates of incorporation were filed, which, by section 5 of the General Corpo- ration Law (Laws of 1892, chap. 687, as amd. by Laws of 1895, chap. 672) are the offices of the Secretary of State and the county clerk, was not complied with as to the county clerk imtil after the com- mencement of this action, although the requirement as to filing a copy with the Secretary of State was complied with at the time; but the action increasing the number of directors from four to five was acquiesced in, and from that time there have been five directors. A special meeting of the stockholders was duly called for the pur- pose of reducing the niunber of directors from five to four and was held on the 23d day of May, 1905. The learned counsel for the appellant contends that the increase in the number of directors from four to five never became effectual owing to the failure to file a transcript of the minutes of the pro- ceedings with the county clerk, and that consequently the proposed election of four directors sought to be enjoined is perfectly lega} regardless of the validity of the by-law which provides that the nimiber of directors shall not be increased or diminished by a vote of less than ninety per cent, of the stock issued and outstanding, and the case of Matter of Dolgeville El. L. & P. Co. (160 N. Y. 500) is cited as authority for that proposition. The learned counsel for the respondent contends on the authority of Wallace V. Walsh (125 N. Y. 26, 32) that the corporation is estopped, by its action in elect- ing five directors and in attempting to amend the by-laws by reduc- ing the number from five to four, from denying that the mmiber was lawfully increased. It would seem, however, that the action of the stockholders in increasing the number of directors from four to five became effectual before the hearing of the motion, for at that time a transcript of the minutes had been duly filed both in the office of the Secretary of State and with the county clerk. Section 21 of the Stock Corporation Law (Laws of 1892, chap. 688), so far as material, provides as follows : "The number of directors of any stock corpora- tion may be increased or reduced, but not above the maximum nor below the minimum number prescribed by law, when the stockhold- ers owning a majority of the stock of the corporation shall so deter- mine at a meeting to be held at the usual place of meeting of thp 422 BY-LAWS — VALIDITY. [CHAP. II. directors on two weeks' notice in writing to each stockholder of rec- ord. . . . The proceedings of such meeting shall be entered in the minutes of the corporation and a transcript thereof verified by the president and secretary of the meeting shall be filed in the offices where the original certificates of incorporation were filed." This section has since been amended by chapter 320 of the Laws of 1903, chapter 307 of the Laws of 1904 and chapter 750 of the Laws of 1905. The provision of the statute relating to the filing of the verified transcript has not been changed, but the words in italic in the quotation supra have been omitted. It appears that one of the by-laws of the corporation provides that the board of directors shall consist of five, and another by-law provides that "stockholders by a vote of ninety (90%) per cent, of the stock issued and outstanding, may, at any regular or any special meeting, alter or amend" the by-laws. It is contended on the one hand that it is competent for the stockholders even to forbid a change in the number of directors without the unanimous consent of the stockholders, and, on the other hand, that the statute has pre- scribed that a majority of the stockholders may alter the number of directors, and that, therefore, any action of the stockholders or directors prescribing differently is inconsistent therewith and void. The authority to make by-laws ^ is conferred by section 11 of the General Corporation Law (as and by Laws of 1895, chap. 672) and is limited to such by-laws for the management of its property, the regulation of its affairs, etc., as are not inconsistent with any exist- ing law. It seems to me clear that, so far as this case is concerned, this is a matter that is regulated by section 21 of the Stock Cor- poration Law, which provides in express terms that the owners of a majority of the stock may at a regular or special meeting called for the purpose as therein provided increase or decrease the number of directors withm the limits prescribed by law. I think it. was not competent for the stockholders to prescribe that such increase or decrease could not be made except by a vote of those representing a largel- percentage of the stock than that prescribed by the statute. I am of opinion that a person purchasing stock in such corporation has a right to assume that the directorate may be increased or re- duced by a majority vote or in any other manner authorized by • The power to make by-laws includes the power to alter and repeal them (43 A. S. R. 157, note), and it resides in the members of the corporation at large, unless there is a statute to the contrary. Morton Gravel &c. Co. v. Wysong, 51 Ind. 4 ; Bank of Holly Springs v. Pinson, 58 Miss. 421 ; North Milwaukee &c. v. Bishop, 103 Wis. 492. By statute, power to make by-laws is sometimes conferred upon the directors, either by authorizing express delegation from the stockholders or else by conferring the power until the stockholders decide otherwise. In either event, by-laws adopted by the stock- holders control the action of the directors, whose power to make by-laws is thus subject to the by-laws adopted by the members. Stevens ». Davison, 18 Grat. (Va.) 819. A delegation of power from the stockholders to the directors to amend the by-laws does not curtail their own power to amend. Matter of A. A. Griffing Iron Co. 63 N. J. L. 168. SECT. 1.] KATZ V. THE H. & H. MANUFACTURING COMPANY. 423 the statutes of the State, and that he is not called upon to examine the by-laws to discover whether some different percentage is therein prescribed. If it be competent for the stockholders to prescribe that the mmiber of directors may only be increased or diminished by a vote representing a percentage of the stock greater than a majority it must be likewise competent for them to prescribe that this may be done by those representing a percentage of the stock less than a majority. Such action, I think, would be clearly incon- sistent with the statute. It would permit the stockholders at a particular time to control the number of directors for all future time by a requirement not prescribed by the statute and inconsistent with the express provisions thereof. The action of the stockholders in reducing the number of direc- tors from five to four was taken by three resolutions apparently all put and carried as a single resolution. The first was a simple reso- lution reducing the number from five to four. The second provided that the action should take effect on the 30th day of June, 1905, and the third amended the by-law by substituting four for five in the provisions relating to the number of the directors. The resolutions were adopted by a vote of the owners of a majority of the stock of the company but not the owners of ninety per cent, of such stock. I am of opinion that the action taken was valid aind that the pro- posed call issued subsequently for the, election of four instead of five directors is legal and valid. The facts are not in dispute. The question presented is one of law. It is evident that the merits of the litigation are presented by the appeal. In these circiunstances the temporary injunction should not be allowed to stand. It follows that the order should be reversed, with ten dollars costs and disbursements, and the motion denied, with ten dollars costs. Patterson, Ingraham and McLaughlin, JJ., concurred. O'Brien, P. J. (dissenting) : I dissent. Section 21 of the Stock Corporation Law is intended in my view to prevent an amendment of a by-law, by less than a majority vote ; but it does not prohibit a corporation from fixing or requiring a greater vote in order to amend. . Order reversed, with ten dollars costs and disbursements, and motion denied, with ten dollars costs.^ 1 Cf. Bipin V, V. S. Woven Label Co. ante page 180. 424 BY-LAWS — VALIDITY. [CHAP. II. DANIEL V. NORTH JERSEY STREET RAILWAY COMPANY. 64 N. J. L. 603. 1900. This cause was tried at the Union Circuit and a verdict rendered for the plaintiff below. Gaebison, J. The plaintiff, carr3'ing in his arms in plain view a small goat, got on one of the cars of the defendant and paid his fare ; later he paid a second fare and received from the conductor a token that entitled him to be transferred to another car of the, defendant company. At the proper junction he presented this token to the conductor on the transfer car who refused to allow him to board the car with the goat. This was the plaintiff's case. A regu- lation of the defendant corporation forbidding the carrying of ani- mals in its cars was proved, and the case went to the jury. The jury were told by the trial court that if the regulation in question was an unreasonable one, the defendant would be liable in damages for enforcing it, and that if it was a reasonable one the defendant, before enforcing it, must call the attention of the passenger to it, which was not done in this case. In effect this directed a verdict for the plaintiff, without regard to the finding of the jury upon the only question submitted to it, viz., whether the regulation of the defend- ant allowing no animals to be carried in their cars was a reasonable one. Inasmuch as the court is unanimously of the opinion that it was error to submit this question to the jury, the judgment will be re- versed for that error without reference to the assignment touching the necessity of giving notice of a reasonable regulation before en- forcing it. The unanimity with which this result is reached does not, how- ever, extend to the line of reasoning pursued in reaching it. Hence, no general rule upon the question of the relative functions of court and jury with respect to the reasonableness of corporate regulations can be laid down at this time. A majority of the court, however, are of opinion that the defendant company might lawfully adopt some regulation with respect to the carrying of animals on its cars, and that the reasonableness of such a rule would be a question for the trial court and not for the jury. Whether, as a class, questions as to the reasonableness of corporate regulations are for the jury, to be taken from it only when deemed to be free from doubt ; or whether they are primarily court questions, to be left to juries only when some other standard than that of reasonableness enters into the test of corporate duty, is a point upon which the majority is not agreed inter sese. SECT. 1.] DANIEL V. NORTH JERSEY STREET RAILWAY COMPANY. 425 It suffices for the decision of the present case to say that in either of these views it was error to leave to the jury the reasonableness of this regulation. It should have been decided by the court. To this extent the cases of State v. Overton/ 4 Zab. 435 ; Morris and Essex Railroad Co. v. Ayres, 5 Butcher 393 ; Compton v. Van Yolkenburgh, 5 Vroom 134, are disapproved ; although the learned judge who tried the case did right to follow these Supreme' Court 1 In this case, defendant, a conductor of a railroad, was indicted for assault and bat- tery committed in forcibly ejecting a passenger from his train. He sought to justify his action by a corporate regulation requiring him to dishonor the particular kind of ticket proffered by the passenger. The trial court. submitted to the jury the reasonableness and validity of the regulation. Held: Error because no such question was involved, as the Tailroad had a contract right under the facts to eject him. The court was of opinion, however, that the reasonableness of such regulations was a jury question. Green. C J. said: "Assuming at the bar, as was done upon the trial, that the guilt or innocence of the defendant depended upon the validity of a regulation made by the company, affecting the rights of passengers, the question was elaborately argued whether the valid- ity of such regulation can in any case be submitted as a question of fact to be decided by a jury, and the broad principle was assumed that the validity of every regulation made by a railroad company, regulating the concerns and affecting the rights of the road, is a question of law, to be decided by the court, and never can be submitted to a jury ; that the company is bound to make regulations for the comfort and convenience ■of passengers ; that the power is regulated by their charter ; that what is lawful is rea- sonable ; and that, therefore, every regulation is reasonable tirhich is not unlawful. "The validity of the by-law of a corporation is purely a question of law. Whether the by-law be in conflict with the law or with the charter of the company, or be in a legal sense unreasonable, and therefore unlawful, is a question for the court and not for the jury. Commonwealth s. Worcester, 3 Pickering, 462 ; Paxon v. Sweet, 1 Green, 196 ; Ang. & Ames on Corps^ 357. But the by-laws of a private corporation bind the mem- bers only by virtue of their assent, and do not affect third persons. All regulations of a company affecting its business, which do not operate upon third persons, no^ in any way affect their rights, are properly denominated by-laws of the company, and may come within the operation of the principle. Within this limit it is the peculiar and exclusive oflSoe of the court to decide upon the validity of the regulation. "But there is another class of regulations, made by corporations, as well as by individuals, who are common carriers of passengers, which operate upon, and affect the rights of others which are not, properly speaking, by-laws of the corporation, and which do not fall within the operation of the principle. Of this character are all regulations touching the comfort and convenience of travellers, or prescribing rules for their conduct to secure the just rights of the company. — It is not perceivable of this class of regula- tions, that they are never unreasonable unless they are unlawful. On the contrary, they are unlawful because they are unreasonable, or an unnecessary infringement of the rights and liberty.of the passengers. The reasonableness and validity of a regulation, that passengers by railroad or steamboat should exhibit their tickets when reasonably re- quested, that they should not smoke or indulge in other filthy, or offensive practices ; that male passengers should not enter a car or a saloon, especially appropriated to fe- males, might be conceded, and the right of the company to enforce them, even by ex- cluding, in case of necessity, the offending passenger from the train. But it would scarely be contended that a regulation requiring passengers continually, or as often as the caprice or malice of a conductor might require it, to exhibit their tickets ; forbidding them to speak, or change their seats from one part of a car or saloon, to another, when the right of no other passenger was affected, was a regulation lawful in itself or which might safely be enforced. This latter class of regulations are no more in violation of the charter of the company, or of any particular statute, than the former. But they would be held unlawful, because they are unreasonable, and an unnecessary infringe- ment of the rights and liberty of travelers. The distinction between such regulations as are necessary, and conducive to the comfort and convenience of travelers, or to pro- tect the rights of the company, must from its very nature be a question of fact rather than of law. The reasonableness and unreasonableness of the regulation, is properly ior the consideration, not of the court, but of the jury." 426 BY-LAWS — SCOPE. [CHAP. II. decisions for the reasons given by Chief Justice Beasley in the Comp- ton case. It is thought best to say that the question of the corporate authority of the defendant to carry animals on its cars is not involved in the decision of this case. Let the judgment he reversed.^ Section 2. Scope and Operation. FLINT V. PIERCE.* 99 Mass. 68. 1868. Contract against a stockholder of the Reading Agricultural and Mechanic Association for the amount of a balance due on a promis- sory note of the association made by its treasurer. The declaration alleged the individual liability of the defendant on the note by rea- son of his subscription of the following by-law of the association : "Article 10. The members of this association pledge themselves in their individual as well as their collective capacity to be responsible' for all moneys loaned to this association and for the payment of which the treasurer may have given his obligation agreeably to the direction of the defendants." The defendant subscribed his name to the by-laws, and became a shareholder and member of the association, prior to 1847. In 1859 the plaintiff lent to the association twenty-six hundred dollars, and held its notes therefor at five per cent, interest. Prior to August 29, 1862, the directors instructed the treasurer to "pay all outstanding notes which were at five per cent, interest, unless the creditors would renew them at four per cent, interest, and to renew all such as would renew at four per cent. ;" and the treasurer gave notice of this direc- tion to the plaintiff, who on that day surrendered the notes he held at five per cent., and took instead the following note for the balance due him: "Reading, August 29, 1862. The Reading Agricultural and Mechanic Association for value received promise to pay Samuel Flint or order twenty-six hundred and ninety-nine dollars in twenty days after demand, with interest at four per cent, if not paid within one year from date. Jonathan Frost, Treasurer." Upon this note the association made one payment of ,ninety-nine dollars in October, 1862, and another of six hundred dollars and one year's interest in January, 1864, and then, notwithstanding repeated demands by the ' Followed in Walker ». John Hancock &c. Ins. Co., 75 N. J. L. 281. ' Statement of facts condensed. SECT. 2.] FLINT V. PIERCE. 427 plaintiff, failed ever to pay the balance. More than twenty days after the last such demand the plaintiff gave the defendant notice of the failure of the association to pay the note, and demanded payment thereof from him as a member of the association and upon his refusal brought this action. Wells, J. The note upon which this action is based is the con- tract of the corporation. The defendant is not a party to that contract; and the plaintiff does not geek, by this suit, to charge him upon any statute liability as a stockholder. Responsibility for the amount of the note is sought to be established through a by-law of the corporation, to which the defendant had attached his signa- ture. This by-law, with others, was adopted in 1831. To become a member of the association it was requisite to subscribe the by-laws. It does not appear that the defendant's signature was attached for any other purpose than to constitute him a member of the corpora- tion. It does not appear, and is not alleged, that the plaintiff lent his money upon the faith or credit of the individual pledge contained in the by-law ; nor that the by-law was in any manner made known to him, or to the public, as the basis of such credit. The office of a by-law is to regulate the conduct and define the duties of the members towards the corporation and between them- selves. So far as its provisions are in the nature of contract, the parties thereto are the members of the association, as between themselves ; or the corporation upon the one side, and its individual members upon the other. The right of any third party, stranger to the association, to establish a legal claim through such a by-law, must depend upon the general principles applicable to express con- tracts,' as laid down in Mellen v. Whipple, 1 Gray, 317, and the subsequent decisions in Field v. Crawford, 6 Gray, 116, and Dow v. Clark, 7 Gray, 198. No action can be maintained by such third party unless he can bring his case within some of the recognized ex- ceptions to that general rule. A pledge like the one in question, if made for the purpose of enabling the corporation to obtain a loan upon the faith of it, and used for that purpose, may perhaps give a right of action against the subscribers in favor of a party who has been induced to advance money upon its credit. This seems to be implied strongly by the decision in the case of Trustees of Free Schools in Andover v. Flint, 13 Met. 543, inasmuch as the plaintiff in that case appears to have failed to recover upon a similar claim merely for the reason that the defendant had not signed the by-law. But no such facts are shown to exist in the present case. The plaintiff not only is no party to the contract contained in the by-law, but he fails to show any privity between himself and the defendant in rela- i Accord: American Live Stock &c. Co. v. Chicago Live Stock Exchange, 143 111. 210 ; Zwolanek v. Baker Mfg. Co., 150 Wis. 517. (Profit sharing scheme embodied in by-laws may ripen into contract between corporation and its employees.) 428 BY-LAWS — SCOPE. [CHAP. H. tion to the subject matter, or to the consideration, of his demands. Judgment must be rendered accordingly for the defendant.^ BUTLER v. BROADWAY SAVINGS INSTITUTION. 171A. D. 682. 1916. Per Curiam — The plaintiff, through one Gibbs, was induced to buy mining stock of Pratt, the president of a mining company. It was represented to her that the stock was worth more than she was paying for it, and that it would pay dividends within four months. In payment of the stock she gave Pratt a draft on her savings bank, the defendant herein. It was her custom to draw drafts on her account with the defendant in payment of her obligations, and for that purpose she left her passbook at defendant's office. Pratt presented the draft for payment at the bank at 9.30 on the morning following the sale of the stock. The bank honored the draft and, as was its custom, entered the amount in plaintiff's passbook. Plain- tiff, meantime repenting of her bargain, went to the bank on the same morning for the purpose of intercepting payment. When she arrived there, at 9.40, she.was informed the draft had been paid. The bank was accustomed to open at 9 a.m. and to pay similar drafts before 10 a.m., although it had a by-law which provided that "the bank shall be open for business daily from 10 o'clock a.m. to 3 o'clock P.M." The plaintiff did not know of the bank's custom to ' a by-law enacted previous to a subscription to stock, providing that calls may only be made upon the vote of at least five directors, becomes a part of the subscriber's con- tract with the corporation, and constitutes a material condition of his promise. Sey- mour V. Sturgess, 26 N. Y. 134. A customer of the corporation, although he be a stockholder, is not chargeable with constructive notice Of its by-laws regulating the mode in which its business shall be transacted with its customers. Pearsall ii. Western Union Tel. Co., 124 N. Y. 256. In Rathbun i). Snow, 123 N. Y. 343, Andrews, J. said: "It follows from the general principle, now well settled, to the effect that third persons may act upon the apparent authority conferred by the principal upon the agent, and are not bound by secret limita- tions or instructions qualifying the terms of the written or verbal appointment, that the defense based upon the limitation in the by-laws of the company, of which the plaintiff had no knowledge, cannot be sustained. By-laws of business corporations are as to third persons private regulations binding as between the corporation and its members or third persons having knowledge of them, but of no force as limitations per se as to third persons of an authority, which, except for the by-law, would be construed as within the apparent scope of the agency:" See also Moyer v. East Shore Terminal Co., -41 S. C. 300 ; Barber v. Stromberg &c. Mfg. Co., 81 Neb. 517. But actual notice of a by-law, limiting the authority of officers or agents, is binding upon a third party. Hale ii. Mechanics &c. Ins. Co., 6 Gray 169. So a by-law confer- ring upon the corporation a lien upon the stock of any of its stockholders who might be indebted to it, is binding upon a transferee of the stock who has actual notice of the lien. Bank of Holly Springs v. Pinaon, 58 Miss. 421. SECT. 2.] BUTLER V. BROADWAY SAVINGS INSTITUTION. 429 open at 9 o'clock. She relies upon the by-law and claims that the act of the bank in paying the draft before 10 o'clock was illegal. . . . The bank claims that the payment was valid. If that contention is soimd, this controversy is settled in its favor. We have not been supplied with a precedent, and we have been unable to find one. The rule quoted does not expressly prohibit the payment of a draft without the fixed hours. The rule is merely a regulation for the convenience of the bank; there is no evidence that in its turn it was designed to afford special protection to the depositors. Judgment directed for the defendant, with costs.^ 1 Cf. Union &o. Ins. Co. v. Keyser, 32 N. H. 313 ; Campbell v. Merchants &e. Ins. Co., 37 N. H. 35 ; Knox v. Eden Musee &c. Co., 148 N. Y. 441. 430 DIKECTOKS — OFFICE. [CHAP. III. CHAPTER III. DIRECTORS- AND OFFICERS. Section 1. Office and Qualification. VARDEMAN v. PENN MUTUAL LIFE INSURANCE CO. 125 Ga. 117. 1906. Mrs. a. O. Vardeman brought suit against the Penn Mutual Life Insurance Company, and alleged : On July 31, 1902, the company issued a policy of insurance upon the life of A. 0. Vardeman, agree- ing to pay $1,000 to petitioner in case of the death of the insured. When A. O. Vardeman purchased the policy it was represented to him that the second premitim need not be paid until thirty days after July 31, 1903. The insured was informed and assured by the agent of the defendant that "it was the general custom of their business, and was imiversal," to extend the insurance and date of payment for thirty days from the date of payment named in the policy. When the insured insisted on inserting this prowsion in his contract of insurance, the agent, in the presence of the insured, referred the matter to the "general agent of the company in Colum- bus," who stated in the presence of the insured that it was not necessary, that it was the custom of the defendant to so extend the time of payment, that the receipt would be in his office, and that the insured could pay it in the thirty days. The insured died on August 20, 1903. The second premium was due under the policy on July 31, 1903. On August 22, 1903, the petitioner tendered to the defendant the amount of the second premium. The defendant re- fused to accept it, and declared the policy had been forfeited. Peti- tioner prayed for judgment, and for a reformation of the contract of insurance, so that it would contain the provision for the thirty- day extension. The policy contained the stipulation that if the premiums were not paid when due, the policy should be null and void, and the further stipulation : "No alteration of this contract or SECT. 1.] VAKDEMAN V. PENN MUTUAL LIFE INSURANCE CO. 431 waiver of any of its conditions shall be valid unless made in writing and signed by an officer of the company." The defendant de- murred to the petition, on the ground that it set forth no cause of action. This demurrer was sustained and the petition dismissed. To this judgment the plaintiff excepted. Cobb, P. J.^ The plaintiff in this case sought a reformation of the contract which would alter it materially and waive one of its condi- tions, upon the ground that the alteration and waiver were made by "the general agent of the company at Columbus." In the case of Hutson V. Prudential Ins. Co., 122 Ga. 847, there was a stipulation that no provision or condition of the policy could be waived except ^y endorsement on the policy, signed by the president, one of the vice-presidents, the secretary, the assistant secretary, or the actuary ; and it was held that a general agent was without authority to waive any condition in the policy, and that "no person save the desig- nated officers of the company would have such authority." In the present case the person authorized to make the waiver is designated by the general term "officer," and the question is whether a general agent is an officer. One distinction between officers and agents of a corporation lies in the manner of their creation. An office is created by the charter of the corporation, and the officer is elected by the directors or the stockholders. An agency is usually created by the officers, or one or more of them, and the agent is appointed by the same authority. It is clear that the two terms, officers and agents, are by no means interchangeable. One, deriving its existence from the other, and being dependent upon that other for its continuation, is necessarily restricted in its powers and duties, and such powers and duties are not necessarily the same as those pertaining' to the authority creating it. The officers, as such, are the corporation.* An agent is an employee. "A mere employment, however liberally compen- sated, does not rise to the dignity of an office." 21 Am. & Eng. Enc. L. (2d ed.) 836. In Wheeler & Wilson Mfg. Co. v. Lawson, 57 Wis. 400, it was held that under a statute requiring an affidavit to be made by an officer of a corporation, the general agent or man- aging agent, within the State, of a fdreign corporation is not an ' Portions of opinion omitted. tt u u 2 Cf. American Soda Fountain Co. s. Stolzenbach, ante page 38. But m Horbach v. Tyrrell, 48 Neb. 514, it was held that a notary public is not disqualified from takmg an acknowledgment of a mortgage made to a corporation of which he is secretary and treasurer, it not appearing that he was a stockholder in such corporation or otherwise beneficially interested in having the conveyance made. Ryan, C, dissenting says, at page 527 ■ " When it ia taken into consideration that the corporation, in the only m anner in which it could act, — that is by its officers, — took an acknowledgment of a mort- gage to itself, there is, to my mind, an exquisite suggestion of irony in the general prop- osition gravely laid down, that 'each case must be determined from the pecuhar facts and circumstances of that case.' " „ „ . ,. ^ , oa <« Cf. also Hall's Safe Co. v. Herring-Hall-Marvin Safe Co. cited in note 1, page 34, ante. 432 DIKECTOKS — OFFICE. [CHAP. III. officer. In Farmers Loan & Trust Co. v. Warring, 20 Wis. 305, service was made upon the "principal agent" of a corporation hold- ing in trust a railroad, when the statute required service upon a "principal officer." In answering the question whether or not the agent was a principal officer, the court said : "It is evident he was not, and must be regarded only as an agent, not as an officer of any- kind, much less a principal officer." A ruling that a "general man- ager" of a corporation was not authorized to verify pleadings, under a statute requiring verification by "an officer," was made inMeton V. Isham Wagon Co., 4 N. Y. Supp. 215. In Raleigh R. Co. v. Pullman Co., 122 Ga. 704 (4), it was held that the term "general manager," as applied to one representing a -corporation, and espe- cially a railroad corporation, imported an agent of very extensive authority; but it was not ruled that even the term "general man- ager" would import that the person holding that position was neces- sarily an officer of the company. One distinction between an officer and an agent, suggested in Commonwealth v. Christian, 9 Phila. (Pa.) 558, is that an officer of a corporation, if illegally excluded from his office, may by mandamus conipel the corporation to rein- state him ; * while an agent may be dismissed without cause, and his only remedy would be compensation in damages. It would not be contended that the "general agent of the defendant at Columbus," in the event of his discharge, could be reinstated by mandamus. We do not think that the general agent at Columbus was an officer of the defendant company. Therefore his alleged waiver of a con- dition in the policy was not binding upon the company. The general agent at Columbus had no authority to change the contract as contained in the written policy, nor to make the contract which the policy would contain if the writing were reformed as prayed by the plaintiff. There was no error in dismissing the peti- tion. , Judgment affirmed.^ * Accord: American RaUway-Frog Co. v. Haven, 101 Mass. 398. But see People ex rd. Manice ». Powell, 201 N. Y. 194. (Quo Warranto the proper remedy under the circumstances.) ' Cf. People ex rel. Manice D. Powell, 201 N. Y. 194. ("While the ordinary rulea of law relating to an agent are applicable in considering the acts of a board of directors in behalf of a corporation when dealing with third persons, the individual directors mak- ing up the board are not mere employees, but a part of an elected body of officers con- stituting the executive agents of the corporation.") SECT. 1.] ' BRINDLEY V. WALKEB. 433 BRINDLEY v. WALKER. 221 Pa. 287 ; 23 L. R. A. (N. S.) 1293. 1908. Petition for mandamus. Demurrer to answer. The following facts appear from the opinion of the court below : The Erie Specialty Company is a business corporation duly char- tered in 1902, under the general act of April 29, 1874, and its supple- ments, and located at Erie, Pa. It has an authorized capital stock of $100,000 divided into 1,000 shares of the par value of $100 each. It has a paid up capital of $70,000, consisting of 700 shares of stock, of which the plaintiff, Zachary T. Brindley, owns 350 shares and defendant Edwin Walker owns 349 shares, and defendant Clarence L. Walker owns one share. That said corporation has always been, and still is, managed by a board of three directors, which directors are said stockholders, and have been elected annually at the stockholders' meeting held in the month of August of each year, and were again re-elected at such meeting held in August, 1907. And the said board of directors thereupon immediately organized by the election of said Edwin Walker as president, and said Zachary T. Brindley as secretary and treasurer, and the said Clarence L. Walker was appointed superin- tendent for the ensuing year. That said Edwin Walker had held the said oflSce of president and the said Zachary T. Brindley had held the said office of secretary and treasurer ever since the organ- ization of said corporation. That about one month after said last annual election the said president of the board of directors requested the secretary to call a meeting of said board in a letter. Pursuant to which the secretary called a meeting of the board for Monday, September 30, 1907, at which all the directors were present) and at which resolutions as follows were adopted by the votes of said directors, Edwin Walker and Clarence L. Walker : "Resolved, that the president of the Erie Specialty Company is hereby authorized and directed to employ counsel and defend the Erie Specialty Company in the suit brought by Z. T. Brindley v. Erie Specialty Company. "Resolved, that Z. T. Brindley is hereby removed and dismissed from the office of secretary and treasurer of the Erie Specialty Com- pany, to take effect immediately. "Resolved, that Henry L. Morse is hereby elected secretary of the Erie Specialty Company, to take effect immediately. "Resolved, that Clarence L. Walker is hereby elected treasurer of the Erie Specialty Company, and that his salary as treasurer and 434 DIRECTORS — OFFICE. [CHAP. III. superintendent shall be two hundred ($200) dollars per month from and after September 30, 1907." And that said director, Zachary T. Brindley, protested and voted against the adoption of each of said resolutions. That at such directors' meeting in August, 1907, the salary of Edwin Walker as president was fixed at $300 a month, and that of Zachary T. Brindley as secretary and treasurer was fixed at $250 a month, and that of Clarence L. Walker as superintendent at $175 a month for the ensuing year. That at a subsequent meeting of said board the action of said board in increasing the salary of said Clarence L. Walker to $200 a month was rescinded. That said plaintiff, by virtue of his said appointment at the August meeting of said board, continued to act as secretary and treasurer of said corporation until said meeting on September 30, 1907, but had not taken the secretary's oath as required by law, nor filed a new bond as required by the by-laws of said corporation, but did tender such a bond on October 28, 1907, before bringing this suit. That on said September 30, 1907, after the adoption of said resolutions, the said president of the board gave Mr. Brindley written notice of his removal and directed him to surrender the property which he held as such secretary and treasurer, and to transact no further business as such ; alid since which time he has not been permitted to act as such ofl&cer. No charges were preferred against Mr. Brindley and no reason given for his removal. He is still a director of said company, and brings this writ of mandamus to be restored to the said ofiice of secretary and treasurer. There is nothing in the by-laws of said corporation fixing the length of the term of any of the officers of said company nor the manner of their removal. The court entered judgment for defendants on the demurrer to answer. Error assigned was the judgment of the court. Opinion by Mr. Justice Stewart : By the action of the board of directors of the defendant corporation the appellant was removed, without cause being assigned, from the office of secretary and treas- urer to which he had been elected by the board. He seeks by this proceeding to be reinstated, on the ground, that in removing him the directors exceeded their power. The general rule with respect to officers in private corporations such as this is, that all below the grade of directors, and such other officers as are elected by the cor- poration at large, hold their offices durante bene placito, and are removable by the directors without cause being assigned. The reason for the rule is as obvious as the distinction made. The supreme authority in every corporation resides in its membership. The expressed will of the majority at a regular shareholders' meeting governs in all matters within the limits of the charter. Therefore, when action has been taken by the corporation at such a meeting. SECT. 1.] BRINDLEY V. WALKER. 435 on any subject pertaining to the affairs of the association, it is beyond the power of any of the agents of the corporation to undo or change what has been done.' The directors are the immediate representa- tives of the corporation charged with the management of its affairs, and are necessarily invested with large discretionary powers; but they can act only where the corporation has not. Ordinarily, the selection of the secretary and treasurer is committed to the board of directors, as was the case here ; but when the corporation has itself elected these officers the directors must accept them, and the officers so elected hold on the terms and conditions prescribed by the cor- poration, and none other. They derive their title to their respec- tive offices from the same source as the directors do theirs, and they can be removed only by the power that appointed them.'' It is otherwise when the corporation has committed the election to the board of directors. In such case the board stands for the corporation ; the officers selected are its appointees, and its power to remove is necessarily implied. "The directors and managing agents of a cor- poration have undoubted authority to revoke the powers of the inferior agents whom they have appointed. It would be practically impossible to carry on the business of a corporation without this power ; it is, therefore, always implied. The power is a discretion- ary one, and the rightfulness of its exercise cannot be investigated by the courts. But the directors of a corporation have no implied authority to revoke the power of those agents who are appointed by a vote of the stockholders, or whose office is fixed and regulated by the charter :" Morawetz on Private Corporations, sec. 541. "The ministerial officers who are not elected by the corporation at large, for stated terms, but who are appointed by the board of directors, and who, therefore, sustain toward the corporation the relation of an employee toward an employer, serving for a compen- sation, which in general the directors do not receive, have no fran- chise in their office, and hence are removable at the mere pleasure of the directors, without the assignment of any cause, without the giving of any notice, and without any trial or investigation into the groimds of the removal : " Thompson on the Law of Corporations, sec. 805. The secretary and treasurer in corporations such as this are purely ministerial officers. The effort here made to show that under our act of assembly they are something more, is unavailing. The act • Cf. note 1, page 422, ante. ' Thus directors may not remove one of their own number. Commonwealth v. Detwiller, 131 Pa. 614. Nor in the absence of a statute or charter provision, may the stdckhold'ers effect the removal or suspension of a director during his term of office, except for cause. People ex rel. Manice v. Powell, 201 N^ Y. 194. A statute, providing for an action in the name of the attorney-general to suspend or remove a director for cause, is not exclusive of the power of the stockholders, if reserved in the charter, ibid., or if the by-laws, original or amended, warrant. Imperial &o. Hotel Co.- v. Hampson, 23 Ch. D. 1 isemble) ; Matter of A. A. Griffing Iron Co., 63 N. J. L. 168 (.semble.) 436 DIRECTORS — OFFICE. [CHAP. III. of 1891, under which this corporation is said to have been chartered, provides that corporations chartered under it "shall be managed and conducted by a president, a board of directors or trustees, a secretary or clerk, a treasurer, and such other officers, agents and factors as the corporation authorizes for that purpose." The effect and purpose of this provision is to require of every corporation that it shall have the officers named, viz. : a president; directors, secretary and treasurer, as a necessary part of the equipment of its organiza- tion. The act does not attempt to define the powers and duties of any of the officers named, but leaves these to be implied from the established custom and the nature and character of the places filled. The construction that would make the act invest the secretary and treasurer with discretionary power — something which a ministerial officer has not — would extend that discretionary power to all the agents and factors which the act allows the corporation to employ. Manifestly nothing of this kind was intended. From what we have said it follows that in removing the appellant from the office of secretary and treasurer the board of directors was exercisiDg a power which rightfully belonged to it. Whether it was wisely or considerately exercised is not for us to determine. The assignments of error are overruled and the judgment is affirmed} KUSER et al. v. WRIGHT. 52 N. J. Eq. 825. 1894. Van Stckel, J.^ The Ott & Brewer Company was organized under the laws of this state, with three directors, viz., Brewer, Tucker and Bell. In June, 1891, Bell made an assignment for the benefit of creditors, and soon after that left the st^te. In November, 1891, the Ott & Brewer Company, by the two directors, Brewer and Tucker, executed a mortgage on its real estate and certain goods and chattels, to the First National Bank of Tren- ton, to secure a pre-existing indebtedness. This mortgage was recorded as a real estate mortgage, but was not sworn to or. recorded as a chattel mortgage. ' Like legislatures, a board of directors may not tie the hands of its successors by appointing officers for a fixed period. Such appointments would render nugatory sub- sequent elections of directors so far as the management of the company is concerned. Llewellyn v. Aberdeen Brewing Co., 65 Wash. 319. Whether the party removed has a right of action for breach of contract of employment depends upon his status as an offi- cer or as a mere servant. Ibid.; Munn v. Wellsburg Banking &e. Co., 66 W. Va. 204. ' Portions of opinion omitted. SECT. 1.-] KUSER ET AL. V. WEIGHT. 437 In August, 1892, the said company, by the same two directors, executed three several chattel mortgages to Anthony R. Kuser, John L. Kuser and Albert Brewer respectively, to secure to each of them the sum of $5,000, at that time loaned by them to the said company. In May, 1893, a bill was filed in the court of chancery, alleging that the said "The Ott & Brewer Company" was insolvent, and thereupon John Wright was appointed receiver of the said company. The receiver exhibited his bill to set aside all these mortgages. The alleged infirmity, chiefly rehed upon, is that two directors had no power to establish a lien upon the property of the corporation. Our act concerning corporations, section 16, provides : "That the business of every such corporation shall be managed and conducted by the directors thereof, who shall respectively be shareholders therein." Section 17 provides : "The directors shall not be less than three in number, and they shall be chosen annually by the stockholders at such time and place as shall be provided by the by-laws of the company, and shall hold their office for one year, and until others are chosen and qualified in their stead." Section 20 provides that "when any vacancy occurs among the directors, or secretary or treasurer, by death, resignation, removal or otherwise, it shall be filled for the remainder of the year in such man- ner as may be provided for by the by-laws of the said company." Section 47 provides that "it shall not be lawful for any person to be elected a director of any body corporate in this state issuing stock unless that person shall be, at the time of his election, a bona fide holder of some of the stock thereof." Section 48 provides that "when any person, a director of any body corporate, shall cease to be a bona fide holder of some of the stock thereof, he shall cease thereupon to be a director thereof." The point made against these mortgagees is that under our statute there must be at least three directors to manage the corporate busi- ness; that by the assignment made by Bell for the benefit of his creditors he ceased to be a stockholder, and by force of the statute ceased at the same time to be a director of the company, thereby leaving the corporation without a board of directors legally quahfied to conduct its affairs. That such a result justly or legally flows from these premises cannot be conceded. It is apparent that dealing with these cor- porate bodies would be in the. highest degree hazardous and unsafe if the public, without notice in fact, is chargeable in law with knowl- edge of a latent infirmity in the title of every director of the company. A doctrine so destructive to the security of commercial transactions, now so largely conducted by corporate action, has no support in the 438 DIRECTORS — OFFICE. [CHAP. III. law. The receiver stands for the corporation, and cannot impeach any act which the corporation itself could not successfully assail. Bell's original title to the office of director was good; it is not denied that he was legally elected. The corporation held him out to the public as one of its duly-authorized agents by failing to de- clare, his office vacant and electing his successor. In Doremus v. The Dutch Reformed Church, 2 Gr. Ch. 349, Chancellor Veoom said "that where the original title of an oflBcer is sufiicient, though good cause of amotion be shown, even in a case where the charter declares that for such cause of amotion the oflScer shall vacate his office, the ofiice is not determined until there be an amotion." He also said "that where persons are officers de facto they are in colore officii, and their acts will be valid until they are lawfully ousted, and more especially as they respect third persons they are binding on the corporation." This rule has never been departed from in this state. Vice-Chancellor Van Fleet, in Mechanics' Bank v. Burnet Com- pany, 5 Stew. Eq. 236, adopted it. He there declares "that if the officers selected are ineligible or are elected irregularly or illegally, but are allowed by the proprietors of the corporation to take control of its property, and to exercise its functions and powers, they become officers de facto, and as such may act for and bind the corporation. An officer de facto is one who has the reputation of being the officer he assumes to be, and yet is not a good officer in point of law.' "From a very early time it has been held that the acts of de facto officers are binding upon the corporation until they are lawfully ousted, especially so far as their acts create rights in favor of third persons." Mr. Taylor, in his book on Private Corporations, §§ 187, 188, after stating the rule as formulated in the cases above cited, eays that "It is submitted that this statement of the rule does not give sufficient prominence to the principle of estoppel, on which the rule depends ; a principle which, in its application to the responsibility of corporations for the acts of de facto officers, may be stated thus : If a body of men, acting as a corporation, permits certain persons to act openly as corporate officers, or if it is permitted by the direc- tors, assuming them' to have had the power to appoint the officer in question, the corporation will not, to the detriment of persons who, 1 In Moses v. Tompkins, 84 Ala. 613, Clopton, J. said : " To constitute an officer de facto, there must be a color of election or appointment, or an exercise of the functions of the office under such circumstances and for such length of time without interference, as to justify the presumption of a due election or appointment. Gary v. State, 76 Ala. 78. The mere exercise of the functions of the office is in itself insufficient." Mere assumption of the office, therefore, does not make the intruder a de facto officer. There must be some color of title, some degree of notoriety. Waterman v. Chicago &C. R. R. Co., 139 111. 658. Cf. the term " sheer usurpation" in note 1, page 106, ante and in note 2, page 118, ante. As to "color of law," see note 1, page 105, onte. SECT, 1.] KUSEE ET AL. V. WRIGHT. 439 in good faith, have acted on the assurance that the persons acting as officers were the officers they assumed to be, be permitted to im- peach the validity of their acts and contracts on the ground that such persons were not legally corporate officers." In In re County Life Assurance Company, L. R. 5 Ch. App. Cas. 288, a pohcy signed by three de facto directors of the company was enforced in favor of the party insured. Lord-Justice Giffard observed, in delivering his judgment, that he did not hesitate to say that the business of companies could not be carried on if this was not held to be the law. As to the public, Bell was clearly a director de facto, and the cor- poration was represented in the affair before us by three directors, as required by the statute. This court has adjudged that, as in favor of creditors and third persons dealing with a corporation in good faith, the regularity and validity of its organization, effected under color of its charter, can- not be impeached, and the acts of its officers, who are officers de facto under color of an election, are binding on the corporation. Hackensack Water Co. v. De Kay, 9 Stew. Eq. 548. A majority of the directors of a corporation, in the absence of any statutory regulation, is a quorum, and such majority, when convened, can do any act within the power of directors. Wells v. Rahway Rubber Co., 4 C. E. Gr. 402. Under these cases, the fact that no notice of the meeting of direc- tors, at which the mortgages were authorized, was given to Bell can- not affect the validity of these securities. That is a subject into which those who are dealing with a corporation are not bound to inquire. That duty falls on the company alone when it holds out its officers as its accredited agents. Nothing like an approach to safety could exist in transactions with corporate bodies if such an obliga- tion was laid upon third parties contracting with them. After the most careful inquiry, the question would still be open to controversy. The assignment by Bell for the benefit of creditors was not con- structive notice to the appellants that he had ceased to become a shareholder. Actual notice must be shown, and that was not proven. Those only are chargeable with constructive notice of the assign- ment who seek to establish a title to his individual property. The company is estopped from denying the authority of one who is, de facto, a director, and in that capacity authorized to represent it. Reversed.^ ' Accord: Mahoney Mining Co. v. Anglo-California Bank, 104 U. S. 192. (Innocent third party protected in his dealings with de facto directors, even after judgment of ouster rendered. Cf. Society Perun v. Cleveland, ante, page 120) ; Chandler v. Hart, 161 Cal. 405 ; Murphy ». Cane, 82 N. J. L. 854 ; Richards v. Farmers &o. Institute &o., 154 Pa. 449. (Doctrine applied in favor of a stockholder, who had voted at elec- tions for directors but was ignorant of pending proceedings to oust the board of directors with whom his contract was made, and which board was afterwards declared to be 440 DIRECTORS — OFFICE. [CHAP. III. MATTER OF GEORGE RINGLER & CO.' 204 N. Y. 30. 1912. Petition to the Supreme Court under section 32 of the General Corporation Law, praying that the elections of certain directors or trustees of George Ringler & Company, a domestic corporation, be set aside upon .the ground that those elected by the stockholders were not legally qualified for the ofl&ce because they were not stock- holders in the corporation, as required by the by-laws; and also because two of them were elected to fill subsequently occurring vacancies in the board by the votes of directors or trustees who are said to have been thus disqualified. Its capital stock, at the time of the elections assailed in this pro- ceeding, was owned in equal amounts by William G. Ringler, now deceased, and the estate of Henry Hachemeister, deceased. The by-laws of the corporation have always provided that "No person shall be a trustee who is not the holder or owner of at least one share in the capital stock of this company. . . . The transfer by any trustee of his entire stock in the company shall cause the forfeiture by said trustee of his rights as such, and such transfer shall be equiv- alent to a resignation of such trustee, and thereupon a new election shall be held to fill the place of such trustee in the manner hereinafter designated." The election of trustees which is first challenged occurred at the stockholders' meeting held on October 30th, 1909. At that time Ringler was still alive. The following persons were then elected trustees : Ringler, Trommer, Strauss, Anna Hachemeister (one of the petitioners and the widow of Henry Hachemeister, deceased) and Kugelman. It is admitted that Trommer, Strauss and Kugel- man were not the owners of any stock in the company. Their names appear upon the books of the company as stockholders, but only for the purpose of qualifying them to be elected trustees, and when they were elected they had divested themselves of the stock of which they appeared to be the owners of record. Prior to the meeting at which they were elected, Ringler had transferred to each of them illegally constituted. The court said : "The learned counsel for defendant, in a very able and ingenious argument, contended that there is a distinction between de facto officers of public corporations and de facto officers of private corporations. While such a distinction appears to be recognized in some of the cases cited and relied on by him, we are not convinced that it is sound; The weight of authority, in this country especially, is decidedly against it. In the case of public corporations, the reasons for holding the acts of de facto officers binding on the corporations they represent are doubtless stronger than in the case of private corporations ; but, to some extent at least, they are the same in both, differing only in degree.") 1 Statement of facts condensed ; portions of opinion omitted. SECT. 1.] MATTER OF GEORGE RINGLER & CO. 441 five shares of the stock of the company, which were "at once trans- ferred back in blank to Mr. Ringler by the said parties." It is also admitted that it had been the custom for Messrs. Hachemeister and Ringler, the real owners of the stock, from time to time to transfer shares to various persons jmder the same arrangement for the sole purpose of qualifying them to become trustees. Thereafter Ringler died, and Trommer and Ehret were appointed his executors. On the following February 28th Ehret was elected a trustee in place of Ringler at a meeting of trustees at which the alleged disqualified trustees, Trommer, Strauss and Kugelman, were the only persons present. On the succeeding 4th of March Wilson was elected a trustee in place of Anna Hachemeister by the votes of Trommer, Strauss, Kugelman and Ehret. Prior to Wilson's election his name appeared on the books of the company as a stock- holder, but he was not in fact a stockholder, because he had been only colorably qualified by the same process as Trommer, Strauss and Kugelman before him. The Supreme Court at Special Term granted the application of the petitioners so far as the three trustees, Trommer, Strauss and Kugel- man were concerned, and set aside their election as trustees upon the groimd that they were not eligible because they were not stocldiolders within the meaning of the by-laws of the company and the statutes.: The application was denied, however, as to Ehret and Wilson upon the specific ground that the court had no power to interfere because the statute under which the proceeding was instituted only relates to elections by stockholders. Upon appeal to the Appellate Division the order of the Special Term was reversed in so far as it set aside the election of the three trustees, Tronomer, Strauss and Kugelman, who were elected by the stockholders, and affirmed as to the refusal to remove the other two, Ehret and Wilson, who had been elected by the board to fill vacancies. The present appeal is by the petitioners from the entire order of the Appellate Division. Weenee, J. Until the year 1901, the statutes of this state relat- ing to the affairs of ordinary business corporations provided that the directors or trustees of such companies should be stockholders to the extent at least of one share of stock. It has been judicially declared that the legislative policy xmderlying this provision of the statutes was to commit the management of corporations to those only who have a personal pecuniary interest in the conduct of their business. (Chemical Nat. Bank v. Colwell, 132 N. Y. 250 ; Sinclair V. Fuller, 158 id., 607.) This was the state of the law when the George Ringler & Company corporation was organized. In 1901 the legislative policy in regard to this class of corporations was changed to the extent of providing that directors (trustees) shall be stockholders, unless otherwise provided in the certificate of incor- poration or by-laws adopted at a stockholders' meeting. (L. 1901, 442 DIRECTORS — OFFICE. , [CHAP. III. ch. 354, amending former section 20 [now sec. 25] of the Stock Cor- poration Law.) As the law now stands, therefore, directors need not be stockholders if the organizers or stockholders of a stock corpo- tion so provide, either in its certificate of incorporation or its by-laws. This brief statement of the law relating to the qualifications of directors or trustees of stock corporations brings into plain view the status oi the three persons, Trommer, Strauss and Kugelman, who were elected at the stockholders' meeting of the Ringler Company held on October 30th, 1909, and whose eligibility to hold the office of trustees therein is first challenged. That they were not at that time beneficial owners of any stock in the corporation is frankly admitted by their learned counsel. But the difficulty reaches down deeper than that, for they were, in fact, not stockholders at all. It is true that five shares of stock had been transferred to each of them prior to their election for the sole purpose of qualifying them, but these shares had been immediately assigned back to the true owner in blank. Thus their only claim to be stockholders rests upon the fact that their names appeared upon the books of the company, and still so appear as record holders of stock. The question to be determined, therefore, is whether an apparent stockholder of record, who is not such in fact, is eligible to the office of director or trustee, under the statute and by-law to which we have referred.^ We are not disposed to construe either the statute or the by-law so strictly as to inhibit the transfer of stock for the express and avowed purpose of qualifying the transferee for election to the oflBce of director or trustee. That might be altogether too drastic a remedy for such evils as are complained of in the case at bar. And so, on the other hand, we cannot uphold the elections of Trommer, Strauss and Kugelman, who were not stockholders at all, without ignoring the letter and spirit of the statute and the by-law. When we con- sider the provisions of the statute and the by-law over against the very general practice of qualifying persons for the offices of direc- tors or trustees in stock corporations, it is going quite far enough to hold that when a transfer of stock is made for that purpose in good ' One is not a stockholder within the meaning of a statute providing for the winding up of insolvent corporations upon summary proceedings to be instituted by its stock- holders or creditors, who, while appearing on the corporate books as the owner of a single share of stock, so as to apparently qualify him as a "dummy" director, had no beneficial interest therein and had, in fact, immediately upon the issuance to him of a certificate, endorsed the same in blank and delivered it to the real owner. Hoopes v. Basic Company, 72 N. J. Eq. 426. Conversely, one is a stockholder, within such statute, who, while the stock stands on the corporate books in the name of the broker who purchased it for the former, is, in fact, vested with the whole beneficial interest therein. Reinhardt v. Interstate Tele- phone Co., 71 N. J. Eq. 70. On the same principle, the holder of a voting trust cer- tificate is a stockholder within the meaning of that statute. O'Grady t). United States &c. Tel. Co., 75 N. J. Eq. 301. See O'Connor v. International Silver Co., 68 N. J. Eq. 67, affirmed at page 680. (Bill against a corporation; complainant's shares stood on books in name of his grantor. Held : Complainant has standing to maintain a stock- holder's bill.) S£CT. 1.] MATTER OF GEORGE RIN6LER & CO. 443 faith, and the transferee actually holds the stock during his incumbency of office, such transferee is a stockholder within the purview of the law. But that is not the case at bar. When Trommer, Strauss and Kugelman took their respective assignments of stock it was with no thought of holding it even until they were elected, for they at once retransferred the stock to the owner. It was simply a fictitious transfer by which it was thought to comply with the naked letter of the law. Thus they were never qualified to become directors or trustees, because they were not stockholders when elected ; and the result would have been the same if their retransfer of the stock had not been made until after their elections, for the by-law of the com- pany, in that event, would have automatically vacated their offices. Their names appeared upon the books of the company as stockholders, to be sure, and that was doubtless conclusive upon the inspectors of election both as to the right of these apparent holders to vote upon the stock, and as to their eligibility to the offices of directors or trus- tees.' But that record is not binding upon the court in such a pro- ceeding as this, when the statute has expressly conferred the power and imposed the duty to make an investigation of the facts and give judgment accordingly. (Matter of Strong v. Smith, 15 Him, 222 ; affd., 80 N. Y. 637.) Although at the time of their election the statute had been so amended as to permit non-stockholders to be directors or trustees in stock corporations, that permission was sub- ject to the condition precedent that either the certificate of incorpo- ration or the by-laws of the corporation must so provide. Here there was no such provision. We hold, therefore, that Trommer, Strauss and Kugelman were not stockholders, when elected, and that they were not then eligible to the offices of directors or trustees. ■ Despite the cogent arguments in the prevailing opinion at the Appel- late Division, based upon considerations of practical business con- venience, we can see no good reason in law or policy for holding otherwise. It seems to us to be going quite far enough to permit a person to become qualified for the office of director or trustee in a stock corporation by the mere transfer to him of a sufficient number of the shares of its stock, if he actually takes and holds it during his term of office. To go further would be to place a premium upon fictitious and colorable transactions designed in form to comply with the law and in fact to defeat its commands. The conchision follows that the Special Term was right in setting aside the election of Trommer, Strauss and Kugelman, and that the Appellate Division erred in reversing the order to that effect.* " Accord: Matter of St. Lawrence Steamboat Co., infra page 525. 2 Cf. Depub, J. in Matter of St. Lawrence Steamboat Co., suvrO" ("Independent' of the statute, a person might be a director of a corporation without being a stockholder. The statute is guardedly expressed. It prescribes as the qualification of a director, that he shall be a bona fide holder of stock. A stockholder may have purchased stock with a view of becoming a director, or have obtained it by gift, or he may hold it upon a trust. 444 DIRECTORS — OFFICE. , [CHAP. III. With reference to the quahfications of Ehret and Wilson, we are confronted with a different question. They were elected to fill vacancies in the board. In respect of this branch of the inquiry, and be qualified to be a director. If the stock was legally issued.-and is not the property of the corporation, and the legal title is in him, he is, prima facie, oapableof being a direc- tor, and his right to be a director, in virtue of his legal title to such stock, can be im- peached only by showing that title was put in him colorably, with a view to qualify him to be a director for some dishonest purpose, in furtherance of some fraudulent scheme touching the organization or control of the company, or to carry into effect some fraudulent arrangement with the company, such as was disclosed in De Ruvigne's Case, 5 Ch. Div. 307, 322. In Bartholomew ii. Bentley, 1 Ohio St. 37, the whole organization of the company was a fraud, and stock was issued gratuitously to certain persons, to qualify them as directors, to carry the fraud into execution.") But the right of such a director to hold office is not impeachable for fraud at the instance of a party consenting to his election. Matter of Leslie, 58 N. J. L. 609. See Wight v. Springfield &c. R. R. Co., 117 Mass. 226 (Representative of municipal- ity owning stock in a corporation eligible to directorship therein.) Also Re Argus Print- ing Co., 1 N. D. 434 ; Smith v. Cornelius, 41 W. Va. 59 ; State ». Manufacturers' &c. Ass'n., 50 Ohio St. 145. In Parkside Cemetery Ass'n v. Cleveland &c. Traction Co., 93 Ohio St. 161, the statute required that directors be stockholders. The directors were given their stock gratuitously and immediately endorsed and delivered the certificates to their donors. Held : A sham transaction and hence, not complying with a mandatory condition prec- edent, the corporation could not exercise the power of eminent domain ; and the ques- tion may be raised collaterally. Contra, (as to eminent domain) Louisville &c. Ry. Co. o. Western Union Tel. Co., 110 N. E. (Ind., 1915) 70. (Defendant, in condemnation proceedings, alleged that plaintiff was organized to evade the laws of Indiana which do not extend the right of eminent domain to foreign corporations ; that plaintiff was organ- ized with intent to transfer its acquisitions of property to a foreign corporation. Held : The exercise of eminent domain does not depend upon dejure existence of the condemn- ing corporation. Morrison v. Indianapolis &c. R. R. Co., 166 Ind. 511, and Central of Ga. R. Co. V. Union Springs &c. R. Co., 144 Ala. 639, approved. See note 1, page 128, ante. Approving the statement by Depue, J. quoted supra, and opposed to the principal case and the Parkside case, supra, on the point of qualification of directors, is People ex rel. Matthiessen v. Lihme, 269 111. 351. A stockholder owning half of the stock of a corporation died, bequeathing his stock in trust, and authorizing the trustee to trans- fer one or two shares to other persons in order to qualify them as directors, and to pay them a reasonable compensation therefor. Accordingly, the trustee assigned a share to defendant to whom a new certificate was issued, which stated that it was transferable only on the books of the company on surrender of the certificate. He signed a state- ment admitting he had absolutely no personal interest or right in the stock but held it merely to qualiify him as a director. He also assigned the certificate in blank and gave it, together with the statement, to the trustee with whom he also entered into a contract in which, after reciting the trust provisions aforesaid, he agreed to act as director in consideration of certain compensation to be paid by the trustee. Proceedings were in- stituted, stockholders owning the other half of the stock being the relators, to oust de- fendant from his ofiice on the ground that he was not a stockholder and hence ineligible to be a director. Held : Defendant became a stockholder, when the trustee assigned a share to him and it was transferred on the books of the corporation and a new certificate was issued to him ; he still has legal title thereto and will have until transfer is again made on the books of the company, that eligibility to be a director follows the legal ownership of shares ; that beneficial interest in the stockholder is unnecessary, as wit- ness the right of trustees, executors, administrators (see note -3, page 630, infra), and pledgees (see note 1, page 536, infra) to vote; that Casper s. Kalt-Zimmers Mfg. Co., 159 Wis. 517, — holding that a director need not be personally interested and declaring "Even where stock is transferred for the express purpose of qualifying one to hold a corporate office, the person so transferring it is personally interested in the sound management of the corporation, and would be unlikely to jeopardize his interest by placing the stock in incompetent hands. The rule that merely a legal title qualifies is more in consonance with present business requirements and is fraught with no undue SECT. 1.] MATTER OF GEORGE RINGLER & CO. 445 the first thing we have to consider is whether the statute authorizes a judicial investigation into elections made by a board of directors or trustees to fill vacancies, as distinguished from elections for full terms by the stockholders. Concretely stated, the inquiry is whether the court at Special Term had the power to inquire into the eligibility qf Ehret and Wilson. [The court holds that the statute confers power upon the Supreme Court to inquire into any corporate election whether made by the stockholders or by directors to fill vacancies. See note 1, page 452, infra.] Next in order is the question whether Ehret and Wilson were properly elected so as to become directors or trustees of the Ringler Company, not merely de facto but de jure. These two, it will be remembered, were elected by different means than the other three and at separate times. Trommer, Strauss and Kugelman were elected by the votes of stocltholders at a meeting held in October, 1909. Ehret was elected at a meeting of the board of directors held on February 28th, 1910, receiving the votes of Trommer, Strauss and Kugelman and no others. Wilson was. elected at a meeting of the directors held March 4th, 1910, receiving the votes of Trommer, Strauss, Kugelman and Ehret, and no others. Thus the proceeding presents the peculiar condition that two di- rectors or trustees, elected to fill vacancies by the votes of three others who assumed to act as trustees or directors but who were themselves disqualified to hold the office, are now claiming to be directors de jure. Reduced to its simplest terms, the argument of the respondents under this head is that although the three directors or trustees, Tronamer, Strauss and Kugelman, may be regarded merely as de facto officers, they had the power while in ofl&ce to create directors or trustees de jure to fill vacancies. The de facto doctrine is one of those legal makeshifts by which unlawful or irregular corporate and public acts are legalized for cer- tain purposes on the score of necessity. It "was introduced into the law," said Chief Judge Butler in the leading case of State v. Carroll (32 Conn. 449), "as a matter of policy and necessity, to protect the interests of the public and individuals, where those interests were involved in the official acts of persons exercising the duties of an office, without being lawful officers." The reason of the rule upon hazard to stockholders," — is to be approved. Judgment in favor of defendant af- firmed. Cf. Chemical National Bank v. Colwell, 132 N. Y. 250. (Defendant not subject to statutory liability upon directors for failure to file annual report, because, before the time came to make the report, he parted with all his beneficial interest in his stock, by assigning the same and delivering the certificate therefor, to his transferee. He re- quested the corporate ofiicers to transfer the stock on their transfer book, but the com- pany did not have one. Held: Since defendant no longer possessed the qualifications ■which the statute declared to be essential, the statute executing itself operated to divest him of title to the ofiSee. Judgment for plaintiff reversed.) 446 DIRECTORS — OFFICE. [CHAP. III. which this policy is founded is stated to be that "third persons, from the nature of the case, cannot always investigate the right of one assuming to hold an important office, even so far as to see that he has color of title to it by virtue of some appointment or election. If they see him pubhcly exercising its authority, if they ascertain that this is generally acquiesced in, they are entitled to treat him as such officer, and, if they employ him as such, should not be subjected to the danger of having his acts collaterally called in question." >■ (Petersilea v. Stone, 119 Mass. 465; Norton v. Shelby Coimty, 118 U. S. 425, 441 ; 3 Thompson on Corporations, sec. 3893.) And the reason of this rule of necessity would seem to imply that "if the title of the assumed officer be directly assailed by the state, in a proper proceeding, it will be necessary for him to show himself something more than an officer in fact," so that when an assumed officer under- takes to enforce in a direct proceeding "rights which belong only to an officer de jure, it may be necessary for him to show himself to be such." (Mechem on Pubhc Officers-, sec. 317.) If Ehret and Wil- son are, therefore, merely de facto directors or trustees, having no higher or better title than Trommer, Strauss and Kugelman, who assumed to elect them, they may be ousted from their offices in this proceeding. (Matter of Sherrill v. O'Brien, opinion by CuUen, Ch. J., 188 N. Y. 213.) And if, on the other hand, Ehret and Wilson are directors or trustees de jure, their title is good, notwithstanding the invalidity of the title of those who assumed to elect them. Dillon in his work on Mimicipal Corporations (Vol. 2 [5th ed.], section 519) says : "It has been argued that, as a de facto coimcil or board does not have title de jure, it cannot by its acts confer a greater or more valid title to office upon its appointee than it has itself, and that, therefore, a person appointed to office by a de facto officer, or by a de facto board is not an officer de jure but only an officer de facto. But the weight of authority denies the existence of any such exception to the general rule that the acts of a de facto board or officer are valid and effectual both as concerns the public and as concerns a third party. In making an appointment pursuant to statutory authority, the, power of appointment is exercised rather by the office upon which it is conferred than by the incumbent. In other words, the power of appointment is incident to the official authority of the incumbent, and the courts have held that no reason exists for making an exception in the case of its appointees. Ac- . cordingly under the decisions, one appointed to office by a de facto officer, or by a de facto board, becomes entitled to the office to which he is appointed dejure, and is not a mere officer de facto." The learned author cites as authorities for this view a long list of decisions, all arising in other states. We have examined thend sufficiently to ascertain that they are all apparently planted upon the accepted ' Cf. Lang V. Bayoune, cited in note 1, page 132, ante. SECT. 1.] MATTER OF GEORGE RINGLER & CO. 447 doctrine that as to the public and third persons dealing with public or corporate officers or their appoLatees, the acts of such officers or appointees are valid. In such cases it matters little whether the officer is such de facto or dejure, for in either event the law recognizes his acts as binding. But if it is true, as suggested by Judge Dillon, that the office and not the officer is the appointing power, it would logically follow that whenever the office lawfully exists, all appoint- ments and elections made by any incumbent, no matter how invalid his title, would be de jure appointments or elections. It seems to us that this is carrying the de facto doctrine beyond the reason upon which it rests. It is certainly more logical to hold that in cases where public convenience or the rights of innocent third persons require that the acts of those who are permitted to serve as public officers must be held valid, the de facto doctrine will be applied, and that in all other cases where the question arises in a direct proceeding it will be decided according to the fact. It is in terms a paradox to say that one who owes his election or appointment to an unlawful usurpation of power by another, holds his appointment or election de jure. As between themselves, the appointer and the appointee stand upon the same footing. If the former is merely an officer. de facto, the latter falls into the same class. That does not give either of them a good title to office. The classification, as we have seen, is merely a legal fiction which the law invokes for the protection of third persons and the public. So far as their own rights are concerned, ' both appointer and appointee are mere intruders, subject to deposi- tion in the proper proceeding. In any event the foregoing rule referred to by Judge Dillon seems never to have been the law of England, for the courts there have held that a judgment of ouster against the de facto incumbent is admissible to impeach the title of his, appointees and is conclusive as against them, except for fraud in obtaining it. (King v. Lisle, Andrews, 163 ; Rex v. Grimes, 5 Burr. 2601 ; King v. Hebden, An- drews, 391.) And the English rule, which seems to have been ap- proved by this court in People ex rel. Gilchrist v. Murray (73 N. Y. 535, 538) has also been applied in several cases in the Supreme Court of this state. In Mayor, etc., of N. Y. v. Flagg (6 Abb. Pr. 296, 302) there were adverse claimants to a municipal office. Upon an appli- cation for an injunction restraining the comptroller from paying a salary to either of the contestants pending the proceedings to try the title, Mr. Justice Sutherland wrote an opinion in which he clearly pointed out the reasons why the acts of a de facto officer may be valid as to the public and third persons, and invahd against him and his appointees. "The distinction," said the learned justice, "between an officer de facto, and a mere usurper has arisen, and is recognized in the law, for the benefit and protection of third persons, and not for the benefit of the officer, who is presumed to know whether he 448 DIRECTORS — OFFICE. [cHAP. III. has been legally appointed or elected. An officer de facto merely, without the legal right, has himself the benefit of a legal recognition, as such, only in suits to which he is not a party. As to himself, he is a mere usurper, though an ofiicer de facto as to third persons in- terested in his acts. The rule of law, which makes him an ofiicer de facto as to such third persons, confers on him no rights, and ab- solves him from no responsibility for his affirmative claimed acts or proceedings. As to himself, such acts and proceedings are a mere nullity. Without right himself, he cannot confer any on others. His appointment of deputies or subordinates, as to himself and them, would be as void as any other colorable official act. It might make them severally officers de facto as to third persons, but could give them no better or greater right to institute, as such, any affirmative action or proceeding than he himself had or has, as an officer de facto. The right and title of his appointee rests on his own right and title, and neither can recover the salaries or the fees, and the emolimaents of the office, without proof that he is an officer de jure, and duly quali- fied, and entitled to act." (Citing People ex rel. Bush v. Collins, 7 Johns. 549, 551 ; Town of Plymouth v. Painter, 17 Conn. 585 ; Fowler v. Bebee, 9 Mass. 231 ; Gilmore v. Holt, 4 Pick. 258 ; Riddle «. Co. of Bedford, 7 Serg. & R. 392 ; Neale v. Overseers, 5 Watts, 538.) In the more recent case of Ppople ex rel. Steinert v. Anthony (6 Hun, 142) the relator waS appointed clerk of a District Court, by one McGuire, who entered the office of justice of that court under a certificate of election, which was later set aside and McGuire de- clared a usurper of the office. The question was whether Steinert, the relator, or Anthony, the respondent, was entitled to the clerk's salary, and that depended upon the question whether McGuire had been legally elected to the office of justice. In that case Mr. Justice Lawrence followed the decision in Mayor, etc., of N. Y. «. Flagg (supra) and the whole argument was summed up in this paragraph : "If McGuire had no title to the office of justice, it seems clear that he could not confer a title to another office, the right to appoint to which was conferred on the justice not upon one who simply asserted that he was such justice." Leaving the discussion of the authorities, we return to the inquiry whether Ehret and Wilson had any better title to office than Trom- mer, Strauss and Kugelman, who assumed to elect them. The latter, as between themselves and the corporation, were never directors or trustees either in fact or in law. They became officers de facto only as to the public and third persons dealing with the corporation. By their act, that is by their votes, they assmned to elect Ehret and Wilson to fill vacancies then existing in the board. As to the public and third persons, Ehret and Wilson thus became directors or trus- tees de facto, but we think that as to the corporation and its stock- SECT. 1.] MATTER OF GEOEGE EINGLEE & CO. 449 holders they acquired no more right or title to the office than the three, Trommer, Strauss and Kugelman, who assumed, without power or authority, to elect them. They were all in office under mere color of title which has been defined "to be that which in ap- pearance is title, but which in reality is not title." (Wright v. Matti- son, 18 How. [U. S.] 50.) We think they must all stand or fall to- gether, and as the election of Trommer, Strauss and Kugelman was clearly invalid, the attempt by these three to elect Ehret and Wilson is equally illegal as regards the corporation and its stockholders. To hold otherwise would produce the incongruous result that mere intruders into a corporate board could legally elect others of their own choosing, who in turn could accept the resignations of the intruders and legally elect their successors, thus usurping the powers which of right belong to the real stockholders, who by such means might be excluded from all participation in the affairs of the Cor- poration. The courts should not lend themselves to such a consum- mation unless the letter of the law plainly commands it, and we can find no such command. The order of the Appellate Division should be reversed ; the order of the Special Term modified so as to set aside the election of all the directors of George Ringler & Co. named in the petition, with costs to appellant in all courts. Ordered accordingly.^ ' De facto directors will be restrained at the instance of a stockholder from enforcing a forfeiture of his stock for non-payment of calls made by them. Moses v. Tompkins, 84 Ala. 613. Clopton, J. said: "The theory of the doctrine of officers de facto, and the principles sustaining the validity of their official acts, are that, though wrongfully in office, yet exercising power and functions appertaining to such office, justice and neces- sity require, for the protection and preservation of the rights and interests of third persons, that their actions, within the scope of official authority and duty, shall be sus- tained. The stockholders are not third persons in their relation to the corporation. If persons undertake to exercise the functions and discharge the duties of directors in oppo- sition to the will of a majority of the stockholders, they are mere usurpers, and their acts can not be deemed valid, when invoked for their own protection. Otherwise, the wrongful assumption of official authority and its exercise would operate to constitute the usurpers, as between themselves and the corporation and shareholders, . a board invested with the power to transact its business and administer its affairs. In such case, the necessity and justice of the rule as to the validity of the acts of directors de facto do not exist, and the rule itself is inapplicable. The acts of officers de facto are only valid when third persons have rights and interests to be protected. By the terms of their contract an assessment or call, made by directors duly appointed, is essential to create a liability on the stockholders. The validity of the acts of directors de facto and their authority may be called in question by a stockholder whenever such acts are de- structive or affect his property rights, or impose a liability on him as such, and the rights of third persons do not intervene. Thorington v. Gould, 59 Ala. 461 ; People s Mutual Life Ins. Co. v. Westcott, 14 Gray 440." Accord: Schwab a. Frisco Mining &c. Co., 21 Utah 258. . ^ _, . „ Contra: Steinmetz ». Versailles &c. Co., 57 Ind. 457 ; San Joaqum Land &c. Co. v. Beecher, 101 Cal. 70 ; Ohio &c. R. R. Co. ». McPherson, 35 Mo. 13 While defMto directors may remove officers. State v. Kupferle, 44 Mo. 154, they may not employ the corporate name to sue de jure directors for the latter s alleged torts in respect to the corporate property. The d^ facto doctrine has no application in such case. Stratton-Massaohusetts &c. Mines Co. ». Davis, 111 N. E. Rep. (Mass., 1916) 375. 450 DIEECTOKS — OFFICE. [CHAP. IH, KEAN ET AL. v. THE UNION WATER COMPANY. 52 N. J. Eq. 813. 1894. Beasley, C. J.* On the part of the appellants, who were the defendants in the court of chancery, it is insisted on this appeal that the subject of the suit is not within the cognizance of a court of equity. In the process of deciding the case, a jurisdictional ob- jection of this nature must of necessity have precedence. Looking at the bill before us in its general aspects, it presents to our view neither more nor less than a controversy between two rival sets of directors of the corporate defendant, each claiming to be its legal representative, having as such the right to exercise the functions appertaining to their office. This is the sole ground on which jurisdiction over the case in hand can be claimed, for there are no other facts stated in the bill which even tend to strengthen, in this particular, the complainant's position. Indeed, such addi- tional facts as are there exhibited must be deemed rather to impair than to add force to the contention that this contest is susceptible of equitable cognizance. The averments are to this effect : The complainant alleges that many years ago the commissioners named in its charter organized it in due form, and that subsequently certain persons were chosen directors, who still continue to be such ; that a number of years after such organization, as the appellants contend, these same commissioners convened and received subscriptions for stock, and that the persons so subscribing elected the appellants to be directors. They also deny the legality of the election of the directors who are represented in the suit by the corporate body. The status of these parties is this : Each contends that the, election of directors relied upon by his opponent is invalid for the want of a legal organization of the corporate body at the time of choosing, re- spectively, such officers. No one who examines the case with the least care, can have any doubt upon this subject. There is nO' groimd nor hint of any circumstances laying a further jurisdictional foundation. If, therefore, the court of chancery had rightful cognizance of the controversy before us, it was because that court has the power to arbitrate between rival claimants to corporate office. A jurisdiction resting on this single basis was asserted and exer- cised in the present case in the inferior court, and the inquiry now arises, can that course of law be vindicated? It does not seem possible to doubt that this conclusion just stated stands opposed to everything that had preceded it in the shape of • Portions of opinion omitted. SECT. 1.] KEAN ET AL. V. THE UNION WATER COMPANY. 451 judicial decision and judicial declaration. The rule, as decided and expressed, was that a court of equity could not inquire into the legality of an existing corporation, except when such inquiry arose collaterally in a case within its cognizance, and that a dispute touching the elec- tion of directors did not, per se, constitute such a case. This doctrine is not only explicitly stated, but is just as explicitly enforced by de- cree, in the case of Owen v. Whitaker, 5 C. E. Gr. 122. The nature of the controversy in that instance was not merely similar but was in all respects identical with that now present on this appeal, so that if the present decision should be affirmed by this court as an in- evitable concomitant, the reported decision would be repudiated as a precedent. The facts to which the adjudication now referred to applied have been carefully collected and stated in the elaborate and very lucid brief of the counsel of the appellants, and may be thus summarized, viz. : By the act incorporating the Sussex County Railroad Company, sixteen persons were nominated as incorporators and commissioners. The capital stock of the company was fixed at $175,000. The com- missioners gave notice, opened books and received subscriptions in an amount exceeding $175,000, and thereupon apportioned the stock among all the subscribers. A controversy arose as to the right to make such apportionment. The persons who subscribed for the first $175,000 of stock claimed that they were entitled to the full amoimt of their respective subscriptions, and that all the subscriptions made in excess of such amount were void. The two classes of stockholders thereupon elected two boards of directors, and a bill was filed by one class of stockholders and directors against the other class of stock- holders and directors to ascertain which party were the true stock- holders and directors. It will be observed from this statement that the issue was, whether a court of equity was the appropriate tribunal to adjudge of the legality of these two several elections, and that is precisely what has been done in the present case. Nor is there a particle of doubt with respect to what Chancellor Zabriskie, who decided the case, considered the issue before him, nor with respect to the rule that was applied in disposing of such issue. He thus, certainly in very plain terms, states the problem he is called upon to solve. He says: "The first question in the cause is, whether the court has jurisdiction to determine whether an election of the directors of a private cor- poration has been legally held, and whether certain persons claiming to be and acting as directors are such." And in deciding this ques- tion he declares, emphatically : "This court has no jurisdiction to determine the validity of this election or the right of the directors, elected to hold and exercise the office of directors, and therefore can grant no relief that is merely incident to that power, such as to re- strain the directors from acting as such." 452 DIKECTOES — OFFICE. [CHAP. III. In deciding the case of Owen v. Whitaker, it is held that the statute laws of this state provide an ample remedy for the injury complained of, and the forty-fourth section to the Corporation act (Rev. p. 184) was particularly referred to. That provision is in these words, viz. : ■ "It shall be the duty of the supreme court, upon the application of •any person or persons, or a body corporate, who may be aggrieved by or may complain of any election ^ or any proceeding, act or matter, in or touching the same, reasonable notice having been given to the adverse party or to those who are to be affected thereby, of such intended application, to proceed forthwith and in a summary way to hear the affidavits, proofs and allegations of the parties, or other- wise inquire into the matter or causes of complaint, and thereupon establish the election so complained of or to order a new election, or inake such order and give such relief in the premises as right and justice may appear to said supreme court to require ; provided, that said supreme court may, if the case shall appear to require it, either order an issue or issues to be made up in such manner and form as the supreme court may direct in order to try the respective rights of the parties who may claim the same to the office or offices or franchise in question, or may give leave to exhibit, or direct the attorney-general to exhibit, one or more information or informations in the nature of a quo warranto in the premises." The chancellor, in denying the jurisdiction of his court to de- termine the validity of an election of directors of a private corpora- tion, describes this act as a "summary and efficient proceeding," created for the very purpose of determining the dispute before him, and he cites the case of Mickles v. Rochester City Bank , 1 1 Paige 124, in which Chancellor Walworth, passing on the same jurisdictional question, as well as the efficacy of an identical New York statute, says: "The question as to the validity of the election of G., W. and S., as .trustees, does not appear to be a proper subject of equitable cognizance. The legislature has provided a summary remedy by an application to the supreme court to set aside the election of these directors of it as illegal. That court, therefore, is the proper tri- bunal to set aside the election if it has not been in conformity to law." ' In the subsequent case of Johnston et al. v. Jones et al., Chan- cellor Zabriskie reiterates, with emphasis, the doctrine declared ' In Matter of George Ringler & Co., ante, page 440, Werner, J. speaking of the simi- lar New York statute, said: "The statute was clearly enacted in order that courts might have power to proceed in a summary manner to test the title of ofiicers of cor- porations without recourse to the more cumbersome proceeding under the writ of ««o warranto." The purpose of the amendment of 1890 to the New York statute, add- ing the words "of any corporation" after the words "of any election" was not to con- fine its scope to inquiries into elections by stockholders as distinguished from those by directors, but to make the statute applicable to all classes of corporations. Ibid. See Matter of St. Lawrence Steamboat Co., infra, page 625, as to scope of this statute. SECT. 1.] KEAN ET AL. V. THE tlNION WATER COMPANY. 453 by him in Owen v. Whitaker, and discriminates between the cases in which the jurisdictional foundation is laid simply in the averment of a disputed election, as in the instance we are now considering, and that other class in which such question comes in collaterally in the determination of matters over which equity has direct cog- nizance. The distinction is indisputable, and is recognized in every authority that has been noticed, and is nowhere more plainly de- clared than in the cases just cited. After repudiating, in express terms, the theory that a court of equity, in a direct procedure for that purpose, can inquire into the question of the right to an office, or as to the regularity of a corporate election, the very able chancellor then proceeds to set out the ground on which he vindicates his right to take charge of the controversy. He says : " That the defendant obtained an^oflfice claimed by him in a corporation by an election procured to be held by him by fraud, by breach of trust and a posi- tive agreement, by concealment and treachery, confers on a court of equity jurisdiction to inquire into the validity of such an election, for the purpose of restraining the acts of the defendant and other persons claiming office by such election. That equity had juris- diction of the question of the legality of one of these elections, where such question arises incidentally to the decision of fraud, a breach of trust will be denied by no one versed in the law ; and this is what this particular case enunciates, but how such a doctrine has any tendency to support the hypothesis in which the present decree has been rendered is not apparent." This view of the law on this subject, thus expresssed by Chancellor Zabriskie, has received the weighty approval of the late Vice-Chan- cellor Van Fleet. In the case of Mechanics' National Bank of Newark y. Burnet Mfg. Co., 5 Stew. Eq. 238, this very distinguished jurist says : "A court of equity has no jurisdiction to pass upon the validity of the election of the officers of a private corporation and pronounce judgment of amotion against them. Owen v. Whitaker, 5 C. E. Gr. 122. But where the question of the right or power of an officer to represent or bind a corporation arises incidentally in the course of a suit, of which this court may properly take cognizance, and it becomes necessary to look into the legality of his election and the validity of his title, in order properly to determine the rights of the parties, this court will pass upon his title and capacity, as it would upon any other question of law or fact necessarily arising in the due determination of an action. Johnston v. Jones, 8 C. E. Gr. 216." In the opinion of this court the jurisdictional rule is properly and accurately delineated in the decisions there referred to. The question of the right to corporate office or franchise is purely a legal one. It seems to have always been so regarded. It is .many years since the subject was examined by Chancellor Kent, who. 454 DIRECTORS — OFFICE. [CHAP. III. in the leading case of Attorney-General v. The Utica Insurance Co., 2 Johns. Gh. 371, said that "The charge of the usurpation of a fran- chise has so frequently occurred, and the remedy by injunction is so convenient and summary that the jurisdiction of this court would have been placed beyond all possibility of doubt, and have been distinctly announced by a series of precedents if any such general jurisdiction existed. But I have searched in vain for this authentic evidence of such a power. The precedents are all in the king's bench, and Kyd cites nearly an hundred instances, within the last century, of informations filed in the king's bench to call in question the exercise of a franchise." ^ In conclusion, it is sufficient to say that the entire weight of author- ity is, in our opinion, opposed to the theory on which the decree appealed from was based. And, indeed, if there were no precedents relating to the subject, our conclusions, on general principles, would have been adverse to the jurisdiction exercised in the present in- stance. The controversy is exclusively a legal one ; it has no trace of anything to put it within the cognizance of an equitable tribunal, and the remedy at law is more complete than any other. The fu- tility of a proceeding in equity is perfectly manifest. . The present decree does not vacate the offices in question ; it ties the hands of the defendants, but leaves them in their offices ; and if the decision had been in their favor a decree to that effect would have been as useless as so much blank paper ; it would have left the dispute between these two sets of directors absolutely untouched, for in that litigation the determination of the court in this proceeding would not have been legitimate evidence, for the class of directors who have pushed to the front the corporation as the dominus litis are not parties to the pres- ent bill. In contrast to a legal course so uncertain and ineffectual, if we turn to the provision of the statute above referred to, it will be observed that, in our entire system of law, no remedy exists that is more simple and complete. Let the decree appealed from be reversed and the bill dismissed.^ 1 Cf. note 1, page 328, ante. * Normally equity has no jurisdiction to try title to corporate office. Sherman v. Clark, 4 Nev. 138. But if the case ia otherwise of equitable cognizance, equity will afford complete relief by investigating the election. Schmidt ». Mitchell, 101 Ky. 570; Hayes v. Burns, 25 App. Cas. (D. C.) 242. Cf. oases in Chap. 4, Sec. 7, infra. SECT. 2.] BEVEEIDGE V. NEW TOBK ELEVATED RAILROAD CO. 455 Section 2. — Powers. BEVERIDGE v. NEW YORK ELEVATED RAILROAD CO.^ 112 N. Y. 1 ; 2 L. R. A. 648. 1889. Chapter 218 of the Laws of 1839 conferred power upon all rail- road corporations thereafter organized to contract with other rail- roads for the use of their respective roads in such manner as the contract may prescribe. In Woodruff v. Erie Ry. Co., 93 N.Y. 616, it was held that this statute involved the power to make a lease for a term of years. A corporation, subsequently organized, made such a lease and its action was challenged on the ground that its directors lacked the power to make such a lease without the consent of its stockholders. Gray. J. All powers directly conferred by statute, or impliedly granted, of necessity, must be exercised by the directors who are constituted by the law as the agency for the doing of corporate acts. The expression of the corporate will and the performance of corporate functions, in the management of a corporation, may originate with its directors, where the law or the by-laws have not expressly re- stricted '^ their authority and made their action to rest for its validity upon the concurrence of the stockholders, by previous action or subse- quent ratification. Within the chartered authority they have the fullest power to regulate the concerns of a corporation, according to their best judgment, and contracts, which the corporation could legitimately make, come within the scope of the ordinary powers of corporate management.' Leslie v. Lorillard, 110 N. Y., 536. In ' Facts restated ; portions of opinion omitted. 2 Cf. note 1, page 422, ante: also note 1, page 428, ante. ' "Whether a given power is to be exercised by the directors or by the shareholders depends upon its nature and the terms of the enabling act." Day, J. in Commercial National Bank v. Weinhard, 192 U. S. 243. If the enabling act or by-laws made pursuant thereto declare, either expressly or upon proper construction thereof, where the power shaU be lodged, such declaration governs. See preceding note. _ , i ^ r If the enabUng act is silent, there is no room for construction, and the nature of act to be accomplished governs. If the exercise of the power has for its object ordinary corporate management, the power is vested in the board of directors. Bank v. Weinhard, supra. (" Corporate powers conferred upon a board of directors usuaUy refer to the ordinary business transactions of the corporation.") This means "the affairs of every corporation. Continental Securities Co. v. Belmont, infra, page 634. It covers the bi^mess of every corporation." McCarter v. Firemen's Ins. Co., ante, page 327 C/. Whitten- don Millsj.. Upton, ante, page 220, and note 2, page 223, ante. Within this sphere. 456 DIEECTORS — POWERS. [cHAP. III. the management of the affairs of the corporation, they are dependent solely upon their own knowledge of its business and their own judg- ment as to what its interests require. The error, in the' supposition that, in the case of a railroad corporation, a lease of the railroad property requires for its validity the authorization of stockholders, has its source in the idea that such an act involves an organic change, which either the law inhibits or, if it.permits, vests the power to make only in the corporators, either by express enactment, or by necessary or natural implication. If such a contract, as the lease by a railroad corporation to another of its railway, was not within the powers .ex- pressly conferred by general laws, by which, as by the charter, the corporate powers are measured, it would be ultra vires and could not be made at all. But, as the act of 1839 authorizes the making of such a contract, and the law does not regulate the manner of making it, or impose restrictions with respect to it, I think it must logically follow that the power to make it is, like all other general powers of management, lodged in the directors. They must exercise all the powers of a corporation, subject to, the general law and to the by- the action of the board of directors is not subject to challenge by a stockholder, Re- publican Mountain &c. Co. v. Brown, 58 Fed. 644, nor subject to the control of the stockholders collectively, 'Continental Securities Co. v. Belmont, supra. And see note following. "Corporate elections furnish the only remedy for internal dissensions." Flynn v. Brooklyn City R. R. Co., 158 N. Y. 493. If the exercise of the power has for its object something beyond ordinary corporate management or not germane to the prosecution of the corporate enterprise, the power resides in the stockholders. Thus in Chicago City Ry. Co. ». Allerton, 18 Wall. 233, Bradley, J. said: "The general power to perform all corporate acts refers to the ordi- nary business transactions of the corporation, apd does not extend to a reconstruction of the body itself, or to an enlargement of its capital stock. . . . Changes in the purpose and object of an association, or in the extent of its constituency or member- ship, involving the amount of its capital stock, are necessarily fundamental in their character, and caAnot, on general principles, be made without the express or implied consent of the members." In Bank v. Weinhard, supra, question arose as to who might exercise a statutory option, afforded to banks, either to levy an assessment to make good an impaired capital, or to wind up business.. Day, J. said: "The origin and continuance of the association would seem to be matters in which the owners and not the managers of the bank are primarily interested. If these are privileges of the shareholders and only exercisable by them, this case presents a total lack of the exertion'of the power by those upon whom it is legally conferred, as no action of the shareholders was had in the present case in making the assessment. Action upon the Comptroller's order involves extraordinary action of the association, and deter- mines its future operations or liquidation, and is not found within the powers conferred upon the directors for the management of the business of the bank. If this were not so, then thfe decision of a question of such vital importance is left to the directors, who may or may not be large holders of stock. As it is a matter foreign to the powers of such boards and not conferred by statute or required for the transaction of the business of the bank, we think it was intended to be vested in the shareholders." Held: Since the choice of methods was with the stockholders, an assessment made by direc- tors without action by the stockholders was void. Ibid. Cf. Visalia &c. R. R. Co. II. Hyde, cited in note 3, page 396, ante. Cf. Union Pacific R. R. Co. v. Chicago, Rock Island &c. Co., 163 U. S. 564, at 595 — "the ultimate determination of the management of the corporate affairs rests with its stockholders." — And at page 600 — "Except in cases where the charter imposes a limitation, the stockholders are the proper parties to take* final action in the manage- ment of corporate affairs." SECT. 2.] BEVERIDGE V. NEW YORK ELEVATED EAILROAD CO. 457 laws of the company, and, where they act in good faith and without fraud or collusion, their action is conclusive upon the corporation.' As agents of the corporation, we must find the extent of their powers by an examination of the laws under which it was created and exists. Those laws, in defining the powers of the corporation, define the scope of the directors' powers to act for it. Judge Comstock, in Hoyt V. Thomson, 19 N. Y. 216, said : "The board of directors of a corporation do not stand in the same relation to the corporate body which a private agent holds, toward his principal. In the strict relation of principal and agent, all the authority of the latter is de- rived by delegation from the former. . . . But in corporate bodies the powers of the board of directors are, in a very important sense, original and undelegated. The stockholders do not confer nor can they revoke those powers. They are derivative only in the sense of being received from the State in the act of incorporation. The directors convened as a board are the prunary possessors of all the powers which the charter confers." It is difficult to find a solid foundation for the argument which denies to the directors the power of making a contract, which the law expressly permits the corporation to make, without the authorization of the stockholders. If it is deemed to be too extensive a power to be vested in the directors and dangerous to the rights of the stockholders, in the possibihties of fraud, it is for the legislature to interfere and prescribe regulations for its exercise. What we hold here is, that a contract for the leasing of one railroad to another is within the original powers of a board of directors to make ; because it is a power conferred upon the corporation by the legislature, which lodges primarily in its directors; to be exercised, when, according to their best judgment, the needs or interests of the corporation require it. What business a corporation can do within its chartered limits and in or about that business, by statutory authority, its di- rectors hold a delegated power from the legislature to do for it.^ 'Accord: EUerman,.. Chicago Junction Rys. &c. Co. 49 N J. Eq. 217 C' Indi- vidual stockholders cannot question, in judicial proceedings, *1>«/°JP°;^^*^^^^*; ° directors, if the same are within the powers of the corporation, and, in f"rtheran«e of its purposes, are not unlawful or against good mora s, and are done m good faith and in the exercise of an honest judgment. Questions of pohcy of management, of expedi- Incy TcTntracts or action ofTdequacy of consideration not ^-^^f ^.^3°^°'^™^^ of lawful appropriation of corporate funds to advance corporate interests, are left sLlTto the honest decision of the directors if their powers are without hmitation and free from restrafnt To hold otherwise would be to substitute the judgment and dis- cretion S othe'r'sTn the place of those determined on by the scheme of mcorpora^n. Gamble v. Queens County Water Co., cited ^nfra, note 1, page 624, Continental "^Ttin^rfer^nr^^ihttiXnTaffairs of foreign corporations, see Hogue . ^'tZ '^fZ::^'S7.:^^:'^^rs'^:S:!t:... agents, see Brindley . WalUer. ante page 433, ^nd notes deadlock occurs in the directorate, see Stern- As t° ^'^^I^f °f •'"JP^'f |P°7p;^ JefrXf ^^^ only by the appointment of a t^- Si.'^milace^.- Pie?ce-Waute°l?ib. Co., 101 Iowa 313 (error to appoint receiver). 458 DIRECTORS — POWERS. [CHAP. III. CURTIN V. SALMON RIVER HYDRAULIC GOLD MINING &c. CO.i 130 Cal. 345. 1900. Action to foreclose a mortgage executed by the president and secretary of the defendant. Defendant denied its execution of the note and mortgage. The trial court determined this issue in favor of plaintiff and rendered judgment accordingly. From this judg- ment and an order denying motion for a new trial, defendant appeals. The appellate court determined that the directors' meeting, at which the resolution authorizing the execution of the niiortgage was enacted, was irregular and, there being no quorum present, that the directors present could not perform any vahd corporate act. Plaintiff relied upon subsequent ratification by two-thirds of the stockholders. Harrison, J. After the president and secretary of the corporation had executed the note and mortgage an instrument was signed by the holders and owners of more than two-thirds of the capital stock of the defendant, by which they purported to ratify and approve the said mortgage, and it is contended by the plaintiff that under| the provisions of the act of April 23, 1880 (Stats. 1880, p. 131), the mort- gage thereby became valid and binding upon the defendant. Section 1 of that act is as follows : "It shall not be la-wful for the directors of any mining corporation to sell, lease, mortgage, or other- wise dispose of the whole or any part of the mining ground owned or held by such corporation, nor to purchase or obtain in any way any additional mining ground, imless such act be ratified by the holders of at least two-thirds of the capital stock of such corporation." This section does not confer upon the stockholders any power to mortgage the property of the corporation, or to authorize the directors to mort- gage it, and it is a familiar rule that ratification cannot give effect to an unauthorized or invalid act, unless the person or body making the ratification could in the first instance have authorized the act. The corporate power and business of the corporation myst be ex- ercised by the board of directors (Civ. Code, sec. 305), and the stock- holders cannot, by their own act, mortgage its property. (Gashwiler V. Willis, 33 Cal. 11.) Any mortgage, to be effective, must be made by the board of directors, but under the provisions of the above act of 1880 the consent of two-thirds of the stockholders is requisite to its vahdity. The stockholders are thus made a component part of the power to make a mortgage effective, but cannot, by any act of their own, make a mortgage, or validate one that has not been pre- viously authorized and executed by the board of directors. 1 Facts restated from the opinion, of which portion is omitted. SECT. 2.] people's bank v. ST. ANTHONY'S R. C. CHURCH. 459 Whether the defendant would be estopped from contesting the claim of the plaintiff to recover the moneys advanced to it' by him is not involved herein. The plaintiff seeks by this action the sale of the defendant's property in payment of the note held by him, but, unless the defendant has created a hen upon the property, the plaintiff cannot maintain the present action for compeUing its sale. The judgment and order denying a new trial are reversed} PEOPLE'S BANK v. ST. ANTHONY'S R. C. CHURCH. 109 N. Y. 512. 1888. Appeal from an order of the General Term reversing a judgment in favor of plaintiff, entered upon report of a referee. This action was brought against defendant, a religious corporation, upon eight certificates or promissory notes, all similar in form, of one of which the following is a copy : "St. Anthony's Roman Catholic Church, \ "Greenpoint, Brooklyn, E. D., April 1, 1876. J "This certifies that St. Anthony's Roman Catholic Church, of the city of Brooklyn, county of Kings, and state of New York, is in- debted to Edwin Harlow, or order, $500, duly received from the said Edwin Harlow as a loan, bearing interest at seven per cent, per annum, payable semi-annually at the Mechanics and Traders' Bank, Greenpoint, Brooklyn, E. D. " This certificate is redeemable within two (2) years, or sooner, at the option of the church. "(Signed.) John Loughlin, " President. "Daniel Ross, "Secitetary. " William J. Lane, "Treasurer and Pastor of St. Anthony's Church." • In Charlestown &c. Shoe Co. s. Dunsmore', 60 N. H. 85, Smith, J. said : "When a statute provides that powers granted to a corporation shall be exercised by any set of officers or any particular agents, such powers can be exercised only by such officers or agents, although they are required to be chosen by the whole corporation,; and if the whole corporation attempts to exercise powers which by the charter are lodged elsewhere, its action upon the subject is void. Insurance Co. j). Keyser, 32 N. H. 313, 315. The vote choosing Osgood a committee to act with the directors in closing up. the affairs of the plaintiff corporation was inoperative and void." An additional corollary follows from the absence of power in the stockholders to^ do a given corporate act, viz.: They may not impose their wiU in reference thereto upon the board of directors. Hutchinson v. Green, 91 Mo. 367 ; Automatic &c. FUter 460 DIRECTORS — POWKBS. [CHAP. Ill, Andrews, J.' The answer put in issue the allegation in the com- plaint that the notes sued upon were made by the corporation de- fendant. It became necessary, therefore, for the plaintiff, in the first instance, to show or to give evidence which legitimately raised a presumption that the notes were the corporate obligations of the defendant. Neither party entered into any investigation of the question whether the execution of the notes was in fact authorized by the corporation. The fact that the defendant was a body corpo- rate was admitted in the pleadings, and it was shown that it was organized under the act for the incorporation of religious societies, passed April 5, 1813, and the amendatory act chapter 45 of the Laws of 1863. The plaintiff further proved that the notes were signed by the persons whose names are affixed thereto, and that they were, respectively, the president, secretary and treasurer of the defendant, and constituted three of the five members composing its board of trustees. The plaintiff also proved title to the notes by transfer from the administrators of the payee, in consideration of an indebtedness of the estate-of the decedent to the plaintiff. The notes were offered and received in evidence, and upon the admissions and proofs thus made the plaintiff rested its case. The defendant on its part proved, , upon ci;oss-examination of the witnesses for the plaintiff, the single additional fact that the notes were signed by the officers of the de- fendant, acting separately, and not at the same time or place, or while assembled as a board of trustees. It is elementary that the powers vested in a corporation aggre-- gate, having a board of trustees, reside, for all purposes of practical administration, in the board as the governing body. The corpora- tion being a legal entity merely, can only act through instrumen- talities and by delegation. The statute creating it may prescribe its mode of action, and when the methods and agencies by which it may act are designated, that designation operates as a linaitation and excludes other modes of action. (Landers v. Methodist Church, 97 N. Y. 119.) The general powers of religious corporations are enumerated in the fourth section of the act of 1813. They are in form conferred upon the trustees. The section authorizes and empowers the " trustees " to exercise the powers specified, and by the closing paragraph empowers them to regulate and order "all other matters and things relating to the temporal concerns and. revenues of isuch church." The trustees of the defendant were, therefore, the only &c. Co. ». Cunuinghame, L. R. 1906, 2 Ch. Div. 34. See Continental Securities Co. V, Belmont, infra, page 634. Where the board of directors are dormant, and the executive officers have, by direction or acquiescence of the stockholders, assumed and exercised the functions of the board, the corporation is bound by the acts of such officers. Cunningham v. German Ins. Bank, 101 Fed. 977. See Smith v. Wells Mfg. Co., 148 Ind. 333; ■Garmany v. Lawton, 124 Ga. 876. ' Portions of opinion omitted. SECT. 2.] people's bank v. ST. anthony's r. c. chtxrch. 461 legal representatives of the corporation in exercising its corporate franchises and powers. Whatever powers were conferred on the cor- poration may be exercised in its behalf by the trustees. They, acting as a board, can make or authorize acts binding on the corporation, and they alone. Their sanction or authority is essential to a valid corpo- rate act. The quahfication that the collective authority of the trustees acting as a board, is essential in.order to bind the corporation by the action of its trustees, is a recognized doctrine of the law of corpbrations. The trustees of a corporation have no separate or individual authority to bind the corporation, and this although the majority or the whole number, acting singly and not collectively as a board, should assent to the particular transaction.^ (Cammeyer V. The Churches, 2 Sand. Ch. 186 ; D'Arcy v. Tamar, etc., R. W. Co., • In Baldwin v. Canfield, 26 Minn. 43, Bbrkt, J. said: "The legal effect of this [vesting, by the incorporation articles, of the management of corporate affairs in the board of directors] was to invest the directors with such government and manage- ment as a board, and not otherwise. This is in accordance with the general rule that the governing body of a corporation, as such, are agents of the corporation only as a board, and not individually. Hence it follows that they have no authority to act, save when assembled at a board meeting. The separate action, individually, of the persons composing such governing body, is not the action of the constituted body of men clothed with corporate powers. Ahgell & Ames on Corporations, § 504, et seg.; In re Marseilles Extension Ry. Co., Law Rep. 7 Ch. Ap. 161 ; D'Arcy v. Tamar, etc., Ry. Co., Law Rep. 2 Exch. 158 ; Schumm v. Seymour, 24 N. J. Eq. 143 ; First Nat. Bank v. Christopher, 40 N. J. Law 435; Junction R. Co. v. Reeve, 15 Ind. 237; Cammeyer v. United German Churches, 2 Sandf. Ch. 186; Yellow Jacket Silver Mining Co. ». Stevenson, 5 Nev. 224; Hillyer v. Overman Silver Mining Co., 6 Nev. 51 ; Stoystown, etc.. Turnpike Road Co. v. Craver, 45 Pa. St. 386 ; Edgerly ». Emerson, 23 N. H. 555. In Vermont a somewhat different rule is allowed, as in the Bank of Middlebury s. Rutland & Washington R. Co., 30 Vt. 159. In that case, and perhaps others in that state, it is held that directors may bind their corporation by acting separately, if this is their usual practice in transacting the corporate business. But we think that the general rule before mentioned is the more rational one, and it is supported by the great weight of authority." The same result was reached despite an express provision of the incorporation arti- cles to the contrary. Audenried v. East Coast Milling Co., 68 N. J. Eq. 450. ("Stock- holders may waive an advantage, but they cannot by waiver ordain a method of corporate action which the law does not recognize, nor dispense with the aid of a board of directors as a means of corporate action. Such a course is not sanctioned by our law and is inconsistent with the twelfth section of our act, which requires that 'the business oi every corporation shall be managed by its directors.' . . . The legislature may be presumed to have provided for and recognized deliberative meetings of direc- tors as a safeguard to the public interest, which presumption ought not to be over- thrown by a forced construction of the act. The fundamental idea of a business cor- poration involves an advantage coming from the aggregation of wisdom, knowledge and business foresight which results from bringing a large number of stockholders and directors into a common enterprise. It is their knowledge and wisdom combined, acting as a unit, that gives efficiency and safety to the corporate management.") Cf. Whittenton Mills v. Upton, ante, page 220. See Holcombe ». Trenton White City Co., 80 N. J. Eq. 122, at 132 et seg., affirmed 82 N. J. Eq. 364 ; ChaveUe v. Washington Trust Co., 226 Fed. 400 ; U. S. Fire Appara- tus Co. V. G. W. Baker Mach. Co., 95 Atl. (Del., 1915) 294 ; cf. Cassidy v. Uhhnann, in/ro, page 681 ; Stafford &c. Co. ■». Middle River Co., 80 Conn. 37 at 41. Stockholders' acts, to be valid as corporate acts, must likewise be performed at a duly convened meeting. Stowe v. Wyse, 7 Conn. 214 ; Duke v. Markham, 105 N. C. 131; Finley &c. Leather Co. v. Kurtz, 34 Mich. 89. Cf. statutory provisions, ■ as la Curtin s. Salmon River &c. Co., ante, for manifesting individual consent. 462 DIRECTORS — POWERS. [CHAP. III. L. R., 2 Ex. 158 ; Constant v. Rector, etc., 4 Daly, 305 ; 1 Waterman on Corporations, § 70; 1 Morawetz on Corporations, § 531.) But the plaintiff asserts that the facts proved raised a presumption that the notes were executed pursuant to the authority of the board of trustees. The notes on their face purport to be obligations of the corporation. They recite that they were given for loans made by the payee to the corporation, and they are signed by its president, secretary and treasurer in their official character. It was not shown, as matter of fact, that they were issued in pursuance of any vote, action or resolution of the board of trustees, or that they were given for a corporate debt, or that the corporation received the benefit of the consideration, or, indeed, that any consideration existed. These material facts, it is insisted, are presumptively estabUshed by the instruments themselves, and the proof that they were executed by the executive officers of the defendant. In an action against a corporation, where the act or contract, which is the foundation of the suit, is shown to be a corporate act which the corporation had power to perform, but upon certain con- ditions, the doctrine of presmnption is sometimes applied in favor of the plaintiff. This doctrine is stated by Story, J., in his opinion in the case of Bank of the United States v. Dandridge (12 Wheat. 64, 70), in language which has been frequently quoted as follows : " Acts which presuppose the existence of other acts, to make them legally operative, are presumptive evidence of the latter." The same principle was asserted in Nelson v. Eaton (26 N. Y. 410), in answer to the claim that the notes sued upon in that case, to which the plaintiff claimed title through a bank, had been transferred by a banking corporation to the plaintiff, without authority of a resolution of the board of directors, as required by statute. It appeared by the complaint, and was admitted by the demurrer, that the notes sued upon were duly indorsed by the corporation by an authorized officer. The court said that it " would not presume that the transfer had been made in violation of the statute." In the cases referred to a corporate act was proved and a presump- tion , was indulged in favor of its regularity. In the present case there is no proof of a corporate act, except by the declaration of the officers of the defendant on the face of the instruments, and there is no proof whatever that they were authorized either to make the notes or to make any representations binding upon the defendant. They assumed to act as agents, but the only proof of their agency to make the notes is their own declaration, and it is familiar doctrine that an agency can neither be created nor proved by the acts or declarations of the assumed agent alone. (Marvin v. Wilber, 52 N. Y. 270.) It is true that the persons who signed the notes were officers of the de- fendant, and that they constituted a majority of the trustees of the ■defendant. But proof that a promissory note, purporting to be SECT. 2.] people's bank v. ST. anthony's b. c. church. 463 made by a corporation, was signed by its president and secretary does not show that it is the note of the corporation, without proof that it was made by its authority .1 (McCullough v. Moss, 5 Den 567 ; Niagara v. Bachman, 66 N. Y. 262 ; Bank v. Clements, 3 Bosw. 600.) The official name of an officer of a corporation may be de- scriptive of his authority and authorize him, as to third persons, to bind the corporation in respect to matters which, according to usage and the common understanding, are within the authority of such an officer, although in the particular case such authority has been with- held.2 The case of a cashier or teller of a bank is an illustration. (Story on Agency, § 114.) But it is not the common usage or under- standing that the president,- secretary and treasurer of a rehgious corporation possess power, by virtue of their offices, to borrow money • for or issue notes of the corporation. They may be the agents usually designated to issue such obhgations when their issuance is deter- mined upon by the trustees. But they are special and not general agents of the corporation, and can only act in such a" transaction by virtue of a special authority, and their authority must be shown by those claiming to bind the corporation upon obligations issued by them. The fact that the three persons who signed the notes, being 1 In Cushman v. Cloverland Coal &c. Co., 170 Ind. 402, Hadlet, J. said : "Cor- porations act exoliisively by agents. The oflScers, principal and subordinate, are but agents, created and granted all their powers by the board of directors. In respect to being commissioned to act for the principal, the agent of the corporation, of what- ever station or rank, is governed by the same general rules and principles of the law as the agent of an individual. National State Bank v. Vigo County Nat. Bank (1895), 141 Ind. 352, 355, 50 Am. St. 330; Brooklyn Gravel Road Co. ». Slaughter (1870), 33 Ind. 185. The naked act of investing the individual with the office of president gives him very little power to act for the corporation. He has no power to bind it in material matters, except as he may be authorized by law, or by the board of directors. Louisville, etc., R. Co. v. McVay (1884), 98 Ind. 391, 49 Am. Rep. 770; National State Bank v. Vigo County Nat. Bank, sujyra. When the president and general man- ager does an act within the domain of the general objects or business of the corpora- tion, and within the scope of the usual duties of the chief officer, it will be presumed that he had the authority to do it, and whoever would assert the contrary must prove it. But when a chief or other officer performs an act, not incidental, or pertaining to the chartered business of his corporation, nor engrafted thereon by a well-established usage, it must, as a general rule, be alleged and proved that he was duly authorized by the directors. Louisville, etc., R. Co. s. McVay, supra, and cases cited." 2 In Cumberiand Trust Co. v. B. S. Ayars &c. Co., 83 N. J. Eq. 479, Leaming, V. C. said ; "I am satisfied that the authority of Arthur D. Ayars to execute the contract in question in behalf of the corporation represented by him has been sufficiently estab- lished. "In practical operation the entire business management of the corporation appears to have been entrusted to Mr. Ayars without limitation, supervision or restraint on the part of the board ; an inference of authorization co-extensive with the scope of that management cannot be properly resisted. The instrument in question may be said to be unusual in character ; but unlike a mortgage (Bennett ». Keene, 59 N. J. Eq. 634), or a warrant for confession of judgment (Stokes v. New Jersey Pottery Co., 46 N. J. Law 237) or cognovit (Raub v. Blairstown Creamery Association, 56 N. J. Law 262), it in no way fastened a lien on the property of the corporation. It was a purely executory contract, operative alone on the business to be transacted under it. The power of the president to execute it in the name of the corporation may be sustained under the principles defined in Murphy v. Cane, 82 N. J. Law 557." See Hoisting Machinery Co. v. Goeller Iron Works, 84 N. J. L. 504. 464 DIRECTORS — POWERS. [CHAP.' HI. a majority of the trustees, might, acting as a board, have authorized the issuing of the notes, does not show or tend to show that this had been done. The other circumstances shown rather tend to repel the inference of authority by resolution of the board of trustees. The notes do not purport to have been executed by the signers acting as a board, and it is shown that, in fact, they acted separately in signing them. It does not follow that their joint action in a meeting^ with their associates, as a board, would be the same as their separate action outside of the board.' The presumption that officers have done their duty does not stand for proof of authority in an action against the principal in a matter outside of their official duties and where special authority must have been conferred to justify the act. . (See U. S. V. Ross, 92 U. S. 281.) There is an ancient rule of the common law, founded on technical reasons, that a contract under the seal of a corporation, attested by the signature of its executive officers, is prima facie, at least, the contract of the corporation. (Lovett V. Steam Saw-Mill Assn., 6 Pai. 54; Bowen v. Irish Pres- byterian Congregation, 6 Bosw. 245, 263 ; Trustees, etc. v. McKechnie, 90 N. Y. 618.) The seal of a corporation was its signature. The fact that it was affixed to an instrument purporting to be the deed of a corporation was evidence that its custody had been committed, to the persons signing it. It was regarded as a transaction of such solemn import that the corporation was deemed to be present at the^ doing of the very act which the seal authenticated. Now that it is. no longer necessary for a corporation to contract under seal, it does- not follow that the same presumption should attend an unsealed contract, purporting to have been made by the officers of a corpora- tion. Such a presumption has never been indulged, so far as we have been able to find, to sustain an allegation that an unsealed contract, . executed by officers of a corporation in its name, was a corporate obhgation, unless authority was implied from the nature of the office, or from previous similar dealings recognized by the corporation, or a ratification was shown. When an agency is once lawfully con- stituted, the agent may, in some cases, bind the principal by a false representation that a particular transaction of the same general nature with that authorized is within the power conferred, when, in fact, it has never been authorized and was a fraud upon the power. The case of North River Bank v. Aymar (3 Hill, 262), the principle of which has been reaffirmed in subsequent cases, is an illustration. These cases have no appHcation. The very fact to be proved by the • In Bull V. International Power Co., 99 Atl. (N. J. Eq., 1916) 111, Walkek, C. said: "Nor is it any answer to say that the parties preferring the present petition own a majority of the stock of the defunct corporation, and that therefore they would control the directors to the end which they desire ; for in a meeting of a board of di- rectors there may be a dissenting member whose argument might convince the major- ity of the unwisdom of their proposed action, Holcombe i). Trenton White City Co.,. 80 N. J. Eq. 122." Cf. Dunphy «. Traveler's Newspaper Ass'n., infra, page 622. SECT. 2.] people's bank v. ST. Anthony's e. c. chuech. 465 plaintiff, and without proving which he could not advance a step, was whether an agency to make notes had been constituted at all. This could not be proved by the declarations of the assumed agent or by his representations. No original authority to make the notes was shown, nor any adoption or ratification of the instruments by the corporation. The plaintiff failed on the vital issue of authority. For the reasons stated, we are of opinion that the order of the General Term should be affirmed. Order Affirmed.^ ' Since directors do not exercise a delegated authority, in the sense of the law of agency, Hoyt a. Thompson's Exr., 19 N. Y. 207, they may delegate authority to an executive committee, at least so far as routine business is concerned. Burrill v. Nahant Bank, 2 Meto. (Mass.) 163 ; Metropolitan Tel. Co. v. Domestic Tel. Co., 44 N. J. Eq. 568 ; Sheridan Elec. Light Co. v. Chatham Nat. Bank, 127 N. Y. 517 ; Cassidy v. Uhlmann, infra, page 681. Otherwise, if it involves the exercise of judgment and dis- cretion not incident to the transaction of the ordinary business of the corporation. Tempel v. Dodge, 89 Tex. 69, Be N. Y. & Westchester Town Site Co., ante, page 396. But see Jones v. Williams, 139 Mo. 1. ("Directors have the power, without statutory authority, to delegate to officers, agents or executive committees the power to trans- act, not only ordinary and routine'business, but business requiring the highest degree of judgment and discretion. Thus authority to manage the business of railroad cor- porations, insurance companies, banking institutions and other corporations having large and complicated business interests, is, usually, delegated by the directors to agents, often, but not necessarily, officers of the corporation. These agents, .or man- aging officers, have incidental power to employ all assistants and to do all acts neces- sary to properly conduct the business over which they are given charge. Formal action of the board of directors is not necessary in order to confer the authority.") See also Young v. Canada &c. S. S. Co., 211 Mass. 453. In any event, directors may not delegate greater power than they themselves possess. Thus, an authority conferred upon an executive committee in respect to matters calling for the exercise of discretion for a period of thirty years, is invalid after the time the board which delegated its powers went out of existence. Shaw v. Bankers' Nat. Life Ins. Co., 112 N. E. (Ind., 1916) 16. Delegation of authority, as in the law of agency, requires no special formality, if commensurate with the act to be done. York v. Mathis, 103 Me. 67. ("It is en- tirely competent for a board of directors to establish a mutual understanding that one of their number shall be the active agent of the board in the management of the prop- erty and the conduct of the business affairs of the corporation. It is not necessary that such an understanding should be created by a formal vote passed at a formal meeting or proved by a formal record. It may be inferred from the situation and conduct of the parties. A director 'may acquire the power to bind the corporation by the habit of acting with the assent and acquiescence of the board,' and so his un- authorized acts 'may be confirmed by the approbation and acquiescence of the board.' It is true that in either case it is the board that acts or acquiesces and not the directors as individuals, but subsequent ratification as well as previous authority or acquiescence may be shown by circumstances and conduct.") Sherman i». Fitch, 98 Mass. 59. ("Authority in the agent of a corporation may be inferred from the conduct of its officers, or from their knowledge and neglect to make objection, as well as in the case of individuals.") 466 DIRECTOES — EIGHTS. [CHAP. III. Section 3. — Rights. SANTA CLARA MINING ASSOCIATION v. MEREDITH.' 49 Md. 389. 1878. Appellee sued appellant on the conunon counts, "for services rendered during 1870, 1871, 1872, 1873 and 1874, in obtaining patent, negotiating loan in London, and various duties in California, Balti- more, Philadelphia and New York." Grason, J. At the trial of this case in the Baltimore City Court the pMntiff offered three prayers, the two first of which were granted and the third was refused, and the defendant seven, all of which were rejected except the sixth, which was granted, and the judgment being in favor of the plaintiff, the defendant appealed. The question presented by the prayers for our determination is, whether an officer of a corporation can recover for services rendered the corporation without an express contract of employment. ^ We have carefully examined the authorities referred to by the counsel of the respective parties, and without in this opinion enter- ing upon a review of them in detail, we deem it sufficient merely to state the principles of law which they establish. To entitle a presi- dent or director of a corporation to recover for services rendered his corporation, he must prove an express contract of employment, if the services for which he claims compensation are within the line and scope of his duties as president or director.' To this effect are 1 statement of facts condensed. * In Pennsylvania, a president or director cannot recover for services rendered the corporation of which he is such officer except an express contract can be shown. Alt- house V. Cobaugh Colliery Co., 227 Pa. 580. And this is so whether the services ren- dered fall within the scope of his oflScial duties or not. Ibid. In Kilpatrick v. Penrose Ac. Bridge Co., 49 Pa. 118, Woodward, C. J. said: "Corporate officers have ample opportunities to adjust and fix their compensation before they render their services, and no great mischief is likely to result from compelling them to do so ; but if, on the other hand, actions are to be maintained by corporate officers for services which, how- ever faithful and valuable, were not rendered on the foot of an express contract, there would be no limitation to corporate liabilities, and stockholders would be devoured by officers." ' In the absence of some provision of statute, by-law or charter, directors have no authority to vote salaries to each other as mere incidents of their office. A minority stockholder may maintain a representative action to recover salaries thus voted by the directors to themselves. Godley v. Crandall & Godley Co., 212 N. Y. 121. The rule obtains although the services were rendered in expectation and under- standing of remuneration. New York &e. R. R. Co. v. Ketcham, 27 Conn. 175. ("It would be a sad spectacle to see the managers of any corporation assembling to- gether and parceling out among themselves, the obligations and other property of the corporation in payment for past services.") SECT. 3.] SANTA CLARA MINING ASSOCIATION V. MEEEDITH. 467 nearly all the cases cited in the briefs, and this general principle is admitted by the counsel of the appellee to be correct. But if a presi- dent or director of a corporation renders services to his corporation which are not within the scope of, and are not required of him by, his his duties as president, or director, but are such as are properly to be performed by an agent, broker or attorney, he may recover com- pensation for such services upon an implied promise.^ See Angell & Ames, on Corporations, sec. 317, p. 316 ; Chandley v. Monmouth Bank, 1 Green's N. J., 260 ; Henry v. Rutland and Burlington R. R. Co., 27 Vermont, 455 ; Hall v. Vermont and Mass R. R. Co., 28 Ver- mont, 408 ; New York and New Haven R. R. Co. v. Ketcham, 27 Conn., 181 ; Evans v. City of Trenton, 4 Zabriskie, 769. Agency for a corporation is not required to be shown by a resolu- tion of the board of directors or other written evidence, but it may be inferred from facts and circumstances. Union Bank v. Ridgely, 1 H. & G., 326 ; 1 Md. Chan. Dec, 398 ; Elysville Man. Co. v. Okisko Co., 5 Md., 159; N. C. Railway Co. v. Bastian, 15 Md., 501 ; Bank of the United States v. Dandridge, 12 Wheat., 69, 70, 83. All the pra,yers of the appellant asked instructions that the plaintiff was not entitled to recover unless the jury should find an express contract of employment of the plaintiff by the defendant. We have shown that his employment as the agent of the defendant may be inferred from facts and circumstances, and the appellant's prayers were, therefore, properly rejected. There were facts and circum- stances in evidence from which the jury were at liberty to infer that the appellee was employed by the appellant in respect of obtaining a patent for the lands in California, in obtaining the loan in London, and in procuring the surrender and cancellation of the first mortgage bonds of the Company, the accomplishment of the latter being A director may not receive commissions for rendering the very services which his corporation undertook in the performance of a trust assumed by it. Purchase v. Atlantic &c. Trust Co., cited infra, in note 1, page 476. ' In Cheeney v. Lafayette &c. R. R. Co., 68 111. 570, Walker, J. said: " Because he was a. member of the board of directors, it does not follow that he was bound to perform any and all duties usually exercised by agents properly appointed, and when he performed such duties under an appointment by a resolution of the board, he should be allowed compensation therefor." But neither by-laws nor resolution is pre-requisite to suit upon a quantum meruit, for services rendered outside of official duties. Bagley v. Carthage,- Watertown &c. R. R. Co., 25 A. D. 475 ; affirmed 165 N. Y. 179. ' Or to sustain the payment of rea- sonable salaries as fixed by resolution passed subsequent to rendition of such services, provided there was an agreement, express or implied that such services should be re- quited with reasonable although indefinite compensation. National Loan & Co. v. Rockland Co., 94 Fed. 335. See note following. In the absence of express agreement,' the question is resolved into the legal infer- ence to be drawn from the acts and circumstances of the parties, i.e. whether the serv- ices were "voluntary" or were rendered at the instance of the corporation under an implied promise of remuneration. Fitzgerald &c. Const. Co. v. Fitzgerald, 137 U. S 98 ; Ten Eyck v. Pontiac &c. R. R. Co., 74 Mich. 226 ; New Orleans &c. Packet Co. v. Brown, 36 La. Ann. 138 ; Bassett v. Fairchild, 132 Cal. 637 ; Taussig ». St. Louis &c. R. R. Co., 166 Mo. 28 ; Huffaker v. Krieger's Assignee, 107 Ky. 200. 468 DIRECTORS — RIGHTS. [CHAP. III. indispensable to the obtention of the loan. There is evidence in the record tending to prove that these services were either authorized by the corporation previously to their rendition, or were ratified by it after they were performed, and that they were such services as were not required of the appellee in the discharge of his duties as a director. All these matters were left to the finding of the jury by the instructions granted in the appellee's first and second prayers, and if found in his favor he was entitled to recover a reasonable com- pensation for his loss of time and for services rendered. These two prayers were, therefore, properly granted. . . . Finding no error in the rulings of Court below, the judgment ap- pealed from will be affirmed. Judgment affirmed.^ ' As to compensation and indemnity of promoters, see Van Hummell v. International &c. Co., ante, page 359. In National Loan &c. Co. v. Rockland Co., 94 Fed. 335, Sanborn, J. said : "Ordi- narily, the employment of a servant by a corporation raises the implication of a con- tract to pay fair wages or a reasonable salary for the service rendered, because it is the custom to pay such compensation, and men rarely sacrifice their time and expend their labor or their money in the service of others without reward. Directors of corporations, however, usually serve without wages or salary. They are generally financially inter- ested in the success of the corporation they represent, and their service as directors secures its reward in the benefit which it confers upon the stock which they own. In other words, the custom is to pay the ordinary employees of corporations for the serv- ices they render, but it is the custom of directors of corporations to serve gratuitously, without compensation or expectation of it. The presumption of law follows the custom. From the employment of an ordinary servant the law implies a contract to pay him. From the service of a director, the implication is that he serves gratuitously. The latter presumption prevails, in the absence of an understanding or an agreement to the contrary, when directors are discharging the duties of other offices of the cor- poration to which they are chosen by the directory, such as those of president, secretary, and treasurer. Moreover, as the members of boards of directors act in a fiduciary capacity, they are without the power or authority to dispose of the property of the corporation without consideration. Consequently they may not lawfully vote back pay to an ofiicer ^ho has been serving the corporation voluntarily without any agree- ment that he shall receive any reward for the discharge of his duties. It is beyond their powers to create a debt of the corporation by their mere vote or resolulion. . . . OflBcers of a corporation, who are also directors, and who, without any agreement, express or implied, with the corporation or its owners, or their representatives, have voluntarily rendered their services, can recover no back pay or compensation there- for ; and it is beyond the powers of the board of directors, after such services are rendered, to pay for them out of the funds of the corporation, or to create a debt of the corporation on account of them. . . . But such officers, who have rendered their services under an agreement, either express or implied, with the corporation, its owners or representatives, that they shall receive reasonable, but indefinite, compensation therefor, may recover as much as their services are worth ; and it is not beyond the powers of the board of directors to fix and pay reasonable salaries to them after they have discharged the duties of their offices." SECT. 4.] STEWART ET AL. V. LEHIGH VALLEY RAILROAD CO. Section 4. — Disqualification-. 469 STEWART ET AL. v. LEHIGH VALLEY RAILROAD C0.» 38 N. J. L. 505. 1875. Appellants-defendants were sued by the railroad in assumpsit for tolls for the passage of boats over the Morris canal of which plaintiff was lessee. Appellants set up (1) a contract for a five year term made by them with the Morris Canal and Banking Co., then owner of the canal, providing for a drawback in their favor of one half the published rates of toll ; (2) the sum sued for was the amount of such drawbacks accrued during the term and then due the de- fendants, which therefore they set off in full satisfaction of plaintiff's demand ; (3) subsequent to the making of the contract and during its term, the Morris Canal &c. Co., pursuant to legislative permission, demised the canal to plaintiff for a term not yet ended together with all boats, property, and franchises, and assigned said contract to plaintiff. At the time of negotiations for and the execution of the aforesaid contract, one of the defendant partners was a director of the Morris Canal &c. Co. Plaintiff insisted that such relation to the corporation prohibited him from entering into this contract with it, and therefore the contract is, ipso facto, void. Judgment below for plaintiff. Defendants appeal. Dixon, J. The position thus assumed by the plaintiff rests upon the broad principle that it was the duty of the director to so deal with the property and franchises of the corporation — to so manage its affairs as would most conduce to the corporate interest, and that he could not perform that duty while contracting with it in his own behalf, or if by possibility his own interest was consistent with the best interest of the company in so contracting, yet, so insidious are the promptings of selfishness and so great is the danger, that it will over-ride duty when brought into conflict with it, that sound policy requires that such contracts should not be enforced or regarded. After an examination of all the cases cited, and such others as I have foimd, and a careful consideration of the principle and the results of regarding and of disregarding it, I have come to the conviction that the true legal rule is, that such a contract is not void, but voidable, to be avoided at the option of the cestui que trust, exercised within a ' statement of facts rewritten ; portions of opinion omitted. 470 DIKECTOBS — DISQUALIFICATION. [cHAP. Ill reasonable time.* I can see no further safe modification or relaxatioi of the principle than this. A director of a corporation may have rights not arising out of express contract — such as the right to pass over its raiboad, or transport his goods over its canal, on paying reasonable tolls, or to have money which he has loaned it repaid tc him : but where the right is one which must stand, if at all, upon ar express contract, and which does not arise by operation or implica- tion of law, then he shall not hold it against the will of his cestui qui trust ;^ for in the very bargain which gave rise to it, in which he should have kept in view the interest of that cestui que trust, there intervened before his eyes the opposing interest of himself. The vice which inheres in the judgment of a judge in his own cause, contaminates the contract ; the mind of the director or trustee is the forum in which he and his cestui que trust are urging their rival claims, and when his opposing litigant appeals from the judgmeijt there pronounced, that judgment must fall. It matters not that the contract seems a fair one. Fraud is too cunning and evasive for courts to establish a rule that invites its presence. There may be isolated cases in which the trustee is willing to make a contract on more favorable terms for the cestui que trust than any one else, but the opportunities for self -ad- vancement, at the expense of those whose concerns he has in charge, and under circumstances where concealment is easy, are so much more numerous than these isolated cases, that in declaring a rule the latter are not worthy of consideration. Nor is it proper for one ' In United States Steel Corp. v. Hodge, 64 N. J. Eq. 807, Van Stckel, J. said : "The object of the rule is to prevent directors from secretly using their fiduciary position for their own emolument, and not to impair the right of stockholders to enter into any lawful engagement with a fuU disclosure of the facts. . . . The shareholders may, within a reasonable time after the disclosure to them of the interest of a director, elect to avoid the contract ; but if an unreasonable time is allowed to elapse without exercising suoh option, during which the position of directors become so changed that it would be inequitable to vacate the engagement, equity woiild refuse to interpose, "A fortiori, when the contract is entered into by the stockholders with'the direc- tors, or when the stockholders expressly authorize the directors to enter into a contract, when the stockholders have notice of the directors' interest, the agreement will be unassailable in the absence of actual fraud or want of power in the corporation. . . . It would be manifestly contrary to fair dealing and good faith to permit stockholders to invite directors to enter into an engagement, and after the directors had put them- selves in a position in which the contract could be enforced against them, to permit the stockholders to deprive them of the benefits of it." 2 On the same principle, a director may not make private profit from or by virtue of his office. He must account for and disgorge such ill-gotten gains. Farmers' &c. Bank &c. v. Downey, 53 Cal. 466 ; McClure v. Law, 161 N. Y. 78 ; Klein v. Indepen- dent Brewing Ass'n., 231 111. 594 ; Rutland Electric Light Co. v. Bates, 68 Vt. 579 ; Bird Coal &c. Co. v. Humes, 157 Pa. 278 ; European &c. Ry. Co. v. Poor, 59 Me. 277. Nor, since his relation is fiduciary, may he purchase for his own benefit the property of or obligations against the corporation or any interest adverse to it. Such acquisi- tion may be impressed with a constructive trust in favor of the corporation. MoCourt J). Singers-Bigger, 145 Fed. 103; McGaw v. Acker, MerraU &c. Co., Ill Md. 153; Janney v. Minneapolis Industrial Exposition, 79, Minn. 488; Collins ». Hoffman, 62 Wash. 278. Cf. note 1, page 492, infra: also Seymour v. Spring Forest Cemetery SECT. 4.] STEWART ET AL. V. LEHIGH VALLEY RAILROAD CO. 471 of a board of directors to support his contract with his company, upon the ground that he abstained ' from participating as director in the negotiations for and final adoption of the bargain by his co-directors, the very words m which he asserts his right declare his wrong; he ought to have participated, and in the interest of the stockholders, and if he did not, and they have thereby suffered loss, of which they shall be the judges, he must restore the rights he has obtained — he must hold against them no advantage that he has got through neglect of his duty towards them. Many authorities exemplifying the rule may be found. I cite a few only — York Building Ass. v. Mackenzie, 8 Bro. P. C, 42 of Appendix— 4 Cr. & Stew. 378 : Aberdeen Railway Co. v. Blaikie, 1 Macq. 461 ; The York & M. N. R. Co. v. Hudson, 16 Beav. 485 ; Mulford v. Minch, 3 Stockt. 16 ; Davoue v. Fanning, 2 Johns. Ch. 252 ; Cumber- land Coal & Iron Co. v. Sherman et al., 30 Barb. 553 ; Gardner v. Ogden et al., 22 N. Y. 327; Butts v. Wood, 37 N. Y. 317 ; Michoud et al., V. Girod et al., 4 How. 503. The application of the rule is most frequent in the relations be- tween vendor and purchaser, but its reason and force extend to all agents and trustees, public and private. It has not always presented itself to the minds of judges in its full scope. At times they have been seduced into listening to suggestions that the circumstances of the special case showed the absence of fraud and over-reaching. At other times, they have intimated that the cestui que trust must seek his relief in equity ; but the strongest intellects have enunciated the rule with its utmost vigor, and in its broadest extent. The qualification, however, which the rule undoubtedly has, saves the case before us from its operation. The cestui que trust of the de- fendant director was not the plaintiff, but the Morris Canal and Banking Company. The right of avoidance was one which belonged " Contra: Fort Payne &c. Mill v. Hill, 174 Mass. 224. In Curtin v. Salmon River &c. Co., 130 Cal. 345, it was held that a director was not only disqualified from voting on a resolution in which he was personally interested but also that his presence could not be counted in determining whether a quorum of the board of directors had assembled; that what the law forbids an interested director from doing, may not be accomplished by indirection. Harkison, J. said : "The same rules which preclude an interested director from uniting with other directors in the creation of an obligation in favor of himself by his vote forbid him from uniting with them in creating such obligation by any act or exercise of his official position, and a meeting at which there is not a majority of the directors, exclusive of such interested director, is not a competent board for the transaction of any corporate business. . . . For the purpose of any action upon this resolution he was as much a stranger to the board as if he had never been elected a director, and, although he may have been physically present in the room with the other two directors, he was not for that purpose a component part of the board, any more than would have been any other bystander." See also Star Mills v. Bailey, 140 Ky. 194. Contra : Buell ». Bucking- ham, 16 Iowa 284 ; Gumaer v: Cripple Creek &c. Co., 40 Col. 1. The subterfuge of temporary resignation is unavailing. Millsaps v. Chapman, 76 Miss. 942. So the device of dummy directors. Miner v. Belle Isle Ice Co., 93 Mich. 97. 472 DIRECTORS — DISQUALIFICATION. [CHAP. III. to that company and its stockholders, and not to the plaintiff. ■ The act of 1871, empowering the canal company to lease, only authorized it to lease the canal, with its boats, property, works, appurtenances, and franchises ; and under this power, it could scarcely transfer so peculiarly personal a privilege as this option to avoid a contract. Nor would a transfer of the contract, and all of the canal company's rights under it, carry this right of choice ; for that does not spring out of the contract, but out of the fiduciary relation existing between the parties at the time the contract was made. And, moreover, the case shows that, after the lease to the plaintiff, and during all the time in which' it is claimed the tolls sued for were accruing, the plain- tiff dealt with the defendants on the basis of the binding efi&cacy of the contract. I conclude, therefore, that there appears before us no reason for refusing to give to this contract that force to which our construction of its terms entitles it, and that, upon the case before us, judgment should be rendered for the defendants below, the plaintiffs in error. lieversed. PEARSON V. CONCORD RAILROAD CORPORATION ET AL.2 62 N. H. 537. 1883. Bill in equity by a stockholder of the Concord R. R. Corporation in behalf of himself and all other stockholders &c. against that com- pany, and its directors, and the Northern Railroad, and the Boston, Concord & Montreal Railroad (the latter two railroads being herein- after called "the upper companies"), and several other railroads (hereinafter called "the lower companies"), praying that" certain contracts 6i 1877 be set aside and declared void, and that defendants be enjoined from acting thereunder ; that some suitable person be appointed by the court to act in behalf of the Concord company in all matters where its directors are disqualified by reason of their represfenting adverse interests ; for an account and for general relief. ' In Buell V. Buckingham & Co., 16 Iowa 284, Dillon, J. said: "As the principal or parties interested may confirm the sale, a mere stranger cannot make the objection, that the trustee was the purchaser ; or that the sale was irregular. The remedy be- longs only ' to persons who had an interest in the property before the sale, and no other person can apply to set aside the sale.' " Accord ; Mobile Land &c. Co. v. Gass, 142 Ala. 520. Similarly, in those states which do not treat a contract by a director with his cor- poration as either void or voidable, but merely subject it to searching scrutiny in equit J (see note 1, page 474, infra), only the corporation itself or its stockholders or creditors, and not a stranger thereto, may invoke such scrutiny. Vermeule v. Hover, 113 Me SECT. 4.] PEAESON V. CONCORD EAILROAD CORPORATION ET AL, 473 In 1865 the Concord company had made contracts with some of the lower companies by which the business of the upper companies . was forced over those roads at rates oppressive and unjust to the upper companies but to the benefit of the Concord company. In 1873, the upper companies purchased a controlling interest in the stock of the Concord company with the intent of obtaining con- trol of the road and thereby securing more favorable contracts for the biisiness of the upper companies over the lower roads to which the referee found them to be entitled. Common directors have since controlled the management of the Concord. They have acted hon- estly and fairly in the discharge of their joint duties, but as a result of such directorship the income of the Concord company has been diminished and that of the upper companies increased. There were grounds on which, perhaps, a claim might be sustained by the upper companies against the Concord company, for return of a portion of the rates, founded on a promise of the then manager of the latter company "that he wOuld make it just as well for the upper roads as though the contract were not executed." There- upon the upper companies withdrew their protests against the afore- said contracts of 1865. The validity of this claim was not denied by the different boards of directors of the Concord company. Its directors in 1878 voted to pay the upper companies certain sums of money in settlement of their respective claims. In 1877, the Concord company made new contracts with the upper and lower companies, by which it receives the same rates from the upper roads that it pays to the lower roads, and by which the upper pay to the Concord less than under the contract of 1865, and the Con- cord pays the lower roads more, amounting to about $10,000 a year. Smith, J. The gist of the referee's report is, the two upper com- panies were justly entitled to more favorable contracts for their business over the road of the Concord, and the upper companies {i.e., the managers acting for them and in their interests) bought a controlling interest in the stock of the Concord for the purpose of making with themselves, as controlling managers of the Concord, contracts more favorable to themselves ; and they accomplished that purpose. The upper companies having bought Concord stock for the purpose of controlling that road for their own advantage, having exercised their control of it by making certain contracts with them- selves, and having passed the vote of indemnity for their own benefit, the question ife whether they can be allowed, against the objection of a stockholder in the Concord, to execute their illegal contracts and their illegal vote, on the ground that the contracts and vote are just and fair, and such as the Concord ought to have made and pa,ssed. A director of a railroad corporation, though not technically a trustee, stands in a fiduciary relation to the corporation, and is under the disability of a trustee. Practically, the directors are trustees, 474 DIRECTORS — DISQUALIFICATION. [CHAP. Ii: and the stockholders are the cestuis que trust. Like all other person where this relation exists, he cannot, as buyer for his corporatior buy of himself against the objection of his cestui que trust, nor a seller for the corporation become the purchaser, nor, being its agen and trustee, contract with himself, or secure to himself advantage not common to other stockholders, because such contracts and re lations are likely to bring him in conflict with his duty and self interest, and ternpt him to be unfaithful to the superior obligation he has assumed. Pierce R. R. 36; Mor. Corp., s. 245; Ang. & A Corp., ss. 233, note a 312 ; Butts v. Wood, 37 N. Y. 317 ; Hoyle i Railroad, 54 N. Y. 314, 328 ; Blake v. Railroad, 56 N. Y. 485, 490 Barnes v. Brown, 80 N. Y. 527, 535 ; Duncomb v. Railroad, 84 N. Y 190, 198 ; Robinson v. Smith, 3 Paige 222, 232 ; Koehler v. Conipany 2 Black 715, 721 ; Bliss v. Matteson, 45 N. Y. 22 ; 1 Per. Tr., s. 207 Booth .V. Robinson, 55 Md. 419, 436, 440. The plaintiff is a Stockholder in the Concord, and sustains to thi directors of the company the relation of a cestui que trust. He seek an injunction to prevent the execution of these illegal contracts an( vote. Must he fail because they are, or may be shown to be, fai and just? On this question the authorities are not unanimous One class answers it in the affirmative, some of them putting upoi the trustee the burden of proving fairness. Coal & Iron Co. v Parish, 42 Md. 598 ; Ashhurst's Appeal, 60 Pa. St. 290 ; Watts'i Appeal, 78 Pa. St. 370. Others put upon the beneficiary the burdei of proving fraud. Buell v. Buckingham, 16 Iowa, 284; Merricl V. Coal Co., 61 111. 472. The second class answer it in the negative and this is the view adopted by the author in Pierce R. R. 36, wh( says, — "The rule is so strict that it does not permit, as against s disapproving cestui que trust, an inquiry into the good faith and fair ness of a transaction which comes within it." ^ And this is the lav as settled in our own decisions. « [The court examines its own and other decisions.] The reasons for the exclusion of all inquiry into the bona fide. of the transaction are expressed in these cases with clearness am exactness. Mr. Justice Field said, — "The two positions imposi different obligations, and their union would at once raise a conflic between interest and duty ; and constituted as humanity is, in thi majority ofcases duty would be overborne in the struggle." Wardel 1 Under the first class, the contract is valid provided (1) it is fair and just ; (2) i quorum of directors, excluding the one with whom the contract is made, is present am enacts the resolution. Those courts, which adhere to this view, nevertheless aubjeo the contract to close scrutiny and divide merely upon whom shall be placed the bittdei of proof. See Vermeule v. Hover, 113 Me. 74. Under the second class, however fair the contract may be or whatever quorum wa present when it was adopted it is either absolutely void as against public policy or else i is voidable at the ODtion of the rnrnnrn.+.inn The rirnofinol ri;o^i'Ti/>f;nn Vto+nraan^.h SECT. 4.] PEARSON V. CONCORD RAILROAD CORPORATION ET AL. 475 V. R. R. Co., 103 U. S. 651 ; Marsh v. Whitmore, 21 Wall. 178, 183. "It is to avoid the necessity of any such inquiry, in which justice might be balked, that the rule takes so general a form." Jewett v. Miller, 10 N. Y. 402, 405. "It is founded in the danger of imposi- tion, and the presumption of the existence of fraud which is inac- cessible to the eye of the court. The policy of the rule is to shut the door against temptation." Van Epps v. Van Epps, 9 Paige 237, 242 ; 4 Kent Com. 438. Lord Eldon gave as a reason "that the in- quiry is so easily bafHed in a court of justice." Hatch v. Hatch, 9 Ves. 297. Lord Hardwicke said, — "It is not enough for the trustee to say 'you cannot prove any fraud,' as it is in his power to conceal it." Whelpdale v. Cookson, 1 Ves. Sen. 9. Lord Cranworth said, — "It may sometimes happen that the terms on which a trustee has dealt, or attempted to deal, with the estate or interests of those for whom he is trustee may have been as good as could have been ob- tained from any other person : they may even at the time have been better.^ But still, so inflexible ^ is the rule that no inquiry on that subject is permitted." Railway Co. v. Blaikie, 1 Macq. 461. Noth- ing less than incapacity is "able to shut the door against temptation, where the danger is imminent and the security against discovery great. The wise policy of the law has therefore put the, sting of disability into the temptation as a defensive weapon against the strength of the danger which lies in the situation." The York Buildings Co. v. Mackenzie, 8 Bro. P. C. 42; Davoue v. Fanning, 2 Johns Ch. 252, 270. ' In Creveling v. Fritts, 34 N. J. Eq. 134, in which the disqualification of fiduciaries is lucidly discussed, Van Fleet, V. C. said: "The rule is now universal, that, no matter how fair the purchase by a trustee may be, nor how ample the consideration he pays, the cestui gue trust is at liberty in every case to set the sale aside. Because, if a trustee were permitted to buy in an honest case, be might likewise buy in a case having that appearance, but which, from the infirmity of human testimony, might be grossly otherwise. Thus, a trustee for the sale of land may, by the knowledge he' acquires in the performance of his duty, ascertain that the land has an extraordinary latent value ; as, for example, that it contains a deposit of valuable minerals, or some other hidden treasure, and locking up that knowledge in his own breast, he might purchase the land for what might seem a fabulous price, and yet get it for a mere tithe of its real value. Now, in such case, if the trustee should choose to deny the fact of knowledge, how would it be possible to establish it against him? Lewin on Trusts, 439, 461, 462. I think it may be regarded as unquestionably true that a trustee who would enter upon the accomplishment of such a scheme, would be equal to the task of concealing the real motive which induced him to purchase. Adequate protection can only be given to the cestui gue trust by elevating the trustee to a region where temptation never comes, and if he descends, to take from him whatever of the trust property may be found in his grasp, which he cannot show, by satisfactory proof, that he obtained without any violation of the great principles which should govern his conduct." . 2 In Munson v. Syracuse &c. R. R. Co., 103 N. Y. 58, Andrews, J. said : The value of the rule of equity, -to which we have adverted, lies to a great extent in its stubbornness and inflexibility. Its rigidity gives it one of its chief uses as a preven- tive or discouraging influence, because it weakens the temptation to dishonesty or unfair dealing on the part of trustees, by vitiating, without attempt at discrimination, all transactions in which they assume the dual character of principal and represen- tative." 476 DIRECTORS — DISQUALIFICATION. [cHAP. III. This case is within that class where the agent to sell is precluded by the policy of the law from purchasing.^ The Northern, B. C. & M., and Concord companies are connecting roads. The upper companies have the right by statute to require the Concord to haul their passengers and freight over its road upon paying reasonable tolls therefor, and in turn they are required to do the same for the Concord. Rates for such transportation must be fixed by contract, or by referees appointed by the' court upon petition of one of the parties. G. L., c. 164, ss. 3-9. The statute has provided a remedy, simple, adequate, inexpensive, expeditious, and effectual. The upper companies, feeling aggrieved by the tolls charged by the Concord, declined to seek redress under the statute, but sought a remedy by disabling the Concord to contract with them, and undertook to contract with a board of directors elected by themselves. The relation of the upper companies to the Concord was that of buyer and seller. The upper companies desired to purchase of the Concord the transportation of their freight and passengers over the road of the latter. The Concord desired to sell the transportation over its own road of the traffic of the upper roads. It was for the interest of the upper companies to procure the lowest rates, and their direc- tors were bound to use the knowledge they had derived from the con- fidence reposed in them as directors to attain that result; and the interest of the Concord was to procure the highest rates, and its directors were bound to use their special knowledge for the advantage of that company. Their interests being conflicting, it was impossible for common directors to procure the lowest rates for one party and the highest rates for the other. "No man can serve two masters." They were not arbitrators, called in to adjust conflicting claims, nor were they disinterested. The referee has found that the purchase of Concord stock at prices largely in excess of its market value was made with the intent and purpose of obtaining control of "the Con- cord, and thereby to secure more favorable contracts for the business of the upper companies over the lower. The plan was formed, the purchase was made, the control of the Concord was obtained, and more favorable contracts were secured. By taking the control of the Concord, the upper companies disabled it as a contracting party. In fixing the rates of that company for their business, they were con- tracting with themselves. When a transaction is a fraud in law, it is unnecessary to prove a fraud in fact, nor is it permissible to show * A trust company holding property in trust for sale may not pay commissions out of the proceeds to a member of its board of directors for his services in finding a purchaser. The director owes that service both to the cprporation and the cestui que trust. The trust company hgid paid this commission in good faith believing that the purchaser was a stranger, but, in fact, the purchase was made in the individual behalf of that director. lield, both the trust company and that director are liable to the cestui que trust for the amount of the commission, and the director alone liable for the profits made by his purchase. Purchase v. Atlantic &c. Trust Co., 81 N. J. Eq. 344, affirmed 83 N. J. Eq. 353. SECT. 4.] PKARSON V. CONCORD RAILROAD CORPORATION ET AL. 477 that the transaction was an honest one. Coburn v. Pickering, 3 N. H. 415. The justness of the contracts made with themselves and of the votes they passed as directors of the Concord Railroad for their own benefit does not impart any validity or legality to those contracts or votes. If such contracts were to stand until shown to be fraudu- lent and corrupt, the result, as a general rule, would be that they must be enforced in spite of fraud or corruption. Railway Co. «. Dewey, 14 Mich. 477. A plea in trespass qu. cl., that the defendant was a creditor of the plaintiff, and entered upon his farm to take the crops in pay- ment of his debt, is no better in ethics than in law. If the defend- ant in replevin or trover were to defend upon the ground that he was a creditor of the plaintiff, and took the goods in payment of his claim, he would scarcely need to be informed that the justness of his claim would be utterly immaterial upon the question of his right to enforce payment by committing a tort. A person may require a common carrier to transport his goods for a reasonable compensa- tion. His refusal does not justify the former in seizing his teams, fixing reasonable rates, and compelling the carrier's servants to transport his goods at such rates. The reasonableness of the rates . so fixed would impart no validity to the compulsory process em- ployed in fixing them. , The immediate government and direction of the affairs of the Concord Railroad are, by its charter, vested in a board of seven directors, to be chosen by the members of the corporation. In the exercise of the director's powers the stockholders have no voice and no vote. They are as powerless as a ward in the hands of, a guardian annually elected by himself. The law requires of a guardian self- denial, integrity, diligent attention, an eye single to the interest of his ward, and that he be above mercenary motives (Sparhawk v. Allen, 21 N. H. 9, 26) -^ qualities no less requisite in a director in the discharge of his duty. To whom shall the stockholders look with confidence that their interests will be protected but to their directors? And when the stockholders' interests are sacrificed, or threatened, they may have no other resort for adequate protection except to a court of chancery. This is a case where equity is called upon to interpose its aid in behalf of the stockholders. March v. Railroad, 40 N. H. 548, 567. The question whether the contracts made by the defendants for rates over the lower roads are fair and just, and whether the upper companies have valid and legal claims against the Concord, cannot be litigated or contested with the upper companies by a board of Concord Railroad directors whose interests are opposed to those of the Concord, and are in harmony with those of the upper companies. In the making of these contracts, and in the settlement of these claims, the stockholders of the Concord have the legal right to the 478 DIRECTOKS — DISQUALIFICATION. [CHAP. III. services of directors whose interests are not hostile to their interests. A director or stockholder in the Northern or B. C. & M. company is not such a director. It may, for most purposes, be convenient and desirable that the same person or persons should act as directors of two or more roads forming parts of a continuous line. For many purposes their interests are not adverse. The harmonious working of the several parts, when a large portion of its business is the trans- portation of goods and passengers over the whole line, requires unity of purpose and management. Burke v. Concord R. R., 61 N. H. 160, 233, 234. But however all this may be, the right of the stock- holders of a single road, that it shall be operated primarily in their own interest, cannot be overridden or displaced by directors occupy- ing inconsistent relations. Flagg V. Railway Co., 20 Blatch. 142 — s. c, 21 Am. Law Reg. 775 — decides that where an agreement is made by the directors' relinqiiishing the right to a guaranty of dividends to a corporation by another corporation, the execution of the agreement will not be enjoined at the suit of a stockholder, because three of the directors voting were also stockholders in the guarantor corporation, it ap- pearing that, .without counting their votes, a majority of the direc- tors voted for the measure. ^ Stockholders and creditors are entitled not only to the vote of a director in the board, but to his influence and argument in' discussion. Ogden V. Murray, 39 N. Y. 202, 207 ; Railway Co. v. Blaikie, 1 Macq. (H. L. Cas.) 461, where the court said, " It was Mr. Blaikie's duty to give his co-directors, and through them to the company, the full benefit of all the knowledge and skiU which he could bring to bear on the subject." Our conclusion upon this part of the case is, that the directors of the Concord could not make the contracts with the upper com- panies, nor settle the claims of those companies against the Concord. For the transaction of that part of the business of their office they were disabled by the understanding on which, the purpose for which, and the interest in and by which, they were elected. [The court determines that the purchase of Concord stock by the upper companies was ultra vires.] The law does not suffer a trust to fail for want of a trustee. This principle applies as well when, without legal remedy, the fiduciary failure would be partial as when it would be total. In this case the failure would be partial. The trustees, namely, the directors of the Concord company, are disabled to perform their official duty of managing the trust fund, namely, the property and business interests of that company, only so far as the dealings between that and the ' Accord: United States Rolling Stock Co. ». Atlantic &c. Railroad Co., 34 Ohio St. 450 ; Booth j). Robinson, 55 Md. 419 ; Metropolitan Telephone Co. v. Domestic Telegraph Co., 44 N. J. Eq. 568 (.semble). SECT. 4.] PEAKSON V. CONCORD RAILROAD CORPORATION ET AL. 479 upper companies are concerned. The plaintiff has not shown that the trustees are incompetent to manage the other affairs of the trust or that there is danger of the other affairs being mismanaged. His protection should be commensurate with the fiduciary disability and the danger shown to exist. For the legal. incapacity of the trustees to deal with the upper companies the plaintiff is entitled to a com- plete remedy that will prevent a partial failure of the trust. This requires not a removal of the trustees (directors), but the provis- ional appointment of a trustee (one or more) for the performance of that part of the duty of the present directors which they are legally incapacita,ted to perform. The court will appoint a trustee to manage those affairs of the Concord which are subjects of controversy in this suit, and which the directors of the Concord are held by this decision to be legally disabled to manage. And an injunction is granted against the execution by the directors of the vote to pay sums of money to the upper companies upon claims made by those companies against the Concord company. It wiU be the duty of the trustee appointed under this decision to manage the trust so far as it involves deab'ngs with the upper companies in relation to those claims and all other claims between those companies and the Concord, in relation to terms of connection and transportation, past, present, and future. The roads must be run upon some terms of connection and trans- portation ; and the existing terms will be allowed to continue until they are terminated by the trustee now to be appointed, or in some other legal manner. To the control and management of such trustee the interests of the Concord company in that behalf are transferred. It may be necessary to go further than this decision goes; but such necessity does not now appear. If the remedy now given is found by experience, or, on further consideration, to be inadequate, it will be supplemented by such action as th& case requires. Decree accordingly.^ ' Either party to a contract made between corporations having common directors may exercise the option of avoidance unless, at least, those directors, common to both, are a minority in the directorate of each corporation. And the presence of those directors cannot be counted in determining whether a quorum of the board was pres- ent capable of acting. Metropolitan Telephone Co. v. Domestic Telegraph Co., 44 N. J. Eq. 568 ; O'Connor &c. Mfg. Co. v. Coosa Furnace Co., 95 Ala. 614. Cf. note 1, page 471, ante. That a holding company has caused' the election of the directorate in each contract- ing corporation, does not make such separate boards "common directors" within the rule above stated. Pierce v. Old Dominion &c. Smelting Co., 67 N. J.'Eq. 399. Cf. State V. Missouri Pacific Ry. Co., cited in note 2, page 274, ante. Contracts between corporations having interlocking directors are not ipso facto void, but are subject to searching scrutiny in respect to their fairness. If they sur- vive this test, minority stockholders have no ground for complaint. South Side Trust Co. V. Washington Tin Plate Co., 252 Pa. 237 ("Utmost good faith must not only exist but must be made manifest") ; Marcy v. Guanajuato Development Co., 228 Fed. 150 ; Lewis v. Fakes, 183 S. W. (Ark., 1916) 755 ; Gould Copper Mining Co. v. Walker, 152 Pac. (Ariz., 1915) 853. In Robotham v. Prudential Ins. Co., 64 N. J. Eq. 673, Stevenson, V. C. said : " On the one hand it may be urged with great force that a minority stockholder has a 480 DIRECTORS — DISQUALIFICATION. [CHAP. III. SAN DIEGO &c. R. R. CO. v. PACIFIC BEACH CO.' 112 Cal. 53 ; 33 L. R. A. 788. 1896. McFaeland, J. — This is an action upon two promissory notes made by defendant to plaintiff • — one for fifteen thousand dollars, and the other for fifteen hundred dollars, the latter being for interest due upon said first-named note. Judgment went for plaintiff, from which, and from an order denying a new trial, defendant appeals. Each of the parties is a corporation. The respondent owns and operates a railroad from a certain point in the city of San Diego to another point in said city, about ten miles distant, known as Pacific Beach ; and it is the only railroad running to the latter point. The right to repo3e upon impartial, unbiased action on the part of the directors, who are his trustees, and that he ought not to be obliged, where directors have been acting on both sides of a transaction, or are proposing so to act, to come into court with proofs of actual injury to himself or to the corporation. On the other hand, theoretical rules have to give way to the practical necessities of business. Business eventually is not extended, and great departments of human activity are not developed by means which are fraudulent. The use of such means in the end is suicidal. In these days the relations of corporations to each other are exceedingly complex. Common di- rectors abound and common directors are better than 'dummies.' Whether a trans- action between two corporations has been accomplished or remains executory, I in- cline strongly to believe that the safe rule in most cases in the end will be found to be that the presence of a director or directors on both sides of the transaction under inves- tigation does not give the dissenting stockholders an arbitrary right to an injunction, but may give him a most ample right to subject the transaction to the security [scru- tiny ?] of the court, and may oast upon the corporations or directors concerned the burden of disclosing and justifying the transaction. "To give the dissenting stockholder the arbitrary right to an injimction in this class of cases often will put a deadly weapon in the hands of the blackmailer and the corporation 'striker.' Such a rule tends to drive the actual wrongdoers to cover, to induce them to seek concealment, while the corporate action is accomplished through apparently impartial directors, who are, in fact, only agents or 'dummies.' In sev- eral recent cases before this court, where the existence of common directors was relied on for injunctive relief, these common directors, while the motion was pending, were made to disappear, and apparently impartial directors took their place, Y^ho proceeded solemnly to approve of the action of the old boards which the injunction was designed to restrain. "The fiction of corporate existence goes down in many cases before a charge of fraud, but I incline to think that this fiction, in most cases belonging to the class under consideration, should be rigidly maintained' to defeat a mere arbitrary demand on the part of a stockholder that a corporate transaction should be enjoined even though all the impartial directors of the corporation and nine-tenths of the stockholders come into court with a demonstration that the transaction was advantageous in all respects to their corporation, and that an injunction upon it would cause great loss. "But whether in this case dissenting stockholders can arbitrarily prevent corporate action on the ground of the presence of directors, or a majority of directors having a hostile interest, I do not intend to consider. I propose to apply, not to the details of this scheme, but to the scheme as a whole, what certainly is a safe rule, viz., that where all the directors of a corporation have a direct valuable interest in the action which they propose to take, in which interest their stockholders do not participate, these stockholders may compel them, before they will be allowed to carry out their scheme, to prove before the court that it is advantageous to the corporation.'' ' Portions of opinion omitted. SECT. 4.] SAN DIEGO &C. B. R. CO. «. PACIFIC BEACH CO. 481 appellant is a real estate company owning a large tract of land at said Pacific Beach, and engaged in subdividing, improving, and sell- ing said land by lots and blocks. In July, 1888, the two corporations entered into a written contract, by which respondent covenanted that, in consideration of certain sums of money to be paid it by appellant, it would operate its road between said points for two years ; that during said time it would run at least four trains daily at such times as appellant should direct, the appellant to have the right to change its directions; that it would charge for passenger fare not exceeding twenty-five cents for each round trip, and sell to residents at Pacific Beach commutation tickets for a sum not ex- ceeding four dollars and fifty cents per month ; and it bound itself to appellant in the sum of thirty-five thousand dollars, and pledged all its property as security for the obhgation to comply with all its covenants, and agreed that, in case of its failure to so comply for five days, the said sum of money should be paid to appellant as liquidated damages. In consideration of these covenants appellant gave its three promissory notes to respondent — one for five thou- sand dollars, due in six months, one for fifteen thousand, dollars, due in one year, and the third for fifteen thousand dollars, due in two years. Respondent complied with all its said covenants, and operated its road in accordance with said contract during the two years. The appellant paid the two first notes in full, and paid the interest on the third (fifteen thousand doUar) note up to July 10, 1891 — the last in- stallment of said interest having been paid by the fifteen hundred dollar note here sued on. Afterward appellant refused to make any further payment ; and this suit is upon the second fifteen thousand dollar note, and the said fifteen hundred dollars given for interest, as aforesaid. • The main contention of appellant for a reversal arises out of these facts : The respondent had five directors, and the appellant nine ; and, at the time the contract was made, four of the directors of the appellant were also directors of the respondent, and it is also claimed that before the completion of the contract a fifth director of appellant — D. C. Reed — became a director of respondent. A majority of the directors of both corporations were also stockholders in both. And the contention of appellant is that, because there were common directors of the two corporations as aforesaid, therefore the contract was absolutely void and incapable of ratification. Respondent con- tends that upon these facts the contract was, at the most, only voidable, and that the appellant ratified it. Appellant also con- tends that, even though ratification were possible, there was none. In this case there is no actual fraud, either alleged or found ; and this distinguishes it from rnany of the cases cited by appellant. The contract seems to have been a fair, open one, and carried mto effect before the eyes of all persons interested. Neither is there any ques- 482 DIRECTORS — DISQUALIFICATION. [CHAP. III. tion of ultra vires; and this also distinguishes the case from cases cited by appellant. The court found that appellant's charter ex- pressly gave it the power to make such a contract. The contention, therefore, at this point of the case, is that the mere fact that there were common directors, as above stated, of the two corporations at the time of the contract makes it absolutely void ; and this conten- tion cannot be maiatained. , Where two corporations, through their boards of directors, make a contract with each other, the directors "who are common to both are not within the rigid rule of the cases which hold that one who acts in a fiduciary capacity cannot deal with himself in his individual capacity, and that any contract thus made will be declared void without any examination into its fairness, or the benefits derived from it to the cestui que trust. Two corporations have the right, within the scope of their chartered powers, to deal with each other ; and this right is certainly not destroyed or paralyzed by the fact that some, or a majority, of the directors are common to both. Of course, if such directors should wrongfully and willfully use their powers to the prejudice of one of the corporations, their action, if not acquiesced in, and contested at the proper time, could be avoided — as in any other case of actual fraud. But such common directors, owe the same fidehty to both corporations, and there is no presump- tion that they will deal unfairly with either ; therefore, their acts as such common directors are not void. There are abundance of authorities to this proposition, but it is hardly necessary to refer to any other than that of Pauly v. Pauly, 107 Cal. 8, 48 Am. St. Rep. 98, and the cases there cited. The contract, therefore, was not void ; and assuming that it was voidable, and might have been avoided by the appellant at the proper time and in the proper manner, it is clear that it was not so avoided, but that it was ratified. In the first place, there was no attempt to avoid it nor any intimation of such intention, until long after the time mentioned in the contract had expired, and respondent had performed all its covenants therein provided; until long after ap- pellant had received all the benefits coming to it from respondent's performance ; and until long after it had become impossible to restore anything to respondent, or to put it, in whole or in part, in statu quo. And during this time appellant without objection paid, from time to time, the greater part of the principal and a large part of the interest which by the contract it had promised to pay, thus inducing respondent to perform the whole of its part of the contract in con- fidence that appellant would do the same. This, we think, under the circumstances of this case, constitutes ratification by acq\iies- cence ; for the rule is that a party cannot repudiate the burdens of a contract while enjoying its benefits. (Underbill v. Santa Barbara etc. Co., 93 Cal. 312.) There is some question as to the sufiiciency SECT. 4.] SAN DIEGO &C. E. R. CO. V. PACIFIC BEACH CO. 483 of the findings on this point, although in our judgment they sufficiently state the fads constituting such acquiescence. The court, however, also found that at three different meetings of the stockholders of appellant, at two of which over two-thirds of the stockholders were represented, and at the other over a majority, the action of the di- rectors in making the contract in question was ratified, approved, and confirmed ; and the evidence supports this finding. At the regular annual meeting on August 29, 1888, six weeks after the mak- ing of the contract, at which more than two-thirds of the stockholders were represented, all the previous acts of the board were expressly ratified. At the regular annual meeting on August 29, 1889, at which more than two-thirds were represented, the reports of the secretary and treasurer, showing the existence of the fifteen thousand dollar note sued on, were read and approved; and all the proceedings of the preceding year were unanimously approved; and at a regular adjourned meeting on September 5, 1889, at which a majority of the stock was represented, the same thing was shown by the reports of said two officers, and the action of the board again unanimously approved. It is admitted that there was also another annual meeting, of the stockholders in August, 1890, at which all former actions of the directors were approved. These acts constituted a ratification of the contract in question. (Underbill v. Santa Barbara Co., supra.) The contention of appellant that the contract could not be ratified except by the unanimous consent of all th'e stockholders cannot be maintained. That principle does not apply to acts which might have been authorized by a majority in the first instance. "The corporation may, however, ratify an unauthorized transaction of its agents ; and this may be done either by the unanimous acquies- cence of the shareholders, or by a vote of the majority, if the transac- tion is of such a character that the majority might have authorized it at the outset." (Morawetz on Private Corporations, 2d ed., sec. 524, and the cases there cited.) The rule is that the majority governs, and every stockholder contracts that such shall be the rule. (Civ. Code, sec. 312 ; 1 Morawetz on Private Corporations, sec. 474.) There is nothing in the contention that the ratifications were made without knowledge of what they meant. In the first place, this is not an action by individual stockholders to set aside a contract made by the corporation; the point is made by the corporation itself in a defense in which it seeks to violate its own obligation, and it would be absurd to say that it did not know what it was doing. But, if we assume that in this action the corporation could shield itself behind the ignorance of a few of its stockholders, it is clear that the latter knew, or ought to have known, the nature of the contract and the circumstances attending it. The respondent ran its railroad through the premises of appellant upon land purchased for that purpose by the former from the latter; there was a continuous 484 DIBECTORS — DISQUALIFICATION. [CHAP. III. operation of the road according to the contract, and a continuous payment from time to time by appellant of large sums of .money under the contract ; and the relations of the two corporations were of an intimate character. Moreover, at the meeting of the stock- holders at which the contract was first ratified, the minutes of the meeting of the board of directors of appellant at which the contract was made were read ; and they showed that Gassen, who was a di- rector of appellant, was also director, president, and general liianager of the respondent, and presented the table of trains and acted for the respondent. ^Furthermore, as was said in Underbill v. Santa Barbara Co., supra, quoting from Morawetz: "Nor can the shareholders of a corporation avoid responsibihty for the unauthorized acts of their agents by abstaining from inquiring into the affairs of the com- pany, or by absenting themselves from the company's meetings, and at the same time reap the benefits of their acts in case of success." ' It is significant that in the case at bar there was no attempt to show a want of knowledge of any of the stockholders of any circumstance connected with the contract which is now sought to be repudiated. In considering this case we have assumed without deciding that the contract involved was one which the appellant, if there had been no acquiescence or express ratification, might by prompt action have avoided. The judgment and order appealed from are affirmed.^ RUSSELL V. HENRY C. PATTERSON COMPANY. 232 Pa. 113; 36 L. R. A. (N. 8.) 199. 1911. Opinion' BY Mr. Justice Mestrezat : The Henry C. Patterson Company was incorporated January 20, 1904, under the laws of Pennsylvania, and is engaged in the lumber business. It has a capital stock of $50,000, divided into 500 shares of the par value of $100 each. From September 1, 1908, to the date of the hearing by the court below, the stock was held as follows : Coane, 348 shares ; Freas, one share ; Kimball, one share ; and Russell, 150 shares. The by-laws fixed the number of directors at four and the board is composed of the plaintiff and the three defendants. At the annual meeting of the stockholders, held February 9, 1909, Coane, Freas, Kimball and Russell were reelected directors for the ensuing year, ' Accord : United States Steel Corp. v. Hodge, 64 N. J. Eq. 807. 2 Accord : Continental Ins. Co. v. New York &o. R. R. Co., 187 N. Y. 225 ; Gould Copper Mining Co. v. Walker, 152 Pac. (Ariz., 1915) 853. ' Portions omitted. SECT. 4.] RUSSELL V. HENRY C. PATTERSON COMPANY. 485 and at a meeting of the board of directors held on the same day Coane was reelected president, Kimball vice president, and Freas, secretary and treasurer. The by-laws provide : "The board of directors . . . shall, from time to time, fix the compensation of the officers." At the time of the election of the officers in February, 1909, the salary of the president and of the secretary and treasurer was $1,200 each per anmmi, said amoimts having been fixed at a meeting of the board of directors in July, 1908, when they were reduced from $1,500. At a meeting of the board on February 9, 1909, after the election of the officers, a motion was made to fix the salary of the president and of the secretary and treasurer at $2,000 per year for each, dating from February 1, 1909. Coane, Freas, and Kimball voted for the motion and Russell against it. These salaries have been paid to the officials, in accordance with the resolution. From the organization of the company imtil July, 1908, Russell acted as vice president of the com- pany and was actively engaged in the conduct of the business. In the early part of his employment, he received a salary, as vice presi- dent, of $2,500 per year; Freas, as secretary and treasurer, and Miller, RusseU's brother-in-law who was acting as general manager, each received the same, and Coane as president in lieu i of a fixed salary the profit on one branch of the company's business amounting to about $1,500 per year, the total salaries of the four persons being $9,000 a year. Owing to certain losses and changes in the location of the company's business the salaries were reduced to $1,500 per year and thereafter to $1,200 per year. Then Russell notified the officers of the company that he would no longer continue to render services to the company and Miller withdrew from the company. Coane, as president, thereafter devoted much more of his time to the business of the company and at the time of the hearing in the case was devoting practically all of his time to its general business. Freas at all times devoted the whole of his time and attention to the com- pany's busiriess. The work of the company which had formerly been done by the four stockholders and Miller is now done by Coane, Freas, and a clerk whose salary is $1,300 per year. At the annual meeting of the stockholders of the company, held February 8, 1910, which was their first meeting held after the resolu- tion of the board of directors adopted February 9, 1909, increasing the salaries, a resolution was passed ratifying and confirming the action of the board of directors fixing the salaries' of the president and of the secretary and treasurer each at $2,000 per year. Coane, Kimball, and Freas voted for the resolution and Russell against it. On January 10, 1909, [1910?] Russell filed this bUl to restrain the officers of the company from further paying the salaries, and to com- pel Coane and Freas to return into the treasury of the company the excess of salaries above $1,200 per annum. The bill averred, inter alia, that the salaries were exorbitant, unreasonable and unfair, and 486 DIRECTORS — DISQUALIFICATION. [CHAP. IH. that the increase was illegal because it could not have been made without the votes of Coane and Freas, the incumbents of the offices. The learned judge held that the resolution of the board of directors increasing the salaries was void, and that the resolution adopted by the stockholders ratifying and afiirming the resolution of the board was also void and of no effect, and entered a decree restraining the officers and directors of the company from carrying into effect the motion of February 9, 1909, increasing the salaries of Coane and Freas, and directing them to return to the treasury of the company such sums as they had received as salaries in excess of $1,200 per year. The defendants, Coane, Freas, and Kimball have appealed. The defendants requested the court to find that the "increase of salaries was reasonable and a just compensation for the services rendered." The court declined to affirm the point in the form in which it was submitted. The learned judge, however, in answering the point said : "The amount of the salaries of Coane and Freas as increased to $2,000 per annum each is probably not more than reason- able compensation for the services rendered, particularly in the case of Coane who appears to have devoted much more of his time to the work of the company after the withdrawal of the plaintiff from an active part in the management of its affairs, and it probably would have cost the company quite as much to employ other persons to perform that part of the labor now done by Coane and Freas, which does not strictly pertain to their duties as officers." He then gives as a reason for not unqualifiedly affirming the point that as stock- holders Coane and Freas were interested in making their stock more valuable; and that if they did not desire to perform the manual labor then performed by them they, as officers and directors, could employ others to do the work, and that the plaintiff could not and probably would not complain. This reason for not affirming the point after having found the facts above stated we do not regard as tenable. The learned judge was simply requested to find whether the compensation voted by the directors as salaries was reasonable and just, and not whether the directors should have employed others to perform the services. The directors had a right to serve the com- pany in the capacity of officers or employees and to receive compensa- tion for such services if legally employed by the company. The finding of the learned judge required him to affirm the point, and it must be so regarded. The learned court below held that the question in controversy in this case was settled by our decision in Schaffhauser v. Brewing Co., 218 Pa. 298. We there held as stated in the syllabus that "the president of a corporation cannot, against the protest of a minority of the board of directors, and as against stockholders who choose to challenge the action, sustain a claim for an increase of salary, the right to which, if it exists, is secured by his own vote as a member of SECT. 4.] RUSSELL ». HENBY C. PATTERSON COMPANY. 487 the boa,rd which allows it." In his ruling, the learned judge failed to distinguish the facts of the case cited from those of the present case. The question involved in the Schaffhauser case was whether the directors may bind the corporation or a minority stockholder by yoting a salary or compensation to one of their number who either is or is not an officer of the board ; in the present case, the question is whether a majority of the stockholders, who are also the directors, may at a regular stockholders' meeting ratify and confirm against the vote and protest of a minority stockholder a resolution of a majority of the board of directors increasing the salaries of two of such directors as officers of the company where such salaries are found by the court to be fair and reasonable compensation for the services rendered. In the Schaffhauser case the president of the corporation, who was a director, claimed the right to recover the compensation solely upon the resolution of a majority of the board of directors increasing his salary ; in the present case, the right to the compensation rests upon the action of a majority of the directors ratified by a majority in interest of the stockholders in making a reasonable increase of salaries of two of the directors who as such and as stockholders voted for the increase. The single question for consideration here, therefore, is whether under the circumstances of the case the ratification of the action of the majority of the directors by a majority in interest of the stock- holders bound the corporation as against a dissenting stockholder to pay the salaries of the president and of the secretary aiid treasurer of the company. The answer to the proposition depends upon (a) whether the action of the directors in increasing the salary of the two members of the board was void or voidable, and (6) whether the two directors whose salaries were increased and whose votes were necessary to pass the resolution increasing the salaries could vote at a stock- holders' meeting held to ratify the action of the directors. [The act of the directors in making the increases in salaries was held voidable, not void.] The well-settled general rule is that any act of a board of directors may be ratified by the stockholders which they could originally have authorized. This proposition seems to be feound in principle and supported by the authorities. Of course, this assumes that the act is not fraudulent or detrimental to the interest of the corporation. The stockholders could not bind the corporation by ratifying a con- tract made by the directors with the company which would fraudu- lently dispose of or waste the assets of the corporation. ^ But where the contract is reasonable and fair, and a consideration has been re- ceived by the corporation, the stockholders may ratify it and thus bind the corporation : U. S. Steel Corporation v. Hodge, 64 N. J. Eq. ' This subject is considered under the rights of jninority stockholders in Chap. IV, Sec. 7, infra. DIRECTORS — DISQUALIFICATION. [CHAP. III. 807, 60 L. R. A. 742 ; Continental Ins. Co. v. N. Y., etc. R. R. Co., 187 N. Y. 225 ; In Re George Newman & Co., L. R. (1895)1 Ch. Div. 674. We are of the opinion that the resolution of the stockholders rati- fying the action of the directors in increasing the salaries was not invahd because it was done by the votes of the same individuals by whose votes the resolution of the board of directors was passed and two of whom were the recipients of the salaries. At the meeting of the board, the voting was done by the directors as agents of the corporation, occupying a fiduciary relation to the corporation which prevented them contracting with their principal or voting themselves compensation for their services. When these directors voted as stockholders, in a stockholders' meeting, they held no trust relation to the company which would deprive them of the right to vote as their interests dictated. As shareholders they, like other owners of the stock, had a voting capacity to the extent of the number of shares they held in the corporation. The right to vote their shares was a privilege of which they could not be deprived. While the majority stockholders may not use their voting power to defraud the minority stockholders, yet they have the right to protect their own interests in the stock by voting as they deem best in the stockholders' meeting. This might, as it did in the case in hand, result in sustaining them in obtaining a salary from the corporation. But their action cannot be condemned for that reason as it must be assumed that they believed that in so voting it was to the advantage and interest of the corpora- tion. They owed the duty of good faith to the other stockholders in the management, of the affairs of the corporation, and the other stockholders owed a like duty to them. Each stockholder had a right to vote in the shareholders' meeting as he thought best to protect his own individual interest. Such interest would naturally and necessarily influence him in voting, but it would not deprive him of the right to vote on the ratification of the action of the directors. To hold otherwise, would be to permit a minority stockholder to control the majority stockholders and their property. This cannot be done. The majority stockholders may not as against the cor- poration and a minority stockholder dissipate or waste its funds or fraudulently dispose of them in any way, either by ratifying the action of the board of directors in voting themselves illegal salaries or by any other act. But where the action of the board of directors is not fraudulent or unfair to the extent of amounting to fraud and the action of the directors may be ratified by the shareholders, the well- settled general rule is that the stock of the director who is benefited is to be counted, even though the vote would have failed had his stock not been voted : 2 Cook on Corp., sec. 662 ; Booth v. Land, etc., Co., 68 N. J. Eq. 536 ; Bjorngaard v. Goodhue County Bank, 49 Minn. 483; United States Rolling Stock Co. v. Railroad Co., 34 SECT. 4.] KUSSELL V. HEOTIT C. PATTERSON COMPANY. 489 Ohio, 450, 32 Am. Rep. 380 ; Foss v. Harbottle, 2 Hare 461 ; Beatty ■V. Northwest Transportation Co.,' 5 Can. L. T. 277 ; Middleton v. Arastraville Min. Co., 146 Cal. 219; Blinn d. Riggs, 110 III. App. 37 ; U. S. Steel Corporation v. Hodge,^ 64 N. J. Eq. 807, 60 L. R A. 742. For the reasons stated, the decree of the court below is reversed and the ■hill is dismissed at the cost of the appellee.* ' This was a bill to rescind corporate purchase of a steamer, the United Empire, from Beatty a director and majority stockholder. There was no fraud; the ship was reasonably necessary to the prosecution of the corporate enterprise ; the price -was fair. The action of the directors in making the purchase was approved via a. by-law of the stockholders by a vote of 306 to 289 of which affirmative votes, 301 were cast by Beatty and his transferees. Bill dismissed. Sir R. Baggallat said (Jud. Com. of Privy Council — L. R. 12 A. C. 589) : Beatty had a perfect right "to exer- cise his voting power in such a manner as to secure the election of directors whose views upon policy agreed with his own, and to support those views at any shareholders' meeting ; the acquisition of the United Empire was a pure question of policy, as to which :it might be expected that there would be differences of opinion, and upon which the voice of the majority ought to prevail : to reject the votes of the defendant upon the -question of the adoption of the by-law would be to give effect to the views of the minority, and to disregard those of the majority." A director, while not disqualified from selling property to his corporation, must be ■scrupulous that he does not involve it in a transaction which is unfair or disadvan- tageous to it. The burden is on him to show the transaction was perfectly fair. How- land V. Corn, 232 Fed. 35. 2 Van Stckbl, J. said: "They voted upon that resolution not as directors, not in their fiduciary capacity, but solely in the right of the shares of stock held by them. A most valuable privilege, which attaches to the ownership of stock in a corporation, is the right to vote upon it at any meeting of stockholders. As to that resolution, considered by itself, as stockholders, they owed no greater duty to their co-stock- holders than those stockholders owed to them. Like other stockholders, they had a right to be influenced by what they conceived to be for their own interest, and they cannot lawfully be denied that right ; nor can it be limited or circumscribed by the fact that they occupied the position of directors in the company." ' In Colgate v. V. S. Leather Co., 73 N. J. Eq. 72, reversed on another point in 75 N. J. Eq. 229, Emery, V. C. said : "The general rule ... is, that the individual stockholders are not trustees for each other, but each may, as a member of the general corporate body, exercise his individual right and vote equally with other stockholders on the ratification of a contract in which he is interested, and ratification or adoption of the contract is valid even if carried by his vote. . . . This right of the majority (statutory or other) either to originally direct or to affirm contracts or other proceed- ings in which the directors or the majority stockholders are interested, is not, however, absolute, but is subject to the necessary qualification that the majority, although they may deal with the assets of the company, cannot so deal with them as to divide these assets, more or less, between themselves to the exclusion of the minority. . . . By this rule, full practical protection, and all the protection they are entitled to, is given to the minority stockholders without resort to any principle of supposed trust relationship of one individual stockholder or any combination of such individual Btookholders, who constitute a majority, toward those who do not act with them and constitute a minority. To make the majority of the stockholders either directly or through their directors trustees of the minority, and obliged, because they are m a majority to conduct the business or affairs of the company as, m any respect, the special trustees of the minority, seems to me to be a misconception of the theory of -trust relations. The directors elected, as they must be, by a majority, become, when «lected, the trustees, not of the majority or of the minority stockholders, but trustees of the entire body of stockholders whether belonging to the majority or minority. The same learned jurist in Lillard .. Oil, Paint & Drug Co., 70 N J. Eq. 197, set aside an excessive salary appropriated by a majority stockholder and compelled him *o account for the excess. He said : "The fixing of his salary by the sole vote of the 490 DIRECTORS — DISQUALIFICATION. [cHAP. III. DUNCOMB ET AL. v. NEW YORK &c. R. R. CO. 84 N. Y. 190. 1881. This action was brought to foreclose a mortgage executed by the defendant, the New York, Housatoiiic & Northern Railroad Com- pany, to plaintiffs as trustees for bondholders. A referee was appointed to ascertain the amount due on account of the bonds and the nature and extent of the interest of the bond- holders and to report with the evidence. The report of the referee was confirmed with two exceptions. It appeared that a corporation was organized under the general railroad act in 1863, having the same name as the corporation de- fendant. Said corporation, in 1868, made its mortgage to plaintiffs as trustees for $2,500,000. In 1872, said corporation was consohdated with the Southern Westchester Railroad Company into the corpora- tion defendant. In October, 1872, it made a mortgage for $2,000,000 and exchanged its bonds secured thereby to the amount of about $183,500, for bonds issued by the old corporation. The referee found, as to the claims of Louis D. Rucker, that he produced bonds to the amount of $1,117,000. That $810,000 of these bonds were issued to said Rucker, as security for previous ad- vances made by him to said railroad company, amounting to $81,000. That $250,000 of said bonds were issued to the New York Loan and Indemnity Company as collateral security for a loan of $25,000. That the claim of said New York Loan and Indemnity Company was • placed in judgment against the railroad company, and the said judg- majority stockholder in his own favor is, in effect, an appropriation of the assets to his own use, and under this necessary qualification or limitation of the power of the stockholders it is subject to the review of a court, when properly questioned, and if fraudulent or oppressive should not be allowed to stand." See Heublein v. Wight, 227 Fed. 667. (Defendant urged that plaintiff acquired his stock with knowledge of excessive salaries he now alleges. Held: No bar to this suit which seeks to fix future payments. Query, if bill sought recovery of back salaries.) In Gamble v. Queens County Water Co., 123 N. Y. 91, Peckham, J. said : "A shareholder has a legal right, at a meeting of the shareholders, to vote upon a measure, even though he has a personal interest therein separate from other shareholders. In such a meeting each shareholder represents himself and his own interests solely, and he in no sense acts as a trustee or representative of others. The law of self in- . terest has at such time very great and proper sway. There can be little doubt, too, that at such meetings those who do vote upon their own stock vote upon it in the light solely of their own interest, or, at least, in what they conceive to be their own interest. Their action resulting from such votes must not be so detrimental to the interests of the corporation itself, as to lead to the necessary inference that the interests of the majority of the shareholders lie wholly outside of and in opposition to the interests of the corporation and of the minority of the shareholders, and that their action is a wanton or fraudulent destruction of the rights of such minority. In such cases it may be stated that the action of the majority of the shareholders may be subjected to the scrutiny of a court of equity at the suit of the minority shareholders." SECT. 4.] DimCOMB ET AL. V. NEW YORK &C. R. R. CO. 491 ment was assigned to Rucker for $12,500. That the balance of said bonds were obtained by Rucker from the Bessemer Company, never having been issued to him or delivered to him by the railroad com- pany, but were taken and held by him as security for certain advances made by him from time to time. It appeared that these advances were made on the joint obligations of the railroad company and the Bessemer Company, which latter company had a contract for the construction of the road of the former. At the time of these advances Rucker was president of the railroad company. The referee held that Rucker was entitled to prove said $810,000 of bonds only to the extent of his claim of $81,000 and interest thereon. That he was entitled to prove the bonds assigned to him by the Loan and In- demnity Company only to the extent of the $12,500 paid by him with interest. That the balance of bonds claimed by him were of no value in his hands and he was not entitled to receive any payment thereon. Finch, J.' We have reached the conclusion that the appellant, Rucker, should be allowed to prove in full all of the $810,000 of bonds, which he holds as a pledge, to secure the debt due him from the rail- road company of $81,000 and interest, and which he can produce for that purpose ; and is entitled to share in the distribution upon that basis to the extent of such indebtedness. It is not intended to deny; or question the rule that whether a director of a corporation is to be called a trustee or not, in a strict sense, there can be no doubt that his character is fiduciary, being intrusted by others with powers which are to be exercised for the common and general interests of the corpo- ration, and not for his own private interests, and that he falls, there- fore, within the doctrine by which equity requires that confidence shall not be abused by the party in whom it is reposed, and which it enforces by imposing a disability, either partial or complete, upon the party intrusted to deal, on his own behalf, in respect to any matter involving such confidence. (Hoyle v. Plattsburgh & Montreal R. R. Co., 54 N. Y. 328 ; Gardner v. Ogden, 22 id., 327 ; Twin Lick Oil Co. V. Marbury, 1 Otto, 587 ; Smith v. Lansing, 22 N. Y. 531 ; Aberdeen Railway Co. v. Blaikie Bros., 1 Macq. 461, per Lord Ceanworth.) Nor is it at all questioned that, in such cases, the right of the bene- ficiary or those claiming through him to avoidance does not depend upon the question whether the trustee in fact has acted fraudulently, or in good faith and honestly, but is founded upon the known weak- ness of human nature, and the peril of permitting any sort of collision between the personal interests of the individual and his duties as trustee, in his fiduciary character. (Davoue v. Fanning, 2 Johns. Ch. 260.) But the rule was adopted to secure justice, not to work injustice ; to prevent a wrong, not to substitute one wrong for an- other; and hence have arisen limitations upon its operation, cal- culated to guard it against evil results as inequitable as those it was 1 Portions of opinion omitted. 492 DIRECTORS — DISQUALIFICATION. [cHAP. III. designed to prevent. Thus, the beneficiary may avoid the act of the trustee, but cannot do so without restoring what it has received. (York Co. V. McKenzie, 8 B. Par. Cas. 42.) To cling to the fruits of the trustee's dealing while seeking to avoid his act ; to take the benefit of his loan, and yet avoid and reverse its security, would be grossly inequitable and unjust. It would turn a rule designed as a protection, ' into a weapon of offense and injustice. And where the trustee's act consists, not in possessing himself of the property of the beneficiary as owner, but in taking collateral security for a debt honestly due him, or a habihty justly incurred, the rule can have no application, since the payment of the debt or the discharge of the liability is an essential prerequisite of the avoidance. And this is true whether the pledge be taken for a present or precedent debt. In either case the equity to be regarded equally exists. It is upon this ground that the case of Smith V. Lansing (22 N. Y. 520) stands. The collateral taken there was after the creation of the liability, and we held the transac- tion valid. The ground of the decision was distinctly stated to be that the association had received the direct benefit of the several amounts of money to secure which the bonds were given, and the creditors had indirectly received the benefits of the same by the con- sequent increase of the assets ; and that, upon the application of the beneficiary or its receiver, the trustee should be permitted to set up any equities which existed, entitling him to retain the property, either absolutely or as security for the moneys advanced or liabilities incurred. Since, therefore, in the case of a pledge delivered as se- curity for a just and honest debt, the principal may always redeem upon payment, and the rule of equity is in no respect different, we do not see that it has any appUcation, or can in any respect modify the legal relation of the parties. We conclude, therefore, that he is entitled to prove so many of the $810,000 of bonds as he holds, and can produce as pledgee, and share in the distribution accordingly up to the amount of his debt. It was error to reject the bonds held by Rucker as the assignee of the Loan and Indemnity Company, and those which he received as a pledge from the Bessemer Company. The transactions relating to these bonds occurred after he had ceased to be an officer of the railroad company, and when he occupied toward it no relation of trust or confidence which could, on any theory, expose his action to scrutiny or criticism. He dealt, therefore, Hke any other stranger, and is entitled to prove such of these bonds as he holds as pledgee and can produce for that purpose, and receive the dividends thereon to the amount of the debts respectively which the bonds were pledged to secure. Ordered accordingly} ' No rule forbids a director from loaning money to his own corporation. Twin- Lick Oil Co. V. Marbury, 91 U. S. 587. ("Such a doctrine, while it would afford little SECT. 4.] SEYMOUR V. SPRING FOREST CEMETERY ASSOCIATION. 493 SEYMOUR V. SPRING FOREST CEMETERY ASSOCIA- TION. 144 N. Y. 333 ; 26 L. R. A. 859. 1895. Finch, J. This appeal is from a final judgment rendered upon an accounting which ascertained the amount payable upon bonds held by the plaintiff and issued by the defendant corporation. Neces- sarily the main questions involved are as to the legality of that issue and the right of the plaintiff to hold and enforce the obUgations ilpon which she sues. [The court determines that the bonds issued were valid corporate obligations in the hands of the original holders, who were at liberty to' enforce them, and who had full power and authority to transfer them. . It finds they were so transferred. In discussing alleged technical irregularities in the issue of the bonds, the court said : "These represented the purchase price of the land which the corpo- ration bought and kept, and were its promise to pay which it could not justly repudiate. That kind of plunder which holds on to the property but pleads the doctrine of ultra vires against the obligation to pay for it, has no recognition or support in the law of this state. Whitney Arms Co. v. Barlow, 63 N. Y. 62 ; Duncomb v. N. Y., H. & N. R. R. Co., 84 id., 199 ; Woodruff v. Erie R. Co., 93 id., 619."] But the further claim is made that, because Hotchkiss and Sey- protection to the corporation against actual fraud or oppreesion, would deprive it«f the aid of those most interested in giving aid judiciously, and best qualified to judge of the necessity of that aid, and of the extent to which it may safely be given.") And as part of an honest transaction, he may take security to indemnify himself. JMd. It follows "that he acquires the right, as any other mortgagee, to protect himself even to the extent of being a purchaser at a foreclosure sale, which has become inevitable through no fault or design of his." Jn re New Memphis Gaslight Co. Cases, 105 Tenn. 268. "For, if he could not bid, he would have been deprived of the only means which his contract gave him of making his debt oiit of the security on which he loaned his money." Twin-Lick Oil Co. v. Marbury, supra; Buckler v. Black, 226 Fed. 703. "But in all such cases the director must act in the utmost good faith, for the trans- action will be jealously scrutinized." Janney v. Minneapolis Industrial Exposition, 79 Minn. 488. Hence, while he may ex necessitate, "for the purpose of collecting his debt, assume a position antagonistic to his company and its stockholders," and may "bring action against the company and proceed to judgment and execution for the recovery of his debt," yet "the director, who is also creditor, must, on taking legal proceedings for the collection of his debt, relinquish his trust pro hoc vice, not covertly, but openly, and with fair notice to the company." Marr v. Marr, 73 N. J. Eq. 643. And for failure to operJy relinquish his trust and give adequate notice to the company that he had done so, his purchase of corporate assets upon execution sales will be set aside or a trust impressed thereon in favor of the corporation. Ibid. Cf Evansville Public Hall Co. v. Bank of Commerce, 144 Ind. 34. See Endicott v. Marvel, 81 N. J. Eq. 378, aff. 83 N. J. Eq. 632. The president of an insolvent corporation may not convey its property tp himself in liquidation of its debt to him. Bowdon Lime Works v. Moss, 70 So. (Ala., 1915) 292. 494 DIRECTORS — DISQUALIFICATION. [CHAP. III. mour were officers of the corporation, holding a fiduciary relation as trustees or directors, they could not lawfully buy the valid and outstanding obligations of the company at less than par and enforce them for the full amount against the debtors. If that be sound doctrine, as is stoutly maintained, if directors cannot in any case invest in the bonds of their own companies except at the peril of a constructive fraud, if they cannot safely buy such bonds below par, because they deem them unduly depressed, if titles to corporate obligations passing through their hands become tainted by their touch, it is quite time that the courts should give, what they have not given, a very definite and distinct warning. Some citations of seeming authority are pressed upon us and others exist. The broad rule is stated in Perry on Trusts (§ 428), that "a trustee, executor or assignee cannot buy up a debt or incumbrance to which the trust estate is liable for less than is actually due thereon, and make a profit to himself," and that is the doctrine invoked in this case as appUcable to a director regarded as a trustee of the corporation. But the state- ment, however correct in its application to specific instances, must be taken with the limitations which belong to it. Its foundation is that a fiduciary agent, owing a duty to his principal, cannot make a contract for his own benefit which is or may be inconsistent with that duty, and the cases generally are of two kinds. The trustee buys in the property of his principal at a sacrifice for his own benefit, when, if he bought it at all, it was his duty to do it for his principal orhe makes a contract in behalf of his principal with himself directly or indirectly as the other party to the agreement. The first class of cases is illustrated by Slade v. Van Vechten (11 Paige, 26), where the assignee bought in assigned property at a sheriff's sale and claimed the personal benefit of his bargain ; and the second class by Munson V. S. G. & C. R. R. Co. (103 N. Y. 68), in which the directors con- tracting had a private and personal interest, possibly adverse to their fiduciary duty. Almost, if not quite all, of the cases cited by the learned counsel for the appellant belong to one or the other of these two classes. But they do not decide this case, for Hotchkiss and Seymour neither bought in any property of the company nor dealt with the corporation in any respect. They made their contract, not with it, but with third persons capable of protecting their own rights, and bought nothing which the corporation owned or to which it had a right. We must go to still other cases, founded it may be to some extent upon similar ideas of fiduciary duty, to discover even an ap- proximate authority. There are cases of co-partnership in which the general rules pertaining to that specific relation might prove to be broad enough to cover the purchase of the debt owing by the firm, (Am. Bk. Note Co. v. Edson, 56 Barb. 89), and other cases in which the duties flowing from a liquidation conducted by the trustee, and \Cf. note 2, page 470, ante: also note 1, page 492, ante. SECT. 4.] SEYMOXJK V. SPRING FOREST CEMETERY ASSOCIATION. 495 as to which he owes a specific trust duty, forbid a purchase by the trustee for his own benefit at a discount. But in every class of cases the rule is founded upon the unwillingness of the law to uphold contracts which bring into collision the trust duty and the personal- interest, and it is because of that colhsion, and the temptations which surround it, that it declares the contract voidable ,at the election of the beneficiary without investigating the good or bad faith of the trustee. The entire basis of the rule consists in this collision be- tween trust duty and personal interest, and the equitable prohibition has no appUcation where there is no such possible inconsistency. There is no such conflict in the ordinary case of the purchase by a director in a going corporation of its. outstanding obligations. There is no present duty resting upon him to extinguish them. The time for that has not come, the duty has not arisen, may never arise, the corporation is not prepared to pay, does not contemplate paying, but intends and expects to await the full maturity of the debt. Un- less someispecial fund has been provided, or some special liquidation has been ordered, the director owes no duty to his company to dis- charge or buy in the outstanding bonds, and may purchase for him- self because no inconsistent trust duty has arisen. Why should he not? While the bonds are running to their maturity, and the corpo- ration is not able to extinguish them, is not bound to do so, does not even wish or seek to do so, what does it matter who holds the securities or on what terms they pass from hand to hand? It seems to me that we are asked to crowd the rule almost to the verge of an ab- surdity, and to inflict a vital injury upon business interests by taint- ing with invalidity the holding by a director of the unmatured obligations of the corporation bought by him in the open market and not put in liquidation or sought to be extinguished. There must at least be some fact or circumstance which charges the trustee with a present duty to act for his company in respect to the bonds, which duty is or may be inconsistent with a personal purchase. No such duty rested upon Hotchkiss and Seymour, and they h£|d a right to buy and hold for their own benefit. Indeed, there is a further and equally conclusive answer. If the doctrine invoked applied to this case it would make the purchase not void but voidable at the election of the corporation, and that elec- tion must be made promptly and upon sufficient knowledge of the facts. The beneficiary cannot wait and speculate upon the chances of delay, but must act. Here the purchase was made before 1873, and in 1880 the corporation is found recognizing and ratifying the title of the vendees or their successors, making payments to them, and providing for future payments, and it is only after a delay of fifteen years that an attempt to repudiate the purchase is made. . . . Judgment affirmed. 496 DIKECTOKS — DISQUALIFICATION. [CHAP. III. DEADERICK v. WILSON ET AL. 67 Tenn. 108. 1874. Freeman, J., delivered the opinion ^ of the court. The first question we discuss is raised by the first and part of the- fifth, the sixth and seventh prayers of the bill, together with the subordinate prayers in aid of the relief thus sought. They are as follows : 1. That the defendants be required to produce and file the genuine original contract in writing made with the Southern Railway Se- curity Company, or with Thos. A. Scott, for the sale of the said ten thousand shares of stock, and that the same be decreed to be null, void, and of no validity. * The clause of the fifth prayer is : "But if your Honor shall hold they are not entitled to the rehef for which they above pray, that is, to have the sale of ten thousand shares of stock set aside, then they pray that Wilson, Jaques, McGhee and Jackson, with such other directors and officers as were confederated with them in the purchase and sale of said stock, be held to account to the stockholders from whom they purchased the same, for all profits made and reaUzed, by said purchase and sale ; but if said sale and transfer is set aside, they pray for an account of such profits and advances in value as may have accrued, and that the parties be required to show from whom they purchased stock, when each purchase was made, the price paid, and through what agency purchased." The facts on which this latter branch of relief is prayed, may b& substantially stated as follows : It is alleged that Wilson, Jaques, McGhee and Jackson, with other ofiicers and directors of the corpo- ration, receiving salaries as such, conceived and formed the design and scheme of speculating in the stock owned by complainants, and others on whose behalf they sue, to the damage of the owners of the- stock, and profit of said respondents ; that they availed themselves- of their superior knowledge, infiuence and power, and other ad- vantages incident to their positions as such officers and directors, and as trustees for the stockholders, to carry said scheme into exe- cution, and procured the smaller stockholders to transfer to them their shares of stock at prices far below their par value, and far below the prices that their superior information enabled them to foresee said shares would command. Stripped of all verbiage, this charge is, simply, that officers and I ' Portions omitted. SECT. 4.] DEADERICK V. WILSON ET AL. 497 directors of a railroad corporation have purchased stock of parties owning small amounts of stock at below the par value of the stock, and below the value which they foresaw it would command — that is, in the future — and that they so purchased because of their su- perior knowledge of the real value of the stock, or their superior fore- sight as to its future value, which knowledge was obtained by means of their official positions. The legal proposition that underlies it, on which relief is sought, and the charge made, is, that the officers and directors of a corpora- tion of this kind are trustees for the stockholders, or individual owners of the stock, and, as such, cannot be allowed to make a profit out of their trust, — the rule appUcable to all trustees in courts of equity. On the correctness and accuracy of this proposition all this branch of the case niade by the bill turns, assuming for the present, but not deciding, that complainants have presented themselves properly before the court to obtain this rehef. To this question we now address ourselves. Numerous cases, both in England and this country, have settled that the position of a director is in some sense one of a fiduciary character ; in most of them, directors are stated to be trustees for the stockholders. That this is true in some particulars, is beyond all question. See cases of Overend, Gurney & Co. v. Gibb, 3 vol. Eng. R., 7-17 ; Liquidators v. Coleman, 6 vol. Eng. R.., 26-33 ; 1 Redf. on Railw., 576; and numerous authorities cited in printed brief of Shields' counsel, pp. 29, 30, 31 ; also cases collected in Board of Commissioners of Tippecanoe County v. Reynolds,* June number Amer. L. Reg., p. 376, decided by Supreine Court of Indiana. To call directors of a corporation trustees for the stockholders, however, without limiting the use of this term by the facts of the cases in which the question has been presented for adjudication, is cal- culated to mislead, and induce a very wrong conclusion as to the Uabilities of officers, or rather agents, of corporations. As said by Judge Sharswood in Spering's appeal, 71 Pa. Amer. Rep. vol. 10, p. 689, "It is by no means a well settled point what is the precise relation which directors sustain to stockholders. They are undoubtedly said in many authorities to be trustees, but that, I apprehend, is only in a general sense, as we term an agent or any bailee instructed with the care and management of the property of another. It is certain they are not technical trustees." This statement of the learned judge, we think, is correct beyond doubt. The officers and directors of a railroad corporation do not have the legal title of the corporate property vested in them as such, to be held by them for the use of the company or the stockholders ; much less have they the title to or control of the individual shares of stockholders. 1 44 Ind. 509. 498 DIRECTORS — DISQUALIFICATION. [CHAP. III. The corporation, the legal entity, owns the franchise and corporate property. The officers and directors are the agents through whom this legal entity acts, and, in the performance of the duties pertaining to their positions, represent the corporation. And so, with ref- erence to the stockholder, who, by virtue of his ownership as his individual property, is entitled to the dividends properly accruing to him as owner of such shares of stock, the officers and directors are under obligations to the faithful management and use of the corpo- rate franchise and property, so as to secure him the benefit of such dividends. In both cases they are responsible, under certain circum- stances, in a proper proceeding in a court of equity, and probably in some cases in a court of law, for any wrong conduct in violation of the rights of either the corporation or injuriously affecting the in- terests in which the stockholder is concerned. In a word, they are agents charged with the performance with fidelity of the duties that grow out of their position, as defined by the powers, objects and purposes of the charter of the company. To this extent is their position fiduciary, and for breaches of good faith in the performance of these trusts they are held responsible. These general propositions, though sound in our judgment, may, in their application to particular cases, require some qualification; but, as general propositions, we think they embody the true idea on which the responsibility of such parties rest, as deducible from the cases and the nature of the position themselves. But do these principles sustain the argument of complainants, and the theory of their bill on this branch of the case? It is, first, that the shares of stock amounting to ten thousand, sold by defend- ants Thomas A. Scott, or Security Company, be declared null and void, for reasons that will be referred to hereafter. Second, if this is not done, then that defendants be held to account to the stock- holders from whom they purchased, on what stock they purchased from them, for all profits reahzed by said purchase and sale; and this on the ground that the officers and directors were trustees in such a sense as to forbid their purchasing the shares of stock owned by individual stockholders, except under the stringent rules that govern as between trustee and beneficiary in a technical trust, or as between principal and agent, attorney and client. It suffices to say, first, on this proposition, that we have been pointed to no case that holds such a doctrine, and we feel sure none can be found going this length. We are totally unable to see the application of the principle invoked to the case in hand. The officers and directors of a corporation are charged with no trust, or fixed with any duty, as far as we can see, as to the sale or disposition or transfer in any way of the shares of stock owned by the shareholder. They have no power to control its sale or transfer, are charged with no duty in reference to such sale or transfer, by reason of their official posi- SECT. 4.] DEADERICK V. WILSON ET AL. 499 tion. They, as individuals, might by contract assume such duties, as any other parties might, and would then be held responsible individually as others under Uke circumstances. But officially they could not, probably, assume or undertake such a duty; certainly not without the previous authority of the corporation, regularly conferred. It certainly is not in the Hne of the duty of the president, directors, or other officers of a railroad company, to sell the shares of stock owned by the shareholders. If not, then as such they can be charged with no breach of trust or duty in connection with said transfer or sale growing out of their official relation to the company, for no such duty is imposed or trust assumed to be violated. Nor can it be said that such officers may not, as individuals, purchase and hold stock in the corporation of which they are members ; cer- tainly not, unless prohibited so to do by the Legislature. No such prohibition is shown. In fact, we believe it is a general qualification in all corporations of this character that the directors and officers shall own stock, and in most cases, in order to be eUgible to offices of a certain character, to own some considerable amount of it. There being no limit as to the amount which he may own, as a matter of course he may purchase it, and if he may do this, he must necessarily do so from an owner, and that must be a stockholder. Whether . he owns much or httle, can have no possible bearing on the question of his right to sell, nor of the other to buy. After all, the simple question involved is, whether the officers and directors are free to purchase stock from a shareholder in the corporation on the same terms as others. To this there can be but one answer, that is, they may, unless prohibited by legislative restriction. The true relation between directors and officers of a corporation and the shareholder, is thus stated by Chief Justice Shaw in the case Smith V. Hurd, 12 Ind. R., 371, cited in A. L. R., vol. 13, p. 378 : " There is no legal privity relation or immediate connection between the holders of shares in a bank, in their individual capacity, on the one side, and the directors of the bank on the other. The directors are not the bailees, the factor's agents, or trustees of such individual stockholders." In the language of the Supreme Court of Indiana, in the case from which the above quotation is cited, "stock in a corporation held by an individual is his own private property, which he may sell or dis- pose of as he sees proper, and over which neither the corporation nor its officers have any control. It is the subject of daily commerce, and is bought and sold in market like any other marketable commodity." This is a clear and accurate statement of the relation of the parties on this subject. We refer to this case ^ for a very complete review of the cases, both English and American, on this subject. See also, Delaware R. R. Tax, 18 Wall., 229-30, with authorities referred to » Fbebman, J. refers to the case mentioned in preceding footnote. 500 DIRECTORS — DISQUALIFICATION. [CHAP. III. by Field, J., as to the character of such property ; also, in our State, 9 Yer., 490; 10 Yer., 197. It being clear and beyond all question, both on sound principle and authority, that the directors or officers of the company were charged with no trust in reference to the sale or disposition, the management or control of the shares of stock owned by the individual stockholders, it follows that none of the responsibilities growing out of this relation attach to them in making such purchase from the stockholder as are contended for by complainant, and that this feature of the bill cannot be maintained, and the demurrer was properly sustained on this question. It is proper to say, that in all the cases and other authorities cited by complainants' counsel in his learned and elaborate argument, in which directors are called trustees, not one of them hints at the idea that they are trustees, or have any fiduciary relation whatever to the shares of stock owned by the stockholders, so far as selling or buying such stock is concerned. They are all of quite a different character from the case now under discussion, and the trust relation was appUed to a very different state of facts. We cite a few of these authorities by way of illustration. In Story's Eq., vol. 2, sec. 1564, it is said : "So, too, courts of equity will require the officers of joint stock companies to account for moneys received in trust for the company. The directors of a company, on the transfer of its busi- ness to another company, received from the latter a large sirna for compensation, the particulars of which they withheld from the members, and it was held that they were trustees of the money for the members, and they were ordered, on application for an injunc- tion, to pay it into court." It is obvious this has no apphcation to the question ' which we have discussed. We need not go through with the authorities cited by counsel. They are all cases where the directors have either made a profit out of the use of the corporate property, or derived some personal advantage, which of right ought to have gone to the corporation of which they were agents or man- agers, and in which the shareholder, as a member of the corporation, had an interest that was or might have been injured by the wrong done. They were properly held responsible as trustees in such cases, because of a violation of duties assumed and growing out of their relation to the corporation and its members, of which they were ofiicers. But no case has been found, nor do we believe can be, where any trust has been fixed on officers or directors of a corporation in relation to the individual shares owned by the stockholder as hi* private property. With this, as we have said, the officers, as siich, of the corporation have no concern or connection whatever, either in law or in fact. See cases on this question. The Liquidators &c., V. Coleman & Knight, 6 vol. Eng. Reps., 18 ; Post v. Russell, 36 Ind., 60; Amer. R., p. 5, vol. 10, and cases cited; Overend, Gurney & Co.. SECT. 4.] OLIVER ET AL. V. OLIVER ET AL. 501 V. Gibbs, 3 vol. Eng. R., 7-17 ; House of Lords Cases, in Eng R p. 1 ; Koeler v. Black River Falls Co., 2 BL, 716-17-18. ' Bill dismissed.^ OLIVER ET AL. v. OLIVER ET AL.^ 118 Ga. 362. 1903. Bill to rescind a transfer of stock from plaintiffs to defendants, and to reform the options, pursuant to which the transfer was made, which options and transfer were alleged to have been obtained by fraud practiced on plaintiffs, who were stockholders in a company, by their brother, one of the defendants who was the president, ma- jority stockholder and a director of that company. The bill alleged inter ^ alia that the options were obtained and the transfer made at a price of $110 per share, while negotiations, concealed from peti- tioners, were pending which subsequently resulted in the sale of the corporate assets to another corporation at a figure which made their stock worth 15185 per share. Defendants' demurrer was sustained as the prayer for reformation but overruled on all other grounds. Defendants appeal. Lamah, J. [The court holds itself powerless to relieve against a hard bargain unless authorized to do so by some rule of civil law and cites Lord Thurlow in Fox v. Mackreth, 2 Bro. C. C. 420, to ' Accord : Board of Commissioners of Tippecanoe County v. Reynolds, cited in text, which adopts an earlier ruling in Carpenter v. banforth, 52 Barb. 581 ; Crowell II. Jackson, 53 N. J. L. 656 ("In purchase or sale, if there be no designed misrepre- sentation by words or deeds and no active intentional concealment, and no intentional silence where there is a duty to speak, an action for deceit will not lie. A director, or the treasurer, of a corporation, is not, because of his office, in duty bound to disclose to an individual stockholder, before purchasing his stock, that which he may know as to the real condition of the corporation affecting the value of that stock. He is, to some extent, trustee for the stockholders, as. a body, in respect to the property and business of the corporation, but does not sustain that relation to individual stock- holders with respect to their several holdings of stock over which he has no control.") ; Bawden v. Taylor, 254 111. 464 following Hooker v. Midland Steel Co., 215 111. 444. (Director "may deal with an individual stockholder and purchase his stock practi- cally on the same terms as a stranger. In the absence of actual fraud such purchase will not be set aside for a mere failure to disclose any information the director may have affecting the value of the stock.") ; Haverland v. Lane, 89 Wash. 557, following O'Neile v. Ternes, 32 Wash. 528 ("It would seem then, if we grant that defendant was bound to disclose anything that might affect the corporation, that he was under no duty to reveal a contract and a market that was the result of a personal venture. There is nothing in the law that will prevent a stockholder, although he be an officer, from dealing in the shares of a corporation. He may find a market and buy stock to fill it. If his purchaser is willing to pay more than the stock is worth to get control of the company or for any ulterior purpose it is of no concern to the seller. If the purchaser is under personal contract to deliver to a third party, he is not bound to disclose his market. If it is for the benefit of the corporation, he is.") ; Walsh v. Goulden, 130 Mich. 531. ' Statement of facts rewritten ; portion of opinion omitted. 502 DIRECTORS — DISQUALIFICATION. [CHAP. III. the effect that equity will not set aside a sale where the purchaser failed to divulge the fact, of which he knew the seller was ignorant, that the estate had upon it a valuable mine, unless the relation be- tween the parties was such as to raise an obligation on the part of the vendee to make the discovery.] And this brings us to a consideration of the relation which a di- rector bears to an individual stockholder. All the authorities agree that he is trustee for the company, and in his capacity as such he .serves the interest of the entire body of stockholders, as well as those of the individual shareholder, who usually can not sue in his own name for wrongs done the company by the officer. Civil Code, §§ 1858, 1859, 1860. But the fact that he is trustee for all is not to be per- verted into holding that he is under no obligation to each ; the fact that he must serve the company does not warrant him in becoming the active and successful opponent of an individual stockholder with reference to the latter's undivided interest in the very property committed to the director's care. That he is primarily trustee for the corporation is not intended to make the artificial entity a fetich to be worshipped in the sacrifice of those who, in the last analysis, are the real parties at interest. No process of reasoning and no amount of argument can destroy the fact that the director is, in a most important and legitimate sense, trustee for the stockholder. Jackson v. Ludeling, 21 Wall. 616 ; 2 Pom. Eq. Jur. (2d ed.) § 1090. Not a strict trustee, since he does not hold title to the shares ; not even a strict trustee who is practically prohibited from dealing with his cestui que trust; but a quasi trustee as to the shareholder's interest in the shares. If the market or contract price of the stock should be different from the book value, he would be under no legal obligation to call special attention to that fact ; for the stockholder is entitled to examine the books, and this source of information, at least theoretically, is equally accessible to both. It might be that the director is in possession of information which his duty to the company requires him to keep secret ; and if so, he must not disclose the fact even to the shareholder ; for his obligation to the company overrides that to an individual holder of the stock. But if the fact so known to the director can not be published, it does not follow that he may use it to his own advantage, and to the disadvantage of one whom he also represents. The very fact that he can not disclose prevents him from dealing with one who does not know, and to whom material information can not be made known. If, however, the fact within the knowledge of the director is of a character calculated to affect the selling price, and can, without detriment to the interest of the company, be imparted to the shareholder, the director, before he buys, is bound to make a full disclosure. In a certain sense the information is a qvnsi asset of the company, and the shareholder is as much entitled to the advantage of that sort of an asset as to any SECT. 4.] OLIVER ET AL. V. OLIVER ET AL. 503 other regularly entered on the list of the company's holdings. If the officer should purposely conceal from a stockholder information as to the existence of valuable property belonging to the company, and take advantage of this concealment, the sale would necessarily be set aside. The same result would logically follow where the fact giving value to the stock was of a character which could not formally be entered on the records. Where the director obtains the infor- mation giving added value to the stock by virtue of his official posi- tion, he holds the information in trust for the benefit of those who placed him where this knowledge was obtained, in the well-founded expectation that the same should be used first for the company, and ultimately for those who were the real owners of the company. The director can not deal on this information to the prejudice of the artificial being which is called the corporation, nor on any sound principle can he be permitted to act differently towards those who are not artificially, but actually interested. There are several authorities directly on the point. Some are at law, others in equity; the decisions were based on a finding of a want of actual fraud, and not on demurrer, as here. But it must be conceded that they are opposed to the conclusions we have reached. Krumbhaar v. Griffiths, 25 Atl. R. 64; Haarstick v. Fox, 9 Utah, 110 ; Crowell v. Jackson, 53 N. J. L. 656, adopting the ruling in Board of Comm'rs v. Reynolds, 44 Ind. 509, 15 Am. Rep. 245, where it was held that there was no relation of trust between a director and an individual stockholder; and that therefore the director was not bound, when purchajsing the stock, to disclose to the shareholder facts, knowledge of which was acquired through his official position, although they were of a character which materially and largely affected the value of the stock. There, however, the Chief Justice dissented on the ground that a director does occupy a relation of trust, which makes him guilty of constructive fraud in acquiring the stock without disclosing facts which enhanced its value. The case has been doubted by Judge Thompson, who prefers the dis- senting opinion, saying that the decision of the majority "proceeds upon a conception which, if extended, would sanction nearly all of the fraud and injustice which the managers of corporations have committed against the stockholders." 3 Thomp. Corp. 4034 ; Cor- bin's Benj. Sales § 624. And in 2 Pomeroy's Eq. Jur. (2d ed.) § 1090, it is shown that directors are not only trustees of the corporation, but also "quasi or sub modo trustees for the stockholders with re- spect to their shares of stock." If, then, any sort of trustees, they are necessarily subject to the obligations and restrictions which inhere in that relation, as to property entrusted to them. The shares are but the paper evidence of the interest which the stockholder has in the property under the control of the director. In their sale the stockholder disposes, not only of the lithographed or engraved scrip, 504 DIRECTOES — DISQUALIFICATION. [cHAP. Ill, but of his holdings in property. And when the director .deals with a stockholder for the purchase of shares, he is not buying paper, but in effect is buying an undivided and substantial interest in property which has been committed to the director's care, custody, and con- trol. Equity abhors mere names, and looks to the substance. Whether the corporation be treated as an enlarged and amplified form of partnership and the director as managing partner, or whether he is called an agent or trustee elected by the stockholders to repre- sent them in the management of the concern, he occupies a fiduciary position, and is essentially within the rule which requires agents, attorneys, bailees, partners, trustees, or other fiduciaries to exercise the highest degree of good faith as to all matters connected with the property committed to their care. 2 Pom. Eq. Jur. (2d ed.) § 963 ; Stubinger v. Frey, 116 Ga. 396. It is matter of common knowledge that the market value of shares rises and falls, not only because of an increase or decrease in tangible property, but by reason of real or contemplated action on the part of managing officers; declaring or passing dividends; the making of fortunate or unfortunate contracts; the loss or gain of property in dispute; profitable or disadvantageous sales or leases. And to say that a director who has been placed where he himself may raise or depress the value of the stock, or in a position where he first knows of facts which may produce that result, may take advantage thereof, and buy from or sell to one whom he is directly representing, without making a full disclosure and putting the stockholder on an equaUty of knowledge as to these facts, would offer a premium for faithless silence, and give a reward for the suppression of truth. It would sanction concealment by one who is bound to speak, and permit him to take advantage of his own wrong — a thing abhorrent to a court of conscience. It is conceded that the position which the director occupies prevents him from making personal gains at the expense of the company or of the whole body of stockholders. But a rule that he is not trustee for the individual shareholders leads inevitably to the conclusion that while a director is bound to serve stockholders en masse, he may antagonize them one by one ; that he is an officer of the company, but may be the foe of each private in the ranks. When it is admitted, as it must be, both from the very nature of his duty and from the ruUngs of nearly all the cases, that he is trustee for the shareholder, how is it possible in principle to draw the Une and say that while trustee for some purposes, he is not for others immediately connected therewith? that the incidents of the trust relation stop short at the very point where it is vitally important to the shareholders that they should become active? For it must not be forgotten that the right to good faith in dealings concerning the stock is one of the very few which the individual shareholder is in a position to assert in his own name. Except in a few other in- SECT. 4.] OLIVER ET AL. V. OLIVER ET AL. 505 stances, the company itself is the only proper party to enforce the obligation arising from the trust relation of the director. In con- tracts with reference to the shares the stockholder himself can enforce the rights arising from the quasi trust. Civil Code, §§ 1858, 1859 1860. While not decided, it is in one case suggested that a stockholder in dealing with a director should recognize his superior opportu- nities for knowledge, and be warned thereby to exercise special caution. But the fiduciary relation fully warrants exactly the op- posite course. Here, at least, the beneficiary may be off guard, and may rely implicitly, not only on what is said, but also on the sup- position that nothing important will be left unsaid by the officer. Having previously trusted the director in the management of the company, he is not required, when selling his shares, suddenly to exhibit entire want of confidence. And directors generally recog- nize the obligations imposed, and act accordingly. But the pecul- iar powers and special opportunities of these fiduciaries call for an enlargement rather than a restriction of the rule requiring disclo- sures. Civil Code, §§ 402?, 3534. The obligations of his office bring him peculiarly within the general doctrine which declares that concealment of material facts may of itself amount to a fraud, where from any reason one .has the right to expect full information from another, or where one knows that the other is laboring under a a delusion in respect to the property sold, and yet keeps silence. Civil Code, §§ 3534, 4030, 4031. "A suppression of the truth may amount to a suggestion of falsehood ; and if, with intent to deceive, either party to a contract of sale conceals or suppresses a material fact which he is in good faith bound to disclose, this is evidence of and equivalent to a false representation." Stewart v. Wyoming Ranch Co., 128 U. S. 388. See also Fisher v. Budlong, 10 R. I. 525 ; Bowman v. Patrick, 36 Fed. Rep. 138 (2) ; Colton v. Stanford, 82 Cal. 351 ; Walsham v. Stainton, 1 DeGex, J. & S. 678 ; Porter v. Woodruff, 9 N. J. Eq. 174 ; Laidlaw v. Organ, 2 Wheat. 178 ; Kintzing V. McElrath, 5 Pa. St. 467; 2 Pom. Eq. Jur. (2d ed.) §§ 902, 903, 963, 1090. We base our decision on the obligation raised by the relation of director and stockholder, having purposely refrained from consid- ering the effect of the fact that the defendant is the brother of the petitioners, which, though apparent in the record, was not pressed in the briefs or arguments here. Judgment affirmed.^ ' Accord : Stewart v. Hams, 69 Kan. 498 ; Strong v. Repide, 213 U. S. 419 ; Com- monwealth Trust Co. ». Seltzer, 227 Pa. 410. ' (Semble) ; Jacquith v. Mason, 156 N. W. (Neb., 1916) 1041. A distinction of Strong v. Repide, supra, is attempted in Haverland v. Lane, 89 Wash. 557 In Von Au v. Magenheimer, 126 A. D. 257, affirmed 196 N. Y. 510, there was actual. 506 DIRECTORS — DISQUALIFICATION. [CHAP. 'ill. fraud in the purchase by the directors of plaintiff's stock. Miller, J. said: "I think a case of fraud and deceit was established. The defendants undertook to create the impression that the business of the company was not as profitable as it had been, and that unusual losses had been sustained since the last semi-annual dividend had been declared ; but the record shows that the company had never been more pros- perous, and that any unusual loss was a matter of bookkeeping. It will not do to say that the statement that there had been heavy losses was literally true. The law does not suffer deceit to be practiced by any trick or device. The defendants at least •owed the plaintiff the duty to speak the whole truth, .if they spoke at all, not literally in words, but truthfully in substance. When they undertook to explain the condition of the company they were bound not to deceive her either by the suppression of the truth or by making statements which, through literally true, were calculated to deceive. They are to be judged by what they intentionally induced her to think, not by what they literally said." . . . Speaking of the refusal of the directors for their own pur- poses and in bad faith, to make proper distribution of earnings via dividends, he said: "The discretion of directors in that respect is so unlimited that a successful suit to compel the distribution of earnings is almost unknown. That wide liiscretion affords many opportunities for oppression of minority by majority stockholders which can- not successfully be met within the corporation. The injured stockholder, as in this case, may not get clear proof of the bad faith of the directors until after he is forced out. The process applied to the plaintiff in this case has become so common with the growth of corporations that a coUoqmal phrase to express it has become current. (See Century Dictionary, 'To freeze out.') The plaintiff's withdrawal was not vol- untary. She was constrained, as most of us would be, to take the best terms offered. The defendants profited and she was injured by exactly the difference between the value of the stock and what they paid her, and having accomplished their purpose they should not now be heard to say that that was the indirect result of their wrong ; that their victim should have kept her stock and sought redress through the corpora- tion, which they did not intend to, and, in fact, did not harm. . . . While the wrong now being considered was not technically a deceit its effect was to defraud the plain- tiff, and, in respect of the remedy at least, should be treated as a fraud. It was a species of fraud ; by the wrongful acts of the defendants the plaintiff was led to think that her stock was worth less than in fact it was, and we should not indulge in hair- splitting discriminations between that kind of deceit and a fraudulent misrepresen- tation or concealment respecting an existing fact, in view of the relations of the parties. If their relation was not strictly of the fiduciary character of trustee and cestui que trust, it was in a sense fiduciary; at least the parties did not deal on equal terms; indirectly, if not actually, the defendants were the agents or trustees of the plaintiff, for in truth the entity called the corporation but represents the stockholders ; in law the two are distinct, as the stockholders own merely their shares, not the property of the corporation ; but in fact ^ach share represents a given interest in the property of the corporation. While the defendants did not have control of the plaintiff's shares, they had control of the property represented by said shares, and their management of that property affected the value of the shares precisely as though the corporate prop- erty and the shares were one and the same. The defendants were not under the disabilities of trustees in respect of dealings with a cestui que trust, but their superior position imposed upon them some duty to the plaintiff as well as to the corporation, at least the duty not to take advantage of the opportunity afforded by their position to wrong her by any affirmative act designed to injure. Having the power to so man- age the affairs of the corporation as to affect the value of her shares, they owed her the duty to refrain from intentionally abusing that power actually or apparently to depress the value of those shares for the purpose of acquiring them at an undervalua- tion. When they succeeded in securing her stock by that misuse of power they com- mitted a breach of duty to her resulting in injury, and it is immaterial that their act may also have wronged the corporation. In view of the conditions under which busi- ness is now conducted it will be very unfortunate if it shall be held that the duty of corporate managers in respect of their conduct of the corporate affairs is solely to the corporate entity, and that however great a designed injury to an individual stock- holder may be he can only get redress through the corporation." SECT. 5.] speeing's appeal. 507 Section 5. — Liabilities. SPERING'S APPEAL.i 71 Pa. 11. 1872. Shahswood, J. This bill was filed by the appellant as the assignee of the "National Safety Insurance and Trust Company," against the defendants, who were directors of the corporation, alleging fraudulent, illegal and improper management of its affairs, extend- ing over a period of more than ten years, from 1850 to 1861. The case upon the bill, answers and proofs was referred to a Master, who reported that the bill should be dismissed and a pro fc/rma decree was entered accordingly. Upon a careful examination of the record and paper-books, which make up nine hundred and sixty-six printed octavo pages, we have come to the following conclusions of fact, which are supported also by the opinion of the Master. First, That no fraudulent conduct is imputable to any one of the defendants, at any period of time during their administration of the trust. No pecuniary advantage, to the amount of a dollar, was ever realized or sought by any one of them. There was no embezzlement or misappropriation of the funds by any officer or agent of the corporation. There is no pretence that the defendants are liable to account upon either of these grounds. Second, That in regard to investments, and the mode of transacting the business — the legality of which under the charter is questioned — the defendants tiniformly acted under legal advice. " It appears in the evidence," says the report, "that the defendants always acted upon legal advice, as to the mode of doing business and making in- vestriients. No important step was ever taken without first obtain- ing the advice of the solicitor." Third, Looking at the history of the institution in the light of subsequent events, its direction was unwise and unfortunate. The money of the depositors was not in- vested in first-rate and perfectly safe securities, as they engaged to do, and as the funds of such a charity imquestionably ought to be. Loans were largely made upon very doubtful collaterals. Their investments in real estate were injudicious. They lost from a failure to insure. They sought to realize large profits at usurious rates of interest. The crash came in 1860, just before the breaking oiit of the civil war. All doubtful securities fell in the market. Their debtors went to the wall. In the vain attempt to sustain their credit ' Statement of facts and portions of opinion omitted. 508 DIRECTORS — LIABILITIES. [CHAP. III. they sacrificed securities and collaterals. Had they stopped and made an assignment at once, a. large amount of the loss which subse- quently fell upon them would undoubtedly have been prevented. The story might be much amplified by entering into a detail of par- ticulars: but the conclusion would be the same. Such is a brief r6sum6 of the facts. It is not the history of this institution alone, but of many others in this country. The broad question then is, whether upon such a state of facts, the directors of a . corporation can be made to account for losses arising from mismanagement merely. It is by no means a well-settled point what is the precise relation which directors sustain to stockholders. They are undoubtedly said in many authorities to be trustees, but that as I apprehend is only in a general sense, as we term an agent or any bailee intrusted with the care and management of the property of another. It is certain that they are not technical trustees. They can only be regarded as mandataries — persons who have gratuitously under- taken to perform certain duties, and who are therefore bound to apply ordinary skill and diligence, but no more. Indeed, as the directors are themselves stockholders, interested as well as all others that the affairs and business of the corporation should be successful, when we ascertain and determine that they have not sought to make any profit not common to all the stockholders, we raise a strong presumption that they have brought to the administration their best judgment and skill. Ought they to be held responsible for mis- takes of judgment or want of skill and knowledge? They have been requested by their co-stockholders to take their positions, and they have given their services without compensation. We are dealing now with their responsibility to stockholders, not to outside parties — creditors and depositors. It is unnecessary to consider what the rule may be as to them. Upon a close examination of all the reported cases, althdugh there are many dicta not easily reconcilable, yet I have found no judgment or decree which has held directors to ac- count, except when they have themselves been personally guilty of some fraud on the corporation, or have known and connived at some fraud in others, or where such fraud might have been prevented had they given ordinary attention to their duties. I do hot mean to say by any means that their responsibility is limited to these cases, and that there might not exist' such a case of negligence or of acts clearly ultra vires, as would make perfectly honest directors personally liable. But it is evident that gentlemen elected by the stockholders from their own body ought not to be judged by the same strict standard as the agent or trustee of a private estate. Were such a rule applied, no gentlemen of character and responsibiUty would be found willing to accept such places. The authorities I think fully endorse these views. SECT. 5.] spering's appeal. 50 In Turquard v. Marshall, 3 Equity (Law Rep.) 127, which is th last EngUsh case on the subject. Lord Romilly, M. R., held directoi liable, first, for not calling a meeting of the shareholders under clause of the charter requiring them to do so, on the exhaustion c their surplus fund, and second, for loaning money to one of themselve without security. He used however this language : that if director have been guilty of gross and palpable breach of trust, which canno be set right by a public meeting of the company, they may be mad responsible for their misconduct. On appeal, however, the decre of Lord Romilly, holding the directors personally hable, was re versed by Lord Chancellor Hatherley, 5 Chancery Appeals (Lai Rep.) 386. He said: "There was no fraud alleged, nor was i alleged that the directors apphed the funds of the company to thei own use, or in any way except in what they thought was for th benefit of the company, however incorrect their course might hav been." Then as to the loan to Higgins (the co-director): "Th statement of this in the bill was only as part of the general miscoj] duct of the directors, and the loan was only mentioned as one of th losses incurred. There was no specific allegation of any impropriet; in lending the money to him, nor was any specific relief prayed i: this respect. It was within the powers of the deed to lend to brother director, and however foolish the loan might have been, s long as it was within the powers of the directors, the court could no interfere and make them liable. They were intrusted with fu^ powers of lending the money, and it was part of the business of th concern to trust people with money, and their trusting to an undu extent was not a matter with which they could be fixed, unless ther was something more alleged, as, for instance, that it was done fraudt lently and improperly and not merely by a default of judgmeni Whatever may have been the amount lent to anybody, howev€ ridiculous and absurd their conduct might seem, it was the misfo: tune of the company that they chose such unwise directors ; but a long as they kept within the powers of their deed, the court coul not interfere with the discretion exercised by them." In Scott V. Depeyster, 1 Edw. Ch. Rep. 513, the object of the bi was to make the directors liable for money embezzled by their seen tary on the ground of their negligence. So, Robinson v. Smith, Paige 222, the bill alleged that the directors had engaged in a gamblin speculation in stocks, wholly unauthorized by the charter, whic was carried on to subserve their own individual interests and pui poses. On demurrer to the bill, it was of course held that the direc tors of a corporation, who wilfully abuse their trust or misappl the funds of the company by which a loss is sustained, are personal! hable as trustees to make good that loss, and they are also liable : they suffer the corporate funds to be lost or wasted by gross negl: gence and inattention to the duties of their trust. Lexington < 510 DIRECTORS — LIABILITIES. [CHAP. III. Ohio Railroad Co. v. Bridge, 7 B. Monroe 556, was a bill by creditors against directors for making a dividend when no profits existed. "We are satisfied," say the court, "that if they were guilty of negli- gence to any extent it is not of that gross and palpable character that would render their conduct so reprehensible as to subject them, to the imputation of a personal or even a legal fraud." In Godbold V. Branch Bank at Mobile, 11 Alab. 191, it was decided that the di- rectors of a bank are not responsible for an injury to the bank caused by their act, originating in an error of judgment, unless the act be so grossly wrong as to warrant the imputation of fraud or the want of the necessary knowledge for the performance of the duty assumed by them on accepting the agency. In Hodges v. New England Screw Company, 1 Rhode Island 312, in dismissing the bill, Greene, C. J., observed : "It does not appear that the directors sought or secured to themselves any benefit or advantages which was not common to all the other stockholders of the Screw Company." ^ See also Neall V. nm, 16 CaUfornia 145. It seems unnecessary to pursue this investigation any further. These citations, which might be multipUed, establish, as it seems to me, that while directors are personally responsible to the stockholders for any losses resulting froin fraud, embezzlement or wilful misconduct or breach of trust for their own benefit and not for the benefit of the stockholders, for gross inattention and negUgence by which such fraud or misconduct has been perpetrated by agents, officers or co- directors, yet they are not liable for mistakes of judgment, even though they may be so gross as to appear to us absurd and ridiculous, pro- vided they are honest and provided they are fairly within the scope of the powers and discretion confided to the managing body. In regard to the question last adverted to, whether the defendants should be held responsible for any of their acts and investments as ultra vires, it might be sufficient to notice the fact that the charter of this corporation was a very complicated one, made up by compar- ing together no less than sixteen different acts of incorporation or supplements. The ingenuity of the young gentlemen of counsel for the defendants has been exercised in presenting to the court a genea- logical map or pedigree, tracing the Acts of Assembly, from one to another. To have mistaken the extent of their powers under such circumstances would not have been matter of surprise even in the most timid and cautious. We may adopt upon this point the lan- guage of C. J. Greene in Hodges v. New England Screw Co., 1 Rhode Island 312. "In considering the question of the personal responsi- bility of the directors we shall assume that they violated the charter of the Screw Company. The question then will be, was such viola- tion the result of mistake as to their powers, and if so did they fall ' This does not ipso jacto exonerate the defendant. See Leeds &c. Co. j). Shepherd, infra, and cases cited in note 2, page 515, infra. SECT. 5.] spering's appeal. 5H into the mistake from want of proper care, such care as a man of ordmary prudence practises in his own affairs. For, if the mistake be such as with proper care might have been avoided, they ought to be hable. If on the other hand, the niistake be such as the directors might well make, notwithstanding the exercise of proper care, and if they acted in good faith and for the benefit of the Screw Company, they ought not to be liable." We may say in this case, con- ceding that the directors did violate the charter, it was a question upon which with all due care they might have made an honest mis- take ; and moreover, it appears by the evidence, and is so reported, that they acted throughout by the advice of their counsel. It is well settled that trustees will be prptected from responsibility under such circumstances: Lewin on Trusts 595; Vez v. Emery, 5 Ves. 141 ; Calhoun's Estate, 6 "Watts 189. Decree affirmed, and appeal dismissed at the costs of the estate in the hands of the appellants} ' In North Hudson B. & L. Ass'n. v. Chads, 82 Wis. 460, Pinnet, J. said : "The rule of liability has been the subject of much discussion in the recent case of Briggs v. Spaulding, 141 XT. S. 132, in which, although there was a strong dissent, the rule may- be regarded as settled . . . that directors, although often called 'trustees,' are not such in any technical sense, but that they are mandataries, the relation between them and the corporation being rather that of principal and agent, but under circumstances they may be treated as occupying, in consequence of the powers conferred on them, the position of trustees to cestui que trustent: that the degree of care required of them depends upon the subject to which it is to be applied, and each case is to be determined upon its own circumstances ; that, as they render their services gratuitously, they are not to be held to the degree of responsibility of bailees for hire, or expected to devote their whole time and attention to their duties ; that they are not, in the absence of any element of positive misfeasance, and solely on the ground of passive negligence, to be held liable, uqless their negligence is gross, or they are fairly subject to the im- putation of a want of good faith. It is to be remembered that they have the same interests to protect and subserve as other stockholders, and self-interest naturally prompts them to look after their own, and the degree of care they are bound to exer- cise is that which ordinarily prudent and diligent men would exercise under similar circumstances in respect to a like gratuitous employment, regard being had to the usages of business and the circumstances of each particular case ; that they are not liable, in the absence of fraud or intentional breach of trust, for negligence, mistakes of judgment and bad management in making investments on doubtful or insuiScient security. Where they have not profited personally by their bad management, or appropriated any of the property of the corporation to their own use, courts of equity treat them with indulgence. Were a more rigid rule to be applied, it would be diffi- cult to get men of character and pecuniary responsibility to fill such positions. Thomp. Liab. Off. Corp. 357; Beach Corp., § 249. These views are sustained in Briggs v. Spaulding, 141 IT. S. 130 ; Spering's Appeal, 71 Pa. St. 11 ; Citizens' B., L. & S. Assn. V. Coriell, 34 N. J. Eq. 383, 392 ; Swentzel ». Bank (Pa. Sup.), 23 Atl. Rep. 413 ; In re Forest of Dean Coal Min. Co., L. R. 10 Ch. Div. 450; Ackerman v. Halsey, 37 N. J. Eq. 363 ; Hun v. Cary, 82- N. Y. 65 ; In re Denham, L. R. 25 Ch. Div. 752 ; Watt's Appeal, 78 Pa. St. 391." In Cass V. Realty Securities Co., 148 A. D. 96, affirmed 206 N. Y. 649, Scott, J. said : ' 'Directors are not liable for mere errors of judgment if they act without cor- rupt intent. People ». Equitable Life Assurance Society, 124 App. Div. 731, and cases there cited. And this is equally true whether the mistake of judgment refers to the law or the facts. It was so held in Seymour ». Spring Forest Cemetery Ass'n., 4 App. Div. 359 ; affirmed in opinion below 157 N. Y. 697, wherein the claim against the directors was . . . that the directors had failed to apply to the proper purpose certain funds of the association." 512 DIEECTOKS — LIABILITIES. [CHAP. III. LEEDS ESTATE, BUILDING AND INVESTMENT CO. v. SHEPHERD.i L. R. 36 Ch. Div. 787. 1887. Action by a company, formed, under the Companies Act of 1862 for the purpose of lending money on security, now in Uquidation, against former directors, seeking to render them liable, amongst other things, for breach of duty in making payment of dividends out of capital. Stirling, J. There appears to me to be a fundamental difference between the two classes of acts in respect of which it is sought to fix the Defendants with habiUty. It is now settled by decisions of the House of Lords and Court of Appeal that the capital of a company formed under the Act of 1862 can be legally applied only for the purposes specified in the articles of association. The capital may be lost in the course of such appUcation, and creditors or other persons dealing with the company must take that risk ; but they are entitled to act on the faith that no part of the capital will be ap- plied to any other purpose, and in particular that no part of the capital will be returned to the shareholders except in the cases and under the safeguards in and under which a reduction of capital is permitted by the various Acts of ParUament. Among the objects for which the present. company was formed was the lending of money on security ; and the acts of the directors with reference to any advances they made were within the powers of the company: but if (as is alleged) they paid dividends out of capital, their acts in this respect were beyond the powers of the com- pany and contrary to law. It has now been decided that directors are trustees or gpasi trustees of the capital of the conipany, and are liable as trustees for any breach of duty as regards the' application of it, but when such liability is sought to be enforced it has to be determined on the facts of each particular case whether a breach of duty has been committed. Now it is obvious that the duties of the directors of a trading company with reference to advances on security made in the course of conducting the business of a company formed for the purpose of making such advances are totally different from those (for example) of the trustees of a settlement. The funds which form the subject of a settlement are intended to be preserved for the benefit of those who may successively become entitled to them, and it is the duty of trustees making advances out of such "funds to take care that the' ' Statement of facts condensed ; portions of opinion omitted. SECT. 5.] LEEDS CO. V. SHEPHERD. 513 securities they obtain are such as will expose the beneficiaries to as little risk of loss as may be. The funds embarked in a trading com- pany, on the other hand, are placed under the control of the directors in order that they may be employed for the acquisition of gain, and risk (greater or less, according to circumstances) is of the very es- sence of such ernployment. When the advance of money on security is one of the objects of such a company the acts of directors with reference to the advances are to be judged not by the rules which have been laid down as to the investment of settled funds but (more nearly at all events) by those which regulate the duties of the manag- ing partners of an ordinary trading firm as between themselves and those partners who do not take an active part in the conduct of the firm's business. Accordingly, it is settled by such cases as Overend & Gurney Co. V. Gibb 1 and Turquand v. Marshall ^ that directors are not to be made liable for loss occasioned by mere imprudence or error of judg- ment in the exercise of the powers conferred on them. The case sought to be made against the Defendants with regard to the ad- vances complained of falls within this rule, a;nd, indeed, after the evidence on behalf of the Plaintiff was given this head of complaint was abandoned by the Plaintiff's counsel, and so much of the action as relates to it must be dismissed. The case as regards the payment of dividends out of capital stands in a very different position, and the law as regards it is perhaps not yet completely settled. It follows from the decisions in In re National Funds Assurance Company ^ and Flitcroft's Case * that directors who make such payments either with acttial knowledge thatT;he capital of the company is being paisappropriated or with knowledge of the facts which establish the misappropriation are liable as for a breach of trust. The present case does not fall within those which I have just mentioned, for I am unable on the evidence before me to arrive at the conclusion that the directors had actual knowledge of the real state of the company's affairs. I have, however, the guidance of the recent judgment of Mr. Justice Kay in In re Oxford Benefit Building and Investment Society ,« a case which, although it is not precisely identical with the present, nevertheless closely resembles it in many of its features. In that case as in the present it was contended that directors who had continually paid dividends out of capital could not be made liable unless their conduct amounted to fraud. " From that proposi- tion," says the learned Judge, "I must express my dissent," and he accordingly held that directors who had omitted to lay before the shareholders proper accounts of income and expenditure and balance- sheets, and who acted negligently or carelessly as regards the ascer- 1 Law Rep. 5 H. L. 480. ' Ibid., 4 Ch 376. » 10 Ch. D. 118. * 21 Ch. D. 519. » 35 Ch. D. 502. 514 DIRECTORS — LIABILITIES. [CHAP. lU. taining of the profits which they professed to divide, were jointly and severally liable to repay the sums improperly paid out of capital by way of dividends. The law prohibits the payment of dividends out of capital, and it may well be that directors are called upon to exercise greater care when they are in danger of violating such prohibition than when they apply the capital for purposes unquestionably within the ob- jects of the company. So, if a company were formed for the purpose of working a mine, it might be the duty of those engaged in super- intending its operations to exercise greater care when they approach their neighbour's property and are in danger of committing, a tres- pass than when the scene of action is undeniably within the bound- aries of the company's property. Another case cited, and one which undoubtedly is in point, is Ranee's Case.^ It was there sought to compel a director to refund a dividend or bonus alleged to have been improperly paid out of capital, and the appHcation came in the first instance before Lord Romilly, who in his judgment laid it down that "in order to make directors liable in a case like this there must be either proof of distinct fraud or else of such gross and wilful negligence as is equivalent to fraud" ; and he held that in the particular case the director was not liable. If this statement of the law had been adopted by the Court of Appeal (who reversed Lord Romilly's decision) it would no doubt have been a strong authority in favour of the Defendants, but neither of the very eminent Judges who then constituted the Court of Ap- peal appears to me to have taken that view of the law. It seems to me that the views expressed by the learned Judges who decided Ranee's Case are consistent- with the proposition that directors who are proved to have in fact paid a dividend out of capital fail to excuse themselves if they have not taken reasonable care to secure the preparation of estimates and statements of accotint such as it was their duty to prepare and submit to the shareholders, and have declared the dividends complained of without having exercised thereon their judgment as mercantile men on the estimates and state- ments of account submitted to them ; and if this be so. In re Oxford Benefit Building and Investment Society does not, in my opinion, conflict with Ranee's Case. ["The company never made any annual profits except in one year when it made a profit of less than 5 per cent., but the directors in every year from 1870, when the company commenced business, declared and paid a dividend of 5 per cent, and upwards. Such pay- ments were in fact made out of capital. "The balance-sheets on which the dividends were declared were prepared not by the directors, but by the manager. They were de- lusive, they over-estimated the assets of the company, and were ' Law Rep. 6 Ch. 104. SECT. 5.] LEEDS CO. V. SHEPHERD. 515 framed with the object of showing a profit available for a dividend. The auditor never looked at the articles of association but accepted the statements of the manager, and certified from time to time that the accounts submitted to him were true copies of those shewn in the books of the company. No proper statement of income and expenditure or auditor's report was ever laid before the company. The directors did not know the true state of the company's affairs or that the balance-sheets were delusive. .They never exercised any judgment with reference to the accounts, but rehed entirely on the manager and auditor : — "Held (1), that the directors had fallen short of the standard of care which they ought to have applied to the affairs of the company ; and that the onus was upon them to shew that the dividends had ,been paid out of profits : — , "Held (2), that upon the evidence they had failed to show this, and that they were jointly and severally liable to make good all sums improperly paid out of capital in respect of dividends to the shareholders."] ^ The form of the order made in In re Oxford Building and Invest- ment Society, which was well considered, must be followed in this > The matter in brackets is taken from the head notes. ^ Cf. Dovey v. Cory, L. R. (1901) A. C. 477, where dividends were in fact paid out of capital but the director exonerated from liability. Lord Chancellor HAiiSBTjKT said : "The charge of neglect appears to rest on the assertion that Mr. Cory, like the other directors, did not attend to any details of business not brought before them by the general manager or the chairman, and the argument raises a serious question as to the responsibility of all persons holding positions like that of directors — how far they are called upon to distrust and be on their guard against the possibility of fraud being committed by their subordinates of every degree. It is obvious that if there is such a duty it must render anything like an inteUigeut devolution of labor impossible. Was Mr. Cory to turn himself into an auditor, a managing director, a chairman, and find out whether auditors, managing directors and chairman were all alike deceiving him? ... I cannot think that it can be expected of a director that he should be watching either the inferior officers of the bank or verifying the calculations of the auditors themselves. The business of life could not go on if people could not trust those who are put into a position of trust for the express purpose of attending to details of management. If Mr. Cory was deceived by his own officers — and the theory of his being free from all fraud assumes under the circumstances that he was^— there appears to me to be no case against him at all. The provision made for bad debts, it is well said, was inadequate, but those who assured him that it was adequate were the very persons who were to attend to that part of the business — and so of the rest. If the state and condition of the bank were what were represented, then no one will say that the sum paid in dividends' was excessive. If I assume, as I do, that Mr. Cory acted upon representations made to him which he believed and which came from the officers of the bank to whom he was, in my judgment, justified in giving credit, the discussion of whether the dividends actually paid were or were not properly divis- ible, has no bearing upon Mr. Cory's liability." But see Gibbons v. Anderson, 80 Fed. 345, in which Severns, J. said : From the time of their election the board of directors seems to have slumbered over the affairs of the bank while its managing officer was plundering it of all that it owned, and much that belonged to others. Once in a whUe there seems to have been some faint con- Bciousness, but nothing which indicates any activity. But they say, and have called witnesses to prove, that acting in accord with the usage and custom of national banks. 516 DIRECTORS — LIABILITIES. " [CHAP. III. and having called into the management a person in whom they had entire confidence, which was justified by his reputation, and committed the affairs of the bank to him, they were not bound to have doubt and distrust of his correct dealing until something occurred which should arouse suspicion. ... To begin with, it is to be assumed in every case that the directors have not selected any other than a man of good repu- tation for capacity and integrity. Any other idea assumes that they have been guilty at the outset of a glaring faxilt. Further, it is a well-known fact that a large propor- tion of the disasters which befall banking institutions come from the malfeasance of j^st such men, and it would be manifest to everybody that only a satisfactory and quieting reply would be made by the official who has any reason for concealment. . . . It is the right and duty of the board to maintain a supervision of the affairs of the bank ; to have a general knowledge of the manner in which its business is conducted, and of the character of that business ; and to have at least such a degree of intimacy with it? affairs as to know to whom, and upon what security, its large lines of credit are given ; and generally to know of, and give direction with regard to, the important and general affairs of the bank, of which the cashier executes the details. They are not expected to watch the routine of every day's business, or observe the particular state of the accounts, unless there is special reason ; nor are they to be held responsible for any sudden and unforeseen dereliction of executive officers, or other accidents which there was no reason to apprehend. . . . The idea is not to be tolerated that' they serve as merely gilded ornaments of the institution, to enhance its attractiveness, or that their reputations should be used as a lure to customers. What the public suppose, and have the right to suppose, is that those men have been selected by reason of their high character for integrity, their sound judgment, and their capacity for conducting the affairs of the bank safely and securely. The public act on this pre- sumption, and trust their property with the bank in the confidence that the directors will discharge a substantial duty. . . . Eecurring to the present case, it is clear that unless the board of directors is to be absolved upon the theory that they were justified in committing the affairs of the bank to Moore, and relying upon his good conduct, and his answers to the perfunctory questions which were occasionally put to him, until they were brought to the facts by the collapse of the bank upon the first prick of a financial stringency such as came upon the country in the summer of 1893, they must be held liable." So held. In E. L. Moore & Co. v. Miurchison, 226 Fed. 679, a corporation with a capital stock of $10,000, purchased for $2500 certain accounts receivable and carried them on its books at their full face value of $19,109.86. It also purchased for $7500, certain merchandise and fixtures, inventoried but not appraised in a previous bankruptcy matter at $15,484.81, at which figure it was carried on its boolcs. Out of the apparent but fictitious surplus, dividends aggregating 70% were paid for five years, where- upon the corporation became bankrupt, its liabilities being ten times its assets. The book accounts aforesaid yielded only $1,657.12. Held: Directors must return to trustee in bankruptcy the dividends illegally declared, because they must have known that the majority of the book accounts reckoned in full as assets were worthless and any reasonable or intelligent effort to ascertain the real situation would have shown that the company was doing business on a losing basis and that the dividends for the most part were being paid from the meagre capital put in. Knapp, J. said : "The question of the liability of these directors for the dividends they declared is essentially a question of fact, and no unfamiliar principles of law are involved. It is well settled that, when directors declare a dividend in good faith and without negligence, they are not to be held liable merely because the dividend turns out to have impaired the capi- tal stock. Reid v. Manufacturing Co., 40 Ga. 98; Chick v. Fuller, 114 Fed. 22; Briggs !). Spaulding, 141 U. S. 132 ; McDonald i). Williams, 174 U. S. 397. But it is equally well settled that directors cannot escape liability, when they are in actual charge of the business of the corporation, and know, or ought to know, that the divi- dends they declare have not been earned. Hauser v. Tate, 85 N. C. 85 ; Spurr v. United States, 87 Fed. 701 ; Bynum v. Scott, 217 Fed. 122 ; Finn v. Brown, 142 U. S. 56." In Williams v. McDonald, 42 N. J. Eq. 392, a director of a savings bank was held liable for loss resulting in investing some of its funds on a mortgage on real property which, contrary to the statutory prohibition, was riot worth at least double the sum so invested and all other encumbrance. Scuddee, J. said : "Defendant coiild not be chargeable for any mere error of judgment or mistake in estimating the value of property, using reasonable and ordinary care in forming that judgment and making the SECT. 5.] HUN V. CAKY. " 517 HUN V. CARY.i 82 N. Y. 65. 1880. Earl, J. This action was brought by the receiver of the Central Savings Bank of the city of New York, against the defendants, who were trustees of the bank, to recover damages which, it is alleged, they caused the bank by their misconduct as such trustees. The first question to be considered is the measure of fideUty, care estimate, but here there was no such error or mistake, for he knew the purchase price of the property, was well acquainted with its rentals, its location and advantages. . . . It is not essential to prove that he acted fraudulently or that he derived any benefit from the loan ; it is sufficient to show that there was a culpable lack of prudence, or failure to exercise with ordinary care his functions as quasi trustee of the funds of the bank, by which loss was sustained." In Gerhard v. Walsh, 80 N. J. Eq. 203, directors of a building and loan association were held liable to its shareholders for losses resulting from investment of its funds in purchase of the preferred stock of a manufacturing corporation, irrespective of their good faith. There was no express prohibition against such purchase ; the direc- tors were, in fact, empowered to loan its funds, when lying unproductive, to its share- holders and " others than shareholders, on undoubted security." Held : (1) The association had no power to purchase stock in a manufacturing corporation, for such power exists only when the purpose to exercise it is expressed in its certificate of in- corporation or else when its exercise is necessary or convenient to enable the holding company to attain the objects for which it was created. State v. Atlantic City &c. R. R. Co., 77 N. J. L. 465, followed (see note on page 282 ante) ; (2) The distinction between purchasing a security and loaning upon security is not technical but substan- tial, for, in the former, title is taken, while, in the latter, the loan is made upon promise of repayment and the security is taken at a part only of its actual value ; (3) There being no ratification by the stockholders, defendants, who, directed by statute as to what they may do, have gone beyond that statute and done something else which results in loss, must make good that loss to the stockholders. In Hill V. Murphy, 212 Mass. 1, defendant ditectors published a false and malicious libel in the name of the corporation to gratify their own personal ends. The corpora- tion was mulcted in damages, which defendants paid out of its treasury. Held : Defendants must indemnify the corporation for the loss sustained. De Coukcy, J. said : "When directors intentionally act ultra vires of the corporation, they are liable for the losses it sustains in consequence. Richardson v. Clinton Wall Trunk Co., 181 Mass. 580; Greenfield Savings Bank v. Abercrombie, 211 Mass. 252, and cases cited ; Leeds Estate, Building & Loan Association v. Shepherd, 36 Ch. D. 787 ; Wil- liams V. McDonald, 42 N. J. Eq. 392. And regardless of whether the publishing of the Ubel was within the powers of the corporation the tortious act, alleged to be wilfully done by the directors to gratify their own personal ends, was a breach of the duty they owed as quasi trustees and it has resulted in loss to the corporation. . . . The lia- bility of directors is not limited to cases where the loss to the corporation results from fraudttlent misconduct on their part, or where they have received financial profit which in equity belongs to the company. Von Arnim v. American Tube Works, 188 Mass. 515; Greenfield Savings Bank v. Simons, 133 Mass. 415. And the familiar decisions of non-liability of directors, acting honestly and within their powers for losses sustained by the corporation through their negligence, do not apply. Lyman v. Bonney, 118 Mass. 222; Overend, Gurney & Co. v. Gibb, L. R. 5 H. L. 480; Hun V. Gary, 82 N. Y. 65 ; Savings Bank of Louisville ». Caperton, 87 Ky. 306. See Phoemx Ins. Co. ■„. Feissell, 142 Mass. 513." „ Cf. Hodges V. New England Screw Co., 1 R. I. 312, rated m extenso by Sharswood, J. in Spering's Appeal, ante at page 510. ' Portions of opinion omitted. 518 ' " DIRECTORS — LIABILITIES. [CHAP. III. and diligence which such trustees owe to such a bank and its de- positors. The relation existing between the corporation and its trustees is mainly that of principal and agent, and the relation be- tween the trustees and the depositors is similar to that of trustee and cestui que trust. The trustees are bound to observe the limits placed upon their powers in the charter, and if they transcend such limits and cause damage, they incur liabihty. If they act fraudulently or do a willful wrong, it is not doubted that they may be held for all the damage they cause to the bank or its depositors. But if they act in good faith within the hmits of powers conferred, using proper prudence and diligence, they are not responsible for mere mistakes or errors of judgment. That the trustees of such corporations are bound to use some diUgence in the discharge of their duties cannot be disputed. All the authorities hold so. What degree of care and dihgence are they bound to exercise? Not the highest degree, not such as a very vigilant or extremely careful person would exercise. If such were required, it would be difficult to find trustees who would incur the responsibility of such trust positions. It would not be proper to answer the question by saying the lowest degree. Few persons would be willing to deposit money in savings banks, or to take stock in corporations, with the understanding that the trustees or directors were bound only to exercise sh'ght care, such as inattentive persoiis would give to their own business, in the management of the large and important interests committed to their hands. When one deposits money in a savings bank, or takes stock in a corporation, thus divesting himself of the immediate control of his property, he expects, and has the right to expect, that the trustees or directors, who are chosen to take his place in the management and control of his property, will exercise ordinary care. and prudence in the trusts committed to them — the same degree of care and prudence,that men prompted by self-interest generally exercise in their own affairs. When one voluntarily takes the position of trustee or director of a corporation, good faith, exact justice, and public policy unite in requiring of him such a degree of care and prudence, and it is a gross breach of duty — crassa negligentia — not to bestow them. It is impossible to give the measure of culpable negligence for all cases, as the degree of care required depends upon the subjects to which it is to be applied. (First Nat. Bank v. Ocean Nat. Bank, 60 N. Y. 278). What would be slight neglect in the care of a quantity of iron might be gross neglect in the care of a jewel. What would be slight neglect in the care exercised in the affairs of a turnpike corpo- ration, or even of a manufacturing corporation, might be gross neglect in the care exercised in the management of a savings bank intrusted with the savings of a multitude of poor people, depending for its life upon credit and liable to be wrecked by the breath of suspicion. There is a classification of negligence to be found in the books, not SECT. 5.] HTJN V. GARY. 519 always of practical value and yet sometimes serviceable, into slight negligence, gross negligence, and that degree of neghgence inter- mediate the two, attributed to the absence of ordinary care ; and the claim on behalf of these trustees is that they can only be held respon- sible in this action in consequence of gross neghgence, according to this classification. If gross negligence be taken according to its ordinary meaning — as something nearly approaching fraud or bad faith — I cannot yield to this claim ; and if there are any authorities upholding the claim, I emphatically dissent from them. It seems to me that it would be a monstrous proposition to hold that trustees, intrusted with the management of the property, in- terests and business of other people, who divest themselves of the management and confide in them, are bound to give only sUght care to the duties of their trust, and are liable only in case of gross inat- tention and neghgence; and I have found no authority fully up- holding such a proposition. It is true that authorities are found which hold that trustees are Hable only for crassa negligentia, which literally means gross neghgence; but that phrase has been defined to mean the absence of ordinary care and dihgence adequate to the particular case. In Scott v. De Peyster (1 Edw. Ch. 513, 543) — a case much cited — the learned Vice Chancellor said : "I think the question in all such cases should and must necessarily be, whether they (directors) have omitted that care which men of common pru- dence take of their own concerns. To require more, would be adopting too rigid a rule and rendering them liable for sUght neglect ; while to reqtdre less, would be relaxing too much the obligation which binds them to vigilance and attention in regard to the interests of those confided to their care, and expose them to hability for gross neglect only — which is very little short of fraud itself." In the case of The Liquidators of the Western Bank v. Douglas (11 Session Cases [3d series], 112 [Scotch]), it is said: " Whatever the duties (of di- rectors) are, they must be discharged with fidelity and conscience, and with ordinary and reasonable care. It is not necessary that I should attempt to define where excusable remissness ends and gross neghgence begins. That must depend to a large extent on the cir- cumstances. It is enough to say that gross negligence in the per- formance of such a duty, the want of reasonable and ordinary fidelity and care, will impose liabihty for loss thereby occasioned." In The Charitable Corporation v. Sutton (2 Atkyns, 405) Lord Chancellor Haedwicke said, that a person who accepted the ofiice of director of a corporation "is obliged to execute it with fidelity and reasonable diligence," although he acts without compensation. In Litchfield V. White (3 Sandf. 545) Sandford, J., said: "In general, a trustee is bound to manage and employ the trust property for the benefit of the cestui que trust with the care and dihgence of a provident owner. Consequently he is hable for every loss sustained by reason of his 520 DIRECTORS — LIABILITIES. [CHAP. III. negligence, want of caution, or mistake, as well as positive miscon- duct." . In Spering's Appeal, Judge Sharswood said that directors "are not liable for mistakes of judgment, even though they may be so gross as to appear to us absurd and ridiculous, provided they were honest, and provided they are fairly within the scope of the powers and discretion confided to the managing body." As I understand this language, I cannot assent to it as properly defining to any extent the nature of a director's responsibility. Like a mandatary, to whom he has been likened, he is bound not only to exercise proper care and diligence, but ordinary skill and judgment. As he is bound to ex- ercise ordinary skill and judgment, he cannot set up that he did not possess them. When damage is caused by his want of judgment, he cannot excuse himself by alleging his gross ignorance. One who voluntarily takes the position of director, and invites confidence in that relation, undertakes, Hke a mandatary, with those whom he represents or for whom he acts, that he possesses at least ordinary knowledge and skill, and that he will bring them to bear in the dis- charge of his duties. (Story on Bailments, § 182.) Such is the rule applicable to public officers, to professional men and to mechanics, and such is the rule which must be apphcable to every person who undertakes to act for another in a situation or employment requiring skill and knowledge; and it matters not that the service is to be rendered gratuitously. These defendants voluntarily took the posi- tion of trustees of the bank. They invited depositors to confide to them their savings, and to intrust the safe-keeping and management of them ;to their skUl and prildence. They undertook not only that they would discharge their duties with proper care, but that they would exercise the ordinary sldll and judgment requisite for the discharge of their delicate trust. Enough has now been said to show what measure of diligence, skill and prudence the law exacts from managers and directors of corporations ; and we are now prepared to examine the facts of this case, for the purpose of seeing if these trustees fell short of this measure in the matters alleged in the complaint. [The bank, incorporated in 1867, commenced business in a hired building. Subsequently it removed to other hired rooms which it occupied until its failure in 1875. During the whole time the de- posits averaged only about $70,000. Down to 1873, its expenses had exceeded its income. In May of that year the directors caused the bank to purchase four lots for $74,500, of which $10,000 was paid in cash, the balance remaining on mortgages, one on each lot. The bank covenanted to erect upon the corner lot, mortgaged for $30,500, a banking house to cost not less than $25,000. That cost proved about $27,000. When nearly completed, a receiver of the bank was appointed. The other three lots were disposed of without loss, with SECT. 5.] HXIN V. GARY. 52 result that the net cost of the land was $29,250. At the time of th receivership, the bank assets consisted solely of that lot and building and other items which produced less then $1,000. Subsequentl; the lot and building were swept away by a mortgage foreclosure This action was brought by the receiver to recover the damage caused to the bank by the alleged improper investment of its fundj as above stated.] At the time of the purchase of the lot, the bank was substantiall; insolvent. If it had gone into liquidation, its assets would hav fallen several thousand dollars short of discharging its liabilities and this state of things was known to the trustees. It had been ii •existence about six years, doing a losing business. The amount of it deposits, which its managers had not been able to increase, shows tha the enterprise was an abortion from the beginning, either becaus it lacked public confidence, or was not needed in the place where i was located. It had changed its location once without any benefil It had on hand but about $13,000 in cash, of which $10,000 wer taken to make the first payments. The balance of its assets wa mostly in mortgages not readily convertible. One was a mortgag for $40,000, which had been purchased at a large discount, and w may infer that it was not very saleable, as the trustees resolved to se it as early as May, 1873, and in August, 1873, authorized it to be soL at a discount of not more than $2,500, and yet it was not sold unt 1874. In this condition of things the trustees made the purchas complained of, under an obligation to place on the lot an expensiv banking-house. Whether, under the circumstances, the purchas was such as the trustees, in the exercise of ordinary prudence, ski and care, could make ; or whether the act of purchase was reckless rash, extravagant, showing a want of ordinary prudence, skill an^ care, were questions for the jury. It is not disputed that, under th charter of this bank, as amended in 1868 (chap. 294), it had the powe to purchase a lot for a banking-house "requisite for the transactio: of its business." That was a power, like every other possessed b; the bank, to be exercised with prudence and care. Situated as thi moribund institution was, was it a prudent and reasonable thin to do, to invest nearly half of all the trust funds in this expensive lol with an obligation to take most of the balance to erect thereon a: extravagant building ? The trustees were urged on by no real neces sity. They had hired rooms where they could have remained ; o if those rooms were not adequate for their small business, we ma; assume that others could have been hired. They put forward th claim upon the trial that the rooms they then occupied were not safe That may have been a good reason for making them more secure, o for getting other rooms, but not for the extravagance in which the; indulged. It is inferable, however, that the principal motive whic! influenced the trustees to make the change of location was to improv 522 DIRECTORS — LIABILITIES. [CHAP. III. the financial condition of the bank by increasing its deposits. Their project was to buy this corner lot and erect thereon an imposing edifice, to inspire confidence, attract attention, and thus draw de- posits. It was intended as a sort of advertisement of the bank, a very expensive one indeed. Savings banks are not orgaiiized as business enterprises. They have no stockholders, and are not to engage in speculations or money-making in a business sense. They are simply to take the deposits, usually small, which are offered, aggregate them, and keep and invest them safely, paying such in- terest to the depositors as is thus made, after deducting expenses, and paying the principal upon demand. It is not legitimate for the trustees of such a bank to seek deposits at the expense of present depositors. It is their business to take deposits when offered. It was not proper for these trustees — or at least the jury may have found that it was not — to take the money then on deposit and invest it in a banking- house, merely for the purpose of drawing other deposits. In making this investment, the interests of the depositors, whose money was taken, can scarcely be said to have been consulted. It matters not that the trustees purchased this lot for no more than a fair value, and that the loss was occasioned by the subsequent general decUne in the value of real estate. They had no right to : sxpose their bank to the hazard of such a decHne. If the purchase was an improper one when made, it matters not that the loss came From the unavoidable fall in the value of the real estate purchased. The jury may have found that it was grossly careless for the trustees to lock up the funds in their charge in such an investment, where bhey could not be reached in any emergency which was likely to arise in the affairs of the crippled bank. We conclude, therefore, that the evidence justified a finding by the jury that this was not a case of mere error or mistake of judg- oaent on the part of the trustees, but that it was a case of improvi- lence, of recldess, unreasonable extravagance, in which the trustees 'ailed in that measure of reasonable prudence, care and skill which the law requires. I conclude, therefore, that the judgment appealed from should be iffirmed. Judgment affirmed} • Directors were held liable for losses occasioned by want of reasonable care in Loan Society v. Bavenson, 248 Pa. 407. See cases therein cited. See also Anthony I. Jeffress, 90 S. E. (N. C, 1916) 414. (" Good faith alone wiU not excuse.") The liability of directors is normally enforceable by the corporation itself, or, if it s in the hands of a receiver or trustee, then by the latter as its representative. The lituation arising when the corporation refuses or fails to prosecute causes of action igainst its directors, is considered in Chap. IV, See. 7, infra. StCT. 1.] MOKRILL V. LITTLE FALLS MANUFACTURING CO. 523 CHAPTER IV. SHAREHOLDERS. Section 1. — Meetings, Votes and Transactions. MORRILL'?;. LITTLE FALLS MANUFACTURING CO.i 53 Minn. 371 ; 21 L. R. A. 174. 1893. This was an ordinary statutory action to determine adverse claims to real property, plaintiff alleging generally that he was the owner in fee and in possession, and that defendants claimed some interest adverse to him. The answer sets forth that the corporation is the owner of the property in controversy ; that the interest claimed by plaintiff is by virtue of a deed purporting to have been executed by the corporation to one Eustis on July 11, 1882, which deed is attacked because, as alleged, the persons by whom it was executed were not officers of the corporation and had no authority to execute conveyances in its behalf. The corporation was organized in 1856 under a special charter which, made it the duty of the president, under the authority of the by-laws or under the direction of a majority of the directors, to exe- cute conveyances, etc., in behalf of the corporation. The by-laws provided that the directors should be elected at the office of the com- pany at Little Falls, either in person or by proxy, on the second Mon- day of August in each year. There was nothing in the by-laws re- quiring any notice to be given of this annual meeting. The company constructed a dam, built a mill, acquired the title to all the real estate in question in this action, and made extensive improvements. Reverses followed. The dam and miU were swept away in a flood. The panic of 1857, and the war of 1861 enhanced the difficulties. The organization of the corporation was kept up until 1864, when both the president and secretary died, and from that time until 1881, no effort was made to elect officers or hold meetings. About this time the property advanced rapidly in value and the plain- ' Statement of facts rewritten ; portions of opinion omitted. ' 524 SHAREHOLDERS — MEETINGS AND VOTES. [CHAP. IV. tiff took measures to acquire title to it. He procured one Thayer who owned, or held proxies for, one hundred and fifty shares of the stock, to go on the day provided by the by-laws for holding the annual meet- ing of stockholders, and to alone elect a board of directors, to each of whom he transferred one share of his stock. They elected him presi- dent and one Tomhnson, secretary, and they conveyed the property to Eustis. Plaintiff derives his title by mesne conveyances from Eustis. Mitchell, J. As affecting the vaHdity of the deeds executed in 1882, in behalf of the corporation, by Thayer as president, the appel- lants assail the finding of the court as to the election of directors in August, 1881. The grounds of objection are: First, that no notice was given of the meeting ; and, second, that it required a majority of the shares of stock to constitute a quorum to hold a meeting, or, in any event, that one person could not hold a meeting ; that at least two persons are necessary to constitute a corporate meeting. As to the first point, all that is necessary to say is that the by- laws fixed the time and place of holding the meeting, and neither the charter nor the by-laws required any notice to be given. Under such circumstances, the rule is that the by-laws themselves are sufficient notice to all the stockholders, and no further notice is necessary.^ 1 Mor. Priv. Corp. § 479. The second objection is equally untenable. Where the charter and by-laws of a corporation are silent oh the subject, the common-law rule is that such of the shareholders as actually assemble at a prop- erly convened meeting, although a minority of the whole number, and representing only a minority of the stock, constitute a quorum for the transaction of business, and may express the corporate will, and the body will be bound by their acts.^ Cook, Stock & S. §§ 607, • If the statute requires notice of the annual meeting to be given in a specified man- ner to the stockholders, failure to serve such notice invalidates a meetifig, although held at the customary hour at the place and on the day prescribed in the by-laws. Such notice, however, may be waived, either expressly or by consenting to or partici- pating in the meeting. Benbow v. Cook, 115 N. C. 324. But mere physical pres- ence of all the stockholders is insufiScient, if a single member having the right to be present and vote refuses to consent or participate. A director elected over the pro- test of such member may be ousted by quo warranto. Such protest is not participation. People ex rel Carus v. Matthiessen, 269 111. 499, approving Charter Gas Engine Co. v. Charter, 47 111. App. 36. The principle applies to a special meeting of the stockholders. A notice thereof stating that the purpose of the meeting was "to transact such business as may come before said meeting" is not sufificient notice that the purpose was to elect directors. Dolbear v. WUkinson, 156 Pac. (Cal., 1916) 488. Cf. Bagley v. Reno OU Co., 201 Pa. 78. ^ See generally Hill v. Town, 172 Mich. 508. Cf. Tidewater &c. R. R. Co. v. Jordan, 163 Cal. 105. See also Clark v. Wild, 85 Vt. 212 ; Gummaer v. Cripple Creek Tunnel &c. Co., 40 Col. 1. While a corporation may act per alium outside the limits of the state which created it, it can act per se only within those limits. Corporate meetings, being an act per ae, must be held within such limits. Miller v. Ewer, 27 Me. 509 ; Duke v. Taylor, 37 Fla. 64. SECT. 1.] KE ST. LAWRENCE STEAMBOAT CO. 525 623 ; 2 Kent, Comm. 293 ; Mor. Priv. Corp. § 476 ; Craig v. First Presbyterian Church, 88 Pa. St. 42 ; Rex v. Varlo, Cowp. 248 ; Co- lumbia Bottom Levee Co. v. Meier, 39 Mo. 53 ; Ex parte Willcocks, 7 Cow. 402 ; Field v. Field, 9 Wend. 395. The contention of appellants that this rule applies only to such organizations as towns, churches, and the like, and not to stock corporations, finds no support either in reason or authority. The correct distinction is between a corporate act to be done by a select body, of a definite number, as, for example, a board of directors or trustees, and one to be performed by the constituent members of the corporation. In the latter case a majority of those who appear may act. This distinction is clearly made in several of the cases above cited, and also in the leading case of Rex v. Bellringer, 4 Term R. 810. As was said by Lord Mansfield in Rex v. Varlo, supra: "It is in the nature of all corporations to do corporate acts; and, when the power of doing them is not specially delegated to a par- ticular number, the general mode is for the members to meet on the charter days, and the major part who are present to do the act. But, when there is a select body, it is a different thing, for then it is a special appointment." And, this being so, it is immaterial whether the number present is only one or more than one. It was held in Sharpe v. Dawes, 46 Law J. Q. B. 104, followed reluctantly in another case, that one person cannot constitute a quorum ; that at least two persons are necessary to hold a corporate meeting ; but this decision is based upon a narrow lexicographical definition of the word "meeting," as the coming together of two or more persons, — a reason that does not commend itself to our judgment. Therefore, in our opinion, the court was justified in holding that the election of directors in 1881 was regular; and it follows that the deeds executed in 1882 by Thayer, the president elected by them, were the deeds of the corporation. Reversed (upon another point). IN THE MATTER OF THE ELECTION OF DIRECTORS OF THE ST. LAWRENCE STEAMBOAT C0.» 44 N. J. L. 529. 1882. On apphcation to set aside the election. The St. Lawrence Steamboat Company is a corporation organized tinder the general corporation law of this state. On the 22d of March, 1882, a regular meeting of the stockholders • statement of facts condensed ; portions of opinion omitted., 526 SHAREHOLDERS — MEETINGS AND VOTES. [CHAP. IV. was held for the election of directors. The board consisted of seven directors, who were then to be elected to hold office for the ensuing year. At the time of this election, the capital stock consisted of five hun- dred and ninety-three shares, of which number, one hundred and fifty shares were held by D. Mitchell McDonald. Nine persons were voted for as directors, viz.. Garrison, Copeland, Alden, Leve, Prince, L. M. Ferris, Jr., R. M. Ferris, D. M. McDonald and Jenkins. The whole number of votes tendered at the election was five hundred and thirty-seven. In canvassing the votes, the inspectors rejected one hundred and fifty votes cast in McDonald's name, upon his stock, and .the result certified by them was that Garrison, Copeland, Alden, Leve, Prince, L. M. Ferris, Jr., and R. M. Ferris, were elected. Of these, the five first named received, and were allowed by the in- spectors, three hundred and seventy-seven votes each, and their election is conceded. L. M. Ferris, Jr., and R. M. Ferris received two hundred and seventy-seven votes each, and the inspectors allowed and certified one hundred and fifty votes for McDonald and Jenkins. They rejected the one hundred and fifty votes tendered upon the McDonald stock, which were offered to be cast for McDonald and Jenkins. If these votes had been received and counted for McDonald and Jenkins, they would have been elected instead of L. M. Ferris, Jr., and R. M. Ferris. The, vote on McDonald's stock was tendered by Alden, in pursuance of the following proxy : "Know all men by these presents, that I, D. Mitchell McDonald, do hereby constitute and appoint H. P. Alden my attorney and agent, for nae and in my name, place and stead, to vote as my proxy, at the special meeting to be held February 18th, 1882, and at t^e annual meeting of the stockholders of St. Lawrence Steamboat Company, for the election of directors, according to the number of votes I should be entitled to vote if then personally present. "In Witness whereof, I have hereunto set my hand and seal this day of , , one thousand eight hundred and eighty-two. [L. S.] ^ "D. Mitchell McDonald. "Sealed and dehvered in the presence "W. A. J. G. McDonald." Alden, Leve and Prince, three of the stockholders, and also directors of the company, have prosecuted these proceedings, to test the legahty of the election of L. M. Ferris, Jr., and R. M. Ferris. The statute under which this application was made is quoted in Kean v. Union Water Co., ante at page 452. Depue, J. [The court determines that stockholders in a private SECT. 1.] BE ST. LAWRENCE STEAMBOAT CO. 527 corporation, in virtue of their interest in the management of its affairs, have such an interest as will give them a standing in court to test the regularity of an election of directors, and the legality of the acts of inspectors of the election in receiving or rejecting votes and de- claring the result. They are parties aggrieved, within the meaning of the statute.] McDonald was the owner of one hundred and fifty shares of stock standing in his name. His right to one vote for each share, and to cast his votes by proxy, is undisputed.' Rev., p. 183, § 36. In- spectors of election cannot reject a vote offered by proxy because the written proxy was not acknowledged or proved. If the proxy is regular in form, and apparently the act of the stockholder, the in- spectors should receive the vote. In re Cecil, 36 How. Pr. 477. They testify that they were led to doubt the genuineness of the paper from the fact that a blank was left in it for the day and month of its date, and from the appearance of the paper and the manner in which it was offered. A stockholder who desires to exercise his right to vote on his stock by proxy, is imdoubtedly bound to furnish his agent with such written evidence of the latter's right to act for him as will reasonably assure the inspectors that the agent is acting by the authority of his principal. But the power of attorney need not be in any prescribed form, nor be executed with any particular formality.^ It is sufficient that it appear on its face to confer the requisite authority, and that it be free from all reasonable grounds of suspicion of its genuineness and authenticity; and the court, in reviewing the proceedings at an election, must be satisfied that the inspectors had reasonable grovmds for rejecting the proxy. There does not appear to have been any circumstance connected with the offer of the proxy, justly calculated to excite suspicion. Before the inspectors rejected the proxy, they were bound to resort to all reasonable means of satisfying themselves of its authenticity. We think that the inspectors were not justified in rejecting the proxy, either by circumstances under which it was produced, or because of the blank in it for the day and month of its execution. The most solemn and formal instruments, such as deeds of conveyance, are sometimes executed with similar blanks ; and the courts have never regarded such omissions as evidence that they were forged or fabri- cated. If the votes on the McDonald stock be counted, McDonald and Jenkins had more votes than either L. M. Ferris, Jr., or R. M. Ferris. But it is contended that the election of one of these persons last 1 At common law, a stockholder, in analogy to munjcip.al corporations, could not vote by proxy. Taylor v. Griswold, 14 N. J. L. 222. To-day, statutes generally afford the privilege. See Harvey v. Linville Improvement Co., infra, page 657. 2 Thus, a proxy requires no seal. Hankins v. Newell, 75 N. J. L. 26. 528 SHAREHOLDEES — MEETINGS AND VOTES. [CHAP. IV. named must be sustained on the ground that Jenkins was ineligible to the office of director. The effect of the ineUgibility of a candidate for office, upon the result, depends entirely on the motive of the- electors in casting their votes for him. Votes cast for a candidate who is disqualified for the office, will not be thrown away, so as to make the election fall on a candidate having a minority of votes, unless the electors casting such votes had knowledge of the fact on which the disquahfication of the candidate for whom they voted, rested, and also knew that the latter was, for that reason, disabled by law from holding the office.^ Regina v. Coaks, 3 E. & B. 248 ; Regina v. Tewkesbury, L. R., 3 Q. B. 628 ; Drinkwater v. Deakin, L. R., 9 C. P. 626 ; Etherington v. Wilson, L. R., 20 Eq. 606. If Jenkins was disqualified for the office of director, the fact of his; disqualification was unknown to the stockholders who voted for him.. The election of both L. M. Ferris, Jr., and R. M. Ferris must be set aside, without regard to the question of the inehgibiUty of one of the opposing candidates. The power of the court, in this proceeding, to put in office the persons who would have been elected if all the legal votes tendered had been received and counted, as well as to put out the intruders, I think is clear. The Supreme Court of New York, under a statute like ours, set aside an election of directors chosen by votes on stock belonging to the company, and declared the other persons elected who had a majority of the votes, excluding those illegally cast. Ex -parte Desdoity, 1 Wend. 98. In a later case, the same court, where the votes illegally rejected would have elected other persons, set aside the election only, and refused to declare the directors elected who would have been successful if the rejected votes had been counted. In re Long Island R. R. Co., 19 Wend. 37. In the case last referred to, seventeen hundred shares of the stock were not represented at the election, though the holders were qualified, and the holders of upwards of eleven thousand shares were disqualified, by reason of transfers within the thirty days. The court properly refused to consider, as a finaUty in any way an election held undet such circumstances, and ordered a new election ; and it is not made entirely clear by the opinion that the court adopted the course of ordering another election, from any want of power to declare the persons elected who would have been elected if the votes illegally rejected had been received, or were constrained to do so by the cir- cumstances under which the election was held. The language of the statute, on this subject, seems to me to be too clear to admit of a doubt. A construction which restricts the power of the court simply to establishing the election or ordering a new election, involves the rejection of an important member of the sen- tence, expressed in the disjunctive, and plainly declaring that the > Accord : Solunidt v. MitcheU, 101 Ky. 570. SECT. 1. BK ST. LAWRENCE STEAMBOAT CO. 529 court shall grant other relief than ordering a new election, if right and justice shall require it. This power is conferred on the court, which has, inherent ^ in its jurisdiction, control, by means of the prerogative writs of quo warranto and mandamus, over elections held by private corporations ; and the power is to be exercised in a sum- mary manner. In many cases where, at an election for directors, legal votes have been rejected, which, if received, would have elected the contestants, the only rehef which would do complete justice would be to repair the wrong by putting the contestants in office. The act was designed to enable the court, in its discretion, to make such an order as would put parties in office who would have been there if the election had been properly conducted, if such relief appears to the court to be such as right and justice require. In the case now before us, the election was regularly conducted in all respects, except in the rejection of the votes cast under the McDonald proxy. Including the one hundred and fifty shares of the McDonald stock, McDonald and Jenkins received three hundred votes, being more than a majority of all the stock issued. The cor- poration was organized as a navigation company. Its business is, to a large extent, transacted during the summer season, and the affidavits show that it is necessary to the welfare of the company that. its directors be allowed to organize speedily, and elect officers for the ensuing year, and make arrangements for carrying on the business of the company. In Adew of the interests of stockholders, as well as the rights of those who should have been declared to be elected, the case is one in which the court, in ousting the intruders, should put in office those who would have been elected if the votes had been legally canvassed, provided they are quafified to hold the office. The qualification of the unsuccessful candidates to hold the office has place in this controversy only as it may affect the order which shall be made. If they are disquahfied for the office, the court will only set aside the election and order a new election. McDonald's qualification for the office of director is undisputed.. There can be no valid objection to instating him in office. Jenkins' qualification is denied on the ground that he was not, at the time of the election, a bona fide holder of any of the stock of the company. Section 47 of the Corporation act provides that no person shall be elected a director of a corporation issuing stock, unless he shall, at the time of the election, be a bona fi.de holder of some of its stock ; » The power to issue prerogative writs is a part of the general jurisdiction of the Supreme Court, " as the successor of the courts of the colony of New York, which had the jurisdiction of the Court of King's Bench and the Court of Chancery in England. Matter of Steinway, 159 N. Y. 250. Likewise, the prerogative wnt of certiorari may be issued by the Supreme Court in its superintendence of all corporations m the exer- cise of their corporate powers and execution of their corporate functions., Ludlow II. Executors of Ludlow, 4 N. J. L. * 387. 530 SHAREHOLDEES — MEETINGS AND VOTES. [CHAP. IV. and by section 48, a director who shall cease to be a bona fide holder of the stock, shall thereupon cease to be a director.' Rev., p. 185. On the company's books, Jenkins appeared to be the owner of ten shares of the stock, and a certificate for them had been issued in his name. The general rule is, that the books of a corporation are the evidence of the persons who are entitled to the rights and privileges of stock- holders in the management of the affairs of the corporation. With the single exception that stock really belonging to the corporation cannot, at any election for its directors, be voted upon directly or indirectly,^ (Rev., p. 184, § 43; McNeely v. Woodruff, 1 Green 352, 360,) the books of the corporation are the only evidence of who are the stockholders, and as such, are entitled to vote at elections. Downing v. Potts, 3 Zab. 66. Neither the inspector nor other stock- holders can dispute the right to vote of one who appears by the com- pany's books to be the holder of stock legally issued. Pender v. Lushington, 6 Ch. Div. 70. So, also, it is held that a person has a right to vote on stock standing in his name as trustee for another,' or on stock which he has pledged or hypothecated,* if it be in his own name, on the company's books, and that inspectors of the election, in determining the qualifications of voters, have no authority to inquire whether the stockholder, who appears by the books to be a stock- holder, is or not the real owner of the stock standing in his name. They must take the company's books as conclusive evidence of the qualification to vote.^ Ex parte Willcocks, 7 Cow. 402 ; People v. Kipp, 4 Id., 382, n. ; People v. Tibbets, Id., 358 ; In re Barker, 6 Wend, 509 ; In re Wheeler, 2 Abb. Prac. {N. S.) 361 ; In re Cecil, 36 How. 477 ; Boone on Corp., § 69. But, with respect to the qualifications of a director, the company's books are not conclusive. A person may be quaUfied to be a director • Cf. Kuser v. Wright, ante, page 436. * 2 See Thomas ». International Silver Co., infra, page 534. " Accord : Hoppin v. Buffum, 9 R. I. 513. Cf. Tunis v. Hestonville, &o. R. R. Co., 149 Pa. 70. Until the estate is distributed, executors and administrators may vote the stock standing in decedent's name. Schmidt v. Mitchell, 101 Ky. 570 ; Jones v. Green, 129 Mich. 203 ; and formal transfer or entry on the books of the corporation is unnecessary. Re Cape May Navigation Co., 51 N. J. L. 78 ; Matter of Hastings, 120 A. D. 756. Any one of the executors present at a corporate meeting may, in the absence of objec- tion by his co-executors, vote decedent's shares Schmidt v. Mitchell, supra. But a majority of co-executors have no inherent right to vote such shares against the oppo- sition of one executor. Tunis v. Hestonville &c. R. R. Co., supra. So where stock is held by partners or tenants in common, disagreement among the owners may operate to disfranchise that stock for the time being. Be Pioneer Paper Co., 36 How. Pr. Ill ; Kenton Furnace Co. •». McAlpin, 5 Fed. 737. * See note 1, page 636, infra. ^Accmd: In re Long Island R. R. Co., 19 Wend. 37. See Commonwealth a. Dalzell, 152 Pa. 217. (Statutory modification.) The right to vote normally accom- panies the legal title to the stock, but for voting purposes, the title must be determined by the company's books. Royal Consol. &c. Co. v. Royal &c. Mines Co., 157 Cal. 737. Also see Be Argus Printing Co., 1 N. D. 434, and note 1, page 536, infra. SECT. 1.] BE ST. LAWHENCE STEAMBOAT CO. 531 whose vote cannot be received at the election. He may be a bona fide holder of stock at that time, and yet be disquahfied from voting on it by reason of the transfer to him not being entered on the books.^ He may appear as a stockholder on the books, and still, for reasons aliunde, be disqualified for the office of director.'' The question of the competency of a person for the directorship is one exclusively of judicial cognizance, over which the inspectors of the election have no jurisdiction. They have no means of making the necessary investiga- tion on the subject, and no power to reject a competent vote because cast for a person who, in their judgment, is disqualified for the office. Whether a vote given for a disqualified candidate is so completely thrown away as to be entirely void, is a mixed question, made up of the fact of disquahfication, and knowledge by the voter of the legal effect of the disquahfication. Inspectors, in conducting an election, are required to determine the admissibility of the votes that may be offered, but have no power to pass upon the eligibiUty of the persons for whom they are proposed to be cast. The question of eUgibility is one that can be raised only in the courts. [Here follows the paragraph quoted in note 2, at page 443, ante.] The proof in relation to the stock held by Jenkins is that the stock was legally issued. He subscribed for the stock and paid for it with money belonging to his wife, intending it as an investment for her, and to have the stock certificate in her name. By inadvertence, the certificate was made out in his name, and he returned it to the treasurer of the company, to have a new certificate made out, in the name of his wife. On account of the resignation of the treasurer, the change was not made. Jenkins testified that he afterwards learned that the affairs of the company were not in a prosperous condition, and resolved that it was not proper to saddle the stock on his wife, and that he consequently transferred the cost of it from her account to his own ; and it appears that he applied to the treasurer, after the resignation of the latter, for a return of the certificate, informing him that he had decided to make no change in it. The stock re-, mained in Jenkins' name, on the company's books. His name ap- peared on the list of stockholders prepared for the election of March 22d, and his vote upon this stock was received at that election without objection. He was then a bona fide holder of the stock, within the meaning of the statute, and qualified to be elected as director. A rule should be entered, setting aside the election of L. M. Ferris, Jr., and R. M. Ferris, and ordering the admission of D. M. McDonald and E. M. Jenkins as directors. » See note 1, page 442, ante ; also Re Argus Printing Co., 1 N. D. 434. 8 See Matter of George Ringler & Co., ante, page 440. 532 SHAREHOLDERS — MEETINGS AND VOTES. [CHAP. IV. PEOPLE EX REL. BROWNE ET AL. v. KOENIG. 118 N. Y. Supp. 136. 1909. Houghton, J.' Relators presented to defendant, as Secretary of State, for filing and record, a certificate of incorporation of the Na- tional Investing Company, a business corporation. The certificate of incorporation provided that the stock should be divided into one- half preferred and one-half common, the preferred to receive cumula- tive dividends at the rate of 6 per cent, before any dividends on the common should be paid, and to have certain rights upon dissolution of the corporation over the common stock. It was further provided in the certificate that the preferred stock should have the right to vote only upon certain matters relating to corporate management. They were given no right to vote for directors of the corporation. For this reason the Secretary of State refused to file the certificate, and the relators applied for a peremptory mandamus directing him to do so. From the order directing that such a mandamus issue, the defendant appeals. The tender of the certificate to the Secretary of State was after February 17, 1909, when chapter 23 of the Consolidated Laws went into effect, and the defendant contends that by that law no class of stock can be deprived of its voting power. Section 3, subd. 8, of that chapter provides that : "The term 'member of a corporation' shall include every person having a right to vote at a meeting of the corporation for the election of directors, other than a person having a right to vote only upon a proxy." And section 23 provides that : "Unless otherwise provided in the certificate of incorporation, every stockholder of record of a stock corporation shall be entitled at every meeting of the corporation to one vote " for every share of stock standing in his name on the books of the corporation." And section 24 provides that: "The certificate of incorporation of any stock corporation may provide that at all elections of directors of such corporation, each stockholder shall be entitled to as many votes as shall equal the number of his shares of stock multipUed by the number of directors to be elected and that he may cast all of such votes for a single director or ' Portions of opinion omitted. ? At common law, a stockholder, in analogy to municipal corporations, was entitled to merely one vote, irrespective of the number of shares he held. Taylor v. Griswold, 14 N. J. L. 222. But see Brooks ». State, 3 Boyce (Del.) 1. To-day, statutes generally afford the privilege of one vote per share. But this is not uniform. Smith v. Iron Mountain &c. Co., 46 Mont. 13 '; Commonwealth d. Detwiller, 131 Pa. 614. SECT. 1.] PEOPLE EX KEL. BROWNE ET Al. V. KOENIG. 533 may distribute them among the number to be voted for, or any two or more of them as he may see fit; which right when exercised, shall be termed cumulative voting." ' The learned Deputy Attorney General contends that the above provisions of the law forbid the excluding of any class of stockholders from voting for directors of the corporation, and hence that a cer- tificate that so provides is not entitled to be filed. His argument is that the phrase "unless otherwise provided in the certificate of incor- poration," found at the beginning of section 23, relates only to the cumulative vote permitted by section 24, and that it is not broad enough to permit the certificate of incorporation to provide that a preferred stockholder shall be limited in his right to vote concerning matters affecting the corporation. Unless expressly forbidden by statute, the articles of incorporation may divide the stock into common and preferred,^ and may provide that the preferred stockholders shall be deprived of voting power in consideration of the preferences over the common stock which is given them. Such a provision is but an arrangement between two classes of stockholders, which does not concern the public, and does not violate any rule of the common law or any rule of public policy. State ex rel. Frank et al. v. Swanger, Secretary of State, 190 Mo. 561, 89 S. W. 872, 2 L. R. A. (N. S.) 121 ; 1 Thompson on Corp. (2d Ed.) § 859; 2 Cook on Corp. (6th Ed.) § 622b. The law of Missouri with respect to the right of a stockholder to vote his stock is similar to our own, except that the Constitution of that state insures such right rather than by an enactment of the Leg- islature, and in State v. Swanger, supra, the defendant had refused to file a certificate of incorporation because it provided that preferred stockholders should not have the right to vote. The conclusion was reached that notwithstanding the guaranty to stockholders of the right to vote contained in the Constitution, it was proper to provide in a certificate of incorporation that preferred stockholders should have no right to vote, because it amounted to a mere agreement to refrain from so doing, and the Secretary of State was directed to receive and file the certificate. It is only by a strained and narrow construction that the phrase "unless otherwise provided in the certificate of incorporation," contained in section 23, can be held to relate only to cumulative voting. The more natural construction is that it permits the certif- icate of incorporation to provide what right to vote classes of stock- holders shall possess. In view of the fact that it is perfectly lawful • Cumulative voting, while aometimes secured by constitutional provision, is no invasion of the majority's rights. Maynard ». Looker, 111 Mich. 498. This valu- able privilege, however accorded, is merely an option of which each member may make avail or not. Pierce v. Commonwealth, 104 Pa. 150 ; Schmidt v. MitcheU, 101 Ky. 570. 2 See Sec. 6, infra. 534 SHAREHOLDERS — MEETINGS AND VOTES. [CHAP. IV. for different classes of stockholders to agree amongst themselves, through the certificate of incorporation, that one class shall have no vote upon all or certain questions relating to the management of the corporation, and that such an agreement does not contravene pubhc pohcy or affect the public, we are of the opinion that the Legislature did not intend to compel every class of stockholders to hold the right to vote, or to prohibit the formation of a corporation which deprived the preferred stockholders of voting power. It follows that the Secretary of State was not justified in refusing to file the certificate, and that the order directing the issuing of a mandamus compelling him to accept it was proper, and should be affirmed. Order affirmed} THOMAS V. INTERNATIONAL SILVER CO. 72 N. J. Eq. 224. 1906. Bergen, V. C. The United States Silver Company is the owner of ninety-three thousand shares of the common and five thousand shares of the preferred stock of the International Silver Company, and the latter company owns all of the capital stock of the United States Silver Company, and controls, through such ownership, its management. The direct result intended by this arrangement is the voting of the shares of the International company, registered in the name of the United States company by the officers of the International company for such persons as they may desire to con- tinue in, or appoint to, the management of their company, the directors of the United States company being also directors of the International company. The testimony shows that all of the capital stock of the United States Silver Company was purchased by, and now belongs to, the International company, although some of the shares stand in the names of the officers of the International company for the purpose of qualifying them as directors. That the Inter- national company is the real owner of the stock, and that its officers should not be allowed to exercise the voting power usually incident to stock ownership, either directly as owners, or indirectly through its control of the United States company, seems to me very clear, and their right to vote the stock was not seriously pressed on behalf of the defendants on the argument. No substantial change in the situation upon this branch of the case has occurred since the matter was passed upon by the court of errors and appeals in O'Connor v. ' Cf. Ripin V. United States Woven Label Co., ante, page 180. As to the value of the right to vote, see note 1, page 564, infra. SECT. 1.] THOMAS V. INTERNATIONAL SILVER CO. 535 .International Silver Co., 68 N. J. Eq. (2 Robb.) 680, and the argu- ment for the defendants was based upon the assumption that, in equity, the International company was the owner of the sto'ck.^ The present controversy arises over the right claimed by certain pledgees, to whom the stock has been assigned in pledge as collateral for the debts of the Internationg,l company, to vote at the next annual meeting of that company for the election of officers. The evi- dence shows that just previous to the fihng of the bill of complaint by O'Connor, the stock owned by the United States company was transferred to several banks and trust companies as collateral security, in some cases for loans already made to, and in others for loans expected by, the International company. The present proceeding looks to an injunction preventing the pledgees from voting on the hypothecated stock held by them respectively, which in each case was regularly transferred to them on the books of the International company, the transfer expressly empowering each pledgee to vote thereon. The first question presented is, can a corporation, by pledging its own stock as collateral to another corporation, empower the pledgee corporation to exercise a power or incident of ownership which the real owner does not possess? Section 38 of the Corporation act of this state declares "shares of stock of a corporation belonging to said corporation shall not be voted on directly or indirectly,"^ and if by pledging stock as collateral security the directors of a corpora- tion can endow the stock with a virtue it does not possess in the hands of the real owner, and the disqualification of the pledgor to vote the stock does not extend to the pledgee, it would appear that in every case where a corporation is the owner of its own stock a ready method is provided by which the officers of a corporation desiring to perpetuate themselves in office can bring about that result, and it should not be allowed unless the law plainly requires it, because it is in effect an indirect way of voting the stock. According to section 37 of the same act the pledgor may represent his stock at all meetings and vote ' In the cited case, Gummbke, C. J. incisively and decisively impaled the present defendant upon the horns of the dilemma that its acquisition of the entire stock of the U. S. Co. either did or did not constitute itself the owner of its own stock held by the U. S. Co. ; if it did not, it could not vote it, for owners of stock alone (pledgees excepted) are entitled to vote ; if it did, its right to vote such stock is prohibited. (See note following.) Therefore, the International Co. had no right to vote the shares of its own stock held by the U. S. Co. Held, further, the effect of such acquisition was ipso facto ouster of the directors of the latter company, because directorship depends upon and ceases concurrently with cessation of ownership of stock (See Re St. Lawrence Steamboat Co. ante, at note 1, page 530.) and hence there was no agency of the U. S. Co. that could act for it, as against complainant (c/. note 1, page 449, ante), a stock- holder of the International Co., in casting its vote on the block of stock of the latter company held by it. ' Common law as well as statute, effects this prohibition. Ex parte Holmes, 5 Cow. 426 ; American Railway-Frog Co. v. Haven, 101 Mass. 398 ; McNeely v. Wood- ruff, 13 N. J. L. 352 ; O'Connor v. International Silver Co., 68 N. J, Eq. 67, affirmed 68 N. J. Eq. 680. 536 SHAREHOLDERS — MEETINGS AND VOTES. [CHAP. IV. thereon as a stockholder, "unless in the transfer to the pledgee on the. books of the company he shall have expressly empowered the pledgee to vote thereon." The right to vote on stock pledged as collateral remains, under our law, with the pledgor, unless by his act .he shall empower the pledgee to vote thereon.' The transaction is a contract between the parties, settling as between them who shall exercise the voting power incident to the ownership of the stock. It is in its nature a proxy given by the pledgor to the pledgee to represent the voting power of the owner, and may be revoked by the pledgor at any time by redeeming his pledge. That the directors may sell the stock and thereby restore its voting power, does not meet the question, for an absolute sale of the stock deprives the pledgor of any right in, or control over, the stock, it is not subject to redemption, and the real owner in such case takes the voting power, not by way of contract or proxy, but as a right incident to his ownership. To interpret our statute otherwise would open the door to a constant evasion of the law which prohibits directors from voting, directly or indirectly, on the stock of their own company, because temporary loans could always be made by them just prior to the annual election, and the stock pledged with a voting power to persons known by the directors to be friendly to their aspirations. My conclusion is, that under our law whenever the owner of' stock is disquahfied to vote it, that disqualification is not removed 1 In the absence of statute or agreement, the right to vote pledged stock resides in the pledgor until the pledgee causes the stock to be transferred into hia own name on the corporate books. "The duty of the corporation is to recognize the registered holder shown on its transfer books." Gaekison, V. C. in Canadian Improvement Co. ■a. Lea, 74 N. J. Eq. 234. Statutes or agreements, determining voting power of such stock, of course, control. See Cohen ». Big Stone '&c. Co., Ill Va. 468 and notes thereto as reported in Ann. Cas. 1912 A. 203 ; Commonwealth v. Dalzell, 152 Pa. 217 ; Lawrence ». Maxwell, 53 N. Y. 19 ; Note 121 A. S. R. 196 ; and Matter of St. Law- rence Steamboat Co. at note 5, page 530, ante. As to the rights of pledgees of stock, see Canadian Improvement Co., supra (pledgee stipulated for voting power and representation in directorate), and Matter of Mer- cantile Trust Co., 210 N. Y. 83 (stock carried on margin by broker). Normally, a pledgor has no greater right of action in respect to injuries done the corporation than any other stockholder, even though the pledgee be a director and perpetrate the wrbug. Milliken v. McGarrah, 159 A. D. 725. "The fact," said Tapt, J. in Ritchie ». McMullen, 79 Fed. 522, "that the pledgee of stock owns other stock in the same company, or is a director or officer therein, does not impose any greater duty upon him, in respect to the stock pledged, than if he had no relation to the com- pany at all. But, if such pledgee use his position as director and his vote as stock- holder intentionally to depreciate the stock of his pledgor held in pledge with the dis- honest purpose of acquiring ownership of the stock at a forced sale, this is a direct injury done by him to his pledgor, and he cannot avoid direct liability to his pledgor for it, by pleading that the means by which he accomplished this wrong, and violated his duty as pledgee, involved an injury to the corporation for which it may also recover damages." Cf. Von Au s. Magenheimer, cited in note 1, page 505, ante. . In Earle v. American Sugar Refining Co., 74 N. J. Eq. 751, a pledge by a majority stockholder of a corporation of his stock therein to a competing corporation, as secur- ity for a loan granted by the latter to him individually, was, with its incidental voting power, effectually employed to stifle competition b^etween the corporations. The receiver of the former was unable to prove himself entitled to an accounting by the latter corporation. SECT. 2.] VARNEY V. BAKER. 537 by simply hypothecating the stock as collateral for a loan, and that the right which the law gives to the pledgor to empower "the pledgee to vote thereon" is lunited to such pledgors as are themselves possessed of the right to vote on the stock which they own, and that the pledgees in this case hold the stock of the International company subject to the same disqualification, so far as the power to vote there- on is concerned, as that which the statute imposes on the pledgor. The second question presented is whether the pledging of this stock was made in good faith for the purpose of affording additional security for loans made to the International company, or for the pur- pose of placing the stock in the hands of those friendly to the existing management in order that it might be voted to retain them in power, and thus avoid the letter and spirit of the prohibition contained in our law. [The court finds the latter alternative to be the fact.] On this branch of the case my conclusion is, that these pledgees are not bona fide holders of this stock as collateral for loans made by them, but took it for the sole purpose of aiding in the indirect voting of the stock of a corporation owned by the corporation itself, and that the pledgees hold this stock in equity, in trust for the International company, and without any real interest therein, and that to permit them to vote it would effect the very evil which the law intended to prohibit when it forbade the voting by the corporation of its own stock either directly or indirectly. r will advise an injunction preventing the defendant pledgees from voting on the stock held in pledge. Section 2. — Inspection of CoKPORA'^rioNs' Books and Records. VARNEY V. BAKER. 194 Mass. 239. 1907. Knowlton, C. J. This is a petition for a writ of mandamus to obtain an examination of the books of accoimt of the defendant corpo- ration.i The petitioner is the owner of eighty shares of the capital stock of the corporation, the whole number of shares being three hundred and fifty. The respondent Baker admitted that he told the son of the petitioner, three or four months before the petition was filed, that the company had lost several thousand dollars. The truth of the statement was not denied, although oflicers of the com- > The Baker Shoe Company, a corporation organized under the general laws of Maesachusetts; 538 SHAEEHOLDEES — INSPECTION OF BOOKS. [CHAP. IV. pany testified that at the time of the hearing, the company was in a prosperous condition. The single justice who heard the case found that the petitioner honestly believes that the company is being mismanaged, and desires in good faith, for the protection of his interest in the corporation, to examine the books and records of the company for the purpose of ascertaining its condition and the value of its stock, and of deter- mining what to do with his stock, and whether there has been mis- management of the corporation, and if so, what effect it has had upon the assets and business of the corporation, in order that he may be enabled to bring a bill in equity for the appointment of a receiver, or to take other proper proceedings for the benefit of the corporation and of his interest therein. He also found that an examination could be conducted without interfering unduly with the business of the corporation. It was not proved to the satisfaction of the justice that there was any mismanagement in fact, or any incapacity on the part of the managing officers. The justice reserved the case for our determination, and his report presents the question of law whether, on these facts, the petitioner should have an opportunity to examine the books of account and deposit of the corporation, and if so, to what extent. The stockholders of a corporation are the equitable owners of its assets, and the officers act in a fiduciary relation as agents of the corporation and of the stockholders. They should be ready to account to the stockholders for their doings at all reasonable times, and the stockholders have a right to inspect their records and ac- counts, and to ascertain whether they are faithful, honest and in- telUgent in the performance of their duties. There is no good reason why the stockholders, acting in good faith for the purpose of advanc- ing the interest of the corporation and protecting their rights as owners, should not be permitted to examine the corporate property, including the books and accounts. It was formerly held in England that this right could be exercised, against the will of the managing officers, only when there was a specific dispute about some corporate matter, between the stock- holders and the officers. Rex v. Merchant Tailors' Co. 2 B. & Ad. 115. But this rule has been modified by statute. See St. 8 & 9 Vict. c. 16, §§ 117, 119, and St. 25 & 26 Vict. c. 89, Table A 78. The doctrine has not been adopted in America, the cases which go furthest in that direction holding that a dispute as to the alleged mismanage- ment of the corporation is enough to entitle the stockholder to an examination of the accounts to see whether there is a ground for an action. Commonwealth v. Phoenix Iron Co.' 105 Penn. St. HI. 1 The court said : "Unless the charter provides otherwise a shareholder in a trad- ing corporation has the right to inspect its books and papers and to take minutes from them for a definite and proper purpose at reasonable times. The doctrine of the law SECT. 2.] VAENEY V. BAKER. 539 PhcBnix Iron Co. v. Commonwealth/ 113 Penn. St. 563. According to the general rule in this country, it is not necessary that there should be any particular dispute to entitle the stockholder to exercise this right. Nothing more is required than that, acting in good faith for the protection of the interests of the corporation and his own interests, he desires to ascertain the condition of the company's business. Guthrie v. Harkness,^ 199 U. S. 148. In re Steinway,' 159 N. Y. 250. Huylar v. Gragin Cattle Co.* 13 Stew. (N. J.) 392. State V. Pacific Brewing & Malting Co. 21 Wash. 451. Cockburn V. Union Bank of Louisiana,* 13 La. Ann. 289. State v. Laughlin, 53 Mo. App. 542. Heminway v. Heminway, 58 Conn. 443. See Union Bank v. Knapp, 3 Pick. 96, 108. Of course the right at common law is not absolute, so that it can be exercised for mere curiosity, or for merely speculative purposes, or vexatiously. If the court is appealed to for the enforcement of the right, a sound discretion will be exercised to determine whether is that the books and papers of the corporation, though of necessity kept in some one hand, are the common property of all the stockholders." 1 The court said : "Such a right is, of course, not to be exercised to gratify curiosity, or for speculative purposes, but in good faith and for a specific honest purpose, and where there is a particular matter in dispute involving and affecting seriously the rights of the relator as a stockholder. . . ' . Sellers (the relator) was not bound to accept the mere statement of the board, whether under oath or otherwise, as to the contents of the books, etc. He had a right to a reasonable personal inspection of them, and with the aid of a disinterested expert might make such extracts as were reasonably required in the preparation of the biU he purposed to bring." 2 The court said : "It does not follow that the courts will compel the inspection of the bank's books under all circumstances. In issuing the writ of mandamus the court will exercise a sound discretion and grant the right under proper safeguards to protect the interests of all concerned. The writ should not be granted for speculative purposes or to gratify idle curiosity or to aid a blackmailer, but it may not be denied to the stockholder who seeks the information for legitimate purposes." 'In this case, the court said: "A stockholder has the right at common law to inspect the books of his corporation at a proper time and place, and for a proper pur- pose, and ... if this right is refused by the officers in charge a writ of mandamus may issue, in the sound discretion of the court, with suitable safeguards to protect the interests of all concerned. It should not be issued to aid a blackmailer, nor with- held simply because the interest of the stockholder is small, but the court should proceed cautiously and discreetly, according to the facts of the particular case." It was held that a statute, prescribing that every stock corporation shall keep a stock book, containing a list of all stockholders and showing their respective places of resi- dence, and the number of shares held by each, said book to be open daily during business hours for the inspection of its stockholders and judgment creditors, was neither exclusive nor did it abridge the common law right of inspection. The court said : "The statute merely strengthened the common law rule with reference to one part thereof, and left the remainder unaffected." * The court said : "They are entitled to such inspection, though their only object is to ascertain whether their affairs have been properly conducted by the directors or managers. Such a right is necessary to their protection. To say that they have the right but that it can be enforced only when they have ascertained, in some way with- out the books, that their affairs have been mismanaged, or that their interests are m danger, is practically to deny the right in the majority of cases. Oftentimes frauds are discoverable only by examination of the books by an expert accountant." 6 The court said ■ "It cannot be denied that it is the right of every one to see that his property is well managed and to have access to the proper sources of knowledge in this respect." 540 SHAREHOLDERS — INSPECTION OF BOOKS. [CHAP. IV. the petitioner is acting for an honest purpose, not adverse to the interests of the corporation. The court will consider whether his desire for an examination is reasonable, having reference to the interests of the corporation and his personal interest as a member of it. Its effect upon the corporation in reference to competitors and other interests will not be disregarded. But as was stated in Dunphy v. Traveller Newspaper Association, 146 Mass. 495, "Courts of equity are swift to protect helpless minorities of stockholders of corporations from the oppression and fraud of majorities." In the present case the findings of the justice show that the peti- tioner should be permitted to examine the books in accordance with his request. His right to such an examination includes the right to have the assistance of an expert, or other person, if he desires to make transcripts from the books for subsequent use. There is nothing in our statutes which enlarges or diminishes this right as it exists at common law. The provision of the St. 1903, c. 437, § 30, relates only to the copies, books and records therein re- ferred to, and is not applicable to the present case. Peremptory writ of mandamus to issue. WHITE V. MANTER. 109 Me. 408; 42 L. R. A. (N. S.) 332. 1912. Savage, J. Petition for mandamus to compel the defendant, as clerk of the New England Land Company, a corporation, to allow the petitioner to examine the records and stock book of the corpo- ration, and to take copies and minutes therefrom of such parts as concern her interest. The petitioner is a stockholder in the defendant corporation. In her petition she does not state the purpose for which she desires to examine the books. And for this reason the defendant moved to quash the alternative writ. The motion was denied, and the de- fendant took an exception. After hearing a peremptory writ was ordered to issue, and to that order the defendant excepted. It is provided by R. S. c. 47, § 20, that all corporations existing by virtue of the laws of the state shall ha,ve a clerk and a clerk's office within the §tate, where shall be kept their records and a book showing a tnie and complete list of all stockholders, their residences, and the amount of stock held by each. "Such records and stock, book shall be open at all reasonable hours to the inspection of per- sons interested, who may take copies and minutes therefrom of such parts as concern their interests." SECT. 2.] WHITE V. MANTER. 541 The common law gave to stockholders the right to examine the books, records, and papers of the corporation, when the inspection was sought at proper times and for proper purposes. 10 Cyc. 954 ; In re Steinway, 159 N. Y. 250. And it is generally held at common law that the purpose must relate to the interest of the stockholder as such.i Varney v. Baker, 194 Mass. 239; In re Steinway, swpra; Stone V. Kellog, 165 111. 192 ; Venner v. Chicago City Railway Co., 246 lU. 170. The defendant contends that the statute above cited is afifirmatory of the common law, and that the right under the statute to inspect is subject to the same limitations as the right under the common law. Starting with this premise, the defendant contends; first, as to pleading, that the petitioner must allege and prove a proper purpose ; and, secondly, as to the merits, that the petitioner's purpose is not a proper one. We think that the statute is affirmatory of the common law, and that it is more. It adds to the common-law right ; it removes some of the common-law limitations. In other words, the statute right of inspection of corporate records and of the list of stockholders by a stockholder is absolute and unlimited. The statute does not make the purpose material, and we cannot. We are now speaking of the statutory right, and not of any particular remedy. Where the right is guaranteed by statute, the great weight of authority is to the effect -that the motive or purpose of seeking to exercise it is not the proper subject of judicial inquiry. The court, in Henry v. Babcock & Wil- son Co., 196 N. Y. 302, said : "No doubt the Legislature could make the stockholder's privilege of inspection dependent upon the motive or purpose with which it is sought ; but it has not seen fit to do so. The language of the statute is plain and mandatory. It recognizes the absolute right in the stockholder, and imposes an absolute duty upon the corporation and the custodian of the stock book. The law requires no statement of any particular interest upon the part of the person demanding the inspection. He must be a stockholder, and must prefer his request during reasonable hours; that is all." So, in Venner v. Chicago City Railway Co., 246 111. 170, the court, » In Withington v. Bradley, 111 Me. 384, question was raised whether a list of stock- holders concerned a stockholder's interest. Cornish, J. said : "It is apparent that ownership of stock per se renders information as to who are the co-owners a matter of vital interest. A stockholder is one of many engaged in a joint enterprise, and the opportunity to communicate with his associates may be of prime necessity. The conduct of the corporation, its poUcies, plans, and methods, concern all stockholders, and, unless they can reachone another so as to obtain concert of action, they may be powerless to prevent injury or disaster. If those in control can prevent the stock- holder from obtaining such » list, they may thereby perpetuate themselves in power and continue their disastrous policies. Why should this ^formation be confined to the officers, who are but agents of the stockholders, and withheld from the stock- holders themselves, who are the principals?' See Re Taylor, 117 A. D. 348. 542 SHAEEHOLDEKS — INSPECTION OF BOOKS. [CHAP. IV. pointing out the distinction between the common-law right and an unlimited right given by the statute, said: "When the right is conferred by statute in absolute terms, the purpose or motive of the stockholder in making the demand for an inspection is not material ; and he cannot be required to state his reason therefor." To the same effect are Foster v. White, 86 Ala. 467; State ex rel. Wilson V. St. Louis & San Francisco Ry. Co., 29 Mo. App. 301 ; Hub Construction Co. v. Breeders' Club, 74 N. H. 282 ; Ellsworth V. Dorwart, 95 Iowa, 108 ; Johnson v. Langdon, 135 Cal. 624 ; Cin- cinnati Volksblatt Co. v. Hoffmeister, 62 Ohio St. 189; Weihen- mayer v. Bitner, 88 Md. 331. According to the tenor of these cases, which we approve, the petitioner was not required to allege and prove her purpose, and the refusal to quash the writ for that reason was right. The foregoing discussion applies to the main question, whether the peremptory writ was properly ordered to issue. The stock- holder's right to inspect is unlimited. The purpose he seeks to promote is not confined to his interest in the corporation as a stock- holder. It has been held that the fact that he is a competitor in business is not a sufficient reason for denying the right. Weihen- mayer v. Bitner, supra. And so when the purpose is to enable the stockholder to enforce a claim against the corporation itself. But to avoid any misconstruction it should be observed that, while the right of stockholders to inspect the records of the corpora- tion and the list of stockholders is unlimited, the right "to take copies and minutes therefrom" is limited to such parts "as concern their interests." It has been frequently held that the right to make copies and minutes is, at common law, necessarily incidental to the right to inspect. However this may be, the statute in this state is restrictive. The stockholder has no statutory right ip make copies or minutes of more than concerns his interests. Although we have used the language of the cases in saying that the motive or purpose of seeking to exercise the right is immaterial upon the question of right, the courts are not agreed that it is com- pulsory upon the court in all cases to enforce the right by mandamus, which is a discretionary writ, and not a writ of right. Some courts seem to hold that when the right to inspect is guaranteed by statute, mandamus must issue as a matter of course; and that nothing is left to the discretion of the court. See In re Steinway, 159 N. Y. 250; Venner v. Chicago City Railway Co., 246 111. 170; Ellsworth v._ Dorwart, 95 Iowa, 108. It is elsewhere held that the statutory right, while absolute in terms, is subject to the imphed limitation that it shall not be exercised from idle curiosity, or for a merely vexatious or an unlawful purpose. White v. Foster, 86 Ala. 467 ; Stone V. Kellog, 165 111. 192; O'Hara v. National Biscuit Co., 69 SECT. 2.] WHITE V. MANTER. 543 N. J. Law, 198; Weihenmayer v. Bitner, 88 Md. 325. It is im- possible as yet to extract a rule that may be called well settled.' But whatever may be the precise limitations, if there are any, we find no case under a statute that goes farther than White v. Foster, supra, except O'Hara v. National Biscuit Co., supra. In the last case cited the court attaches to the statute guaranty the common- law limitation that the inspection must relate to the stockholder's rights as a stockholder. This is contrary to the great weight of authority. We are not called upon in this case to fix the limitations ; for if we assume that we have the authority to deny the writ, when to issue it would be merely to serve curiosity, or to promote a vexa- tious or unlawful purpose — in other words, enable the petitioner to abuse the writ rather than use it — we do not think the facts in this case warrant any such limitation. The petitioner swears that her purpose in inspecting the records is to enable her to judge better of the value of her stock. The defendant contends that her real pur- pose is to find out what amount of stock is owned by her former husband, from whom she has been divorced, and against whom pro- ' The question was not decided in the subsequent case of Withington v. Bradley, 111 Me. 384, but Cobnish, J. qualified his ruling therein by saying : "It should be added, however, that we do not wish to be understood as holding that it is compulsory upon the court in all cases to enforce the stockholder's right by granting the writ of mandamus. White v. Manter, supra. From its inception mandamus has been a discretionary writ, not a writ of right, and the remedy extraordinary in its nature has been somewhat sparingly employed. The character of this writ and the discretion to be exercised by the court in issuing it seem not to have been taken away nor abridged by the statute under consideration. A state of facts might be presented where the purpose of the petitioner was so obviously vexatious, improper, or unlawful that the court might feel compelled to exercise its discretion in the interests of law and justice and decline to issue the writ." But in the later case of Eaton v. Manter, 95 Atl. (Me., 1915) 948, the above dictum was approved, and petition for mandamus, to compel defendant corporation to permit inspection of its stock book, was denied the holder of a single share acquired by him solely for the purpose of enabling him to examine the records and stock book and take copies therefrom of the lists of stockholders, in order to sell same to brokers, and to enable him otherwise to give information of the names and holdings to persons not stockholders of or in any manner interested in said corporation. Accord : People ex rel. Britton v. American Press Ass'n, 148 A. D. 651, distinguishing Henry v. Babcock & Wilcox Co., 196 N. Y. 302, which latter action was to recover a statutory penalty ; State ex rel. Holmes v. Doe Run Lead Co., 178 S. W. (Mo., 1915) 298. (Semble. — "We are not prepared to say the statutory right is so far absolute as to make it incumbent upon a court to issue a writ of mandamus in every case where such right is invoked.") Contra : -Poor ». Yarnell, 153 Pac. (Cal., 1915) 976, (Despite alleged motive to "injure and embarrass "■ the corporation "in the transaction of its business.") ; Venner v. Chicago City Ry. Co., 216 111. 170. See Johnson v. Langdon, 135 Cal. 624. ("The clear legal right given by the Constitution and the statute cannot be defeated by stopping to- inquire into motives.") Chapter 127, Laws of 1916, New York, amends the section under consideration, by adding the following clauses: "It shall be a defense to any action for penalties under this section that the person suing therefor has within two years aold or offered for sale any list of stockholders of such corporation or of any other corporation, or has aided or abetted any person in procuring any stock list for any such purpose. Nothing herein, impairs the power of the courts to compel by mandamus or judgment the production for examination by any stockholder of the stock books of a corporation. , Cf. Hodge V. U. S. Steel Corp., injra, page 650. 544 SHAREHOLDERS — DIVIDENDS. [CHAP. IV. ceedings are now pending to determine the amount of her ahmony; that another purpose is to gain from the records information which will assist her in litigation hostile to the corporation, in which she is seeking to recover a dower interest in certain real estate which her husband has conveyed to the corporation ; and that she is looking for information which may assist her brother, who is a competitor of the corporation. This last contention is not supported by the evidence. Assuming that the other contentions of the defendant are well founded, we do not think that under the broad right of in- spection given by the statute the purpose should be adjudged vexa- tious, improper, or unlawful, even if that question is open. Accord- ingly, we hold that the power of the court was properly exercised in this case. . . . Exceptions overruled} Section 3. — Dividends. HYATT ET AL. v. ALLEN.^ 56 N. Y. 553. 1874. Action to recover a dividend of $300 received by defendant upon twenty shares of stock of Albany Dental Plate Company, a corpo- ration. 1 In Klotz V. Pan-American Match Co., 221 Mass. 38, writ of mandamus was granted against a Delaware corporation whose manufacturing plant, principal office and books were in Massachusetts and which had accepted the provisions of the do- mestic statute enabling it to do business there, to permit plaintiff's inspection of its books generally. This result was reached in spite of a by-law providing that the directors should decide, whether, when and under what conditions, inspection of the corporate books would be allowed. Held: (1) the court had jurisdiction of the parties and a practical means of enforcing its orders ; that, as was said in Andrews v. Mines Corporation, 205 Mass. 121, in order to enforce this right of inspection, "the court is not called upon to investigate the internal affairs of the corporation, or to make any order that affects it in the management of its business, or in the relation of stock- holders to one another" ; (2) that no charter or other provision of the general corpo- ration law of Delaware, or any ruling on the common law of Delaware, having been introduced, which would authorize the by-law aforesaid, upon which and the action of its directors thereunder, defendant justified its refusal, the law would be presumed to be the same as in Massachusetts ; that, under the law of the latter state, a by-law must be reasonable and must not contravene the established principle of right guaran- teed by the common law ; that the by-law was invalid and could not deprive petitioner of his legal rights ; that "undoubtedly a corporation may make reasonable regulations as to the time and manner of the inspection of its books by stockholders. But it can- not make a by-law which denies or unreasonably obstructs their common law right. Hodgens v. ijnited Copper Co. (N. J. Sup.) 67 Atl. 756 ; State v. Citizens' Bank, 51 La. Ann. 426 ; State v. Jessup & Moore Paper Co., 24 Del. (1 Boyce) 379 " ; that the right of inspection would be afforded on common law principles, the statutory right applying only to domestic corporations. » Facts restated ; portions of opinion omitted. SECT. 3.] HYATT ET AL. V. ALLEN. 545 The parties, on August 11, 1871, entered into contract by which plaintiffs, then owning the said twenty shares, agreed to exchange same with defendant for stock in another concern, and defendant covenanted "that all profits and dividends of and upon the stock of the Albany Dental Plate Company so exchanged, up to the first day of January, 1872, shall be paid" to the plaintiffs. The exchange was made. No dividends were thereafter declared on the stock, nor any distribution or division of profits made or paid by the company until April 9, 1872, when a dividend of fifteen dollars on each share was declared, whereby the defendant was en- titled to receive, and did receive on the twenty shares transferred to him by the plaintiffs, $300. The referee finds that of this sum $250 was derived from the in- crease in the value of the assets and cash of said company on hand Januarj' 1, 1872, over the value of its cash and other assets August 11, 1871, the date of the agreement, and for that sum he directed judgment against the defendant. Defendant appeals. Andrews, J. The question of law in the case is whether, upon the facts found, there were any profits or dividends on the stock to which, under the agreement, the plaintiffs were entitled. It is conceded that the plaintiffs are not entitled to recover any- thing by force of the word dividends contained in the agreement. This word when used in reference to corporate stocks has a technical but well understood meaning, and indicates corporate funds derived from the business and earnings of the corporation, appropriated by a corporate act to the use of and to be divided among the stock- holders.i If it has in some cases a broader signification, it is not material now to notice it. The defendant agreed that dividends to the 1st of January, 1872, should be paid to the plaintiffs. As no declaration of a dividend was made until April 9, 1872, the defendant incurred no hability under this part of the agreement. It is claimed, however, that the increase in the assets of the com- pany from the date of the agreement to January 1, 1872, were profits, and that the defendant having as a stockholder an interest in them, that interest was a profi,t on the stock which he had bound himself to pay to the plaintiffs. If this position can be sustained, the defendant derived no benefit from the limitation of the habihty to pay dividends, to such as should be declared prior to January 1, 1872, because, under the name of jyrofiis, the plaintiffs would be entitled to recover the defendant's share of the earnings of the company up to that time, whenever they might be divided. But it is to be observed that the > The nature and source of dividenda has been hereinbefore considered. Gooduow V. American Writing Paper Co., ante, page 407, and note 1, page 410, ante. As to the liability of directors for improperly declaring dividends, see Leeds &c. Co. v. Shepherd, ante, page 612, and note 2, page 515, ante. We now consider the rights of stockholders in respect to dividends which have been declared and in respect to compelling the declaration thereof. 546 SHAREHOLDERS — DIVIDENDS. [CHAP. IV. defendant's undertaking was that the "profits and dividends of and upon the stock" should be paid to the plaintiffs. A shareholder in a corporation has no legal title to the property or profits of the corporation until a division is made. In Browne v. Collins (L. R. [12 Eq. Cas.], 594) the vice-chancellor, in speaking of the rights of a stockholder, says : "He has no inchoate or other right till the divi- dends have been declared." The undivided profits of a corporation may never be received by the stockholders. They may be squan- dered or lost, and no benefit may accrue to the stockholders therefrom. The covenant of the defendant related to profits of the stock up to the 1st of January, 1872. There were profits earned by the corpo- ration up to that time, but to these the covenant does not apply. They were not profits of the stockholders in any legitimate sense. There were no profits accruing to the stockholders until they were set apart by the corporation for their use. If the construction of the covenant claimed by the plaintiffs is correct, the defendant would be liable for a pro rata share of the profits earned by the corporation up to January 1, 1872, irrespective of the fact of a division. This would subject the defendant to liability if upon an investigation of the affairs of the company at that time it should appear that profits had been earned. It can hardly be supposed that it was intended to subject the defendant to so inconvenient and onerous an obliga- tion. A gift of the profits and dividends of stock for life would not, I think, be held to carry dividends declared after the death of the beneficiary, although made from profits accrued during his Hfe. The language of the vice-chancellor in Clapp v. Astor (2 Ed. Ch., 379) is applicable, and the principle stated is founded in good sense. He says : "When, therefore, a contract is made in relation to divi- dends or profits, it must be deemed to have reference to dividends or profits to be ascertained and declared- by the particular company, and not to growing profits from day to day, or month to month, to be ascertained upon an investigation by third persons, or courts of justice, into the accounts and transactions of the company." The words profits a,nd'dividends, in the contract in question, related to profits or dividends realized by the defendant as a stockholder, or declared by the company, prior to January 1, 1872, and as no division of profits or declaration of dividends was made, the plaintiffs are not entitled to recover. The fact that this construction does not affix a separate and distinct meaning to the terms used is a consideration which is not entitled to much weight. No word is rejected, and the use of several words in a contract to express substantially the same thing is certainly not infrequent. That the words referred to were so used in the contract in question is apparent from the considera- tion of the whole instrument. SECT. 3.] Jackson's adm'rs v. newabk plank-road co. 547 The judgment should be reversed, and a new trial ordered. All concur except, Church, Ch. J., dissenting. Judgment reversed.^ JACKSON'S ADMINISTRATORS v. THE NEWARK PLANK-ROAD COMPANY. 31 N." J. L. 277. 1865. On demurrer to declaration. The Chief Justice.'' This is an action of assumpsit. The first two counts of the declaration are special, and, in substance, are identical ; the gravamen of each consisting of the following circum- stances, viz., that the plaintiffs' intestate was the owner of certain shares of the capital stock of the defendants, for which he held cer- tificates ; that thereby he became a stockholder in said corporation, and entitled to all the rights of a shareholder and to a participation ' In Boardman v. Lake Shore & M. S. Ry. Co., 84 N. Y. 157, Millbb, J. said : A shareholder in a corporation has no legal title to the property or profits of the corpora- tion until a division is made or a dividend declared. When this is done, the dividend belongs to the owner of the share at the time, and until the dividend is declared it is a portion of the assets of the corporation, and an assignment of the stock carries with it its proportionate share of such assets, which necessarily include as an incident all undeclared dividends." In Jermain v. Lake Shore & M. S. By. Co., 91 N. Y. 483, Earl, J. said : "Before a dividend has been declared, a share of stock represents the whole interest which the shareholder has in the corporation, and when he transfers his stock he transfers his entire interest, and dividends subsequently declared, without reference to the source from which or the time during which the funds divided were acquired by the corpora- tion, necessarily belong to the holder of the stock at the time of the declaration. But; when the dividend has once been declared and credited to the shareholder, the amount thereof has been separated from the assets of the corporation and been appropriated to his use. It is then no longer represented by his stock and is no longer an incident thereof ; and hence when he transfers his stock he does not transfer his dividend, which remains subject to his control." A sale of stock made after declaration of a dividend,, will not carry the dividend with it, although the dividend may not be paid or payable until after the sale. Bright V. Lord, 51 Ind. 272. (Holder of option for purchase of stock, made prior to declara- tion of dividend, not entitled to dividend declared before, but not payable until after, the time he exercised the option.) While an express contract will determine the disposition of a dividend, the law will fix the ownership in accordance with the foregoing principles, if there be no contract or if it is silent on the particular point. Hopper v. Sage, 112 N. Y. 530. When no particular day is named in a corporate resolution, declaratory of a dividend, the divi- dend belongs to those who are stockholders on the day of its declaration. Ibid. And this is so irrespective of provisions made by the resolution for the temporary closing of the transfer books for dividend purposes. Ibid. But see contra (as to the last point) Burroughs v. North Carolina R. R. Co., 67 N. C. 376. See Wallin v. Johnson City Lumber &c. Co., 188 S. W. (Tenn., 1916) 577. '(Corpo- ration has reasonable time within which to make payment of dividends declared by its directors.) 2 Beasley. 548 SHAEEHOLDERS — DIVIDENDS. [CHAP. IV. in the profits of said corporation, and to his share and full proportion of all profits made by said corporation, and of the dividends thereof declared or made among the shareholders ; and that in consideration thereof the said corporation thereby promised said intestate that he should be entitled to all the rights of a shareholder therein, and that he should receive a share of the profits made by the said corporation, and of the dividends thereof declared among the shareholders, in proportion to the number of shares so held by him. The breach assigned is, that the defendants having made large profits, to wit, five per centum on each share of their capital stock, declared a divi- dend thereof to each of their shareholders, except to the plaintiffs' intestate. As the demurrer admits these facts, it would seem to follow, as an inevitable conclusion, that the plaintiffs have a cause of action against the defendants, and that the only question to be considered is, whether it is enforceable in this present form of proceeding. The suit appears to be one of the first impression, but this circumstance is of no importance if it be founded in correct legal principles. The theory upon which the plaintiffs' case rests appears to be this : a person holding, as owner, the stock of a corporation, be- comes thereby entitled to a proportionate share in the profits of the company, and that, consequently, a duty is imposed by law, on the body corporate, to distribute all dividends which, from time to time, may be declared, ratably on all its capital stock ; and from this duty, it is said, springs the implied promise stated in the declaration. I am unable to perceive any flaw in this statement of principles, or in the deduction which is made from them. It is clearly, as a general thing, the duty of the corporation to give to each stockholder an equable share of such dividends as are declared, and it has been all established doctrine of the courts that most of the duties imposed upon corporations by law, raise implied promises which will, sustain, when broken, the action of assumpsit. . . . The class of adjudications which bears the closest analogy in principle to the case now considered, is that which relates to the remedy on the refusal of the corporation to transfer stock at the request of the owner.i As long ago as the time of Lord Mansfield^ it was decided that a special action of assumpsit was the remedy for such breach of duty. Rex v. Bank of England, Doug. R. 525, and the same rule has been repeatedly sanctioned and enforced by the courts of this country. Shipley v. Mechanics Bank, 10 Johns. 484 ; Angell & Ames on Corp., chap. XVI. And upon hke grounds in Gray v. The Portland Bank, 3 Mass. 364, it was held by the Supreme Court of Massachusetts, tha,t a special action on the case would lie against an incorporated company for a refusal to permit one of its stockholders to subscribe for a fair proportion of certain new stock, ' See Sec. 5, infra. SECT. 3.] Jackson's adm'rs v. newaek plank-road co. 549 which had been issued by the corporation, with a view to increase its capital.' It will be perceived that in each of these cases the promise sued on was impUed from the legal duty due from the corporation to the stockholder, growing out of the mere relationship between them. It is one of the obHgations of a corporation, inherent in its essential nature, to permit, at the request of the holder, a transfer of its stock ; and as this is an obligation not due to the members at large, but ex- clusively owing to the individual stockholder, it was properly held that the law, upon its ordinary principles, implied an agreement on the part of the company to discharge such specific obhgation. But the right to transfer stock is no more an incident to its owner- ship than is the right to dividends upon it ; and the duty of the com- pany, in making a distribution of profits, to appropriate a quota to each share of stock, is, in all respects, as definite and specific as is the duty to allow a transfer of stock on a sale. In iieither case does the act to be done rest in the discretion of the company, and in both of them the duty is due, not to the members in general, but to each separate stockholder. It is not perceived how these two classes of cases are to be discriminated. If a suable promise can be deduced from the absolute and specific duty to allow stock to be transferred, so must the same result follow from the absolute and specific duty to set off, when dividends are declared to each share of stock, its distributive allotment. It appears to me that the general rule, dis- tinguishing between that class of duties which give rise to actional promises by implication and those which do not, may be thus stated ; that in all cases in which the duty is definite and due to the individual, such promise will be implied; but that, on. the other hand, when such duties are indefinite or are due to the members in their collective capacity, no such promise can be inferred. Thus, as an illustration, the duty to declare a dividend, where profits are in hand, is one of the indefinite and general character alluded to, it is, to a certain ex- tent, discretionary in its nature, and it is due, in no sense, to any particular member, but to the community of members, and hence there is no promise for its performance to be drawn in favor of the separate shareholder. But after a dividend is declared the right to the profits becomes individuahzed, and the duty to distribute, in certain proportions, which, so far from being arbitrary, are mere matters of arithmetical calculation, becomes attached as a right to each member distributively ; and from these incidents arises the promise by implication. . . . Judgment should be entered for the plaintiff on the present record. •Judgment for plaintiff .^ • See Sec. 4, infra. ' No action for a dividend may be maintained at law against a corporation, even by a preferred stockholder, until the directors have declared a dividend. The fact that ample profits have been made is immaterial. Knight v. Alamo Mfg. Co., 157 N. W. 550 SHAREHOLDERS — DIVIDENDS. [CHAP. IV. McLARAN V. THE CRESCENT PLANING MILL COMPANY.! 117 Mo. App. 40. 1906. The appellant was a business corporation with a capital stock of $50,000j divided into 500 shares of the par value of $100 each. Re- spondent's testator, Robert J. Humber, was in his lifetime proprietor of fifty-seven full paid shares of said corporate stock. The corpora- tion being solvent and possessing ample surplus funds, at a regular meeting of its board of directors, held on February 7, 1903, unani- mously adopted the following resolution: "Moved and seconded that the company declare a dividend of six per cent., divided into four payments of one and one-half per cent, each, payable February 15, April 1, July 1, and October 1, 1903." No further resolution was passed nor were there additional steps taken in any manner to set apart a fund out of which to pay the dividend, although the com- pany was solvent and then had on hand, according to the showing made that day, something near $10,000 undivided profits and $29,000 surplus. Notwithstanding the fact that no separate resolution was adopted setting aside a fund out of which said dividend should be paid, the oflScers of the company proceeded to and did actually pay the plaintiff and other stockholders the first installment of said divi- dend, the one and one-half per cent, installment falling due February 15, 1903. The one and one-half, per cent, installment falling due April 1st, was not paid and at a meeting of the board of directors held April 11th, it was shown that an error had been discovered in the previous showing of the financial condition of the company and that its assets were actually $6,000 less than had been undopstood, which reduced its surplus from $29,000 to $23,000. For this and other business, reasons which appeared sufiicient to the board of directors, the board on that day adopted the following resolution: "Moved by Mr. Herman and seconded by Thomas Sparks that on the recommendation of the president's report rescinding and recalling of dividends payable April 1st, July 1st and October 1st be adopted ; that payment of said dividends be indefinitely deferred and the said dividends rescinded and recalled." Whereby it sought to revoke and rescind the former declaration of dividends. The company was perfectly solvent and had ample funds on hand at the time to pay the dividend and retain a comfortable surplus of $20,000. (Mich., 1916) 24. See also Boardman v. Mansfield, 79 Conn. 634; Northwestern Marble &c. Co. «. Carlson, 116 Minn. 438; Winchester &c. Turnpike Co. v. Wiokliffe, 100 Ky. 531 ; Field v. Lamson &c. Mfg. Co., 162 Mass. 388. 1 Statement of facts condensed ; portions of opinion omitted. SECT. 3.] MoLAEAN V. THE CRESCENT PLANING MILL COMPANY. 551 Plaintiff requested the payment of his installment of the dividend, falling due April 1st, which amounted to 1235.50, and it was refused on the ground that its declaration and allowance had been superseded and set aside by resolution of May 11th, supra; whereupon he in- stituted this suit, an action at law, against appellant seeking to re- cover the amount of the installment due April 1st, $235.50, and six per cent, interest thereon from April 1, 1903. Judgment for plaintiff. Defendant appeals. NORTONI, J. The precise questions arising on the record calling for the opinion of the court are : First. Whether the mere declaration of a dividend by a solvent corporation under such circumstances as indicated, creates a debt in favor of the stockholder and against such corporation for the amount of such dividend in the absence of further express action on the part of the board of directors, setting aside a fund out of which to pay such dividend ? Second. Is it competent for such corporation, after having de- clared the dividend, to pay one installment thereon and to rescind and recall the installments thereof yet unpaid ? Counsel for appellant presents the following definitions of the word " dividend," from the authorities cited : "A dividend is defined as follows: 'A profit set aside, declared by the board of directors of a corporation and ordered by them to be distributed among the holders of its stock.' [9 Amer. and Eng. Ency. Law (2 Ed.), 680.] 'A dividend is a fund which the corpo- ration sets apart from its profits to be divided among its members.' [Anderson's Law Dictionary, p. 369.] 'A dividend is that portion of the profits and surplus funds of the corporation which has been actually set apart by a valid resolution of the board of directors, or by the shareholders at a corporate meeting, for distribution among the shareholders according to their respective interests, in such a sense as to become segregated from the property of the corporation, and to become the property of the shareholders, distributively.' {2 Thompson on Corporations, sec. 2126.]" Upon the words "set aside," "set apart," and "actually set apart," 'employed in the definitions above stated, the learned counsel pred- icates the argument that a resolution declaring a dividend is not sufficient to create a dividend, or, in other words, to create a debt from the corporation to the stockholders therefor, in the absence of further action on the part of the corporation setting apart a fund out of which the dividend or debt is to be paid. It is insisted that such resolution declaring a dividend, as in this case, is but an ex- pression of intention in that behalf, which, to constitute it effectual for that purpose, must be followed or accompanied with coinpetent action as well, setting aside a fund out of which the dividend is to be 552 SHAREHOLDERS — DIVmENDS. [CHAP. IV. paid when due, and until such fund is set aside for that purpose, no dividend has been declared and no right thereto is vested in the stock- holders, and therefore it is competent for the same authority to rescind or recall the former action in that behalf. In short, it is ar- gued that a declaration of a dividend and the fixing of a time for its payment does not create a dividend in the absence of the setting apart a fund out of which it is to be paid. With this thought in mind, we have carefully examined the many authorities and find the fundamental idea running through every case (save one)^ to be that if the declara- tion of the dividend is fairly and properly made, out of profits exist- ing at the time it is declared, the relation of debtor and creditor is thereby established between the corporation and the stockholders and a debt is thereby created against the corporation and in favor of the stockholder for the amount of the dividend due on the stock held by him. Lowne v. Amer. Fire Ins. Co., 6 Paige's Ch. Rep. 482; Hunt V. O'Shea, 69 N. H. 600 ; Terry v. Eagle Lock Co., 47 Conn. 141 ; Wheeler v. N. W. Sleigh Co., 39 Fed. 347 ; Hill v. Newicha- wranick, 8 Hun (N. Y.) 459 ; s. c, 71 N. Y. 593 ; De Gendre v. Kent, L. R. 4 Eq. 283; Hopper v. Sage, 112 N. Y. 530; Bright v. Lord, 51 Ind. 272; Ex Parte Windsor, 3 Story 411; Price v. Mining Co., 53 Mo. App. 470; Leroy v. Globe Ins. Co., 2 Edwards' Ch. 657; Beers v. The Bridgeport Spring Co., 42 Conn. 17 ; King v. Paterson, 3tc., Ry. Co., 29 N. J. L. 504; King v. Paterson, etc., Ry. Co., 29 N. J. L. 82 ; In re Le Blanc, 14 Hun (N. Y.) 8 ; Mo. Baptist San. >. McCune, 112 Mo. App. 332. And the doctrine is that a dividend is considered parcel of the nass of corporate property until declared and therefore incident to md parcel of the stock up to the time it is declared, and before its leclaration, will pass with the sale or devise of the stock. Whoso- ;ver owns the stock prior to the declaration of a dividend, owns ihe dividend also, but the moment the dividend is declared it becpmes )hen separate and distinct from the stock and the dividend falls to lim who is proprietor of the stock of which it was theretofore incident. In De Gendre v. Kent, L. R. 4 Eq. 283, such dividends were happily ikened to fallen fruit which does not pass with the sale or gift of the Tee ; the principle clearly established being that the act of declaring he dividend operates as a severance thereof from the stock, and as aid in Missouri Baptist Sanitarium v. McCune, 112 Mb. App. 332, he time the law fixes in adjusting the ownership of dividends is the ime when the dividends were declared and thus severed from the tock of which they were theretofore treated as incident. Under he foregoing principles, a specific legatee of corporate shares is en- itled to all dividends which are declared after the death of the estator. Wright v. Warren, 4 De Gex Rep. 367 ; Browne v. Collins, • The court probably refers to Ford ». East Hampton &c. Co., cited and discussed y it infra. SECT. 3.] McLAEAN V. THE CRESCENT PLANING MILL COMPANY. 553 12 Eq. 586; Ibotson v. Elam, 1 Eq. 186; Jacques v. Chamber, 2 •CoUyer 435. A transfer of stock passes, of course, all dividends declared subsequent to the transfer although the dividend was earned before the transfer was made. A legatee of shares takes the stock AS it was at the time of the testator's death. All dividends declared previous to that event go to the administrator. Brundage v. Brun- dage, 60 N. Y. 544 ; In re Kernochen et al., 104 N. Y. 618 ; Johnson v. Bridgewater Iron Mfg. Co., 80 Mass. 274. And upon the principle that the declaration of the dividend operates as a severance thereof from' the stock in the general mass of the corporate property, and raises from such declaration an implied promise on the part of the corpo- ration to pay the stockholder the amount of the dividend, it has been adjudicated that when moneys for the payment of such divi- dends are not set apart for the payment thereof, but are permitted to remain still in the corpus of such corporate estate after the declara- tion, the stockholder stands as a general creditor of the concern in bankruptcy who can come in only ratably with such creditors, look- ing to the general estate for liquidation of his dividend debt. Lowne V. Amer. Fire Ins. Co., 6 Paige's Ch. 482 ; Hunt v. O'Shea, 69 N. H. 600. While on the other hand, the converse of this principle has been stated and applied in cases where the dividend has been de- clared and a fund set apart out of which to pay the same. Under such circumstances, it is held that such action on the part of the corporation in setting aside the fund for the specific purpose consti- tutes such moneys a trust fund in the hands of the corporation for the use of the stockholders, and in event of the bankruptcy of the ■corporation, the stockholders are not required to go in pro rata with the general creditors for such unpaid dividends, but may proceed as against a trustee on account of such trust fund and recover the "whole of their pro rata thereof. Leroy v. Globe Ins. Co.,' 2 Ed- wards' Ch. Rep. 657 ; King v. Paterson, etc., Ry. Co.," 29 N. J. L. 504; In re Le Blanc, 14 Hun (N. Y.) 8; Hunt v. O'Shea,' 69 N. H. 600. 1 In this case, the corporation declared a dividend on Nov. 10th, payable Dec. 1st. Dividend checks dated Dec. 1st were prepared and signed, ready to be delivered to the stockholders as they should call therefor. A disastrous fire subsequently rendered the insurance company insolvent. Plaintiff stockholder called for his check after the fire. Held: The dividend had been so far set apart that it became a trust fund in the hands of the corporation ; hence plaintiff was entitled to his share of the fund to the exclusion of the general creditors of the insolvent corporation. 2 In this case, the corporation declared a dividend and deposited a fund, sufficient to pay it, with a trust company. Before the day of payment, the trust company failed. Held : the declaration of a dividend created the relation of debtor and creditor between the corporation and its stockholders ; the tnist company was the agent of the debtor, not of the creditor ; the fund having been lost in the hands of the agent, the loss falls upon the corporation as owner, since the fund remained its property until the payment was made. Hence a stockholder may maintain action against it to re- cover the dividend. , ., ' In this case, a dividend had been declared but no fund set apart for its payment. Jleld; Stockholders were not entitled to priority over general creditors in bankruptcy. 554 SHAREHOLDERS — DIVIDENDS. [CHAP. IV. Wherefore, it appears that the principle obtains that the mere declaration of thd dividend, without more, by competent authority under proper circumstances, creates a debt against the corporation in favor of the stockholder the same as any other general creditor of the concern ; whereas, the setting apart of a fund after or con- current with the declaration, out of which the debt thus created is to be paid, passes one step further toward securing the payment of the identical fund to the shareholder inasmuch as the law treats the setting apart of such fund as a payment to the corporation as trustee for the use of the stockholder, on which fund the stockholder has a lien, and to which fund he has rights superior to the general creditor. From these considerations we are persuaded that the mere declara- tion of the dividend itself, without the setting aside of the fund, creates a debt and that when the learned text-writers supra employed the terms "set aside," "set apart," and "actually set apart," as above pointed out, they proceed upon the theory and principle supra, that the act of declaring a dividend, operating as it does, as an actual severance of the dividend from the stock and corpus of the corporate property and estate, is ipso facto, in and of itself, the setting apart, setting aside and segregating such dividends in the sense that it creates an immediate right of the stockholder to demand and recover the same when due, inasmuch as thereby it is actually severed and segregated from the other property. This seems quite clear by noting the manner in which the authorities have employed the ex- pressions and applied the pertinent principles in the adjudicated cases. The doctrine is that by the mere declaration, the dividend becomes immediately thereby separated and segregated from the stock and exists independently of it ; that the right thereto becomes at once immediately fixed and absolute in the stockholder and from thenceforth the right of each individual stockholder is changed by the act of declaration from that of partner and part owner of the corporate property to a status absolutely adverse to every other stockholder and to the corporation itself, in so far as his pro rata proportion to the dividend is concerned. Wheeler v. N. W. Sleigh Co., 39 Fed. 347; Beers v. Bridgeport Spring Co., 42 Conn. 17; Hill V. Newichawanick, 8 Hun (N. Y.) 459 ; Hopper v. Sage, 112 N. Y. 530 ; Bright v. Lord, 51 Ind. 272 ; Terry v. Eagle Lock Co., 47 Conn. 141 ; Hunt v. O'Shea, 69 N. H. 600. It follows, of course, that a cash dividend, properly and fairly declared, cannot be revoked by the subsequent action of the corpo- ration, for if, by the declaration of the dividend, the corporation thereby becomes the debtor of the stockholder, it goes without saying that the debtor cannot revoke, recall or rescind the debt or other- wise absolve itself from its payment by any action on its part against or without the consent of the creditor, and therefore the resolution of April 1 1th, attempting to so do, was of no force. Ex Parte Windsor, SECT. 3.] McLARAN V. THE CRESCENT PLANING MILL COMPANY. 555 3 Story 411 ; Beers v. Bridgeport Spring Co., 42 Conn. 17; 1 Mora- wetz Pri. Corp. (2 Ed.), 445; 9 Amer. and Eng. Ency. Law (2 Ed ) 629. Ford V. East Hampton Rubber Thread Co., 158 Mass. 84, is relied upon by appellant as authority for the action of the board of directors in rescinding the dividend. In that case the board of directors made and declared a dividend, but before notifying any of the stockholders except the directors themselves who were present, and without hav- ing set apart a fund for its payment, rescinded and recalled their action declaring the same. The court held, laying stress upon the facts that none of the stockholders knew of the original vote by which the dividend was declared, and that no fund had been distinctively set apart for its payment, "the passage of the vote did not constitute an actual contract of the corporation with the stockholders, but was merely a mode of dividing its profits, and it is therefore competent under the circumstances, to rescind the dividend." The decision of that case xan only be sustained upon the theory that the declaration of the dividend did not create a debt to the stockholders, for if a debt was thereby created, it is preposterous to say that such debt can be cancelled by the action of the debtor without the consent of the creditor. In fact, we understand the opinion, inasmuch as it is there asserted that "the passage of the vote did not constitute an actual contract of the corporation with the stockholder," as hold- ing that the declaration of the dividend did not create a debt ; and if this be its holding, it stands out boldly, single and alone in this country against an unbroken line of cases and overwhelming weight of authority that we are not at liberty to disregard, were we so in- chned, and we are not. On the other hand, if that case proceeds and predicates upon the theory that the declared dividend is a debt, which proposition is so well estabUshed that it is now far removed from the realm of controversy, and that being such debt, it is com- petent for the debtor to rescind it without the consent of the creditor, it is so palpably unsound as to require neither citation nor argument to refute it. The judgment will therefore be affirmed. It is so ordered} 1 See Dock v. Schlichter Jute &c. Co., 167 Pa. 370. {Semble — If a fund is not actually set aside, or other express appropriation made, directors may rescind a resolu- tion declaring a dividend in a proper case and for cause, as where the corporate manu- facturing plant is destroyed by fire immediately foUowing such resolution. " If in the business and honest judgment of the board the earnings intended to be distributed should be recalled and used for the restoration of the destroyed property, it would be within its power to so deal with them.") , ,. . , , , . , , A stock dividend stands on a different basis from a cash dividend and its declara- tion may be rescinded at any time prior to actual issuance of the stock. Terry v. Eagle Lock Co 47 Conn. 141. Whether this result is attributable to the inherent fact that the right to a stock dividend is a "mere naked right which hf ™ight ^aive without losing anything, and might enforce if it could be enforced^wlthout gaimng anything", (Eagle Lock Co., case, supra), or is due to the fact that the issuance of a stock dividend normally requires, besides its declaration, comphance with legal for- 556 SHAREHOLDERS — DIVIDENDS. [CHAP. TV. WILLIAMS V. WESTERN UNION TELEGRAPH C0.» 93 N. Y. 162. 1883. The defendant made a contract with two other telegraph com- panies whereby it agreed to purchase and they to convey to it all their property, &c. Its capital stock at the time was $41,073,410. It agreed to take the necessary steps to increase same to $80,000,000, of which increased stock $23,400,000 was to be the consideration for the conveyance aforesaid, and the balance of $15,526,590 was to be declared as a stock dividend to its then stockholders. This action was brought by a stockholder to test the validity and restrain the carrying out of the contract. The trial court found that the value of the property purchased was equal to the par value of the stock to be paid therefor ; that there was no fraud or collusion ; that the Western Union Telegraph Co. owned, at the time, over and above its then capital, property equal in value to the amount of the stock dividend. The General Term ruled, however, against defend- ant, who now appeals. Eakl, J. The stock dividend was claimed to be in violation of chapter 18, part 1, title 4, section 2 of the Revised Statutes, which provides as follows: "It shall not be lawful for the directors or managers of any incorporated company in this State to make divi- dends excepting from the surplus profits arising from the business of such corporation ; and it shall not be lawful for the directors of any such company to divide, withdraw, or in any way pay to the stock- holders, or any of them, any part of the capital stock of such company, or to reduce the said capital stock without the consent of the legis- lature; . . ." This dividend was condemned by the General Term of the Superior Court as a violation of that section. Our attention has been called to no other law forbidding or condemning a stock dividend, and in* their allegations against it the counsel for the plaintiff rely mainly upon that section. We are unable to perceive that that section has any bearing whatever upon the question we are to determine. These provisions were intended to prevent the division, distribution, with- drawal and reduction of the property of a corporation below the sum malities precedent to an increase of its capital, whereby ••all is in fieri", (Machen, Modern Law of Corp., Vol. I, Sec. 601), is not perfectly clear.' See opinion of Rogers, J., elaborately reviewing the cases, in Staats v. Biograph Co., reported in N. Y. L. J. of July 12, 1916 (U. S. Circuit Court of Appeals, 2d Circuit, 1916), and holding that the declaration of a stock dividend rests in fieri and hence, not having become obliga- tory upon the corporation, was subject to repeal. 1 Statement of facts condensed from head note ; portions of opinion omitted. Only so much of the opinion is given as relates to the validity of the stock dividend. The purchase was held valid. SECT. 3.] "WILLIAMS ». WESTERN UNION TELEGRAPH CO. S limited in its charter or articles of association for its capital, but r to prevent its increase above that sum. The purpose was to p vent the depletion of the property of the corporation thereby « dangering its solvency. All the other provisions of the section shi very clearly that such was the intention. All these provisions shi that it was the purpose of the legislature, by means of them, to crej a property capital for the corporation, and then to keep that intj so as to secure the solvency of the corporation and its responsibili to its creditors. The "capital stock" in this section does not me share stock, but it means the property of the corporation contribut by its stockholders or otherwise obtained by it, to the extent : quired by its charter. By loss or misfortune, or misconduct of i managing officers of a corporation,, its capital stock may be reduc below the amount limited by its charter ; but whatever propei it has up to that limit must be regarded as its capital stock. Wh its property exceeds that limit, then the excess is surplus. Su surplus belongs to the corporation and is a portion of its proper and, in a general sense, may be regarded as a portion of its capit but in a strictly legal sense it is not a portion of its capital, and always regarded as surplus profits. The very section we are cc sidering contemplates that there may be a surplus, and that svi surplus may be divided. The surplus may be in cash, and then may be divided in cash ; it may be in property, and if the propei is so situated that a division thereof among the stockholders practicable, a dividend in property may be declared, and that m be distributed among stockholders. All such dividends dimin: and deplete the property of the corporation, and that section v designed to prevent dividends of property which tended to depli the assets of the company below the sum limited in its charter the amount of its capital stock. But stock dividends never dimin: or interfere with the property of a corporation, and hence are r within the purview of that section. After a stock dividend a corj ration has just as much property as it had before. It is just solvent and just as capable of meeting all demands upon it. Af such a dividend the aggregate of the stockholders own no more terest in the corporation than before. The whole number of sha: before the stock dividend represented the whole property of i corporation, and after the dividend they represent that and' no moi >In Green v. Bissell, 79 Conn. 547, Phbntice, J. said : "The declaration o stock dividend involves the creation and issue of new shares of stock. The basis the issue, in so far as payment into the corporation is not required of the recipient surplus assets, which thus become converted into strict capital with all which t implies. From the process there results an increase of both the number of outsta ing shares and the amount of the corporate assets, which have had that peculiar di cation to the corporate uses which entitles them to the name of capital, strictly spe ing. Smith v. Dana, 77 Conn. 543, 552, 60 Atl. 117. It is also one of the-inoidt of a stock dividend, that the stockholder who receives his pro rata proportion of new issue, while he acquires the ownership of more shares, adds nothing to his pro] 558 SHAREHOLDERS — DIVIDENDS, [CHAP. IV. A stock dividend does not distribute property, but simply dilutes the shares as they existed before ; and hence that section in no way prevented or related to a stock dividend. Such a dividend could be declared by a corporation without violating its letter, its spirit or its purpose. It is, therefore, clear that the directors of the Western Union Telegraph Company did not violate that section by the stock dividend which they declared ; and if that dividend was illegal it must be because it was condemned by some other statute, or by some general principle of law or by public pohcy. Our attention has been called to no statute, and we know of none in this State which prohibits a corporation from making a stock dividend. The legislatures in some of the States have, we believe, passed laws prohibiting such dividends; but in this State no such law has been enacted. There is no pubhc policy which, in all cases, condemns such divi- dends. Shares having been legally brought into existence may be distributed among the stockholders of a company. By such dis- tribution no harm is done to any person, provided the dividend is not a mere inflation of the stock of the company, with no corre- sponding values to answer to the stock distributed. It may be that a distribution of stock gratuitously to the stockholders of a company based upon no values, a mere inflation, or, to use a phrase much in vogue, a watering of stock, would be condemned by the law. But when the stock has been lawfully created and is held by a corpora- tion, which it has a right to issue for value, then a stock dividend may be made, provided that the stock always represents property. It is conceded that the directors of the Western Union Telegraph Company could have issued this stock for money to be paid into its treasury. It could have issued it for property to be received by it for the purposes of its legitimate business. But here it is found that over and above its capital it possessed property actually worth upwards of $15,000,000, and we know of no law that is violated, and no public policy that is invaded by issuing to the stockholders stock to represent that amount of property rather than in any mode to divide it up and distribute it among them. If it can issue stock in payment of property to be obtained by it as part of its capital for its legitimate uses, why may it not issue stock to its stoclcholders in payment for property in effect purchased of them and added to its permanent capital, and which they relinquish the right to have di- vided ? So long as every dollar of stock issued by a corporation is represented by a dollar of property, no harm can result to individuals or the public from distributing the stock to the stockholders. Here tionate ownership of the assets of the corporation. His holding, after the new issue, bears precisely the same ratio to the total of the outstanding shares of the corporation as did his previous holding to the previous total. Terry v. Eagle Lock Co., 47 Conn. 141." SECT. 3,] WILLIAMS V. WESTERN UNION TELEGRAPH CO. 5£ there was no fraud, no conspiracy, no unlawful combination, an we are bound, under the findings of the court at Special Term, t assume that all this was done in good faith; and we know of n principle of law, no pubUc policy, and no statute that condemns stock dividend under such circumstances. Howell v. The Chicag & Northwestern R. Co., 51 Barb. 378; Jones v. Terre Haute ( Richmond R. R. Co., 57 N. Y. 196 ; Kenton Furnace, etc., Co. i McAlpin, 5 Fed. Rep. 743 ; Attorney-General v. State Bank, 1 I & B. Eq. Cas. 545 ; Minot v. Paine, 99 Mass. 101 ; Rand v. Hubbel 115 id., 471 ; Brown v. Lehigh Coal & Nav. Co., 49 Penn. St. 270 Commonwealth v. Pittsburgh, Fort Wayne & Chicago R. Co., 74 id 83 ; Terry v. Eagle Lock Co., 47 Conn. 141 ; Barton's Trust, L. R 5 Eq. Cas. 239 ; Mills v. Northern R. of B. A. Co., L. R., 5 Ch. Api 621 ; Pierce on the Law of Railroads [2d ed.], 123. It is true that this dividend largely increases the capital stock c the company, but that is not against the policy of our laws. Tha cannot be against the policy of the law which the law expressly pei mits. There is no hmit to the capital which business corporation in this State may have, and there is no limit in the law beyond whic^ they may not increase their capital. All that can be required i any case is that there shall be an actual capital in property repre senting the amount of share capital issued. Indeed, so far as th solvency and responsibility of a corporation is concerned, they ar increased by a stock dividend where it has a surplus of property t correspond to the amount of shares issued. In such case the surplu property is secured and impounded for the benefit of the creditor of the corporation and for the public, so that thereafter it can neve be legally divided, withdrawn or dissipated in any way. But if it can be conceived that this was a dividend of propert; within the meaning of the section of the Revised Statutes above se out, then what property did it divide ? Not any portion of the capita of the company ; that remained intact. After subtracting th^j divi dend there remained to the company the full amount of itfe prio capital stock, to-wit : Property to the value of $41,073^10. Sud is the finding of the trial court, and that cannot herefberdisputed The company had made surplus earnings w^ich it could have divided but instead of dividing them it had invested them in property ti facilitate and enlarge its business; and such property was found t^ be worth $15,526,590. That sum constituted its surplus. It wa commingled with the other property of the company and used fo corporate purposes. But it was not beyond the reach of the divi dend-making power of the directors.^ They could reclaim it fo division among the stockholders, and, if practicable, convert i ' So a fund created out of earnings and known as "Reserve for additional workin capital" is available for dividends. Bassett v. United States Cast Iron Pipe &c. Co infra, page 613. 560 SHAREHOLDERS — DIVIDENDS. [CHAP. IV.. into cash for that purpose. They could borrow money on the faith of it and divide that.^ They could issue to the stockholders certif- icates of indebtedness, redeemable in the future, representing their respective interests in such surplus, thus, in effect, borrowing the same of the stockholders. Desiring to use the surplus and add it to the permanent capital of the company, and having lawfully created shares of stock, they could issue to the stockholders such shares to represent their respective interests in such surplus. In doing these things no law would be violated, the capital would be kept intact, and no stockholders or creditors would have any legal right to complain. All this, however, depends upon the finding of the trial court that the surplus is equal to the dividend. That find- ing is not open to criticism here. It was not disturbed at the General Term and therefore concludes us. When a corporation has a surplus, whether a dividend shall be made, and if made, how much it shall be, and when and where it ■ shall iDe payable, rest in the fair and honest discretion of the directors uncontrollable by the courts.^ Brown v. Monmouthshire R'y & C. Co., 4 Eng. L. & Eq. 118 ; Rex v. Bank of England, 2 Barn. & Aid. 620 ; Jackson's Admr's v. Newark Plank-road Co., 31 N. J. Law, 277; Ely v. Sprague, Clark's Ch. 351. There is no statute which requires dividends in telegraph companies or in companies generally to be made in cash. Whether they shall be made in cash - or property must also rest in the discretion of the directors. There is no rule of law or reason founded upon public pohcy which con- demns a property dividend.' The directors could convert the > Accmd : Bankers Trust Co. ». Dietz Co., 157 A. D. 594. ' This is true if taken as a statement of policy. It is not correct as a statement of jurisdiction. While the courts are exceedingly loath to substitute their discretion for that of the directors to whom is confided the duty of determining whether dividends- should be declared, and will not interfere, although the constituent members of the court if sitting as a board of directors would vote unanimously for the declaration of a dividend, yet, if the discretion vested in the directors appear by cogent and convincing evidence to have been abused, rather than exercised, the court may compel the direc- tors to declare a dividend. See Crichton v. Webb Press Co., 113 La. 167 ; Blanchard v.. Prudential Ins. Co., 78 N. J. Eq. 471 ; United States &c. Ins. Co. v. Spinks, 126 Ky. 405. Since such a judgment calls for specific performance of a duty resting on the directors, equity is the only forum which can grant proper relief. Boardman v. Lake- Shore & M. S. Ry. Co., 84 N. Y. 157. As to rights of preferred stockholders in this respect, see note 1, page 614, infra. Whether common or preferred stock be involved, the refusal of directors to make proper distribution of earnings is, primarily, an injury to the stockholders collectively and must be redressed through the corporation by a representative suit in equity to compel proper action. Cf. Jackson's Admrs. ». Newark Plank-road Co., ante, page 547. And see Sec. 7, infra. »In Green v. Bissell, 79 Conn. 547, Prentice, J. said ; "Usually the assets thus distributed are in the form of cash and the distribution a cash one. This, however, is, not necessarily so, and there is no departure in principle or essence if the distributed, assets chance to be in some other form of property. Leland v. Hayden, 102 Mass. 542 ; Allegheny v. Pittsburgh, A. & M. P. R. Co., 179 Pa. St. 414; Olsen v. Homestead L. & I. Co., 87 Tex. 368 ; Scott ». Central R. & B. Co., 52 Barb. (N. Y.) 45." Distribution of stock of another corporation is a dividend of property, and not a SECT. 4.] STOKES V. CONTINENTAL TRUST CO. 561 property into cash before a dividend and divide that. So the stock- holders can take the property divided to them and sell it and thus realize the cash. Within the domain of law, it can make no material difference which course is pursued. If, however, a dividend be made payable in cash or payable generally, the corporation becomes a debtor, and must discharge such- debt, as it is bound to discharge all its other debts, in lawful currency. It is true that a stockholder cannot be compelled to receive property divided to him. So he cannot be compelled to take a cash dividend. In case of his re- fusal to take a cash dividend, the corporation may retain it for him until he shall demand it. In case he shall refuse to take a property dividend, the corporation may retain it and hold it in trust for him, or possibly sell it for his benefit. If such a case shall ever arise, the courts will find some way to dispose of it. So this plaintiff cannot be compelled to accept the stock divided to him, and thus incur the possible liability which it may impose upon him as a stockholder. In ca^e of his refusal, the corporation will find some way to deal with the stock which the law will sanction, but which need not now be pointed out. We are, therefore, of opinion upon the facts, found at Special Term, that the stock dividend was authorized by law and, therefore, valid. Reversed. Section 4. — Participation in Issues of New Stock. STOKES V. CONTINENTAL TRUST C0.= 186 N. Y. 285 ; 12 L. R. A. (N. S.) 969. 1906. Appeal from an order of the Appellate Division reversing a judg- ment of the trial court in favor of plaintiff. stock dividend within the meaning of the term as employed in the principal case. Matter of Rogers, 22 A. D. 428. This is also true of a dividend of its own shares theretofore acquired by the distributing corporation, as an incident of its business. Green ». Bissell, supra. Property dividends, like cash dividends, are distinguished from stock dividends, in that, whatever form the distribution takes, the result always is the reduction of both the corporate assets and surplus by just the amount of the dis- tribution, whereas stock dividends leave the assets and surplus unaffected. Ibid. ' The apportionment between life tenant and remainderman, to be made by a trustee holding stock in trust for them, of a cash, property, or stock dividend, is not properly a part of the law of corporations but rather a problem in ascertainment of the intent of the donor or testator. The English and American cases from all juris- dictions are collected, grouped and exhaustively reviewed by Taylok, J. in In Re Heaton's Estate, 96 Atl. Rep. (Vt., 1915) 21, a case of first impression in that state. See article by Hpn. Alexander W. Smith, 21 Yale Law Jul. 181. See also notes, 26 Harv. Law Rev. 77; 11 Col. Law. Rev. 556. 2 Statement of facts condensed ; portions of opinion omitted. 562 SHAEEHOLDEES — SUBSCEIPTION EIGHTS. [CHAP. IV. The defendant is a domestic corporation with a capital stock of $500,000, consisting of 5,000 shares of the par value of $100 each. The plaintiff was one of the original stockholders and owns 221 shares in all. On the 29th of January, 1902, the book value of the stock was $309.69 per share. On the 2d of January, 1902, Blair & Company, private bankers, made the following proposition to the defendant: "If your stockholders vote to increase your capital stock from $500,000 to $1,000,000 you may deliver the additional stock to us as soon as issued at $450 per share ($100 par value)." Upon due notice a special meeting of the stockholders was held and a resolution to increase the stock adopted by the vote of 4,197 shares, all that were cast. Thereupon the plaintiff demanded from the defendant the right to subscribe for 221 shares of the new stock at par, and offered to pay immediately for the same, which demand was refused. A resolution directing a sale to Blair & Company at $450 a share was then adopted by a vote of 3,596 shares to 241. The plaintiff voted against the last resolution and before its adop- tion protested against the proposed sale of his proportionate share of the stock and again demanded the right to subscribe and pay for the same, but the demand was refused. On the 30th of January, 1902, the stock was increased, and on the same day was sold to Blair & Company. Although the plaintiff formally renewed his demand for 221 shares of the new stock at par and tendered payment therefor, it was refused upon the ground that the stock had already been issued to Blair & Company. Owing in part to the offer of Blair & Company, the market price of the stock had increased from $450 a share in September, 1901, to $550 in January, 1902, and at the time of the trial, in April, 1904, it was worth $700 per share. The action was to compel defendant to issue to plaintiff at par such proportion of the increase made in its capital stQ<;k as the number of his shares held by him before such increase bore to the number of all the shares originally issued, and in case such additional shares could not be deUvered to him, for his damages in the premises. Vann, J. The question presented for decision is whether according to the facts found the plaintiff had the legal right to subscribe for and take the same number of shares of the new stock that he held of the old? The subject is not regulated by statute and the question presented has never been directly passed upon by this court, and only to a limited extent has it been considered by courts in this state. In other jurisdictions the decisions support the claim of the plaintiff with the exception of Ohio Insurance Co. v. Nunnemaker (15 Ind. 294) which turned on the language of the charter. The leading authority is Gray v. Portland Bank, decided ia 1807 and reported in 3 Mass. 364. In that case a verdict was found for the plaintiff. SECT. 4.] STOKES V. CONTINENTAL TRUST CO. 563 subject, by the agreement of the parties, to the opinion of the court upon the evidence in the case whether the plaintiff was entitled to recover, and, if so, as to tlie measure of damages. The court held that stockholders who held old stock had a right to subscribe for and take new stock in proportion to their respective shares. As the corporation refused this right to the plaintiff he was permitted to recover the excess of the market value above the par value, with interest. This decision has stood unquestioned for nearly a hundred years and has been followed generally by courts of the highest standing. It is the foundation of the rule upon the subject that prevails, almost without exception, throughout the entire country. In Jones v. Morrison (31 Minn. 140, 152) it was said: "When the proposition that a corporation is trustee of the corporate property for the benefit of the stockholders in proportion to the stock held by them is admitted (and we find no well considered case which denies it), it covers as well the power to issue new stock as any other fran- chise or property which may be of value, held by the corporation. The value of that power, where it has actual value, is given to it by the property acquired and the business built up with the money paid by the subsisting stockholders. It happens not infrequently that corporations, instead of distributing their profits in the way of divi- dends to stockholders, accumulate them till a large surplus is on Tiand. No one would deny that, in such case, each stockholder has an interest in the surplus which the courts will protect. No one would claim that the oflnlcers, directors or majority of the stock- holders, without the consent of all, could give away the surplus, or devote it to any other than the general purposes of the corporation. But when new stock is issued, each share of it has an interest in the surplus equal to that pertaining to each share of the original stock. And if the corporation, either through the officers, directors or ma- jority of stockholders, may dispose of the new stock to whomsoever it will, at whatever price it may fix, then it has the power to diminish the value of each share of old stock by letting in other parties to an equal interest in the surplus and in the good will or value of the established business." If the right claimed by the plaintiff was a right of property belong- ing to him as a stockholder he could not be deprived of it by the joint action of the other stockholders and of all the directors and officers of the corporation. What is the nature of the right acquired by a stockholder through the ownership of shares of stock? What rights can he assert against the will of a majority of the stockholders and all the officers and directors? While he does not own and cannot dispose of any specific property of the corporation, yet he and his associates own the corpo- ration itself, its charter, franchises and all rights conferred thereby. 564 SHABEHOLDEKS — SUBSCRIPTION EIGHTS. [CHAP. IV. including the right to increase the stock. He has an inherent right to his proportionate share of any dividend declared, or of any surplus arising upon dissolution, and he can prevent waste or misappro- priation of the property of the corporation by those in control. Fi- nally, he has the right to vote for directors aind upon all propositions subject by law to 'the control of the stockholders, and this is his supreme right and main protection. Stockholders have no direct voice in transacting the corporate business, but through their right to vote they can select those to whom the law intrusts the power of management and control. .A corporation is somewhat like a partnership, if one were possible, conducted wholly by agents where the copartners have power to appoint the agents, but are not responsible for their acts. The power to manage its affairs resides in the directors, who are its agents, but the power to elect directors resides in the stockholders. This right to vote for directors and upon propositions to increase the stock or mortgage the assets, is about all the power the stockholder has. So long as the management is honest, within the corporate powers and involves no waste, the stockholders cannot interfere, even if the administration is feeble and unsatisfactory, but must correct such evils through their power to elect other directors. Hence, the power of the individual stockholder to vote in proportion to the number of his shares, is vital and cannot be cut off or curtailed by the action of all the other stockholders even with the cooperation of the directors and officers.' In the case before us the new stock came into existence through the exercise of a right belonging wholly to the stockholders. As the right to increase the stock belonged to them, the stock when increased > In Lord v. Equitable Life &c. Society, 194 N. Y. 212, Vann, J. said : "The stock- holders of a corporation, as such, have no direct power of management, and even by united action they can neither bind nor loose the company by making contracts or controlling investments. The capital stock owned by them is property. It repre- sents an investment upon which they are entitled to dividends, provided they are earned, and whether they can be earned or not depends on the management. Indeed, the safety of the entire investment depends on the power to manage the corporate busi- ness, because, even in the case of the defendant, with its immense surplus, careless and improvident management might impair the value of the stock or utterly destroy it. The right to vote for directors, therefore, is the right to protect property from loss and make it effective in earning dividends. In other words, it is the right which gives the property value and is part of the property itself, for it cannot be separated there- from. Unless the stockholder can protect his investment in this way he cannot pro- tect it at all, and his property might be wasted by feeble administration and he could not prevent it. He might see the value of all he possessed fading away, yet he would have no power, direct or indirect, to save himself, or the company from financial down- fall. With the right to vote, as we may assume, his property is safe and valuable. Without that right, as we may further assume, his property is not safe and may be- come of no value. To absolutely deprive him of the right to vote, therefore, is to deprive him of an essential attribute of his property. To so undermine that right as to essentially affect its power of protection, would, under ordinary circumstances, undermine the right to property involved in the ownership of stock and we have so held. Stokes v. Continental Trust Company, 186 N. Y. 285." SECT. 4.] STOKES V. CONTINENTAL TRUST CO. 565 belonged to them also, as it was issued for money and not for property or for some purpose other than the sale thereof for money. By the increase of stock the voting power of the plaintiff was reduced one- half, and while he consented to the increase he did not consent to the disposition of the new stock by a sale thereof to Blair & Com- pany at less than its market value, nor by sale to any person in any way except by an allotment to the stockholders. The increase and sale involved the transfer of rights belonging to the stockholders as part of their investment. The issue of new stock and the sale thereof to Blair & Company was not only a transfer to them of one-half the voting power of the old stockholders, but also of an equitable right to one-half the surplus which belonged to them. In other words, it was a partial division of the property of the old stockholders. The right to increase stock is riot an asset of the corporation any more than the original stock when it was issued pursuant to subscription. The ownership of stock is in the nature of an inherent but indirect power to control the corporation. The stock when issued ready for delivery does not belong to the corporation in the way that it holds its real and personal property, with power to sell the same, but is held by it with no power of ahenation in trust for the stockholders, who are the beneficial owners and become the legal owners upon pay- ing therefor. The corporation has no rights hostile to those of the stockholders, but is the trustee for all including the minority. The new stock issued by the defendant under the permission of the statute did not belong to it, but was held by it the same as the original stock when first issued was held in trust for the stockholders. It has the same voting power as the old, share for share. The stockholders decided to enlarge their holdings, not by increasing the amount of each share, but by increasing the number of shares. The new stock belonged to the stockholders as an inherent right by virtue of their being stockholders, to be shared in proportion upon paying its par value or the value per share fixed by vote of a majority of the stock- holders, or ascertained by a sale at public auction. While the corpo- ration could not compel the plaintiff to take new shares at any price, since they were issued for money and not for property, it could not lawfully dispose of those shares without giving him a chance to get his proportion at the same price that outsiders got theirs. He had an inchoate right to one share of the new stock for each share owned by him of the old stock, provided he was ready to pay the price fixed by the stockholders. If so situated that he could not take it himself, he was entitled to sell the right to one who could, as is frequently done. Even this gives an advantage to capital, but capital neces- sarily has some advantage. Of course, there is a distinction when the new stock is issued in payment for property, but that is not this, case. The stock in question was issued to be sold for money and was sold for money only. A majority of the stockholders, as part of 'their 566 SHAREHOLDERS — SUBSCRIPTION RIGHTS. [CHAP. IV. power to increase the stock, may attach reasonable conditions to the disposition thereof, such as the requirement that every old stock- holder electing to take new stock shall pay a fixed price therefor, not less than par, however, owing to the limitation of the statute. They may also provide for a sale in parcels or bulk at pubhc auction, when every stockholder can bid the same as strangers. They cannot, however, dispose of it to strangers against the protest of any stock- holder who insists that he has a right to his proportion. Otherwise the majority could deprive the minority of their proportionate power in the election of directors and of their proportionate right to share in the surplus, each of which is an inherent, pre-emptive and vested right of property. It is inviolable and can neither be taken away nor lessened without consent, or a waiver implying consent. The plaintiff had power, before the increase of stock, to vote on 221 shares of stock, out of a total of 5,000, at any meeting held by the stockholders for any purpose. By the action of the majority, taken against his will and protest, he now has only one-half the voting power that he had before, because the number of shares has been doubled while he still owns but 221. This touches him as a stock- holder in such a way as to deprive him of a right of property.' Blair & Company acquired virtual control, while he and the other stock- holders lost it. We are not discussing equities, but legal rights, for this is an action at law, and the plaintiff was deprived of a strictly legal right. If the result gives him an advantage over other stock- holders, it is because he stood upon his legal rights, while they did not. The question is what were his legal rights, not what his profit may be under the sale to Blair & Company, but what it might have been if the new stock had been issued to him in proportion to his holding of the old. The other stockholders could give their property to Blair & Company, but they could not give his. A share of stock is a share in the power to increase the stock , and belongs to the stockholders the same as the stock itself. When that power is exercised, the new stock, belongs to the old stockholders in proportion to their holding of old stock, subject to compliance with the lawful terms upon which it is issued. When the new stock is issued in payment for property purchased by the corporation, the stockholders' right is merged in the purchase, and they have an advantage in the increase of the property of the corporation in pro- ' Cf. In re Tower's Estate, 98 Atl. (Pa., 1916) 576. (Testator bequeathed to his executors in trust to preserve &c., certain shares of stock in a corporation which sub- sequently doubled its capital stock and afforded subscription rights to its stockholders. The trustees subscribed and paid for the additional stock. Held: Allowance there- for was properly made. "To preserve is to keep, to save, to maintain, to retain. What the trustees did in taking up the allotments was the preservation of the invest- ment mad? by the testator. . . . They have but kept and preserved his proportion- ate holdmg of the capital stock of the company.") SECT. 4.] STOKES V. CONTINENTAL TRUST CO. 567 portion to the increase of stock.i When the new stock is issued for money, while the stockholders may provide that it be sold at auction or fix the price at which it is to be sold, each stockholder is entitled to his proportion of the proceeds of the sale at auction, after he has had a right to bid at the sale, or to his proportion of the new stock at the price fixed by the stockholders.^ We are thus led to lay down the rule that a stockholder has an inherent right to a proportionate share of new stock issued for money only and not to purchase property for the purposes of the corpora- tion or to effect a consolidation, and while he can waive that right, he cannot be deprived of it without his consent except when the stock is issued at a fixed price not less than pair and he is given the right tQ take at that price in proportion to his holding, or in some other equitable way that will enable him to protect his interest by acting on his own judgment and using his own resources. This rule is just to all and tends to prevent the tyranny of majorities which needs restraint, as well as virtual attempts to blackmail by small minorities which should be prevented. The remaining question is whether the plaintiff waived his rights by failing to do what he ought to have done, or by doing something he ought not to have done. He demanded his share of the new stock at par, instead of at the price fixed by the stockholders, for the authori- zation to sell at $450 a share was virtually fixing the price of the stock. He did more than this, however, for he not only voted against the proposition to sell to Blair & Company at $450, but as the court expressly found, he "protested against the proposed sale of his proportionate share of the stock and again demanded the right to subscribe and pay for the same which demands were again refused ", and "the resolution was carried notwithstanding such protest and demands." Thus he protested against the sale of his share before the price was fixed, for the same resolution fixed the price and di- rected the sale, which was promptly carried into effect. If he had not attended the meeting, called upon due notice to do precisely what was done, perhaps he would have waived his rights, but he attended the meeting and before the price was fixed demanded the right to subscribe for 221 shares at par and offered to pay for the same im- mediately. It is true that after the price was fixed he did not offer to take his share at that price, but he did not acquiesce in the sale of his proportion to Blair & Company, and unless he acquiesced the sale as to him was without right. He was under no obligation to 1 See Meredith v. New Jersey Zinc &c. Co., 55 N. J. Eq. 211 ; also notes to princi- pal case as reported in 9 Ann. Cas. 738. 2 Cf. Hammond v. Edison Illuminating Co. &o., 131 Mich. 79, holding that majority cannot fix the price above par. The matter is sometimes regulated by charter or statutory provisions. Ohio Ins. Co. V. Nunnemaker, 15 Ind. 294 ; Aspinwall v. Butler, 133 U. S. 595 ; Cunningham's Appeal, 108 Pa. 546. 568 SHAREHOLDERS — SUBSCRIPTION EIGHTS. [CHAP. IV. put the corporation in default by making a demand. The ordinary- doctrine of demand, tender and refusal has no application to this case. The plaintiff had made no contract. He had not promised to do anything. No duty of performance rested upon him. He had an absolute right to the new stock in proportion to his holding of the old and he gave notice that he wanted it. It was his property and could not be disposed of without his consent. He did not consent. He protested in due time, and the sale was made in defiance of his protest. While in connection with his protest he demanded the right to subscribe at par, that demand was entirely proper when made, because the price had not then been fixed. After the price Y^as fixed it was the duty of the defendant to offer him his propor- tion at that price, for it had notice that he had not acquiesced in the proposed sale of his share, but wanted it himself. The directors were under the legal obligation to give him an opportunity to pur- chase at the price fixed before they could sell his property to a third party, even with the approval of a large majority of the stockholders. If he had remained silent and had made no request or protest he would have waived his rights, but after he had given notice that he wanted his part and had protested against the sale thereof, the de- fendant was bound to offer it to him at the price fixed by the stock- holders. By selling to strangers without thus offering to sell to him, the defendant wrongfully deprived him of his property and is liable for such damages as he actually sustained. The learned trial court, however, did not measure the damages according to law. The plaintiff was not entitled to the difference between the par value of the new stock and the market value thereof, for the stockholders had the right to fix the price at which the stock should be sold. They fixed the price at $450 a share, and for the failure of the defendant to offer the plaintiff his share at that price we hold it hable in damages. His actual loss, therefore, is $100 per share, or the difference between $450, the price that he would have been obhged to pay had he been permitted, to purchase, and the market value on the day of sale, which was $550. This conclusion requires a reversal of the judgment rendered by the Appellate Division and a modification of that rendered by the trial court. Th€i order appealed from should be reversed and the judgment of the trial court modified by reducing the damages from the sum of $99,450, with interest from January 30th, 1902, to the sum of $22,100, with in- terest from that date, and by striking out the extra allowance of costs, and as thus modified the judgment of the trial court is aflarmed, with- out costs in this court or in the Appellate Division to either party. Haight, J. (dissenting).! Ordered accordingly.^ ' Dissenting opinion omitted. ' As to whether the principle applies to new stock only or to the original, but un- issued, stock as well, c/. Way v. American Grease Co., 60 N. J. Eq. 263, with Russell SECT. 5.] CUSHMAN V. THAYEK MANUFACTXJRING JEWELRY CO. 569 Section 5. — Transfeh of Stock. CUSHMAN V. THAYER MANUFACTURING JEWELRY CO.i 76 N. Y. 365. 1879. Action in equity to compel defendant to transfer upon its books certain shares of stock to plaintiff, and to issue a new certificate for the same to her. The original certificate was issued to plaintiff's husband; by its terms it was transferable only upon the books of the company upon surrender thereof. He executed ia blank the usual printed assign- ment and power of attorney upon the back of the certificate, to which one Beals was a witness, and delivered same to plaintiff, who pre- sented it to defendant, offe'red to surrender the certificate, and de- manded a transfer of the same to her upon the company's books, and that a certificate be issued to her; this defendant refused. The blanks in the assignment were filled before such presentation by inserting the name of plaintiff as assignee, and the name of one Thayer as attorney. Defendant set up as a defense, and proved, that after the assignment to plaintiff, Mr. Cushman executed an assignment of the stock to said Beals for a valuable consideration, and caused the same to be transferred to Beals upon defendant's books. Beals was one of defendant's officers. Judgment below for plaintiff. Defendant appeals. Miller, J. The right of the plaintiff to maintain this action depends upon the question whether an equitable action will lie to compel a transfer of stock by a corporation to the owner of the same, or the plaintiff must seek a remedy by an action at law for damages. n. American Gas &c. Co., 152 A. D. 136, and Archer v. Hesse, 164 A. D. 493 ; see also note, 9 Ann. Cas. 746. It does not apply to shares acquired by the corporation. State v. Smith, 48 Vt. 266 ; npte, 9 Ann. Cas. 746 ; note, 12 L. R. A. (N. S.) 970. It does apply to an issue of bonds, the holders of which are accorded the privilege of converting the same into stock. Wall v. Utah Copper Co., 70 N. J. Eq. 17. It does apply to preferred stockholders, unless their contract deprives them of the right, either expressly or by implication. Jones v. Concord, &c. R. R. Co., 67 N. H. 119; Russell ». American Gas &c. Co., stijjro. See note 1, page 612, in/ra. Directors, being under inherent obligation not to use their position to advance their private interests, Porter v. Healy, 244 Pa. 427, may not issue and appropriate to tjiemselves unsubscribed-for stock at a price greatly below its seUing value. The profit made must be surrendered to the corporation. Hechelman v. Geyer, 248 Pa. 430. See also Provident Trust Co. v. Geyer, 248 Pa. 423. ' Facts restated ; portion of opinion omitted. 570 SHAREHOLDERS — TRANSFER. [CHAP. IV. The latter action is frequently of no avail, and does not always afford complete and full redress.^ It is easy to see that a party may have become the owner or purchaser of stock in a corporation, which he desires to hold as a permanent investment, which may be at the time of but httle value, in fact without any market value whatever, and its real worth may consist in the prospective rise which the owner has reason to anticipate will follow from facts within his knowledge. To say that the holder shall not be entitled to the stock, because the corporation, without any just reason, refuses, to transfer it, and that he shall be left to- pursue the remedy of an action for damages, in which he can recover only a nominal amount, would establish a rule which must work great injustice in many cases, and confer a power on corporate bodies which has no sanction in the law. A court of equity will enforce a specific performance on a contract for the sale of real estate, and compel the execution of a deed by the vendor to the vendee, although an action at law may be brought to recover damages for the breach of the contract. Such a case bears a striking analogy ' Refusal by a corporation to permit transfer of its stock on its books and to issue a new certificate to the transferee is an exercise of wrongful dominion over the stock. The transferee may sue for its conversion. Bond v. Mt. Hope Iron Co., 99 Mass. 505 ; Ralston ». Bank of California, 112 Cal. 208 ; Ardmore State Bank v. Mason, 30 Okla. 568. But it is not conversion to refuse to transfer stock which plaintiff had no right to acquire. Franklin Bank u. Commercial Bank, 36 Ohio St. 350. And see Note, 13 Ann. Cas. 300. Or, he may recover his damages from the corporation in an action on the case. Protection Lite Ins. Co. j). Osgood, 93 111. 69 ; Morgan v. Bank of North America, 8 Serg. & R. (Pa.) 73. Or, waiving the tort, action in assuw-vsit will lie, since "all duties imposed upon them [a corporation] by law, raise an implied promise of performance." Nelson, J. in Kortright ». Buffalo &c. Bank, 20 Wend. 91. Hill ». Pine River Bank, 45 N. H. 300 ; Sargent v. Franklin Ins. Co., 8 Pick. (Mass.) 90. See New York & New Haven R. R. Co. V. Schuyler, 34 N. Y. 30. Cf. Jackson's Adms. v. Newark Plank-road Co., ante, page 547. Or, standing on his ownership, irrespective of registry, he may sue for the Accord: Rex v. Bank of England, Doug. 523; Shipley v. Mechanic's Bank, 10 Johns. (N. Y.) 484 ; Kimball v. Union Water Co., 44 Cal. 173 ; Freon v. Carriage Co., 42 Ohio St. 30 ; Travis v. Knox Terpezone Co., 215 N. Y. 259. 2 The corporation is also liable to the owner of the stock if it permits the transfer on its books of his stock under a forged assignment or power of attorney. Pratt v. Boston & Albany B. R. Co., 126 Mass. 443. Cf. Cooper v. Spring Valley Water Co., 171 Cal. 158. In such case, plaintiff may have his shares replaced on the books of the 572 SHAREHOLDERS — TRANSFER. [CHAP. IV. was an officer of the company, and took the transfer to himself with full knowledge of plaintiff's claim, for a very trifling consideration, and in fraud of plaintiff's rights as the owner of the stock. In view of the facts, Beals has no reason for questioning the plaintiff's title ; and the defendant certainly has no valid grounds for claiming that Beals was the owner instead of the plaintiff. Judgment affirmed} EAST BIRMINGHAM LAND CO. v. DENNIS. 85 Ala. 565; 2 L. R. A. 836. 1888. The bill in this case was filed on the 13th April, 1888, by J. F. Dennis, against J. P. Mudd, and the East Birmingham Land Com- pany, a private corporation ; and sought to compel the transfer, on the books of the corporation, of a certificate for ten shares of stock, of which the complainant claimed to be the owner, and to compel the delivery of the certificate to him by said Mudd, who had possession of it under claim of ownership. The certificate was issued in the name of A. R. Dearborn, and was indorsed by him in blank. The complainant claimed that he had. bought the certificate, with the blank indorsement thereon, from a holder who had acquired it by purchase from said Dearborn ; and that it was lost by him, or stolen from him, without fault on his part. Mudd purchased the certificate, for full value, from Wilson, Sage & Clark, stock-brokers in Birming- ham; and while denying complainant's ownership, claimed that he acquired a good title by the custom and usage of brokers and mer- company and proper certificate issued to him or have alternative judgment for the value of his shares. Western Union Tel. Co. t). Davenport, 97 U. S. 369. Hence, if the officers "upon the presentation of a certificate for transfer, . . . are at all doubt- ful of the identity of the party offering it with its owner, or if not satisfied of the genuine- ness of a power of attorney produced, they can require the identity of the party in the one case, and the genuineness of the document in the other, to be satisfactorily estab- lished before allowing the transfer to be made. In either case, they must act upon their own responsibility. . . . Neither the absence of blame on the part of the officers of the company in allowing an unauttiorized transfer of stock, nor the good faith of the purchaser of stolen property, will avail as an answer to the demand of the true owner." Ihid.. See O'Neill v. Walcott Mining Co., 174 Fed. 527 as to corporate duty in presence of adverse claims to the same stock. As to the counter right of the present defendant against Beals, see Boston & Albany R. R. Co. 1). Richardson, infra,, page 583. 1 Accord (as to the remedy in equity) : Westminster Nat. Bank v. New England Electrical Works, 73 N. H. 465 ; Guilford «. Western Union Tel. Co., 59 Minn. 332 ; London Bank ». Aronstein, 117 Fed. 601 ; Travis ». Knox Terpezone Co., 215 N. Y. 259. A corporation, whose stock certificates themselves provide that they are only trans- ferable on the corporate books, which has reissued a certificate without surrender of the original, is liable in equity to transfer the original certificate to a bona fide pur- chaser thereof. Litchfield v. Henson Oil Co., 157 Pao. (Okla., 1915) 137. SECT. 5.] EAST BIRMINGHAM LAND CO. V. DENNIS. 573 chants in Birmingham. A decree pro confesso was taken against the corporation. On final hearing, on pleadings and' proof, the court rendered a decree for the complainant; and this decree is now- assigned as error, by each of the defendants separately. SoMERViLLE, J.^ We concur in the conclusion reached by the judge of the City Court, that the appellee, Dennis, complainant in the bill, is the owner of the ten shares of stock which are the subject of litigation in the present suit. The testimony satisfactorily proves that the certificate of stock, indorsed in blank by Dearborn, who was the owner on the books- of the defendant corporation, was the prop- erty of the appellee, and was taken or stolen from his possession, without any neghgence on his part whatever, several months before it was purchased by the defendant Mudd, who innocently bought and paid value for it, some time in March, 1888. The only question is, whether Mudd, who paid full value for this stock, without notice of the complainant's claim to it, acquired a title superior to that of complainant. The established rule is, that no person can ordinarily be deprived of his ownership of property save by his own consent, or his negli- gence. The only exception to this rule is the case of a bona fide pur- chaser for value, of negotiable paper. We have no reference, of course, to the taking of property for pubhc uses by judicial condem- nation, which may be done without the owner's consent. It can not be contended, with any degree of plausibility, that, under the facts of this case, the complainant was guilty of negligence, or the want of ordinary care in the custody of the certificate. He kept it in a box in the vault of a banking-house, whence it was abstracted by some unknown person, apparently, without any fault on his part. Nor does any question arise involving the rights of a subsequent bona fide purchaser of stock, from one shown to be owner on the cor- porate books, who has already made a prior unregistered transfer of it to another purchaser. All such transfers made by the true owner, and not registered on the books of the corporation within fifteen days, are declared by statute to be "void as to bona fid;e creditors, or pm-chasers without notice." — Code, 1886, § 1671 ; Fisher v. Jones, 82 Ala. 117. If the defendant Mudd had claimed by a subsequent purchase from Dearborn, the owner of the stock on the corporate books, this question would arise. But he does not so claiin, his title being derived through the complainant Dennis him- self, by two or more intermediate transferees, the first of whom was a fraudulent holder without title. Whether Mudd's title to the stock, therefore, is superior to that of Dennis, depends on whether a certifi- cate of stock, indorsed in blank by the owner, is to be treated as negotiable papfer. The rule is well settled, that a bona fide purchaser of a negotiable ' Portions of opinion omitted. 574 SHAREHOLDERS — TRANSFER. [CHAP. IV. bill, bond or note, although he buys from a thief, acquires a good title, if he pays value for it without notice of the infirmity of his vendor's title. The authorities are clear in support of the view, that a certificate of corporate shares of stock, in the ordinary form, is not negotiable paper, and that a purchaser of such certificate, although indorsed in blank by the owner, where no question arises under the registration laws, obtains no better title to the stock than his vendor had, in the absence of all negligence on the part of the owner, or his authority to make the sale. This question arose, and was decided by the New York Court of Appeals, in Mechanics' Bank v. New York & New Haven R. R. Co., 13 N. Y. (1856), 599. It was there held, that such a certificate does not partake of the character of a nego- tiable instrument, and that a bona fide assignee, with full power to transfer the stock, takes the certificate subject to the equities which existed against his assignor. Such certificates, said Comstock, J., "contain no words of negotiability. They declare simply that the person named is entitled to certain shares of stock. They do not, like negotiable instruments, run to the bearer, or order of the party to whom they are given." The precise point in the present case was also decided in Barstow V. Savage Mining Co., 64 Cal. 388 ; s. c, 49 Amer. Rep. 705, where it was expressly held, that a bona fide purchaser of stock standing on the company's books in the name of the former owner, regularly indorsed by him, and stolen from the present owner without his fault, gets no title. The decision was based on the fact, that such certificates are not negotiable instruments, but simply muniments of title, and evidences of the holder's right to a given share in the prop- erty and franchises of the corporation. It being an established principle of law, that certificates of stock are not to be regarded as negotiable paper, it is not permissible to prove a custom or usage among stock-brokers to the contrary. No usage is good which conflicts with an established principle of law, any more than one which contravenes or nullifies the express stipula- tions of a contract. Dickinson v. Gay, 83 Amer. Dec. 656, and note, 664; E. T., Va. &. Ga. R. R. Co. v. Johnston, 75 Ala. 576; Lehman V. Marshall, 47 Ala. 362. The decree of the court below is in accordance with these views, and must be affirmed. SECT. 5.] McNEIL V. TENTH NATIONAL BANK. 575 McNeil v. tenth national BANK.i 46 N. Y. 325. 1871. The action was brought, to compel the surrender to the plaintiff of 134 shares of the capital stock of the First National Bank of St. Johnsville, which had been acquired by the appellant in the following manner : In November, 1866, the plaintiff then being the owner of the shares in question, had an account with Goodyear Brothers & Durant, of the city of New York, stock brokers, relating to other stocks, which they had purchased and were carrying for him. For the purpose of securing any balance which might become due them on that account, the plaintiff delivered to and left with them, the certificate of the 134 shares in dispute, with a blank assignment, and power of attorney to transfer indorsed thereon, signed by the plaintiff, in the following words : For value received, the undersigned hereby assigns and transfers unto * * * shares of the capital stock of the First National Bank of St. Johnsville, and do hereby constitute and appoint * * * true and lawful attorney, irrevocable for * * * and in * * * name and behalf, to make and execute all necessary acts of assignment and transfer required by the regulations and by-laws of said bank. In witness whereof, I have hereunto set my hand and seal, this day of . (Signed.) B. McNEIL. Sealed and sworn in presence of . On the 18th of June, 1868, at the city of New York, the appellant at the request of Goodyear Brothers & Durant paid the sum of $45,135 to Fred. Butterfield, Jacobs & Co. receiving from them certain securities, including the certificate and power for the 134 shares in question, which had been previously pledged by Goodyear Brothers & Durant to Fred. Butterfield, Jacobs & Co. Goodyear Brothers & Co. were at that time insolvent, and indebted to the appellant. In pledging the plaintiff's shares, they had acted without actual authority from him, and without his knowledge. He was indebted to them, on the account for which the shares were pledged to them, in the sum of $3,000, with interest from December 1, 1866 ; but the account had not been rendered, or any demand made. ' The appellant, at the time of receiving the shares, had no knowl- edge of the plaintiff's interest therein. 1 Statement of facts condensed ; portions of opinion omitted. 576 SHAREHOLDERS — TRANSFER. [CHAP. IV. The cashier of the appellant, within a few days after receiving the certificate, assignment and power, filled in the blank in the assign- ment and power with "I. H. Stout, cashier. Tenth National Bank, New York, one hundred and thirty-four," and dated the same the 19th day of June, 1868, and sent the scrip to the First National Bank of St. Johnsville, for the purpose of having the shares trans- ferred on the books accordingly ; but such transfer was prevented by an order of injunction in this action.. The plaintiff demanded of the appellant a surrender of the scrip, on payment of the balance due by him to Goodyear Brothers & Durant ; which demand was refused. The value of the shares was $17,420. The balance of the advance made by the appellant thereon ($45,135, less the proceeds of the other securities received therewith, $29,915.19), was $15,219.81, besides interest. The referee found in favor of the plaintiff, and in conformity with his report, a judgment was entered, requiring a surrender of the scrip to the plaintiff, on payment by him of the $3,000 and interest due by him to Goodyear Brothers & Durant. This judgment was affirmed at General Term, and an appeal taken to the late Court of Appeals, where, after argument, that court was divided and a re-argument ordered. The case now comes up on the re-argument. Rapallo, J. The pledge of the plaintiff's shares by his brokers, for a larger sum than the amount of their lien thereon, was a clear violation of their duty, and excess of their actual power. And if the effect of the transaction was merely to transfer to the appellant, through Fred. Butterfield, Jacobs & Co., the title or interest of Good- year Brothers and Durant in the shares, the judgment appealed from was right. It must be conceded, that as a general rule, applicable to property other than negotiable securities, the vendor or pledgor can convey no greater right or title than he has. But this is a truism, predicable of a simple transfer from one party to another where no other ele- ment intervenes. It does not interfere with the well-established principle, that where the true owner holds out another, or allows him to appear, as the owner of, or as having full power of disposition over the property, and innocent third parties are thus led into dealing with such apparent owner, they will be protected. Their rights in such cases do not depend upon the actual title or authority of the party with whom they deal directly, but are derived from the act of the real owner, which precludes him from disputing, as against them, the existence of the title or power which, through negligence or mistaken confidence he caused or allowed to appear to be vested in the party making the conveyance. (Pickering v. Busk, 15 East, 38 ; Gregg v. Wells, 10 Adol. & EL, 90 ; Saltus v. Everett, 20 Wend., SECT. 5.] MoNEIL V. TENTH NATIONAL BANK. 577 268, 284 ; Mowrey v. Walsh, 8 Cow., 238 ; Root v. French, 13 Wend 570.) ' The true point of inquiry in this case is, whether the plaintiff did confer upon his brokers such an apparent title to, or power of disposi- tion over the shares in question, as will thus estop him from asserting his own title, as against parties who took bona fide through the brokers. Simply intrusting the possession of a chattel to another as deposi- tary, pledgee or other bailee, or even under a conditional executory contract of sale, is clearly insvifScient to preclude the real owner from Teclaiming his property, in case of an unauthorized disposition of it by the person so intrusted. (Ballard v. Burgett, 40 N. Y. R., 314.) "The mere possession of chattels, by whatever means acquired, if there he no other evidence of 'property or authority to sell from the true owner, will not enable the possessor to give a good title." Per Denio, J. in Covill v. Hill (4 Den., 323). But if the owner intrusts to another, not merely the possession of the property, but also written evidence, over his own signature, of title thereto, and of an unconditional power of disposition over it, the case is vastly different. There can be no occasion for the delivery of such documents, unless it is intended that they- shall be used, either at the pleasure of the depositary, or under contingencies to arise. If the conditions upon which this apparent right of control is to be exercised, are not expressed on the face of the instrument, but remain in confidence between the owner and the depositary, the case cannot be distinguished in principle, from that of an agent who receives secret instructions qualifying or restricting an apparently absolute power. In the present case, the plaintiff delivered to and left with his brokers, the certificate of the shares, having indorsed thereon the form of an assignment, expressed to be made "for value received," and an irrevocable power to make all necessary transfers. The name of the transferee and attorney, and the date, were left blank. This docimient was signed by the plaintiff, and its effect must be now considered. It was only necessary to a valid transfer as between the parties, that the assignment and power should be in writing. The common practice of passing the title to stock by delivery of the certificate with blank assignment and power, has been repeatedly shown and sanctioned in cases which have come before our courts. Such was established to be the common practice in the city of New York, in the case of The New York and New Haven Railroad Company v. Schuyler (34 N. Y., 41), and the rights of parties claiming under such instruments were fully recognized in that case. And in the case of Kortright v. The Commercial Bank of Buffalo (20 Wend., 91, and 22 Wend., 348), the same usage was established as existing in New York and other States, and it was expressly held that even in the 578 SHABEHOLDEBS — TEANSFEB. [CHAP. IV. absence of such usage, a blank transfer on the back of the certificate, to which the holder has affixed his name, is a good assignment ; and that a party to whom it is delivered is authorized to fill it up, by writ- ing a transfer and power of attorney over the signature. It has also been settled, by repeated adjudications, that, as between the parties, the dehvery of the certificate, with assignment and power indorsed, passes the entire title, legal and equitable, in the shares, notwithstanding that, by the terms of the charter or by-laws of the corporation, the stock is declared to be transferable only on its books ; that such provisions are intended solely for the protection of the corpo- ration, and can be waived or asserted at its pleasure, and that no effect is given to them except for the protection of the corporation ; that they do not incapacitate the shareholder from parting with his interest, and that his assignment, not on the books, passes the entire legal title to the stock, subject only to such liens or claims as the corporation may have upon it, and excepting the right of voting at elections, etc. (Angell and Ames on Corporations, 8th ed., § 354; Bank of Utica v. Smalley, 2 Cow., 770 ; Gilbert v. Manchester Co., 11 Wend., 627 ; Kortright v. Com. Bank of Buffalo, 22 Wend., 362; N. Y. and N. H. R. R. Co. v. Schuyler, 34 N. Y., 80.) In the case of Kortright v. Com. Bank, Chancellor Walworth, in a dissenting opinion, strenuously maintained, in conformity with^his previous decision in Stebbins v. Phoenix Ins. Co. (3 Paige, 356), that by a transfer not on the books, the transferee acquired only an equitable right to or hen on the shares; and that, having but an equitable right or hen, he took subject to all prior equities which existed in favor of any other person from whom such assignment was obtained. (22 Wend., 352, 353, 355.) But his view was over- ruled by the majority of the court. The action was at law in assump- sit, brought by the holder of the certificate and power, for a refusal to permit him to make a transfer on the books, and the qfuestion of his legal title was necessarily involved in the case. The judgment therein must therefore be regarded as a direct adjudication that, as between the parties, the legal title to the shares will pass by dehvery of the certificate and power. (See 20 Wend., 362.) This was reasserted in this court m the New Haven Railroad Case (34 N. Y., 80), notwithstanding what was said in the Mechanics' Bank Case (13 id., 625). By omitting to register his transfer, the holder of the certificate and power fails to obtain the right to vote, and may lose his stock by a fraudulent transfer on the books of the company, by the registered holder, to a bona fide purchaser (34 N. Y., 80) ; but in this respect he IS m a condition analogous to that of the holder of an unrecorded deed of land, and possesses a no less perfect title as against the assignor and others. And he would have an action against the corporation, for allowing such a transfer in violation of his rights. {Id.) He SECT. 5.] McNeil v. tenth national bank. 579 also takes the risk of the collection of dividends by his assignor, or of any hen the corporation may have on the shares. But in other respects his title is complete. The holder of such a certificate and power, possesses all the external indicia of title to the stock, and an apparently unlimited power of disposition oyer it. He does not appear to have, as is said in some of the authorities cited, concerning the assignee of a chose in action, a mere equitable interest, which is said to be notice to all persons dealing with him that they take subject to all equities, latent or otherwise, of third parties ; but, apparently, the legal title, and the means of transferring such title in the most effectual manner. Such, then, being the nature and effect of the documents with which the plaintiff intrusted his brokers, what position does he occupy toward persons who, in reUance upon those documents, have in good faith advanced money to the brokers or their assigns on a pledge of the shares ? When he asserts his title, and claims, as against, them, that he could not be deprived of his property without his consent, cannot he be truly answered that, by leaving the certificate in the hands of his brokers, accompanied by an instnmient bearing his own signature, which purported to be executed for a consideration, and to convey the title away from him, and to empower the bearer of it irrevocably to dispose of the stock, he in fact "substituted his trust in the honesty of his brokers, for the control which the law gave him over his own property," and that the consequences of a betrayal of that trust, should fall upon him who reposed it, rather than upon innocent strangers from whom the brokers were thereby enabled to obtain their money? My conclusion is, that the Tenth National Bank must, on the facts foimd, be deemed to have advanced bona fide on the credit of the shares, and of the assignment and power executed by the plaintiff, and is entitled to' hold the stock for the full amount so. advanced, and remaining unpaid after exhausting the other securities, received for the same advance. The judgment of the General Term, and that entered on the report, of the referee, should be modified, so as to allow the plaintiff to redeem, on payment of the balance due to the Tenth National Bank, on its advance of June 19th, 1868, and the costs of the action. Judgment modified} > Accord : Little ». Fearon, 97 Atl. (Penn., 1916) 578. The principle of the instant case does not apply if the holder of the certificate, in- dorsed in blank, represents himself, not as owner thereof, but merely as the agent of' the person named in the certificate. Merchants' Bank v. Livingston, 74 N. Y. 223. The party, with whose name the blank power of attorney is filled to make^he trans- fer on the corporate books, is not the agent of the stockholder who has indorsed the certificate in blank. Hence, the knowledge of or notice to the former is not to be im- puted to the latter. Johnston r>. Laflin, 103 U. S. 800. Field, J. said : " The power of attorney indorsed on the certifitrate is usually written or printed, with a space la blank for the name of the attorney to be inserted, for the accommodation of the pur- 580 SHAREHOLDERS — TRANSFER. [CHAP. IV. BANGOR ELECTRIC LIGHT & POWER CO. ET AL. v. ROBINSON ET AL. 52 Fed. Rep. 520. 1892. ; In Equity. Bill of interpleader brought 'by the Bangor Electric Light & Power Company, a Maine corporation, and Frederick M. Laughton, president thereof, and a citizen of Maine, against EKza- beth R. Lee and Augustus G. Robinson, both citizens of Massachu- setts, to determine the right to a certificate of 100 shares of stock in the complainant corporation. ' The bill shows that complainant Laughton, in his individual ca- pacity, sold to defendant Robinson the certificate of stock in question, and transferred the same to him by an indorsement in blank, that no transfer on the books of the company had ever been made, and that the stock had subsequently come into possession of defendant Lee, who still retained it, and claimed a right to hold it as collateral security, and that Robinson also still claimed to be the owner thereof, and had notified the company to that effect. From the separate answers of the defendants and the proofs, it appeared that Robinson had certain business relations with one Williams, a broker, and that they had in common a safety deposit box, to which each had access ; that Robinson placed the certificate therein, and that, without his authority or knowledge, Wilhams abstracted it therefrom, and trans- ferred it to Mrs. Lee, as collateral security for a loan, and that he subsequently disappeared without repaying the money borrowed. The. answer of Mrs. Lee averred, among other things, that Williams was introduced to her by Robinson, who recommended him to her in high terms, represented that he was honest, and advised her to buy stocks through him and deal with him, and stated that he himself had employed WUUams as his financial agent to buy and sell stocks, and intended to do so in future. She further averred that, beheving these representations, she had various dealings with Williams, in- cluding that already mentioned. Putnam, Circuit Judge.' In the view of the court, no statute, either of Maine or Massachusetts, affects this case. The court is satisfied that this suit is to be disposed of according to the general chaser. The subsequent filling up of the blank by him with another name, instead of his own, as it may suit his convenience, does not so connect the vendor with the party named as to charge him with the latter's knowledge and thus affect the previous trans- action. . . . The name with which the blank may be subsequently filled up by the purchaser is not, in practice, regarded as affecting the previous sale in any respect, but as a matter which concerns only the purchaser. It would be a source of disturbance i)i business if any other result were attached by the law to the proceeding." Ibid. . . ' Portions of opinion onutted. SECT. 5,] BANGOR ELECTRIC CO. V. ROBINSON. 581 principles of jurisprudence, applicable to certificates of corporate stocks indorsed in blank. The court is of the opinion that whatever took place personally between Robinson and Mrs. Lee was purely of a friendly character, in no sense allied to business transactions, entirely in good faith, and not to be held by the law to prejudice either. The counsel for Mrs, Lee bring forward the proposition that when one of two innocent persons must suffer from the fraud of a third, the loss must be borne by him whose negUgence enabled the third person to commit the fraud ; and they cite on this point Allen v. Railroad Co., 150 Mass. 2()0, 207, 22 N. E. Rep. 917. It can hardly be said that this is a rule, of the common law ; but, if it were, the practical application of it is not helped by the general terms in which it is expressed. The court is forced to the conclusion that it does not apply to relieve Mrs. Lee any more than it would an innocent purchaser for full value of jewelry stolen as the result of careless exposure by the t)wner. Mrs, Lee either purchased outright, or advanced money on a pledge of the certificate, or both ; but the details of this are of no consequence; because, having advanced a valuable consideration in good faith, she stands in the courts of the United States the same in either view. Robinson was absent when the transaction took place ; and, if he had been within reach, non constat that she would have inquired of him concerning the certificate, there being nothing on it to show that he had any interest in it. Indeed, there was no person of whom she could inquire, tmless of Laughton, the indorser of the certificate. As he had parted with it long before, he could not have aided her. She had no means of protecting herself. Robinson, with reasonable care, could easily have protected all parties. If it were a mere question of balancing equities, or of throwing the loss on the innocent party, the court would have little difficulty, and it regrets that the result of the case must be contrary to what seems natural justice. The evidence shows, and it is not disputed, that the certificate of stock was deposited by Robinson in a box in the Boston Safe-Deposit & Trust Company, under such circumstances that both Robinson and the broker of whom Mrs. Lee purchased had access to it. The certificate, however, was not intrusted to the possession of the broker, either directly, indirectly, or impliedly; nor was he authorized to remove it from the box. His misdoing was not embezzlement or fraud, but criminal larceny at common law.' The condition of things ' In Russell v. American &c. Tel. Co., 180 Mass. 467, plaintiff intrusted a certificate of stock, indorsed in blank, to a fraudulent agent, who, instead of using it for the pur- pose for which it was intrusted to him, obtained a loan from a bank by giving the certificate in pledge. Plaintiff contended that as possession of the certificate was obtained by fraud, it was obtained by larceny ; and on this ground justified tl^ de- cision of the lower court in his favor against the bona-fide pledgee, the bank. Held : Reversed. Holmes, C. J. said : The qualification of the rule, aj-ising when the mstru- ment is stolen, "is not based upon the name of the agent's crime but upon the fact that in the ordinary and typical case of theft the owner has not intrusted the agent 582 SHAKEHOLDEES — TRANSFER. [CHAP. IV. was like that of two persons, lawyers or brokers, occupying the same ofSce, with a common safe or vault, to which each has access, and in which each is accustomed to deposit his papers or securities. The general principle which the court must follow has been stated as late as April of the current year by Lord Herschell in Bank v. Simmons, [1892] App. Cas. 201, 215, as follows : "The general rule of the law is that, where a person has obtained the property of another from one who is deaHng with it without the authority of the true owner, no title is acquired as against that owner, even though full value be given, and the property be taken in the belief that an unquestionable title thereto is being obtained, unless the person taking it can show that the true owner has so acted as to mislead him into the belief that the person dealing with the property had authority to do so. If this can be shown, a good title is acquired by personal estoppel against the true owner. There is an exception to the general rule, however, in the case of negotiable instruments." Consider first the exception in behalf of negotiable instru- ments. . . . Touching the other proposition found, in the foregoing citation from Bank v. Simmons, namely, that the purchaser shows that "the true owner has so acted as to mislead him into the belief that the person dealing with the property had authority to do so," the rule is stated quite generally, but its apphcation is Umited. The court need not refer to the well-known cases in which a party stands by silently, and permits his property to be disposed of without a protest. The contest at bar relates to the mere negUgence of the original holder, and how far this may prevent him from reclaiming .his property. At first it occurred to the court that, inasmuch as Robinson had seen fit to leave this certificate in such condition as to indicate that somebody was authorized to acquire it and fill in the indorsement, he was barred ; but the court is unable to find any authorities sustaining this suggestion, and is compelled to treat this certificate, indorsed in blank and stolen, as it would any other stolen property, aside from strictly negotiable securities. In all the cases in any way pertinent rehed on by the counsel of Mrs. Lee there was a voluntary intrusting of actual possession by the holder. On the whole, the court is unable to find any principle of the common law which will protect her ; and the case at bar, though in equity, in- volves only common-law rights. Let there be a decree that the blank with the document and therefore is not considered to have done enough to be estopped as against a purchaser in good faith. He certainly has not done enough if the estoppel IS based upon the principle that when one of two innocent persons is to suffer the sufferer should be the one whose confidence put into the hands of the wrongdoer the means of doing the wrong. But in a case like the present the agent has been intrusted with the converted property, and it is totally immaterial whether, by a stretch which extends larceny beyond the true field of trespass, his wrong has been brought within the criminal law or not. The ground of the estoppel is present and the estoppel arises." SECT. 5.] BOSTON & ALBANY R.R. CO. V. RICHARDSON. 583 transfer, on the certificate of stock in question in this ease, deposited in the registry of the court, be filled up in favor of defendant Robin- son, and that the plaintiff corporation issue him a new certificate m exchange therefor, and that complainants recover one half of their costs from defendant Robinson and one half from defendant Lee.i BOSTON AND ALBANY RAILROAD COMPANY v RICHARDSON & OTHERS. 135 Mass. 473. 1883. Morton, C. J. This case, which is an action of contract with a count in tort, presents an important question, referred to, but not decided, in Machinists' National Bank v. Field, 126 Mass. 345. In January, 1876, Mrs. Pratt owned five shares of the stock of the Boston and Albany Railroad Company, and held a certificate running in her name. Her son forged her name to a blank power of attorney, printed upon the back of the certificate, and delivered it to one Field, a broker. Field sold the shares to the defendants, and delivered to them the certificate with the forged signature thereon. The defend- ants presented it to the transfer clerk of the plaintiff by Brown, their clerk, who filled up the blanks so as to make it a power of attor- ney to Brown to transfer the shares to Richardson, Hill and Company, the defendants. Throughout, Brown was acting as the agent and on behalf of the defendants. Thereupon the transfer clerk permitted Brown to transfer the shares upon the books of the corporation, and ' In Knox v. Eden Musee, &c. Co., 148 N. Y. 441, it was sought to hold defendant corporation liable for damages resulting from its alleged negligence in failing to cancel certificates of its stock, surrendered to it for transfer, and for which new certificates had, in fact, been issued. The surrendered certificates, instead of being immediately cancelled as required by the by-laws, were placed in an office safe, of which, Jurgens, defendant's clerk, had the key. He stole them, and sold them as valid certificates to bona fide purchasers. Held : (1) The certificates were in the legal possession of de- fendant; hence the doctrine of implied agency was inapplicable. "The company never placed them in the possession of Jurgens or invested him with the indicia of ownership. He had access to the safe as the mere servant of the defendant." (2) De- fendant was not guilty of actionable negligence. That Jurgens had the key, and was thereby afforded the opportunity to commit the crime, did not suffice to make out plaintiff's case. "It is not true as a general rule that a man may not intrust his prop- erty to the custody of his servant, except at the peril of losing his title thereto if the servant steals and disposes of it to another. There must be something more than the mere intrusting to a servant of the custody of a chattel and the consequent oppor- tunity for theft, in order to- preclude the master from reclaiming it, if stolen by the servant and sold to another." (3) Same result as to non-observance of the by-law because the injury to the plaintiff was not the natural consequence of the alleged negligent act or one which might reasonably have been anticipated. Cf. Ruoff v. Long & Co., L. R. 1916, 1 K. B. 148 ; Frashella v. Taylor, 157 N. Y. Supp. 881 ; Austin D. Buffalo Electric Vehicle Co., 158 N. Y. Supp. 148. 584 SHAREHOLDERS — TRANSFER. [CHAP. IV. issued a new certificate to the defendants. Subsequently, and before the discovery of the forgery, the defendants sold the stock to a third person, and, at their request, the corporation issued a new certificate to the purchaser. Upon these facts, it is clear that Mrs. Pratt never parted with her property in the shares, and therefore the plaintiff was obliged to procure five shares of its corporate stock, and issue a certificate to her, and also to pay her the dividends upon the five shares. Pratt V. Taunton Copper Co., 123 Mass. 110, and cases cited. It is also settled that the corporation has no remedy against the person who purchased of the defendants, because, as to him, the corporation is estopped to deny its certificate issued to the defendants and trans- ferred to the purchaser. Machinists' National Bank v'. Field,' vM ^ In this ease, another occasioned by the forgeries by Mrs. Pratt's son, the plaintiff bank was in the position of the Boston & Albany R. R. Co. in the instant case. The son had delivered the forged certificate to Field, who sold it through his auctioneers, Hawes & Henshaw, to one Dean. The bank, at the instance of Field, who believed the power of attorney to be genuine, transferred the stofck on its books and issued a. new certificate in the name of Hawes & Henshaw, who upon receipt of the purchase price, delivered the same to Dean with a power of attorney to transfer the same. The bank subsequently reissued to Mrs. Pratt a certificate for her twelve shares of its stock, pursuant to a decree obtained by her against it. It now files bill against Field, Hawes & Henshaw, and Dean, setting up that there was thus outstanding, certificates for twelve shares more than its authorized capital, and alleging there were now two differ- ent parties, claiming distinct rights or interests in the same stock, and praying that Dean surrender to it his certificate aforesaid, and that Field and Hawes & Henshaw be decreed either to repay it the money received by Hawes & Henshaw from Dean for these shares, so that the plaintiff might return that money to Dean, or else repay the money to Dean directly. The bill was dismissed. Gkay, C. J. said : "Dean can- not be ordered to return his certificate, because he purchased the shares in good faith and for valuable consideration, and the certificate issued to him is as against the bank conclusive evidence of his title. The bank has no right to compel him rather than any other stockholder to give up his certificate and thereby assume the responsibility of its own illegal act in issuing a greater number of shares than the law authorized. Salis- bury Mills V. Townsend, 109 Mass. 115, 122. Pratt ». Machinists' Bank, 123 Mass. 110, 112. Lowry v. Commercial & Farnjers' Bank, Taney, 310, 328. In re Bghia & San Francisco Railway, L. R. 3 Q. B. 584. Holbrook v. New Jersey Zinc Co., 57 N. Y. 616. The relief specifically prayed for against Field and against Hawes & Henshaw is for Dean's benefit, and contingent upon his being ordered to surrender his certificate, and, as he is not bound to do so, he has no claim to be repaid any money by either of the other defendants. The general relief pray6d for must be confined to the ground of jurisdiction stated in the bill ; and it is quite clear that there are not two parties before the court, claiming distinct rights or interests in the same stock. Mrs. Pratt is not a party, but has obtained her rights in her former suit against the bank. The only party claiming the shares in question is Dean, whose title,. as we have seen, this plaintiff cannot controvert. Hawes & Henshaw .claim no title in the stock, and are protected, equally with Dean, by the certificates issued to them by the plaintiff. Field also has and claims no title in the stock, and if, by reason of his having presented to the bank the forged power of attorney upon which the new certificates were issued, he is liable to the bank in any form (of which we give no opinion), the bank has an ade- quate remedy against him alone by action at law." In the Bahia case, supra, Blackbubn, J. said : "Suppose an action by the claimants [In the position of Dean. — Ed.] against the company, asserting that the shares were the plaintiff's and that the company refused to pay them the dividends and deprived them of the use of the shares, in effect an action of trover. The only plea would be that the plaintiffs were not the true owners of the shares, and there would be a replica- tion by way of estoppel, that the company were estopped from saying that the plaintiffs SECT. 5.] BQSTON & ALBANY E.R. CO. V. RICHARDSON. 585 supra, and cases oited. The question in this case is whether it has a remedy against the person who presented a forged transfer or power of attorney, upon the faith of which it issued to such persons a new certificate. This question has never been directly decided in this Common- •wealth, but the adjudged cases furnish analogies which aid us in its solution. It is familiar law that, in a sale of chattels, a warranty of title is implied, unless the circumstances are such as to give rise to a contrary presumption. Shattuck v. Green, 104 Mass. 42. The possession and offer to sell a chattel is held equivalent to an affirma- tion that the seller has title to it. This is founded upon the reason that men naturally understand that a seller who offers a chattel for sale owns it. The same rule has been extended to the case of a sale of a promissory note. The seller imphedly warrants that the previous signatures are genuine. Cabot Bank v. Morton, 4 Gray, 156. Merriam v. Wolcott, 3 Allen, 258. So it has been held that, if one, honestly believing himself to be authorized, acts as agent for another, and procures money or goods upon the credit of his supposed principal, and it turns out that he is not authorized, he is liable for the value of "the money or goods. Chief Justice Shaw says : "If one falsely represents that he has an authority, by which another, relying on the representation, is misled, he is liable; and by acting as agent for another, when he is not, though he thinks he is, he tacitly and impliedly represents himself authorized without knowing the fact to be true, it is in the nature of a false warranty, and he is liable." Jefts v. York, 10 Cash. 392. The chief justice adds : "But in both cases his liability is founded on the groimd of deceit, and the remedy is by action of tort." We do not understand him as intending to say that the only remedy is the technical action of deceit, and that a guilty knowledge must be proved. He used the word " deceit " in the sense of tort. In numer- ous other cases, the remedy is said to be an action on the case for falsely assuming to be an agent. Bartlett v. Tucker, 104 Mass. 336, and cases cited. And in the recent case of May v. Western Union Telegraph, 112 Mass. 90, it was held that the proper remedy is not an action of deceit ; but "it is an action in the nature of a false war- were not the owners, because they had purchased on a statement of title made by the company, and intended by them to be acted upon ; this would clearly amount to an estoppel within the rule defined in Freeman v. Cooke, 2 Ex. 654, 18 L. J. Ex. 114. The claimants, therefore, would be entitled to a verdict, and it foUows that they are en- titled as damages to the value of the shares at the time they were converted ; that is, at the time when Miss Trittin [In the position of Mrs. Pratt. — Ed.] interfered and claimed the shares." , ' .. . „ See Joslyn v. St. Paul DistUling Co., 44 Minn. 183. ("The certificate itself must be regarded as a continuing affirmation of the ownership by the person to whom it has been issued, and of his power over and right to sell the stock, until this power and light has lawfully terminated.") 586 SHAEEHOLDEES — TEANSFEK. ^ [CHAP. IV. ranty against one acting as agent, who represents that he has authority when he has not. Whether such representation is made in terms, or tacitly and imphedly, he supposing but not knowing the fact to be true, he is liable to the person misled." We can see no good reason why an action of contract upon the implied warranty should not be maintained, in the same manner as it may be upon the implied war- ranty in the sale of chattels. Randell v. Trimen, 18 C. B. 786. Richardson v. Wilhamson, L. R. 6 Q. B. 276. Baltzen v. Nicolay, 53 N. Y. 467. But it is not necessary to discuss this, because in the case at bar there is both a count in contract and a count in tort in the nature of case, for falsely assuming to act as an agent. Perhaps these considerations are sufficient to dispose of this case ; but it seems to us that the result would be the same if Pratt had signed the transfer on the back of the certificate, instead of the power of attorney. The difference between the two modes of effecting a transfer is theoretical rather than practical. There is in either case a similar implied representation or w:arranty. If one buys stock and takes a transfer, and presents the certificate to the corporation and demands a new one, he thereby impliedly represents that he is entitled to the new certificate. He demands it as his right ; this implies that he is the owner and has a right to it. The corporation has the right to understand him as. asserting this. It is not bound to question or investigate the genuineness of the trans- fer, and see if the purchaser has not been defrauded. When the purchaser presents his transfer and certificate, the transfer officer naturally understand that he claims the transfer to be valid; ajid to have a right to a certificate ; he has the right to act as if this had been said in terms. And if, relying upon such tacit and imphed representations, the corporation suffers a loss, the purchaser who mis- led it is. liable. The' case of Simm v. Anglo-American Telegraph, 5 Q. B. D."188, is very much like the case at bar. The court of appeals held, over- ruling Lindley, J., that the loss must fall upon the purchaser who took the forged transfer, and not upon the company. Bramwell, L. J., says : "Burge and Company sent to the company a document pur- porting to be a transfer from Coates, and in effect demanded to be registered as transferees of the stock ; to this demand the company assented. How can these facts constitute an estoppel against the company? What have they done that they should be debarred from saying that Coates did not transfer the stock ? " In Hambleton V. Central Ohio Railroad, 44 Md. 551, the plaintiff, in good faith, advanced money upon stock of the defendant company pledged to them under forged powers of transfer. The railroad company, upon the receipt of the original certificates of stock, in good faith cancelled them, and issued new certificates in the name of the plaintiff. After- wards, the plaintiff sold the stock to a third party ; but the railroad ECT. 5.] BROADWAY BANK V. McELEATH. 587 ompany, having discovered the forgery, refused to permit a transfer o such third party. It was held that the loss must fall upon the )laintiff, the court saying that it was the plaintiff's duty to ascertain he genuineness of the signature, and that the company were not stopped by having issued a certificate to him. To the same effect s Brown v. Howard Ins. Co. 42 Md. 384. These cases differ from the case before us in the fact that, at the ime the forgery was discovered, the first transferee still held the ihares. But how can this make any difference ? The transfer to a ,hird party by the defendants did not change their relations to the )laintiff ; it did not purge their misrepresentations, or give any added reight to the act of plaintiff in issuing to them a certificate. Instead )f holding the stock, they hold its proceeds. The defendants have been cheated, but they have not lost their noney by any act of the plaintiff ; they dost it because they failed ;o make the inquiries necessary to detect the forgery. They have a ■emedy over against the person who sold the stock to them ; but the Dlaintiff has no remedy except against the defendants. We are of jpinion that, in law and upon the equities of the case, the plaintiff s entitled to recover ; and that it can maintain this action. The remaining question is as to the measure of damages. [The jourt held plaintiff entitled to (1) the costs and expenses (not includ- ng counsel fees) incurred by it in defending the suit brought against t by Mrs. Pratt; (2) the amount paid by it in procuring stock to replace the shares belonging to her, although the stock was then of ligher market value than when the forgery was committed; (3) ;he di-vidends upon the stock which it was obliged to pay to her.] Judgment for plaintiff accordingly. , THE BROADWAY BANK v. McELRATH. 13 N. J. Eq. 24. 1860. The Chancellor.! The property which forms the subject of controversy consists of fifty shares of the capital stock of the Trenton [ron Company standing on the books in the name of McEkath. On }he second of June, 1854, the certificate of the stock, accompanied by a Dower of attorney irrevocable for the transfer thereof, was delivered :o the Broadway Bank, as collateral security on loan of four thousand iollars, obtained by McElrath from the bank, upon his mdmdual lote. • Portions of opinion omitted. 588 SHAEEHOLDERS — TRANSFER. [CHAP. IV. On the 24th of August, 1857, the Hunterdon County Bank sued out of the Supreme Court of this state, a writ of attachment against the estate of the said McElrath, by virtue of which the stock in ques- tion was attached as the property of McElrath. Judgment having been rendered in favor of the plaintiff in attachment, the auditors in attachment were proceeding to make sale of the stock in question, to satisfy those judgments, when they were restrained by an injunc- tion issuing in this cause. The complainants insist that they have an equitable lien upon the stock, for the payment of the debt for which it was hypothecated as security. The defendants claim that they have acquired a vaUd title to the stock at law and in equity, by virtue of the attachment. The stock, irrespective of the complainants, was, undoubtedly, under the provisions of the statute, the subject of attachment. The judgment at law has established the claims of the plaintiff and the , applying creditors in attachment. The vaUdity of the proceedings under the attachment, is not drawn in question. The defenda,nt's right to the property is unquestioned, except so far as it conflicts with the prior rights of the complainants. By the fifth section of the charter of the Trenton Iron Company, approved February 16th, 1847, (Pamph. Laws 61), it is enacted that "the capital stock of the said corporation shall be deemed personal estate, and be transferase upon the books of the said corporation." Where it is provided, by the charter or by-laws, that the stock shall be transferred only upon the books of the corporation, there is a de- cided weight of authority in support of the position that a bona fide transfer, by delivery of the certificate, is, nevertheless, valid as between vendor and vendee, that the equitable title passes by such transfer, and that the claim of the vendee is good, in equity, against the claim of an execution or attaching creditor of the vendor. Such provision, whether by charter or by law, is regarded as designed to protect the interests of the corporation, and as applying solely to the relation between the corporation and its stockholders. Its only ofiice is held to be equivalent to that of the provision contained in the ninth section of the charter of the Trenton Iron Company, viz., " to afford evidence of the ownership of the stock, in all elections and other matters submitted to the decision of the corporation," including all questions as to the ownership of the stock as between the corpora- tion and its members. There is not an entire uniformity of authority upon the question whether a transfer or pledge of stock as collateral security without a transfer upon the books of the company, as required by the charter, will protect the holder against the claims of an attaching creditor, though the weight of authority is decidedly in favor of the right of the assignee. It is the well-settled rule in New York, where this contract was ECT. 5.] BROADWAY BANK V. McELRATH. 589, aade, and where the contracting parties had their domicile at the ■. ime of the contract, and the pledge of the stock by McElrath to he bank. It was so expressly decided in this state long prior to the date of ,hat contract. Rogers et al. v. Stevens, 4 Halst. Ch. 167. I think it clear, moreover, whatever might be the strict legal inter- jretation of the provision in question, that the legislature never lesigned it to impair the validity of a transfer of stock, as between the jarties making it. It was not intended to introduce a new mode of icquiring title to stocks, much less to operate as a registry law, by 'urnishing conclusive evidence to the public of the ownership of the jroperty. If such had been the design, it might have been expected , ihat the legislature would have required that the books of transfer should be at all times open to public inspection, and the record, not n certain specified cases merely, but in all cases, made evidence of ownership. Nor does sound policy require such construction to be given to the ■ ict. The pledge of stocks as collateral security has become a prev- alent, and to the borrower, especially, an advantageous mode of effecting loans. In manufacturing companies especially, where the business of the company is carried on by the stockholder, and where tiis capital is mainly or exclusively vested in the stock, and employed in the active operations of business, the pledge of stocks affords the most ready and advantageous mode of effecting loans for the demands of business. To require a transfer of the stock to the lender as security for the loan against the right of attaching or execution creditors will at once destroy the value of the security, or compel the borrower to divest himself of his character as corporator, to for- fdt his control of the business of the corporation, of his right to dividends, and of all his other rights as a stockholder in the corpora- tion. Why should the owner of stocks be deprived of the privilege, of mortgaging or pledging his stock for the security of a loan, without stripping himself of all his rights of ownership, more than the owner of any other property? The objection is, that it will open the door to fraud, and deprive an execution or attaching creditor of the means of ascertaining the real ownership of the stock. It is worthy of notice that this clause requiring a transfer of stock on the books of the company was inserted in numerous charters long before the stock was made the subject of execution. . v.- * The transfer book is not the only evidence of the ownership ot stock The certificate, which has always been deemed prima facie evidence of ownership, is the only evidence in possession of the owner, and where there has been no transfer, is the only recogmzed evidence of title. ■ 1.1 1 f Such a certificate annexed to or accompanying a blank power ot 590 . SHAEEHOLDEKS — TRANSPEK. [CHAP. IV. attorney we cannot doubt, not only according to the understanding of men in business, but upon well-settled principles of law, passes by delivery an equitable title to a bona fide purchaser ; nor can such pur- chaser be justly prevented from converting his equitable into a legal title by filUng up and exercising the power, whenever he is entitled to do so by the nature and terms of the contract under which the certifi- cates were delivered to him. When the stock is sold absolutely his light then to perfect his title is immediate ; when it is hypothecated, the right accrues when the debt meant to be secured becomes due and re- mains unpaid. Per Ackley, C. J., in Fatman v. Lobach, 1 Duer 361. They [The Broadway Bank] are entitled to the stock in question clear of the hen of the attachment. Decree accordingly.'^ ^ In Flostroy v. Wm. B. Corby Coal Co., 80 N. J. Eq. 547, a similar result was Teaehed in favor of a prior transferee against a subsequent execution creditor. The transferee was also a creditor of the debtor and did not part with value at the titoe of obtaining title, the stock certificate being transferred to him, in blank, in satisfaction of his debt. The execution creditor later purchased the debtor's stock at the exeou- ton sale and a new certificate therefor had been issued to him by the company, before the aforesaid transferee notified the company or requested transfer on its books. S,TEVENS, V,.C. said : "The question, which under these circumstances has the better title, has been directly adjudicated by Vice Chancellor Pitney in Board of Education v. Duparqiiet, 50 N. J. Eq. 234, 24 Atl. 922. He there held that notice was not neces- sary in order to give priority to the prior assignee over a subsequent attaching creditor, apd that, as between the former and the latter, the former had the better title. There is a manifest distinction between such a creditor and one who, without notice, parts vpith value, on the strength of an assignment based on the apparent ownership of the assignor, in cases where he has notified the debtor, and the first assignee has not." Cf. Gray ». Graham, 87 Conn. 601. (Stock in name of A on books to qualify him us director but certificate in possessio]a of B. C, an attaching creditor of A but parting ■with no value oh the strength of A's ownership of the stock, levies upon same. Held : B's right was paramount to C's.) The student will find much information upon. the methods and a keen analysis of the legal effect of stock transfers in an article by Prof. Thaddeus D. Kenneson, in 23 Yale Law Jnl. 193, entitled "Purchase for Value Without Notice." , In the principal case. Chancellor Gbeen well says that "there is not an^ntire uni- formity of authority upon the question whether a transfer or pledge of stock . . . -without a transfer upon the books . . . will protect the holder against the claims of an attaching creditor." The student must distinguish between the situations before noted and those where the execution or attaching creditor has made his levy before the transfer or pledge occurred. In such cases, the subsequent transferee or pledgee, al- though bona fide, usually acquires nothing as against the prior creditor. Statutes frequently change this result however. See Clews v. Friedman, 182 Mass. 555. Again, the procedure in and effect of attachments and executions being prescribed and defined in varying statutes, the result varies accordingly. So in respect to the emphasis placed in some jurisdictions upon the necessity of transfer on the books, and, in others, the stress laid on notice, either to the creditor or to the company itself. Upon variant statutes and charter provisions, the problem is mainly one of construction. See Mapleton Bank v. Standrod, 8 Idaho 740 and notes in 67 L. R. A. 656 ; Everitt v. Farmers ■& Merchants Bank, 82 Neb. 191 and notes in 20 L. R. A. (n. 8.) 996 ; National Bank V. Western Pacific R. R. Co., 157 Cal. 573. MoClung ». Colwell, 107 Tenn. 592 ; Lund V. Wheaton Roller Mill Co., 50 Minn. 36 ; Young v. South Tredegar Iron Co., 85 Tenn. 189 ; People ex rel. Matthiesen v. Lihme, cited ante, in note 2, page 443. The Uniform Stock Transfer Act embodies a recent legislative attempt to cure the lack of uniformity noted. It is now (1916) in force in Massachusetts, New York, Maryland, Rhode Island, Pennsylvania, Louisiana, Ohio, Michigan, Wisconsin, and New Jersey. Its provisions follow: SECT. 5.] BROADWAY BANK V. McELRATH. 591 1. Title to a certificate and to the shares represented thereby can be transferred only- Co) By delivery of the certificate indorsed either in blank or to a specified person by the person appearing by the certificate to be the owner of the shares represented thereby, or (6) By delivery of the certificate and a separate document containing a written assignment of the certificate or a power of attorney to sell, assign or transfer the same or the shares represented thereby, signed by the person appearing by the certificate to be the owner of the shares represented thereby. Such assignment or power of at- torney may be either in blank or to a specified person. The provisions of this section shall be applicable although the charter or articles of incorporation or code of regulations or by-laws of the corporation issuing the certificate, and the certificate itself, provide that the shares represented thereby shall be trans- ferable only on the books of the corporation or shall be registered by a registrar or transferred by a transfer agent. 2. Nothing in this act shall be construed as enlarging the powers of an infant or other person lacking fiill legal capacity, oj of a trustee, executor or administrator or other fiduciary to make a valid indorsement, assignment or power of attorney. 3. Nothing in this act shall be construed as forbidding a corporation (a) To recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, or (6) To hold liable for calls and assessments a person registered on its books as the owner of shares. 4. The title of a transferee of a certificate under a power of attorney or assignment not written upon the certificate, and the title of any person claiming under such trans- feree, shall cease and determine if, at any time prior to the surrender of the certificate to the corporation issuing it, another person, for value in good faith, and without notice of the prior transfer, shall purchase and obtain delivery of such certificate with the indorsement of the person appearing by the certificate to be the owner thereof, or shall purchase and obtain delivery of such certificate and the written assignment or power of attorney of such person, though contained in a separate document. 5. The delivery of a certificate to transfer title in accordance with the provisions of section one is effectual, except as provided in section seven, though made by one having no right of possession and having no authority from the owner of the certificate or from the person purporting to transfer the title. 6. The indorsement of a certificate by the person appearing by the certificate to be the owner of the shares represented thereby is effectual, except as provided in section seven, though the indorser or transferor (o) Was induced by fraud, duress or mistake to make the indorsement or delivery, or (5) Has revoked the delivery of the certificate, or the authority given by the in- dorsement or delivery of the certificate, or (c) Has died or become legally incapacitated after the indorsement, whether before or after the delivery of the certificate, or (d) Has received no consideration. 7. If the indorsement or delivery of a certificate (0) Was procured by fraud or duress, or (6) Was made under such mistake as to make the indorsement or delivery inequi- table ; or If the delivery of a certificate was made (c) Without authority from the owner, or (d) After the owner's death or legal incapacity, the possession of the certificate may be reclaimed and the transfer thereof rescinded, unless: (1) The certificate has been transferred to a purchaser for value iri good faith with- out notice of any facts making the transfer wrongful, or (2) The injured person has elected to waive the injury, or has been guilty of laches in endeavoring to enforce his rights. , . , Any court of appropriate jiuisdiction may enforce specifically such right to reclaun the possession of the certificate or to rescind the transfer, thereof and, pending litiga- tion, may enjoin the fiu'ther transfer of the certificate or impound it. 8. Although the transfer of a certificate or of shares represented thereby has been rescinded or set aside, nevertheless, if the transferee has possession of the certificate or of a new certificate representing part of the whole of the same shares of stock, a 592 SHAREHOLDERS — TRANSFER. [CHAP. IV. subsequent transfer of such certificate by the transferee, mediately or immediately, to a purchaser for value in good faith, without notice of any facts making the transfer, wrongful, shall give such purchaser an indefeasible right to the certificate and the shares represented thereby. 9. The delivery of a certificate by the person appearing by the certificate to be the owner thereof without the indorsement requisite for the transfer of the certificate and the shares represented thereby, but with intent to transfer such certificate or shares shall impose an obligation, in the absence of an agreement to the contraiy, upon the person so delivering, to complete the transfer by making the necessary indorse- ment. The transfer shall take effect as of the time when the indorsement is actually made. This obligation may be specifically enforced. 10. An attempted transfer of title to a certificate or to the shares represented thereby without delivery of the certificate shall have the effect of a promise to transfer, and the obligation, if any, imposed by such promise shall be determined by the law governing the formation and performance of contracts. 11. A person who for value transfers a certificate, including one who assigns for value a claim secured by a certificate, unless a contrary intention appears, warrants — (o) Thait the certificate is genuine ; (6) That he has a legal right to transfer it, and (c) That he has no knowledge of any fact which would impair the validity of the certificate. In the case of an assignment of a claim secured by a certificate, the liability of the assignor upon such warranty shall not exceed the amount of the claim. 12. A mortgagee, pledgee or other holder for security of a certificate who in good faith demands or receives payment of the debt for which such certificate is security, whether from a party to a draft drawn for such debt, or from any other person, shall not by so doing be deemed to represent or to warrant the genuineness of such certificate, or the value of the shares represented thereby. 13. No attachment or levy upon shares of stock for which a certificate is outstand- ing shall .be valid until such certificate be actually seized by the officer making the attachment or levy, or be surrendered to the corporation which issued it, or its transfer by the holder be enjoined. Except where a certificate is lost or destroyed, such cor- poration shall not be compelled to issue a new certificate for the stock until the old certificate is surrendered to it. 14. A creditor whose debtor is the owner of a certificate shall be entitled to such aid from courts of appropriate jurisdiction, by injunction and otherwise, in attaching such certificate or in satisfying the claim by" means thereof as is allowed at law or in equity, in regard to property which can not readily be attached or levied upon by or- dinary legal process. 15. There shall be no lien in favor of a corporation upon the shares represented by a. certificate issued by such corporation and there shall be no restriction upon the transfer of shares so represented by virtue of any by-law of such corporation, or otherwise,, unless the right of the corporation to such' lien or the restriction is stated upon the certificate. 16. The alteration of a certificate, whether fraudvdent pr not and by whomsoever made, shall not deprive the owner of his title to the certificate and the shares originally represented thereby, and the transfer of such a certificate shall convey to the transferee a good title to such certificate and to the shares originally represented thereby. 17. Where a certificate has been lost or destroyed, a court of competent jurisdiction may order the issue of a new certificate therefor on service of process upon the cor- poration and on reasonable notice by publication, and in any other way which the court may direct, to all persons interested, and upon satisfactory proof of such loss or destruction and upon giving of a bond with suflScient surety to be approved by the . court to protect the corporation or any person injured by the issue of the new certificate from any liability or expense, which it or they may incur by reason of the original, certificate remaining outstanding. The court may also in its discretion order the payment of the corporation's reasonable costs and counsel fees. The issue of a new certificate under an order of the coiu-t as provided in this sec- tion, shall not relieve the corporation from liability in damages to a person to whom the original certificate has been or shall be transferred for value without notice of the proceedings or of the issuance of the new certificate. 18. In any case not provided for by this act the rules of law and equity, including the law merchant, and in particular the rules relating to the law of principal and agent,. SECT. 5.] NICHOLSON V. FRANKLIN BREWING COMPANY. 593 NICHOLSON V. FRANKLIN BREWING COMPANY.' 82 Ohio St. 94. 1910. Suit to compel defendant, a Delaware corporation, to accept sur- render of two certificates of its common stock which plaintiff had received by assignment and transfer from former owners thereof and issue to him a new certificate therefor. Upon the face of these certificates was printed the clause " The Franklin Brewing Company has a hen upon the stock represented by this certificate for any and all indebtedness owing to it by the holder hereof, as shown upon the books of the company." Upon the back of these certificates was printed the following provi- executors, administrators and trustees, and to the effect of fraud, misrepresentation, duress or coercion, mistake, bankruptcy, or other invalidating cause, shall govern. 19. This act shall be so interpreted and construed as to effectuate its general pur- pose to make uniform the law of those States which enact it. 20. A certificate is indorsed when an assignment or a power of attorney to sell, assign, or transfer the certificate or the shares represented thereby is written on the certificate and signed by the person appearing by the certificate to be the owner of the shares represented thereby, or when the signature of such person is written with- out more upon the back of the certificate. In any of such cases a certificate is indorsed though it has not been delivered. 21. The person to whom a certificate was originally issued is the person appearing by the certificate to be the owner thereof, and of the shares represented thereby, until and unless he indorses the certificate to another specified person, and thereupon such other specified person is the person appearing by the certificate to be the owner thereof until and unless he also indorses the certificate to another specified person. Subse- quent special indorsements may be made with like effect. 22. (1) In this act, unless the context or subject matter otherwise requires — "Certificate" means a certificate of stock in a corporation organized under the laws of this State or of another State whose laws are consistent with this act. "Delivery" means voluntary transfer of possession from one person to another. "Person" includes a corporation or partnership or two or more persons having a. joint or common interest. To "purchase" includes to take as .mortgagee or as pledgee. "Purchaser" includes mortgagee and pledgee. "Shares" means a share or shares of stock in a corporation organized under the laws of this State or of another State whose laws are consistent with this act. "State" includes State, Territory, district and insular possession of the United States. "Transfer" means transfer of legal title. "Title" means legal title and does not include a merely equitable or beneficial ownership or interest. "Value" is any consideration sufficient to support a simple contract. An ante- cedent or pre-existing obligation, whether for money or not, constitutes value where a certificate is taken either in satisfaction thereof or as security therefor. (2) A thing is done "in good faith" within the meaning of this act when it is in fact done honestly, whether it be done negligently or not. 23. The provisions of this act apply only to certificates issued after the taking effect of this act. „ 24. The short title to this act is "Uniform Stock Transfer act (1916). 25. All acts and parts of acts inconsistent with this act are hereby repealed. ' Statement of facts re-written. 594 SHAREHOLDERS — TRANSFER. [CHAP. IV. sion, together with the blank form for the written consent of the directors and president: "The stock represented by this certificate is not transferable except with the consent of at least two-thirds of the directors of the corporation indorsed upon the back hereof and signed by said directors and the president of this corporation, naming the person to whom the same may be transferred, and bearing the corporate seal. "We hereby consent to the transfer of shares of the stock represented by this certificate to r Signed by us this day of ,190-." ' President. "Directors." Section 19 of defendant's by-laws provided : "In case any member of this company desires to sell all or part of the stock held by him, he shall notify the secretary of this company in writing, stating the amount of stock he desires to sell and the market value of same, when this company shall have an option on said stock for thirty days follow- ing such notice. The directors in turn shall first offer it for sale to saloonkeepers who are not stockholders ; second, to saloonkeepers who are stockholders, and, third, to stockholders who are not saloon- keepers. The meaning of the word 'saloonkeepers,' as applied in this section, is held to be all men actually engaged in the sal@on busi- ness." The material provisions of the Delaware statute under which defendant was formed are mentioned in the opinion. Plaintiff had no actual knowledge or notice of the provisions of the by-laws of defendant except such as he is chargeable with by reason of the provisions and recitations in and on the certificates of stock aforesaid. Plaintiff appeals from a judgment of the circuit court in favor of defendant. SHAtrcK, J. There is no occasion to doubt that the defendant in refusing to transfer the shares of stock acquired by the plaintiff, in view of the failure to give an option to the directors for thirty days in order that they might have opportunity to sell it to persons whose business would aid in promoting the welfare of the corporation, is strictly within section nineteen of its by-laws. The question of SECT. 5.] NICHOLSON V. FRANKLIN BREWING COMPANY. 595 doubt in the case concerns the validity of the by-law and its binding obligation upon the plaintiff. Separate analysis of the very numerous cases cited in the briefs of counsel is impracticable and unnecessary. A few generahzations will meet the requirements of most of the cases and materially narrow the field of inquiry. The corporation being organized under the laws of the state of Delaware, although its principal place of business is in Ohio where the plaintiff resides and where these transactions in stock were conducted, he had actual knowl- edge that he was acquiring the stock of a Delaware corporation and he is deemed to know all restrictions which the laws of that state or by-laws not inconsistent with them imposed upon its alienation. Relfe V. Rundle, 103 U. S., 222 ; Hammond v. Hastings, 134 U. S., 401. Effective regulations of the transfer of stock in a corporation must be prescribed in statutes or in by-laws of the corporation which are not inconsistent with the statutes. A corporation may not refuse to transfer stock "because of the motive which may have prompted the transferee to acquire it, this being upon the well estab- lished ground that however important may be the motive which prompts one to the commission of a wrong, the motive which prompts him to the exercise of a legal right can never be the subject of judicial inquiry.! By-laws of a corporation, to be valid, must not contravene the policy defined in the statute of its creation, and this renders it entirely unnecessary to consider further the cases in which it has been held that corporations formed under the national banking laws may not provide for liens upon their stock to secure the debts of their stock- holders, since the laws provide expressly that they may not loan money upon the security of their stock.^ When statutes under which corporations are formed authorize them to make by-laws upon specifi- cally named subjects there is an implied denial of authority to make by-laws upon subjects not named. In very many cases it has been held that a by-law imposing a restrictive regulation upon the transfer of stock is invalid unless it is expressly authorized by statute.' Quite uniformly when that con- clusion is reached it is placed upon the ground that such regulations impose a restraint upon the aUenation of property and that they are therefore inimical to pubhc policy. It does not appear to have been deemed necessary in these cases to demonstrate that the right to alienate property should be more highly regarded than the right to > Accord: Rice s. Rockefeller, 134 N. Y. 174, distinguishing Forrest v. Manchester &c. Ry. Co., 4 DeG., F. & G. 126. Cf. Hodge D. U. S. Steel Corp. infra, page 650. See note 1, page 543, ante. 2 See Third National Bank v. Buffalo &c. Ins. Co., 193 U. S. 581. Cf. National Bank v. Watsontown Bank, 105 U. S. 217. 3 See Ireland v. Globe Milling &c. Co., 19 R. I. 180; 20 R. I. 190; 21 R. I. 9; Victor G. Bloede Co. v. Bloede, 84 Md. 129 ; Bank of Atchison County v. Durfee, 118 Mo. 431 ; DriscoU v. West Bradley &c. Co., 59 N. Y. 96 ; Bridges v. Bank, 185 N. Y. 146 ; McNulta v. Corn Belt Bank, 164 lU. 427 ; In re Klaus, 67 Wis. 401. 596 SHAEKHOLDERS — TRANSFER. [CHAE. IV, make contracts respecting it. By the assumption that it should be, a task of much obvious difficulty has been avoided. In a few cases the opposite conclusion has been reached and supported by reasons of much strength. In New England Trust Co. v. Abbott, 162 Mass., 148 (27 L. R. A., 271), a by-law differing in no essential respect from that relied on by the defendant here was enforced although it was wholly without express statutory sanction. The court did not consider whether the by-law was technically vahd so as to impress upon property in the stock of the company a restricted alienability, but placed the decision upon the ground that the terms of the by-law became a contract between the corporation and the subscriber for its stock.i In the later case of Barrett v. King, 181 Mass., 476, which arose out of the refusal of the Continental Brewing Company to enter a transfer of its stock, the refusal being for non-compliance with a by-law not distinguishable from this, the rights of the parties wei;e determined by the same view.^ What may be the effect of a by-law of this character upoi;i the transferabihty of stock when the question is not affected by any provision of the statute under which the corporation is formed, we need not determine in the present case. The different conclusions with respect to that question result from different views of the policy involved. To define and establish rules of public poUcy is a recog- 1 In this case, Mohton, J. said: "The defendant contends that these by-laws are void. We have not found it necessary to consider that question, and we express no opinion upon it. We think that the case well may stand on the ground that the de- fendant's testator entered into an agreement with the plaintiff to do what the plaintiff now seeks to compel his executor to do. It is manifest that a stockholder may make a contract with a corporation to do or not to do certain things in regard to his stock, or to waive certain rights, or to submit to certain restrictions respecting which the stock- holders might have no power of compulsion over him. ... In the present case the certificates were issued to the defendant's testator in consideration of the payment by him to the corporation of the amount due for the stock, and of the agreements with it on his part which they contained. By accepting them without objection, and by signing the receipts, he agreed to the conditions printed on the backs of the certificates. The fact that the conditions were contained in by-laws which may have been invalid as such, does not render his agreement void, if the contract was in substance one which the corporation had power to make." 2 III this casey Holmes, C. J. said : "Under the law of Massachusetts, the stipula- tions, considered as a contract between the corporation and Holmes, undoubtedly would be lawful. New England Trust Co. v. Abbott, 162 Mass. 148. And this de- cision goes far to sustain the by-law as such, by consequence. See Feckheimer v. National Exchange Bank of Norfolk, 79 Va. 80, 83. Furthermore, looking at the stock merely as property, it might be said that, so far as appears and probably in fact, it was called into existence with this restriction inherent in it, by the consent of all concerned. See Braintree Water Supply Co. v. Braintree, 146 Mass. 482, 488. This is not the case of a by-law attempting to cut down the rights of property already acquired, against the will of some of the owners. The whole stock originally was issued to the defendant King in payment for the plant and he was desirous of keeping it in the hands of consumers, that is of liquor dealers. And this suggests a further consideration. Stock in a corporation is not merely property. It also creates a per- sonal relation analogous otherwise than technically to a partnership. Notwithstand- ing decisions under statutes, like In re Klaus, 67 Wis. 401, there seems to be no greater objection to retaining the right of choosing one's associates in a corporation than in a firm." SECT. 5.] NICHOLSON V. FRANKLIN BREWING COMPANY. 597 nized function of legislation. The statute of the state of Delaware, under which this corporation was formed, expressly authorized it to make by-laws "for the management of its property, the regulation and. government of its affairs, and for the certification arid transfer of Its stock." It also provides expressly that "the shares of stock in every corporation shall be deemed personal property and trans- ferable on the books of the corporation in such manner and under such regulations as the by-laws provide." The third section of the act further provides generally that the corporation shall have such powers not inconsistent with law as may be necessary or convenient to the. attainment of the objects of the corporation. Certainly power to regulate transfers of stock could not properly be regarded as power to prohibit the transfer, and it may be that in the interpreta- tion of acts conferring such power it would be the duty of courts to see that prohibition is not accomplished under the guise of regulation, and that restrictions would not be permitted if foreign to the purpose for which the corporation is formed. The by-law here called in question contains no suggestion of a purpose to prevent the aliena- tion of stock nor to restrict it beyond reasons suggested by a considera- tion of the welfare of the corporation and the express provisions of the statute. It interposes no permanent impediment to the transfer, providing only for an option in the directors for thirty days as a reasonable opportunity to them to dispose of stock to persons deemed desirable as holders. The statute having recognized the lawfulness of the purpose for which the corporation is formed and having em- powered it to make by-laws in furtherance of that purpose, expressly including the issuance and transfer of stock within the subjects for regulation by by-laws, we find no reason for saying that the by-law is invalid. Judgment affirmed.^ ' In Lougyear v. Hardman, 219 Mass. 405, the enabling statute required that the certificate of incorporation shall state inter alia the number of shares, and the restrie- tions, if any, imposed upon their transfer. A corporation, formed under this statute, adopted a by-law that any stockholder, desirous of selling any of his shares, shall, before selling, file a statement with the clerk, naming the proposed purchaser, number of shares to be sold and the purchase price ; that thereupon a meeting of the stock- holders shall be held and it three-fourths of the stock issued and outstanding shall vote in favor of permitting such sale, then such stockholder may sell and dispose of the stock. Held : Defendant directors who held office by virtue of shares transferred in violation of this restriction inherent in the nature of the corporation were not qualified and must surrender their office. Rtjgg, C. J. said: "The absence of any definite limitation upon the power of the incorporators to impose restrictions must be taken to be a legislative determination that considerable latitude was intended. No such restrictions can be stricken down as unlawful under these circuinstances unless palpably unreasonable. A corporation bears some resemblance to a partnership. Plainly no new partner can be introduced into a partnership without the assent of all the partners." Contra: Steele v. Farmers' & Merchants' &c. Tel. Ass'n., 148 Pao. (Kan., 1915) 661. BuRCH, J. said : "While it is transferable only on the books of the corporation according to such reasonable formalities as may be prescribed, it is transferable there to any one holding lawful title. The power to adopt by-laws regulating transfers is intended to promote convenience and certainty as to membership. It cannot be em- 598 SHAREHOLDERS — PREFERRED STOCK. [CHAP. IV Section 6. — Preferred Stockholders. LLOYD V. PENNSYLVANIA ELECTRIC VEHICLE CO. 75 N. J. Bq. 263 ; 21 L. R. A. (N. S.) 228. 1909. SwAYZE, J. The question involved in this case is the distributioi of a surplus remaining in the hands of the trustees in Hquidatioi of the Pennsylvania Electric Vehicle Company after payment of th( debts. The controversy is between the preferred stockholders whose claims will absorb the whole surplus in case they are entitlec to a preference in the distribution, and the common stockholders The vice chancellor decided in favor of the preferred stockholders The question to be decided is one of contract, and the contract of th( preferred and common stockholders inter sese is determined by thi provisions of the statute and of the certificate of incorporation. Th( sections of the statute (P. L. 1896, p. 277) that are material to th( inquiry are sections 8, 18, and 86. Section 8, as amended in 1898 (P. L. p. 407), requires that the cer tificate of incorporation shall set forth the amount of the authorizec capital stock, the number of shares into which the same is divided and the par value of each share, and, if there be more than one clasi of stock created by the certificate of incorporation, a description o the different classes, with the terms on which the respective classei of stock are created. ployed to embarrass transfers or curtail property rights, and the provisions of tb defendant's constitution making election to membership or acceptance ofa membe by the board of directors a condition of transfer are void. . . . The Legislatun considered the subject of restrictions on the alienation of shares of stock and per mitted just two — full payment of previous assessments and transfer on the book of the corporation. Gen. Stat. 1909, § 1743. Aside from these restrictions, share of stock are personal estate vendible at will, and the corporation possesses no franchis to impose other conditions or disqualifications. . . . The sale of his stock by a stock holder of a corporation is not an affair of the corporation at aU, except as already in dicated, and a contract of the corporation with its stockholders creating the right ti limit future ownership of stock and future membership in the corporation is as muol beyond the power of the board of directors as a by-law to the same effect. The func tion of the board of directors or trustees is to manage the business of the corporatioi The law determines who may compose the corporation. The prevailing view is tha by-laws of the character of those under consideration accomplish no lawful purpose.' In United Cigarette Machine Co. v. Brown, 89 S. E. (Va., 1916) 850, the article of association of an English corporation provided for a lien in its favor upon the share (and dividends thereon) registered in the name of each member for his debts, liabilitie and engagements and ttat directors might refuse to register a transfer of any share upon which the company has a lien: Held : The corporation may refuse transfer to stockholder against whom its claim is not only unliquidated but also barred by th statute of limitations. SECT, 6.] LLOYD V. PENNSYLVANIA ELECTRIC VEHICLE CO. 599 Section 18 authorizes every corporation organized under the act to create two or more kinds of stoek, of such classes, with such desig- nations, preferences, and voting powers or restrictions,^ or qualifica- tions thereof, as shall be stated and expressed in the certificate of incorporation, or in any certificate of amendment thereof. It pro- vides that at no time shall the total amoimt of the preferred stocks issued and outstanding exceed two-thirds of the capital stock paid for in cash or property, and such preferred stocks may, if desired, be made subject to redemption at any time after three years from the issue thereof at a price not less than par, and the holders thereof shall be entitled to receive, and the corporation shall be bound to pay thereon, dividends at such rates and on such conditions as shall be stated in the original or amended certificate of incorporation, not exceeding 8 per centum. It also provides that in case of insolvency the debts or other habUities shall be paid in preference to the preferred stock. The provision of the certificate of incorporation as amended is as follows : "Forty thousand of said shares are to be preferred stock, the holder thereof to receive, and the company to pay, a fixed yearly dividend of six per cent, before any dividend shall be set apart or paid on the general stock." The company was organized in 1899, pursuant to the act of 1896. Section 86 of the present act is substantially the same as section 80 of the act of 1875 (Rev. St. 1874, p. 29). Sections 8 and 18 intro- duced new provisions, in that the former requires that the certificate of incorporation shall contain a description of the different classes, with the terms on which the respective classes of stock are created, in case more than one class of stock is created by the certificate ; and the latter, which takes the place of section 25 of the act of 1875, authorizes the creation of more than two kinds of stock, with such designations, preferences, and voting powers or restrictions or quali- fications thereof as shall be stated and expressed in. the certificate of incorporation. It has been held, and may be regarded as entirely settled, that calHng stock "preferred stock" does not of itself determine the rights of the holders, for the extent of the preference is to be determined by the terms of the contract. McGregor v. Home Insurance Co.,^ ' Cf. People ex rel. Browne v. Koenig, ante, page 532. ^ In this case the court said that normally the rights of the two classes of stock- holders must be determined by their contract, and that unless that gives a preference in the distribution of capital, the surplus assets must be distributed equally among aU the stock. The court held, however, that the statute under which the preferred stock was issued, was a part of the contract between the corporation and the stock- holder; that the 80th section of the General Corporation Act in directing how the surplus assets of a corporation, wound up under that act, should be distributed, de- clares that "the surplus funds, if any, after payment of creditors, and costs and ex- penses, and the preferred stockholders, may be divided and paid to, the general stock- holders" ; that in view of this statute the holders of preferred stock of the defendant corporation were, 'in the distribution of capital to be first paid, although the certificate of stock called merely for a preference in the division of profits. 600 SHAREHOLDERS — PREFERRED STOCK, [CHAP. IV. 33 N. J. Eq. 181 ; Elkins v. Camden & Atlantic R. Co.,i 36 N. J. Eq. 233. It was also said, upon equally good grounds, in the McGregor Case, that preferred' stock, in the absence of an express stipulation or direction to the contrary, simply gives the holder a right of pref- erence in the division of profits, and not in the distribution of capital. The learned vice chancellor cited as authority the opinion of Vice Chan- cellor MaUns in the case of In re London India Rubber Company, L. R. 5 Equity, 519, 37 L. J. Eq. 235, and of Sir George Jessel in Griffith v. Paget, L. R. 6 Chancery Division, 511, 46 L. J. Eq. 493. It was, how- ever, held in the McGregor Case that the terms of section 80 of the act of 1875, now section 86, required that the preferred stockholders should be preferred in the distribution of assets upon insolvency. It is 1 In this case the court was called upon to construe the rights of holders of preferred stock Issued under a statute which provided that the holders thereof "shall be entitled to receive dividends on the same not to exceed seven per centum. per annum, before any dividend shall be set apart or paid on the other and ordinary stock of said com- pany." Approaching the problem, Van Fleet, V. C. said : "There are certain legal principles pertinent to this discussion which I think are so firmly established that they may be taken for granted, without argument or the citation of authorities: First, stockholders are not creditors, and until the winding up of the corporation, are entitled to nothing from it but a distribution of its net earnings ; second, dividends can only be paid out of profits ; third, calling stock preferred stock does not, per se, define the rights of such stock, but in order to determine in what respect the holder of such stock is to be preferred to the holder of ordinary stock, resort must be had to the statute or contract under which it is issued ; and, fourth, where the statute or contract under which preferred stock is issued, declares or promises that the holder of such stock shall receive a dividend of a fixed and certain rate per annum, without limit- ing the annual sum to be paid as dividend to profits earned or made within a designated period — as, for example, that he shall receive a dividend of seven per cent, per annum before any dividend shall be paid on the ordinary stock — there the preferred stock- holder is entitled to seven per cent, per annum from the date of the issuing of the stock held by him." Adverting to the fact that the statute under which the preferred stock in question was issued, made no provision for the payment of an annual dividend at a fixed and certain rate, he said : "The maximum of the preferred dividend is specified. It may be seven per cent. ; it cannot be more ; it may be less, or it may be nothing. No minimum is specified. This being the case, is it not obvious that the legislature meant, and the persons who originally took the stock must be assumed to have understood, that the amount, within the limit prescribed, payable annually In dividends on the preferred stock, would depend wholly upon the amount of profits which, in the proper and judicious management of the affairs of the corporation, could be divided among its stockholders? There is not the slightest warrant for saying that the legislature meant that the preferred stockholder should have seven per cent, per annum on his stock, whether the net earnings which could properly be applied in the payment of dividends were sufiicient to give him a dividend at that rate or not ; 61- that if the net earnings of any year were not sufficient to give him a seven-per-cent. dividend, he should have a right to carry any deficiency which might exist over to the next year." He concluded : "The language employed renders it very clear, I think, that what the legislature meant was this : The rights of the preferred stockholder should depend upon the pecuniary condition of the corporation; if there were no profits during the ciurent year, he was not entitled to a dividend ; if there were, he was entitled to a preference to the extent of seven per cent. ; if the profits were not sufficient to give him seven per cent., he was entitled to a dividend at such rate as they were sufficient to pay, but not to carry any deficiency or arrears over to a sub- sequent division of profits. In other words, his rights were to be governed and regu- lated each year by the pecuniary condition of the corporation at the close of the year." As to the use of the phrase, "entitled to dividends", cf. note 1, page 402, ante. As to the effect of the phrase, "before dividends shall be paid to common stock- holders", see Spear v. Rockland-Rockport Lime Co., cited in note on page 616, infra. SECT. 6.] LLOTD V. PENNSYLVANIA ELECTEIC VEHICLE CO. 601 unnecessary to consider whether the opinion of the vice chancellor in this respect was, as Mr. Cook says (Cook on Corporations, § 278, note), a mere dictum. We are satisfied that it has been acted upon as a correct statement of the law of the state, and that if the Legisla- ture, in the revision of the corporation act in 1896, had done no more than re-enact this provision, it would be necessary to hold that they had adopted the construction which had been put upon the section. 16 years before. This, however, is not the situation presented by the act of 1896, for that act contained the provisions in section 8 and in section 18 that we have quoted. The insertion of those provisions in the act indicates an intent upon the part of the Legislature to make some change in the then existing law. We think the change that they intended was to require that all preferences or special privileges to be, conferred upon any class of stock be set forth in the certificate of incorporation. If they did not intend this result, it would have been unnecessary to require, by section 8, that the certificate should set forth the terms on which the respective classes of stock were created ; and it was probably because they intended that the stock should not have any other preference that in section 18, in attempting to define the rights of preferred or special stockholders, they limited the special rights or special restrictions to such preferences and voting powers or restrictions or qualifications thereof "as shall be stated or expressed in the certificate of incorporation." The power to create preferred stock is granted by section 18, and it is granted upon the terms set forth in that section. To enact that the stock should have such preference as is stated or expressed in the certificate was equiv- alent to enacting that it should have no other preference, upon the general principle of interpretation that the expression of one thing is the exclusion of another. The very fact that section 18 provided for more than one class of preferred or special stock leads to the same conclusion, for it can hardly be claimed that the rights of more than one kind of preferred stock would be determined by the language of section 86 standing alone. That section is a survival of legislation going back to the early days of corporations in this state, at a time when only one class of preferred stockholders was authorized. Such is not now the case. Under the present act it is possible, for example, to issue what are called sometimes "founders' shares." Unless the rights of such shares are determined by the certificate of incorporation, they cannot be determined by the provisions of section 86, and the same reasoning is applicable to other classes of shares (aside from the ordinary preferred shares) which are issued by modern corpo- rations. We recognize the necessity of construing the several sections of the act so as to give effect to each and to all the language of each. We think that can well be done. Section 86 is still necessary, not- withstanding the changes made in 1896, in order to cover the case 602 SHAREHOLDERS — PBEFERHED STOCK. [CHAP. IV. of corporations existing under special charters, or corporations under the general acts prior to 1896. A greater difficulty, perhaps, is pre- sented by the provision of section 86 that the surplus funds, after payment of creditors, costs, expenses, and allowances, and the pre- ferred stockholders, shall be paid to the general stockholders propor- tionally according to their respective shares. It requires no strained construction, however, to hold that this provision as to the payment of preferred stockholders in preference to the general stockholders is a payment to them, not of the par value of their stock, but of the amount to which they are entitled as a preference by virtue of the contract contained in the certificate of incorporation. Sec- tion 86 does not say that the preferred stockholders shall be paid the par value of their stock with the unpaid dividends that may have accrued thereon. It requires only that the preferred stock shall be paid in preference to the general stockholders, and that means that they shall be paid so much, and so much, only as their contract gives them. The amount of the surplus to be paid to the general stockholders is not necessarily the amount that may be left after paying the preferred stockholders the par value of their stock. It may just as well mean the surplus that is left after paying them the amount to which they are entitled by their contract. Nor is any difficulty presented where the terms of the contract entitle the pre- ferred stockholder to a preference in dividends only. In this caSe, which, as Vice Chancellor Van Fleet said, and as the authorities show, was the ordinary case, in the absence of such a provision as that contained in section 86, the preferred stockholders and the general stockholders would share pro rata in the distribution of assets after the payment of dividends due the preferred stockholders. That such would be the rule is well illustrated by a thoroughly considered case in the Enghsh courts, which presented the novel situation of a fund upon dissolution of a corporation sufficient to pay not only the debts and the amount invested by the preferred and common stock- holders, but to leave a large surplus for distribution. In that case the preferred stock had been fully paid up to the extent of £10 per share. The common stock had been paid for only to the extent of £3 10s. per £10-share. It was held in the court of first instance and in the court of appeal that after paying to each preferred stockholder £10 per share, and to each common stockholder £3 10s. per share, the surplus should be divided among all the stockholders, preferred and common, in proportion to the amount of money actually con- tributed by each. The common stockholders insisted that the whole of this surplus was profits, and that, as they were entitled to all of the profits after paying the 5 per cent, to the preferred stock- holders, they were entitled to the whole of the fund. The court, however, held that this position was untenable, and that the rule contended for by the common stockholders applied only to annual SECT. 6.] LLOTD ». PENNSYLVANIA ELECTRIC VEHICLE CO. 603 profits, and not to the large profits arising from the sale of the prop- erty of the corporation. In this respect the decree was affirmed by the House of Lords, but it was there held that the surplus should be divided among the stockholders in proportion to the number of shares held by each, and not in proportion to the amount contributed by each. In re Bridgewater Navigation Co., L. R. 39 Chancery Division, 1, 57 L. J. Ch. Div. 809, 14 Appeal Cases, 525, 59 L. R. Ch. Div. 122. We see no reason why, if the case is ever presented, the same rule should not be apphcable under section 86, and the amount to be paid to the preferred stockholders in such a case would be, first, what they were entitled to under the certificate of organiza- tion, and, second, their proportional share of the remaining assets. The surplus, after making that payment, would by the terms of sec- tion 86, belong to the general stockholders. Section 18 provides that in case of insolvency the debts or other liabilities shall be paid in preference to the preferred stock. With our present notions of the character of stock, such a provision seems unnecessary, and, unless explained, it might be supposed that it implied that preferred stockholders were to be paid as creditors next after the debts. We think, however, that there is an explanation of the insertion of this provision in the act pf 1875 growing out of the efforts that had been made in other jurisdictions to give preferred stock more the character of a security for money loaned than of an investment in the business subject to the ordinary hazards. Attempts to give preferred stockholders the status of creditors rather than of shareholders are referred to in Cook on Corporations (3d Ed.) § 271. Some of these efforts were directed to securing a dividend to the preferred stockholder whether profits were made or not ; some were directed to securing him by way of mortgage. Taft v. Hartford, Providence & Fishkill R. Co., 8 R. I. 310, 5 Am. Rep. 575 ; Lockhart V. Van Alstein, 31 Mich. 76, 18 Am. Rep. 156 ; Chaffee v. Rutland, &c., R. Co., 55 Vt. 110; Warren v. King, 108 U. S. 389, 2 Sup. Ct. 789, 27 L. Ed. 769; Miller v. Ratterman, 47 Ohio, .141, 24 N. E. 496. In view of these cases, it is not surprising that the Legislature in- serted the clause in question in the act of 1875, and has retained it in the act of 1896. The effect of it is to prevent the incorporators from giving the preferred stockholders a claim superior to that of creditors by an insertion of a provision to that effect in the certificate of organization, and in that respect this clause still serves a useful purpose.* ' In Cass ji. Realty Securities Co., 148 A. D. 96, affirmed 206 N. Y. 649, Scott, J. said : "The securities upon which plaintiff claims, although denominated bonds, and drawn in that general form, are in effect nothing more than a species of preferred stock. The fact that the instrument is called a bond is not determinative of its character, for it is our duty to look to the substance of things, and there are many cases wherein securities denominated bonds h^ve been held to be stock, and vice, versa. Burt v. Battle, 31 Ohio St. 116; Hilson Co. v. State Board of Assessors, 80 Atl. Rep. 929. 604 SHAREHOLDERS — PREFERRED STOCK. [CHAP. IV. It is important that investors in a corporation should be able to ascertain their rights by an examination of the certificate, and it was no doubt with that end in view that the Legislature made the changes in the act of 1875 which now appear in section 8 and section 18. It is true, as was forcibly argued on behalf of the respondents, that it can hardly be that all of the rights of preferred stockholders need be set forth in the certificate of organization, but this fact does not re- quire that we should hold that the certificate of organization cannot limit such rights. Manifestly it can, for, if it were not so, it would be beyond the power of the incorporators to take away the right to a preference on distribution of assets conferred by section 86. Since the corporators have this power to limit the rights of preferred stock- holders, the question in any particular case is whether they have in fact done so. When they have undertaken, as in this case, to set forth the preference to which preferred stock is entitled, we think that they must set forth that preference fully, and that, so far as The distinguishing feature of a bond is that it is an obligation to pay a fixed sum, with stated interest. It may or may not be secured, but if ii is, and the security proves to be insufficient, the indebtedness is not thereby wiped put. The distinguishing fea- ture of stock is that it confers upon the holder a part ownership of the assets and right to participate according to the amount of his stock in the surplus profits of the cor- poration, and ultimately, on its dissolution, in the assets remaining after the payment of its debts. Burrall v. Bushwiok R. R. Co., 75 N. Y. 211 ; Plimpton v. Bigelow, 93 id. 592. It is fundamental that a stockholder, whether common or preferred, cannot have a lien on the property of the corporation, even though the stock by its terms is accorded a lien. Cook Corp. [6th ed.] § 271 ; Warren v. King, 108 U. S. 389. The securities upon which plaintiffs claim partake in a marked degree of the distinguish- ing characteristics of stock. It is true that they contain a promise to pay a stated sum of money at a fixed time, and to pay meanwhile a stated rate of interest, but these obligations are qualified by what follows. It is provided that after the payment of certain fixed, dividends on the common and preferred stock, the holders of the bonds in suit are 'entitled to a proportionate share in the surplus income, if any.' So upon the liquidation of the company the holders of the bonds are entitled to share, after certain payments have been made, in the surplus capital of the corporation, and finally the bond will be satisfied, not only upon payment of its face value, but uppn payment of a ratable proportion of the assets, whether more or less than the amount called for on its face. All these features are characteristic of stock and quite foreign to the accepted definition of a bond. In short the attempt seems to have been to devise a form of security which should possess all the attributes of stock, including a right to share ratably in the profits and increase in value, and at the same time to preserve a specific lien upon the company's assets which should be superior to the claims of creditors. This cannot lawfully be done, for the two things are inherently inconsistent." In In re Feohheimer Fishel Co., 212 Fed. 357, Rogers, J. said : "Another condition indorsed on the bonds provides that the said debenture bond shall be entitled to receive out of the earnings interest at the rate of 8 per cent, per annum before any dividend shall be set apart or paid on the stock of the company, and that such interest shall be cumulative. It is also provided that, upon the liquidation or dissolution of the com- pany's business or the final distribution of its as6ets, the said debenture bonds shall after payment of the debts of the company be entitled to the whole residue of the com- pany's assets. All these features are quite characteristic of stock. They are not at ail characteristic of bonds. And we are satisfied that no error was committed by the court below in holding that these so-called ' bonds ' were in effect preferred stock. Burt V. Battle, 31 Ohio St. 116 ; Hilson Co. v. State Board of Assessors, 82 N. J. Law, 2; Cass v. Realty Securities Co., 148 App. Div. 96, affirmed 206 N.Y. 649." Cf. Smith D. Southern Foundry Co., 179 S. W. (Ky., 1915) 205. SECT. 6.] STERNBEKGH V. BROCK. 605 they fail to express a preference, the preferred stock can have no other rights than the common stock. The decree must be reversed, with costs, and the record remitted to the Court of Chancery for further proceedings therein in con- formity with this opinion.' Gaebison, J., dissents. STERNBERGH v. BROCK.^ 225 Pa. 279 ; 24 L. R. A. (N.S.) 1078. 1909. Bill by a holder of common stock against the directors and treas- urer of the American Iron & Steel Co. and the corporation itself to enjoin a payment of a dividend to the preferred stockholders in excess of five per cent, per annum on the par value of their stock. The corporation had declared a dividend at the rate of eight per cent, per annum upon all its stock, both preferred and common. By resolution previously adopted at a stockholders' meeting, it was provided "that the preferred stock whose issue was thereby authorized to the amount of $3,000,000 should be entitled, (a) to receive a cumulative' yearly dividend of five per cent, payable quarterly on the first days of January, April, July and October, in each year before any dividends shall be set apart or paid on the com- mon stock, (6) to be paid in full both principal and accrued dividends in the event of hquidation or dissolution of the company before any amount shall be paid to the holders of the common or general stock ; (c) to require the consent in writing of a majority of the holders thereof to the creation of any mortgage." Bill dismissed. Plaintiff appeals. • In Mellon v. Mississippi Wire Glass Co., 77 N. J. Eq. 498, stockholders, entitled to preference in the assets, sought to compel the corporation to establish a sinking fund for their protection because, nearly the whole capital being invested in patents, there would be neither patents nor good will nor property on which to realize the par value of the preferred shares upon dissolution. Relief denied because there was no contract to that effect, nor did the law cast any such obligation upon the corporation. See note 1, page 410, ante. 2 Facts restated ; portions of opinion omitted. ' In Spear v. Rockland-Rockport Lime Co., 113 Me. 285, Savage, C. J., said: "The plaintiff's contract is that he shall be entitled, out of the net earnings of the company, to a semiannual, preferential, cumulative dividend, to be paid or provided for before any dividend is set apart or paid on the common stock. And that is why it is called preferential. By being cumulative, if net earnings at any dividend period are insuflScient to pay the contract dividend, it is to be made up out of subsequent net earnings." The use of term "guaranteed" in a preferred stock certificate is equivalent in effect to "cumulative." Boardman v. Lake Shore & M. S. Ry. Co., 84 N. Y. 157. Cf. Strickland v. National Salt Co., 79 N. J. Eq. 182, and Thomas v. Matthews, 113 N. E. (Ohio, 1916) 669. 606 SHAREHOLDERS — PREFERRED STOCK. [CHAP. IV. Potter, J. Three questions are raised by the arguments of counsel on this appeal. 1. Whether preferred stock issued by a company incorporated under the corporation act of 1874, is limited as to dividends, to the amount of its preference; or whether, after payment of an equal amount as dividend on the common stock it is entitled to participate in the distribution of the remaining profits, if any. 2. Whether under the agreement and resolution in the present case, the preferred stockholders can receive dividends of more than five per cent, per annum on the par value of their stock. 3. Whether the alleged fact that for a long series of years the preferred stockholders were paid without objection on their part, only five per cent, per annum and the entire balance of profits was paid to the common stockholders, is to be considered in determining the present rights of the parties. The authority to issue the preferred stock in the present case is derived from the Act of April 29, 1874, sec. 16, P. L. 43, which pro- vides: "Every corporation created under the provisions of this act, or accepting its provisions, may, with the consent of a majority in interest of its stockholders, obtained at a meeting to be called for. that purpose, of which public notice shall be given during thirty days in a newspaper of the proper county, issue preferred stock of the corporation, the holders of which preferred stock shall be entitled to receive such dividends thereon as the board of directors of the corporation may prescribe, payable only out of the net earnings of the corporations." Where there is no stipulation in the contract to the contrary, the weight of authority clearly favors the right of preferred stockholders, to share with the common stockholders, in all profits distributed, after the latter have received an amount equal to the stipulated dividend on the jireferred stock. "In the absence of special provisions, the holders of preferred stock in a corporation are in precisely the same position, both with respect to the corporation itself and with respect to creditors of the corporation, as the holders of common stock, except only that they are entitled to receive dividends on their shares, to the extent guar- anteed or agreed upon, before any dividends can be paid to the holders of common stock:" 2 Clark & Marshall on Priv. Corp. (1901) sec. 417c. "A share of stock is a share of stock, whether preferred or common:" 1 Cook on Corps, sec. 269, note. See also, 1 Elliott on Railroads (2d ed.), sec. 84; 2 Beach on Priv. Corp. sec. 501. We do not find anything in the agreement or resolution in the present case which limited the preferred stockholders to a dividend of five per cent per annum upon their stock. SECT. 6.] EQUITABLE LIFE ASS. SOC. V. V. P. K. R. CO. 607 With regard to the contention that the court should follow the construction placed upon the contract, which it is alleged the parties followed for a series of years, that is, by paying to the preferred stockholders only the stipulated five per cent, dividends, and award- ing the remaining profits to the common stockholders, the trial judge does not find that any such construction was established. With reference to this subject, the present chief justice in Kane V. Ins. Co., 199 Pa. 205, said (p. 207) : "Cotemporary construction of a contract by acts of the parties is entitled to very great weight, but it ought to appear with reasonable certainty that they were acts of both parties, done with knowledge, and in view of a purpose at least consistent with that to which they are now sought to be applied." In our view, these requirements are not met in the present case. Further, it should be noted, that the rule invoked appUes only to contracts that are ambiguous, and where the intention is doubtful. We see no need in the present case, for looking beyond the terms of the contract. We think it was properly construed by the court below. The assignments of error are overruled, and the decree is affirmed. EQUITABLE LIFE ASSURANCE SOCIETY v. UNION PACIFIC R. R. CO. 212 N. Y. 360 ; L. R. A. 1915 D, 1052. 1914. Appeal by permission, from an order of the Appellate Division which aflarmed an order of Special Term granting a motion by de- fendant for judgment in its favor upon the pleadings. The following question was certified :" Does the complaint state facts sufficient to constitute a cause of action?" HiscocK, J.i This action was brought by the plaintiff as the holder of a large amount of the preferred stock issued by defendant to restrain the distribution by the latter of about $80,000,000 as a dividend among its common stockholders. The material facts set forth in the complaint which asks this relief are as follows : At the times involved the defendant had a large outstanding issue both of preferred and common stock. Prior to January 8, 1914, it had carried to the credit of its profit and loss accoimt large amounts based on valuations which are not questioned, and at that date the credit balance of this account was more than 180,000,000. Of this amount upwards of $15,000,000 had accruec} through the retirement of defendant's convertible bonds with common stock on a basis of one share of stock at, par for $175 par value of bonds, and upwards 1 Portions of opinion omitted. 608 SHAREHOLDERS — PREFERRED STOCK. [CHAP. IV, of $58,000,000 had accrued as gain or profit on the sale of stocks of other corporations purchased and held by or for, the benefit of the defendant. On the date above mentioned the defendant declared the extraordinary dividend in issue payable in cash and property to its common stockholders and chargeable against said balance so standing to the credit of its profit and loss account. The plaintiff holds its preferred stock under a clause in the defendant's articles of association which reads as follows : "Such preferred stock shall be entitled, in preference and priority over the common stock of said corporation, to dividends in each and every fiscal year, at such ra,te, not exceeding four per cent, per annum, payable out of net profits, as shall be declardd by the Board of Direc- tors. Such dividends are to be non-cimiulative, and the preferred stock is entitled to no other or further share of the profits." It is conceded that the plaintiff has received all of the dividends and "profits" to which it is entitled under the foregoing article. It is also conceded that the amount carried to the credit of profit and loss as above stated need not be retained by the defendant but may be distributed among its stockholders. It is, however, insisted that this balance does not represent profits which under the fore- going article may be distributed exclusively amongst holders of com- mon stock, but that it represents to the extent of the two items above mentioned an increase of or accretion to capital which must be dis- tributed as capital amongst- all the stockholders including those hold- ing preferred stock. Thus arises the question which we are required to decide. If this is a distribution, even though unusual in amount, of accumulated gains or profits of a character which the directors of a going corporation may at any time in their discretion divide amongst the stockholders as returns or income on their investment, the plaintiff has no ground for complaint. It elected to take stock havingv a preferred but limited right to dividends and profits. It chose the right to returns on its investment which made up in cer- tainty for what they lacked in possible quantity, and there is no inequity in holding it to its choice. If, on the other hand, all or part of the gains which it is proposed to distribute are accretions to and have somehow become permanent capital and been withdrawn from availability for dividends it will be assumed that they must be distributed amongst all the stockholders. When a corporation is organized it secures capital by the issue of shares of capital stock. The fund or property thus secured answers the twofold purpose of furnishing means for carrying on the opera- tions of the corporation and also security for the payment of creditors. This capital stock is earned as a liability and universally, so far as I am aware, at its par amount. It is thus carried as a liability be- cause this is the proper bookkeeping entry. But aside from this, such entry also serves to emphasize the duty of the corporation to SECT. 6.] EQUITABLE LIFE ASS. SOC. «. U. P. E. R. CO. 609 keep its capital stock unimpaired for the protection of those dealing with it. If the operations of the corporation result in gains, such gains are carried to the credit, not of the capitkl stock account but of some other account as surplus or profit and loss. Of course they may be capitahzed by the issue of stock against them and sometimes, in the cases of certain corporations Uke banks or insurance corpora- tions where a certain ratio between assets and liabilities other than to capital stock is required, such surplus or profits may be counted and maintained as capital although not formally capitalized. In the absence of some such special consideration I think we may take notice that it is the ordinary rule of corporate management estabUshed by decisions, statutes and business usages that the sur- plus of these gains or profits beyond what may be necessary to keep good the liability to capital stock which has been issued, may, in the discretion of a board of directors, be distributed amongst its stockholders as dividends and returns on their investment. Such being the general rule, it is incumbent on the plaintiff to show that there is something so peculiar in the two transactions being considered that the profits resulting therefrom are of a different nature in re- spect of this subject than those ordinarily realized in corporate business, and I think it has failed to do this. I shall not attempt to discuss whether there might be an accretion to or increment of capital of a going corporation under such circum- stances and of such a character that it would become permanent capital and might not be distributed as dividends. That question for the purposes now concerning us doubtless would be surrounded with some uncertainty and difficulties. It ife sufficient for this appeal to consider the transactions before us and see, as I think we must, that there is nothing about them which impresses their results with any other character than that of ordinary current profits which the directors may in their discretion divide among the stockholders entitled to dividends. It is said, because in the retirement of its convertible bonds de- fendants sold and issued its capital stock at $175 per share of $100 par value, that this entire sum was paid in as capital and must be held and distributed as such. That is not my interpretation of the trans- action under the allegations of the complaint. The amount at par value paid for each share of stock undoubtedly became capital which the corporation was required to preserve and maintain as against its liabiUty on the outstanding share of stock which had been issued for it. Just as undoubtedly the extra $75 paid per share represented the amount of accumulated profits or surplus which it was supposed would be apportionable to each share of new ^tock after payment and issue as aforesaid. In other words, as I think we must assume, the payment of this premium was not for permanent capital but for the purpose of equalizing as between new and old stockholders, their 610 SHAREHOLDERS — PREFERRED STOCK. [CHAP. IV respective rights in accumulated profits which so far as we know wer current and distributable in dividends. When paid in this premiur became part of such accumulation of profits and surplus and distribu table as such. It was credited to profit and loss and not to capital. It is unnecessary to decide what would be the rule-of_distributioi in the case stated by plaintiff by way of illustration where stock holders on the organization of a bank subscribe for stock at doubl its par value for the express purpose of creating a permanent surplu or capital with the intent of affording a greater security to creditor and attracting depositors. That case is utterly different from thi one.^ The other transaction which produced a large item in the profi and loss account was the purchase and sale at an advance of variou stocks. Ordinarily the profits made by a corporation on the purchas and sale of property would so clearly belong to a fund applicable t( the payment of dividends that there would be no debate about it The plaintiff in this case, however, says in substance that the de fendant was not organized to deal in stocks and, therefore, thi preferred shareholders could not have had such profits in mind whei they agreed to take four per cent, dividends in full of their share o the profits and, therefore, further, "an accretion realized from sucl traffic is not profits within the contemplation of the instrumen (defendant's charter), but belongs to capital." It seems to me tha this reasoning involves a misinterpretation of the charter and i decided non sequitur. The language by which these stockholder reUnquished all other claims to profits in consideration of preferentia dividends was broad and comprehensive. They were to be "entitlec to no other or further share of the profits." There is no limitatioi on this exclusion from any farther participation in whatever wa profits ; nothing to suggest that one item of profits was to be differ entiated from another by the nature of the transaction which pf oduce( it. The contract was that whatever in the way of profits went int( the profit and loss account should be subject to a payment of certaii dividends on preferred stock before common stock received any, an< that was the end of the rights of the former class of stock so far a profits were concerned. The result of the transaction in questioi was a profit and the distribution of it is subject to this agreement This seems so clear that it is difficult by discussion to make it mor so. The proposition that these profits because resulting from wha was perhaps an unusual transaction are not profits, but are an ac cretion which "belongs to capital," notwithstanding the painstakini argument of counsel, does not seem to have any foundation on whicl to rest except earnest assertion. • Cf. Roberts v. Roberta-Wicks Co., 184 N- Y. 257. (Surplus derived from redui tion of capital stock not applicable to dividend arrears on preferred stock, whic dividends were payable "out of surplus profits." ) SECT. 6.] EQUITABLE LIFE ASS. SOC. V. U. P. R. R. CO. 611 No case has been cited which in my opinion sustains the proposi- tion that these gains must be treated as an accretion to capital and distributed as such, rather than as profits distributable in the discretion of the directors in dividends. The case Matter of Bridgewater Navigation Co. (reported [in Chancery Division and on appeal therefrom in the Court of Appeal] L. R. [39 Ch. Div.] 1, and [on appea,l to House of Lords] L. R. [14 App. Cas.] 520, and [on a further appeal] L. R. [2 Ch. Div. 1891], 317) is especially relied on by the appella,nt, but in my judgment it is entirely dis- tinguishable from the present case and does not at all sustain appellant's position. The Bridgewater Navigation Company issued both common and preferred shares. One of the articles of association provided that, subject to certain possible deductions, the "entire net profits of each year" should belong to the shareholders. It was provided that the preferred shares should "entitle the holders thereof to a dividend after the rate of 5 per cent, per annum . . . taking precedence of and priority over all dividends and claims of the holders of the ordinary shares of the company." Certain sums were carried from current profits each year to various reserve and depreciation funds. ■After awhUe the company sold out its business and property and entered on voluntary liquidation. After satisfying all liabilities and repaying all amounts paid in by the shareholders there remained a large surplus, and the question was how this surplus should be dis- tributed as between preferred and common shareholders. It is true that the common shareholders amongst other things did urge that the rights of preferred stockholders in gains and profits were limited to a preferential dividend of 5 per cent., and that after payment of . this the common stockholders were entitled to all remaining surplus. All of the courts disagreed with this contention, but it is not too much to say that they repeatedly affirmed as the fundamental basis for this conclusion the proposition that under the articles of association the principles which would control the distribution by a going con- cern of current profits between common and preferred stockholders with preferential but limited rights to dividends were utterly in- applicable to surplus and accretion resulting from augmented values realized by a beneficial sale on dissolution and liquidation; that the provisions concerning distribution of profits by way of dividends then no longer applied. There is in my opinion nothing whatever to be found in any of the opinions which is applicable to the present case or which supports the proposition that the profits now about to be distributed have become capital which must be paid if at all to preferred as well as common stockholders. In fact I think some support is found for respondent's position in the decision that the sums carried from annual profits to various reserve funds of a per- manent character did not thereby lose their nature of divisible profits 612 SHAREHOLDERS — PREFERRED STOCK. [CHAP. but even in liquidation proceedings were to be distributed as pro: away from the preferred stockholders. As against the contentions of the plaintiff, I think it is abundan estabhshed by decisions which are in conformity with and fortif , by commercial understanding and experience that the gains or proi realized by a corporation at least from its active transactions si; as those under consideration here constitute profits and surp^ which are available for dividends. Williams v. West. Union 1 ■ Co., 93 N. Y. 162, 191 ; Lubbock v. British Bank of So. Amer., L. [2 Ch. Div. 1892] 198 ; Mackintosh v. F. & P. M. R. R. Co., 34 F( Rep. 582, 606. The order appealed from should be aflB.rmed, with costs, and t question certified to us answered in the negative. Order affirmed} 1 In Russell v. American Gas &c. Co., 152 A. D. 136, a preferred stockholder soui to restrain a proposed issue of common stock at par but worth about thirty doll more than par, unless the holders of both preferred and common were permitted, un the same terms, to subscribe therefor. The lower court denied the injunction "1 upon condition that he be allowed to subscribe for an equivalent amount of prefer: stock at par." Plaintiff alone appealed. Decision affirmed. The preferred st( was entitled to cumulative, preferential dividends of six per cent, per annum and ■ preference in the distribution of assets until the par value and accumulated dividei have been paid and "to no further dividend or distribution." McLaughlin, J. sa "As a holder of the preferred stock the plaintiff could claim no interest in such exc( So long as the dividends upon his stock were paid, and the defendant had prope equal in value to the amount of its outstanding capital stock, after the payment its debts, the corporation, if it saw fit to do so, could distribute all the rest of its ass among the holders of its common stock and the plaintiff would have no ground complaint. ... It is urged, however, and with some force, that the plaintiff, ai stockholder, had the right to share proportionately in any issue of stock, under principle laid down in Stokes v. Continental Trust Co. (186 N. Y. 285). In so far this contention is based upon the plaintiff's asserted right to participate in the pro derived from the issue of the common stock below its market value, it is unsound a cannot be sustained. The issue of stock will, however, reduce the plaintiff's prop tibnate interest in the corporation, but in considering this phase of the question th is ,one point in which the present case differs materially from the Stokes case and f r the case of Page ». American & British Mfg. Co. (129 App. Div. 346). In each of th ' cases the change was made in the authorized capital stock, while in the case now bef us thestock which it is proposed to issue is a part of the stock authorized in the fendant's certificate of incorporation. . . . But even assuming that the plaintifl entitled to preserve his present proportionate interest in the defendant, I am of ' opinion that the court below was right in refusing an injunction pendente lite. Um the order appealed from the plaintiff is afforded an opportunity to increase his holdii in the same ratio offered to the holders of the common stock. . . . Indeed, if he 1 an inherent right to a proportionate interest in the corporation at the present ratio £ desires to preserve that right, he can do so, and then recover for any damages he n sustain by adopting that course." In Jones v. Concord & Montreal R. R., 67 N. H. 119, two corporations, each hav two classes of stock, consolidated under agreement whereby the four classes of sti of the two constituent companies were exchanged for four classes of stock in the o Bolidated company, each of the latter being entitled to different dividends. Sul: quently the consolidated company increased its capital stock. Held: Its sevt ■ stockholders were entitlted to subscribe to the new stock at par, irrespective of divid( discriminations, and in proportion only as their respective shares bore to the tc original stock of the consolidated company. SECT. 6.] BASSETT V. V. S. CAST IRON PIPE &C. CO. 613 BASSETT «;. UNITED STATES CAST IRON PIPE & FOUNDRY CO. 75 N. J. Eq. 539. 1909. Appeal by complainant from a decree for defendant. GuMMERE, C. J. The contest in this case is over the right of the board of directors of the defendant company to declare a diAddend on its preferred stock out of a fund known as "Reserve for additional working capital." By the defendant's certificate of incorporation, its preferred stock is entitled to noncumulative dividends not ex- ceeding 7 per cent, per annum, payable out of any and all surplus net profits; and the common stock is entitled to dividends out of the surplus net profits remaining after payment of the dividends on the. preferred stock. The fund known as "Reserve for additional work- ing capital" amounts to $2,459,896, and was accumulated from the sm-plus net profits for the years 1900, 1902, 1903, 1904, and 1906. Of this amount $1,593,750 was obtained by scaling down the divi- dends on the preferred stock below 7 per cent, in four of these years. The complainant is a holder of common stock of the defendant company. His contention in the court below and here, was, and is, that the dividends on preferred stock for any fiscal year must be paid out of the profits made during that year; that the profits of any given year which are not distributed in dividends declared in that year belong to the common stockholders, and when distributed must be paid to them to the exclusion of the holders of preferred stock. The defendant's claim is that it may pay dividends on its preferred stock out of any and all surplus net profits, without regard to the period during which they were earned. The learned vice chancellor who heard the cause adopts in his opinion the contention of the defendant upon this point. It seems to us that neither the contention of the complainant nor that of the defendant is altogether sound. On the one hand, the corporation has no right to accumulate a reserve fund from earnings which would otherwise be paid out as dividends to the holders of common stock, and afterward use it to pay dividends to the preferred stockholders, when the net profits of the jrear for which the dividend is declared are not sufficient for that purpose. On the other hand, when the reserve fund is accumulated, in whole or in part, by the cutting down of dividends which would otherwise have been paid to preferred stockholders, that fund, so far as it represents moneys so retained, is available for the payment of subsequent dividends upon the preferred stock. To yield to the contention of the complainant would be to permit the directors of the corporation to defraud the. 614 SHAREHOLDERS — PREFERRED STOCK. [CHAP. IV preferred for the benefit of the common stockholders; while tc sanction the claim of the defendant would be to put it in the powe: of the directors to defraud the common for the benefit of the preferred stockholders. The dividend which the defendant proposes to paj to its preferred stockholders, and the payment of which the com- plainant seeks to enjoin, amounts to $218,750. The fund out oi which it is proposed to pay it contains over $1,000,000, which would have been heretofore paid in dividends to the preferred stockholders had not the directors of the company considered it wise to accumu- late the fund as a reserve. So far as that fund is made up from moneys which would otherwise have_ been paid to the preferred stockholders, we concur in the conclusion of the vice chancellor thai it is available for the purpose of paying the dividend which is the subject-matter of this controversy. Except to the extent indicated, we are in entire accord with the views contained in the opinion of the learned vice chancellor, and conclude that the decree under review must be affirmed} ' The right of common stockholders in certain instances to compel the declaration of dividends was considered ante in note 2, page 560. With preferred stockholders, the situation is somewhat different. The duty to declare dividends on their shares arises, not merely from the relationship of corporation and stockholder, but from the express contract to pay stipulated dividends, contingent, however, upon being earned and declared. They must be earned, otherwise the dividends would be illegal, liockhart v. Van Alstyne, 31 Mich. 76 ; Strickland v. National Salt Co., 79 N. J. Eq. 182. They must be declared, else the stockholder cannot sue at law. Knight v. Alamo Mfg. Co., 157 N. W. (Mich., 1916) 24. Thus, in the case last cited, plaintiff, a stock- holder entitled to cumulative dividends of seven per cent, per annum payable March 1st and September 1st in each year, sued for certain unpaid dividends. . Admitting that dividends on his stock were payable only from profits, and that, as a genersil rule, no action will lie at law for a dividend until declared, he claimed his certificate con- stituted an absolute promise to pay dividends in March and September of each year, if there were profits from which they could be paid ; that, therefore, the existence of such profits was a legitimate question to be decided by the jury. His contention was denied, the court holding that directors alone have the power to declare a dividend of the earnings of a corporation and to determine its amount ; that except as to priori- ties over common stock, preferred stock, so far as dividends are concerned, is subject to the same rules as common stock, unless rendered inapplicable by express provision, citing Clark & Marshall on Priv. Corp. sec. 417 (e), and Hunter v. Roberts &o. Co., 83 Mich. 63. Person, J. said : "If each stockholder might call in a jury at his pleas- ure to determine whether a dividend should be declared, corporations would be short- lived affairs and of but little value." i Admitting, therefore, that the duty to declare dividends is discretionary,- even as regards a preferred stockholder, yet, because of his express contract, the duty is more specific than in the case of common stockholders. Hence, while a preferred stock- holder may not maintain any action at law for a dividend until declared, Knight v. Alamo Mfg. Co., supra, he is received in equity with more sympathetic ear than com- mon stockholders, and the policy referred to ante in note 2, page 560, does not ob- tain. Especially is this true where his dividend is non-cumulative. In such case, failure to declare same operates to thfe exclusive advantage of the common stockholders, a f^ct which is prone to warp the judgment of directors chosen by common stockholders and produce a refined and subtle fraud upon such preferred stockholders. See note, 73 A. S. R. 234. As in the instant case, equity is invoked to adjust the conflicting rights of the two classes of stockholders. Thus, in Belfast &c. R. R. Co. v. City of Belfast, 77 Me. 445, Peters, C. J. said: "As a general rule, the officers of a corporation are the sole judges as to the propriety of declaring dividends, and the courts will not interfere with a SECT. 7.] THE SILK MANUFACTUKING COMPANY V. CAMPBELL. 615 Section 7. — Actions by Stockholder in his Own Right and IN THE Right of the Corpokation. THE SILK MANUFACTURING COMPANY v. CAMPBELL. 27 N. J. L. 539. 1859. On certiorari to Passaic Circuit. An attachment was issued out of the Passaic Circuit Court against "the Silk Manufacturing Company", at the suit of James Campbell. proper exercise of their discretion. The company usually establishes its financial policy for itself. Yet, when the right to a dividend is clear, and there are funds from which it can properly be made, a court of equity will interfere to compel the company to declare it. Directors are not allowed to use their power illegally, wantonly or oppressively." In Hazeltine v. Belfast &c. R. R. Co., 79 Me. 411, the court compelled the directors to declare a dividend on the preferred stock. Peters, C. J. said : "Three questions arise on the facts. First : Are the preferred stockholders entitled to annual dividends, if earned? Second. At the date of the bill had dividends been earned? Third: Is this a case authorizing the court to require the directors to declare a dividend?" He answered all three questions in the affirmative ; the first involving a construction of the contract; the second, an inquiry of fact. As to the third, he said: "The last point which the case presents is whether the court can interfere in behalf of the com- plainants. We think it can and should. The directors refuse to perform a duty. They ignore a contract. They are chosen by the holders of the common stock, who are the majority, and are hostile to the interest of the complainants. . . . Says Morawetz (Cor. § 280) : ' Where certain shareholders are entitled to privileges which do not belong to the other members of the company, the court will provide a remedy for an infringement of these privileges by the other shareholders of the company's agents.' Says Wheeler, J., in Lake Erie, &c. Railroad Co. v. Nickals, [15 Fed. 575] ' when it comes to the question of using the profits which would go to one set of stock- holders for the benefit of another set, a more rigid rule should be upheld. The ques- tion becomes more one of right to be determined by the law, than one of policy to be determined by the discretion of the directors.' When the resolution of directors makes an alteration in the priorities and payments provided in the memorandum of associa- tion, it is beyond their power, and may be interfered with by the court. Ashbury v. Watson, L. R. 30 Ch. Div. 376." Again speaking of the Nickals case, supra, he said : "The case was first decided in the circuit court, 21 Blatch. 177, where it was held that the company could not, against the interests of preferred stockholders, divert a large quantity of funds from them to other uses of the company. The decree was reversed in the upper court, not for any difference between the two tribunals as to the law of the case, as stated by the judge below, but upon a difference of opinion in making an application of the law to the facts. The points of the case are correctly represented by the head-notes which are as follows : ' The holder of preferred stock is not entitled absolutely to a dividend, even if there be "net earnings" from which such dividend might be paid. The directors may use the "net earnings" for the improvement of the road, where such improvement is shown to be imperatively necessary to the pres- ervation of the corporate property, and the continuance of the corporate business.' The court were deeply impressed with the uncontradicted testimony of the president of the company, that 'but for using the funds in question in that case, the company could not have paid its fixed charges, but would have again gone into bankruptcy, and the entire interest of the stockholders been destroyed.' That is unquestionable doctrine. Preferred stockholders are not to be protected to the extent of endangering 616 SHAREHOLDERS — ACTIONS. [CHAP. IV. An application was made at the circuit to quash the writ, which was refused. One William Smith, who had previously been a superintendent for the defendants at their factory at Paterson, caused the writ and pro- ceedings to be removed to this court by certiorari. The attorney for the plaintiff in attachment moved to dismiss the certiorari, on the ground that it was prosecuted by Smith without the authority of the company. Clawson, J. This certiorari brings up an attachment, issued June 29th, 1857, and the proceedings thereon, and is prosecuted in the corporate name of the company, by the direction of one William Smith, who was, up to June 27th, 1857, superintendent of the affairs of the company at their manufacturing establishment at Paterson. It is a foreign corporation, created by the legislature Of New York. On June 27th, 1857, by a resolution of said corporation, WilUam Smith was removed from his office of superintendent, and John Campbell was appointed to his place; and, by the same resolution, it was ordered that no officer, except the said Campbell, president, be allowed to create any debt, large or small, against the company. Whatever, therefore, may have been the powers of Smith, as Superin- tendent, by virtue of the by-laws of the corporation or otherwise, to bring suits in the name of the corporation, and to create debts the rights of creditors, or of wrecking or crippling the enterprise of the road. Clark Stock. § 271. Culver v. Reno, &c. Co., 91 Penn. St. 367." In Spear v. Roekland-Rockport Lime Co., 113 Me. 285, on a bill brought by a stock- holder, entitled to preferential, cumulative dividends, to compel the declaration of a dividend on the preferred stock. Savage, C. J. said : "OAe feature of the contract remains to be noticed. The contract was that the preferred stockholder was entitled, out of the net earnings, to 'semiannual . . . dividends.' The defendant contends that, under this contract, the plaintiff was not entitled, even if there were net earnings, to have dividends paid for any half year, year, or series of years ; that the directors might use the net earnings for the development of the business ; and that there was but a single limitation, namely, that the plaintiff must be paid all accrued and unpaid dividends before anything is paid to common stockholders. In other words, it is claimed that the defendant made no promise or guaranty to the plaintiff of any divi- dends to be paid out of net earnings, at any particular time, and that it will have fully kept and performed the obligation of its contract, if at any time, past or future, it has paid or will pay the preferred dividends before common ones are paid ; that is, it may indefinitely postpone payment. We are unable to concur, in this view. This con- tract, like all others, must be interpreted in accordance with the expressed intention of the parties, reading the contract in the light of its purposes and existing conditions, and surrounding circumstances. And, reading the contract in that way, we think it obvious that, when the parties agreed that the plaintiff was to be entitled, out of the net earnings, to a semiannual dividend, they intended that he should be entitled to have a dividend paid semiannually if there were net earnings. Such, we think, would be the ordinary acceptation of the words used. And, if there is any ambiguity in meaning, the contract should be construed more strictly against the company. The phraseology was its own, and it should be held to the significance which the words would ordinarily imply to an investor. It follows, therefore, that the plaintiff is now entitled to cumulative dividends, if there are net earnings, and if now there is any available fund out of which dividends may properly be paid." See Boardman v. Lake Shore & M. S. Ry. Co., 84 N. Y. 157 ; Cratty i). Peoria &c. Library Ass'n, 219 111. 516. SECT. 7.] NILES V. N. Y. C. & H. R. R. CO. 617 against the company by carrying on the same, or in any other way, iis powers all ceased on the said 27th day of June, 1857, except so Jar as his interests and powers as an individual stockholder were concerned. Then the question is, can an individual stockholder bring a certiorari in the name of a corporation, without the consent of a legal majority of the s^tockholders, as the fact appears to be in this case, for his individual benefit, or that of the company. If not, -then the certiorari must be dismissed, and it is unnecessary to look -at the merits of the case. The well-settled principle that a corporatibn acts by the majority — that the will of the majority is the will of the corporation, and to this the minority must yield, furnishes us with a full answer to this question. Grant on Corporations 68. By the majority is meant, of course, the legal majority, or that majority made requisite by some .law creating the corporation, or some law of the corporate body, and not a mere ntimerical majority. It may mean a majority of votes of members present, or it may mean a majority of shares present ; it must be the legal majority. The principle, ibi major pars ibi totum, seems to be so well settled and established, as an incident at common law to all corporations, that it is questionable whether a private founder of a corporation can estabUsh a different rule or mode of decision without a special enactment of parUament. In the absence of the statute creating this silk manufacturing company, and in the absence of all proof to satisfy the court that this case is to be deter- mined by anything special, we must apply to it the general principles above alluded to, and dismiss the certiorari, because it is a proceeding against the will of the corporation, as is clearly shown by the testi- mony taken in pursuance of a rule of this court granted at the last term. NILES V. NEW YORK CENTRAL AND HUDSON RIVER RAILROAD COMPANY ET AL. 176N. Y. 119. 1903. Appeal from a judgment of the Appellate Division which affirmed a judgment of Special Term sustaining demurrers to and dismissing the complaint. Haight, J.i The demurrers interposed to the plaintiff's complaint were upon the ground that the facts stated therein were not sufficient to constitute a cause of action. The allegations of the complaint are somewhat voluminous, but so far as they are necessary to present the question to be determined ' Portions of opinion omitted. 618 SHAEEHOLDEKS — ACTIONS. [CHAP. rv upon this review they may be summarized and stated in substance as follows : The plaintiff was a stockholder of the New York & Northern Rail road Company. The company had about sixty miles of railroad with terminal faciUties and other property, in the city of New Yorl and elsewhere, of great value, which competed with the New Yorl Central & Hudson River railroad, or roads which it controlled Under these circumstances the defendants wrongfully, unlawfully fraudulently and mahciously entered into a combination and con spiracy to procure for -the New York Central & Hudson River Rail road Company the possession, control and virtual ownership, of th( property and franchises of the New York & Northern Company Among the overt acts alleged to have taken place, in order to ao complish this result, are the following : A majority of the stock of the New York & Northern Company was purchased by the defendants, and officers friendly to them wen elected. These officers, after obtaining the possession of the company obstructed and hampered its business by refusing traffic offered t( it by other transportation companies and shippers, thus depriving it of the income which it might have received, and diverted its earn ings so as to leave it without sufficient funds with which to pay th( interest accruing and accrued upon its bonded indebtedness; tha thereupon the defendants purchased or secured the control, by con tract, of a majority of the outstanding bonds, and then procurec the trustee to institute an action for the foreclosure of the mortgag( given to secure the payment of the bonds. This action resulted u a sale of the property of the company to the New York & Putnan Railroad Company, who leased the same to the New York Centra & Hudson River Railroad Company for a period of nine hundrec and ninety-nine years, who thereupon mortgaged its property t( secure the payment of bonds amounting to one hundred miffionso dollars, which have passed into the hands of bona fide purchasers thus rendering the plaintiff's stock of no value. He demanded judg ment for the value of his stock before it was injured by the action o the conspirators. The action is at law for the purpose of recovering the damage; which the plaintiff has sustained, and is not brought for or on behal of the corporation or of its stockholders. The question raised fo review is as to whether the damages resulting from the conspiracy belong to the corporation or to the mdividual stockholder. li determining this question we must bear in mmd that the rights o creditors are superior to those of the stockholders, who are only per mitted to share in the earnings of the corporation or in the divisioi of its assets after the claims of creditors have been satisfied. We are thus brought to a consideration of the nature of the injur inflicted by the conspirators. The refusing of traffic and the diver SECT. 7.] NILES V. N, Y. C. & H. R. B. R. CO. 619 sion of funds operated to deplete the company's treasury and was a direct wrong to the corporation. It was an injury for which an action could have been maintained by the corporation, its receiver, if one had been appointed, or by any stockholder, after proper demand, in behalf of the company and for its benefit. In such an action the creditors are vitally interested. They have the right to have the action prosecuted on behalf of the company, so that their interests may be protected and their claims paid out of any recovery which may be obtained. True, the plaintiff has suffered a depreciation in the value of his stock as a result of the wrong, and in this respect the injury was personal to the holders of the stock. But every stockholder has suffered from the same wrong, and if the plaintiff can maintain an action for the recovery of the damages sustained by him, every stock- holder must be accorded the same right. The injury, however, resulting from the wrong was, as we have seen, to the corporation. The depreciation in the value of the plaintiff's stock, and that of the other stockholders, was in consequence of the waste and destruction of the property and franchise of the corporation.* There are wrongs 1 Accord: Smith v, Hurd, 12 Mete. (Mass.) 371. This was an action on the case by a, stockholder in a bank against its directors, alleging their negligence and mal- feasance in consequence of which the whole capital of the bank was wasted and lost, and plaintiff's shares became of no value. Demurrer to the declaration was sustained. Shaw, C. J. said : "There is no legal privity, relation, or immediate connection, be- tween the holders of shares in a bank, in their individual capacity, on the one side, and the directors of the bank on the other. The directors are not the bailees, the factors, agents or trustees of such individual stockholders. The bank is a corporation and body politic, having a separate existence as a distinct person in law, in whom the whole stock and property of the bank are vested, and to whom all agents, debtors, officers and servants are responsible for aU contracts, express or implied, made in refer- ence to such capital; and for all torts and injuries diminishing or impairing it. . . . But another important consideration is, that the injury done to the capital stock by wasting, impairing, and diminishing its value, is not, in the first instance, nor neces- sarily, a damage to the stockholders. All sums which could, in any form, be recovered on that ground, would be assets of the corporation, and when collected and received by directors, receivers, or any other persons entitled to receive the same, they would be held in trust, first to redeem the bills and pay the debts of the bank ; and it would be only after these debts were paid, and in case any surplus should remain, that the stockholders would be entitled to receive anything. It is, therefore, an indirect, contingent, and subordinate interest, which each stockholder has, in damages so to be recovered against directors. If, upon such indirect, contingent, and remote in- terest, individual stockholders could recover for the defaults of directors, and .es- pecially, as is alleged in this case, where these defaults have been so great as to sink the capital, a fortiori would the creditors of the bank individually have a right, to maintain similar actions ; because their claim upon the funds, being prior to that of stockholders, would be somewhat more immediate and direct. In the same con- nection, it is obvious to remark that a judgment in favor of one stockholder would be no bar to an action by a creditor, nor a judgment by both, to an action by the corporation. .x- j -^ i "But it is said that although the real and personal estate, the securities and capital stock, are, in legal contemplation, vested in the corporation, yet the individual has a separate and distinct property and interest in his particular shares, by any injury to which he may have a separate damage. To some extent, it is true that he has a several interest in his shares ; but it is to be taken with some qualifications. Stnctly speak- ing shares in a bank do not constitute a legal estate and property ; it is rather a limited 620 SHAREHOLDERS — ACTIONS. [CHAP. IV which if committed against a stockholder entitle him to a right o action against the person committing the wrong for the damage sustained, as, for instance, where a person had been induced to pur chase stock in a corporation and pay a higher price than the stocl was fairly and reasonably worth, or where the owner of stock hac been induced to part with it for a less sum than its true value, b] reason of false and fraudulent representations of others with referenci to its value. (Rothmiller v. Stein, 143 N. Y. 581 ; Ritchie v. McMul len, 79 Fed. Repr. 522.y But these wrongs are distinguishable fron those against the corporation. They result in injury to the stock holder upon whom the wrong is practiced, but do not injure the othei stockholders or the corporation itself.^ The injuries, however, ir this case are not of that character. The defendants had obtainec control of the affairs of the corporation through the board of directors elected by them. These directors undertook to manage the propertj of the corporation in good faith, according to their best judgmen! and skill in the interests of all of the stockholders. Having assumec the management, they were bound to use their best endeavors tc prevent default in the payment of interest and the consequent sacri- fice of the corporate property. Under the allegations of the com- plaint the directors of this corporation not only failed to discharge their duties to the stockholders, but they actively participated ir the depletion of the company's treasury and in a sacrifice of the and qualified right which the stoclfholder has to participate, in a certain proportion in the benefits of a common fund, vested in a corporation for the common use ; it is e qualified and equitable interest, a valuable interest, manifested usually by a certificate, which is transferable. To the extent of this separate and peculiar interest, a stock- holder, no doubt, might maintain his separate and special action, according to the nature of the wrong done to him in respect to it ; as trover or trespass, for the con- version or tortious taking of his certificate ; trespass on the case for refusing to make a transfer on a proper occasion ; assumpsit for a dividend declared, and the like. Bu( an injiiry done to the stock and capital, by negligence or misfeasance, is not an injurj to such separate interest, but to the whole body of stockholders in common. It is like the case of a common nuisance, where one who suffers a special damage, peculiai to himself, and distinguishable in kind from that which he shares in the common in- jury, may maintain a special action. Otherwise, he cannot. Co. Lit. 56a ; 3 Steph. N. P. 2372; Lansing v. Smith, 8 Cow. 146." • See excerpt from Ritchie case in note 1, page 536, ante; cf. Von Au ». Magen- heimer cited in note 1, page 505, ante. See also Childs v. White, 158 A. D. 1. (Judg- ment on directed verdict for defendant reversed. Action by stockholder against direc- tor for the loss of plaintiff's stock upon the bankruptcy of the corporation; that defendant knowing the company to be insolvent at its inception, became a directoi to facilitate sale of its stock by giving it the benefit of hig name and reputation ; that the sale to plaintiff was accomplished .by false circulars, reports, &c. uttered by an agent of the corporation with the knowledge, actual or imputed, of defendant.) Cf. note 2, page 364, ante. ! ' Cf. analogy of a common nuisance put by Shaw, C. J. in Smith u. Hurd, supra. In the Ritchie case, sujyra, Taft, J. made the distinction thus: "This principle [Smitl V. Hurd] has no application where the wrongful acts are not only wrongs against the corporation, but are also violations by the wrongdoer of a duty arising from contract or otherwise, and owing directly by him to the stockholders." See also the distinctioc made by Beasley, C. J. in .Jackson's Administrators v. Newark Plankroad Co. ante, page 547. SECT. 7.] NILES V. isr. Y. C. & H. K. R. E. CO. 621 company's property, thus depriving the stockholders and the creditors of that which belonged to them. It is suggested that the corporation is in the hands of a board of directors controlled by the defendants, and that they would work against the interest of the minority stockholders. It is also urged that the remedy of the stockholders, through the corporation, is inadequate, and that if a recovery should be had the proceeds might not' reach the plaintiff, thus leaving him with a barren victory. It is doubtless true that the interests of the directors are inimical to those of the plaintiff and other minority stockholders, but the Su- preme Court has ample power to protect the minority stockholders, even against the unlawful acts of the company's board of directors. It may appoint a receiver, if it has not already done so, and he may bring the action, or the plaintiff himself, where the officers of the corporation are under the control of the parties to be sued, may briiig the action in his own name, but in the right of the corporation, making it a party defendant. (Flynn v. Brooklyn City R. R, Co., 158 N. Y. 493-508.) As to the suggested inadequacy of the remedy, we apprehend there is no trouble. If the defendants conspired with the officers of 'the company to improperly deplete its treasury and thus render the corporation insolvent, in order that a sale might be made upon a foreclosure judgment, and the stockholders and creditors thus deprived of their interest in the property, we see no reason why the damages recoverable may not be for the full value of the property and franchises of the corporation as it existed prior to the overt acts complained of producing insolvency, less that which the property actually brought upon the foreclosure sale. This would afford full protection to all concerned. It would indemnify the creditors, and if the stock of the company was actually worth thirty-five dollars, or any other sum, per share, it would restore to the stockholders the property of which they have been deprived, or compensation therefor. We think that the damages belong to the corporation and not to the individual stockholder, and that the judgment should be affirmed, with costs.* Judgment affirmed^ 1 The refusal to declare dividends is primarily an injury to the stockholders collec- tively. See note 2, page 560, ante ; also Von Au v. Magenheimer,. 126 A. D. 257 at 263. The principle of Ritchie v. McMullen, supra, and not that of the principal ■ case, applies to an action by a corporation against one of its directors to recover depreciation in the value of stock held by it in a subsidiary concern, caused by the latter's treasury being looted by an embezzler with the knowledge, acquiescence and approval of the defendant.. General Rubber Co. v. Benedict, 215 N. Y. 18. But see dissenting opinion of Collin, J. 622 SHAREHOLDEES — ACTIONS. [CHAP. IV. DUNPHY V. TRAVELERS' NEWSPAPER ASSOCIATION. 146 Mass. 495. 1888. Knowlton, J.i The plaintiff brings this bill, as a stockholder in the defendant corporation, in behalf of himself and such other stock- holders as may join therein, alleging that Roland Worthington, one of the defendants, is the president and treasm-er of said corporation, and is, and for a long time has been, the owner or controller of a majority of the shares of its capital stock, and, by means of his owner- ship and control, has chosen such persons to be directors as he has seen fit, and has improperly used and invested large sums of the money of the corporation in certain specified ways, and has kept other large sums of its money on hand, drawing no interest; dnd has improperly received large amounts as his salary as president of the corporation, and as rent of a building owned by him and occupied by it ; and has prevented the making of dividends upon the capital stock, and has otherwise improperly managed the affairs of said corporation, to the great damage of the plaintiff and other stock- holders. The plaintiff prays that said Worthington may be directed to render accounts of all his dealings with the assets of the corpo- ration ; and to refund all moneys improperly received or paid out by him, and to pay to certain stockholders such sums of money as shall equalize among all the stockholders certain distributions alleged to have been irregularly made among some of them ; and to file a correct statement in detail of all the present assets and Uabilities of the corporation ; and to hereafter annually render accounts of his deal- ings with it as treasurer, so long as he holds that office. Courts of equity are sw;ift to protect helpless minorities of ^ stock- holders of corporations from oppression and fraud of majorities. But the legal relations into which the members of a corporation enter require them to seek redress of supposed wrongs done them as stock- holders from its officers, and from the corporation itself, before apply^ ing elsewhere. Misconduct in dealing with a corporation, or in the management of its affairs, can affect its members only through the corporation itself. The wrong, in such a case, is done primarily to the corporation. It is the duty of its directors, or other managing officers, to protect it from those who would do it injustice, and to seek compensation for any injury which it receives. Stockholders in a corporation impliedly agree, when they join it, to act in the corporate business through officers chosen to represent them, or by vote at meetings of the members regularly called; and so, if they deem themselves aggrieved as shareholders by the dealings of others with ' Portions of opinion omitted. SECT. 7.] DUNPHY V. TRAVELERS' NEWSPAPER ASSOCIATION. 623 it, or by the acts of its managers, they are bound to seek'their remedy through corporate channels — Firsi, by apphcation to the officers in charge ; and, failing there, secondly, to the corporation itself, at a meeting of its members. If they can obtain justice at the hand of neither, the courts are open for their relief.^ It would be contrary to the fundamental principles of corporate organizations to hold that a single shareholder can at any time launch the corporation into htigation to obtain from another what he deems to be due it, or to prevent methods of management which he thinks unwise. Intelligent and honest men differ upon questions of busi- ness policy. It is not always best to insist upon all one's rights; and a corporation, acting by its directors or by vote of its members, may properly refuse to bring a suit which one of its stockholders believes should be prosecuted.^ In such a case the will of the ma- ' In Converse v. United Shoe Machinery Co., 209 Mass. 539, Morto)n, J. said: "In order to prevent a failure of justice stockholders are allowed to institute proceed- ings on behalf of the corporation if neither the corporation, nor its officers can be induced to take action. But such proceedings derive their validity not from wrongs done to the individual stockholders instituting them but from the right of the stock- holder to act under the circumstances on behalf of the corporation." "If it were otherwise, the minority would be without means of protection or redress against inequality and injustice. They would be equally so if they could obtain redress only in the name and through the action of the corporation itself. Such acts are wrongs done primarily to the corporation ; and therefore the restitution or redress is to be secured to the corporation. But in their effect and essential character they are wrongs to the individual shareholder, inflicted upon his corporate interests by means of the control over those interests secured through the corporate organization and management. He can seek his redress only through the corporation ; but that does not give the corporation the right to deprive him of all redress. Any attempt to do BO, whether regarded as the action of the corporation or of a majority of shareholders, would have the same voidable character as the original wrong." Wells, J. in Brewer J). Boston Theatre, 104 Mass. 378. In Dodge v. Woolsey, 18 How. (U. S.) 331, Wayne, J. said: "Courts of equity . . . have a jurisdiction over corporations, at the instance of one or more of their members, to apply preventive remedies by injunction to restrain those who administer them from doing acts which would amount to a violation of charters, or to prevent any misapplication of their capitals or profits which might result in lessening the dividends of stockholders or the value of their shares, as either may be protected by the fran- chises of a corporation, if the acts intended to be done create what is in the law de- nominated a breach of trust. And the jurisdiction extends to inquire into and to en- join, as the case may require that to be done, any proceedings by individuals, in what-' ever character they may profess to act, if the subject of complaint is an. imputed violation of a corporate franchise or the denial of a right growing out of it, for which there is not an adequate remedy at law. . . . Beyond the limits of the act of incor- poration the will of the majority cannot make an act valid, and the powers of a court of equity may be put in motion at the instance of a single shareholder, if he can show that the corporations are employing their statutory powers for the accomplishment of purposes not within the scope of their institution." 2 See Foss v. Harbottle, 2 Hare 461, and Bagshaw v. Eastern &c. Ry. Co. 7 Hare 114, explaining and differentiating the Foss case. In Brewer v. Boston Theatre, supra. Wells, J. said: "The defendants contend that the corporation cannot be deprived of its right to determine, in all matters not uttra mres, whether to impeach or to ratify transactions supposed to be prejudicial to its interests. Granting this position, it would result that in no case, as to matters intra vires, could a suit be maintained by individual stockholders to enforce rights or redress wrongs of the corporate body, except where the delay necessary m order to secure corporate action might defeat or endanger the attainment of appropriate re- 624 SHAREHOLDERS — ACTIONS. [CHAP. IV. jority must control.^ It is only when the action of a corporation in refusing to proceed at the request of a stockholder is fraudulent as. against him, or in disregard of his rights, that he can maintain a suit lief. If, when called upon to act, the corporate body should elect to confirm the supposed wrongful transactions, or should do so indirectly by refusal to act; they would no longer be open to impeachment. If, on the other hand, it should determine to take action, it would do so in its own name and behalf ; and there would be no ground of necessity for proceedings in the name of the individual corporator. "We are not prepared to say that this would not be the case in all matters to which, the only objection is that they are prejudicial, or supposed' to be so, to the corporate interests merely, but not illegal in themselves, and affecting all the corporators alike. Perhaps it would be so whenever the surrender of property or the release of rights, acquired by the corporation through the transactions sought to be irnpeached, is necessary in order to reach the proper remedy. Great Luxembourg Railway Co. v. Magnay, 25 Beav. 586. The corporation might be entitled to determine for itself exclusively whether it would retain or release property or rights thus acquired, al- though it thereby precluded, or rendered ineffectual, all proceedings against parties who may have made illegal or fraudulent gains out of the transactions." It was held, however, that these considerations did not apply as the wrongs alleged by plaintiffs, minority stockholders, were not merely prejudicial to the interests of the corporation but were such as tended to deprive one part of the members of their rightful share in the fruits of the common property and business for the advantage of other members, and hence were not susceptible of ratification by the majority. Cf. Pearson v. Concord R. R. Corp. ante, page 472, in which plaintiff's standing was not challenged. See second note following. > In Gamble v. Queens County Water Co., 123 N. Y. 91, Pbckham, J. said: "Where- the action of the majority is plainly a fraud upon, or, in other words, is really oppres- sive to the minority stockholders, and the directors or trustees have acted with and formed part of the majority, an action may be sustained by one of the minority share- holders suing in his own behalf and in that of all others coming in, etc., to enjoin the action contemplated, and in which action the corporation should be made a party defendant. It is not, however, every question of mere administration or of policy in which there is a difference of opinion among the shareholders that enables the minor- ity to claim that the action of the majority is oppressive, and which justifies the mi- nority in coming to a covu-t of equity to obtain relief. Generally, the rule must be that in such cases the will of the majority shall govern. The court would not be justified in interfering even in doubtful cases, where the action of the majority might be sus- ceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interests, but that he must have acted with an intent to subserve some outside purpose, regard- less of the consequences to the company and in a manner inconsistent with its interests. Otherwise the court might be called upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans proposed by or on behalf of different shareholders in a corporation, and to decree the adoption of that line of policy which seemed to it to promise the best results, or at least to enjoin the carrying out of the opposite policy. This is no business for any court to follow." In Flynn i). Brooklyn City R. R. Co., 158 N. Y. 493, Vann, J. said: "As a general rule courts have nothing to do with the internal management of 'business corporations. Whatever may lawfully be done by the directors or stockholders, acting through majorities prescribed by law, must of necessity be submitted to by the minority, for corporations can be conducted upon no other basis. All questions within the scope of the corporate powers which relate to the policy of administration, to the ex- pediency of proposed measures, or to the consideration of contracts, provided it is not so grossly inadequate as to be evidence of fraud, are beyond the province of the courts. The minority directors or stockholders cannot come into coiu:t upon allega- tions of a want of judgment or lack of efficiency on the part of the majority and change SECT. 7.] DUNPHY I). TRAVELERS* NEWSPAPER ASSOCIATION. 625 in his own name in the corporate right.' The court cannot inter- fere with the management of corporations in matters which are properly within their discretion, so long as their discretion is fairly- exercised ; and it is always assumed, until the contrary appears, that they and their officers obey the law, and act in good faith towards all their members. Even when their acts are ultra vires, or otherwise illegal, a complaining member must first seek his remedy within the corporation. The only exception to the rule that the stockholder must apply to the directors, and also, if need be, to the corporation for the redress of a wrong done it, before he can sue in a court of equity for himself, and in behalf of the other stockholders, is when the course of administration. Corporate elections furnish the only remedy for in- ternal dissentions,, as the majority must rule so long as it keeps within the powers con- ferred by the charter. "To these general rules, however, there are some exceptions, and the most im- port?int. is that founded on fraud'. While courts cannot compel directors or stock- holders, proceeding by the vote of a majority, to act wisely, they can compel them to act honestly, or undo their work if they act otherwise. Where a majority of the directors, or stockholders, or both, acting in bad faith, carry into effect a scheme which, even if lawful upon its face, is intended to circumvent the minority stockholders and defraud them out of their legal rights, the courts interfere and remedy the wrong. Action on the part of directors or stockholders, pursuant to a fraudulent scheme de- signed to injure the other stockholders, will sustain an action by the corporation, or, if it refuses to act, by a stockholder in its stead for the benefit of all the injured stock- holders." See Republican Mountain &c. Co. v. Brown, 68 Fed. 644. In Phinizy v. Anniston City Land Co., 71 So. (Ala., 1916) 469, minority stock- holders sought dissolution of a corporation and appointment of a receiver, alleging that its business was a failure and further prosecution thereof will end in inevitable ruin. A demurrer to the bill was sustained. The court, declaring this power of inter- vention extremely dangerous in its tendencies and, therefore, to be exercised only in the plainest cases, and holding it not enoiigh that the business has been a failure in the past, nor that its future prosecution will probably be devoid of profit, however strong that probability, and concluding from the averments that its success or failure is a simple speculation just as at the inception of the corporation, said: "On the con- trary, so long as the corporation is a going concern; so long as it possesses the means and ability to pursue one or more of its primary purposes or lines of business ; and so long as the conditions exhibited do not demonstrate to a moral certainty that its continuation must by inevitable necessity result in serious loss in the near future, and in complete ruin sooner or later — a court of equity will not and should not deprive the majority stockholders of their right to carry on their business under their chosen management, however speculative and uncertain its prospects may seem to a disap- proving and dissentient minority." See Metropolitan Fire Ins. Co. v. Middendorf, 188 S. W. (Ky., 1916) 790. ("Whenever it is clearly demonstrated that a corpora- tion cannot accomplish the purpose for which it was organized.") C/. note 1, page 254 arate. j ^ .. x i J See Russell v. Henry C. Patterson Co., ante, page 484, and notes thereto ; also Menier v. Hooper's Telegraph Works, L. R. 9 Ch. App. 350 (Majority may not divide corporate assets, more or less, between themselves, to the exclusion of the mmonty) ; Wheeler v Abilene &c. Building Co., 158 Fed. 391, (Because of the power reposed in majority there is imposed a correlative duty toward minority to exercise good faith, care and diligence to make corporate property produce the largest possible amount, to protect interests of minority, and to secure and pay over to theiji their just propor- tiorofTncome and proceeds) . Chicago &c. Cab Co. «. Yerkes, 141 lU 320 (^^^i^^^- ing Northwest Transportation Co. v. Beatty, cited ante in ^°i^ J-^^g^ ^^f- ^°. Woolsey permits the stockholder in one of these corporations to step in between that corporation and the party with whom it has been dealing and institute and control a suit in which the rights involved are those of the corpo- rationj and the controversy is one really between that corporation and the other party, each being entirely capable of asserting its own rights. This is a very different affair from a controversy between the shareholder of a corporation and that corporation itself, or its manag- ing directors or trustees, or the other shareholders, who may be violating his rights or destroying the property in which he has an interest. Into such a. contest the outsider, dealing with the corpo- ration through its managing agents in a matter within their authority, cannot be dragged, except where It is necessary to prevent an ab- solute failure of justice in cases which have been recognized as ex- ceptional in their character and calling for the extraordinary powers of a court of equity. It is, therefore, always a question of equitable jurisprudence, and as such has, within the last forty years, received the repeated consideration of the highest courts of England and of this country. The earhest English case in which this subject received any very careful consideration is Foss v. Harbottle (2 Hare, 461), where Vice- Chancellor Wigram gave a very full and able opinion. The case was decided in 1843 on a demurrer to the bill, which was brought by Foss and Turton, two shareholders in an incorporation called the Victoria Park Company, on behalf of themselves and all other stockholders,' ' Wigram, V. C. said : "The first objection taken in the argument for the de- fendants was, that the individual members of the corporation cannot in any case sue in the form in which this bill is framed. ..." I think there are cases in which a suit might properly be so framed. ... If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that . . . the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which 'corporations are required to sue." Cf. MoKTON, J. in Converse v. United Shoe Machinery Co., 209 Mass. 539: "The ^^^'^- ^-^ HAWES V. OAKLAND. 631 except those who were made defendants, against the directors and one shareholder not a director, and against the soUcitor LTarchitect and effected various fraudulent and Ulegal • transactions, whereby i^t^fr''*/;^ the company was misapplied, aUened, and wasted^ that there had ceased to be a sufficient number of qualified directors to constitute a board; and that the company had no clerk or office. It prayed for the appointment of a receiver and for a decree against the defendants to make good the loss. After showing that the case was one m which the right of action was in the company, the Vice- Chancellor says : "In law the corporation and the aggregate mem- bers of the corporation are not the same thing for purposes hke this ■ and the only question can be, whether the facts alleged in this case justify a departure from the rule which prima facie would require that the corporation should sue in its own name and in its corporate character, or in the name of some one whom the law has appointed to be its representative." Again, after pointing out that cases may arise where the claims of justice would be found superior to the tech- nical rules respecting the mode in which corporations are required to sue, he adds : — "But, on the other hand, it must not be without reasons of a very urgent character that the established rules of law and practice are to be departed from, — rules which, though in a sense technical, are founded on the general principles of justice and convenience; and the question is, whether a case is stated in this bill entitling the plain- tiffs to sue in their private characters." He then, in an elaborate argument, holds that the bill is fatally defective because it does not aver that there is no acting or de facto board of directors who might have ordered the bringing of this suit ; and, secondly, that it was the duty of the plaintiffs — the two shareholders who complain of what had been done — to have called a meeting of the shareholders or attended at some regular annual meeting, and obtained the action of a majority on the matters in issue. The majority, he says, may have been content with what was done, and may have ratified the action bill in the present case is not brought and does not purport to be brought, as we con- strue it, in behalf of the plaintiffs and such other stockholders as may join, or on behalf of the corporation, but is brought by the plaintiffs to enforce individual rights assumed to belong to them as stockholders, and this constitutes, it seems to us, as the case stands, a fatal defect and renders it necessary to sustain the demurrers. The wrong, if any, was done not to the plaintiffs as individual stockholders but to the corporation and the remedy must be sought by or on behalf of the corporation. . . . When pro- ceedings are instituted by stockholders in behalf of the corporation, it is necessary that the corporation shoiild be made a party defendant, but we do not think that the fact that the corporation is made a party defendant is enough to show of itself that the' proceedings in the present case are prosecuted in behalf of the corporation or of such stockholders as may join in the absence of any allegations in the bill to that effect. . . . For the reason that the bill does not appear to be brought on behalf of the corporation, or of such other stockholders, not defendants, as may join, which is in effect the same thiilg, and seeks to enforce individual rights against the defendants, the demurrers must be sustained and the bill dismissed.". 632 SHAJREHOLDERS — ACTIONS. [cHAP. IV. of the board, in which case the whole body would have been bound by it. The demurrer was sustained and the bill dismissed. But perhaps the best assertion of the rule and of the exceptions to it are found in the opinion of the court in MacDougall v. Gardiner, in 1875, 1 Ch. D. 13. "I am of opinion," he ^ says, "that this de- murrer ought to be allowed. I think it is of the utmost importance in all these controversies that the rule . . . should always be ad- hered to ; that is to say, that nothing connected with internal dis- putes between shareholders is to be made the subject of a bill by some one shareholder on behalf of himself and others, unless there be something illegal, oppressive, or fraudulent ; unless there is some- thing ultra vires on the part of the company qud company, or on the part of the majority of the company, so that they are not fit persons to determine it, but that every Utigation must be in the name of the company, if the company really desire it. Because there may be a great many wrongs committed in a company, — there may be claims against directors, there may be claims against officers, there may be claims against debtors; there may be a variety of things which a company may well be entitled to complain of, but which, as a matter of good sense, they do not think it right to make the subject of Uti- gation ; and it is the company, as a company, which has to determine -whether it will make anything that is a wrong to the company a subject-matter of Utigation, or whether it will take steps to prevent the wrong from being done." We understand that doctrine to be that to enable a stockholder in a corporation to sustain in a court of equity in his own name, a suit founded on a right of action existing in the corporation itself, and in which the corporation itself is the appropriate plaintiff, there must exist as the foundation of the suit — Some action or threatened action of the managing board of directors or trustees of the corporation which is beyond the authority conferred on them by their charter or other source of organization ; Or such a fraudulent transaction completed or contemplated by the acting managers, in connection with some other party, or among themselves, or with other shareholders as will result in serious injury tcJ the corporation, or to the interests of the other shareholders ; Or where the board of directors, or a majority of them, are acting for their own interest, in a manner destructive of the corporation itself, or of the rights of the other shareholders ; Or where the majority of shareholders themselves are oppressively and iUegally pursuing a course in the name of the corporation, which is in violation of the rights of the other shareholders, and which can only be restrained by the aid of a court of equity. Possibly other cases may arise in which, to prevent irremediable » Sir W. M. James, L. J. SECT. 7.] HAWES V. OAKLAKD. 633 injury, or a total failure of justice, the court would be justified in exercising its powers, but the foregoing may be regarded as an out- line of the principles which govern this class of cases. ^ But, in addition to the existence of grievances which call for this kind of relief, it is equally important that before the shareholder is permitted in his own name to institute and conduct a litigation which usually belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain, within the corporation itself, the redress of his grievances, or action in conformity to his wishes. He must make an earnest, not a simulated effort, with the managing body of the corporation, to induce remedial action on their part, and this must be made ap- parent to the court. If time permits or has permitted, he must show, if he fails with the directors, that he has made an honest effort to obtain action by the stockholders as a body, in the matter of which he complains. And he must show a case, if this is not done, where it could not be done, or it was not reasonable to require it. The efforts to induce such action as complainant desires on the part of the directors, and of the shareholders when that is necessary, and the cause of failure in these efforts should be stated with partic- ularity, and an allegation that complainant was a shareholder at the time of the transactions of which he Qomplains, or that his shares have devolved on him since by operation of law, and that the suit is not a collusive one to confer on a court of the United States juris- diction in a case of which it could otherwise have no cognizance, should be in the bill, which should be verified by affidavit. It is needless to say that appellant's bill presents no such case as we have here supposed to be necessary to the jurisdiction of the court. He merely avers that he requested the president and directors to desist from furnishing water free of expense to the city, except in case of fire or other great necessity, and that they dechned to do as he requested. No correspondence on the subject is given. No reason for declining. We have here no allegation of a meeting of the directors, in which the matter was formally laid before them for ac- tion. No attempt to consult the other shareholders to ascertain their opinions, or obtain their action. But within five days after his application to the directors this bill is filed. There is no allega- tion of fraud or of acts ultra vires, or of destruction of property, or of irremediable injury of any kind. , , . x i. Conceding appellant's construction of the company s charter to be corrfect, there is nothing which forUds the corporation from dealing with the city in the manner it has done. That city conferred on the company valuable rights by special ordinance; namely, the use of the streets for laying its pipes, and the privilege of furmshmg water to the whole population. It may be the exercise of the highest 634 SHAREHOLDERS — ACTIONS. [CHAP. IV. wisdom to let the city use the water in the manner complained of. The directors are better able to act understandingly on this subject than a stockholder residing in New York. The great body of the stockholders residing in Oakland or other places in California may take this view of it, and be content to abide by the action of their directors. If this be so, is a bitter litigation with the city to be conducted by one stockholder for the corporation and all other stockholders, be- cause the amount of his dividends is diminished ? This question answers itself, and without considering the other point raised by the demurrer, we are of opinion that it was properly sustained, and the bill dismissed, because the appellant shows no standing in a court of equity — no right in himself to prosecute this suit. Decree affirmed. CONTINENTAL SECURITIES CO. v. BELMONT. 206 N. Y. 7 ; 61 L. R. A. (n. s.) 112. 1912. Chase, J.'' This is a representative action derived from the Inter- borough Rapid Transit Company. It is brought in behalf of the ' The following Rule of Practice in Equity, No. 94, was promulgated Jan. 23, 1882 (104 U. S., Preface IX) : "Every bill brought by one or more stockholders in a cor- poration, against the corporation and other parties, founded on rights which may properly be asserted by the corporation, must be verified by oath, and must contain an allegation that the plaintiff was a shareholder at the time of the transaction of which he complains, or that his share had devolved on him since by operation of law ; and that the suit is not a collusive one to confer on a court of the United States juris- diction of a case of which it would not otherwise have cognizance. It must also set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of his failure to obtain such action." This rule, except as to verification, "is, in effect, merely confirmatory of what was by correct practice before required." Lanning, J. in Groel d. United Electric Co. 132 Fed. 252. Non-compliance with the rule renders the bill demurrable, Venner v. Great Northern Ry. Co., 153 Fed. 408, and raises, not a question of jurisdiction, but of the authority of the plaintiff to maintain his bill. Illinois Central R. R. Co. v. Adams, 180 U. S. 28. Rule 27 of the New Federal Equity Rules of 1912 regnacts foruier rule. No. 94, adding thereto, however, at the end, the clause, "or the reasons for not making such effort." The additional clause conforms the rule to the propositions involved in the preceding cases of Doctor v. Harrington, 196 U. S. 579, and Delaware & Hudson Co. «. Albany & Susq. R. R. Co., 213 U. S. 435. The rule must be followed even in cases where the wrong to the corporation arises from alleged unconstitutional legislation. Wathen ». Jackson &c. Refining Co.,, 235 U. S. 635. ("The right of action to restrain the enforcement of the statute as an un- constitutional deprivation of the liberty and property of the corporation was a right existing in the corporation itself, and a stockholder was not entitled to sue without showing to the satisfaction of the court that he had exhausted the means within his Teach to obtain action by the corporation in conformity with his wishes.") ' Portions of opinion omitted. SECT. 7.] CONTINENTAL SECURITIES CO. V. BELMONT. 635 plaintiffs and all others similarly interested, as stockholders of said company, against the directors of said company and said company to require said individual defendants to account to said company for fifteen thousand shares of its capital stock, alleged to have been issued fraudulently and illegally, and without any valid or adequate consideration therefor, but upon an alleged consideration that was a pretense and subterfuge and intended to cover a gift or bonus to the defendants Belmont and Luttgen, and their nominees, and also to require said individual defendants to account for the dividends which have been paid on said stock. It is alleged that by reason of the facts set forth in the complaint the defendant corporation has suffered damage to an amount exceeding $4,500,000. Each of the defendants answered the complaint, and after the answers were interposed, a motion was made for judgment upon the pleadings dismissing the complaint pursuant to section 547 of the Code of Civil Procedure, which motion was denied. An appeal was taken therefrom to the Appellate Division, where the order denying said motion was unan- imously affirmed. Leave was granted by the Appellate Division to the defendants, other than the defendant company, to appeal to this court, and the following questions were certified : 1. Does the complaint state a cause of action? 2. Was the motion of the defendants for judgment against the plaintiffs on the pleadings rightfully denied? As the opinion will not discuss the complaint generally, but only in connection with the objections that are made to it by the appellants in this court, it is unnecessary to state its provisions except as re- quired in considering such objections. The appellants assert that the complaint is fatally defective be- cause it does not offer to return the stock and bonds described in said resolution. The action is not brought for a rescission of the contract with August Belmont & Company, but for an accounting. The plaintiffs are not in possession of said stocks and bonds and as individual stockholders are unable through no fault of theirs to return them. The plaintiffs do not bring this action because their rights have been directly violated or because the cause of action is theirs, or because they are entitled to the relief sought ; they are permitted to sue' in this manner simply in order to set in motion the judicial machinery of the court. (Pomeroy's Equity Jurisprudence, sec. 1095 ) The court in the action can preserve and adjust the equities of the parties to .it. (Thompson on Corporations [2d ed.], section 4568; Machen on Corporations, vol. 2, section 1179; Kley z;. Healy, 127 N. Y. 555; s. c, 149 N. Y. 346; Pritz v. Jones, 117 App. Div. 643; Heckscher v. Edenborn, 203 N. Y. 210.) The actual value of said stocks and bonds can be found in the action, and if equity re- quires it, the defendant corporation can be directed to return such stocks and bonds to said August Behnont & Co. 636 SHAREHOLDEKS — ACTIONS. [CHAP. IV. , It is also claimed by the appellants that it does not appear from the complaint that the defendant corporation and its board of directors were requested to bring suit to recover said fifteen thousand shares of stock or the value thereof, or that said corporation or said board of directors neglected or refused to bring such action. It appears from the complaint that on the 12th day of March, 1910, the plaintiff corporation, then being the owner of the stock now owned by the two plaintiffs, delivered to the defendant corpora- tion and to its officers and directors a written communication directed to said defendant corporation and its president and directors, calling attention to the fact of the issue and delivery of said fifteen thousand shares of capital stock for a grossly inadequate and illegal considera- tion, and requesting and demanding that suit be brought in behalf of the corporation and in good faith prosecuted against the incorpora- tors of said company and members of its- board of directors during the year 1902 and said firm of August Belmont & Co. to recover the damages suffered by reason of the action of the said incorporators and directors. Said written communication also stated and provided as follows: "We hereby offer to properly indemnify the Interborough Rapid Transit Company agaiiist any damage or costs it may sustain as a result of bringing and prosecuting such suit. A copy of this letter is mailed to each director of the Interborough Rapid Transit Com- pany. Unless within ten days from date you advise us that the request and demand herein will be complied with we shall conclude that you refuse," Thereafter the plaintiffs waited until May 4, 1910, when no action having been commenced and no response having been made to said written communication, this action was com- menced. Upon the facts so alleged the plaintiffs treated the defendant cor- poration and its board of directors as having refused and neglected to bring such action and the allegations relating thereto are sufficient to sustain the complaint. (Kavanaugh v. Commonwealth 'Trust Co., 103 App. Div. 95.) It is conceded that an action in equity cannot be maintained by the plaintiffs as individual stockholders for themselves and all others similarly interested unless it is necessary because of the neglect and refusal of the corporate body to act. It is necessary, therefore, in an action by the plaintiffs to set forth two things, first, a cause of action in favor of the corporation with the same detail of facts as would be proper in 'case the corporation itself had brought the action ; second, the facts which entitle the plaintiff to maintain the action in place of the corporation.' (Kava- naugh V. Commonwealth Trust Co., 181 N. Y. 121 ; O'Connor v. Virginia Passenger & Power Co., 184 N. Y. 46.) It is not seriously contended that the complaint does not state a SECT. 7.] CONTINENTAL SECUEITIES CO. V. BELMONT. 637 good cause of action in favor of the defendant corporation. It is insisted by the defendants that it was necessary for the plaintiffs in addition to alleging a demand upon the defendant corporation and its board of directors to bring the action and their neglect and refusal to do so, to allege that they had given notice of the alleged fraud to the body of stockholders of the defendant corporation and had de- manded of said stockholders that some action be taken by them to redress the wrong, and that such body of stockholders had neglected and refused to take any action relating thereto. The cause of action belongs to the corporate body and not to the plaintiffs and other stockholders individually, nor to the body of stockholders collectively. The board of directors represents the corporate body. It is pro- vided by statute in this state that the affairs of every corporation shall be managed by its board of directors. (General Corporation Law, section 34.) The directors are not ordinary agents in the •immediate control of the stockholders. The directors hold their office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. The corporation is the owner of the property, but the directors in the performance of their duty possess it and act in every way as if they owned it. (People ex rel. Manice v. Powell, 201 N. Y. 194.) They are trustees clothed with the power of controlUng the property and managing the affairs of a corporation without let or lundrance. As to third persons they are its agents, but as to the corporation itself, equity holds them hable as trustees. (2 Pomeroy's Equity Jurisprudence, sec- tions 1061, 1073, 1088, 1097; People ex rel. Manice v. Powell, supra.) The claim of the appellants that the body of stockholders has some itimiediate or direct authority to act for the corporation or to control the board of directors in the matters set forth in the complaint is based upon an erroneous conception of the duties and powers of the body of stockholders in this state. As a general rule stockholders cannot act in relation to the ordinary business of a corporation. The body of stockholders have certain authority conferred by statute which must be exercised to enable the corporation to act in specific cases, but except for certam authority conferred by statute, which is mainly permissive or confirmatory, such as consenting to the mort- gage, lease or sale of real property of the corporation, they have no express power given by statute. They are not by any statute in this state given general power of initiative in corporate affairs. Any action by them relating to the details of the corporate business is necessarily in the form of an assent, request or recommendation. Recommendations by a body of stockholders can o^ly b^f^^^^J^^^ through the board of directors, and indirectly by the authority of the stockholders to change the personnel of the directors at a meetmg 638 SHAREHOLDERS — ACTIONS. [CHAP. IV. for the election of directors. Such action may or may not result in securing adequate, corporate action with reference to illegal or fraudulent acts. For reasons wholly apart from the matter in dispute the stockholders may not desire to change a majority of the persons comprising its board of directors. Some of the reasons why the power vested .in stockholders to elect directors is inadequate as a remedy for specific fraudulent acts are stated by Cook in his work on Stock and Stockholders, section 740, in which he says : "There has been considerable discussion as to whether the stockholder in addi- tion to his request to the corporate officers to institute the suit, should not also be required to attempt to induce the stockholders in meeting assembled to take action' by directing the directors to bring suit, or by refusing to re-elect them at the next election. The facts, however, that the stockholders in meeting assembled cannot control the discretion of the directors in bringing such a suit; that the remedy of refusing to re-elect them involves delay, and the assump- tion that a minority of the stockholders can by the election control such a suit ; that irreparable injury or the vesting of great financial interests may occur in the meantime; and that laches may arise as a bar to the stockholder's suit, have settled the rule that the stock- holder's request to the corporate directors to institute the suit is sufficient. He need not also apply to a stockholders' meeting." Although it is said that the authority of stockholders in the manage- ment of business corporations is exhausted when they elect the direc- tors (Thompson on Corporations [2nd ed.], section 1178) nevertheless it is generally recognized that certain acts of boards of directors that are legal, but voidable, can be ratified and confirmed by a major- ity of the body of stockholders as the ultimate parties in interest and thus make them binding upon the corporation. (Morawetz on Cor- porations [2nd ed.], sections 625, 626.) Such recognized authority in stockholders to ratify and confirm the acts of boards of directors is confined to acts voidable by reason of irregularities in the make up of the board or otherwise or by reason of the directors or some of them being personally interested in the subject-matter of the con- tract or act, or for some other similar reason which makes the action of the directors voidable. No such authority exists in case of an act of the board of directors which is prohibited by law or which is against pubHc poHcy. (Kent v. Quicksilver Mining Co., 78 N. Y. 159.) In any case where action is taken by stockholders confirming and ratifjdng a fraud and misapplication of the funds of the corpora- tion by the directors or others the action is binding only by way of estoppel upon such stockholders as vote in favor of such approval."^ 1 In Cole 1). Wells, 113 N. E. (Mass., 1916) 189, defendants, majority stockholders, caused a corporate meeting to be held and a resolution enacted authorizing sale of the corporate assets. Plaintiff, objecting to the sale, thereupon made demand for ap- praisal and payment of his stock pursuant to Mass. Laws of 1903, c. 437, sec. 44, the provisions of which are quite similar to those mentioned in In re Timmis, ante, page 261. SECT. 7.] CONTINENTAL SECURITIES CO. V. BELMONT. 639 (Morawetz on Corporations [2nd ed.], section 625.) The distinction between acts that can and those that cannot be confirmed and ratified IS shown in the report of two frequently cited English decisions, namely,. Foss v. Harbottle (2 Hare, 461) and Bagshaw v. Eastern Union R'way Co. (7 Hare, 114). The former of these cases was limited to the approval of a legal but voidable act. In the Bagshaw case where the directors of a corporation had misapplied or were about to misapply certain moneys of the corporation, the court says: "No majority of the shareholders, however large, could sanction the misapplication of this portion of the capital. A single dissenting voice would frustrate the wishes of the majority. Indeed, in strict- ness, even unanimity would not make the act lawful. This appears to me to take it out of the case of Foss v. Harbottle, to which I was referred. That case does not, I apprehend, upon this point, go further than this : That if the act, though it be the act of the directors only, be one which a general meeting of the company could sanction, a bill by some of the shareholders on behalf of themselves and others, to impeach that act, cannot be sustained, because a general meeting of the company might immediately confirm and give validity to the act of which the bill complains." It is the governing body or bodies of a corporation with power to enforce a remedy to whom complaining stockholders must go with their demand for relief. The governing body of corporations in this state, as we have seen, is the board of directors. A complaining stock- holder must go to such board for relief before he can bring an action, imless it clearly appears by the complaint that such application is useless. If the subject-matter of the stockholder's complaint is for any reason within the immediate control, direction or power of confirmation of the body of stockholders, it should be brought to the attention of such stockholders for action, before an action is com- menced by a stockholder unless it clearly appears by the complaint that such application is useless. The decision reported in Hawes ;;. Oakland (104 U. S. 450) and other similar decisions in the Federal and state courts are not in conflict with the decision about to be rendered herein. In such cases, as in this case, it is asserted that an application to the body of stockholders is imnecessary when it is unreasonable to require it. If the body of stockholders has no adequate power or authority to remedy the wrong asserted by the individual stockholders it is unreasonable and un- necessary to require an application to it to redress the wrong before Subsequently learning of misappropriations by and fraudulent management of de- fendant directors, he instituted representative action for an accountmg, restoration, &c. Hdd: (1) He is entitled to the intrinsic not merely the book or even market value of his stock and this includes the value of assets misappropriated; (2) His demand aforesaid, under the circumstances, did not constitute an election, waiver, or estoppel; (3) Such demand is not inconsistent but concurrent with the right to seek rehef m equity in aid of the demand. 640 SHAREHOLDERS — ACTIONS. [CHAP. bringing a representative action. (See opinion of Cabr, J., in Appellate Division herein, 150 App. Div. 298. See, also, Delawai H. Co. V. Albany & S. R. R. Co., 213 U. S. 435.) In this case where the plaintiff alleges fraud and a substar misappropriation of fifteen thousand shares of the stock of the i poration through a nominal purchg,se of property and the payn of a pretended claim for services, application to the body of stc holders was not necessary. The order should be affirmed, with costs, and each of the questi certified answered in the affirmative. Order affirmed WILLOUGHBY v. CHICAGO JUNCTION RAILWAYS & CO., ET AL.2 50 N. J. Eq. 656. 1892. Ellerman, a stockholder in defendant corporation, had filed M behalf of himself and all other stockholders to prevent executioi an agreement made by it with third parties. That case was he on bill and answer and decree was rendered dismissing the bill. Ellerman v. Chicago Junction Railways &c. Co., 49 N. J. Eq. 21' The present plaintiff now files this bill to prevent the executioi the same agreement. After his bill was filed, the corporation m a new agreement with the same parties which cancelled the fon agreement but contained many of its provisions. Plaintiff then f supplemental bill to prevent the execution of the last mentio agreement. Green, V. C. Are the complainants bound by the former adji cation of the questions arising in the Ellerman suit? . . . Actions of the class to which the Ellerman and Willoughby si belong are sui generis, in this, that the complainant does not prosec in his own right — a stockholder, as such, does not have a le or equitable estate in the corporate property ; his only right of pi erty is to a proportionate share of the profits of the business w. the company is in operation, and to a proportionate share of the • Excessive salaries may be recovered in a representative action. Cole v. W supra. And so as to salaries voted to directors for the performance of their duti( such in the absence of a statute, by-law, or charter authorization in that behalf. ( ley V. CrandaU & Godley Co., 212 N. Y. 121. Examples might be multiplied indefinitely. The substantive law determ whether or not there is a cause of action in favor of the corporation. The pre purpose is to determine when and how the individual stockholder may enforce i cause of action. 2 Facts restated ; portions of opinion omitted. ' Reported ante, page 152. SECT. 7.] WILLOUGHBY V. CHICAGO JUNCTION EYS. &C. CO. 641 assets on its dissolution. Unauthorized dealing with the franchises or funds of the corporation directly injure it as a legal entity ; it is the franchises of the corporation which are to be misused; the funds of the corporation which are to be misappropriated, and the cor- poration is, therefore, the party to be injured and should itself seek redress. This class of cases must not be confounded with the pre- ventive remedy of every stockholder to restrain acts ultra vires the corporation. Each stockholder has invested his money in the very enterprise contemplated by the charter, and has, in his own right, an equitable remedy to prevent his guasi-trustees, as directors, from misuse of the corporate franchises, and from diversion of corporate funds, to a purpose foreign to that of the charter, and for which he has invested his money, and this although every other stockholder favors the proposed action, and it is plainly advantageous to the financial interests of the company. The Ellerman and Willoughby suits belong not to this, but to that class of cases in which the corporation itself is directly injured and is primarily interested, and should itself institute and maintain an action for reUef ; in which the remedy to be obtained, whether pecuniary or otherwise, is for its benefit and belongs to it alone ; the stockholder in such case has no standing in the court, as a party, except on the refusal, either express or implied, of the corporation itseK to prosecute. Where, as in this case, an appeal to the directors to bring suit would apparently be unavailing, refusal to prosecute is implied, and a stockholder is permitted to commence the action in his own name ; but otherwise the suit is .treated in every respect as one brought by and for the corporation ; although the stockholder is the nominal, the corporation is the real party complainant, represented not by its accustomed officials, but by one or more of its stockholders. Professor Pomeroy (3 Eq. Jur. § 1095) says, with reference to such a suit : "Wherever a cause of action exists primarily in behalf of the cor- poration against directors, officers and others, for wrongful dealing with corporate property, or wrongful exercises of corporate franchises, so that the remedy should regularly be obtained through a suit by and in the name of the corporation, and the corporation either actually or viHually refuses to institute or prosecute such a suit, then, in order to prevent a failure of justice, an action may be brought and maintained by a stockholder or stockholders, either mdividually ' or suing on behalf of themselves and all others similarly situated, against the wrongdoing directors, officers and other persons; but it is absolutely indispensable that the corporation itself should be joined as a party -usuaUy as a co-defendant. Ihe rationale of this rule should not be misapprehended. The stock- 642 SHAREHOLDERS — ACTIONS. [CHAP. I\ holder does not bring such a suit because his rights have beei directly violated, or because the cause of action is his, or becaus he is entitled to the reUef sought; he is permitted to sue in thi manner simply in order to set in motion, the judicial machinery o the court. The stockholder, either individually or as a representativ of the class, may commence the suit, and may prosecute it to judg ment ; but in every other respect the action is the ordinary on brought by the corporation ; it is maintained directly for the benefi of the corporation, and the final rehef, when obtained, belongs ti the corporation and not to the stockholder-plaintiff. The corporatioi is, therefore, an indispensably necessary party, not simply on thi general principles of equity pleading, in order that it may be bounc by the decree, but in order that the relief when granted, may b awarded to it, as a party to the record, by the decree. This vieii completely answers the objections which are sometimes raised i: suits of this class, that the plaintiff has no interest in the subject matter of the controversy, nor in the relief. In fact, the plaintiff ha no such direct interest; the defendant corporation alone has an; direct interest ; the plaintiff is permitted, notwithstanding his wan of interest, to maintain the action solely to prevent an otherwisi complete failure of justice." Cook on Stockholders (1st ed.) § 692, says : " The rule that the corporation itself is an indispensable partj defendant to such suit, is due to the fact that all other possibl future suits by the corporation are thereby prevented, the rights o the corporation are duly ascertained, and the remedy made effectua against the corporation as well as others." Neither this suit nor the EUerman suit was in the right of th( respective complainants; they were the nominal, but not the real parties complainant. They were suing merely as representing thi company, to establish and enforce its rights ; the relief to be ojitainec was not and is not for their individual benefit, but for the benefi' of the corporation as such. In these cases the corporation itsel is a necessary ' and was and is actually a party defendant ; in thes( it was and is represented by counsel, answered the bills and has taker part by counsel, in the discussion of the case. The decree in th( EUerman suit certainly binds the company. In the face of thai decree, neither the old nor a new board of directors could attack i1 except by an appeal. The former decree could be successfully pleadec as a bar to an action instituted in the name of the company bj 1 Accord : Davenport v. Dows, 18 Wall. (U. S.) 626 ; cf. Converse v. United Shoi Machinery Co. cited ante in note 1, page 630. In Seagrist v. Keid, 171 A. D. 755, stockholders' suit had been instituted to compe directors to account &c. Thereafter a receiver was appointed by a federal court an( he instituted suit in the same state upon the same cause of action. Held: The re ceiver, upon his appointment, became a necessary party to the earlier suit because en titled to be paid the proceeds of any decree entered therein. SECT. 7.] WILLOUGHBY V. CHICAGO JUNCTION EYS. &C. CO. 643 authorized agents who might desire to rehtigate the questions de- cided. If the company and its authorized representatives are then concluded by such a decree, how can a stockholder, suing in behalf of the company, be permitted to relitigate questions which are con- clusive upon the corporation? A stockholder has no standing in the com-t to prosecute such an action except on the refusal of the directors, either actual or presumptive, to prosecute. But such refusal of the directors to prosecute must be an unjustifiable refusal. If their reason for not doing so is a valid one, the individual stock- holder cannot, from such refusal, derive a right to prosecute in his own name. It would not be unreasonable or unjustifiable for a board of directors to refuse to prosecute, on the apphcation of a stock- holder, when there had been an adjudication on the point which he seeks to have passed upon, which is conclusive upon the company. And if the stockholder in the face of a refusal by the directors on that ground should persist and commence the action, an answer by the directors in his suit, that they had refused to bring the action solely on the ground that the question had been before adjudicated, would necessarily be followed by a dismissal of his bill. This argUBaent goes to the root of this question, and demonstrates that the decision of questions litigated in this court in the suit brought by EUerman, a stockholder, in his own behalf and that of other stockholders, in which the company was made a defendant and appeared, is conclusive in another suit brought by another stockholder for the purpose of rehtigating the questions which have been determined. If not so there can be no end of litigation, for the court is then open to suit by every stockholder, seriatim, presenting the questions over and over for consideration and decision. It is urged that no party should be concluded without an oppor- tunity to be heard ; but this complaint does not lie in the mouth of Mr. Willoughby. He had an opportunity to be heard in the EUerman suit. It was expressly for the benefit of all stockholders who might come in and contribute to its expense. He could, at any time before decree, have been made a party to the Ellerman suit, and have then advised the court of anything not before brought to its attention. He had ample time to so apply after he actually knew of the pendency ot the suit, and his solicitor was thoroughly informed of all proceedings in the Ellerman case in time to have intervened. Counsel admitted, upon the argument, that the question whether they should intervene in the Ellerman suit, or resort to an independent action, was considered and discussed before bringing the present suit was determined upon^ Besides, from the very form and nature of ^^^l'''!'\'^'^'^?^- holder must be considered as represented, for if he is "^^y^P^^Jy with the complainant he may become a P^^l^'Tf^'^^^^^J^^r^ cation to the court ; if he is in sympathy with the threatened act on of Se company, he is represented by and in the corporation which 641 SHAKEHOLDEKS — ACTIONS. [CHAP. IV is a necessary party to the suit. March v. Eastern R. R. Co., 40 N. H 548. Not only this, but the court may, if satisfied that the interests of the corporation are not being properly presented or protected admit a stockholder to be made a party defendant. Bronson et at V. La Crosse & M. R. R. Co., 2 WaU. 283. While one counsel on the argument seemed to regard it as the duty of the court to examine all questions de novo, counsel, who drew the original bill, appreciated the difficulty of the former adjudication, and sought to avoid it by alleging that the EUerman suit was collusive, The original biU alleges that the parties to the agreement, having grave doubts as to its legaUty and as to the legal rights of the New Jersey Company to enter into it, devised and put into operation a collusive suit in this court with a view of obtaining an adjudication in favor of the legahty and vaUdity of the agreement, in the guise of an action brought by one of the stockholders for the simulated and pretended purpose of having the said agreement declared an un- lawful one. That for such purpose Mr. EUerman, at the request of the New Jersey Company, instituted the action ; that such suit was arranged between the parties before the agreement was executed, and that the suit was instituted accordingly ; that the EUerman bUl contains few, if any, of the material allegations in the Willoughby bill affecting the validity and legality of the said agreement ; that it made untruthful averments with reference to the value of the Tolleston property and the Central Stockyards; that it was in- geniously drawn so as to attempt to secure from the court an adjudi- cation favorable to the validity of the agreement upon an unfair and garbled statement of the facts and issues. [The court examines the facts on the question of collusion and determines adversely to plaintiff's contention.] The EUerman suit, not being collusive, must be held to be conclusive in this, upon all questions which were therein decided, and J have here to say, that after giving patient attention to the oral and printed arguments of counsel, and after full and careful consideration thereof, I find no conclusion in the opinion rendered in that case which prin- ciple or authority would require me to change. [The court then considers the matters set forth in the supplemental bUl and which were not passed on in the former suit, and concludes that both the bUl and supplemental biU should be dismissed.] Bills dismissed} ^Accord: Hearst v. Putnam Mining Co., 28 Utah 184; Burland v. Earle, 1902, A. C. 83 ; 71 L. J. P. C. 1 ; Goodbody v. Delaney, 80 N. J. Eq. 417 ; Dana v. Morgan, ,232 Fed. 85. See Appleton i). American Malting Co., 65 N. J. Eq. 375. When a stockholder sues in the right of the corporation, his right of action is "deriva- tive." Alexander v. Donohoe, 143 N. Y. 203. The action itself is "representative." Cases supra. A suit by bondholders of the corporation may be representative, but, not being derivative, does not attain the effect of binding the class irrespective of whether or SECT. 7.] POLLITZ V. GOULD. 645 POLLITZ j>. GOULD. 202 N. Y. 11; 38 L. R. A. (N. S.) 988. 1911. Appeal, by permission, from an order of the Appellate Division which affirmed an order of Special Term denying a motion to dismiss the complaint upon the pleading. The following questions were certified: "1. Does the fact that the plaintiff acquired his stock of the defendant, the Wabash Rail- road Company, upon which he bases his right to ask the court to enforce a cause of action in favor of the railroad company against the individual defendants, after all the transactions which the plaintiff insists imposed a liability in favor of the raUroad company against the individual defendants had been consummated, all stocks and bonds issued and the transactions complained of in all respects completed, prevent the plaintiff from maintaining this action? "2. Is the enforcement of such a cause of action confined to 'stock- holders who actually owned stock at the time the transactions com- plained of were consummated and completed?" HiscocK, J. This action was brought by plaintiff as a stockholder in the Wabash Railroad Company in behalf of said company for the benefit of himself and all other stockholders to set aside as fraudulent a transfer and exchange of several milhons of dollars par value of its stock for an equivalent amount of the capital stock of the Wabash Pittsburg Terminal Railway Company. It is unnecessary to go into the details of the transaction which is being attacked by the plaintiff through and in behalf of the company, for the sole question pre- sented for our consideration may be discussed without doing this. This question is whether a stockholder may bring an action. of this character for the purpose of avoiding an improper transaction ' consummated at the expense of the corporation before he acquired his stock, and as presented here the question is unembarrassed by any incidental considerations, as, that the prior holder of the stock con- sented to the transaction ' or that plaintiff's subsequent acquisition not its members were parties or privies thereto. Wabash R. R. Co. v. Adelbert College, 208 U. S. 38. , . , , „ , J „ J „ > A stockholder cannot maintain an action m his own behalf based on aUeged uitra vires corporate acts, where he himself has knowingly accepted pecuniary benefits thereunder. Wormser v. Metropolitan St. Ry. Co., 184 N. Y. 83. Conversely, a. corporation may not set up ultra vires as a defense, where no pubhc interest is con- cerned and the interests of stockholders alone are involved, when all of them con- sented to the contract in suit. Lincoln &c. Realty Co. v. Kentucky &c. Trust Co., Lalhes are equivalent in effect to acquiescence. Rabe >;• ^^""l^P' ^V.^- "'• ^^- ^^j Alexander .. Searcy, 81 Ga. 536; Hill v. Atlantic &c. R. R. Co., 143 N. C. 539 and npte in 9 L. R. A. (N. S.) 606. In the Rabe case, supra. Van Fleet, V. C. said . 646 SHAREHOLDERS — ACTIONS. [CHAP. IV. of the stock was accompanied by any circumstances which would render it inequitable for him to seek rehef .^ While somewhat strangely this question does not appear to have been decided by this court, it has been passed on by the lower courts of this state and by those of many other states and by the Supreme Court of the United States. It has also been somewhat considered by the courts of England. Conflicting conclusions have been reached by these decisions. Without reviewing the English authorities, which so far as cited do not seem to be very decisive, reference may be made to the decisions in this country. The question was presented in Hawes v. Oakland (104 U. S. 450), and it was there held that a stockholder might not bring an action in behalf of the corporation to avoid a fraudulent transaction con- summated before he acquired his stock. While the question was directly passed on it is fair to state that it was not considered at any great length and that the court seems to have been more concerned with establishing this rule as one of practice than of substantive law. The decision resulted in the adoptioh of a rule requiring the plaintiff in such an action to show before bringing suit that he owned the stock on which it was brought at the time the transaction com- plained of occurred, and whether it be regarded as establishing a principle of law or a rule of practice this authority has been subse- quently followed in the United States courts. In addition, this rule in such a stockholder's action has been ap- proved in the following cases : Alexander v. Searcy (81 Ga. 536) ; "Where an act is done openly, and especially on notice, and without evil intent, though clearly in excess of the power of the corporation, a non-assenting stockholder will not be allowed to pause to speculate upon the chances — - to wait until he can see whether such act i$ likely to result in profit or loss — but to be entitled to the summary inter- ference of the court he must ask for it promptly, and before the act of which he com- plains, has become the foundation of rights or equities which must be destroyed or greatly impaired if the act be nullified or undone. Or, stated with greater "brevity, and in its simple essence, the rule is this ; If he wants protection against the conse- quences of an ultra vires act he must ask for it with sufficient promptness to enable the court to do justice to him without doing injustice to others." The gist of laches is estoppel, except in cases where equity, having concurrent juris- diction, applies the doctrine in analogy to the statute of limitations. Hence mere delay is no defense to an action against an unfaithful director, Montgomery Light Co. V. Lahey, 121 Ala. 131 ; MoCounell v. Combination Min. &c. Co., 30 Mont. 239, or where there has been no change of position. Just v. Idaho Canal &c. Co., 16 Idaho 639. Cf. Westminster Nat. Bank v. New England Electrical Works, 73 N. H. 465. The doctrines of acquiescence and laches apply to representative suits. For the theory is that, through the corporation, the stockholder has suffered an actionable wrong. , Babcock v. Farwell, 245 111. 14. But the mere fact that laches may be attrib- uted to some but not all the plaintiffs, does not bar the suit. Endicott v. Jilarvel, 81 N.:J. Eq. 378. Says Leaminq, V. C. ; "The objection of laches of the individual stock- holder goes to his right to assert the property rights of the corporation ; that right cannot be impaired by the laches of another stockholder who may have joined in the bill. The right of action is in no sense joint." Ibid. See Appleton v. American Malting Co., 65 N. J. Eq. 375. Cf. Towers v. African Tug Co., L. R. 1904, 1 Ch. Div. 558. 1 Cf. H. Remington & Son &o. Co. ». Caswell, ante, page 323. ®^*^'^- '^•] POLLITZ D. GOULD. 547 ' no't'^TT'' "• ^"^"^ (^^ <^«Jo- 252); Rankin v. S. W B & 1 Cn (12 N. Mex. 54); Moore .. Silver Valley Co. (104n' C 534V The contrary doctrine that a stockholder acquiring his stock subse- quent to the occurrence complained of may maintain th character of an action has been affirmed in the following cases outside of this f22 ?li I'^V- ^f'^ ?' ^- H- 218) ; City o'f Chicago Calron (22 111. App. 91 ; afiinned 120 111. 447) ; Montgomery Light & Power Co. V. Lahey (121 Ala. 131); Forrester v. B. & M., etc Co T21 Mont 544 565); Just . Idaho, etc., Co. (102 Pac. R;p'^°38 ) Ss N J. E,f 375) ^ ^ ^^- ^^^'^ ' "^PP^"*"" '■ ^- ^^^^^^ ci. It has also been approved in this state directly or indirectly in the following cases: Ramsey v. Gould (57 Barb. 398) ; Young v. Drake (8 Hun 61) ; Ervm v. Oregon Ry. & N. Co. (35 Hun 544) ; Frothing- ham V. Broadway & Seventh Ave. R. R. Co. (9 Civ. Pro Rep 304) • Sayles v. Central Nat. Bank (18 Misc. Rep. 155) ; O'Connor v Vu-gima P. & P. Co. (46 Misc. Rep. 530, 535). Assuming this question to be an open one in this court, we have no hesitation in approving the rule which has heretofore prevailed in this state, that in the absence of special circumstances this char- acter of action may be maintained by a stockholder acquiring his stock subsequent to the transaction which is challenged, rather than the contrary one prevailing elsewhere. We do this not only because a long and uniform line of decisions by our own courts ought to have weight, but because the rule estabhshed by these decisions seems to be the sounder one. A stockholder has an indivisible interest in the property and assets of a corporation subject to the discharge of its obUgations. This indivisible interest generally speaking is represented by certificates of stock and is transferred by their transfer. The general character of) these certificates and the effect of their transfer in passing the interest of the holder is too well estabhshed and understood to require any discussion. As an original proposition it would seem to be clear that a right of action by or in behalf of the corporation for fraud to set aside a conveyance of its assets or to avoid obhgations imposed upon it is part of its rights, property and assets in which a stockholder has this indivisible interest transferable by the transfer of his certificates. I am unable to see any real or substantial dis- tinction by virtue of which a stockholder transferring his certificates would transfer all of his indivisible interest in bonds or real estate on hand, but would not transfer his interest in a right of action to re- cover bonds or real estate which had been fraudulently withdrawn from the possession of the corporation, and which it was entitled to recover. And if the subsequent holder by acquiring the certificates 648 SHAREHOLDERS — ACTIONS. [CHAP. IV. does acquire such latter interest, it seems to follow that he may if necessary, in behalf of the corporation, assert and prosecute an action to protect and enforce the same. Brief reference may be made to some of the reasons advanced in opposition to this view. Counsel points out practical inconvenience which he says will result from its application owmg to the difficulties in tracing stock and distinguishing that which has not assented to the transaction from that which has or from that which perhaps has been issued since its consummation. These arguments, however, are so counterbalanced by corresponding claims from the opposite standpoint as to be of httle weight. Again, it is argued that if one buys stock subsequent to. the trans- action he should be regarded as buying subject to it and not be permitted to question it. If the prior holder should give binding consent to the transaction, this under certain circimistances un- doubtedly would prevent the subsequent purchaser from question- ing it.^ But, in the absence of special circumstances, I fail to see any principle of estoppel or logic which makes a subsequent purchase of stock so subject to a fraudulent corporate transaction that the purchaser may not insist upon its being set aside. Th^re is scarcely any analogy between the situation of one who buys from an individual ' In Parsons v. Joseph, 92 Ala. 403, Coleman, J. said : "A transferee of stock is not necessarily disqualified as a suitor in all cases, because the prior holders were per- sonally disqualified. If the transferee purchased the shares in good faith, and without notice of the fact that the prior holder had precluded himself from suing, he would have as just a title to relief as if he had purchased from a shareholder who was under no disability; but if the purchaser was aware that the prior holder had barred his right to reUef, neither justice nor public policy would require that the transferee, under these circumstances, should be accorded any greater rights than his transferrer. . . . If a stockholder participates in a wrongful or fraudulent contract, or silently acquiesces until the contract becomes executed, he cannot then come into a court of equity to cancel the contract, and more especially if the company or himself as a stockholder has reaped a benefit from the contract ; and this rule holds good, although the con- sideration of the contract may be one expressly prohibited by statute. The same disability would attach to the transferee of his stock who bought with notice." This adjudication, favorable to a bona fide transferee, is not generally followed. The coiu:ts treat consent as a real as distinguished from a personal bar, — • as if it ad- hered to and ran with the stock. Thus, in Babcock v. FarweU, supra, Dunn, J. said : "Neither can an assignee of stock maintain a suit in regard to transactions with the corporation done or assented to by his assignor. The purchaser of shares of stock ac- quires no greater rights than his vendor. He holds by the same title and subject to the same liability. Shares of stock are merely choses in action, and the successive owners acquire only the rights held by their predecessors in title." Opposed to the Parsons case are also the following : McCampbell ». Fountain &c. R. R. Co., Ill Tenn. 55 ; Boldenweck v. Bullis, 40 Col. 253. In Trimble ». American Sugar Refining Co., 61 N. J. Eq. 340, it was held that a stockholder, holding a minute fraction of the outstanding stock, must show aflSrm8i- tively that neither he nor his predecessor has acquiesced in the transaction of which he complains. Contra: Continental Securities Co. v. Belmont, ante. ("It was not necessary for the plaintiffs to allege in the complaint that their predecessors in title did not assent to or acquiesce in the alleged fraudulent issue of said 15,000 shares of stock. It is not necessary to negative such assent or acquiescence in a fraud, unless it is otherwise to be presumed from the delay in bringing the action or generally from the allegations of the complaint. If it exists, it is a matter of defense.") SECT. 7.] POLLITZ V. GOULD. 649 some property which has been subjected to a transaction which has ;not been disaffirmed and that of one who purchases stock in a cor- poration which has the continuing right both before and after the purchase to disaffirm a wrong which has been perpetrated on it by Its agents. There is httle or no basis for the practical consideration that one who buys stock should be deemed to have adjusted his price to an existing transaction even though voidable. If he knows of it he may just as properly be, assumed to have adjusted his price to the knowledge that the transaction may still be disaffirmed and avoided. Then, lastly, an argument is made which seems to be founded on the idea that in order to bring an action of this nature the stockholder must in effect disaffirm the corporate transaction and that this dis- affirmance involves a personal right of election which vests in the one holding the stock when the transaction is consummated and Tvhich cannot be transferred. It is said "the right to question a fraud is not a purchasable commodity," and is not "capable of assign- ment and transfer," and does not pass "as an impHed incident to •every sale of corporate stock," and this view seems to be supported by some of the many cases which have been collected and reviewed lay counsel with manifest industry and care. So far as this argument means to assert that a mere naked right to question a corporate transaction could not be transferred to a stranger, if such an attempt can be conceived of, it may be assumed to be true. But the assertion that the right to protect stock by pro- curing an improper corporate transaction to be vacated does not pass on a transfer of the stock is a very different proposition. The election to disaffirm a fraudulent corporate transaction belongs to and is exercised in the right and name of the corporation and not . Trustees, &c., 67 N. J. Eq. 602. (Insolvency " denotes a general inability to meet pecuniary liabilities as they matufe, by means of either available assets or an honest use of credit.") See also Wright V. American Finance &c. Co., 85 N. J. Eq. 181. As to insolvency of beneficial associations, see Taylor v. Order of Sparta, 99 Atl. (Pa., 1916) 157. (Not insolvent for failure to maintain a reserve fund to meet prob- able liabilities.) CHAP. I.] FT. WAYNE ELECTRIC CO. V. FRANKLIN LIGHT CO. 679 be insolvency, the business of the company has not suspended, the electric lighting continues and receipts therefor come into the treas- ury. I agree that the word "resume," as used in the statute, predicates some interruption of the insolvent's business, but I do not understand that it contemplates an entire suspension of all its workings. Such has not been the practical interpretation the bar and the courts have given it, for manufacturing and other companies with plants in operation have constantly been adjudged to be in- solvent and put in the hands of receivers, and in so doing large values have been saved to creditors and stockholders because of the salable condition of a Hve plant as compared with one that is dead. In- solvency carries with it inability to presently pay indebtedness and suspension of that function, and the word "resume," used in the statute, is, I think, to be taken in the sense of taking up again that suspended function, so that payment of indebtedness, as well as the operation, of the work of the corporation, after temporary, partial or complete paralysis, may be "resumed" with safety to the public and advantage to its stockholders. That the late Vice-Chancellor Van Fleet understood the statute in the way I have interpreted it, I think is manifest in his course of thought in Atlantic Trust Co. v. Consolidated Electric Storage Co., 4 Dick. Ch. Rep. 402, 407, where he suggests an admirable guide in the appointment of receivers for insolvent corporations. He says : "The principle which I think should control the court in the exercise of this power is this — never to appoint a receiver unless the proof of insolvency is clear and satisfactory and unless it also appears that there is no reasonable prospect that the corporation, if let alone, will soon be placed, by the efforts of its managers, in a condition of sol- vency. To illustrate : Where the corporation attacked is shown to be insolvent, but it also appears that its managers are honest and capable and that they are striving, to the best of their ability, with fair pros- pect of success, to reheve the corporation from its embarrassment and to put it in a condition where it may prosecute its business success- fully, and the property of the corporation is free from judgment or other lien vmder which it may be sold speedily, at a sacrifice, the court should not interfere." In the present case the corporation is encumbered by mortgage under foreclosure and by judgments and levies is prepared for imme- diate sale. Its actual management is in the hands of a minority of its directors. The receipts from its business are habitually taken from the state and are unaccounted for to its directors. No effort is being made to relieve the company from its perilous condition. On the contrary, at the single but irregular meeting of directors, held in two years, an effort was made to virtually abandon the corporation. I think that a receiver should be appointed. It may be doubtful whether he can accomplish much for the relief of stockholders, but 680 ' CKEDITORS' RIGHTS — AGAINST CORPOBATION. [CHAP. I. there appears to be a possibility that creditors may be paid through his instrumentaUty.i ' The direct object of the statutory suit is to fix the status of the corporation by decree that it is under disabilities and enjoined from exercising its franchises. Cf. decree in proceedings de lunatico inguirendo. The suit is "more in the nature of a guo warranto than a creditor's bill for a receivership. In the case of a creditor's bill, the direct object is the sequestration of the assets by a receiver, and any injunction is ancillary to that object. If there are no assets, and consequently no receivership, it would be a strange case which would afford any function for an injunction. On the other hand, in the case of a quo warranto suit, the direct object is to procure a for- feiture of the corporate franchises — practically corporate death — and a receivership in those states where there can be a receivership in a quo warranto case is purely ancil- lary and dependent upon the necessities of the particular case — dependent upon the existence of assets to be received and distributed. "That the appointment of a receiver is not the direct object of our statutory suit against an insolvent corporation, that such appointment is purely ancillary, and may or may not be made, according to circumstances, follows, it seems to me, from the fact that our statutory suit may be maintained against a corporation which has not a dollar of assets and has no expectation of ever having any. "Take the class of cases of which Weatherbee v. Baker [35 N. J. Eq. 501] is the type, where a creditor's suit is maintained against an insolvent corporation to reach unpaid stock subscriptions. Insolvency, although practically existing in every case, is not a jurisdictional fact. The status of the corporation, in respect of the exercise of its franchises, is not affected further than some ancillary injunction issued in pur- suance of the main object of the suit may have a temporary effect in that direction. But what I want to point out is that after the whole jurisdiction has been exercised in a case like that of Weatherbee v. Baker, the corporation still lives and is in possession of its franchises and is liable to this statutory suit to place it under disabilities, and any stockholder or any creditor has power to institute and maintain such a suit, even though there are no assets, all having been distributed in tte prior creditor's suit." Stevenson, V. C. in Gallagher v. Asphalt Co., 65 N. J. Eq. 258. In the case last cited, the U. S. Circuit Court had, in a suit by a foreign creditor of a domestic corporation, appointed a receiver, who had seized the assets of the cor- poration. That, court had also issued injunction against the corporation. Later, the present action was brought in the state court and a final decree there entered that an injunction issue disabling the corporation from exercising its franchises but application for a receiver was denied. See also 67 N. J. Eq. 441. The views of the learned Vice-Chancellor are further expounded in Singer v. National Bedstead Mfg.. Co., 65 N. J. Eq. 290. Reconveyance to the corporation of its franchises and property will not be decreed unless its debts have been paid or their actual payment provided for. Bull ». Inter- national Power Co., 99 Atl. (N. J. Eq., 1916) 111. A receiver of the property of an insolvent domestic corporation will not be ap- pointed in proceedings supplementary to execution when the policy of .the state, as; disclosed by its legislation, favors a pro rata distribution of the assets of an insolvent ■ corporation. Boucker Contracting Co. v. W. H. Callahan &c. Co., 218 N. Y. 321., WiLLARD Bahtlett, C. J. said: "A receiver appointed under the General Corporation Law acts for the benefit of all of the creditors of the corporation who are thus assured that no one will acquire a preference over any other in the distribution of its assets ; whereas, a receiver in supplementary proceedings represents only the creditor who- procured his appointment, and such others as may have caused the receivership to be extended to their claims, each becoming entitled to payment in full in the order of his diligence. (Stevens v. Meriden Britannia Co., 160 N. Y. 178, 183.)" The same result was reached in Conner v. Todd, 48 N. J. Eq. 361. ("A corporation which is a judgment debtor, whose property cannot be reached by execution, would be de- creed to be insolvent.") But see later statutory amendment which expressly includes corporations. P. L. 1893, p. 450 ; P. L. 1907, p. 363. Such policy (above mentioned) of a sister state will be enforced via comity. Mar- tyne v. American &c. Ins. Co., cited ante in note, page 247. As to the powers of a statutory receiver, see Hundley v. Hewitt, 71 So. (Ala., 1916> 419. CHAP. 11.] CASSIDY V. UHLMANN. 681 CHAPTER II. AS AGAINST DIRECTORS. CASSIDY V. UHLMANN. 170 N. Y. 505. 1902'. Appeal from a judgment of the Appellate Division affirming a judgment in favor of the plaintiff entered upon a verdict. Werner, J.i The plaintiff, as assignee of the claims of several Portions of opinion omitted. 682 creditors' rights — against directors. (chap. II. depositors the actual condition of said bank to their damage to the extent of their said deposits, less the dividends paid to apply thereon by the receiver of said bank. Service of the summons herein was never made upon said Blaut. McDonald, although served, died before the trial of the action, and it has not been revived as against his personal representatives. The appellant Uhlmann is, therefore, the sole defendant. He presented no evidence.' ' The evidence given in support of the complaint was substantially as follows : At the expiration of banking hours on Tuesday, August 8th, 1893, the bank closed its doors. It was then hopelessly insolvent and had been so during several days prior to the 7th and 8th days of August when the deposits upon which plaintiff's claim is based were made. On the evening of August 2d, Blaut, McDonald and Uhlmann, Thompson, cashier and director, and Morton, its bookkeeper, met in the banking house. Blaut, McDonald and Uhlmann were in the president's room, or the cashier's department. At intervals they called in Morton, the bookkeeper, who gave them figures and statements from the books as to the assets and liabilities of the bank. On the evening of Friday, August 4th, Uhlmann, McDonald, the latter's lawyer, the cashier, and the bookkeeper, were again in the banking house. Morton was at work upon a statement of the bank's assets and liabilities which was not com- plete. He showed it to Uhlmann and had some conversation with him about it. On Saturday morning, August 5th, between 9 : 30 and 10 : 00 o'clock, McDonald and Uhlmann were again at the banking house. Morton showed the completed statement of the bank's assets and liabilities to Uhlmann and had some talk with him about it. After the latter had examined it, he threw his pencil upon the table and exclaimed, "The surplus is gone — the capital begins to walk off — by gosh, the bank is busted." Uhlmann was at the banking house again that afternoon. In the evening he was there with McDonald and Thompson. At the latter meeting there was some dis- cussion as to the advisability of receiving deposits on the following Monday. Mc- Donald and Uhlmann both stated that it would not be right to receive deposits in the then condition of the bank. McDonald asked Thompson what could be done about it. Then the former told the latter to receive deposits on Monday under the following plan, viz. : "If a person owed the bank any money, and the amount that he owed the bank was in excess of his deposit then ataoding to his credit, the amount should be entered upon his pass book. If it was less, he was to be given a duplicate deposit ticket and his book held. In case the depositor did not owe the bank, a dupli- cate deposit ticket was to be given him and his book held on any pretext — for balanc- ing or whatever it might be." This method of receiving deposits was followed on Monday until some time in the aftemoonj "when word was received from down town to put the deposits through." Until this message was received the deposits taken in were laid aside, but after that all deposits, including those received under Said arrangement, were entered upon the books as assets of the bank. On Monday even- ing, August 7th, there was a meeting at the banking house. There were present Blaut; Soulard, McDonald and Uhlmann, directors; Thompson; and counsel for Uhlmann and for McDonald. On August 8th the bank was opened at the usual hour and deposits were received in the regular way. This was continued throughout the day. At the close of banking hours the bank shut its doors forever. At six o'clock that evening there was a meeting at the banking house. There were present Blaut, Thompson ; Uhlmann, McDonald, Ottenberg, Kalisher and Soulard, directors, and a committee of the clearing house. Later in the evening the state treasurer was ad- mitted to the private room where a conference was going on. On Wednesday morn- ing, August 9th, it transpired that after the close of banking hours on the previous day checks had been drawn in favor of said state treasurer for 8250,000.00 ; in favor of the East River Bridge Co., of which the defendant was president, for $50,000.00, and in favor of the Glen Ridge Co., a corporation of which the defendant's brother was an officer, for $5,000.00 against the deposits for these amounts, respectively, standing to their credit, and these checks were paid by the St. Nicholas Bank, the clearing house agent of the Madison Square Bank. There was evidence to the effect that the defendant had not been in the habit of visiting the banking house in the evening at any time prior to August 2d, 1893. There was no evidence showing that any meeting of the directors of the Madison Square CHAP. II.] CASSIDT V. UHLMANN. 683 The theory upon which the action was brought, and upon which the defendant has been held liable in the courts below, is that by taking part in directing the receipt of deposits by said bank, knowing that it was insolvent, the defendant was guilty of a fraud by which the plaintiff's assignors were damaged and which gave them, or their assignee, a cause of action. This charge of fraud is predicated not alone upon the ordinary duties with which the defendant was charged by virtue of his office as a director of the bank, but upon those duties in connection with others, which he is said to have voluntarily assumed by his course of conduct during the last days of the bank. It is evident that we can arrive at no just conclusion upon the questions involved in the action without an approximately correct under- standing of the relations, to each other, of the parties interested in the controversy. The ordinary relation between a bank and its depositors is that of debtor and ' creditor. This is because cash when deposited ceases to be the money of the depositor and becomes the property of the bank. So far as creditors are concerned the relation be- tween a bank and its directors is that of principal and agent. There is also a qualified trust relation between the directors of a bank and its stockholders on the one hand, and between such directors and the bank's creditors on the other. Since the affairs of a bank are necessarily subject to the exclusive control of its directors, the acceptance of the office of director carries with it the implied and in- herent obligation to perform the duties thereof in such a way as to promote the best interests of the stockholders. So long as a bank is solvent and continues its business in the regular and proper way, its directors are neither agents nor trustees of the creditors. But when a bank is insolvent its directors, who continue to serve as such, be- come trustees for the creditors, because they are the custodians of the bank's assets, which constitute a trust fund for the payment of its debts. (Beach v. Miller, 130 111. 162 ; Haywood v. Lincoln Lumber Co., 64 Wis. 639 ; Richards v. N. H. Ins. Co., 43 N. H. 263.) An incorporated bank must, of course, be conducted through the inter- vention of duly authorized officers and agents. The board of directors of a bank has the general superintendence and active management of ail its concerns, and, for all practical purposes, the board is the cor- poration. As a general rule a board of directors must act as a board. But, since directors do not exercise a delegated authority in Bank was held or called at any time between the 2d and 9th days of August, 1893 ; or that any attempt was made to hold or call such meeting. It did not appear who sent word to the bank on Monday "to put the deposits through." , ^ ^. , ^, Upon this evidence the court submitted to the jury two questions: 1st. Did the defendant know, at the time the deposits in question were taken by the bank, that the bank was insolvent? 2d. Did the defendant take part in directing the receipt of the deposits by the bank knowing that it was insolvent? Both of these questions were answered in the affirmative, and a general verdict was rendered m favor of the plaintiff for $6,496.86. 684 CREDITOKS' EIGHTS — AGAINST DIRECTORS. [CHAP. U. the sense which applies to other officers and agents, it is clear that a board of directors may delegate some of its powers to committees and individuals selected from the board. This is common practice in the management of banks as well as other corporations. Since a board of bank directors is composed of individuals it is manifest that each director sustains a distinct relation, not only to his bank, but to its stockholders and depositors. For obvious reasons the duties which attach to this relation cannot be precisely defined. They cannot be the same under all circumstances ; nor can they be imposed with unvarying exactness upon all directors alike. Again, applying a general rule, bank directors are bound to administer the affairs of a bank according to the terms of its charter, in good faith and with reasonable care and diligence. (First Nat. Bank v. Ocean Nat. Bank, 60 N. Y. 278.) Those who deal with a bank have the right to expect reasonable diUgence and good faith at the hands of its directors. If the latter fail in either, they violate a duty which they owe to both stockholders and depositors. Justice and public policy require that when one volimtarily takes the position of bank director he should exercise at least the same degree of care that men of common pru- dence exercise in their own affairs. (Hun v. Gary, 82 N. Y. 65.) In the light of the foregoing general observations let us now look at the situation presented by this record, to ascertain the duties and liabilities, if any, of the defendant towards the plaintiff's assignors. Of the history of the Madison Square Bank which antedated the second day of August, 1893, we know nothing except that the defend- ant was a member of its board of directors and that it had not been his custom to visit the bank outside of banking hours. Beginning with the latter date we find him at the banking house on that even- ing, on Friday evening, August 4th, on Saturday evening, August 5th, on Monday evening, August 7th, and on Tuesday evening, August 8th. His conduct, and the unfortunate termination of the back's history on the latter date, clearly point to the purpose of these visits. It was undoubtedly to obtain definite proofs of facts relating to the bank's condition, which must have been brought to his attention in some way and at some time prior to August 2d, 1893. His worst fears were reaUzed. On August 5th, 1893, he knew beyond per- adventure that the bank was insolvent. This was not an accidental discovery of doubtful import, but the accurate result of a careful and systematic investigation. The later judicial determination of this bank's utter insolvency was but an echo of the defendant's declara- tion of August 5th, "the surplus is gone — the capital begins to walk off — the bank is busted." Who were the defendant's asso- ciates during the week of investigation which preceded this declara- tion? McDonald, a co-director, and Thompson, co-director and cashier. The remainder of the eleven who constituted the board of directors were not present, nor does their presence seem to have CHAP. II.] CASSIDY V. UHLMANN. 685. been considered indispensable. To the man of ordinary prudence, actuated by honest motives, such an emergency would suggest that something ought to be done, and that quickly. ■ What more, natural than that a meeting of the board of directors should be held, or at least called ? But the record is barren of any suggestion of that kind. On the contrary, the self-constituted triumvirate hold another even- ing meeting. Although we have here a bank governed, as defendant now contends, by a board of eleven directors, these three meet to discuss and decide the question whether the bank sha;ll open for business on Monday morning, whether deposits shall be received and, if so, under what conditions. They finally decide that the bank shall open and that deposits shall be received in the manner above set forth. Was this done because it was impossible to procure a meeting of the board of directors? We do not know, for the record is silent upon that subject. Was it because there was hope of extricating this bank from its difficulties ? Evidently not, for it is conceded that there was no substantial change in its condition between Saturday night and Tuesday afternoon when it closed its doors, hopelessly insolvent. A' private banker who continues to take deposits under such circum- stances is clearly guilty of fraud. (Anonymous, 67 N. Y. 599.) The same rule applies against a corporate bank. (Cragie v. Hadley, 99 N. Y. 131.) Counsel for the defendant, while conceding the soundness of the rule referred to, contends that it has no application to the case at bar. As the defendant was neither a private banker, nor a corporate bank, it must be admitted that it does not apply imless the acts of the defendant supply the analogy to make it appfi- cable. It is urged on defendant's behalf : 1st. That the affirmation of solvency impUed in keeping the bank open for the receipt of deposits was the affirmation of the bank and not of the defendant. 2d. That since a corporate bank can only act through its board of direc- tors, as a board, the defendant's acts were without power and that there can be no duty where there is no power. 3d. That defendant did nothing as a result of which the bank was kept open or the receipt of deposits was continued.. It is true that, primarily, the affirmation of the bank's solvency implied in keeping it open for the receipt of deposits, was the act of the bank. It is equally true that a corporate bank usually acts through its board of directors. We think it is not true that the fraud in this transaction was the fraud of the bank alone ; nor can we admit the soundness of the argument that the defendant had neither power nor duty in the premises.- Power and duty even when strictly correlative, are never exact and unvarymg unless they arise out of fixed, clearly defined and unchanging condi- tions Such conditions rarely exist in any phase of commercial activity. This is particularly true of banking. The executive officers- of corporate banks are necessarily vested with large discretionary powers. In delegating some of its powers to others, a board of 686 creditors' rights — against directors. [chap. ii. directors does not abdicate its other functions, nor do the individual members of the board become mere automatons, bereft of the power of speech and action, except when the mechanism of the board is set in motion. There are many emergencies which call for individual action by directors, although no formal authority has been conferred. If a bank director should discover a fire in his banking house he would not wait for a formal meeting of the board of directors to authorize him to make an attempt to extinguish the fire or to call out the fire department; If a theft of the bank's money should be attempted in the presence of a single director, under such circumstances that his prompt interference would easily prevent its consummation, no one would seriously question that director's power and duty in the prem- ises, because the charter and by-laws of the bank contained no provision to meet such an emergency. If, in such a case, a director should try to do his obvious duty and fail, he would of course incur no liabiUty. But suppose he should actually participate with a bank officer, of superior or equal grade, in starting the fire or committing the theft, could there be an utter absence of duty and liability, simply because there was an apparent lack of formal power ? In the case at bar the defendant felt called upon to make an investigation of the bank's condition. We will assume that this may have been done with the best of motives. The investigation was pursued to the point where defendant was confronted with indubitable proofs of the bank's ruin. This was not later than Saturday night and prob- ably was as early as Saturday morning, August 5th. He was then chargeable with knowledge that any attempt of the bank to continue business under such conditions would be a fraud upon those who continued to deal with it in ignorance thereof. His appreciation of tills fact is attested by his suggestion that it would not be right to continue taking deposits in view of the condition of the bank. When McDonald suggested that deposits be received in the qualified way above referred to, there was no intimation from the defendant that the absence of a quorum of the board rendered all action impossible. When the direction was given to continue the taking of deposits the defendant gave no sign that he objected to the cashier's receiving orders from a single director. There was no dissent, no objection, and this, we think, was equivalent to acquiescence. It is to be re- membered that the defendant was not a mere director, actually ignorant of the real state of affairs and hastily called into an im- promptu conference. For nearly a week he had been in daily and almost constant intercourse with the men who were present on that Saturday evening. Between them they had pursued such a system- atic investigation of the bank's condition as would ordinarily be under- taken only at the instance of the board of directors. The president of the bank had not been at the banking house since the previous Wednesday. Somebody was managing that bank. Was it the presi- CHAP. II.] CASSIDT V. DHLMANN. 687 dent, or the board of directors, or the cashier in conjunction with his co-directors, the defendant and McDonald? The events of that week furnish a convincing answer to these inquiries. " But," asks the defendant's counsel, "what particular thing was the defendant called upon to do ? " As we have already intimated, the question cannot be answered categorically. At first suggestion it seems so direct and plausible as to raise serious doubts whether there is anything that the defendant could or ought to have done. But upon second thought the true situation presents itself. This is not the case of a passive and ignorant director, confused by a sudden emergency, but rather that of one whose voluntary activity and assumption of power disclosed, a condition which forbade the continuance of the corporate business. This disclosure was made on Saturday after several days of investi- gation, during which the official head of the bank had been con- spicuous by his absence. The ruin was coniplete. Under the cir- cumstances above referred to this was known to the defendant, unless we clothe the office of bank director with a sacred and vmique immu- nity from all intelligence and knowledge. -In these conditions there were several things that the defendant could have done. He could have called a meeting of the board of directors. He could have communicated with the superintendent of the banking department between Saturday and Monday. He could have instructed the cashier to discontinue the taking of deposits until some other official action could have been taken. He could quietly have warned in- dividual depositors that no further deposits would be received until further notice. He could have publicly annoimced that the bank would be closed pending official investigation. These suggestions -will, of course, meet with a variety of answers. It is said that we do not know whether the defendant called a meetiug of the board of directors or communicated with the banking department. That is true ; but we would know if the defendant had told the court what he knew upon the subject. "But," says the defendant, "this is an action based upon fraud, and as fraud is never presumed it must be proved." Again we assent, but with this quahfication : When a prima facie case of fraud has been made out, the burden of explanation is thrown upon the defendant. Then, again, it is suggested that if the defendant had instructed the cashier to discontinue the receipt of deposits it might have been of no avail, for the cashier was at least the official equal of the defendant and subject to no orders except from the board of directors. It may be true that the cashier was under no obligation to obey an individual director. But he had done so. He had yielded such obedience in coming to the bank in the evenings, in making, or having made, tabulated statements of the bank's finances, and was about to obey McDonald in continuing the taking of deposits under the arrangement suggested by him. In the light of these facts it is not difficult to understand that the cashier CEEDITOKS' EIGHTS — AGAINST DIRECTORS. [CHAP. 11. would not have dared to disobey a direction so obviously proper and honest. With reference to the suggestion that the defendant might have warned individual depositors of the bank's insolvency, or, if all else failed, have announced it publicly, defendant's counsel argues that no reasonable rule of law places upon a director such a duty and responsibOity. To the extent that this observation apphes to bank directors generally we concur in it. We cannot admit its application to the case of this defendant. It may be assumed that no man of ordinary intelligence and prudence would resort to such extreme meas- ures until all others had been exhausted and then only in a case of clear and hopeless insolvency. But here it must either be assumed that the defendant avoided the obvious and simple duty of calling a. meeting of the board of directors, or that it was impossible to procure one to be held. If it was impossible, then it must have been evident to the defendant that there was no hope for the resurrection of an insolvent bank whose directors could not be brought together for a meeting. We think that under such conditions it was as clearly the duty of the defendant to warn intending depositors or to make public announcement of the bank's insolvency as it would have been his duty to avoid these drastic measures in other circumstances. It is urged that the defendant has been punished for his diligence, and that the negUgence of his fellow members of the board of directors is their passport to absolute freedom from liability. Like many other suggestions in this case, this has a taking sound, but, in our judgment, it will not stand the test of analysis. We are not now concerned with any alleged negligence of any other director. Nor is the judgment herein the defendant's penalty for his diligence. Had the knowledge which the defendant gained in making his investigation been properly used instead of being fraudulently concealed, the defendant would have received the commendation of the courts instead of condemna- tion. We regard this as a case of diligence misapplied and misusetl ; of diligence apparently exerted for personal ends at the expense of official constancy. It is further urged on behalf of the defendant, that even if he may be charged with failure of duty in any of the particu- lars above indicated, he cannot be held guilty of fraud, because his acqxiiescence, if any, in the continuance of the business of the bank was only for a specified purpose under proper restrictions ; that he did not agree that deposits should be unqualifiedly received, but only subject to the arrangement proposed by McDonald; that if the cashier, after having partially carried out the arrangement, chose to take orders from somebody else and receive deposits in the usual way, the defendant was powerless to prevent it and should not be held responsible. We cannot admit the soundness of this argument. It is superficially plausible, but it rests upon the false premise that there was no wrong in making some arrangement so long as the parties thereto considered it safe ; and that when once made, it could prop- CHAP. II.] CASSIDY V. UHLMANN. 689 erly be treated as self-executing. So far as the plaintiff's assignors were concerned, the defendant's wrong began when he acquiesced and took part in the arrangement to receive deposits under any condi- tions except a full and fair disclosure of the bank's condition. As we have seen, the mere fact of taking deposits was an assurance to the depositors that the bank was solvent. Had they known it was in- solvent they might well have dechned to make any further deposits, even though they had been informed of the special arrangement under which deposits were to be received. But how are the depositors affected by the secret agreement made between the defendant and McDonald ? As to them it was a nullity if they chose to treat it as such. Let us assume, however, that the agreement was of such a character that, if faithfully observed, it would have exculpated the defendant from the charge of fraud. Did the defendant's responsi- bility end with the mere making thereof? The very theory upon which the agreement is interposed as a shield to the defendant, is based upon the assumption that it was in the interests of honesty and would be faithfully carried out. Let us assume that the measure of defendant's duty was ordinary care. Did he exercise it? When the defendant was at the banking house on Monday evening a single question from him to the cashier or bookkeeper would have revealed the fact that the arrangement of Saturday night had been changed and all the deposits of Monday had been thrown into the assets of the bank. The record contains no such inquiry, and there was evidence from which the jury were at liberty to find that there was a reason for not making it. The sequel shows that the deposits were used for other purposes. A few favored depositors were taken care of as we shall presently ascertain. . . . In the case at bar we are deaUng with fiduciary relations. The defendant was the director of an insolvent bank and the plaintiff's assignors were innocent depositors. The insolvency of the bank made the directors trustees for its creditors. While courts should be careful to estabhsh no rule that will impose upon bank directors harsh and unjust burdens, they should not be over nice, in guarding them with the technicalities of evidence when charged with dishonesty or negligence in the performance of their oflacial duties. Courts should remember that when men accept the honors which attach to such. offices they also assume some duties to the stockholders and depositors whom they represent. In this age of banks and banking, confidence is the cornerstone of the whole business structure. Once let it be known that a bank director can be made Uable for nothing that is not done by an organized board of directors, and confidence in banks will be put to a crucial test, and a dishonest director will never be at a loss for means of escape. There are no other exceptions which seem to require specific mention or discussion, and we, therefore, conclude that the 690 creditors' rights — against directors. [chap. II. judgment of the Appellate Division should be alErmed, with costs. Martin, J. (dissenting).' . , Bartlett, Vann and Cullen, JJ., concur with Werner, J. ; Parker, Ch. J., and Haight, J., concur with Martin, J. Judgment affirmed.^ •HUNTINGTON v. ATTRILL. 146 U. S. 657. 1892. In Equity. The bill was dismissed by the Court of Appeals of ' Maryland, to which judgment this writ of error was sued out. Mr. JtrsTicE Gray delivered the opinion ^ of the court. This was a bill in equity, filed March 21, 1888, in the Circuit Court of Baltimore City, by CoUis P. Huntington, a resident of New York, against the Equitable Gas Light Company of Baltimore, a corpora- tion of Maryland, and against Henry Y. Attrill, his wife and three daughters, all residents of Canada, to set aside a transfer of stock in that company, made by him for their benefit and in fraud of his creditors, and to charge that stock with the payment of a judgment recovered by the plaintiff against him in the State of New York, upon his liability as a director in a New York corporation, under the statute 1 Dissenting opinion omitted. ' The common-law liability of directors and officers to a creditor of the corporation arises, if at all, ex delicto. Jacobs v, Williams, 85 Conn. 215 ; Winchester v. Howard, 136 Cal. 432 ; Westervelt v. Demarest, 46 N. J. L. 37 ; Wilson i>. Stevens, 129 Ala. 630 ; cf. Re Brockway Mfg. Co., 89 Me. 121. Their sole principal is the corporation, and their liability is no different from that of other agents. Mitchell v. Hotchkisa, 48 Conn. 9 ; MuUanphy &a. Bank v. Sohott, 135 111. 655. If they are authorized by and make contracts in the name of the corporate principal, they are immune from personal liability, Jacobs v. Williams, supra; Hall's Safe Co. v. Herring-Hall-Marvin Safe Co., cited ante, note 1, page 34; even though the contract be ultra vires the cor- poration itself. Note to Jacobs v. Williams, supra, as reported in Ann. Gas. 1913 B 900, and cases cited in note 1, page 2^2 ante. That their duty is solely to the corpora- tion, and a dereliction therein is a wrong which can be ratified or ignored by the prin- cipal, irrespective of the attitude of creditors, provided it does not amount to actual fraud upon them, is emphasized when corporate creditors are denied invocation of the fiduciary doctrines appli cable to directors hereinbefore developed. See Barnes ». Spencer &c. Co., 162 Mich. 509 ; O'Coimor Mining &c. Co. v. Coosa Furnace Co. cited ante in note on page 257. Cf. Nappanee Canning Co. v. Reid, Murdoch & Co.,. 159 Ind. 614. But a tort-feasor is personally liable, whether a principal or an agent, and this sound rule of agency applies to corporate officers and directors. See Wines v. Crosby & Co., 169 Mich. 210, 39 L. R. A. (N. S.) 901 and note, Ann. Cas. 1913 D 1955 and note ; Nunnelly v. Southern Iron Co., 94 Tenn. 397, 28 L. R. A. 421 and note ; Ward V. PuUman Car Corp. 131 Ky.'142, 25 L. R. A. (N. S.) 243 and note ; Childs v. White, Rives 1). Bartlett and other cases cited and referred to in note 2, page 364, ante. Cf. cases in Book IV, Chap. 3, Sec. 5 ante. ■ Portions omitted. CHAP. II.] HUNTINGTON V. ATTRILL. 691 of New York in 1875, c. 611, the material provisions of which are copied in the margin.^ The bill alleged that on June 15, 1886, the plaintiff recovered, in the Supreme Court of the State of New York, in an action brought by him against Attrill on March 21, 1883, a judgment for the sum of $100,240, which had not been paid, secured or satisfied ; and that the cause of action on which that judgment was recovered was as follows : On February 29, 1880, the Rockaway Beach Improvement Company, Limited, of which Attrill was an incorporator and a director, became a corporation under the law of New York, with a capital stock of $700,000. On June 15, 1880, the plaintiff lent that company the sum of $100,000, to be repaid on demand. On Feb- ruary 26, 1880, Attrill was elected one of the directors of the company, and accepted the office, and continued to act as a director until after January 29, 1881. On June 30, 1880, Attrill, as a director of the company, signed and made oath to, and caused to be recorded, as re- quired by the law of New York, a certificate, which he knew to be false, stating that the whole of the capital stock of the corporation had been paid in, whereas in truth no part had been paid in ; and by making such false certificate became liable, by the law of New York, for all the debts of the company contracted before January 29, ,1881, including its debt to the plaintiff. On March 8, 1882, by proceedings in a court of New York, the corporation was declared to be insolvent and' to have been so since July, 1880, and was dis- solved. A duly exempHfied copy of the record of that judgment was annexed to and made part of the bill. . . . The bin prayed that the transfer of shares in the gas company be declared fraudulent and void, and executed for the purpose of defrauding the plaintiff out of his claim as existing creditor ; that the certificates of those shares in the name of Attrill as trustee be ordered to be brought into court and cancelled; and that the shares "be » Sec. 21. If any certificate or report made, or public notice given, by the oflScers of any such corporation, shall be false in any material representation, all the officers •who shall have signed the same shall be jointly and severally liable for all the debts of the corporation contracted while they are officers thereof. Sec. 37. In limited liability companies, all the stockholders shall be severally individually liable to the creditors of the company in which they are stockholders, to an amount equal to the amount of stock held by them respectively, for aU debts and contracts made by such company, until the whole amount of capital stock fixed and limited by such company has been paid in, and a certificate thereof has been made and recorded as hereinafter prescribed. . . . The directors of every such company, within thirty days after the payment of the last installment of the capital stock shall make a certificate stating the amount of the capital so paid in, which certificate shaU be signed and sworn to by the president and a majority of the directors ; and they shall, within the said thirty days, record the same in the office of the secretary of state, and of the county in which the principal business office of such corporation ^ ^See 38 The dissolution for any cause whatever, of any corporation created as aforesaid, shaU not take away or impair any remedy given against such corporation, its stockholders or officers, for any habilities incurred previous to its dissolution. 692 CEEDITORS' RIGHTS — AGAINST DIRECTORS. [CHAP. II. decreed to be subject to the claim of this plaintiff on the judgment aforesaid," and to be sold by a trustee appointed by the court, and new certificates issued by the gas company to the purchasers ; and for further relief. One of the daughters demurred to the bill, because it showed that the plaintiff's claim was for the recovery of a penalty against Attrill arising under a statute of the State of New York, and because it did not state a case which entitled the plaintiff to any relief in a court of equity in the State of Maryland. . The Circuit Court of Baltimore City overruled the demurrer. On appeal to the Court of Appeals of the State of Maryland, the order was reversed, and the bill dismissed. 70 Maryland, 191. The ground most prominently brought forward and most fully discussed in the opinion of the majority of the court, dehvered by Judge Bryan, was that the liability imposed by section 21 of the statute of New York upon officers of a corporation, making a false certificate of its condition, was for all its debts, without inquiring whether a creditor had been deceived and induced by deception to lend his money or to give credit, or whether he had incurred loss to any extent by the inability of the corporation to pay, and without limiting the recovery to the amount of loss sustained, and was in-, tended as a punishment for doing any of the forbidden acts, and was therefore, in view of the decisions in that State and in Maryland, a penalty which could not be enforced in the State of Maryland ; arid that the judgment obtained in New York for this penalty, while it "merged the original cause of action so that a suit cannot be again maintained upon it," and "is also conclusive evidence of its existence in the form and under the circumstances stated in the pleadings," yet did not change the nature of the transaction, but, within the decision of this court in Wisconsin v. Pehcan Ins. Co., 127 U. S. 265, was in its "essential liature and real foundation" the same as the original cause of action, and therefore a suit could not be maintained upon such a judgment beyond the limits of the State in which it was rendered, pp. 193-198. Judge Stone, with whom Judge McSherry concurred, dissented from the opinion of the majority of the court, upon the ground that it did not give due effect to the act of Congress, passed in pursuance of the Constitution of the United States, and providing that the records of judgments rendered by a court of any State shall have such faith and credit given to them in every court within the United States as they have by law or usage in the courts of the State whence they are taken. Act of May 26, 1790, c. 11, 1 Stat. 122; Rev. Stat. § 905. It thus appears that the judgment recovered in New York was made the foremost ground of the bill, was fully discussed and dis- tinctly passed upon by the majority of the Court of Appeals of Mary- land, and was the only subject of the dissenting opinion ; and that. CHAP. II.] HUNTINGTON V. ATTRILL. 693 the court, without considering whether the validity of the transfers impeached as fraudulent was to be governed by the law of New York or by the law of Maryland; and without a suggestion that those transfers, alleged to have been made by Attrill with intent to delay, hinder and defraud all his creditors, were not voidable by subsequent, as well as by existing creditors, or that they could not be avoided by the plaintiff, claiming under the judgment recovered by him against Attrill after those transfers were made; declined to maintain his right to do so by virtue of that judgment, simply because the judg- ment had, as the court held, been recovered in another State in an action for a penalty. The question whether due faith and credit were thereby denied to the judgment rendered in another State is a Federal question, of which this court has jurisdiction on this writ of error. Carpenter v. Strange, 141 U. S. 87, 103. In order to determine this question, it will be necessary, in the first place, to consider the true scope and meaning of the fundamental maxim of international law, stated by Chief Justice Marshall in the fewest possible words : "The courts of no country execute the penal laws of another." The Antelope, 10 Wheat. 66, 123. In interpreting this maxim, there is danger of being misled by the different shades of meaning allowed to the word "penal" in our language. In the municipal law of England and America, the words "penal" and "penalty" have been used in various senses. Strictly and primarily, they denote punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offence against its laws. United States v. Eeisinger, 128 U. S. 398, 402; United States V. Chouteau, 102 U. S. 603, 611. But they are also commonly used as including any extraordinary habiUty to which the law sub- jects a wrongdoer in favor of the person wronged, not limited to the damages suffered. They are so elastic in meaning as even to be famil- iarly applied to cases of private contracts, wholly independent ot statutes, as when we speak of the "penal sum" or "penalty of a °Penal laws, strictly and properly, are those imposing P^ishm^nt for an offence committed against the State, and which, by the Enghsh . and American constitutions, the executive of the State has the power to pardon. Statutes giving a private action against the wrongdoer are sometimes spoken of as penal in their nature, but in such cases it has ^en pointed out that neither the Uability imposed nor the '''^IZ':^tl^^tn^^, in the strict and primary sense is whether the wrong sought to be redressed is a wrong to the pubhc, Tr fwTonrto the^individual, according to the famihar classification of Bkckstone : " Wrongs are divisible into two sorts or species : pnmte t^f^nlvuUio wro^s. The former are an infringement or priva- 694 CEEDITOKS' EIGHTS — AGAINST DIKECTOKS. [CHAP. II. tion of the private or civil rights belonging to individuals, considered as individuals ; and are thereupon frequently termed civil injuries : the latter are a breach and violation of public rights and duties, which affect the whole community, considered as a community; and are distinguished by the harsher appellation of crimes and misdemeanors." 3 Bl. Com. 2. Laws have no force of themselves beyond the jurisdiction of the State which enacts them, and can have extra-territorial effect only by the comity of other States. The general rules of international comity upon this subject were well summed up, before the American Revolution, by Chief Justice De Grey, as reported by Sir William Blackstone : " Crimes are in their nature local, and the jurisdiction of crimes is local. And so as to the rights of real property, the subject being fixed and immovable. But personal injuries are of a transitory nature, and sequuntur forum rei." Rafael «;. Verelst, 2 W. Bl. 1055, 1058. Crimes and offences against the laws of any State can only be defined, prosecuted and pardoned by the sovereign authority of that State ; and the authorities, legislative, executive or judicial, of other States take no action with regard to them, except by way of extradition to surrender offenders to the State whose laws they have violated, and whose peace they have broken. Proceedings in rem to determine the title to land must necessarily be brought in the State within whose borders the land is situated, and whose courts and officers alone can put the party in possession. . . . Upon the question what are to be considered penal laws of one country, within the international rule which forbids such laws to be enforced in any other c'ountry, so much reliance was placed by each party in argument upon the opinion of this court in Wisconsin v. PeUcan Ins. Co., 127 U. S. 265, that it will be convenient to quote from that opinion the principal propositions there affirmed : » "The rule that the courts of no country execute the penal law of another apphes not only to prosecutions and sentences for crimes and misdemeanors, but to all suits in favor of the State for the recovery of pecuniary penalties for any violation of statutes for the protection of its revenue, or other municipal laws, and to all judgments for such penalties." p. 290. "The application of the rule to the courts of the several States and of the United States is not affected by the provisions of the Constitu- tion and of the act of Congress, by which the, judgments of the courts of any State are to have such faith and credit given to them in every court within the United States as they have by law or usage in the State in which they were rendered." p. 291. "The essential nature and real foundation of a cause of action are not changed by recovering judgment upon it ; and the technical rules, which regard the original claim as merged in the judgment, and the CHAP. 11.] HTJNTINGTON V. ATTRILL. 695 judgment as implying a promise by the defendant to pay it do not preclude a court, to which a judgment is presented for affirmative action, (while it cannot go behind the judgment for the purpose of examimng into the vaUdity of the claim,) from ascertaining whether the claun is really one of such a nature that the court is authorized to enforce it." pp. 292, 293. "The statute of Wisconsin, under which the State recovered in one of her own courts the judgment now and here sued on, was in the strictest sense a penal statute, imposing a penalty upon any insur- ance company of another State, doing business in the State of Wis- consin without having deposited with the proper officer of the State a full statement of its property and business during the previous year. The cause of action was not any private injury, but solely the offence committed against the State by violating her law. The prosecution was in the name of the State, and the whole penalty, when recovered, would accrue to the State." p. 299. Beyond doubt, (except in cases removed from a state court in obedience to an express act of Congress in order to protect rights under the Constitution and laws of the United States,) a Circuit Court of the United States cannot entertain jurisdiction of a suit in behalf of the State, or of the people thereof, to recover a penalty imposed by way of punishment for a violation of a statute of the State, "the courts of the United States," as observed by Mr. Justice Catron, deUvering a judgment of this court, "having no power to execute the penal laws of the individual States." Gwin v. Breedlove, 2 How. 29, 36, 37 ; Gwin v. Barton, 6 How. 7 ; Iowa v. Chicago &c. Railway, 37 Fed. Rep. 497 ; Ferguson v. Ross, 38 Fed. Rep. 161 ; Texas v. Day Land & Cattle Co., 41 Fed. Rep. 228 ; Dey v. Chicago &c. Railway, 45 Fed. Rep. 82. The question whether a statute of one State, which in some aspects may be called penal, is a penal law in the international sense, so that it cannot be enforced in the courts of another State, depends upon the question whether its purpose is to punish an offence against the public justice of the State, or to afford a private remedy to a person injured by the wrongful act. There could be no better illustration of this than the decision of this court in Dennick v. Railroad Co., 103 U. S. 11. In that case, it was held that, by virtue of a statute of New Jersey making a person or corporation, whose wrongful act, neglect or de- fault should cause the death of any person, Hable to an action by his administrator, for the benefit of his widow and next of kin, to recover damages for the pecuniary injury resulting to them from his death, such an action, where the neglect and the death took place in New Jersey, might, upon general principles of law, be maintained in a Circuit Court of the United States held in the State of New York by an administrator of the deceased, appointed in that State. 696 CEEDITOES' EIGHTS — AGAINST DIEECTOES. [CHAP. II. The provision of the statute of New York, now in question, making the officers of a corporation, who sign and record a false certificate of the amount of its capital stock, liable for all its debts, is in no sense a criminal or quasi criminal law. The statute, while it enables persons complying with its provisions to do business as a corporation, without being subject to the liabiUty of general partners, takes pains to secure and maintain a proper corporate fund for the payment of the corporate debts. With this aim, it makes the stockholders individually hable for the debts of the corporation imtilthe capital stock is paid in and a certificate of the payment made by the officers ; and makes the officers liable for any false and material representation in that cer- tificate. The individual liability of the stockholders takes the place of a corporate fund, until that fund has been duly created ; and the individual liabihty of the officers takes the place of the fund, in case their statement that it has been duly created is false. If the officers do not truly state and record the facts which exempt them from lia- bility, they are made Hable directly to every creditor of the com- pany, who by reason of their wrongful acts has not the security, for the payment of his debt out of the corporate property, on which he had a right to rely. As the statute imposes a burdensome Uabihty on the officers for their wrongful act, it may well be considered penal, in the sense that it should be strictly construed. But as it gives a civil remedy, at the private suit of the creditor only, and measured by the amount of his debt, it is as to him clearly remedial. To main- tain such a suit is not to administer a punishment imposed upon an offender against the State, but simply to enforce a private right secured under its laws to an individual. We can see no just ground, on principle, for holding such a statute to be a penal law, in the sense that it cannot be enforced in a foreign state or country. The decisions of the Court of Appeals of New York, so far as they have been brought to our notice, fall short of holding that the Uability imposed upon the officers of the corporation by such statutes is a punishment or penalty which cannot be enforced in another State. In Garrison v. Howe, the court held that the statute was so far penal that it must be construed strictly, and therefore the officers could not be charged with a debt of the corporation, which was neither contracted nor existing during a default in making the report reqxiired by the statute ; and Chief Justice Denio said : " If the statute were simply a remedial one, it might be said that the plaintiff's case was within its equity ; for the general object of the law doubtless was beside enforcing the duty of making reports for the benefit of all concerned, to enable parties proposing to deal with the corporation to see whether they could safely do so." "But the provision is highly penal, and the rules of law do not permit us to extend it by construction to cases not fairly within the language." 17 N. Y. 458, 465, 466. CHAP. II.] HUNTINGTON V. ATTRILL. 697. _ In Jones v. Barlow, it was accordingly held that oflScers were only liable for debts actually due, and for which a present right of action exists against the corporation; and the court said: "Although the obligation is wholly statutory, and adjudged to be a penalty, it is in substance, as it is in form, a remedy for the collection of the corporate debts. The act is penal as against the defaulting trustees, but is remedial in favor of creditors. The liability of defaulting trustees is measured by the obligation of the company, and a discharge of the obUgations of the company, or a release of the debt, bars the action against the trustees." 62 N. Y. 202, 205, 206. The other cases in that court, cited in the opinion of the Court of Appeals of Maryland in the present case, adjudged only the following points : Within the meaning of a statute of limitations appli- cable to private actions only, the action against an officer is not "upon a liability created by statute, other than a penalty or forfeiture," which would be barred in six years, but is barred in three years as "an action upon a statute for a penalty or forfeiture where action is given to the party aggrieved," because the provisions in question, said the court, "impose a penalty, or a liability in that nature." Merchants' Bank v. Bliss, 35 N. Y. 412, 417. A count against a person as an oflScer for not filing a report cannot be joined with one against him as a stockholder for debts contracted before a report is filed, that being "an action on contract." WUes v. Suydam, 64 N. Y. 173, 176. The action against an officer is an action ex delicto, and therefore does not survive against his personal representatives. Stokes V. Stickney, 96 N. Y. 323. In a later case than any of these, the court, in afiirming the very judgment now sued on, and adjudging the statute of 1875 to be con- stitutional and vahd, said that "while liability within the provision in question is in some sense penal in its character, it may have been intended for the protection of creditors of corporations created pursuant to that statute." Huntington v. Attrill, 118 N. Y. 365, 378. And where such an action against an officer went to judgment before the death of either party, it was decided that "the original wrong was merged in the judgment, and that thus became property with all the attributes of a judgment in an action ex contractu;" and that if, after a reversal of judgment for the plaintiff, both parties died, the plaintiff's representatives might maintain an appeal from the judgment of reversal, and have the defendant's representatives summoned in. Carr v. Eischer, 119 N. Y. 117, 124. We do not refer to these decisions as evidence m this case ot the law of New York, because in the courts of Maryland that law could only be proved as a fact, and was hardly open to proof on the de- murrer, and, if not proved in those courts, could not be taken judicial notice of by this court on this writ of error. Hanley v. Donoghue 116 U S 1 ; Chicago & Alton Railroad v. Wiggins Ferry, 119 U. S. 615 ; 698 CEEDITOKS' EIGHTS — AGAINST DIRECTORS. [CHAP. II. Wernwag v. Pawling, 5 Gill & Johns. 500, 508 ; Coates v. Mackey, 56 Maryland, 416, 419. Nor, for reasons to be stated presently, could those decisions, in any view, be regarded as concluding the courts of Maryland, or this court, upon the question whether this statute is a penal law in the international sense. But they are entitled to great consideration, because made by a court of high- authority, construing the terms of a statute with which it was peculiarly familiar ; and it is satisfactory to find no adjudication of that court inconsistent with the view which we take of the liability in question. That court and some others, indeed, have held that the liability of officers under such a statute is so far in the nature of a penalty, that the creditors of the corporation have no vested right therein, which cannot be taken away by a repeal of the statute before judg- ment in an action brought thereon. Victory Co. v. Beecher, 97 N. Y. 651, and 26 Hun, 48 ; Union Iron Co. v. Pierce, 4 Bissell, 327 ; Breitung v, Lindauer, 37 Michigan, 217, 230; Gregory v. German Bank, 3 Colorado, 332. But whether that is so, or whether, within the decision of this court in Hawthorne v. Calef, 2 Wall. 10^ 23, such a repeal so affects the security which the creditor had when his debt was contracted, as to impair the obligation of his contract with the corporation, is aside from the question now before us. The judgment rendered by a court of the State of New York, now in question, is not impugned for any want of jurisdiction in that court. The statute under- which that judgment was recovered was not, for the reasons already stated at length, a penal law in the inter-^ national sense. The faith and credit, force and effect, which that judgment had by law and usage in New York was to be conclusive evidence of a direct civil liability from the individual defendant to the individual plaintiff for a certain sum of money, and a debt of record, on which an action would he, as on any other civil judgment inter partes. The Court of Appeals of Maryland, therefore, in de- ciding this case against the plaintiff, upon the ground that the judg- ment was not one which it was bound in any manner to enforce, denied to the judgment the full faith, credit and effect to which it was en- titled under the Constitution and laws of the United States. Judgment reversed, and case remanded to the Court of Appeals of the State of Maryland for further proceedings not inconsistent with the opinion of this court} Mr. Chief Justice Fuller dissenting.^ 1 Contra: Derrickson ». Smith, 27 N. J. L. 166; Halseys. McLean, 12 Allen (Mass.) 438 ; First National Bank v. Price, 33 Md. 487. Cf. Mitchell v. Hotohkiss, 48 Conn. 9. See National Bank of Auburn ». Dillingham, 147 N. Y. 603 ; McClaine v. Rankin, 197 U. S. 154; Chemical National Bank i). Colwell, cited ante, in note 2, page 443. 2 Dissenting opinion omitted. C^AP. III.] STEPHENS V. FOX. 699 CHAPTER III. AS AGAINST STOCKHOLDERS. STEPHENS V, F0X.1 83 N. Y. 313. 1881. Appeal from a judgment of the General Term, affirming a judg- ment in favor of plaintiff, entered upon the report of a referee. This action was brought under the general railroad act by plaintiff, as assignee of a judgment against the New York and Oswego Midland Eailroad Company, against defendant, as a stockholder of said com- pany, to recover an amount alleged to be unpaid upon his stock. To prove the indebtedness of the corporation, the plaintiff offered in evidence the record of the judgment. This was objected to, and received imder objection. Rapallo, J. This action is based upon section 10 of the general railroad act (chap. 140 of the Laws of 1850, as amended by chap. 282 of the Laws of 1854), which provides, that "each stockholder of any company formed under this act shall be individually liable to the creditors of such company to an amount equal to the amount unpaid on the stock held by him, for all the debts and Uabilities of such com- pany, until the whole amount of the capital stock so held by him shall have been paid to the company." The only material question brought up on this appeal is whether, in an action against a stock- holder to enforce this habihty, a judgment recovered against the com- pany is competent evidence of the plaintiff's status as a creditor of the company and of the amount due him. The effect of section 10 is not to impose any penalty upon the stockholder, or any original UabiUty, but simply to confer upon the creditor of the corporation the right to pursue, for the satisfaction of his claim, the indebtedness of the stockholder to the corporation for his unpaid subscription to the capital stock. (Mills v. Stewart, 41 N. Y. 389.) The UabiUty of the stockholder is not created or en- larged by the statute. It rests upon his contract with the corporation, ' Facta restated ; portion of opinion omitted. 700 creditors' rights — against stockholders. [chap. III. and the creditor is simply subrogated to the claim of the corporation against its debtor, in case he avails himself of his right under the statute to pursue the stockholder as such debtor to the corporation. A payment by the stockholder to the creditor, upon a recovery by him under the statute, will discharge the stockholder pro tarda from his indebtedness to the corporation. The creditor thus claims through the corporation, and to entitle him to this statutory subro- gation or transfer, he need only show that he is a creditor.' If he shows this fact by evidence which is binding and conclusive against the corporation, such evidence should be competent against ,the stock- holder to establish the title of the creditor to succeed to the rights of the corporation. A judgnient against the corporation being the highest evidence against it, should be as effectual to pass its title to ' In Hatch n. Dana, 105 U. S. 205, a corporate creditor, having exhausted his remedy at law, proceeded in equity against Hatch and Williams, two stockholders, who, having each subscribed for $10,000 of stock, had paid thereon but thirty per cent. Decree that he recover from Hatch and Williams the sum of S9398.72, the amount due on his judgment, provided that not more than S7,000 with interest shall be col- lected from either Hatch or Williams. Decree afErmed. Stbong, J. said: "This bill is an ordinary creditor's bill, the sole object of which is to obtain payment of the complainant's judgment. It is true it is brought on behalf of the complainant and all other creditors of the corporation who might choose to come in and seek relief by it, contributing to the expense of the suit. But no other creditors came in; and it does not appear that there is any other creditor. . . . All the stockholders were not made defendants. . . . Appellants insist that a creditor of an insolvent cor- poration is not at liberty to proceed against one or more delinquent subscribers to recover the amount of his debt, without an account being taken of other indebted- ness, and without bringing in all the stockholders for contribution. . . . "The liability of a subscriber for the capital stock of a company is several, and not joint. By his subscription each becomes a several debtor to the company, as much so as if he had given his promissory note for the amount of his subscription.. At law, certainly, his subscription may be enforced against him without joinder of other subscribers ; and in equity his lialjility does not Cease to be several. A creditot's bill merely subrogates the creditor to the place of the debtor, and garnishes the debt due to the indebted corporation. It does not change the character of the debt attached or garnished. It may be that if the object of the bill is to wind up the affsiirs of this corporation, all the shareholders, at least so far as they can be ascertained, should be made parties, that complete justice may be done by equalizing the burdeng, and in order to prevent a multiplicity of suits. But this is no such case. The most that can be said is that the presence of all the stockholders might be convenient, not that it is. necessary. When the only object of a bill is to obtain payiuent of a judgment against a corporation out of its credits or intangible property, that is, out of its un- paid stock, there is not the same reason for requiring all the stockholders to be made defendants. In such a case no stockholder can be compelled to pay more than he owes. ... Complainant was under no obligation to make all the stockholders of the bank defendants in his bill. It was not his duty to marshal the assets of the bank, or to adjust the equities between the corporators. In all that he had no interest. The appellants may have had such an interest, and, if so, it was quite in their power to secure its protection. They might have moved for a receiver, or they might have filed a cross-bill, obtained a discovery of the other stockholders, brought them in, and enforced contribution from all who had not paid their stock subscriptions. Their equitable right to contribution is not yet lost." Accord: Ogilvie v. Knox Ins. Co., 22 How. (U. S.) 380. ("If A is bound to pay his debt to the corporation in order to satisfy its creditors, he cannot defend himself by pleading that these complainants might have got their satisfaction out of B as well.") ; Bartlett ». Drew, 67 N. Y. 587. (Same principle applies to any corporate assets or property in the hands of stockholders.) CHAP. III.] STEPHENS V. POX. 701 the fund in question as a deed or any other form of transfer. The cases of Miller v. White (50 N. Y. 137) and McMahon v. Macy (51 id. 155) depend upon an entirely different principle. In those cases the defendant was not pursued as a debtor to the corporation, or for any pre-existing liabihty of his own, but upon an original liabiUty created by the statute, and it ,was not in the power of the corporation to admit away his case, or suffer a recovery which should be binding upon him and create, as against him, a habiUty to which he was not previously subject. The present case depends upon the same prin- ciple as Hastings v. Drew (76 N. Y. 9), and other cases of actions by creditors against the debtors of their debtors, or for the recovery of assets of such debtor. In all such cases a judgment recovered by the plaintiff against his debtor is evidence of the right of the plaintiff to pursue the debtors or assets of the judgment debtor. The judgment should be affirmed. Judgment affirmed.^ > ' The liability created by the New York statute is a direct liability on the part of '^ v --^JNi: the stockholder to the creditor. Manufacturers' Commercial Co. «. Hecksoher, 144 e^-*. *->^^'^ A. D. 601, affirmed 203 N. Y. 560 ; Matter of Jassoy Co., 178 Fed. 515. The cause ^^ of action to recover unpaid stock subscriptions vests in the creditor and not in the Y\_ .S. /^'"'^ corporation. Hence the right does not pass to a trustee in bankruptcy. Ibid. Therein the liability differs from the liability imposed by the New Jersey statutes, which vests a cause of action, for unpaid stock subscriptions or what is legally tanta- mount thereto, in the corporation itself and not in its creditors. Easton Nat. Bank •J). American Brick &e. Co., 70 N. J. Eq. 722. And see same case in 70 N. J. Eq. 732, reported infra, page 718. Hence, upon bankruptcy the right passes to the trustee who alone can maintain action thereon. Clevenger v. Moore, 71 N. J. Eq. 148 ; Matter of Remington Auto. Co., 153 Fed. 345; Manufacturers' Commercial Co. v. Heckseher, supra; McDermott v. Woodhouse, 99 Atl. (N. J. Eq., 1916) 103. ("In a going concern, stock subscriptions are collectible by the company only. . . . Upon insolvency the incurred obligation passes to the receiver as a fund for the benefit of creditors.") In the absence of a contract, either express, or implied from the charter or statutes, between the corporation and the subscriber, whereby the latter is bound to pay the former the full par value of his stock, there can be no recovery upon a creditor's bill in respect to the amount unpaid by the stockholder upon his shares. For the creditor's claim would then be based, not in the right of the corporation, or by way of equitable subrogation to any right of the corporation against its stockholder, but in hostility to the arrangement between them. Hence, without more, a person to whom shares have been issued as a gratuity, has not, by accepting them, committed any wrong upon creditors, or made himself liable to pay the nominal face of the shares as upon a subscription or contract. Christensen v. Eno, 106 N. Y. 97. In the absence of proof in the domestic forum of such contract, the trustee in bankruptcy of a foreign cor- poration (organized in a state whose statutes do, in fact, create such statutory con- tract and render all contravening contracts, arrangements, or understandings not merely voidable, but void) may not recover in another state from the stockholder, unless the bankrupt corporation itself might have recovered. The common law as enunciated in Christensen v. Eno, supra, applies in such state of the proof. South- worth V. Morgan, 205 N. Y. 293. 702 creditors' rights — against stockholders. [chap. III. VAN TUYL, SUPERINTENDENT, v. SCHWAB, ET AL. 158 N. Y. Supp. 1133. 1916. Page, J. Section 196 of the Banking Law (Laws of 1909, ch. 10), which created the Uabihty sought to be enforced in this action, pro- vided that the stockholders of a banking corporation should be "indi- vidually responsible, equally and ratably for the then existing debts of the corporation" in an amount not exceeding the par value of the stock held by each. Section 19 of the same law gave the superintend- ent of banks the power under the conditions therein set forth to liquidate the affairs of the bank and the statute provided that he "shall collect all debts due and claims belonging to it, and upon order of the Supreme Court may sell or compound all bad or -doubtful debts and on like order may sell aU real and personal property of such corporation or individual banker on such terms as the court shall direct, and may, if necessary to pay the debts of such corporation, enforce the individual Hability of the stockholders." The facts entitling the plaintiff to maintain the action against each defendant are different. It must be shown that a demand has been made upon each and each has refused to pay the assessment levied by the superin- tendent, and it is in each case a separate demand and refusal, It must be shown that each defendant is a holder of shares in the cor- poration, which are separate and distinct shares in each case. The liability of each shareholder is several, not joint, and arises out of different facts from that of his fellow shareholder. It is clear, there- fore, that the causes of action against the various stockholders could not, in an action at law, be joined in one action (O'Brien v. Fitz Gerald, 143 N. Y. 377). But the stockholders are responsible "equally and ratably" to the extent of the par value of their stock- holdings. In order to apportion the liability among the stockholders equally and ratably, a marshaling of the assets of the corporation is necessary, after which the amount due from each stockholder may be tentatively determined. But in the event of any stockholder being shown to be insolvent, or if for any reason the judgment against him be uncoUectable, the deficiency thus created will have to be appor- tioned among the solvent stockholders until the liability of all has been exhausted to its full extent (Marshall v. Sherman, 148 N. Y. 9, 22; Van Tuyl v. Schwab, 165 App. Div. 412). To accomplish this result at law would, perhaps, involve repeated actions against the same stockholder before his liability was completely exhausted, to say nothing of separate actions, each involving a long accounting against each stockholder. To avoid a multipUcity of suits and accomplish a perfect relief in a single action, it is therefore necessary CHAP. III.] SAWYER V. HOAG. 7Q3 to resort to the equitable side of the court. For this reason T «m of opxmon that the motion to strike the case from thTspeS TerS Calendar was properly denied.^ fspeciai lerm SAWYER V. HOAG.2 17 WaU. (U. S.) 610. 1873. Sawybji, in 1865 subscribed for fifty shares of stock in the Lumber- man s ins Co. of Chicago, upon the understanding that only 15 ner cent would be required to be paid down in cash and that the remain- ing 85 per cent would be lent back to the subscriber, and a note taken therefor payable in five years, with 7 per cent, interest, secured by collateral satisfactory to the directors. The transaction was thus consummated. The transaction was regarded and treated by the company and by Sawyer as a loan by the company to hrni, and his stock was treated as fully paid for. At various times after the giving of the original note, the company reported to the authorities of the State of Illinois and of other States that its capital stock was fuUy paid. On the 8th and 9th day of October, a.d. 1871, a great fire in Chicago rendered the company insolvent ; and on the 25th of January, 1872 — being at that time a notorious fact, one well understood by the pubhc, and one which Sawyer had good reason to beheve, that the said company was insolvent and unable to pay its liabilities — Sawyer purchased of one Hayes a certificate of an adjusted loss for $5,000 against the company for 33 per cent, of its par value. In June, 1872, a petition in bankruptcy was filed against the ' Cf. Wetherbee v. Baker, 35 N. J. Eq. 501. (Proportion cannot be determined unless the corporation is before the court, and all its assets subjected to the suit and all its creditors determined.) In Hatch v. Dana, cited ante in note 1, page 700, Sthong, J. said: "The cases of Pollard ». Bailey (20 Wall. 520) and Terry v. Tubman (92 U. S. 156) are not in conflict with OgUvie v. Knox Insurance' Company. They arose under statutory provisions imposing upon the stockholders of banks a liability for the debts of the corporation, 'in proportion to their stock held therein.' It was this liability beyond the stock subscription which was sought to be enforced, and as it was only a propor- tional liability, its extent could be ascertained only when the obligation of the other shareholders was taken into consideration. Hence it was ruled that the proper mode of proceeding was by bill in equity in which an account of the debts and stock could be taken and a pro rata distribution could be made. Not a hint was given that the latter case was intended to be questioned or qualified. Indeed, Pollard v. Bailey and Terry v. Tubman have little analogy to it, or to the case we have now before us. They were both suits at law. The debt due by these appellants to the corporation of which they are members is a fixed and definite one, and it is neither more nor less because other debts may be due to the company from other stockholders." ' Facts restated. 704 CKEDITOKS' BIGHTS — AGAINST STOCKHOLDERS. [CHAP. III. company, and it having been adjudicated a bankrupt, Hoag was appointed its assignee. Among the effects of the company, which came into Hoag's hands as assignee, was the note of Sawyer for $4250, with the securities assigned as collateral. Hoag demanding of Sawyer payment of this note. Sawyer produced his certificate of adjusted loss for $5000 and insisted on setting it off against the demand ; asserting a right to do this under the twentieth section of the Bankrupt Act. Hoag refused to allow the set-off, and was about to sell the collat- eral securities in accordance with the power given to him. Here- upon Sawyer filed a bill in the court below to enforce the set-off; in which he alleged, among other things, that the note given by him to the insurance company was for money lent to him. The assignee, in his answer, denied that the note was for money lent, and averred that it was in fact for a balance due by Sawyer for his stock subscription, which had never been paid, and insisted that such balances constituted a trust fund for the benefit of all creditors of the insolvent corporation, which could not be made the subject of a set-off against an ordinary debt due by the company to one of its creditors. The court below decreed against the complainant, and from that decree he now appeals. Mr. Justice Miller delivered the opinion * of the court. The first and most important question to be decided in this case is whether the indebtedness of the appellant to the insurance com- pany is to be treated, for the purposes of this suit, as really based on a loan of money by the company to him, or as representing his unpaid stock subscription. The charter under which the company was organized authorized it to commence business upon a capital stock of $100,000, with ten thousand paid in, and the remainder secured by notes with mort- gages on real estate or otherwise. The transaction by which the appellant professes to have paid up his stock subscription is, shortly, this : He gave to the company his check for the full amount of his subscription, namely, $5000. He took the check of the company for $4250, being the amount of his subscription less the 15 per cent, required of each stockholder to be paid in cash, and he gave his note for the amount of the latter check, with good collateral security for its payment, with interest at 7 per cent, per annum. The appel- lant and the company, by its officers, agreed to call this latter trans- action a loan, and the check of the appellant payment in full of his stock ; and on the books of the company, and in all other respects as between themselves, it was treated as payment of the subscription and a loan of money. It is agreed that at this time the current rate of interest in Chicago was greater than 7 per cent., and it is not stated as a fact whether these checks were ever presented and paid at any I ' Portions omitted. CHAP. III.] SAWYER V. HOAG, 705 bank, or that any money was actually paid or received by either party in the transaction. It must, therefore, be treated as an agreement between the corporation, by its officers, on the one part, and the appellant, as a subscriber to the stock of the company, oh the other part, to convert the debt which the latter owed to the company for his stock into a debt for the loan of money, thereby extinguishing the stock debt. Undoubtedly this transaction, if nothing unfair was intended, was one which the parties could do effectually as far as they alone were concerned. Two private persons could thus change the nature of the indebtedness of one to the other if it was found to be mutually convenient to do so. And in any controversy which might or could grow out of the matter between the insurance company and the appel- lant we are not prepared to say that the company, as a corporate body, could deny that the stock was paid in full. And on this consideration one of the main arguments on which the appellant seeks to reverse the decree stands. He assumes that the assignee in bankruptcy is the representative alone of the cor- poration, and can assert no right which it could not have asserted. The weakness of the argument is in this assumption. The assignee is the representative of the creditors as well as the bankrupt. He is appointed by the creditors. The statute is full of authority to him to sue for and recover property, rights, and credits, where the bank- rupt could not have sustained the action, and to set aside as void transactions by which the bankrupt himself would be bound. All this, of course, is in the interest of the creditors of the bankrupt. Had the creditors of this insolvent corporation any right to look into and assail the transaction by which the appellant claims to have paid his stock subscription? Though it be a doctrine of modern date, we think it now well estabUshed that the capital stock of a corporation, especially its un- paid subscriptions, is a trust fund for the benefit of the general creditors of the corporation. And when we consider the rapid development of corporations as instrumentalities of the commercial and business world in the last few years, with the corresponding necessity of adapting legal principles to the new and varying exi- gencies of this business, it is no soKd objection to such a principle that it is modem, for the occasion for it could not sooner have arisen. • u- The principle is fully asserted in two recent cases m this court, namely, Burke v. Smith,i and in New Albany v. Burke} Both these cases turned upon the doctrine we have stated, and upon the necessary inference from that doctrine, that the governmg officers of a corporation cannot, by agreement or other transaction with the stockholder, release the latter from his obligation to pay, to the 1 16 Wallace, 390. ' U Id. 96. 706 CKEDITOKS' RIGHTS — AGAINST STOCKHOLDERS. [CHAP. III. prejudice of its creditors, except by fair and honest dealing and for a, valuable consideration.^ In the case before us the assignee of the bankrupt, in the interest of the creditors, has a right to inquire into this conventional payment of his stock by one of the shareholders of the company ; and on that inquiry, we are of opinion that, as to these creditors, there was no valid payment of his stock by the appellant. We do not base this upon the ground that no money actually passed between the partiefs. It would have been just the same if, agreeing beforehand to turn the stock debt into a loan, the appellant had brought the money with him, paid it, taken a receipt for it, and carried it away with him. This would be precisely the equivalent of the exchange of checks between the parties. It is the intent and purpose of the transaction which forbids it to be treated as vahd payment. It is the change of the character of the debt from one of a stock subscription unpaid to that of a loan of money. The debt ceases by this operation, if effec- tual, to be the trust fund to which creditors can look, and becomes ordinary assets, with which the directors may deal as they choose. And this was precisely what was designed by the parties. It divested the claim against the stockholder of its character of a trust fund, and enabled both him and the directors to deal with it freed from that charge. There are three or four of these cases now before us in which precisely the same thing was done by other insurance companies organized in Chicago, and we have no doubt it was done by this company in regard to all their stockholders. It was, therefore, a regular system of operations to the injury of the creditor, beneficial alone to the stockholder and the corporation. We do not beheve we characterize it too strongly when we say that it was a fraud upon the public who were expected to deal with them. The result of it was that the capital stock of the company was neither paid up in actual money, nor did it exist in the form of deferred instalments properly secured. It is said by the appellant's counsel that conceding this, it is still a debt due by him to the corporation at the time that he became the owner of the debt due by the corporation to Hayes, and, therefore, the proper subject of set-off under the twentieth section of the Bankrupt Act. That section is as follows : "In all cases of mutual debts or mutual credits between the parties, the account between them shall be stated, and one debt set off against the other, and the balance only shall be allowed or paid, but no set-off shall be allowed of a claim in its nature not provable against the estate : Provided, that no set-off shall be allowed in favor of any debtor to the bankrupt of a claim purchased by or transferred to him after the filing of the petition." ' Cf. Fitzpatrick ». McGregor, ante, page 266, and notes. See note 1, page 389,, ante; also Upton ». Englehart, arde, page 389, and notes. CHAP. III.] SAWYEK V. HOAG. 707 This section was not intended to enlarge the doctrine of set-off, or to enable a party to make a set-off in cases where the principles of legal or equitable set-off did not previously authorize it. The debts must be mutual ; must be in the same right. The case before us is not of that character. The debt which the appellant owed for his stock was a trust fund devoted to the pay- ment of all the creditors of the company. As soon as the company became insolvent, and this fact became known to the appellant, the right of set-off for an ordinary debt to its full amount ceased.' It became a fund belonging equally in equity to all the creditors, and could not be approriated by the debtor to the exclusive payment of his own claim.i It is unnecessary to go into the inquiry whether this claim was acquired before the commission of an act of bankruptcy by the company, or the effect of the bankruptcy proceeding. The result would be the same if the corporation was in the process of liquidation in the hands of a trustee or under other legal proceedings. It would still remain true that the unpaid stock was a trust fund for all the creditors, which could not be applied exclusively to the payment of one claim, though held by the stockholder who owed that amount on his subscription. Nor do we think the relation of the appellant in this case to the corporation is without weight in the solution of the question before us. It is very true, that by the power of the legislature there is created in all acts of incorporation a legal entity which can contract with its shareholders in the ordinary transactions of business as with other persons. It can buy of them, sell to them, make loans to them, and in insurance companies, make contracts of insurance with them, in all of which both parties are bound by the ordinary laws of contract. The stockholder is also reUeved from personal hability for the debts of the company. But after all, this artificial body is but the represen- tative of its stockholders, and exists mainly for their benefit, and is governed and controlled by them through the oflJcers whom they ^lect. And the interest and power of legal control of each shareholder is in exact proportion to the amount of his stock. It is,- therefore, but just that when the interest of the public, or of strangers deahng with this corporation is to be affected by any transaction between the stockholders who own the corporation and the corporation itself, such transaction should be subject to a rigid scrutiny, and if found to be infected with anything unfair towards such third person, cal- culated to injure him, or designed intentionally and inequitably to screen the stockholder from loss at the expense of the general creditor, it should be disregarded or annulled so far as it may inequitably affect him.'' 1 See United States Brick Co. v. Reading Co., 228 Pa. 81. 2 Lawrence v. Nelson, 21 New York, 158. 708 creditors' EIGHTS — AGAINST STOCKHOLDERS. [CHAP. III. These principles require the afiBjmation of the decree in the pres- ent case, and it is accordingly Affirmed.^ 1 The "trust fund" doctrine was held inapplicable to the situation presented by the record in Southworth v. Morgan, cited ante in note 1, page 701. Not only was there no statutory or charter provision proved to support the alleged liability of the defendant, but the express agreement between the corporation and defendant was that defendant should pay twenty-five per cent, of the nominal value of his shares and no more. It was contended that the plaintiff trustee, as representative of the creditors, had the right to compel the payment of the unpaid seventy-five per cent. ; that the trust fund doctrine engrafted by legal implication, a paramount undertaking by the stockholder to pay, so far as creditors were concerned, $100 per share or so much thereof as necessary to satisfy their demands ; that this obligation, begotten of the law, was to be substituted for and nullified the expressed stipulation that S25. was the whole sum to be paid on each share. Collins, J. said: *'That doctrine has not such potency. Its peculiar vigor is, that contrary to the common law of England, it secures to the creditors of insolvent corporations or their representatives the right of enforcing subscriptions for shares of which the corporation has deprived itself by release or defeasance. It declares that the capital or capital stock of a corporation is a substitute for the personal liability which subsists in individual or partnership undertakings and is a fund set apart as a security for the payment of the corporate debts. The capital or capital stock which it thus segregates is not the capital stock authorized or named in the charter of the corporation. If it were the members would be bound by the doctrine to contribute on account of it the sum within its named value needed to pay the debts of the insolvent corporation. The statement in the charter does not create a security- for the creditors. It creates authorized or potential capital stock and shares which, transferred into actual shares through the acquisition of subscribing members and their payments, produces the money or property which, put into a single corporate fund is the actual capital or capital stock on which the business is undertaken and the assets or fund contemplated by the trust fund doctrine which the directors or stockholders may not lawfully diminish by appropriating or squandering it or giving it away. And as there is not a fund or security in the nominal or potential shares, there is none in the excess of the nominal value over the subscribed value of the shares. The subscription agreements, as they are enforceable through their express provisions or implication or statutory conditions, are the sources and the measure of the duty of the subscribers. (Christensen v. Eno, 106 N. Y. 97 ; Bur- rall V. Bushwick Railroad Co., 75 N. Y. 211.) The doctrine further declares that unpaid subscriptions are a part of the capital and that a subscriber cannot be dis- charged to the injury of creditors by arrangement or device to which creditors do not give their assent and by which he is to pay less than his subscription. (Stoddard D. Lum, 159 N. Y. 265 ; Ward v. City Trust Co., 192 N. Y. 61 ; Hazard v. Wight, 201 N. Y. 399.) The doctrine does not create or nullify subscriptions. It lays hold of the assets of an insolvent corporation, and in doing that it compels subscribers to fulfill their legal obligations and perform their legal duties; but it does not beget those duties or obligations ; it does not make unlawful or invalid a subscription which, apart from it, was valid and lawful. The question with it is, has the subscriber fully performed the subscription agreement as it in fact and in law exists, and an affirmative finding renders it inapplicable and inoperative. In the case at bar there were not statutory conditions upon which the shares might be owned. . The agreement between the defendant and the corporation expressed with completeness the obligation and liability of the defendant for his shares. He has fulfilled the obligation and thereby destroyed the liability. The trust fund doctrine is inapplicable and the findings of fact do not constitute a cause of action." In Gallagher v. Asphalt Co., 65 N. J. Eq. 258, Stevenson, V. C. said: "The doc- trine is established in a series of federal decisions that the assets of an insolvent cor- poration constitute a trust fund for creditors. This doctrine was announced a great many years ago by Judge Story. It has been very much criticized. Professor Pomeroy refers to the doctrine as one based upon analogy and metaphor. 2 Pom. Eq. § 1046. But this theory that the ordinary general assets of an insolvent corporation are a trust fund for creditors has been worked out in the federal courts so as to establish a' somewhat unique branch of equity jurisdiction. ... A general creditor, who,' pre- sumably, would be regarded as a beneficiary of the trust fund, has no power to come CHAP. III.] SAWYER V. HOAG. 709 Mr. Justice Hunt dissented, holding that the transaction was a loan by the company to the appellant. into a federal court with a bill in order to have the trust. fund — the assets of the insolvent corporation of which he is a beneficiary — administered for his protection. He has no power to file a bill to prevent the corporation from dissipating the assets and to get a trustee who will act for him and his oo-beneficiaries installed and placed in the possession of the trust fund. The doctrine that the assets are a trust fund is not sufficiently potent to enable the beneficiary to get such relief. But he can come into court as a creditor who has exhausted his remedy at law, alleging his judg- ment, his execution, the return of the execution unsatisfied, and thereupon, through a creditors' bill, the court will, of course, take cognizance of his grievance and seize the assets of the corporation. But here the peculiarity of the doctrine as worked out comes in, that although that sort of a creditors' suit is generally maintainable for the benefit of the complainant, and the common allegation in the complainant's bill that he files his bill for the benefit of all other creditors, is mere surplusage, as Vice-Chanoellor Pitney recently pointed out — the case is lauch v. de Socarras, 11 Dick. Ch. Rep. 524 [Contra: Handley v. Stutz, 137 U. S. 366 ("Such a bill can only be maintained by one or. more creditors in behalf of all, and not by any one creditor to secure payment of ' his own debt to the exclusion of others.")] — I say although, according to the equitable theories that we recognize here a creditor coming into a court of equity with such a bill would act for himself, and would be protected and preferred by the decree of the court, such is not the case as this trust fund doctrine has been wrought out in the federal courts. The court undertakes to seize and sequestrate the assets of the cor- poration, but it does it then for the benefit of all the creditors of the corporation. Mr. Justice Brewer points out this peculiar feature — or indicates it — in a recent opinion in the United States supreme court. [The learned Vice-Chancellor, it is conceived, is referring to HoUins «. Brierfield Coal & Iron Co., reported ante, page 670.] The whole efficiency of the doctrine that these assets are a trust fund for creditors is found only when a creditor has come in, not directly as a beneficiary of the trust fund, but in a different capacity, in the guise of a creditor who has exhausted his remedy at law and who is seeking to get a preferential payment — for that is what it amounts to — getting a sequestration of the assets for the payment of his debt, to the exclusion of anybody else. But right at this point the federal court stops the creditor and says: 'You have now qualified yourself to come into court in one capacity, but you are confronted by the trust fund doctrine, and while you can get some relief, the same relief, equal relief, will be accorded to all your co-beneficiaries — all the creditors.' "One of the most interesting features of this application of the theory that, unlike the case of a natural person, when a corporation becomes insolvent, immediately some sort of a trust is fastened upon its assets for the equal benefit of its creditors, is exhibited in the essential basis of this novel suit, which recognizes and enforces the so-called trust. The complainant cannot come into court as a beneficiary, as I have heretofore remarked ; he must come in as a judgment creditor who has exhausted his own personal remedy at law. If by judgment, execution and levy upon all these assets of the insolvent corporation — this so-called trust fund — he -can satisfy his debt in preference to all his oo-beneficiaries, and even to the exclusion of them all, then he is turned out of the court of equity — the court of equity has no jurisdiction. The court of equity says to him: 'You cannot have this trust fund administered for the equal benefit of yourself and your co-beneficiaries because you have not proceeded at law to absorb all that part of the trust fund which is leviable and appropriate to it yourself, as you might have done by a judgment and execution. ■ ■ , ^t "■So ar as I am fware, we do not recognize in New Jersey any ongmal pnnciple of equity jurisprudence which fastens upon the assets of a corporation, upon its becommg insdvent"Sta«i, a trust for the equal benefit of all the creditors o tl>e -3-*^°- We do have, however, certain statutes which provide in certain instances and under ^rt^n conditions for the .qual distribution of the assets "^XZ: " tat'Z res7t and prevent creditors of the corporation from obtaining preferences btat this result h^sbeeTwhoUy reached by legislation -hich brings about a condrtion of fti^^^^^^^^^ relation of the assets of the insolvent corporation to its «^f \t°^^«/\"'';^^t7„*^7°°^ and analogy, as Professor Pomeroy says, may be called a trust ^ *™J* °°^^ "°* nroduce however, the equality among creditors as beneficiaries of the trust. The statuto^ pr^vTsLn 'produces equality from which a result is reached which is m effect the same as if a trust existed.'! ,710' creditors' rights — against stockholders, [chap. hi. HOSPES V. NORTHWESTERN MF'G. & CAR CO. 48 Minn. 174 ; 15 L. R. A. 470. 1892. Mitchell, J.' This appeal is from an order overruling a demurrer to the so-called "supplemental complaint" of the Minnesota Thresher Manufacturing Company. The Northwestern Manufacturing & Car Company was a manufacturing corporation organized in May, 1882. Upon the complaint of a judgment creditor (Hospes & Co.), after return of execution unsatisfied, judgment was rendered in May, 1884, sequestrating all its property, things in action, and effects, and appointing a receiver of the same. This receivership still con- tinues, the affairs of the corporation being not yet fully administered ; but it appears that it is hopelessly insolvent, and that all the assets that have come into the hands of the receiver will not be sufficient to pay any considerable part of the debts. The Minnesota Thresher Manufacturing Company, a corporation organized in November, 1884, as creditor, became a party to the seques- tration proceeding, and proved its claims against the insolvent corpipration. In October, 1889, in behalf of itself and all other creditors who have exhibited their claims, it filed this complaint against certain stockholders (these appellants) of the car company. The object is to recover from these stockholders the amount of certain stock held by them, but alleged never to have been paid for. There is nothing in this practice inconsistent with what was decided in Minnesota Thresher Mfg. Co. v. Langdon, 44 Minn. 37 (46 N. W. Rep. 310.) The Complaint is not the commencement of an independent action by creditors in their own behalf, antagonistic to the rights of the receiver, but is filed in the sequestration proceeding itself, and in aid of it. The principal question in the case is whether the complaint states facts Showing that the thresher company, as creditor, is entitled to the relief prayed for; or, in other words, states a cause of action. Briefly stated, the allegations of the complaint are that on May 10, 1882, Seymour, Sabin & Co. owned property of the value of several milhon dollars, and a business then supposed to be profitable. That, in order to continue and enlarge this business, the parties interested in Seymour, Sabin & Co., with others, organized the car company, to which was sold the greater part of the assets of Seymour, Sabin & Co. at a valuation of $2,267,000, in payment of which there were issued to Sejmaour, Sabin & Co. shares of the preferred stock of the car company of the par value of $2,267,000, it being then and there agreed by both parties that this stock was in full payment of the ' Portions of opinion omitted. CHAP. III.] HOSPES V. NOHTHWESTEEN MF'g. & CAR CO. 711 property thus purchased. It is further alleged that the stockholders of Seymour, Sabin & Co., and the other persons who had agreed to become stockholders in the car company, were then desirous of issu- ing to themselves, and obtaining for their own benefit, a large amount of common stock of the car company, "without paying therefor, and without incurring any liability thereon or to pay therefor;" and for that purpose, and "in order to evade and set at naught the laws of this state," they caused Seymour, Sabin & Co. to subscribe for and agree to take common stock of the car company of the par value of $1,500,000. That Seymour, Sabin & Co. thereupon sub- scribed for that amount of the common stock, but never paid there- for any consideration whatever, either in money or property. That thereafter these persons caused this stock to be issued to D. M. Sabin as trustee, to be by him distributed among them. That it was so distributed without receipt by him or the car company, from any one, of any consideration whatever, but was given by the car company and received by these parties entirely "gratuitously." The car company was, at this time, free from debt, but afterwards became indebted to various persons for about $3,000,000. The "thresher company, incorporated after the insolvency and receiver- ship of the car company, for the purpose of securing possession of its assets, property, and business, and therewith engaging in and con- tinuing the same kind of manufacturing, prior to October 27, 1887, purchased and became the owner of unsecured claims against the car company, "bona fide, and for a valuable consideration," to the aggregate amount of $1,703,000. As creditor, standing on the pur- chase of these debts, which were contracted after the issue of this "bonus" stock, the thresher company files this complaint to recover the par value of the stock as never having been paid for. The com- plaint does not allege what the consideration of these debts was, nor to whom originally owing, nor what the intervener paid for them, nor whether any of the original creditors trusted the car company on the faith of the bonus stock having been paid for. Neither does it allege that either the thresher company or its assignors were ignorant of the bonus issue of stock, nor that they or any of them were deceived or damaged in fact by such issue, nor that the bonus stock was of any value. Neither is there any traversable allegation of any actual fraud or intent to deceive or injure creditors. A desire to get some- thing without paying for it, and actually getting it, is not fraudulent or unlawful if the donor consents, and no one else is injured by it ; and the general allegation that it was done "in order to evade and set at naught the laws of the state" of itself amounts to nothmg but a mere conclusion of law. As a creditors' bill, in the ordmary sense, the complaint is manifestly insufiicient. The thresher company, however, plants itself upon the so-called "trust-fund" doctrine, that the capital stock of a corporation is a trust fund for the payment ot 712 CEEDITOHS' RIGHTS — AGAINST STOCKHOLDERS. [CHAP. III. its debts; its contention being that such a "bonus" issue of stock creates, in case of the subsequent insolvency of the corporation, a, liability on part of the stockholder in favor of creditors to pay for it, notwithstanding his contract with the corporation to the contrary. This "trust-fund" doctrine, commonly called the "American doc- trine," has given rise to much confusion of ideas as to its real mean- , ing, and much conflict of decision in its application. To such an extent has this been the case that many have questioned the accuracy of the phrase, as well as doubted the necessity or expediency of in- venting any such doctrine. While a convenient phrase to express a certain general idea, it is not sufficiently precise or accurate to con- stitute a safe foundation upon which to build a system of legal rules. The doctrine was invented by Justice Story in Wood v. Dummer, S Mason, 308, which called for no such invention, the fact in that case being that a bank divided up two thirds of its capital among its stock- holders without providing funds sufficient to pay its outstanding bill holders. Upon old and famihar principles this was a fraud on cred- itors. Evidently all that the eminent jurist meant by the doctrine was that corporate property must be first appropriated to the pay- ment of the debts of the company before there can be any distribution of it among stockholders, — a proposition that is sound upon the plainest principles of common honesty. The expression used in Wood V. Dummer has, however, been taken up as a new discovery, which furnished a solution of every question on the subject. The phrase that "the capital of a corporation constitutes a trust fund for the benefit of creditors" is misleading. Corporate property is not held in trust, in any proper sense of the term. A trust implies two estates or interests, — one equitable and one legal ; . one person, as trustee, holding the legal title, while another, as- the cestui que trust, has the beneficial interest. Absolute control and power of disposition are inconsistent with the idea of a trust. The capital of a corporation is its property. It has the whole beneficial interest in it, as well as the legal title. It may use the income and profits of it, and sell and ■dispose of it, the same as a natural person. It is a trustee for its. creditors in the same sense and to the same extent as a natural person, but no further. This is well illustrated and clearly announced in the case of Graham v. La Crosse & M. R. Co., 102 U. S. 148.' There is also much confusion in regard to what the "trust-fund" doctrine applies. Some cases seem to hold that unpaid subscribed capital is a trust fund, while other assets are not, — that is, so long: as the subscription is unpaid, it is held in trust by the corporation, but, when once paid in, it ceases to be a trust fund ; while other cases hold that, paid or unpaid, it is all a trust fund. The first seems to to be the rule laid down in Sawyer v. Hoag, 17 Wall. 610, in which, the "trust-fund" doctrine was first squarely announced by that court 1 See page 673, ante. CHAP. III.] HOSPES V. NORTHWESTERN MF'G. & CAR CO. 713 with all the vigor and force characteristic of the great jurist who wrote the opinion. In that case a stockholder in an insurance company had given his note, as the coiu-t found the fact to be, for 85 per cent, of Ms subscription to the stock of the company. After the company had become bankrupt, and the stockholder knew the fact, he bought up a claim agaiust the company for one third its face, and in a suit ^3y the assignee in bankruptcy on his note set up this claim as an •offset. That this would have been a fraud on the bankrupt act, and &t least a moral fraud on policy holders, is quite apparent without invoking the "trust-fund" doctrine; and, if the note for unpaid stock was a trust fund, there could have been no offset, whether the company was solvent or insolvent. In -the opinion it is said that, if the subscription had been paid by the note or otherwise, the note ceased thereby to be a trust fund to which creditors can look, and iDCComes ordinary assets, with which directors may deal as they choose. But in Upton v. Tribilcock, 91 U. S. 45, it is stated: "The capital paid in and promised to be paid in is a fund which the trustees cannot squander or give away." While in Sanger v. Upton, Id. 56, it is said : ^'When debts are incurred a contract arises with the creditors that it [the capital] shall not be withdrawn or applied otherwise than upon their demands until such demands are satisfied." And in the same connection it is distinctly stated that there is no difference between assets paid in and subscriptions; that "unpaid stock is as much a part of this pledge and as much a part of the assets of the company as the cash which has been paid in upon it. Creditors have the same light to look to it as to anything else, and the same right to insist upon its payment as upon the payment of any other debt due to the company. As regards creditors, there is no distinction between such a •demand and any other asset which may form a part of the property and effects of the corporation." It would seem clear that this is the correct statement of the law. The capital (not the mere share certificates) means all the assets, however invested. If a subscriber gives his note for his stock, that note is no more and no less a trust fund than the money would have been if he had paid cash down. Capital cannot change from a trust to not a trust by a mere change of form. It is either all a trust or all not a trust, and the "trust-fund" rule, Tvhatever that be, must apply to all ahke, and in the same way. If the assets of a corporation are given back to stockholders, the result is the same as if the shares had been issued wholly or partly as a bonus. The latter is merely a short cut to the same result. So with dividends paid out of the capital, voluntary conveyances, stock paid in over- valued property ; all are forms of one and the same thing, all reaching the same result, (a disposition of corporate assets,) which may or may not be a fraud on creditors, depending on circumstances. This much beiag once settled, the solution of the question when a sub- sequent creditor can insist on payment of stock issued as paid up, 714 CEEDITOKS' RIGHTS — AGAINST STOCKHOLDEES. [CHAP. III. but not in fact paid for, or not paid for at par, becomes, as we shall presently see, comparatively simple. Another proposition which we think must be sound is that creditors cannot recover on the ground of contract when the corporation could not. Their right to recover in such cases must rest on the ground that the acts of the stockholders with reference to the corporate capital constitutes a fraud on their rights. We have here a case where the contract between the corporation and the takers of the shares was specific that the shares should not be paid for. Therefore, unUke many of the cases cited, there is no ground for implying a prom- ise to pay for them. The parties have explicitly agreed that there shall be no such implication, by agreeing that the stock shall not be paid for. In such a case the creditors undoubtedly may have rights superior to the corporation, but these rights cannot rest on the im- plication that the shareholder agreed to do something directly con- trary to his real agreement, but must be based on tort or fraud, actual or presumed. In England, since the act of 1867, there is an impHed contract created by statute that " every share in any company shall be deemed and be taken to have been issued and to be held subject to the payment of the whole amount thereof in cash." This statu- tory contract makes every contrary contract void. We have no such statute; and, even if the law of 1873, under which the car company was organized, impliedly forbids the issue of stock not paid for, the result might be that such issue would be void as ultra vires, and might be canceled, but such a prohibition would not of itself be sufficient to create an implied contract, contrary to the actual one, that the holder should pay for his stock. It is well settled that an equity in favor of a creditor does not arise absolutely and in every case to have the holder of "bonus" stock pay for it contrary to his actual contract with the corporation. Thus no such equity exists in favor of one whose debt was contracted prior to the issue, since he could not have trusted the company upon the faith of such stock. First Nat. Bank v. Gustin, etc.. Mining Co., 42 Minn. 327 (44 N. W. Rep. 198) ; Coit v. Gold Amalgamating Co., 119 U. S. 343 (7 Sup. Ct. Rep. 231) ; Handley v. Stutz, 139 U. S. 417, 435 (11 Sup. Ct. Rep. 530). It does not exist in favor of a subse- quent creditor who has dealt with the corporation with full knowledge of the arrangement by which the "bonus" stock was issued, for a man cannot be defrauded by that which he knows when he acts. First Nat. Bank v. Gustin, etc.. Mining Co., supra. It has also been held not to exist where stock has been issued and turned out at its full market value to pay corporate debts. Clark v. Bever, 139 U. S. 96.^ The same has been held to be the case where an active 1 In this case, a railroad being unable to pay the claim of the construction company, delivered to it 3500 shares of its stock, worth nothing in the market, at 20 cents ola the dollar, which was accepted in full satisfaction of the debt. In answer to the claim of CHAP, in.] HOSPES V. NORTHWESTERN Mf'g. & CAR CO. 715 corporation, whose original capital has been impaired, for the purpose of recuperating itself issues new stock, and sells it on the market for the best price obtainable, but for less than par (Handley v. Stutz supra),^ although it is difficult to perceive, in the absence of a statute authorizing such a thing, (of which every one deahng with the corporations is bound to take notice,) any difference between the original stock of a new corporation and additional stock issued by a 'going concern." It is difficult, if not impossible, to explain or rec- oncile these cases upon the "trust-fund" doctrine, or, in the light of them, to predicate the liability of the stockholder upon that doc- trine. But by putting it upon the ground of fraud, and applying the old and famiUar rules of law on that subject to the pecuUar nature of a corporation and the relation which its stockholders bear to it and to the pubHc, we have at once rational and logical ground on which to stand. The capital of a corporation is the basis of its credit. It is a substitute for the individual liability of those who own its stock. the judgment creditor, Haklan, J. said : "Of course, under this view, every one having claims against the railway company — even laborers and employes — who could get nothing except stock in payment of their demands, became bound, by accepting stock at its market value in payment, to account to unsatisfied judgment creditors for its full face value, although, at the time it was sought to make them liable, the corporation had ceased to exist, or its stock had remained, as it was when taken, absolutely worth- less. ... To say that a public corporation, charged with public duties, may not relieve itself from embarrassment by paying its debt in stock at its real value — there being no statute forbidding such a transaction — without subjecting the creditor, surrendering his debt, to the liability attaching to stockholders who have agreed, expressly or impliedly, to pay the face value of stock subscribed by them, is, in effect, . to compel them either to suspend operations the moment they become unable to pay their current debts, or to borrow money secured by mortgage upon the corporate property." See also Fogg v. Blair, 139 U. S. 118; Stein v. Howard, 65 Cal. 616. ' In this case. Brown, J. said: "To say that a corporation may not, under the circumstances above indicated, put its stock upon the market and sell it to the highest bidder, is practically to declare that a corporation can never increase its capital by a sale of shares, if the original stock has fallen below par. The wholesome doctrine, BO many times enforced by this court, that the capital stock of an insolvent corporation is a trust fund for the payment of its debts, rests upon the idea that the creditors have a right to rely upon the fact that the subscribers to such stock have put into the treasury of the corporation, in some form, the amount represented by it ; but it does not follow that every creditor has a right to trace each share of stock issued t)y such corporation, and inquire whether its holder, or the person of whom he purchased, has paid its par value for it. It frequently happens that corporations, as well as individuals, find it necessary to increase their capital in order to raise money to prose- cute their business successfully, and one of the most frequent methods resorted to is that of issuing new shares of stock and putting them upon thfe market for the best price that can be obtained ; and so long as the transaction is bona fide, and not a mere cover for 'watering' the stock, and the consideration obtained represents the actual value of such stock, the courts have shown no disposition to disturb it. Of course no one would take stock so issued at a greater price than the original stock could be pur- chased for, ^ad hence the ability to negotiate the stock and to raise the money must depend upon the fact whether the purchaser shall or shall not be called upon to respond for its par value. While, as before observed, the precise question has never been raised in this court, there are numerous decisions to the effect that the general rule that holders of stock, in favor of creditors, must respond for its par value, is, subject to exceptions where the transaction is not a mere cover for an illegal increase." See Article by Victor Morawetz cited in note 1, page 410, ante. 716 CREDITOES' EIGHTS AGAINST STOCKHOLDERS. [CHAP. HI. People deal with it and give it credit on the faith of it. They have a right to assume that it has paid-in capital to the amount which it represents itself as having ; and if they give it credit on the faith of that representation, and if the representation is false, it is a fraud upon them ; and, in case the corporation becomes insolvent, the law, upon the plainest principles of common justice, says to the delinquent stockholder, "Make that representation good by paying for your stock." It certainly cannot require the invention of any new dodtrine in order to enforce so famihar a rule of equity. It is the misrepresen- tation of fact in stating the amount of capital to be greater than it really is that is the true basis of the liability of the stockholder in such cases ; and it follows that it is only those creditors who have relied, or who can fairly be presumed to have relied, upon the pro- fessed amount of capital, in whose favor the law will recognize and enforce an equity against the holders of "bonus" stock. This furnishes a rational and uniform rule,, to which familiar principles are easily applied, and which frees the subject from niany of the difficulties and apparent inconsistencies into which the "trust-fund" doctrine has involved it ; and we think that, even when the trust- fund doctrine has been invoked, the decision in almost every well- considered case is readily referable to such a rule. It is urged, however, that, if fraud be the basis of the stockholders' hability in such cases, the creditor should affirmatively allege that he beUeved that the bonus stock had been paid for, and represented so much actual capital, and that he gave credit to the corporation on the faith of it ; and it is also argued that, while there may be a presump- tion to that effect in the case of a subsequent creditor, this is a mere presumption of fact, and that in pleadings no presumptions of fact are indulged in. This position is very plausible, and at first sight would seem to have much force ; but we think it is unsound. Cer- tainly any such rule of pleading or proof would work very inequitably in practice. Inasmuch as the capital of a corporation is the basis of its, credit, its financial standing and reputation in the community has its source in, and is founded upon, the amount of its professed and supposed capital, and every one who deals with it does so upon the faith of that standing and reputation, although, as a matter of fact, he may have no personal knowledge of the amount of its professed capital, and in a majority of cases knows nothing about the shares of stock held by any particular stockholder, or, if so, what was paid for them. Hence, in a suit by such creditor against the holders of "bonus" stock, he could not truthMly allege, and could npt affirma- tively prove, that he believed that the defendants' stock hactljeen paid for, and that he gave the corporation credit on the faith of it, although, as a matter of fact, he actually gave the credit on the faith of the financial standing of the corporation, which was based upon its appar- ent and professed amount of capital. The misrepresentation as to CHAP. III.] HOSPES 1). NORTHWESTERN MF'g. & CAR CO. 717 the amount of capital would operate as a fraud on such a creditor as fully and effectually as if he had personal knowledge of the existence of the defendants' stock, and believed it to have been paid for when he gave the credit. For this reason, among others, we think that all that it is necessary to allege or prove in that regard is that the plain- tiff is a subsequent creditor ; i and that, if the fact was that he dealt with the corporation with knowledge of the arrangement by which the "bonus" stock was issued, this is a matter of defense. Gogebic Inv. Co. V. Iron Chief Min. Co., 78 Wis. 427 (47 N. W. Rep. 726). Counsel cites Fogg v. Blair, 133 U. S. 534 to the proposition that the complaint should have stated that this stock had some value ; but that case is not in point, for the plaintiff there was a prior creditor ; and, as his debt could not have been contracted on the faith of stock not then issued, he could only maintain his action, if at all, by alleging that the corporation parted with something of value. In one respect, however, we think the complaint is clearly insuffi- cient. The thresher company is here asking the interposition of the court to aid in enforcing an equity in favor of creditors against the stockholders by declaring them liable to pay for this stock contrary to their actual contract with the corporation. While the proceed- ing is not, strictly speaking, an equitable action, yet the relief asked .is equitable in its nature. Under such circumstances, it was in- cvmxbent upon the thresher company to show its own equities, and ' that it was in a position to demand such relief. It was not the orig- inal creditor of the car company, but the assignee of the original creditors. By that purchase it, of course, succeeded to whatever strictly legal rights its assignors had ; but it is not rights of that kind which it is here seeking to enforce. Under such circumstances, 1 In Handley v. Stutz, supra, Brown, J. said: "We also agree . . - that creditors ■who became such after the increase was voted in May, 1886, are entitled to look to those who subsequently received the stock, notwithstanding they did not receive it until after the debts had been contracted. The circuit judge found in this connection that the 'complainants had no knowledge or notice of the subscription paper of De- cember 30, 1886, under which $45,000 of the new stock was distributed to those who subscribed for bonds, nor of the distribution among the old stockholders of 830,000 of said increased stock ; nor does it affirmatively appear that they or either of them dealt with and trusted the company upon the faith of that increased stock ; but the fact that the capital stock had been increased to $200,000 was made pubhc and was generally known.' The real question in this connection is. When may it be presumed creditors trusted th4 corporation upon the faith of the increased stock? Obvious y, when such increase was ordered. That is a fact to which publicity would naturally be given : the creditors could not be expected to know when and by whom such stock wo5d be taken. It is true they assume the risk of the stock not being taken at aU, but the moment shares are taken, they are supposed to represent so much money put into the treasury as they are worth, which becomes available for the payment, not oX of future, but of existing, creditors. It is manifest that any attempt to gauge the liabiUty of stockholders by the exact time they took their stock with reference to the dates when the several claims of the creditors accrued, and by the further fact whetheVthe creditors actually knew of and relied upon such stock, joulciin^a case like this, where the creditors and stockholders are both numerous lead to .n^tricable confusion Even the flexibility of a court of equity would be madequate to adjust the rights of the parties." 718 creditors' rights — against stockholders. [chap. III. we think it was incumbent upon it to state what it paid for the claims, or at least to show that it paid a substantial, and not a mere nominal, consideration. The only allegation is that it paid "a valuable con- sideration." This might have been only one dollar. It appears that it bought the claims after the car company had become insolvent, and its affairs were in the hands of a receiver ; also that the indebtedness of that company amounted to about $3,000,000, and that there were not corporate assets enough to pay any considerable part of it. The mere chance of collecting something out of the stockholders does not ordinarily much enhance the selling price of claims against an in- solvent corporation. If any person or company had gone to work and bought up for a mere song this large indebtedness of the car company for the purpose of speculating on the Uability of the stockholders, no court would grant them the relief here prayed for. It would .say to them, "We will not create and enforce an equity for the benefit of any such speculation." Counsel for respondent suggest that the thresher company is but an organization of the original creditors, who formed it, and pooled their claims, so as to save something out of the wreck of the car company ; but nothing of the kind is alleged. On this ground the demurrer should have been sustained. Order reversed. EASTON NATIONAL BANK v. AMERICAN BRICK & TILE CO. 70 N. J. Eq. 732 ; 8 L. R. A. (N. S.) 271. 1906. Pitney, J.' In the winding up of the American Brick and Tile Company as an insolvent corporation, the appellant Frederick Green, ill his individual right, presented to the receiver a sworn claim for moneys loaned by him to the company, amounting, with interest, to $6,655, and in his capacity as executor of his father, Henry Green, deceased, presented a sworn claim for moneys advanced by the latter in his lifetime showing a balance due of $22,947.88, besides interest. In a proceeding instituted by the receiver againgt certain stock- holders for enforcement of their liability for vmpaid subscriptions the learned vice-chancellor, while upholding the right of the receiver to recover for the benefit of other creditors (and in this his decree has just been affirmed by this court), held that the Green claims were not properly chargeable against the delinquent stockholders. From this part of the decree the present appeals are taken. The grounds upon which the vice-chancellor decided against the Green claims were that Henry Green was a director in and '■ Portions of opinion omitted. CHAP. III.] EASTON BANK V. AMERICAN BRICK & TILE CO. 719 the president of the defendant corporation, and Frederick Green was Its secretary and treasurer at the time the stock found to be unpaid was issued; that each of them, at the time they became creditors, knew the exact condition of the company, and knew that the stock in question was not issued for property at its value as it purported to be. He held that the right to hdd subscribe'rs for unpaid balances on account of stock issued depends entirely upon the fact that the stock was issued fraudulently as to creditors and that m the present case, if it was so issued, it was by act of the direc- tors including Henry Green, and with the knowledge of the treasurer Frederick Green, and that they each extended credit to the company' with notice that the stock was not fuU paid, and that the company had entered mto a contract with its stockholders that no further payments would be required. . . . This brings us to a consideration of the grounds upon which the learned vice-chancellor denied the receiver's prayer for relief so far as the Green claims are concerned. There is a Une of reported cases holding that stockholders who participate or aid in the issue of paid- up stock upon payment of less than its par value, or who have knowl- edge of the act and acquiesce therein, cannot afterwards complain of the transaction, either as stockholders or as creditors. So far as we have observed, however, all well-considered decisions that adopt this doctrine are based upon general principles of equity, in the ab- sence of any controlling statute or public policy, resort being had alone to the "trust fund theory" as a basis for the stockholder's liability to creditors. The theory of these cases is that, as between the stock- holder and the company, there is no absolute UabiUty to pay for his stock in full, and no legal prohibition standing in the way of an agreement that the stock shall be issued to him for less than full pajmient. An agreement to this effect is therefore treated as valid between the parties, and subject to avoidance only at the instance of those creditors who have been defrauded by their reliance upon the stock issues as representative of capital actually paid in to the com- pany. The "trust fund theory" has been repeatedly adopted by the courts of this state to the extent that it deals with the capital stock paid in or subscribed for as a fund for the payment of debts of which the directors are trustees, so that they cannot dispose of it to the prejudice of creditors without an equivalent consideration, nor defeat' the trust by accepting any simulated payment of a stock subscription, or by any other device short of actual payment in good faith. National Trust Co. v. Miller, 33 N. J. Eq. (6 Stew.) 155, 163 ; Wether- bee V. Baker, 35 N. J. Eq. (8 Stew.) 501, 512 ; Bickley v. Schlag, 46 N. J. Eq. (1 Dick.) 533, 537. But so far as this so-called "trust fund doctrine" excludes any creditors from relief against the stockholders, it does so on the theory 720 CEEDITOES' BIGHTS — AGAINST STOCKHOLDERS. [CHAP. III. that the liability of the latter rests alone upon their having held out- the capital of the company to persons extending credit to it as the source from which repayment might be expected. If this be the only foundation of the stockholder's liability, it is perhaps not irra- tional to debar creditors whose claims accrued prior to the stock issue in question, and subsequent creditors who had notice when they ex- tended credit that the stock issue did not represent in whole or in part what it purported to represent — that is, an equivalent amount in value added to the assets of the company. But in this state the stockholder's liability to creditors does not depend alone or chiefly upon the theory of "holding out." It de- pends upon the stockholder's voluntary acceptance, for consideration touching his own interest, of a statutory scheme to which watered stock, under whatever device issued, is absolutely alien, and which requires stock subscriptions to be made good for the benefit of creditors of insolvent companies, without distinction between prior and subsequent creditors, or between creditors who had notice and those who had none. The corporation now under consideration was organized. in 1886, under the General Corporation act of New Jeresy as it then stood — that is, the act of 1875 and its supplements. Rev. 1877, p. 175 ; 1 Gen. Stat. p. 907. Section 5 of this act declares that "where the whole capital of a corporation shall not have been paid in, and the capital paid shall be insufficient to satisfy the claims of its- creditors, each stockholder shall be bound to pay on each share held by him the sum necessary to complete the amount of such share, as fixed by the charter of the company, or such proportion of that sum as shall be required to satisfy the debts of the company." Section 54 declares: "that nothing but money shall be consid- ered as payment of any part of the capital stock of any company organized under this act, except as hereinafter provided for the purchase of property, and no loan of money shall be made to a stockholder or officer therein," &c. Section 55 provides for the issuance of stock for property purchased, to the fair value of such property,^ but as it has already been deter- 1 In State Trust Co. d. Turner, 111 la. 664, Deemer, J. said : "Involved primarily is the so-called 'trust fund doctrine,' as applied to stockholders' obligations to creditors. This is founded on the proposition that as the state undertakes to relieve the stock- holder in a corporation of a general liability for the debts of the concern, to the amount that he has invested in the enterprise, he ought, in good faith, to pay in money or its equivalent the face value of the stock received ; and, if he fails to do this, he should be treated as holding the remainder in trust for the benefit of the creditors of the corpo- ration. From this proposition two apparently conflicting and inconsistent rules have grown up, one of which may be called the 'true-value rule,' and the other the 'good- faith rule.' Courts adopting the good-faith rule are also divided on the proposition as to what is necessary to be shown to constitute good faith. Some of them hold that, in the absence of an affirmative showing of fraud aliunde, mere overvaluation of the property given in exchange for stock will not render the stockholder liable for the difference, while others hold that overvaluation itself, especially if gross, constitutes, or at least raises a strong presumption of fraud." See Herron Co. o. Shaw, 165 Cal. 668 (Valuation conclusive unless fraudulent in CHAP. III.] EASTON BANK V. AMEEICAN BRICK & TILE CO. 721 mined that this section was not compUed with in the present case, it need not be quoted here. Other sections (7, 33, 53, &c.) contain provisions intended to prevent the withdrawal by stockholders, directly or indirectly, of any part of the capital stock to the detriment of creditors. "^he express prohibition of section 54 and the whole spirit and policy of the act are so clearly opposed to any arrangement by which corporate stock shall be issued without receipt by the company of an equivalent in value to its par that any agreement to this effect must be deemed void as contrary to the pohcy of the law. If any doubt has existed upon this question it must be taken as settled by the decision of this court in Volney v. Nixon, 68 N. J. Eq. 605. purpose or effect) ; Lum v. American Wheel, &c. Co., 165 Cal. 657 (Stock issued as non-assessable is protected against assessments where creditors' rights are not directly- involved, despite Code Sec. 331 &c.) ; Harrison v. Armour, 169 Cal. 787 (Failure to describe stock as fully paid works no inference against that fact) ; Tepel v. Coleman, 229 Fed. 300 (Stockholders not being creditors, the capital stock is not a liability to be taken into account in determining whether a corporation is insolvent) ; Rath- bone V. Ayer, 121 A. D. 355, reversed in 196 N. Y. 503 on dissenting opinion of Kellogg, J. below (Plaintiff must affirmatively show fraudulent overvaluation as a basis for recovery) ; Stevens v. Episcopal Church History Co., 140 A. D. 670 (Statutory re- quirements "can only be satisfied as to creditors by labor theretofore performed, by actual payment in money or by the purchase, at what is in good faith deemed its fair and reasonable value, of property of a substantial nature having a pecuniary value capable of ascertainment and which the corporation might lawfully purchase as neces- sary to its business.," They are not met by the purchase of an executory contract for the performance of services in the future) ; Gillette v. Chicago Title &c. Co., 230 111. 373 (Property must be taken at no more than its fair cash market value, or, in the absence of a market, at the cash price it might realize) ; Donald v. American Smelting &c. Co., 62 N. J. Eq. 729 (Stock can be originally issued for property pur- chased only to the amount of what the directors honestly deem its value) ; See v. Heppenheimer, 69 N. J. Eq. 36 (Good will and prospective profits examined as ele- ments of vaJue) ; Holcombe ». Trenton White City Co., 80 N. J. Eq. 122, affirmed 82 N. J. Eq. 364 (Holders of bonus stock liable to creditors) ; Tooker v. National Sugar Ref. Co., 80 N. J. Eq. 305 (Decree for cancellation of stock issued without consideration recognized the stock as outstanding so far as the state and creditors are concerned, but enjoined payment of dividends and voting power thereon, except to vote to retire it in manner provided by statute.) ; Wolcott v. Waldstein, 97 Atl. (N. J. Eq., 1916) 951 (If incorporators are liable to creditors because of conscious overvaluation, they are not relieved by subsequent transfer of their stock) ; Chilson V. Cavanagh, 160 Pac. (Okla., 1916) 601 (Same) ; Higgins v. Illinois Trust &c. Bank, 193 111. 394 {Bona fide transferee not liable to creditors. See also note 1, page 740, infra) ; MoMahon v. Pneumatic Transit Co., 96 Atl. (N. J. Eq., 1916) 999 (Fraud not inferred from fact that rights purchased cost the vendor less than price paid him) ; Whitlock V. Alexander, 160 N. C. 465 (Good faith'suffices, but grave discrepancy in value is evidence of fraud) ; Cole v. Adams, 19 Ter. Civ. App. 507 (True value rule applied) ; Lantz v. Moeller, 76 Wash. 429 (True value rule applied. But cf. Northern Bank &c. Co. «. Day, 145 Pac. (Wash., 1915) 182) ; Merchants' &c. Bank i). Belmgton Coal &c. Co., 51 W. Va. 60 (Statute throws gate wide open for purchase of property in payment of stock at price and on such terms as the contracting parties agree); Maryland RaU Co. v. Taylor, 231 Fed. 119 (Federal courts cannot substitute their judgment for that of the state law-making power because in the light of after events hardship on creditors ensues. Subscriptions having been paid in the manner author- ized by the West Virginia statute, the right of recovery is precluded) ; Union Pac. R. R. Co. V. Blair, 156 Pac. (Utah, 1916) 948 (True value rale applied ; credit allowed for property turned in at its market value at the time). Cf. Knickerbocker Imp. Co. v. Assessors, ante, page 411. 722 CEEDITOES' EIGHTS — AGAINST STOCKHOLDEES. [CHAP. III. Nor do we deem that the weight of authority in other jurisdictions is to the contrary of this. As already remarked, those cases which are apparently opposed proceed upon a view of the equitable rights of the parties as they exist in the absence of express statutory man- date or prohibition. The doctrine was recognized by the United States supreme court in Sawyer v. Hoag (1873), 17 Wall. 610, 620. It will be observed that what was said about the propriety of the transaction as between Sawyer and the company was unnecessary for the decision. More- over, the charter of the company expressly authorized it to begin business upon payment of one-tenth of its capital, the residue to be secured, so that Sawyer's subscription was secured substantially in accordance with the charter. The case of Scovill v. Thayer (1881), 105 U. S. 143, is a clear illustration of the relation of the "trust fund theory" to the more positive rules of law that depend upon express statutory enactments. Here a corporation, organized under the laws of the State of Kansas, had commenced with 1100,000 capital, and had undertaken to suc- cessively increase its capital — first, to $200,000 ; then to $300,000, and afterwards to $400,000. Thayer, who held stock of each of the first two issues, attended, by proxies, the meetings of the stockholders at which the third and fourth issues were voted, and he became a holder of a part of each of those issues. None of his stock was paid up by him in full, and the company having become insolvent, the assignees in bankruptcy petitioned for an assessment against the stockholders, including Thayer. He insisted — first, that the third and fourth issues of stock, having been made in excess of the limit of capital prescribed by the laws of Kansas, were absolutely void, and that no assessment could be made against him by reason of his hold- ing shares of those issues ; and secondly, that the sums voluntarily paid by him upon his void stock should be applied to the payment of the balance due upon his valid stock. The court held that the third and fourth issues were in excess of the limit prescribed by law and therefore void, and that notwithstanding Thayer's assent to those issues, and the fact that after such increase the company had held itself out as possessing a capital of $400,000, and invited and obtained credit on the faith of such representations, he was not estopped from denying the validity of this stock and his obUgation to pay for it in full. With respect to his vahd stock, it appeared that by the agree- ment between him and the company he was not to be called upon to pay any further assessments upon it, the same contract being made with all the other shareholders and the fact being known to all. The court held that as between them and the company this was a valid agreement, since it was "not forbidden by the charter or by any law or public pohcy." It is entirely clear that if there had existed in Kansas any prohibition similar to that contained in our Corporation CHAP. III.] EASTON BANK V. AMERICAN BRICK & TILE CO. 723 act, the court would have reached a different conclusion upon the latter question. In Coit V. North Carolina Gold Co. (1882), 14 Fed. Rep. 12; affirmed (1886), 119 U. S. 343, Mr. Justice Bradley, sitting in the circuit court, held that where for the purchase of additional property the capital of the company had been increased by the issue and dis- tribution of new stock to a ihuch larger extent than the cost or value of the property, the stockholders could not be held individually liable at the suit of a creditor who was cognizant of the whole trans- action and acquiesced in it. The decision was affirmed by the supreme court, Mr. Justice Field dehvering the opinion, saying (119 U. S., at p. 347) "the plaintiff had placed no reliance upon the sup- posed paid-up capital of the company on the increased shares, and , therefore has no cause of complaint by reason 'of their subsequent recall. Had a new indebtedness been created by the company after the issue of the stock and before its recall, a different question would have arisen. The creditor, in that case, relying on the value of the stock being fully paid, might have insisted upon its full payment. But no such new indebtedness was created, and we think, therefore, that the stoclcholders cannot be called upon, at the suit of the plain- tiff, to pay in the amount of the stock which, though issued, was soon afterwards recalled and canceled." But here, again, the case turned upon the general principles of equity, no statute being cited that prohibited the issuance of stock without payment in full in money or money's worth. Clark V. Bever (1891),i 139 U. S. 96, is a case of somewhat similar character, the court (at p. 108, &c.), in terms, placing its decision upon the absence of a statute disabling the corporation from disposing of its stock at less than par. In Handley v. Stutz (1891),^ 139 U. S. 417, it was held that when a stockholder who assents to an increase in the capital stock and its gratuitous distribution among the shareholders receives such stock as full-paid stock, an obligation arises to pay for it in full when called upon to do so by creditors whose debts are subsequent to the author- ization of the increase, but that this equity does not exist in favor of a creditor whose debt was contracted prior to such authorization — and this on the ground (p. 435) that prior creditors could not be presvraied to have trusted the company upon the faith of the increased ^ Dickerman v. Northern Trust Co. (1900), 176 U. S. 181, 203 (a case arising under our Corporation act of 1875), contains a dictum by Mr. Justice Brown to the effect that as between the corporation and its stockholders a declaration upon the face of the certificate that the shares are fully paid and unassessable is binding, although un- true. The learned justice quotes from Scovill v. Thayer to the effect 1 See note 1, page 714, ante. ' See note 1, page 717, ante. 724 CEEDITORS' EIGHTS — AGAINST STOCKHOLDEKS. [CHAP. III. that such an arrangement was "not forbidden by the charter or by any law or pubhc policy," apparently overlooking that what might be true of the Kansas statutes was not true of the Corporation law of New Jersey. Hospes V. Northwestern Manufacturing Co. (1892), 48 Minn. 174. The corporation in question was organized under the laws of Minne- sota. Manifestly such a decision could not properly be reached with respect to any corporation organized under the New Jersey law. The opinion contains an interesting criticism of the "trust fund doctrine," resulting in what seems to be its virtual repudiation. As showing, - however, that the doctrine, where recognized, must give place to an express statutory provision, the following excerpt from the opinion is instructive : "In England, since the act of 1867, there is an impHed contract created by statute that 'every share in any company shall be deemed and be taken to have been issued and to be held subject to the payment of the whole amount thereof in cash.' This statutory contract makes every contrary contract void- Such a' statute would be entirely just to all, for everyone would be advised 6f its provisions and could conduct himself accordingly. , And in view of the fact that 'watered' and 'bonus' stock is one of the greatest abuses connected with the management of modern corporations, such a law might, on grounds of public policy, be very desirable. But this is a matter for the legislature, and not for the courts. We have no such statute." We do not wish to be understood as assenting to the reasoning of the foregoing cases so far as they debar from recourse to the stock- holder's liability those, creditors whose claims accrued before the stock issue in question, and those subsequent creditors who extended credit to the company with knowledge that the stock was issued as full paid when it was not full paid in fact. With respect to prior creditors, the query arises, Why may they not resort to afterracquired property of the company, and as well stock subscriptions as more tangible assets ? With respect to subsequent creditors, the query is, Why, if they knew the stock issued as full paid was not fuU paid in fact, may they not be justified in dealing with the very stockholder's liability thus arising as a part of the assets of the company for the purpose of satisfying creditor's claims ? But without spending time in discussion of these questions, we content ourselves with saying that our Corporation act places the stockholder's hability to creditors upon a firmer foundation than the "trust fund doctrine" as expounded in the above cases, the statute absolutely prohibiting agreements for the issue of stock for a consideration less than its par value, and afford- ing relief to all creditors without distinction. As to the status of Frederick Green in the case before us, the evi- dence does not satisfy us that he participated in the arrangement for the issuance of this stock for the patents. There is nothing, there- CHAP. III.] McDonald, receiver v. Williams. 725 fore, to bar his individual claim save that he had notice of the fact that the stock was issued as full paid for property purchased. As already shown, such notice is not sufficient to debar him. As to the claim of Henry Green, he, of course, did participate actively in the transaction' that resulted in the improper issuance of the stock in question, and he received a part of the stock himself. But there is nothing to show that he intended any actual fraud upon his fellow stockholders, Messrs. Wilbur, Paxson and Potter, upon whom (together with the Henry Green estate) the decree under review fixes a liability for unpaid subscriptions. His estate cannot be debarred on the ground of estoppel, for his associates, who are now disputing their individual liabihty to pay, were not at all misled by the circumstance that their stock certificates were marked "fvdl paid" and for "property purchased" since they knew the fact to be otherwise. Nor is the Green estate debarred by the operation of the maxim in ■pari delicto potior est conditio defendentis. If it were seeking any advantage out of the unlawful agreement, this maxim would apply. But that agreement being absolutely void on grounds of public policy his rights as a creditor for moneys actually advanced remain unim- paired. Cone V. Russell, 48 N. J. Eq. (3 Dick.) 208, 217, and cases cited ; Delaware, Lackawanna and Western Railroad Co. v. Traut- wein, 52 N. J. Law (23 Vr.) 169 ; Newbury v. Luke, 68 N. J. Law (39 Vr.) 189. As against the delinquent stockholders, therefore (including, of course, the Henry Green estate as one), both the Green claims are entitled to pajnnent. Pa3rment of the Henry Green claim should, of course, be deferred until his estate contributes its proper portion of the amount necessary to satisfy the decree. So far as the decree debars the Green claims from participation in the fund, and limits the recovery against the delinquent stockholders to the amount that would be necessary to satisfy the claims other than the Green claims, it will be reversed and the cause remitted for further proceedings in accordance with the views above expressed. For affirmance — 2. For reversal — 11. McDonald, receiver v. williams. ' 174 U. S. 397. 1899. Suit by receiver of a National Bank to recover from defendant stockholders, the amount of certain dividends paid them by the bank, 1 Facts restated ; portions of opinion omitted. The docket title of this case is Hayden, Receiver v. Williams. 726 CEEDITORS' EIGHTS — AGAINST STOCKHOLDERS. [CHAP. III. on the ground that same were fraudulently declared and paid out of its capital and not out of its net profits. The bank suspended payment in 1893. Di-vidends from 1889 to 1891 inclusive were paid out of capital, there being no net profits, but the bank was still solvent. When the dividends of January and July, 1892, were declared and paid, there were ho net profits, the capital was lost, and the bank actually insolvent. Defendants were ignorant of the financial condition of the bank, and received the dividends in good faith, beUeving same were coming out of the profits. The Circuit Court of Appeals certified the following question to the Supreme Court : Can the receiver of a nationfil bank recover a dividend paid not at all out of profits, but entirely out of the capital, when the stock- holder receiving such dividend acted in good faith, believing the same to be paid out of the profits, and when the bank, at the time such divi- dend was declared and paid, was not insolvent ? Peckham, J. The complainant bases his right to recover in this suit upon the theory that the capital of the corporation was a trust fund for the payment of creditors entitled to a portion thereof, and having been paid in the way of dividends to the shareholders that portion can be recovered back in an action of this kind for the purpose of paying the debts of the corporation. He also bases his right to recover upon the terms of section 5204 of the Revised Statutes. We think the theory of a trust fund has no appHcation to a case of this kind. When a corporation is solvent, the theory that its capital is a trust fund upon which there is any lien for the payment of its debts has in fact very little foundation. No general creditor has any lien upon the fund under such circumstances, and the right of the corporation to deal with its property is absolute so long as it does not violate its charter or the law applicable to such corporation. » [The court here examined Graham v. Railroad Co.,' 102 U. S. 148; HoUins v. Brierfield Coal & Iron Co.," 150 U. S. 371; and Wabash &c. Ry. Co. v. Ham,' 114 U. S. 587.] These cases, while not involving precisely the same question now before us, show there is no well-defined lien of creditors upon the capital of a corporation while the latter is a solvent and going con- cern, so as to permit creditors to question, at the time, the disposition of the property. The bank being solvent, although it paid its dividends out of capital, did not pay them out of a trust fund. Upon the subsequent insolvency of the bank and the appointment of a receiver, an action could not be brought by the latter to recover the dividends thus paid on the theory that they were paid from a trust fund, and therefore were liable to be recovered back. > See page 673, ante. ' Reported ante at page 670. ' See page 674, ante. !HAP. III.] Mcdonald, receiver v. williams. 727 It is contended on the part of the complainant, however, that if he assets of the bank are impressed with a trust in favor of its credi- ors when it is insolvent, they must be impressed with the same rust when it is solvent ; thait the mere fact that the value of the ,ssets of the corporation has sunk below the amount of its debts, Ithough as yet unknoivn to anybody, cannot possibly make a new ontract between the corporation and its creditors. In case of in- olvency, -however, the recovery of the money paid in the ordinary ?ay without condition is allowed, not on the ground of contract to epay, but because the money thus paid was in equity the money of he creditor ; that it did not belong to the bank, and the bank in »aying could bestow no title in the money it paid to one who did not eceive it bona fide and for value. The assets of the bank while it is olvent may clearly not be impressed with a trust in favor of creditors, ,nd yet that trust may be created by the very fact of the insolvency ,nd the trust enforced by a receiver as the representative of all the reditors. But we do not wish to be understood as deciding that the loctrine of a trust fund does in truth extend to a shareholder receiving , diAridend, in good faith believing it is paid out of profits, even though he bank at the time of the payment be in fact insolvent. That [uestion is not herein presented to us, and we express no opinion in egard to it. We only say, that if such a dividend be recoverable, b would be on the principle of a trust fund. Insolvency is a most important and material fact, not only with Qdividuals but with corporations, and with the latter as with the ormer the mere fact of its existence may change radically and aaterially its rights and obligations. Where there is no statute (roviding what particular act shall be evidence of insolvency or lankruptcy, it may be and it sometimes is quite difficult to determine he fact of its existence at any particular period of time. Although lo trust exists while the corporation is solvent, the fact which creates he trust is the insolvency, and when that fact is established at that nstant the trust arises. To prove the instant of creation may be Jmost impossible, and yet its existence at some time may very easily »e proved. What the precise nature and extent of the trust is, even a such case, may be somewhat difficult to accurately define, but it flay be admitted in some form and to some extent to exist in a case of Qsolvency. ,■ x- j.- Hence it must be admitted that the law does create a distmction letween solvency and insolvency, and that from the moment when he latter condition is established the legality of acts thereafter per- ormed will be decided by very different principles than m a case of olvency. And so of acts committed in contemplation of insolvency. :'he fact of insolvency must be proved in order to show the act was ne committed in contemplation thereof. , . , ,, • u^ ^ Without reference to the statute, therefore, we thmk the right to 728 CEEDITORS' EIGHTS — AGAINST STOCKHOLDERS. [CHAP. HI. recover the dividend paid while the bank was solvent would not exist. But it is urged on the part of the complainant that section 5204 of the Revised Statutes makes the payment of the dividend out of capital illegal and ultra vires of the corporation, and that money thus paid remains the property of the corporation, and can be followed into the hands of any volunteer. The section provides that "no association, or any member thereof, shall, during the time it shall continue its banking operations, with- draw, or permit to be withdrawn, either in the form of dividends or otherwise, any portion of its capital." What is meant by this lan- guage ? Has a shareholder withdrawn or permitted to be withdrawn in the form of a dividend any portion of the capital of the bank when he has simply and in good faith received a dividend declared by a board of directors of which he was not a member, and which dividend he honestly supposed was declared only out of profits? Does he dn such case within the meaning of the statute withdraw or permit to be withdrawn a portion of the capital ? The law prohibits the making of a dividend by a national bank from its capital or to an amount greater than its net profits then on hand, deducting therefrom its losses and bad debts. The fact of the declaration of a dividend is in effect the assertion by the board of directors that the dividend is made out of profits. Believing that the dividend is thus made, the shareholder in good faith receives his portion of it. Can it be said that in thus doing he withdraws or permits to be withdrawn any portion of the capital of the corporation? We think he does not withdraw it by the mere reception of his proportionate part of the ■dividend. The withdrawal was initiated by the declaration of the dividend by the board of directors, and was consummated on their part when they permitted pa3:ment to be made in accordance with the declaration. We think this language implies some positive or affirmative act on the part of the shareholder by which he knowingly withdraws the capital or some portion thereof, or with knowledge permits some act which results in the withdrawal, and which might not have been so withdrawn without his action. The permitting to be withdrawn cannot be founded upon the simple receipt of a dividend under the facts stated above. One is not usually said to permit an act which he is wholly ignorant of, nor would he be said to consent to an act of the commission of which he had no knowledge. Ought it to be said that he withdraws or permits the withdrawal by ignorantly yet in entire good faith re- ceiving his proportionate part of the dividend ? Is each shareholder an absolute insurer that dividends are paid out of profits? Must he employ experts to examine the books of the bank previous to re- ceiving each dividend ? Few shareholders could make such examina- tion themselves. The shareholder takes the fact that a dividend MAP. III.] Mcdonald, receiver v. williams. 72& las been declared as an assurance that it was declared out of profits md not out of capital, because he knows that the statute prohibits my declaration of a dividend out of capital. Knowing that a divi- lend from capital would be illegal, he would receive the dividend IS an assurance that the bank was in a prosperous condition and with mimpaired capital. Under such circumstances we cannot think ;hat Congress intended by the use of the expression "withdraw or aermit to be withdrawn, either in the form of dividends, or otherwise," my portion of its capital, to include the case of the passive receipt )f a dividend by a shareholder in the bona fide beUef that the dividend ivas paid out of profits, while the bank was in fact solvent. We think t would be an improper construction of the language of the statute }0 hold that it covers such a case. We may concede that the directors who declared the dividend jnder such circumstances violated the law, and that their act was therefore illegal, but the reception of the dividend by the share- aolder in good faith, as mentioned in the question, was not a wrong- ful or designedly improper act. Hence the liability of the share- lolder should not be enlarged by reason of the conduct of the directors, rhey may have rendered themselves liable to prosecution, but the [lability of the shareholder is different in such a case, and the receipt 3f a dividend under the circimistances is different from an act which may be said to be generally illegal, such as the purchase of stock in Dne national bank by another national bank for an investment merely, which is never proper. Concord First National Bank v. Hawkins, just decided, ante, 364. The declaration and payment of a dividend is part of the course of business of these corporations. It is the thing for which they are 3stabUshed, and its payment is looked for as the appropriate result jf the business which has been done. The presumption of legality ittaches to its declaration and payment, because declaring it, is to issert that it is payable out of the profits. As the statute has pro- vided a remedy under section 5205 for the impaiirment of the capital which includes the case of an impairment produced by the payment jf a dividend, we think the payment and receipt of a dividend under the circtmistances detailed in the question certified do not permit 3f its recovery back by a receiver appointed upon the subsequent insolvency of the bank. We answer the question in the negative. The question will be certifisd in the negative} ' The receiver was subsequently held entitled to recover in respect to dividends Daid when the bank was actuaUy insolvent. Hayden v. Williams, 96 Fed. 279. C/ Northern Bank &c. Co. v. Day, 145 Pac. (Wash., 1915) 182 (No recovery from stockholders for the value of stock issued to them as a stock dividend, declared in ;ood faith.) 730 CEEDITORS' RIGHTS — AGAINST STOCKHOLDERS. [CHAP. III. Mcdonald v. dewey.i 202 U. S. 510. 1906. Dewey, owning 105 shares of a National Bank, sold them in December, 1894, and January, 1895. Eighty shares were duly trans- ferred on the books of the bank a few weeks after the sale. He had previously transferred the 105 shares into the name of his agent, Jewett, who, having sold the remaining twenty-five shares (as well as the eighty) for his principal, nevertheless, appeared as the owner thereof on the books of the bank, when it failed in 1897. Dewey was the vice president of the bank at the time of the sales and knew or ought to have known that it was then insolvent. He transferred the shares to Jewett, who was wholly irresponsible, for the purpose of evading liability as a stockholder. The plaintiff, receiver of the bank, sought to enforce an assessment against Dewey on the 105 shares. The Circuit Court of Appeals reversed the decree of the Circuit Court, and directed a decree to be entered for the full amount of the assessment on the twenty-five shares standing in the name of Jewett at the time of the failure; that as to the eighty shares there could be no recov,ery, although the bank was insolvent at the time of the sale of the stock, and was known to be insolvent, and the transfer was made for the purpose of evading liability ; but that there could be no recovery without proof of the additional fact that the several transferees were likewise in- solvent; that as to the twenty-five shares Dewey remained liable, as he had not surrendered the certificate to the bank or given the officers such data as to enable them to make such transfer on its books. From this decree both parties appealed to this court.^ Mr. Justice Brown delivered the opinion of the court. That the transfer of stock in corporations, even when in failing circumstances, should not be unduly impeded, is essential not only to the prosperity of such corporations and the value of their stock, but to the interest of stockholders who may desire for legitimate reasons to change their investments or to raise money for debts incurred outside the business of such corporation. Bank v. Lanier, 11 Wall. 369, 377. At the same time the frequency with which such transfers are made for the purpose of evading the double liability imposed by the National Banldng Act, has given rise to a large amount ' Facts restated ; portions of opinion omitted. 2 The National Bank Act, Sec. 5151, provides : "The shareholders of every national banking association shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such association,' to the extent of the amount of their stock therein, at the par value thereof, in additiou to the amount invested in such shares. . . .'' -HAP. III.] Mcdonald v. dewet. 731 jf litigation turning upon their legality. In this connection certaia propositions have been laid down by so many courts and in so many cases that they may be regarded as fundamental principles of law applicable to all cases of this character. (1) That a party, who by way of pledge or collateral security for a loan of money, accepts stock of a national bank and puts his name on the registry as owner, incurs an immediate liability as a stock- holder, and cannot relieve himself therefrom by making a colorable transfer of his stock.to another person for his own benefit, as was done by the sale to Jewett in this case. National Bank v. Case,' 99 U. S. 628 ; Marcy v. Clark, 17 Massachusetts, 329 ; Nathan v. Whitlock, 9 Paige, 152 ; Cook on Stockholders, § 263. (2) The same result follows if the stockholder, knowing, or having good reason to know, the insolvency of the bank, colludes with an irresponsible person with design to substitute the latter in his place, and thus escape individual liability, and transfers his stock to such person. It is immaterial in such case that he may be able to show a full or partial consideration for the transfer as between himself and the transferee. Bowden v. Johnson,^ 107 U. S. 251. 1 In this case, Strong, J. said that the pledgee of record was held liable for several reasons. "One is that he is estopped from denying his liability by voluntarily hold- ing himself out to the public as the owner of the stock, and his denial of ownership is inconsistent with the representations he has made ; another is, that by taking the legal title he has released the former owner ; and a third is, that after having taken the apparent ownership and thus become entitled to receive dividends, vote at elec- tions, and enjoy all the privileges of ownership, it would be inequitable to allow him to refuse the responsibilities of a stockholder." As to the effect of transfer upon such liability, he said: "It is not every transfer that releases a stockholder from his responsibility as such. ... A transfer for the mere purpose of avoiding his liability to the company or its creditors is fraudulent and void, and he remains still liable. The English cases, it is admitted, give effect to such transfers, if they are made (as it is called) 'out and out' ; that is, completely, 80 as to divest the transferrer of all interest in the stock. But even in them it is held that if the transfer is merely colorable, or, as sometimes coarsely denominated, a sham if, in fact, the transferee is a mere tool or nominee of the transferrer, so that, as between themselves, there has been no real transfer, 'but in the event of the company becoming prosperous the transferrer would become interested in the profits, the transfer will be held for naught, and the transferrer will be put upon the list of contributories.' Williams' Case, Law Rep. 9 Eq. 225, note, where the transfer was, as in the present case, made to a clerk of the transferrer without consideration ; Payne's Case, id. 223 ; Kintrea's Case, Law Rep. 5 Ch. 95." ., , , j Held • The pledgee bank was liable, for its subsequent transfer to its clerk, made to escape responsibility, was not an "out and out" transfer, the stock remaining its property, and the clerk being bound to retransfer it when requested and all the privileges and possible benefits of ownership continuing to belong to the bank. 2 In this case, after stating the holding substantially as above, Blatchford, J. said • "The appellees contend that the statute does not admit of such a rule, because it declares that every person becoming a shareholder by transfer succeeds to all the liabilities of the prior holder, and that, therefore, the liabilities of the prior holder, as a stockholder, are extinguished by the transfer But it was ^eld by this court in National Bank v. Case, 99 U. S. 628; that a transfer on the books of the bank is not in aU cases enough to extinguish liabUity. The court, in that case, defined as one imiTof the right fo transfer, that the transfer must be out and out, or one really trans- eTring the ownership as between the parties to it. But there is nothmg in the statute .!..,. J:„„ „. ..,„*■>.«, limit, that the transfer must not be to a person known to be esci luding, as another limit, that the transfer 732 CRKDITORS' EIGHTS — AGAINST STOCKHOLDERS. [CHAP. III. Upon the other hand, in Whitney v. Butler, 118 U. S. 655, certain stockholders employed an auctioneer to sell their shares at public action. They were bidden in by a purchaser who paid the auctioneer for them and received from him the certificate of stock with a power of attorney to transfer the same in blank. The auctioneer paid the money to the original owner of stock, but no formal transfer was made on the books of the bank. Shortly afterwards the bank became in- solvent and went into the hands of a receiver, who made an assess- ment upon the original stockholders. We held that the responsibility of the stockholders ceased upon the surrender of the certificate to the bank, and the delivery to its president of a power of attorney to transfer the stock on the books of the bank. The controlling con- siderations were the good faith of the stockholders in making the sale, believing the bank to be solvent, and the fact that they had done all that they could reasonably be expected to do to make a valid sale of the stock and a transfer of the certificate on the stock register.' Under the English law a shareholder may transfer his shares to an irresponsible party for a nominal considera,tion, though the sole purpose of the transfer be to escape liability, provided the transfer be out and out, and not merely colorable or collusive, with a secret trust attached. Under such circumstances the person making the transfer is released from liabihty, both as to corporate creditors and the other shareholders. Cook on Stockholders, § 266 ; 2 Morawetz on Private Corporations, § 859. The law is quite different in this country. At the same time the original stockholder cannot be held liable, unless the bank were practically insolvent at the time the transfer was made, and its con- dition was- known or ought to have been known to the stockholder making the transfer.^ If the bank were in fact solvent and able to pay its debts as they matured when the transfer was made, the creditors having ample security in the solvency of the bank, have no special interest in knowing who the stockholders are, since their only recourse to them would be in the remote contingency of the insolvency of the bank. The transferrer can only be held Uable if the bank be insolvent, and such insolvency be known, or ought to have been known, to him from his relations to the bank, since the transfer is prima fade valid, and shifts to the transferee the birrden of the re- sponsibility, which can be laid upon the original stockholder only in case of bad faith, or evidence of a purpose to evade liability. This bad faith may be shown by the fact that the bank was known to him to be insolvent ; but notwithstanding this the transfer would irresponsible, and collusively made, with the intent of escaping liability, and defeat- ing the rights given by statute to creditors." ' Cf. Chemical National Bank v. Colwell, cited ante in note 2, page 443. ' The knowledge of the attorney who actually makes the transfer on the books, as to the insolvent condition of a bank, is not to be imputed to the transferrer. Johnston V. Laflin, cited ante in note 1, page 579. -HAP. ni.J McDonald v. dewey. 733 be valid if made to a person of known financial responsibility, since the creditors could not suffer by the substitution of one solvent stock- holder in place of another. The Court of Appeals, however, went further and held that the transfer would be valid unless made to an irresponsible person unable to respond to an assessment, whose financial condition was known, or ought to have been known, to him. Much stress is laid, in the opinion of the Court of Appeals, upon the case of Earle v. Carson, 188 U. S. 42, supposed to lend countenance to the doctrine that the receiver is bound, as part of his case, to estab- lish the fact that the transferee was insolvent and known to the trans- ferrer to be so at the time of the transfer. The defense was that, prior to the suspension of the bank, the defendant had in good faith sold the stock standing in her name for the full market price, which had been paid her ; that she had delivered up to the bank her stock certificate, with a power of attorney to make the transfer, and requested that the stock be transferred ; that the officer of the bank said the transfer would be made, but it seems that the officer had failed to discharge that duty ; that as the defendant had done every- thing which the law required her to do to secure the transfer, she had ceased to be a stockholder and was not responsible. It was alleged as error that the trial court refused to instruct the jury that the sale of the stock, though lawful in every other respect, could not be so treated if it were found that at the time of the sale the reserve of the bank were, to the knowle4ge of the defendant, below the limit fixed by law (p. 44). This refusal was held not to be error. "Certainly," said Mr. Justice White in the opinion (p. 46), "it cannot in reason be said that the power would exist to sell stock like any other personal property if before the power could be exercised the seller myst examine the affairs of the bank, marshal its assets and liabilities in order to form an accurate judgment as to the precise condition of the bank." In discussing the question in regard to the validity of the transfer, it was said (p. 49) that "the exercise of the power to transfer stock in a national bank is controlled by the rules of good faith applicable to other contracts. The qualification just stated gives no support to the proposition that where a sale of stock in a national bank is made in good faith, nevertheless the consequences of the sale are avoided if subsequently it developed that the bank was insolvent at the time of the transfer, in the sense that its assets were then unequal to the discharge of its liabilities, when such fact was unknown to the, seller of the stock at the time of the sale." The argument was made (p. 54) that as the "person to whom the stock was sold was insolvent, and hence unable to respobd to the double liability, the sale was void, although the fact of such insolvency of the buyer was unknown to the seller." This was held to be un- sound "since it but insists that the validity of the sale of the stock is to be tested, not by the good faith of the seller, but upon the 734 CEEDITOBS' RIGHTS — AGAINST STOCKHOLDEKS. [CHAP. III. unknown financial condition of the buyer." We find nothing in this case which impugns in any degree the authority of the prior cases, or holds that the validity of the sale is to be gauged by the financial condition of the transferee, or the knowledge of that condition by the transferrer. 1. We think it a proper deduction from the prior cases, and such we hold to be the law, that the gist of the liability is the fraud im- plied in selling, with notice of the insolvency of the bank and with intent to evade the double liability imposed upon the stockholder by the National Banking Act. In short, the question of liability is largely determinable by the presence or absence of an intent to evade liabiUty. The fact that the sale was made to an insolvent buyer is doubtless additional evidence of the original fraudulent intent, but would not be in itself sufficient to constitute fraud without notice of the insolvency of the bank. The stockholder is not deprived of his right to sell his stock by the fact that the sale is made to an insolvent person, unless it be made with knowledge of the insolvency of the bank. This was practically the ruling in Earle v. Carson, in which we held that a. bona fide sale would not be void, though the vendee were insolvent, if the fact of such insolvency were at the time un- known to the seller. The case of Earle v. Carson, so far from lend- ing countenance to the argument of the appellees, bears strongly in the opposite direction. The solvency of the vendee, however, is, pertinent in showing that no dainage could have resulted to the creditors of the bank by the transfer. Though not a necessary part of the plaintiff's case, it may be a complete defense, if it be shown that the sale, however fraudu- lent, was njade to a vendee who was as able to respond to the double liability as was the vendor. The proposition that the executors ^ are not responsible because the sales were made to solvent vendees, being defensive in its character, the burden of proof was upon, them. In this particular the case is not unlike that of an ordinary action upon a contract, where the plaintiff relies upon the contract and the breach, and sues for such damages as may be reasonably supposed to follow therefrom. But it may be shown in defense that no damages really resulted, as, for instance, in an action for services, that plaintiff might have obtained other employment at the same wages, or, in an action for a failure" to deliver goods, that plaintiff might have gone into the market and purchased other goods at the same price at which the defendant had agreed to sell them. In such case defendant as- sumes the burden of proving that no damage in fact resulted. The argument in this' case really is that the receiver was bound to show, not only that Dewey was guilty of fraud, but that damages neces- sarily resulted and that he knew that fact. The reply is that the ' Dewey died pending this litigation and the suit was revived in the names of the executors of his will. "HAP. III.] McDonald ». dewey. 735 Taud was consummated by the sale of the stock of a bank known ;o be insolvent, with intent to evade liability, and that the fraud is lot less though the transferees happened to be solvent, but that ;heir solvency may be proved to rebut the presumption that injury •esulted to the creditors from the transfers. It only remains to consider whether the transferees were financially -esponsible to the amount of the assessment. It is not necessary to show that they were persons of responsibility equal to that of the )riginal stockholder. It is sufficient that they were responsible to ;he amount called for by the necessities of the case — in other words, n an amount sufficient to indicate that the creditors of the bank were lot damnified by the change of ownership. Although the evidence does not show affirmatively the insolvency jf the ultimate transferees, it falls far short of showing that a decree igainst them for their assessment could be collected. Without going uto details of the property of each one of the seven transferees, it is mfiicient to say that there ... is no satisfactory evidence that a lecree against any one of these parties for the amount of his assess- nent could have been collected by ordinary process of law. 2. But, except so far as the twenty-five shares held by Jewett IS the agent of Dewey at the time of the failure, we think the exec- itors should not be held liable to the creditors who became such ifter the transfer. The National Banking Act requires (Rev. Stat. § 5210) a list of the names and residences of all the shareholders, and the number of shares held by each to be kept in the banking house, subject to the inspection of all the shareholders and creditors of the association; and (sec. 5139), that every person becoming a share- holder by a transfer of shares to himself shall succeed to all the rights md Uabihties of the prior holder of such shares, and no change shall De made in the articles of association by which the rights, remedies 3r securities of the existing creditors of the association shall be im- paired. The object of this legislation is evidently to apprise persons dealing ivith the bank of the names of the shareholders, upon whom the double liability shall be imposed in case of the insolvency of the bank. [n the event of such insolvency it is only existing creditors who can jlaim to have been damnified by a fraudulent transfer of shares. As ;o them such transfer is voidable. Subsequent creditors are apprised 3y the published list of the names of the shareholders, to whom trans- ■ers have been made, and of the persons to whom they may have re- jourse for the double Uability. The injustice of holding a stockholder iable for an indefinite time in the future to creditors who may have jecome such years after he had parted with his stock, and who were ipprised of the names of the stockholders by the pubhshed list, is ;oo manifest to require an extended comment. We are only applymg ;o this case by analogy the ordinary rule of the common law, that a 736 creditors' rights — against stockholders. {chap. III. voluntary deed by a person heavily indebted is fraudulent and void as to prior credtiors merely upon the ground that he was so indebted, but as to subsequent creditors is only void upon evidence that the deed was made in contemplation of future indebtedness.^ Sexton v. Wheaton, 8 Wheat. 229 ; Schreyer v. Scott, 134 U. S. 405 ; Ridge- way V. Underwood, 4 Wash. C. C. 129, 137 ; Bennett v. Bedford Bank, 11 Mass. 421. This was the interpretation given to a similar statute by the Supreme Court of Ohio in Peter v. Union Mfg. Co., 56 Ohio St. 181, 204. It is true that in Ohio a stockholder cannot escape liability to existing creditors by a transfer of his stock, however bona fide such transfer may be. But we do not see how that affects the ruling in the Peter case, that he does not continue liable as to future creditors. There are, undoubtedly, cases in which we have used the general expression that in the event of a fraudulent transfer of stock the stockholder remains liable to the creditors of the bank, but in none of them were we called upon to discriminate between existing and subsequent creditors, since as a rule the insolvency of the bank followed soon after the transfer, and the distinction was not called to our attention by counsel. It results that there must be a decree affirming the decree of the Circuit Court of Appeals, so far as it holds Dewey liable for his full assessment on the twenty-five shares standing in Jewett's name, and reversing in so far as it exonerated his estate from assessment upon the remaining shares, to such amount as is necessary to satisfy the creditors existing at the time the transfer of the stock was made, and that the cause be remanded to the Circuit Court for the Northern District of Illinois for further proceedings consistent with this opinion. Mr. Justice White, with whom concur Mr. Justice McKenna and Mr. Justice Day, dissenting.^ c My dissent is constrained by a deep conviction of the unsoundness of the proposition now upheld exempting Dewey from liability, in respect to the 80 shares, for the call made by the Comptroller to pay the debts of the bank existing at the time of the failure, and the deci- sion that he is only liable for such sum as may be necessary to pay the unsatisfied debts, if any, which existed when the fraudulent transfer of the stock was made. Both by the National Banldng Act as originally adopted in 1863 and as reenacted in 1864, and as now embodied in section 5139 of the Revised Statutes, owners of stock in national banks were em- powered to transfer that stock as personal property. The purpose of Congress to render this transfer effectual is evidenced by the omission in the reenactment in 1864 of a provision found in the act of 1863, which might have had the effect of limiting transfers. Earle ' See note at page 255 ante. 2 Portions of dissenting opinion omitted. CHAP. HI.] McDonald v. dewey. 737 L^L r"" questioned that creditors existing at the time a stock- holder made and completed a lawful transfer of his stock had no right to complam or hold the outgoing stockholder for existing debts of the bank, since by the statute the result of such a transfer was to sever all connection between such stockholder and the bank, wholly without reference to the consent of the then existing creditors, and to substitute the person to whom the valid and completed transfer had been made. Now, whilst it is true that the statute requires a registry of stockholders to be kept and transfers to be noted thereon in view of the unlimited right of a stockholder to make a lawful transfer without the consent of the creditors existing at the time of the transfer, it cannot be said that the statute gave to the creditors a right to prevent transfers or presupposed that they would contract with the bank upon the faith of a particular state of the registry, ■when by the statute that registry could be changed by lawful transfers without the power of the creditor to complain. It is true also that the statute declares (Rev. Stat. § 5139) that when a lawful transfer is made the shareholder "shall succeed to all the rights and habilities of the prior holder of such shares." But this does not imply that existing creditors have a contract right against the transferring stock- holder, since the right of such stockholder to make a lawful transfer and substitute another for himself without the consent of the creditors is an affirmance instead of a negation of the absence of the contract relation between the transferring stockholder and then existing credi- tors. And this is emphasized, since the new stockholder becomes ratably hable not only for debts contracted after the transfer made to him but for all the prior unsatisfied debts. Of course by the statute as originally enacted and as now existing (Rev. Stat. § 5151), those who were stockholders in a national bank at the time of its failure are made equally and ratably liable to the amount of their stock for the debts of the bank then existing. But this provision does not destroy or impair the right to make a lawful transfer before the failure of a bank, since it only attaches the double liability to those who have not made a lawful transfer and who are in contemplation of law stockholders at the time of the failure. Harmonizing these two sec- tions of the statute, they import the purpose to secure the great advantage resulting from the untrammelled power to make a lawful transfer of stock as pointed out by this court in Earle v. Carson, supra, and First National Bank v. Lanier, 11 Wall. 369, 377, and yet at the same time when failure ensues to give the then existing credi- tors the benefit of the double liability of the then existing stockholders. Besides to me it seems that the rule of limited liability now an- nounced is self-destructive. What is the liability which the statute imposes ? Is it a responsibility only to pay debts of the bank as they existed at the time a fraudulent transfer was made? Not so; for 738 creditors' rights — against stockholders. [chap. Ill, the only liability imposed by tlie statute on the stockholders is an obligation to respond to an equal and ratable assessment made by the Comptroller to pay the debts existing at the time of the failure. Rev. Stat. §§ 5151, 5234. From this it results that if a person is not a stockholder at the time of the failure he is liable for nothing, and if he is such stockholder he is liable for the statutory sum and no other. This plain result of the statute to my mind demonstrates the error of the conclusion as to limited liability now announced. For, if Dewey was not a stockholder at the time of the failure there is an entire absence of statutory authority to make any assessment whatever upon him, and if he was such stockholder then the statute fixed the measure of liability, and there is no power to substitute by judicial discretion a liability which the statute does not impose, and which on the contrary is excluded by its express terms. In other words, the statute imposes a uniform and ratable Uability upon all stockholders who are liable at all and affords no justification for assessing one stockholder at one amount and another stockholder in another sum, upon the theory that the date of the contracting of debts and not the date of the failure is the test of liability. And that this departure from the long received and judicially sanctioned construction of the statute will tend to destroy the security of the national banking system by rendering the double liability impossible of enforcement results from a few obvious considerations. Thus, under the rule now announced, one who owns or controls a majority of the stock of a national bank, knowing it to be insolvent, can transfer his stock to wholly irresponsible persons in order' to avoid the statutory liability, and, by postponing the date of open failure until the existing debts of the bank have been extinguished by novation, leave the creditors existing at the time of the failure with substantially no stocldiolder to respond to the double hability. In- deed, this condition of things cannot be more cogently made manifest than by considering the facts in this case as found by the court. What are they? They are that Dewey was an officer of the bank and knew its hopelessly insolvent condition, and that he transferred his stock to avoid the liability, leaving the shares in the name of his " agent or causing that agent to put the same in the names of irre- sponsible people. In effect controlling the affairs of the bank, Dewey delays the open failure until by a change of the situation, although the indebtedness of the bank may not have diminished, yet, by a mere substitution of creditors, the particular debts due at the time of his fraudulent transfers have largely been extinguished. And thus, when the open failure comes, it is now decided that, as to the shares fraudulently transferred by his agent, Dewey owes nothing towards payment of the debts of the bank, except as to debts still existing, which were contracted prior to the fraudulent transfers. In other words, it is held that although the bank was insolvent prior to and at CHAP. III.] McDonald v. dewey. 739 the time of the commission of the fraudulent acts and continued so to the time of the failure, the fraudulent transferrer has accomplished the wrong which the statute was intended to prevent by holding back and preventing the open failure until he had discharged, at the expense of the subsequent creditors of the bank, the indebtedness existing at the time of the fraudulent transfers. Under the rule hitherto prevailing the duty of the administrative officer was plainly marked out in the statute, to reaUze the assets, and, if necessary to meet a deficiency of assets, to assess ratably the legal stockholders — a simple and effective rule. Now the duty of the administrative officer is wholly changed. He must analyze the situation at the bank, he must determine who were creditors at this time and that, in order to fix the liability of stockholders, and when this process is gone through with, instead of levying the equal and ratable statutory Hability, he must call upon the shareholders for unequal and unratable contribu- tions. It remains only to briefly notice the case of Peter v. Union Mfg. Co., 56 Ohio St. 181, heretofore referred to and cited by the court in its opinion. To understand that case a prior decision of the Supreme Court of Ohio, Brown v. Hitchcock, 36 Ohio St. 667, of which the opinion in the Peter case was but an evolution, must be taken into view. In Brown v. Hitchcock, interpreting the Ohio law, the Supreme Court of Ohio held that by the effect of the constitution and laws of that State a stockholder in an Ohio corporation who was subjected to a double hability was impotent to dispose of his stock, however bona fide might be the sale or disposition thereof, so as to escape liability to creditors who were such at the time of the transfer. . In other wordfe, the court held that the effect of that double liability imposed by the Ohio statutes was to prevent an efficacious transfer of the stock without the consent of the creditors, since such creditors, despite a bona fide sale, as long as debts contracted previously re- mained unsatisfied, had the power, if circumstances required, to pro- ceed against the stockholders who were such at the time the debt was contracted, and this irrespective of whether the corporation was at the time of the transfer solvent or insolvent. Subsequently, in the Peter case, the Ohio court was called upon to determine how far a transfer of stock by a stockholder in an Ohio corporation operated to relieve him from future debts of the corporation. As to this question the court, in effect, applied to the Ohio statutes the Enghsh '*out and out" rule ; in other words, that court, whilst reiterating its ruling as to existing creditors, decided that a stockholder who made an out and out sale, although the corporation was insolvent and the. purpose was to escape the double habiUty, was discharged from any responsibihty to future creditors, although remaining Uable to exist- ing creditors. The difference between the Ohio statutes,- as thus ex- pounded, and the National Banking Act, as expounded by this court, 740 creditors' eights — against stockholders, [chap. in. is at once demonstrated by the statement that under the National Banking Act the stockholder, as repeatedly decided by this court, lias a right, when acting in good faith, to dispose of his stock and es- cape KabiUty both as to existing and future creditors, and that the theory of out and out transfers as to future debts, applied by the Ohio court to the statute of that State, was expressly repudiated by this court as to the National Banking Act in the Case and subsequent decisions. To treat then the Ohio case as authoritative here is, in effect, but to expimge the National Banking Act from the statutes of the United States and to substitute in its stead the statutes of Ohio, when such statutes have a wholly different significance as interpreted by the highest court of that State. I therefore dissent. I am authorized to" say that Mr. Justice McKenna and Mr. Justice Day concur in this dissent.' ' Cf. Jackson v. Meek, 87 Tenn. 69. ("It is insisted that the defendant, . . . having parted with his stock . . . some two years before the suit against him . . . was commenced, his individual liability [by statute in favor of corporate employees &c.] for the plaintiff's . . . wages ceased to rest on him, and passed over to his trans- feree, to whom the plaintiff must now look. Is this correct ? When the wage-earners who were in the employ of the Chronicle Company, and contracted with it, contracted upon the faith of this individual liability clause, the offer of the shareholder contained in the clause in question being accepted by the ' servants and employes' of the com- pany, ripens into a binding contract . . . upon these shareholders who were such at the time the service was rendeijed. . . . None but those for whose benefit the provision was made can release the contract. To hold differently would practically destroy this provision for the wage-earner's benefit.") In West Nashville &c. Mill Co. v. Nashville Sav. Bank, 86 Tenn. 252, held: A bona fide transferee was not liable to the plaintiff corporation upon a stock call duly made for 25 per cent, of the subscription price subscribed by its transferrer, to whom the corporation had issued a certificate in the usual form for shares fully paid up but containing no express declaration to that effect. Lukton, J. said: "The general rule concerning the effect of the transfer of shares in a corporation is that such transfer operates as a novation of the contract of membership. The transferrer ceases to be a shareholder, and the transferee becomes one. The first is ordinarily relieved from all further liability to contribute capital, and loses all right to participate in the further profit of the management ; the transferee takes the place of the retiring member, and by implication assumes all the obligations which rested upon the former holder as a member of the company, and ordinarily becomes liable for calls to the same extent as the former owner before the transfer was made. Assuming the burdens, he be- comes likewise entitled to all the benefits attaching to ownership of the shares. . . . Stockholders become such in several ways — either by original subscription or by assignment of prior holders, or by direct purchase from the company. It is not at all essential that at the time there is an original subscription there shall be an express promise to pay the subscription price. Oftener than otherwise there is none, the subscription being a simple agreement to take so many shares of stock. By necessary implication there arises from such a subscription a promise to pay the par value of such stock, upon which an action of assumpsit lies. . . . But where the purchaser Of such shares buys them as paid-up shares, and without notice that in fact they are not paid up, then no implication arises of an agreement to pay anything to the cor- poration for such shares.' In such case there are no facts from which to imply an agreement. The representation made by the corporation, either upon the face of the stock certificate or by its officers, that the shares are paid up, will, as between the cor- poration and such transferee, prevent any contract by implication. ... In view of the readiness with which corporations can guard themselves, as well as purchasers of such shares, by issuing only fully paid shares, or by expressing upon the face of CHAP. III.] McDonald v. dewet. 741 such as are not paid up the fact that they are subject to call for unpaid subscription price, we hold, in the interest of the negotiability of such shares and of what we deem a true public policy, that a bona fide purchaser of a certificate of stock, for value, and without notice, either from the face of the certificate or otherwise, that the sub- scription price has not been paid, will be protected as between himself and the cor- poration negligently issuing such shares." In Webster v. Upton, 91 U. S. 65, held: A transferee is liable, quoad creditors, for calls made after he has been registered on the corporate books as a stockholder and while he continues the owner. In Brinkley v. Hambleton, 67 Md. 169, Alvey, C. J. said: "The assignee takes the shares with all their rights and liabilities, so that if a liability to a loss has been incurred by the company before he purchased the stock, he may be called upon to contribute thereto as soon as he has accepted a transfer of the shares and become a shareholder in the concern. The liability to pay the calls made upon the stock after the transfer is shifted from the outgoing to the incoming shareholder; the transfer of stock working a complete novation of the contract of membership, the transferee being substituted to the place of the transferrer, with all the rights and liabilities incident to the holding of the shares.'' 742 DISSOLUTION. [chap. r. BOOK VI. DISSOLUTION AND REORGANIZATION OF A CORPORATION. CHAPTER I. DISSOLUTION— ITS CAUSES, MEANS AND EFFECT. THE BOSTON GLASS MANUFACTORY v. LANGDON. 24 Pick. (Mass.) 49. 1834. Assumpsit on a promissory note given by the defendant to the plaintiffs. The defendant pleads in abatement, that at the time of the purchase of the writ there was not, and now is not, any such cor- poration estabUshed by law, called the Boston Glass Manufactory, as in and by the writ is supposed. The plaintiffs' reply that there was and is such a corporation ; and tender an issue ; which is joined. At the trial, before Morton, J., the plaintiffs offered in evidence their act of incorporation, and showed their organization under it in 1811. . The records of the corporation were introduced by the plaintiffs, and were used and relied upon by both parties. The defendant then introduced an indenture, dated the 27th of May, 1827, assigning all the property of the corporation to certain persons, in trust to pay, pro ratd, such creditors as should become parties to the indenture. This instrument contained covenants, that the assignees might use the name of the corporation in the collec- tion of the debts, and in the disposition of the property assigned; that the corporation would not hinder or obstruct them in the per- formance of these functions ; and that it would make any further con- T^eyances and assurances which might become necessary, and per- form any other and further acts which might be required to enable the •assignees fully to execute their trust. No provision was made for a release to the corporation by the creditors, nor for paying over to the (corporation the surplus, if any, of the property assigned. The defend- ant .also referred to all the records subsequent to 1817, and contended CHAP. I.] THE BOSTON GLASS MANUFACTORY V. LaNGDON. 743 that the assignment of the property of the corporation, and the omis- sion to hold annual meetings, to choose directors, and to transact busmess, as appears by the records and books of the corporation, supported the issue on her part and entitled her to a verdict. But the jury were mstructed, that the evidence was competent to prove the estabUshment and continuance. of the corporation down to the present time. The plaintiffs then claimed to have the damages assessed by the jury, if they found a verdict in their favor, and offered in evidence the note declared on. This was objected to by the defendant, be- cause the note had been assigned. But the objection was overruled. The defendant then offered to prove that the note was without consideration. This evidence was objected to and was excluded. The jury fotmd a verdict for the plaintiffs for the whole amount of the note and interest. The defendant excepted to the decisions and instructions of the judge ; and for the reasons above appearing, moved for a new trial. Moeton, J. dehvered the opinion of the Court. The non-exist- ence or death of the plaintiff may properly be pleaded in abatement. 1 Chitty's PI. 482 ; Story's PI. 24. But whether, as it entirely and perpetually destroys the plaintiff's right to recover, it may not also be pleaded in bar, it is not necessary to determine.^ Proprietors of Monumoi v. Rogers, 1 Mass. R. 159 ; First Parish in Sutton v. Cole, 3 Pick. 245. Whether the plea conclude in abatement or bar, the issue being foimd against the defendant, the judgment must be peremptory. The estabUshed rule is, that in dilatory pleas, when the issue is foimd against the defendant on matters of fact, the judgment must be in chief. Gould's PI. 300; Howe's Pract. 215. The principal question for our consideration is, whether judgment shall be rendered on the verdict. The defendants' counsel contends that the evidence introduced will not support the verdict, but that the verdict is against the evidence and the law and should be set aside. The point which has been determined by the jury, though necessary to be submitted to them with proper instructions, is quite as much a matter of law as of fact; and we the more readily enter into the examination of it. The legal estabhshment and due organization of the corporation were admitted ; but it was contended that the facts disclosed showed a dissolution of it. The elementary treatises on corporations describe four methods in which they may be dissolved. It is said that private corporations may lose their legal existence by the act of the legislature ; by the death of all the members ; by a forfeiture of their franchises ; and by 1 In Mumma v. The Potomac Co., 8 Pet. (U. S.) 281, Story, J. said: "There is no pretense to say that a scire facias can be maintained, and a judgment had thereon, against a dead corporation, any more than against a dead man." 744 DISSOLUTION. [chap. I, a surrender of their charters. 2 Kyd on Corp. 447 ; 1 Bl. Comm. 485 ; 2 Kent's Comm. (1st ed.) 245 ; Angell & Ames on Corp. 501 ; Oakes V. Hill, 14 Pick. 442. No other mode of dissolution is anywhere men- tioned or alluded to. 1. In England, where the parliament is said to be omnipotent and where in fact there is no constitutional restraint upon their action, but their own discretion and sense of right, corporations are sup- posed to hold their franchises at the will of the legislature. But if they possess the power to annul charters, it certainly has been rarely exercised by them. In this country, where the legislative power is carefully defined by explicit fundamental laws, by which it must be governed and beyond which it cannot go, it has become a question of some difficulty to determine the precise extent of their authority in relation to the revocation of charters granted by them. But as- it is not pretended that there has been any legislative repeal of the plaintiffs' charter, it will not be useful further to discuss this branch of the subject.^ 2. As all the original stockholders are not deceased, the corporation cannot be dissolved for the want of members to sustain and exercise the corporate powers. Besides, this mode of dissolution cannot apply to pecuniary or business corporations. The shares, being property, pass by assignment, bequest, or descent, and must ever remain the property of some persons, who of necessity must be members of the corporation as long as it may exist. 3. Although a corporation may forfeit its charter by an abuse or misuser of its powers and franchises, yet this can only take effect upon a judgment of a competent tribunal. 2 Kent's Comm. (1st ed.) 249 ; Corporation of Colchester v. Seaber, 3 Burr. 1866 ; Smith's case, 4 Mod. 53. Whatever neglect of duty or abuse of power the corporation may have been guilty of, it is perfectly clear that they have not lost their charter by forfeiture. Until a judicial decree to this effect be passed, they will continue their corporate existence.* The King v. Amery, 2 T. R, 515. ' This subject was considered in Greenwood v. Union Freight E. R. Co., ante, page 201. As to the effect of repeal upon corporate powers and upon corporate prop- erty, see note 1, page 204, ante. As to the limitations upon the legislative power to- repeal, see note 1, page 209, ante. 2 In Heard v. Talbot, 7 Gray (Mass.) 113, Biqelow, J. said: "In the absence of express conditions in an act of incorporation, by which corporate rights and powera are made to depend on their due exercise, a non-user or misuser of them does not operate as a surrender or forfeiture of the charter. Although the disuse of the canal and its abandonment 'by the corporation may be a gross disregard of the duty imposed on them by law, and an essential violation of the terms and conditions implied from the contract entered into with the government by the acceptance of the charter, and upon due proceedings had, might be a sufficient ground upon which to decree a for- feiture of all their corporate rights and privileges, they do not constitute any valid ground upon which the exercise by the corporation of any of the powers conferred by their charter can be defeated or denied by third persons in collateral proceedings. This, results from the very nature of an act of incorporation. It is not a contract between, the corporate body, on the one hand, and individuals whose rights and interests may CHAP. I.] THE BOSTON GLASS MANUFACTORY V. LANGDON. 745 4. Charters are in many respects compacts between the govern- ment and the corporators. And as the former cannot deprive the latter of their franchises in violation of the compact, so the latter cannot put an end to the compact without the consent of the former. It is equally obligatory on both parties. The surrender of a charter can only be made by some formal solemn act of the corporation ; and will be of no avail until accepted by the government. There must be the same agreement of the parties to dissolve, that there was to form the compact. It is the acceptance which gives efficacy to the surrender. The dissolution of a corporation, it is said, extinguishes all its debts. The power of dissolving itself by its own act, would be 3, dangerous power, and one which cannot be supposed to exist.' But there is nothing in this case which shows an intention of the corporators to surrender or forfeit their charter, nor any thing which can be construed into a surrender or forfeiture. The possession of property is not essential to the existence of a corporation. 2 Kent's Comm. (1st ed.) 249. Its insolvency, can- not, therefore, extinguish its legal existence. Nor can the assignment of all its property to pay its debts, or for any other purpose, have that •effect. The instrument of assignment was not so intended, and can- no't be so construed. All its provisions look to the continuance of the corporation. It contains covenants that the assignees may use the corporate name for the collection of the debts and the disposition of the property assigned ; that the corporation will not hinder or obstruct them in the performance of these functions; that it will be affected by the exercise of its powers, on the other. It is a compact between the corporation and the government from which they derive their powers. Individuals therefore cannot take it upon themselves, in the assertion of private rights, to insist on breaches of the contract by the corporation, as a ground for resisting or denjang the ■exercise of a corporate power. That can be done only by the government with which the contract was made, and in proceedings duly instituted against the corporation. It would not only be a great anomafy to allow persons, not parties to a contract, to insist on its breach and enforce a penalty for its violation ; but )t would be against public policy, and lead to confusion of rights, if corporate powers and privileges could be disputed and defeated by every person who might be aggrieved by their exercise. Therefore it tas been often held, that a cause of forfeiture, however great, cannot be taken advantage of or enforced against corporations collaterally or incidentally, or in any other mode than by a direct proceeding for that object in behalf of the govern- ment." Accord : Parker v. Bethel Hotel Co., 96 Tenn. 255. ("Until sentence of dissolution has been pronounced by a court of competent jurisdiction, in a proper proceeding instituted for the purpose, the corporation will continue to exist, notwithstanding its failure to use its franchises. And forfeiture can only be decreed in a proceeding directly instituted for the purpose, by the State granting it. Code (M. & V.) § 1712; State 1). Butler, 15 Lea, 104, 110; Jersey City Gaslight Co. v. Consumers' Gas Co., 40 N. J. Eq. 427 ; Broadwell ». Merritt, 87 Mo. 95. Until dissolution has been thus judicially pronounced, neither the existence of the corporation nor its title to its prop- erty can be questioned collaterally.") A cause of forfeiture may, however, be self-executing. See note 1, page 101, ante. Cf, Bradley v. Reppell, infra, page 763. ' See Harris v. Muskingum Mfg. Co., 4 Blackf. (Ind.) 267; Combes i). Keyes, 89 Wis. 297; State v. Chilhowee Woolen Mills Co., 115 Tenn. 266. Cf. legislative permission to consolidate. See Chap. 2 infra. 746 DISSOLUTION. [chap. I. make any further conveyances and assurances which may become necessary, and will do and perform any other and further acts which may be required to enable the assignees fully to execute their trust. The instrument which covenants for future acts, cannot be construed to take away all power of action. The omission to choose directors clearly does not show a dissolu- tion of the corporation. Although the proper officers may be neces- sary to enable the body to act, yet they are not essential to its vitahty. Even the want of officers and the want of power to elect them, would not be fatal to its existence. It has a potentiality which might, by proper authority, be called into action, without affecting the identity of the corporate body. Colchester v. Seaber, 3 Burr. 1870. But here in fact was no lack of officers. Although no directors had been chosen for several years, yet, by the by-laws of the corpora- tion, the directors, though chosen for one year, were to continue in office till others were chosen in their stead. , The damages were properly assessed by the jury. The defendant having elected to try her case upon a plea in abatement, must submit to the legal consequences of that form of trial. Perhaps the Court might have assessed the damages as in case of default. But most obviously the better course was to submit the subject to a jury. In doing this the defendant could not be allowed to go into the whole defence as upon the general issue. The rule adopted at the trial was the correct one. Judgment according to verdict. WHITE V. KINCAID.2 149 N. C. 415 ; 23 L. R. A. (N. S.) 1177. 1908. I Plaintiff alleged that he owned 20 out of 190 shares of paid-up stock in defendant corporation, which owned a valuable plant and owed not more than twenty-eight hundred dollars ; that one of the defendants, Kincaid, owning 140 shares, had committed certain wrongs in the management of the plant, and, with the individual co-defend- ants, had combined to dissolve the corporation for the purpose of ousting plaintiff from his office as Secretary and Treasurer, and im- pairing the value of his holdings, by selling out the property at a time and in a manner that would result in a sacrifice of the same, and cause great damage to the corporation and the holders of stock therein, etc. ; I ' Accord : Brook v. Poor, 216 N. Y. 387 ; Parker v. Bethel Hotel Co., 96 Tenn. 255 ; Penobscot Boom Corp. n. Lamson, 16 Me. 224. 2 Facts restated. CHAP. I.] WHITE V. KINCAH). 747 that the corporation is solvent, and was prosperous until the last several months, when, owing to the panic, the furniture mills of the county had closed down or were working on shorter time, and this condition of affairs had made it advisable for defendant company to suspend operation temporarily, but there was every reason to be- lieve that, with the revival of business, now probable and imminent, defendant company could resume and, ulider proper management, become a money-making enterprise. The individual defendants answered and admitted that the plant was now closed down, and alleged that its indebtedness is much greater than plaintiff states; that, while the corporation is now solvent, there are no present means available for further operations ; that, the defendants, directors, acting in their best judgment, and believing it ■ advisable and most for the benefit of the corporation that the same be dissolved, had passed resolutions to that effect ; and, having issued proper notices for the stockholders to meet and consider and pass upon this resolution, the said stockholders were proceeding to act under the notice when they were stayed by restraining process of the court issued in this cause. Defendants deny that there has been any scheme or purpose to wrong the plaintiff or deprive him of his property, or to wrong or injure the corporation, or the holders of the stock therein, either by reason of the dissolution or the disposition of the property, but aver that the property is to be sold by methods calculated to make it bring its value, and where plaintiff, and all others, shall have an opportunity to bid and buy ; that defendant Kincaid is the only member of the company who has any experience in this work, and he desires to withdraw and go into the business in the eastern part of the State, and, taking all the conditions and cir- cumstances into consideration, the directors, deeming it to the best interest of the corporation and its stockholders that it should be dissolved, have passed the resolution to that effect, as heretofore stated. On the hearing the preliminary restraining order was dissolved, and the plaintiff excepted and appealed. Hoke, J. : Our statute on the subject, Revisal 1905, sec. 1195, provides for the voluntary dissolution of corporations, in effect, as follows : "That whenever, in the judgment of the board of directors, it shall be deemed advisable and most for the benefit of a corporation that it should be dissolved, they may pass a resolution to that effect by a majority of the board, proper notice being first given as required, and when this resolution has been submitted in writing to the stock- holders, and, in a meeting called for the purpose, two-thirds in interest of the stockholders consent to such dissolution, and the action is filed with the Secretary of State, who shall issue a certificate to that effect, and after due publication of notice in the county, and this having been made to appear to the Secretary, the corporation shall 748 DISSOLUTION. [chap. r. be dissolved and its business affairs settled up and adjusted as required by law." As far as North Carolina is concerned, this statute settles the question formerly much mooted in the courts as to whether, 'and under what circumstances, a corporation could be dissolved by the stockholders, when no time was fixed for its duration, upholding and extending this power of voluntary dissolution as established by the better considered decisions on the subject.^ Black v. Canal Co., 22 N. J. Eq., 130-404^ Treadwell v. Sahsbury Mfg. Co., 7 Gray, 393. This Tegulation enters into every charter, subject to the provisions of the statute, and unless otherwise enacted by the Legis- lature, every stockholder takes and holds his stock subject to this power of voluntary dissolution, by resolution of the directors con- curred in by two-thirds in interest of the stockholders. This being the law governing the interest of these parties, when the board of directors of a corporation have determined, in the exercise of their best judgment, that the corporation be dissolved, and are pursuing the methods specified by the statute, it is only in rare and exceptional instances that their action should be stayed or interfered with by the courts. It is a principle well established, that when a person, cor- poration or individual is doing a lawful thing in a lawful way, his conduct is not actionable, though it may result in damage to another ; for, though the damage done is undoubted, no legal right of another is invaded, and hence it is said to be damnum absque injuria. Dewey v. R. R., 142 N. C, 392; Thomason v. R. R. (plaintiff's appeal), 142 N. C, 318; Oglesby v. Attrill, 105 U. S., 605. In such cases the motive prompting the act, however reprehensible or mali- cious, is not, as a rule, relevant to the inquiry ; nor will courts under- take to. interfere with the honest exercise of discretionary powers vested by statute in the management of a corporation, however unwise or improvident it may seem. WindmuUer v. Distilling Co., 114 Fed., 491.2 It is true that, both before and since the enactment of this statute, there is a salutary principle very generally recognized and upheld by well considered decisions, that the directors of these corporate bodies are to be considered and dealt with as trustees, in respect to their corporate management ; and that this same principle has been applied to a majority or other controlling number of stockholders, in reference to the rights of the minority or any one of them, when they are as a body in the exercise of this control, in the management and direction of the corporate affairs,' Farmers Loan and Trust Co. v. R. R., 150 N. Y., 410 ; and certainly this is true when the majority or controlling ' See Miners' Ditoh Co. d. Zellerbaoh, ante, page 249, and note 1, page 254, ante. CJ. In Re Timmia, ante, page 261. ' See commenta of Stevenson, V. C. upon this case, in note 1, page 626, ante. ' See note 1, page 624, ante, and note 1, page 625, ante. CHAP. I.] WHITE V. KINCAH). 749 number of stockholders are exercising their authority in dictating the action of the directors, thereby "causing a breach of fiduciary duty." Robotham v. Insurance Co., 64 N. J., Eq., 672-689. And while these decisions have been more frequently made in reference to some assignment or disposition of the corporate property or assets, ■whereby the corporation is disabled from performing its work, and is necessarily retired from active business, this same principle applies, in a restricted degree, when the action complained of is a voluntary dissolution, according to the methods provided by law. In these cases also, if it clearly appears that the action of the management is in bad faith, that the resolution for dissolution, for instance, has been superinduced by fraud or undue influence, or if it could be clearly established that this resolution was not taken for the benefit of the corporation, or in furtherance of its interest, but for the mere purpose of unjustly oppressing the minority of the stockholders or any of them, and causing a destruction or sacrifice of their pecuniary interests or holdings, giving clear indication of a breach of trust, such action could well become the subject of judicial scrutiny and control. Tread well V. Copper Co., Appel. Div. Supreme Court N. Y., 613 ; Elbogue et al. V. Gergereau Flyn Co., 62 N. Y. Supp., page 287 ; In re London Mercantile and Dis. Co., 1 Eq. Cas. L. R. 1865-66, page 276 ; In re Beaujolias Mill Co., 3 Chan. App. Cases, L. R. 67-68, page 13. Such cases almost invariably arise when the management of a, solvent concern, going and prosperous, ceases operations and deter- mines to dissolve and sell out, with a view of continuing the same or similar business, under different control, and when there is indication given that the sole purpose was to oppress some of the stockholders and confiscate their holdings, or when it is done in furtherance of some scheme to promote the pecuniary interest of the actors and to the detriment of the corporation, giving indication of a breach of trust on the part of the authorities in charge and control of the corporate affairs. But no such facts are presented here. There is no testimony offered of any scheme or conspiracy on the part of defendants to oppress the plaintiff, except an inference made by him from the fact that a dis- solution was resolved upon. While the company is now solvent, it has not been running for several months, because the returns were not satisfactory, and the prospect of a change in this respect only rests in surmise. There is some dispute as to the amount of indebtedness, nor does there seem to be any capital ready and available, with which to resume operations in case such a course would be determined upon ; and, from the allegations made by the parties, their attitude towards each other does not give promise of mutual co-operation or eventual success. On the evidence, therefore, and in a case of this kind we are permitted to act on the evidence, -the Court is of opinion that the restraining order was properly dissolved, and that, on the facts as 750 DISSOLUTION. [chap. I. they now appear, the contemplated dissolution should be allowed to proceed, . . . . There is no error, and the judgment below is Affirmed.^ THORNTON v. MARGINAL FREIGHT RAILWAY COMPANY. 123 Mass. 32. 1877. Bill in equity, filed February 2, 1877, against the Marginal Freight Railway Company and the Union Freight Railroad Company, alleg- ing that the plaintiff, at July term 1875 of the Superior Court for the county of Suffolk, recovered judgment against the Marginal Freight 1 Accord: Bowditoh v. Jackson Co., 76 N. H. 351. Peaslee, J. said: " Much has been said in the cases upholding the right of the minority to prevent a sale and dissolu- tion, concerning the protection of their rights and saving their property from pillage by the majority. Just how the majority, which sells its own property at the same time and for the same price it sells that of the minority, gains an advantage over the latter is not readily apparent. Cases might be supposed, and undoubtedly occur, where the majority do obtain some undue advantage from the sale. No one contends that such a sale is valid. But because the power of the majority may be abused, it does not follow that it does not exist. If such a conclusion were to be drawn, minorities would always rule. The plain common sense of the matter is that this is a business venture, to be carried on as such so long as it appears to be good business judgment to do so. When the time comes that a majority in interest believe that their affairs should be wound up and the proceeds distributed, the rational rule is that this should be done. ... If the majority may sell to prevent greater losses, why may they not also sell to make greater gains ? Bearing in mind that this is purely a business proposi- tion, with no public rights or duties involved, there seems to be no substantial difference between the two cases, as a matter of principle. In each case the sale is made because it is of advantage to the stockholders. Whether the profit to be made is a reasonable one must be a relative matter. Three per cent, when others make 2 might be reason- able ; but 3 per cent, when a sale could be made which would yield the stockholder 10 could hardly be thought an investment a reasonable person would retain. The loss to the stockholder by a failure to sell out on a basis which would yield him 10 per cent, instead of the 3 he is receiving is in fact much greater than it would be if a' concern went on neither making nor losing when the investment would earn 4 per cent, elsewhere. It does not seem reasonable that the majority should have power to make a sale in the latter case, and not in the former. In neither case would the sale prevent positive loss, but in each it would result in positive gain. And the question is one of future prospects. Its decision requires the exercise of business judgment, ^sagacity, and power to forecast coming events. It is not an issue appropriate for trial and decision in courts, but rather one to be settled by the judgment, of the men conducting the business in question. In a limited sense, the majority act as trustees for all the stockholders. When their acts are impugned by the minority, it is not the function of the court to set its judgment against theirs in settling the wisdom or policy of proposed action. By the contract of association, all questions of this nature were committed to the majority for final decision. Gamble v. Water Co., 123 N. Y. 91." Held : Minority stockholders in the absence of cause, were not entitled to en- join sale of the assets or to have them sold at public auction, instead of private sale, as determined by the majority, or to the appointment of a receiver to assume charge of the liquidation of assets. But see Van dss v. Premier Petroleum Co., 113 Me. 180. C/. Phinizy v. Anniston City Land Co., cited ante in note 1, page 624. CBAP. I.] THORNTON V. MARGINAL FREIGHT RAILWAY COMPANY. 751 Eailway Company, for money due from it to him before May 6, 1872, upon which judgment execution was duly issued, and remained imsatisfied ; that the charter of the Marginal Freight Railway Com- pany was repealed or attempted to be repealed, by the St. of 1872, c. 342, passed May 6, 1872, at which time it owned certain railroad tracks in the streets of Boston; that the Union Freight Railroad Company was incorporated by the same statute, and by virtue thereof took these tracks ; that the Marginal Freight Railway Com- pany, being dissatisfied with the estimate duly made of its damages by reason of such taking, filed a petition to the Superior Court for a jury to estimate such damages, which application was still pending ; that the interest of the Marginal Freight Railway Company in its claim for damages could not be come at to be attached or taken on execution in an action at law against it; and that the Marginal Freight Railway Company neglected to press its application for a jury. The prayer of the bill was that the Marginal Freight Railway Company might be ordered to prosecute, or to permit the plaintiff to prosecute, that petition to final judgment ; that the Union Freight Railroad Company might be ordered to pay to the plaintiff so much of such judgment as might be recovered against it as might be neces- sary to satisfy the plaintiff's debt; that the defendants might be restrained from discontinuing or settling the action without first paying to the plaintiff the amount of his debt ; and for further relief. The Union Freight Railroad Company demurred, on the ground that the plaintiff's judgment against the Marginal Freight Railway Company was void, and that the bill could not be maintained against either defendant, because the charter of that corporation was repealed more than three years before the recovery of the judgment or the bringing of the bill ; and for want of equity. The Marginal Freight Railway Company filed an answer, contain- ing a demurrer for want of equity. Hearing before Endicott, J., who reserved the case, on the bill and demurrers, for the consideration of the full court. Gray, C. J.i The bill is framed upon the theory that the plaintiff has recovered a vahd judgment against the Marginal Freight Rail- way Company ; that that company has a claim for damages for the taking of its tracks by the Union Freight Railroad Company ; and that the interest of the former company in this claim cannot be come at to be attached or taken on execution in a suit at law against it, and should therefore be applied in equity to the payment of the plamtiff 's judgment debt. The difficulties in the way of maintaining this bill appear to us to be insuperable. Upon the absolute repeal of a charter by the Legislature, acting within the limits of its constitutional authority, the corporation 1 Portions of opinion omitted. 752 DissoLXJTiON. [chap. I, ceases to exist,' and no judgment can afterwards be rendered against it in an action at law.^ But such repeal does not impair the obliga- tion of contracts made by the corporation with other parties during its existence, or prevent its creditors or stockholders from asserting their rights against its property in a court of chancery, in accordance .with the reasonable regulations of the Legislature, or with the general principles and practice in equity. Foster v. Essex Bank, 16 Mass. 245. Eead v. Frankfort Bank, 23 Maine, 318. Merrill v. Suffolk Bank, 31 Maine, 57. Mumma v. Potomac Co.' 8 Pet. 281. Curran v. Arkansas, 15 How. 304. Bacon v. Robertson,^ 18 How. 480. Lum v. Robertson, 6 Wall. 277. Upon the repeal of the charter of the Marginal Freight Railway Coihpany by the St. of 1872, c. 342, which was passed and took effect on May 6, 1872, the corporation was nevertheless, by virtue of the Gen. Sts. c. 68, § 36, continued a body corporate for the term of three years afterwards, for the purpose of prosecuting and defending suits by or against it, and of enabling it gradually to settle and close its concerns, to dispose of and convey its property, and to divide its 1 See note 1, page 744, unte. ^ See note 1, page 743, ante. ' In this case, Stohy, J. said : Dissolution via surrender, " cannot, in any just sense,, be considered within the clause of the Constitution of the United States on this sub- ject, an impairing of the obligation of the contracts of the company by those states, any more than the death of a private person can be said to impair the obligation of his contracts. The obligation of those contracts survives ; and the creditors may enforce their claims against any property belonging to the corporation, which has not passed into the hands of bona fide purchasers. ... A corporation, by the very terms and nature of its political existence, is subject to dissolution by a surrender of its cor- porate franchises, and a forfeiture of them for wilful misuser and nonuser. Every creditor must be presumed to understand the nature and incidents of such o, body politic, and to contract with reference to them." * In this case, Campbell, J. said : "If the statement of the consequences of a dis- solution upon the debts and credits of the corporation is literally taken, there can be Ho objection to it. The members caimot recover nor be charged with them, in their natural capacities, in a court of law. But this does not solve the difficulty. Th& question is, has the bona fide and just creditor of a corporation, dissolved under a judi- cial sentence for a breach in its charter, any claim upon the corporate property for the satisfaction of his debt, apart from the reservation in the act of the legislature which directed the prosecution? Can the lands be resumed in disregard of their rights by- vendors, who have received a full payment of their price, and executed an absolute conveyance? Can the careless, improvident or faithless debtor plead the extinction of his debt, or of the creditor's claim, and thus receive protection in his delinquency ? The creditor is blameless — he has not participated in the corporate mismanagement, nor procured the judicial sentence ; he has trusted upon visible property acquired by the corporation, in virtue of its legislative sanction. How can the vendors of the lands or the delinquent debtors resist the* might of his equity? But if the claims of the creditor are irresistible, those of the stockholder are not inferior, at least against th& parties who claim to hold the corporate property. The money, evidences of debt, lands and personalty acquired by the corporation, were purchased with the capital they lawfully contributed to a legitimate enterprise, conducted under the legislative authority. The enterprise has failed under circumstances, it may well be, which en- title the state to withdraw its special support and encouragement ; but the state does not affirm that any cause for the confiscation of the property, or for the infliction of a heavier penalty, has arisen. It is a case, therefore, which courts of chancery, upon their well-settled principles, would aid the parties to realize the property belonging to the corporation, and compel its application to the satisfaction of the demands which, legitimately rest upon it." CHAP. I.] THOENTON V. MARGINAL FREIGHT RAILWAY COMPANY. 753 capital stock.i And, under § 37 of the same chapter, this court, sitting in equity, on the appHcation of a creditor or stockholder, at any time within the three years might have appointed receivers, whose powers should continue as long as the court should deem neces- sary, to take charge of the estate and effects of the corporation, to collect the debts and property due and belonging to it, to prosecute and defend suits, in its name or otherwise, and to do all other acts which might be done by the corporation, if in being, necessary for the final settlement of its unfinished business. No appliqation having been made for the appointment of a re- ceiver, the Marginal Freight Railway Company, at the expiration of the three years, ceased to have any such existence that a valid judgment could be rendered against it in an action at law. We can- not regard the provision of the St. of 1876, c. 229, § 3, that' "nothing in this act contained shall be construed as affecting the legal rights of" that corporation, (which is not otherwise mentioned in the act,) as a legislative recognition that it had, at the time of the passage of this statute, any rights or any existence. The judgment recovered by the plaintiff against the Marginal Freight Railway Company in July, 1875, was therefore wholly void, as if it had been rendered against a dead person. This bill cannot be maintained under that clause of the Gen. Sts. c. 113, § 2, which confers upon this court jurisdiction of "bills by creditors to reach and apply, in payment of a debt, any property, right, title or interest, legal or equitable, of a debtor, within this state, which cannot be come at to be attached or taken on execution in a suit at law against such debtor;" because that clause extends only to living debtors and existing corporations. And a court of equity has no general jurisdiction of a bill by a single creditor, who has not recovered a valid judgment against his debtor, and whose debtor has ceased to exist, to apply, to the payment of his debt, property of the debtor in the hands of a third party. The reasons above stated being conclusive against the right to maintain this bill, the demurrer of the Union Freight Railroad Com- pany must be sustained, and the Bill dismissed. ' In Foster v. Essex Bank, 16 Mass. 245, Pakkeb, C. J. said : "It was an incumbent duty of the legislature to provide that corporations should not avoid their obligations, by ceasing to exist ; and the mode adopted in the act in question [Stat. 1819, c. 43, the precursor of Gen. Sts. c. 68, § 36] was certainly the most favorable. Had they pro- vided that all corporations should cease to transact business, three years before the time for which they were created expired, in order that they might brihg their affairs to a close, it might justly be said that their privileges were taken away, and the grant of the government was impaired. But to provide for their continuance for such pur- pose, three years beyond their term, is no breach of their privileges ; and is, in fact, nothing more than estabhshing a mode by which their business maybe closed, and their contracts carried into execution. It is in the nature of an administration upon their estate, and is only doing, in a more convenient form, what a court of equity, with com- petent powers, might do ; viz., making the common fund answerable for the debts which were created on the credit of that fund." 754 DISSOLUTION. [chap. I. SHAYNE V. EVENING POST PUBLISHING CO. 168 N. Y. 70 ; 55 L. R. A. 777. 1901. Appeal, by permission, from an order of the Appellate Division which reversed an order of Special Term granting a motion to revive and continue against the trustees- of a dissolved corporation an action for libel commenced prior to its dissolution and denied such motion. The following is the question certified : " The defendant having been dissolved by the expiration of the term limited in its certificate of incorporation, and this action being for libel, and the action having for these reasons abated, has the court power to revive or continue the same against the trustees of the dissolved corporation in office at the time of such dissolution ? " Paeker, C. J. Plaintiff brought this action to recover damages for alleged libels published in the defendant's newspaper in Febru- ary, 1899, and when the action came on for trial on the 15th day of May, 1900, the defendant's attorney brought to the attention of the court the fact that the corporate existence of the defendant had ter- minated on the next preceding first day of January. As the action had abated, the plaintiff thereafter moved the court at Special Term for an order continuing and reviving it against the former directors of the defunct corporation and the motion was granted. The Su- preme Court in its Appellate Division, however, reached the conclu- sion that the death of the corporation operated to destroy the cause of action and so it reversed the order. There was a difference of view in the court, but the majority apparently felt constrained to follow the occasional dicta of judges that in actions of slander, libel, assault and battery, or false imprisonment, the property of the share- holders of the corporation is no more subject to pursuit after the dis- solution of the corporation than is the property of an individual after his death. The statute providing for the maintenance -of actions against executors or administrators of a wrongdoer, expressly excepts causes of the character last above named from the operation of the statute. (2 R. S. 447.) This statute modified the rule of the com- mon law so as to permit actions to be brought against executors or administrators for wrongs done to property rights or interests of per- sons ; but it does not affect one way or the other causes of action against corporations. Nor is there any statute in this state indicat- ing a legislative policy to prevent the maintenance of actions against a corporation or its trustees after dissolution, whether the cause of action be founded on a wrong or otherwise. Nor are we foreclosed by authority in this court from considering the question on its merits, for neither the diligence of counsel nor patient investigation CHAP. I.] SHAYNE V. EVENING POST PtJBLISHING CO. 755 on our part has brought to light any decision of this court bearing directly upon the question. .For this court to lay down a rule which would cut off causes of action for wrongs against a corporation upon its dissolution would seem to be both arbitrary and unjust, and in some cases it could be taken advantage of by the officers of the corporation by permitting the charter to expire and afterwards reorganizing, instead of renew- ing the charter before its expiration. In this case there is no question of the good faith of the defendant. Its charter was allowed to expire by an oversight and for a little time it proceeded as if its charter were in full force and effect. But if it be true, as the defendant contends, that the termination of the charter operated of itself to put an end absolutely to all causes of action for wrongs, then it matters not whether the termination be due to oversight or design, for it is the civil death of the corporation, and not the cause of its death that destroys causes of action for wrongs. It hardly need be suggested that if such were the established rule there would be found plenty of persons interested in corporations who would plan to so take advan- tage of it as that meritorious causes of action might be destroyed with only the temporary embarrassment and expense incident to the organization of a new corporation. Of still further importance, however, is the fact that such a rule would work unjustly in every case to a plaintiff in an action for libel such as this one, assuming as we should that the plaintiff has a meritorious cause of action. If a recovery be had during the lifetime of the corporation, the moneys required to satisfy the judgment are necessarily taken from assets belonging to the stockholders and reduce the value of their holdings in the amount required to pay the judgment. If a judg- ment be recovered after the termination of the existence of the cor- poration the result is the same ; for the avails of all the assets of the corporation after payment of all just debts and claims owing by it must be distributed among the stockholders if the corporation be wound up, or if another course be taken and a reorganization be had, the assets of the new corporation are reduced in value in the amount required to pay the judgment. So far as the stockholders, who are the owners of all of the assets of the corporation are concerned, therefore, it matters not whether the judgment be taken before dis- solution or afterward, for in any event it is the assets 5f the corpora- tion which are used in satisfying the demand. In the one case the action is prosecuted to judgment against the corporation, and in the other against the directors, who by force of the statute have become the trustees of the assets of the corporation for the benefit of the stockholders. But this is a difference of form, not of substance, for both the corporation and the trustees represent the assets out of which the judgment must be satisfied and in which the stockholders 756 DISSOLUTION. [chap. I. are alone interested after the satisfaction of all just debts and de- mands. It is apparent, therefore, that the stockholders have no just ground upon which to predicate a claim that the party who has been wronged by the corporation shall be deprived of his cause of action in the event of the dissolution of the corporation. On the other hand, the plaintiff needs his damages, and in some cases the vindication which an award of damages brings, none the less because, designedly or carelessly, the charter of the corporation is permitted to expire. If we are right in the view thus expressed as to the merits of the controversy, there can be no doubt what would be the decision of the court were the question one which had never before been up for consideration in the courts of this country or England. , It is urged, however, that notwithstanding that the merits appeal strongly in the plaintiff's behalf, and that there is an utter absence of decisions in this state standing in the way of a just determination, we are pre- vented from making that determination by a rule of the common law of England which concededly would have cut off such a claim as plaintiff's. Inasmuch as the Constitution of 1777 provided that "Such parts of the common law and of the acts of the legislature of the colony of New York as together already form the law of the said colony . . . shall be and continue the law of this state, subject to such alterations as the legislature shall make concerning the same," it is contended that the common law is now in force except so far as it may have been- expressly altered by acts of the legislature of this state. This court has interpreted this provision of the Constitution to mean not that all the common law of England was the law of the colony at the time of the making of the Constitution, but only so much of it as was applicable to the circumstances of the colonists and conformable to our institutions. (Cutting v. Cutting, 86 N. Y. 522, 529 ; WiUiams v. Williams, 8 N. Y. 525, 541.) It is at least doubtful, as will be apparent when we come to con- sider briefly the history of the rule, whether it did become a part of the law of this state; but we prefer to rest our decision on the ground that if such a rule were appUcable to this state at the time of the adoption of the Constitution, the effect of subsequent legisla- tion regarding corporations created by and under the laws of this state has been such as to render it wholly inapplicable. This rule had its origin when corporations were either municipal, ecclesiastical, or eleemosynary, and business corporations were unknown. There were no stockholders or natural persons who were entitled to the assets of the deceased CQrporation and, as in the case of an indi- vidual dying without heirs, the personalty went to the king, while to prevent the realty from escheating to the king it was held that it reverted to the donor upon the ground that the grant being made to the corporation for public or charitable uses it was made only for CHAP. I.] SHATNE V. EVENING POST PUBLISHING CO. 757 its life. Against those corporations * all causes of a,ction whether upon contract or ,for tort were extinguished, and so, too, were all causes of action which the corporation had against individuals. (Kyd on Corporations — pubUshed 1793 — vol. II, page 516 ; Angell and Ames on Corporations, §§ 779 and 779a; Grant on Corporations, 804.) Angell and Ames in § 779a say : "The rule of the common law in relation to the effect of dissolution upon the property and debts of a corporation has in fact become obsolete -and odious. Practically it has never been appUed in England to insolvent or dissolved monied corporations. . . . Indeed, at this day, it may well be doubted whether in the view at least of a court of equity it has any application to other than public and eleemosynary corporations with which it had its origin." It will be observed that the learned authors do not suggest that it was never apphed by the courts to other than pubhc and eleemosynary corporations, but that it is no longer applied.^ In this state the rule has never been applied to business corpora- tions, and as early as 1811 an act was passed constituting the direc- tors of such corporations, in the event of voluntary dissolution, trustees to settle its affairs and divide the money among the stock- holders after paying the debts due and owing by the corporation at the time of its dissolution. This statute, without substantia,l change, is now to be found in section 30 of the General Corporation Law, and when it is considered in connection with the other provisions of the statute relating to business corporations we find that the ancient rule that the Uabilities of the corporations as well as the debts owing to them are extinguished by the dissolution of the corporations, the personalty vesting in the king and the real estate in the donor, has been entirely ignored by the law-making power in this state, which has instead provided a more equitable method for the distribution of the assets, which secures to the stockholders what is left after those are satisfied who have valid claims against the corporation. So if it be technically true that the rule once prevailed in this state because of the language of the Constitution of 1777 — which I doubt — it is no longer in force because of the changed conditions surrounding the ' The rule still prevails as to public and charitable corporations. Mormon Church c. United States, 136 U. S. 1. ' It was applied in Fox v. Horah, 36 N. C. 358, but expressly overruled by Wilson v. Leary, 120 N. C. 90. It was adopted in Indiana in State Bank v. State, 1 Blackf. 267, but overruled in State v. Bailey, 16 Ind. 46. It was recognized in Coulter v. Robert- son, 24 Miss. 278 but repudiated in Bank of Mississippi ». Duncan, 56 Miss. 173. Accord: Heath v. Barmore, 50 N. Y. 302. ("Where lands are conveyed abso- lutely to a corporation having stockholders, no reversion or possibility of a reverter remains in the grantor.") In Scott V. Gittings, 125 Md. 595, held that upon dissolution of a corporation, cer- tain of its shares which had stood in the name of "R, Agent," with dividend accumu- lations, for forty years, without a claimant, did not escheat. The case reviews the precedents and contains a good discussion of the common law rule upon the effect of corporstte dissolution as modified in the United States. 758 DissoLirriON. [chap. i. creation and dissolution of corporations and the distribution of the assets after dissolution. Ram in his work on Legal Judgments (page 73) states the rule, as it has often been appHed by the courts and as we find it our duty to apply it in this case, in these words : "When a rule relates to the nature of things, as such nature existed at a former period, and the reason of the rule corresponds with that nature, then at an after time, if the nature of the things is altered, and by this alteration the rule is become too general, and the reason given for it fails, the rule in a case of this kind is no longer binding. In Davies v. Powell (Willes, 46), Willes, C. J., giving the opinion of the court, says, 'When the nature of things changes, the rules of law must change too.'" Nor do we think the rule Actio personalis moritur cum persona should be applied. It has long been in force both in England and this country, and in this state has received legislative approval in so far as causes of action for libel, slander and assault and battery are concerned, but our decisions have not extended the rule to the civil death of either persons or corporations. Nor has the language of our statute which authorizes the continuance of certain actions for moneys against the executors and administrators of wrongdoers, but excepts actions for libel, slander, assault and battery and false imprisonment, been held to include the civil death of either individuals or corpora- tions,' and it is sufficient for our present purpose to say that such an intent on the part of the legislature cannot be spelled out of the language employed by it. It is said that the rule of the common law, which has not been interfered with by statute so far as actions for libel are concerned, may, by a process of analogical reasoning, be so extended as to include artificial " persons," and death resulting from an act of God to embrace death of a corporation by execution or other operation of law, and, further, that such reasoning has led learned judges to assume it to be the law that the dissolution of a corporation relieves its assets from that which would otherwise con- stitute a legal burden — that of responding for the damages occa- sioned to others through the misconduct of its representatives or agents. If it be true that, reasoning by analogy, but a single ad- vance step need be taken in order to support the defendant's position, that step should not be taken, however short it may be, inasmuch as the result reached would be without support in the elements of justice, as we have already attempted to show. It is not a short step, however, for the reason of the rule preventing suit against an executor for the wrongs of his testator is stated to be that as neither the executors of the plaintiff nor those of the defendant have com- mitted in their own personal capacity any manner of wrong or injury, they should not be prosecuted for torts in actions which were origi- nally designed for the punishment of the wrongdoer. On the other hand, the object of actions ex contractu being to reach "the property ;HAP. I.] ROSENBAtJM V. UNITED STATES CREDIT SYSTEM CO. 759 •ather than the person, in which the executors now have ike same interest hat their testator had before," it was decided that they should be re- vived and continued against the executor.' (1 Woerner's Admihis- iration, §§ 290, 291, 292, and notes ; PhilHps v. Homfray, L. R. [24 3h. Div.] 457 ; Finlay v. Chirney, L. R. [20 Q. B. Div.l 502-504.) The remedy of a plaintiff, in an action for libel to recover damages, is against the property of the corporation solely. Whether his judg- oaent be rendered against the corporation or against the trustees ifter dissolution, he can have satisfaction only out of the assets of the corporation. The object of his action, therefore, is to reach the property of the corporation, and, hence, it is in all respects within the very reason assigned in support of the right of a creditor to bring actions ex contractu against the executor. Our conclusion is that as the plaintiff could have had satisfaction of his claim — if he have one — out of the assets of the defendant corporation had he prosecuted his action to judgment before the termination of the latter's corporate life, so should he now have satisfaction as he has taken no step which either forfeits or affects his right, unless some rule of law stands across the pathway leading to justice for him, and after a careful examination of the subject we have been unable to find any such rule of law in this state. The question certified to this court by the Appellate Division should be answered in the afi&rmative, its order reversed and that of the Special Term afl&rmed, with co^ts. Ordered accordingly. ROSENBAUM v. UNITED STATES CREDIT SYSTEM CO. 61 N. J. L. 543. 1898. The plaintiff below and here seeks damages for breach of covenant for agency between him and the defendant, an insolvent corporation of this state. On the 1st of December, 1892,. by agreement in writing under seal, it was stipulated that the plaintiff should become and be the agent of the defendant, for the State of Massachusetts, for the term of Sve years thence next ensuing, in procuring appUcations for certifi- eates'of indemnity against excess of losses from credit, and in collect- ing and receiving all fees and premiums for certificates of indemnity issued upon applications therefor procured by him. The plaintiff was to secure new business for the company and at his own expense, to establish and maintain an office in the city of Boston, and employ md pay agents and other assistants sufficient in number to enable 760 DISSOLUTION. [chap. I. him to fully execute the contract upon his part. He was to be paid a stipulated sum per thousand dollars of guarantee issued by the company at his instance, upon receipt by the company of the pre- miums therefor. The declaration alleges that this contract was broken by the. de- fendant on the 23d of August, 1894, and from thenceforward by the defendant's ceasing to employ the plaintiff, without fault upon his part, and that he has suffered damage by deprivation of profits from the agency, and by loss of value in the furniture of the office established by him, and otherwise. Among other pleas filed by the defendant was this : That on the 23d of August, 1894, in a suit in the Court of Chancery of New Jersey between the commissioner of banking and insurance and the defendant, the latter, by the court's order, was required to show cause before it, on the 4th of September then next, why an injunction should not issue and a receiver be appointed pursuant to the statute in such case made and provided, and that it and its agents were mean- while required to desist and refrain from collecting or receiving any money owing to the defendant, and from paying out any money, and from selhng, assigning or transferring any of its property ; that on the 4th of September, 1894, it was adjudged by the Court of Chan- cery that the defendant was insolvent, and that it had suspended its ordinary business for want of funds to carry on the same, and that it was not about to resume its business in a short time with safety to the public and advantage to its stockholders, and that a receiver be appointed to take its assets and perform the duties imposed upon him by the act concerning corporations and its supplements; that on the 2d of October, 1894, by another order, the same court decreed that the charter of the defendant be and the same thereby was declared forfeited and void, except for the purpose of collecting the property and assets of the defendant, selhng the same §nd distribut- ing the proceeds of sale among the creditors and stockholders of the defendant, and that in pursuance of such orders, the defendant, on the 23d of August, 1894, and from thence until the present time, ceased to transact business, and ceased to employ the plaintiff as its agent, which is the breach of covenant by the plaintiff in his declara- tion alleged. The plaintiff demurred to this plea, and the Supreme Court over- ruled the demurrer. Upon this action of the Supreme Court error is assigned. The Chancellor. The first question presented is whether there was a breach of the contract upon the part of the defendant. In the case of People v. Globe Mutual Life Insurance Co., 91 N. Y. 174, upon which the opinion of the Supreme Court reUes, both parties to the contract, the insurance company and its agent, were restrained by injunction, at the instance of the attorney-general, HAP. I.] KOSENBAUM V. UNITED STATES CREDIT SYSTEM CO. 761' rom the further prosecution of the business of the company and the xercise of any of its corporate franchises ; also a receiver was ap- lointed and the corporation was dissolved, and it was held that action ly both the contracting parties was paralyzed by the injunction so hat. neither could put the other in the wrong, and there could be no ireach of the contract. The case before us differs from that. In this case the suspension if the business of the company was in August, and the forfeiture of he charter was in the October following. The only injunction was hat which was contained in the order to show cause, of the 23d of August, which forbade the contraction of debts, the collection of Qoney due to the defendant and the assigning of the defendant's issets, but did not restrain the defendant from exercising its fran- ihises, or the plaintiff from continuing to procure and forward appli- lations for guarantee, and the defendant from considering whether he guarantee desired should be issued. By its terms it was to con- inue in force only until the 4th of September. On the last-named lay there was an adjudication of insolvency and an appointment of I receiver, but no continuance of the injunction or the issuance of inother in its stead. The statutes nowhere provide that a mere adjudication of insol- vency and appointment of a receiver shall take irom the corporation ts right to transact business. The practicail effect of the insolvency ,nd receivership would probably be the stoppage of business, but the ight to continue would not be taken away. The chancellor might lave issued an injunction to restrain the defendant and its agents rom exercising any of the privileges or franchises of the defendant Gen. Stat., p. 919, § 70), but it does not appear that he did so. Put- ing the corporation in charge of the receiver did not work its dis- olution. Kirkpatrick v. Board of Assessors, 28 Vroom 53. It is , hen apparent that prior to October 2d, 1894, the defendant may lave broken its covenant with the plaintiff. The second and broad question in the case is whether the for- eiture of the charter will bar the plaintiff's recovery of damages for he term of the contract unexpired at the date of that forfeiture. Following the reasoning of the New York Court of Appeals in 'eople V. Globe Mutual Life Insurance Co., supra, the Supreme Court Doked upon the contract as one merely for skilled personal service nd treated the insolvency of the defendant and forfeiture of its barter as analogous to the death of the master of such a servant, ?hich, as an implied condition in the contract, terminated it. The Court of Appeals of New York carried the doctrine of implied ondition in the contract still further. Judge Finch, in the case last ited, said : "What had happened was a dissolution of the contract y the sovereign power of the state, rendering performance on either ide impossible. And this result was within the contemplation of the 762 DISSOLUTION. [chap. I. parties and must be deemed an unexpressed condition of their agree- ment. One party was a corporation. It drew its vitality from the grant of the state, and could only live by its permission. It existed within certain defined limitations, and must die whenever its creator so willed. The general agent who contracted with it did so with knowledge of the statutory conditions, and these must be deemed to have permeated the agreement and constituted elements of the obligation." The judge admits that this implication will not exist if it shall be made to appear that the corporation was culpably responsible for the intervention of the state. It appears to us that both these implied conditions are forced, or at least forced in their application to cases in this state similar to the case now jconsidered. It appears to us that the material fact that the corporation defendant is a stock company, and that its capital stands as a trust fund for the payment of its debts, is lost sight of. Such a company may become insolvent, and its charter may be for- feited when its assets may be more than sufiicient to pay its debts. Everyone who deals with such a corporation does so in view of the trust fund its capital provides, and the security that fund is intended to afford. The stockholders who provide the fund invite confidence because of it, that through such confidence their venture may be profitable to them. The mere statement of this situation makes con- spicuous the injustice of any course of reasoning which will return to the stockholders their capital before satisfaction of all losses in- duced by faith in it shall be made. The state creates corporations and requires of them the provision of such a trust fund, and when it destroys their corporate existence, natural justice requires that it shall provide for distribution of the fund so that no part of it shall be returned to those who offer it as security for the action of others, until the latter shall have all the protection against loss in their undertaking that it is capable of affording. We think that our statute undertakes this duty. It provides that the assets of an in- solvent corporation shall be collected and sold, and that the proceeds of sale shall be divided among the creditors of the corporation (Gen. Stat., p. 920, § 72), in proportion to the amount of their respective debts, including debts not due, and making proper rebate, and that the surplus only shall go to stockholders. Gen. Stat., p. 923, § 80. The general scheme of the statutes contemplates the ascertainment and payment of all just claims against the corporation. The terms "creditor" and "debt" are not used in a narrow, restricted or tech- nical sense. By its provision for reference of a claim to a jury (Gen. Stat., p. 922, § 78 ; Pamph. L., 1896, p. 302, § 77), machinery whereby the amounts of claims sounding in unliquidated damages may be ascertained is provided, and such claims are brought within the term "debts." We agree with the view taken in the Court of Chancery CHAP. I.] BRADLEY V. EEPPELL. 763 with respect to the liberality with which the statutes are, in this re- spect, to be construed. Spader v. Mural Decoration Manufacturing Co., 2 Dick. Ch. Rep. 18 ; BoUes v. Crescent Drug and Chemical Co., 8 Dick. Ch. Rep. 615. It is considered that the existence of this trust fund, and the evi- dent policy of the state with reference to it, forbid the application of the rule invoked by the Supreme Court under the analogy it deemed to exist. By the terms of the decree which forfeits the defendant's charter, the corporation is not dead, so far as the ascertainment of its obligations and their satisfaction are concerned. The record shows that this suit is brought by permission of the Chancellor virtually as a feigned issue out of Chancery in the insolvency proceedings, to aid in the ascertainment of an obligation or debt, and consequently the distribution of the assets of the corporation. It is a step in the administration controlled by the statute. The demurrer to the plea should have been sustained, hence the judgment below will be reversed. BRADLEY v. REPPELL;i 133 Mo. 545. 1895. Ejectment. Plaintiff offered in evidence two deeds, each dated August 20, 1880, from the West Kansas City Land Co., a corpora- tion, to one Whitehead. Defendant appeals from an order, setting aside a verdict in his favor, which verdict was rendered by the jury upon the exclusion of plaintiff's said deeds. The corporation was chartered by special act approved March 14, 1859. Nothing was therein stated as to the duration of its corporate existence. By the general law in force at the time this company was thus in- corporated it was provided that "every corporation, as such, has power: First. To have succession by its corporate name, for the period limited in its charter, and when no period is Umited, for twenty years." R. S. 1855, vol. 1, p. 369, sec. 1. And that "upon the dis- solution of any corporation, ... the president and directors, or managers of the affairs of said corporation, at the time of its dissolu- tion, . . . shall be trustees of such corporation, with full power to settle the affairs, etc." R. S. 1855, vol. 1, p. 375, chap. 34, sec. 24. Bbace, p. J. : The corporation thus chartered was an ordinary business corpora- tion whose corporate existence by virtue of these statutory provisions 1 Facts restated from opinion; portions of latter 'omitted. 764 DISSOLUTION. [chap. I. expired on the fourteenth of March, 1879) and the two deeds rejected by the court upon the trial were executed after that date in the name and under the corporate seal of the company "by Wilham McCoy,' President" "Attest, Edw. A. Allen, Secretary." The defendant's claim of title was by adverse possession, and there is not in the case any question of estoppel to deny the existence of the corporation by reason of the relation sustained by the defendant to the land company or of any dealings by him directly or indirectly with it, or any person connected with or representing it. Why, then, should the defendant be precluded from showing by the law that gave that company its corporate existence that at the time these deeds were made it was dead ; incapable of executing a legal conveyance of the real estate in question, and that said deeds were therefore void, and no evidence of title. The answer returned by the counsel for plaintiffs to this question is, "that it is the settled law of this state that a conveyance to or by a corporation de facto can be assailed on the grounds of lack of cor- porate existence only by the state." This answer does not meet the question, unless it be assumed that a corporation, whose corporate existence has expired by the terms of the law which created it, still exists as a de facto corporation as to all persons except the state, an assumption that we think is not sus- tained by the authorities cited, and is not "the settled law in this state." On the contrary, in this state, as elsewhere, unless otherwise pro- vided by statute, the law is, that where the term of the existence of a corporation is fixed by its charter or the general law, upon the expira- tion of that term the corporation becomes ipso facto dissolved ; it can no longer act in a corporate capacity and its title to property ceases. 2 Beach, Priv. Corp., sec. 780; 2 Morawetz, Priv. Corp., sec! 1031. In such an event in this state the title to itg property is by statute devolved upon trustees for the settlement of its affairs and the distribution of its assets. R. S. 1855, supra; R. S. 1889, sec. 2513. ,And thereafter it has no power to make a legal contract or convey property in its corporate name and capacity ; it ceases to be a corporation de jure et de facto, for the reason that there is no law in force authorizing its existence, and no law by virtue of which it might exist, and no person, unless estopped by his own action, ought to be, or can be, precluded from showing this fact, apparent on the face of the law itself, without the necessity of any judicial investiga- tion, in an issue involving his own personal rights and interests. It is true it is sometimes broadly stated as settled law, in sub- stance, "that a transfer of property to or by a corporation de facto will be binding, and valid as against all parties except the state," but this is simply a restatement in another form of the proposition ruled. It implies that the case is one in which a corporation may CHAP. I.] • BRADLEY V. EEPPELL. 765 by law exist, for there can be no corporation de facto when there can not be a corporation dejure (1 Beach, Priv. Corp., sec. 13 ; 4 Thomp. Corp., sec. 5275 ; 1 Ibid., sec. 523) ; at least as to any person who is not precluded by his own action, or that of those under whom he claims, from questioning its existence. Whatever may be the rule as to these, as to all other persons there must be at least color of law for its corporate existence to preclude such inquiry, and it would seem to go without saying that a law which gives existence to a cor- poration for a certain number of years, at the end of which time it must surely die, can not give. color to its corporate existence after the date of its death as decreed by the terms of that same law. Judge Thompson, in his recent work on private corporations, says : "There is much judicial authority for the proposition that where a corporation is brought to an end by lapse of time, that is, by the expiration of the distinct limitation of its life in its charter, any further exercise of its corporate powers may be questioned collaterally. The governing principle here is that, upon the expiration of the term limited by the charter for the existence of the corporation its dissolu- tion is complete. ' The dissolution in such a case,' it has been said, 'is declared by the act of the legislature itself. The limited time of existence has expired, and no judicial determination of that fact is requisite. The corporation is de facto dead.'" Thomp. Corp., sec. 530, citing in support of the text. People v. Manhattan Co., 9 Wend. (N. Y.) 351 ; Morgan v. Ins. Co., 3 Ind. 285 ; Wilson v. Tesson, 12 Ind. 285 ; Grand Rapids Bridge Co. v. Prange, 35 Mich. 400 ; Dob- son V. Simonton, 86 N. C. 492 ; Sturges v. Vanderbilt, 73 N. Y. 384 ; Bank of U. S. v. McLaughlin's Adm'r, 2 Cranch C. C. (U. S.) 20. In Sturges v. Vanderbilt, 73 N. Y. 384, decided in 1878, Rapallo, J., said : "It is further claimed, that, until a corporation is declared dissolved by judicial decree, creditors may proceed against it by its corporate name, and that it remains in esse until formally adjudged dissolyed. All the cases cited in support of this proposition relate to a dissolution in consequence of insolvency or nonuser or misuser of the corporate franchises, or some other cause of forfeiture. In such cases, it is well settled that the dissolution does not take effect until judicially declared. But the principle upon which that class of cases rests is not applicable to a dissolution by expiration of the charter. The dissolution in such a case is declared by the act of the legislature itself. The limited time of existence has expired and no judicial determination of that fact is requisite. The corporation is de facto dead. (People v. Walker, 17 N. Y. 503 ; Greeley v. Smith, 3 Story, C. C. R., 658.) Where the charter of a corporation is annulled by act of the legislature, the corporation is extinct and no judgment can be rendered against it. (Mumma v. Potomac Co., 8 Pet. 286; Merrill v. Suffolk Bk., 31 Me. 57.) We have been referred to no authority holding a contrary doctrine." , 766 DISSOLUTION. [chap. I. In the case of Miller v. Coal Co., 31 West Va. 836, it was held, under the statute of that state, providing, in effect, that when a corporation shall expire or be dissolved suits may be brought, con- tinued, or defended, property conveyed, and all lawful acts be done in the corporate name in the like manner and with like effect as before such dissolution or expiration so far as is necessary to wind up its affairs, that a corporation continuing in business, and committing a tort after the expiration of the term of its existence as provided by its charter, was precluded from setting up the expiration of its cor- porate existence as so provided in an action against it by the person injured by such tort. Here we have a law by which the corporation might exist for certain purposes after its charter term had expired, and a state of facts which precluded the corporation from denying its existence ; in other words, law for the existence of the corporation, and an estoppel to deny it.^ We are cited by counsel for respondent to one other case, which has not yet been noticed, the case of the Catholic Church v. Tobbein, 82 Mo. 418, in which it was held that the plaintiff suing as a corpora- tion acquired no right to property devised to an unincorporated organization of the same name, by a will which took effect before the plaintiff was incorporated. It can not be seen how this case can in any way support the re- spondent's contention. On the contrary the ruling could have been made only upon an inquiry and finding that the alleged corporation was nonexistent at the time the will took effect. It was nonexistent then because there was no law authorizing its existence. If inquiry could be legitimately made in that case whether there was any law in force authorizing the existence of that corporation, why can not a like inquiry be made in the present case? The defendant was not precluded from making such inquiry by any act of his own, or of any other person under whom he claimed. He did not propose to bring in question the validity of any law, 1 In this case, Sntder, J. said : "The corporation coutined to prosecute its business in its corporate name, just as it had done before its charter expired. It continued to exist as a matter of fact after its franchise or legal right to exist had expired. It thus became a corporation de facto, but not de jure. ... A private business corporaticyi acting and carrying on its corporate business in its corporate name after its legal exist- ence has ended by the expiration of its charter must be held to be a corporation de facto ; ... so long as it in fact so carries on its business and contracts and incurs liabilities with or to third persons dealing with it as such de facto corporation, it may sue and be sued at law either in actions ex contractu or ex delicto, and it cannot defeat such action by alleging that its charter had expired before the cause of action arose. Its directors and stockholders by failing to wind up its business when the charter ex- pires, as it is their duty to do under our statute, cannot relieve the corporation from liability for acts done in its name and during its actual existence as a de facto corpora- tion. In order to relieve it from liability, the corporation must have ceased to exist both in law and in fact. And, consequently, when it is sued as a corporation, a plea, averring simply that it has ceased to exist in law or as a legal corporation, will be in- sufficient, but it must aver also that it had ceased to exist in fact at the time the alleged cause of action arose." HAP. I.] STATE V. CREAMERY PACKAGE MANUFACTURING CO. 767 uthorizing the existence of the corporation at the time these deeds rere made, or the regularity or validity of the corporation organized nder such law, or the validity of any of the acts of such corporation a determine which would require judicial investigation, but simply show by the law which once had given corporate existence to the V^est Kansas City Land Company, that at the time these deeds pur- ort to have been executed that corporation had ceased to exist, nd could not have executed them. Upon no principle of law with fhich we are familiar can he be precluded from so doing, and we think well considered case can be found, that, properly understood, gives upport to a ruling to that effect. We have been speaking of the law of the company's existence as , unit, for we fail to discover how the fact that the limit of the term if existence being contained in the general law, and not in the special ,ct, can in any way affect the principle we have been discussing, ["he general law became a part of the charter of the company at the aoment of its creation and must be read into it the same as if it had leen written therein. It follows from what has been said that the trial court committed 10 error in rejecting the deeds aforesaid when offered in evidence by he plaintiffs, and that it did commit error in setting aside the ver- lict for defendant and granting a new trial on the ground that it did iommit error in refusing to admit said deeds in evidence. Having thus reviewed this case and found that the trial court lommitted error in setting aside the verdict and granting a new trial or the reasons specified of record, and no other ground for such action ippearing upon the record thereof before us, the same is reversed md set aside and the cause will be remanded to the circuit court nth directions to enter up judgment in accordance with the verdict. Ul concur. Per Curiam. — The foregoing opinion handed down in division lumber one is adopted as the opinion of the court in banc. Bar- ;lay and Robinson, JJ., dissenting. Judgment will therefore be sntered as directed in the opinion.^ STATE V. CREAMERY PACKAGE MANUFACTURING COMPANY. 115 Minn. 207 ; L. R. A. 1915 A 892. 1911. After the former appeal, reported in 110 Minn. 415, defendant Qoved to modify the conclusions of law and order for judgment in 1 See note 2, page 118, ante. 768 DISSOLUTION. [chap. I. the manner described in the opinion. The motion was denied. From the judgment awarding plaintiff $290.13 as costs and disburse- ments, and prohibiting the Creamery Package Manufacturing Com- pany from continuing business in the state of Minnesota, it appealed. BuNN, J.i This is an appeal by defendant the Creamery Package Manufac- turing Company from a judgment entered in favor of plaintiff, for- feiting the license of defendant to do business in this state, and prohibiting it from continuing to do business in this state. The judg- ment was entered pursuant to the decision of the trial court, after such decision was affirmed by this court in State v. Creamery Package Manufacturing Co., 110 Minn. 415. After the opinion on motion for reargument was rendered, defend- ant, upon affidavits tending to show that it had discontinued the illegal acts which formed the basis of the decision that its license should be forfeited, moved the trial court for an order m,odifying its conclusions of law, by striking out the conclusion that defendant had forfeited its license to do business in this state and should by the judgment to be entered be prohibited from continuing its business therein under its license, and striking out the order for judgment, substituting an order for judgment restraining defendant from doing the illegal acts, providing that on violation of the injunction judg- ment might be entered, on proper notice and order, revoking defend- ant's license, and continuing the court's jurisdiction of the cause for the making of application for and the entry of such judgment. This motion was denied, and judgment was entered as before stated. As to the questions determined on the former appeal, we find no reason to change the views then expressed, and adhere to the decision. It is contended by defendant that the trial court denied its motion to modify the judgment on the ground that it had no discretion in the matter and no power to grant relief other than, that specified in the statute. While it does not clearly appear that the court did not exercise its discretion when it refused to modify the judgment, we will not place our decision upon that ground. The question is :' Did the trial court have the power, was it within its discretion, to grant relief other and less drastic than a forfeiture of defendant's right to continue business within this state? Was it within the court's discretion, notwithstanding the provision of the statute, to refuse or suspend the forfeiture, and simply enjoin the future violation of the law? There can be no doubt that in quo warranto proceedings, or pro- ceedings in the nature of quo warranto, to forfeit the franchise of a corporation for exercising rights which it does not possess under its charter, or for entering into an illegal contract, where the statute does not provide that the penalty of forfeiture shall follow, the 1 Portions of opinion omitted. CHAP. I.] STATE V. CREAMERY PACKAGE MANUFACTURING CO. 769 punishment rests in the discretion of the court. i The judgment may- be a general judgment of ouster, or it may be an ouster of the right to do the particular act complained of, or it may be a suspensive judgment of ouster, with a fine accompanying it, or it may be a'simple fine. This is the rule that defendant asks to have apphed to this case. It claims that this discretion exists even where, as here, the statute is mandatory in form, and clearly says that the corporation, if found guilty, shall thereafter be prohibited from continuing its business within the state. Counsel cites a number of cases in support of this contention, but the only cases where a statute prescribed the judgment, and, yet it was held to be discretionary with the court whether to follow the statute or deal out what it deemed justice in the particular case, are two cases from Missouri. State v. Armour, 173 Mo. 356 ; State v. Standard Oil, 218 Mo. 1. An examination of the authorities cited in State v. Armour to sup- port the court's conclusion that "the character of the judgment rests in the discretion of the court" does not, we think, support that conclusion. In Commonwealth v. Delaware, 43 Pa. St^ 295, the court held that the penalty provided by tlie statute was not in due course of law, and was therefore invalid. State v. Standard, 49 Oh. St. 137, supports the view that the court has discretion notwithstanding a statute ; but it was apparently not a Utigated question. There is abundant authority to support the proposition that, where the legislature has clearly said that forfeiture of its franchises should be the result of a corporation's violation of law, the courts ' have no discretion. Mr. Thompson, in his work on Corporations, lays down the rule that the character of the judgment in quo warranto cases rests in the discretion of the court, and uses the almost identical language employed by the Missouri court in the cases above referred to, but says: "But where the corporation has been guilty of acts which by statute are made a cause of forfeiture, the rule is different, and the court is without discretion where the case is made." 5 Thomp- son, Corporations (2d Ed.) § 5824. Cases that fully support this rule are Marion v. Mexican, 160 Ind. 558; State v. Pennsylvania, 23 Oh. St. 121 ; State v. Oberlin, 35 Oh. St. 258 ; State v. Omaha, 91 Iowa, 517. This court has never passed directly on the question, though in State V. Minnesota Central Ry. Co., 36 Minn. 246, 258, the court said that, where the statute provided the penalty of dissolution for a railway corporation that had suspended business for one year, it had no discretion, when -the facts clearly appeared, to refuse judg- ' Accord: State v. United States Endowment &c. Co., 140 Ala. 610; State v. Port- land &c. Gas Co., 153 Ind. 483. See People v. N. R. Sugar Refining Co., infra, page 787. 770 DISSOLUTION. iCHAP. I. ment of forfeiture. But as the court was not asked to impose a less penalty, or to suspend the forfeiture, the case does not control on the question now before us. We think, however, that on authority the rule is that the court has no discretion when the legislature has clearly provided the character of judgment to be rendered. On principle the question is quite clear. It was within the power of the legislature to say what penalty should be imposed upon a for- eign corporation that was found guilty of a violation of our laws. The legislature had the right to determine what the penalty should be, or they might have left it to the court to fix the penalty and de- termine the character of the judgment. They said in clear and explicit terms that a foreign corporation, found guilty of entering into a pool or combination in restraint of trade, "shall be prohibited from continuing its business in the state." What ground is there for saying that the court may disregard this direction? It seems very clear that the legislature did not intend that the court should have any discretion in regard to the punishment. It would have been easy to have used words indicating that the court might exercise its discretion, but difficult to express more clearly the idea that the whole matter of the penalty was taken from the court and determined by the legislature. We cannot avoid the conclusion that we could be justly accused of legislating, were we to hold that, notwithstanding the plain language of the statute, the court may impose a less punish- ment, or render a judgment that would permit defendant's continu- ing its business within the state. We do not feel warranted in hold- ing that , the word "shall" should be construed as "may" in this case. It is quite apparent that the legislature meant "shall." The statute is mandatory in its terms, and there is nothing that leads us to believe that it was not intended to be mandatory in effect. We hold that the trial court had no power or discretion to modify the judgment as requested. The decisions of the United States Supreme Court in the Standard Oil (221 U. S. 1) and Tobacco (221 U. S. 106) cases, granting time to the corporations to effect such changes in their business as would make it conformable to law, are not in point. The Sherman act [26 St. 209, c. 647] did not impose the penalty of a forfeiture of corporate rights, and prosecutions were not to forfeit such rights, but to enjoin the acts and dissolve the combinations that were in restraint of trade. The Standard Oil and Tobacco cases are appealed to also to induce us to apply the "rule of reason" to this case. In other words, we are asked to hold that our statute should be construed as forbidding only such a monopoly or restraint of trade as was illegal at common law. These decisions do not help defendant. It is expressly stated by Justice O'Brien in his opinion on the former appeal that "we be- lieve the February agreement to have been unlawful under the com- mon law," though the decision does hold, on the authority of U. S, v. CHAP. I.] STATE V. CREAMERY PACKAGE MANUFACTURING CO. 771 Trans-Missouri Freight Assn., 166 U. S. 290, 17 Sup. Ct. 640, 41 L. ed. 1007, that the character of the competition to which the agree- ment put an end is not material. The evidence showed that the acts of defendant constituted an "undue" restraint of trade, a monopoly and restraint of trade that would have been illegal at common law. The judgment herein does not prevent defendant from doing inter- state business within the borders of this state. We construe it as only forbidding defendants continuing its intrastate business.^ Judgment affirmed? ' Cf. note 2, page 242, ante. 'Accord: People ». Buffalo Stone &c. Co., 131 N. Y. 140. 772 CONSOLIDATION. [CHAP. 11. CHAPTER II. REORGANIZATION, CONSOLIDATION AND MERGER OF CORPORATION. WILLIAM B. RIKER & SON COMPANY v. UNITED DRUG COMPANY. 79 N. J. Eq. 580. 1911. GuMMEEE, Chief- Justice. This is an appeal from an order denying a preliminary injunction restraining the defendant, its officers, directors, tellers and inspectors from submitting to the stockholders of the company a proposition to take action upon a resolution of the board of directors providing that the defendant corporation should be dissolved, and prohibiting them from passing any resolution or receiving or counting any votes ■ in favor of any resolution designed to carry into effect or accomplish any proposition to dissolve the said company. The United Drug Company is a New Jersey corporation. The proposed dissolution is a step in the carrying into execution of a plan formulated by the board of directors of the company for its "reorgani- zation," and outlined by the board in a communication, sent by it to the several stockholders of the company upon the same day that a resolution was passed by it, reciting that, in the judgment of the board, it was for the benefit of the corporation that it should be forthwith dissolved and thai a meeting of the stockholders should be held to * take action upon that resolution. The material parts of the resolution (so far as the matter before us is concerned) are as follows : "To the stockholders of the United Drug Company. Your direc- tors have had under consideration for some time the desirability of a reorganization of the affairs of the United Drug Company. They have had in mind, among other things, the accomplishment of the following results — first, owing to the remarkable increase in the business of the company, it is necessary to provide not only for ad- ditional capital to meet its immediate requirements, but also to put the company on such a basis that it can obtain from time to time in the future such additional capital as may be needed ; second, . . . ; CHAP. II.] EIKEB CO. V. UNITED DRUG CO. 773 third, a substantial part of the business of the company is now con- ducted by the United Laboratories Company, the United Perfume Company, the United Candy Company and the United Stationery Company, all subsidiary corporations of the parent company. It is proposed to eliminate these subsidiary companies, to place the owiier- ship of all these in one corporation, and obtain greater simplicity in accounting, and to some extent eliminate an unnecessary duplication of expense. With the approval of your directors, therefore, the fol- lowing plan for the reorganization of the affairs of the United Drug Company has been proposed : Your directors have authorized the organization of a corporation under the laws of Massachusetts by the name of United Drug Company. . . . The United Drug Com- pany (of Massachusetts) has offered to purchase all the property and assets of the United Drug Company (of New Jersey), subject to all its indebtedness, and to pay therefor as follows :" viz., by delivering to the holders of stock of the New Jersey corporation in exchange for that stock shares of the stock of the Massachusetts corporation. The communication then concludes thus : "Your directors unanimously recommend the acceptance of the proposed plan of reorganization, and pending action by the New Jersey company recommend an immediate exchange of the stock of the New Jersey company for stock of the Massachusetts company in accordance with the terms of the offer. If for any reason it should become either necessary or desirable to delay the dissolution of the New Jersey corporation and the transfer of its assets, or even to continue its corporate existence, the practical accomplishment of the plan would not be affected, as the Massachusetts corporation would by the exchange become the controlling stockholder of the New Jersey corporation." Manifestly, the prime purpose of the scheme outlined in this com- munication is not the winding up of the New Jersey corporation and the distribution of its assets, or the proceeds of the sale thereof, among its stockholders, but the absorption of that company by the Massachusetts corporation, the transfer not only of its assets but of its business, to that corporation, and the future carrying on of that business by the Massachusetts corporation under the name of. the defendant company. .The scheme, in its essence, whatever it may be in form, is not a plan for the reorganization of the New Jersey company, nor even for the winding up of its business and its dissolu- tion within the meaning of the latter word as used by our Corpora- tion act, but is a scheme for its merger into or consolidation with the Massachusetts corporation. State v. Atlantic City and Shore Rail- road Co.,. 77 N. J. Law (48 Vr.) 466, 483. Consequently, the fundamental question now to be decided i^, whether a corporation of this state, organized under our General, Corporation act, may legally be merged into or consolidated with' 774 CONSOLIDATION. [CHAPi II. a, corporation created by and organized under the laws of a sister ■state. The answer to this question seems to us not to be in doubt. As was said by this court in Colgate v. United States Leather Co.,^ 75 N. J. Eq. (5 Buch.) 229, the power of corporations to consolidate and merge is not to be imphed, and exists only by virtue of plain legislative enactment ; ^ and no statute of our state can be found which authorizes the proposed scheme. The only right given, by Our legislature, to two or more corporations to merge or consolidate int-o a single corporation, is expressly limited to those which are orgainized under the laws of our own state. Revised Corporation act §104 ; P. L. 1896 p. 309. The proposed plan for the so-called "re- organization" of the defendant company is, therefore, in violation of the law of the state whose creature it is ; ^ and, this being so, any stockholder who refuses to consent thereto is entitled to the aid of a court of equity to prevent its being carried into execution. Each stockholder of the company owns a share in its property and assets, and is entitled to have a proportionate share in its profits. They have invested their capital in it, and in it alone, and they are entitled to every dollar that it earns. This is the agreement of the stock- holders among themselves. They each contract with the other that theit money shall be employed for the purposes specified in the cer- tificate of. incorporation, and for no other purpose, and that the profits of the enterprise shall be ratably apportioned among them. In the absence of legislation permitting a variation of the provisions of this fundamental contract, by vote of a majority of the stock- holders, no majority, however large, has a right to divert any part of the joint capital, however small, to any purpose not consistent with and growing out of this original, fundamental agreement.* ; 1 In this case, the statute authorized consolidation by corporations organized to carry on "business of the same or a similar nature." Held: (1) The determination Of this identity is to be found by comparison of the respective charters ; (2) The pnmary and not the incidental objects are the subjects of such comparison ; (3) Con- solidation is unauthorized when the objects of one of the corporations are much more extensive than, although inclusive of, the objects of the other. • Accord: Copeland v. United. Shoe Machinery Co., 84 N. J. Eq. 276. . The story of this litigation is told from the economic standpoint in Chap. II of a hook entitled, "Corporate Promotions and Reorganizations" by Arthur S. Dewing, Ph. D., an empirical study of equal profit to the student of law. As to the powers of a reorganization committee, see Cox v. Stokes, 156 N. Y. 491 ; Industrial &c. Trust t). Todd, 170 N. Y. 233 ; Sharpe ». Chartiers Oil ,Co., 232 Fed. 703; Church ». Swetland, 233 Fed. 891. As to the rights of stock and bond holders upon reorganization, see Louisville Trust Co. v. Louisville &c. Ry. Co., 174 U. S. 674 ; Northern Pacific Ry. Co. v. Boyd, 228 U. S. 482 ; Vatable v. New York, Lake Erie &c. R. R. Co., 96 N. Y. 49 ; Fernschild v. Yuengling Brewing Co., 154 N. Y. 667 ; Child ». Niew.York &c. R. R. Co., 129 Mass. 170; Bogert v. Southern Pac. Co., 226 Fed. 500. 2 C/. American Malt Corp. ». Public Utility Board, ante, page 81. ' Cf. Hogue V. American Steel Foundries, ante, page 654. .A[s to the status of a corporation chartered in two or more states, see Goodwin i). Kew York, N. H. & H. R. R. Co., 124 Fed. 358 (review of authorities) ; Mackay v. Same, 82 Conn. 73, and annotations thereto in 24 L. R. A. (N. S.) 768. , ■>i Cf. Stevens z). Rutland &o. R. R. Co., ante, page 167. CHAP. 11.] IRVINE V. NEW YOE^ EDISON CO. 775 Black «. Delaware and Raritan Canal Co., 24 N. J. Eq. (9 C. E. Gr.) 456, 463 ; Mills v. Central Railroad Co. of New Jersey, 41 N. J. Eq. (14 Stew.) 1 ; Colgate v. United States Leather Co., supra. The scheme, in the carrying out of which the dissolution of the company is a proposed step, is a fraud upon the statute (the word is used in a legal, not a moral sense) ; and every act done in furtherance thereof, no matter whether it be legal, standing alone, or not, is equally a fraud upon the statute. This being so, the complainants were entitled to an injunction to restrain the proposed invasion of their rights under the contract of incorporation, as soon as it was made manifest that such invasion was in fact contemplated. The order denying the preliminary injunction will be reversed and the case remitted to the court of chancery, with a direction that an injunction do issue restraining the defendant company, its officers and directors, from submitting to its stockholders for action thereon by them the resolution of the board of directors of the company advis- ing its dissolution. Reversed.^ IRVINE V. NEW YORK EDISON CO. 207 N. Y. 425. 1913. Appeal from a judgment of the- Appellate Division, affirming a judgment, in favor of defendant entered upon a dismissal of the com- plaint by the court at a Trial Term. Ghase, J. The Block Lighting and Power Company, No. 1, transferred its property, real and personal, including its franchises, by bill of sale to the Manhattan Lighting Company on December 13, 1898. The consideration of such transfer does not appear. The Block Company and the Manhattan Company were merged into and with the New York Gas and Electric Light, Heat and Power Company on February 1, 1900. The gas company and the Edison Electric Illuminating Company of New York were consoHdated and became the defendant. The New York Edison Company, on May 20, 1901. The transactions mentioned were each independent acts, not having so far as appears any relation to one another. The plain- tiff's claim is against the Block Company. The assets, if any, of the Block Company are in the possession of the defendant, expressly subject, as will hereinafter appear, to the rights of the creditors of the Block Company. The question in this' case is reduced to a consideration of the plaintiff's remedy. Can the plaintiff maintain this action as one of debt against the defendant ? I think not, and I concur in the opinion written by Justice McLaughlin in the court below. 1 See note 1, page 254, ante. 776 COIJSOLIDATION. [CHAP. II. The legislature has provided two ways of uniting two or more cor- porations by transfer of their property to a single corporation. One statute provides that "Any two or more corporations organized under the laws of this state for the purpose of carrying on any kind of busi- ness of the same or of a similar nature " which a corporation organized under the Business. Corporations Law might carry on, may consoli-' date such corporations into a single corporation. (Business Corpora- tions Law, § 7 [Cons. Laws, ch. 4]. See, also, §§ 7 to 11 inclusive; former Business Corporations Law [Laws of 1890, chap. 567], §§ 8 to 12 inclusive, as amended prior to 1909.) Another statute provides that "Any domestic stock corporation and any foreign stock corporation authorized to do business in this state lawfully owning all the stock of any other stock corporation organized for, or engaged in business similar or incidental to that of the possessor corporation may file in the office of the secretary of state, under its common seal, a certificate of such ownership, and of the resolution of its board of directors to merge such other corpora- tion, and thereupon it shall acquire and become, and be possessed of all the estate, property, rights, privileges and franchises of such other corporation, and they shall vest in and be held and enjoyed by it as fully and entirely and without change or diminution as the same were befoj-e held and enjoyed by such other corporation, and be managed and controlled by the board of directors of such possessor corporation, and in its name, but without prejudice to any liabiUties of such other corporation or the rights of any creditors thereof. . . ." (Stock Corporation Law, § 15 [Cons. Laws, ch. 59] ; former Stock Corporation Law [Laws of 1890, chap. 564], § 58, as amended prior to 1909.) It is also provided in the Transportation Corporations Law (Laws of 1909, chap. 219, § 61, subd. 3 [Cons. Laws, ch. 63]) that "subject to the permission and approval of the proper public service com- mission, any two or more corporations organized under this article or under any general or special law of the state for the purpose of carrying on any business which a corporation organized under this article might carry on, may consolidate such corporations into a single corporation, and any such corporation may with the like per- mission and approval be merged with any other such corporation, upon complying with the provisions of the Business Corporations Law relating to the consolidation of business corporations and the Stock Corporation Law relating to the merger of stock corporations." The Transportation Corporations Law thus expressly recognizes the right of corporations to consoUdate under the Business Corpora- tions Law, and also to merge under the Stock Corporation Law. Each form of procedure is independent of the other. Where a con- solidation is consummated pursuant to the statute it is expressly pro- vided that the rights of creditors of any corporation that shall be so CHAP. II.] IKVINE V. NEW YORK EDISON" CO. 777 • consolidated shall not in any manner be impaired, and also "such new corporation shall succeed to and be held liable to pay and dis- charge all such debts and liabilities of each of the corporations con- sohdated in the same manner as if such new corporation had itself incurred the obligation or liability to pay such debt or damages." (Cons. Laws, ch. 4, § H.) If the gas company was liable for the indebtedness to the plaintiff described in the complaint, the action will he against the defendant therefor because of the statute quoted. Whether the gas company became liable for the debts of the Block Company depends upon the statute, pursuant to which the merger took place. In the statute authorizing a merger of corporations, there is no provision making the possessor corporation liable for the debts of the corporation merged. It is expressly provided in that statute that the merging of corporations shall be "without prejudice to any liabilities of such other corporation or the rights of any creditors thereof." This reservation of the rights of creditors permits them to proceed against the debtor corporation, notwithstanding such corporation is merged into another. The rights of creditors include the right to sue the debtor corporation and to take the property which was of the debtor corporation by execution issued upon a judgment obtained against such debtor. Such right rests upon the express terms of the statute and does not necessarily depend, as has been suggested, upon the existence and a finding of a fraudulent transfer. This court has recently considered the effect of a merger of banking corporations. (Matter of Bergdorf , 206 N. Y. 309.) Upon a merger of banking corporations (Banking Law [Cons. Laws, ch. 2], §§ 36 to 40 inclusive) it is expressly provided that the corporation into which they are merged shall "be held liable to pay and discharge all such debts and liabiUties, and to perform all such trusts of the merged corporation in the same manner as if such corporation into which the other shall become merged had itself incurred the obhgation or liability." But it is provided by the statute that no " action or other proceeding then pending before any court or tribunal in which any corporation that may be merged is a party shall be deemed to have abated or discontinued by reason of any such merger, but the same may be prosecuted to final judgment in the same manner as if the said corporation had not entered into the said agreement." This court, in considering the effect of a merger in the Bergdorf case, say : " It could not have taken place without statutory authority and the legislature fixed the indisputable and exclusive effects of it. (People V. N. Y., Chicago & St. Louis R. R. Co., 129 N. Y. 474.)" Referring again to the statutory provisions under which the merger was consummated, the court further say: "Those statutory provi- sions state plainly the effects pf the merger of the Morton Company into the Guaranty Company. The former company became (with 778 CONSOLIDATION. [CHAP. II. the nominal exception hereinafter stated) rightless, propertyless and powerless ; and the latter company was enlarged by the absorption of all that the former surrendered. . . . But the Morton Company did not surrender its corporate existence. It was not dissolved. It remained a corporation, but for the single purpose and with the sole power of being sued or proceeded against upon and defending against causes of action alleged to exist against it at the time of the merger. All the other powers bestowed upon it and which were evidenced by its certificate of incorporation and the statute law relating to it were by the merger transferred to the Guaranty Company. A corporation may exist though it possesses no property. A corporation may have a partial as well as a total extinction, and a legislature may enact that the merged corporation shall be extinguished by the merger, except in so far as the statute shall ke§p it nominally alive for a speci- fied purpose. Our conclusion is that the Morton Trust Company does not exist within or as a part of the Guaranty Company, and the two are not identical. As a legal being, a corporate entity, it retained the one activity and power, and otherwise is non-existent." (p. 315.) The language of the court in the Bergdorf case is applicable to this case. The Block Company never existed within the gas company, and does not exist within or as a part of the defendant. Although, the Block Company has become extinct, its corporate existence is retained for the one purpose of carrying out in good faith the reser- vation in the statute of the rights of the creditors thereof. We repeat that for that purpose the Block Company can be sued. The plaintiff after obtaining judgment against, the Block Company may, by execu- tion or otherwise, reach the assets of such company as though the merger had. never taken place. The provisions of the merger statute and of the consohdation statute were considered together by the legislature in 1890, and they have since been considered by it from time to time. There would seem to be httle or no objection and much reason for making a corporation which takes all of the assets of other corporations by consolidation or merger hable for the indebtedness of such consoli- dated or merged corporations. The acceptance of such property could be made an assent to such liability. The whole matter was, however, clearly before the legislature for its consideration, and it was considered by it, and it made a corporation accepting the assets of other corporations under the statute authorizing the consolidation of corporations hable for the indebtedness of the corporations so consohdated. It decHned so to do in the case of corporations trans- ferring assets under the merger statute. The rights of creditors were not overlooked, as the legislature, expressly provided that the rights of such creditors should be preserved and that the merger should be without prejudice as to them. CHAP. II.] IBVINE V. NEW YORK EDISON CO. 779' In view of the history of the acts referred to it must be assumed that the omission to make the possessor company directly liable for the debts of the merged corporations was intentional. The courts, should not attempt to supplement the kgislative provision relating, to the creditors of the merged corporations by making the possessor company liable as upon contract for the indebtedness of such com- panies, either wholly or to the extent of the property transferred to it, particularly in view of the fact that it appears that the subject, has been fully considered and acted upon by the legislature itself.. ' The reservation by the legislature of the rights of creditors nega- tives the suggestion that a transfer in pursuance of the statute would be a crime. Such a transfer is not one made "with intent to defraud prior or subsequent purchasers, or to hinder, delay or defraud credi- tors or other persons" within the meaning of section 1170 of the Code of Criminal Procedure. If the property of the Block Company is not of such a nature that it can be reached directly by execution or otherwise, it constitutes a trust fund for the benefit of such creditors and can be reached as such precisely as if a merger of the Block Company had never taken place. The rule in equity is that as between cestui que trust and trustee, and all parties claiming under the trustee otherwise than by purchase for a valuable consideration, without notice, all -property belonging to a trust, however much it may be changed or altered in its naturfe or character, and all the fruit of such property, whether in its original or altered state, contiaues to be subject to or affected by the trust. (Matter of Hicks, 170 N. Y. 195.) A creditor of a corporation has 'the right to follow the assets of a corporation and appropriate the property by due process of law, including any property which has been changed, provided the trust ' fund can be clearly ascertained, traced and identified. (Matter of Hicks, supra.) In my view the objection to sustaining the action now before uS may be summarized by stating that the defendant has never con- tracted directly or by inference to pay the debts of the Block Com- pany ; and the statute, which is the authority for the transfer of the property, if any, from the Block Company to the gas company, doeS ' not provide that the possessor company shall assume the indebted- ' ness of the merged company, but expressly provides that the rights of creditors of the merged company are preserved. The statute was not carelessly drawn and the omission to make the possessor com- pany liable for the debts of the merged company was not an oversight. It is the duty of the court to enforce the provisions of the statute without reading into it affirmative provisions. The plaintiff does not claim to recover in equity, but if he did he would be required to first take other steps preliminary thereto. "^SO CONSOLIDATION. [CHAP. II. j This court in Trotter v. Lisman (199 N. Y. 497) held that creditors seeking the aid of a court of equity to reach equitable assets of their debtor in satisfaction of their claims must first exhaust their legal remedies, according to the laws of this state, by the recovery of a judgment in one of its courts and the return of execution thereon unsatisfied, unless there are facts constituting a sufficient excuse for the failure so to do, which facts must be set forth in the complaint. . . . The defendant has never contracted to pay the plaintiff's debt, and has never been made liable therefor by statute. The judgment should be affirmed, with costs. Judgment affirmed. CuLLEN, C. J. (dissenting).' MORRISON V. AMERICAN SNUFF COMPANY. 79 Miss. 330. 1901. MoEBisoN, the appellant, was the plaintiff in the court below; the American Snuff Company, appellee, was, after the suit had been dismissed as to another, the sole defendant there. From a verdict and judgment in plaintiff's favor for a sum much less than that demanded, he appealed to the supreme court. The Geo. W. Helm Company, manufacturers of tobacco and snuff, entered into a contract with D. J. Morrison, a traveling sales- man, for his services as salesman for the year 1900. After this contract was made, there was a consolidation of a number of snuff manufacturing companies, including the Geo. W. Hehn Company, formmg the American Sniiff Company, and to this corporation the Helm Company conveyed all its property, real, personal and mixed. The American Snuff Company refused to carry out the contract of the Helm Company with Morrison, and he brought this suit by attachment against the Helm Company and the American Snuff Company, as foreign corporations, and garnished Jones Bros. & Co., who answered that they owed the defendant, the American Snuff Company, a sum in excess of the amount sued for. The suit was upon an open account for wages and expenses under the con- tract with the Helm Company, and some other items. It was dis- missed before trial as to the Helm Company. After plaintiff had introduced all his evidence and rested, defendant, the American Snuff Company, moved the court to exclude all the evidence from the consideration of the jury relative to the items in the account ' Dissenting opinion omitted. CHAP. II.] MORRISON V. AMERICAN SNUFF COMPANY. 781 for salary and expenses under the contract. The court sustained this motion, to which plaintiff excepted. There were verdict and judgment for plaintiff for the remainder of the account. Whitfield, C. J., delivered the opinion ^ of the court. Whether the plaintiff had any contract with the American Snuff Company, the new company formed by the consolidation of others or not, is immaterial, since he did have a valid contract with the Geo. W. Helm Company, one of the constituent corporations going to form the new consolidated company. It seems to be conceded that the consoUdatibn was by proper legislative authority, and the deed by which the Geo. W. Hehn .Company conveyed "all the prop- erty, interest and business" belonging to it to the new company fully evidences the consolidation. It was not competent for the Geo. W. Helm Company to consolidate itself with other companies forming this hew consolidated company and escape payment of the debts due from it before consohdation. Where there has been qon- soUdation, the new company takes, with notice, the property of the constituent companies, and is not a bona fide purchaser for value. ^ Consolidation is wholly unUke the bona fide sale of the assets of one corporation to another, as to which latter the true rule is stated in 1 Thomp. Corp., sec. 377. This is a case of consohdation. The Geo. W. Helm Company went out of existence, and conveyed every- thing of every kind belonging to it to the new consolidated company. The new company is not a bona fide purchaser. Says Judge Thomp- son (1 Thomp. Corp., sec. 375) : "Where several corporations are united in one, and the property of the old companies is vested in the new, the latter is liable in equity for the debts of the former, at least to the extent of the property received from them ; and, if it is also liable at law, the legal remedy is not exclusive. The governing principle here is that a corporation cannot give away its assets to the prejudice of its creditors, but that a court of equity will follow such assets as a trust fund iiito the hands of any new custodian, the same not being a creditor or bona fide purchaser. It is scarcely necessary to add that in such a case the consolidated corporation holds the property received from the absorbed company with notice of any trust attaching to it in favor of its creditors, and cannot claim the rights of a bona fide purchaser without notice." And in sec. 376 he says : "A statute which provides for a consolidation by the pur- chase by one company of the stock of another, and the issue of its own stock for the same, and which adds that 'the purchase herein provided for, or the surrender of the franchises, shall in no way affect the rights of the creditors of the company' — that is, of the^ absorbed company — give to the general creditors of such company 1 Portions omitted. 2 See Hurd v. New York &o. Commercial &c. Laundry Co. and other cases cited; on page 256 ante. .782 CONSOLIDATION. [CHAP. II. ja remedy in equity against the assets of the absorbed company in ithe hands of the absorbing company upon the theory of a hen, and is not limited to the vain and ideal remedy of an action at law against the absorbed company, although the existence of such company is ■(Continued for the purpose of such actions. In so holding, it was ■said : ' If leaving its debts unpaid, its capital, property and effects are distributed among the stockholders or transferred for their benefit to third persons who are not bona fide purchasers without oaotice ; and, still more, if the corporation be dissolved or become so disorganized that it cannot be made answerable at law, then a court of equity will pursue and lay hold of such property and effects, and apply them to the payment of what it owes to its creditors. A suit having that object is the most direct, if not the only efficient, means of asserting and vindicating any right of the creditors in such a case as the present ; and by holding that it is not maintainable we should refuse to give any real effect to the saving clause in the statute, if such a clause was necessary to enable them to maintain the suit. Certainly if, by virtue of the act, one of the contracting companies might transfer all of its ample property and effects out of which its creditors ought to be paid to the other and weaker company in consideration of its admitting stockholders of the former to become shareholders of its capital and property thus augmented, and might then, by a sor,t of legal suicide, slip out of existence, leaving those creditors to sue at law the surviving company, which they have never dealt with, their rights would be very seriously affected thereby.' " He also says, in 7 Thomp. Corp., sec. 8241 : "As already seen, the consolidation of two or more corporations is like the unit- ing of two or more rivers. Neither stream is annihilated, but all -continue in existence. A new river is formed, but it is a river com- posed of the old rivers, which still exist, though in a different form. So it is with a consolidated corporation. A new corporation is ■formed, but not in a sense which works a destruction of the rights ,of action existing against the old one. Independently of statute, the better view is that the new one is liable for any debts, obligations or rights of action of any kind existing in favor of third persons at the time of the consolidation, and may be sued at law or in equity to enforce such rights, and obligations, without any agreement to become so answerable, and without any statute imposing the liability." Again he says (1 Thomp. Corp., sec. 372) : "Where one corporation goes entirely out of existence by being annexed to or merged into another corporation, if no arrangements are made re- specting the property and liabilities of the corporation that ceases to exist the surviving corporation will be entitled to all the prop- erty and answerable for all the liabilities of the other. The liabilities of the old corporations are enforceable against the new one in the same way as if no change had been made." CHAP. II.] MOEKISON V. AMERICAN SNUFF COMPANY. 783 From this clearly correct statement of the law three propositions are deducible : (1) That where consolidation has taken place, the new company is liable for the debts of the old to the extent of the property received from the old ; (2) that the remedy may be pur- sued either at law or in equity, the existence of a legal remedy (where one exists) not being exclusive ; (3) that in case of consolidation no constituent company can give away its assets to the prejudice of its creditors ; and (4) that the new consolidated company holds the property received from the absorbed company with notice of any trusts attaching to it in favor of creditors, and is therefore not a bona fide purchaser. The foundation of the liability of a consolidated corporation may rest on a statute or on an agreement either expressed or implied. If the statute does not provide that the new company shall assume the debts and lialjiUties of the constituent companies, and there is no expressed agreement respecting the same, the debts of the original companies follow as an incident of the consolidation, and become by implication the obligations of the new corporation. ' Railway Co. v. Powell, 40 Ind. 37 ; Railroad Co. v. Hendricks, 41 Ind. 48 ; Rail- road Co. V. Boney, 117 Ind. 501 (20 N. E., 432; 3 L. R. A., 435) ; Railroad Co.. v. Shirley, 54 Tex. 125. In the latter case it was said : "If neither statute nor agreement make mention of creditors, the consolidated corporation is held to have assumed the liabilities of its constituents." Jones' Ry. Secur. (2 ed.), in his note to sec. 364, quotes the following from Railroad Co. v. Boney, 117 Ind. 501 (20 N. E., 432; 3 L. R. A., 435) : "The rule which the authorities support seems to be that where one corporation goes entirely out of existence, by being incorporated into another, if no arrangements are made respecting the property and liabihties of the corporation that ceases to exist, the corporation into which it is merged will succeed to all its property, and be answerable for all its liabilities." And, in same case (117 Ind. 433; 20 N. E., 438; 3 L. R. A., 435), . it is further said : "While it is an open question in some jurisdictions, whether or not in the absence of a statute, the debts of the original companies follow as an incident of the consoUdation, and become by implication the obligations of the new corporation, it is settled in this state that the act of consolidation involves an implied assump- tion by the new company of all the valid debts and liabilities of the consolidated companies. Railroad Co. v. Jones, 29 Ind. 465 (95 Am. Dec, 754) ; Railway Co. v. Powell, 40 Ind. 37; Railroad Co. V. Hendricks, 41 Ind. 48." 'As to the remedy where the constituent company has conveyed everything that it has to the consolidated company, it is obvious ' See Nugent v. Supervisors, ante, at top of page 177. As to assumption, inferred in fact, see Ziemer v. C. G. Bretting Mfg. Co., 147 Wis. 252. 784 CONSOLIDATION. [CHAP. II. that it would be a mere travesty of justice to remit the creditor to the constituent company. The supreme court of Alabama in Railroad Co. v. Branch, 59 Ala., 130, in the passage cited supra from 1 Thomp. Corp., sec. 376, puts the mockery of such reinitting of the creditors to the constituent corporation which had divested itseK of all its property in the most emphatic terms. And, finally, Mr. Beach says, in sec. 347 : "Judg- ment against the consolidated company on claims against one of the original corporations may be enforced by levy of execution upon the property of the latter, notwithstanding its dissolution." From these various authorities, it is clear that the principles laid down in the outset and stated in Judge Thompson's work are in every particular correct. It is also clear, from these authorities, on the facts of this case, that judgment should have been rendered for the appellant against the consolidated company, to be satisfied out of the property received by the consolidated company froni the Geo. W. Helm Company, or the proceeds of such property coming into the possession of the consolidated- company. It is said in the brief of counsel for appellant that the very property garnished in this case was a debt due to the Geo. W. Helm Company. If this shall turn out to be true, such debt should be condemned to pay the appellant's claim. Reversed and remanded. VICKSBURG &c. TELEPHONE CO. v. CITIZENS' TELEPHONE CO. 79 Miss. 341. 1901. Whitfield, C. J., delivered the opinion of the court. This case is largely controlled by the opinion this day delivered in the case of Morrison v. Snuff Co., ante 330. That was an action at law by attachment, the plaintiff garnishing a debt due to the constituent company, which debt had been transferred to the con- solidated company by the deed of consolidation. This is a bill of equity, one of whose purposes is to subject the property of the Citi- zens' Telephone Company, which had all been conveyed to the Cum- berland Telephone Company, to the payment of such damages as the complainant had sustained by reason of the breach, on the part of the Citizens' Telephone Company, of the contract which it had made with the Complainant's assignor. The bill proceeds upon the theory, in this aspect of it, that the complainant tad a right to reach such property so transferred as being held by the Cumberland Telephone Company, impressed with a trust for the creditors of the CHAP. II.] VICKSBTIRG TEL. CO. V. CITIZENS' TEL. CO. 785 Citizens' Telephone Company, which had transferred its property to the Cumberknd Telephone Company. As pointed out in the' opinion referred to, the remedy in equity is appropriate. We may cite, in addition to the authorities therein cited on this point, 6 Am. & Eng. Enc. L., 820. The consolidated company, where there has been a consolidation, may be sued either at law or in equity, but the fact that it may be sued at law does not make the legal remedy exclusive, nor deprive the creditor of his right to proceed in equity, on the theory of a trust, to reach the property of the con- stituent company in the hands of the consolidated company. 1 Thomp. on Corp., sec. 375. The action of the court below was en- tirely proper, so far as regards the prayer for specific performance. But there are three separate phases to this bill, and three prayers, one appropriate to each phase, and the bill is clearly maintainable in that phase of it which seeks to subject the property of the Citizens' Telephone Company (the transferrer) in the hands of the Cumber- land Telephone Company (transferee), for the reason that the biU expressly charges, and the demurrer admits the charge to be true, that the Cumberland Telephone Company had full knowledge oif the terms of the contract between the Citizens' Telephone Company and the complainant's assignor, and of the breach of said contract by the Citizens' Telephone Company, its transferrer ; in other words, the bill expressly charges and the demurrer admits that the Cimiber- land Telephone Company was not a bona fide purchaser. And where there has been neither a consolidation nor a merger, but a mere sale by one corporation of its property to another, that sale, if permitted by the constitution and the laws as not being against public policy or otherwise illegal, and if made for a valuable con- sideration, in good faith, will pass the property of the selling cor- poration to the purchasing corporation .free from claims of mere simple contract creditors.^ In every such case the same rule obtains as obtains in the case of a sale by an individual to another individual. This is all made perfectly plain in 1 Thomp. on Corp., sec. 377; 6 Am. & Eng. L., 819, note 5. It would be necessary in such case that the complainant should state in his bill that there was fraud, or that the transfer was not made for a valuable consideration, or that the defendant was not a bona fide purchaser. See Powell v. Railroad Co., 42 Mo., at top of page 66. This bill meets these re- quirements by charing that the purchase was not made bona fide. The property here has not passed into the hands of a bona fide pur- chaser from the consolidated company, and is, therefore, chargeable in equity with the debt (if any shall be established) here asserted. See 1 Thomp. on Corp., sec. 378. The bill charges that all the property of every kind which had belonged to the Citizens' Tele- phone Company, except its corporate franchises, had been trans- > See last paragraph of note on page 256 ante. 786 CONSOLIDATION. [CHAP. II. ferred to the Cumberland Telephone Company, and that the Citizens' Telephone Company had gone entirely out of existence, and had become absolutely defunct, and that such was the well understood purpose of the transfer. It is true that the bill does not aver any technical consolidation or merger. It shows no legislative author- ity for a consoHdation. There seems to be a great confusion as to the differences between consolidation and merger and sale. Rightly understood, there never can be a consolidation of corporations ex- cept where all the constituent companies cease to exist as separate corporations, and a new corporation, to wit, the consohdated cor- poration, comes into being. A merger, rightly understood, is not the equivalent of consolidation at all, but exists where one of the constituent companies remains in being, absorbing or merging in itself all the other constituent companies.' This bill, whilst charg- ing no consolidation or merger when properly understood, never- theless does charge that the deaUng between these two corporations has resulted practically, to all intents and purposes, in exactly the same conditions, so far as creditors of the Citizens' Telephone Com- pany and its property are concerned, as would have resulted had there been a consolidation. We think the same principle which -applies in favor of the simple contract creditor against a consohdated corporation, enabUng him to subject, in the hands of that consohdated company, property of a constituent corporation received by the con- sohdated company (such constituent corporation being debtor of the simple contract creditor), will apply in cases hke this. The Citizens' Telephone Company could not give away its property to the prej- udice of the complainant ; and an attempted sale by it of this prop- erty to the Cumberland Telephone Company, the latter not being a bona fide purchaser, cannot avail to defeat the equitable rights of the complainant asserted in this bill, the property being still in the possession of the Cumberland Telephone Company, not sold to a bona fide purchaser from it. Nor does it make any difference that the complainant has asserted here, not a simple contract debt, but a claim for unliquidated damages, arising out of a breach of contract on the part of the Citizens' Telephone Company. The bill is not, in this aspect, one to have unhquidated damages ascertained in a court of chancery as its sole scope and purpose. The ascertainment of these damages is a mere incident to the subject-matter of equitable cognizance conferring the chancery jurisdiction, to wit, the enforce- ment, on the theory of a trust, of complainant's equitable right to satisfaction out of the property of the Citizens' Telephone Company in the hands of the Cumberland Telephone Company. It is that subject-matter which gives the jurisdiction. The ascertainment and award of the damages is a mere incident in the exercise of that > Accord: Matter of Bergdorf, 149 A. D. 529, affirmed 206 N. Y. 309. But see note 3, page 795, infra. CHAP. II.] PEOPLE V. NORTH KIVEK SUGAR REFINING CO. 787 jurisdiction. This precise point is settled in Railroad Co. v. Boring, 51 Ga., 582, and in many other cases. The decree is reversed and the cause remanded, with leave to answer in thirty days from the filing of the mandate in the court below. PEOPLE V. NORTH RIVER SUGAR REFINING CO.i 121 N. Y. 582 ; 9 L. R. A. 33. 1890. Appeal from a judgment of the General Term affirming a judgment in favor of plaintiff entered upon a verdict directed by the trial court and denying a motion for a new trial. This action was brought by the attorney-genera-l to have the defendant "dissolved, its charter vacated and its corporate existence a,nnulled." The complaint alleged, and it was found, that defendant is a cor- poration organized under the General Manufacturing Act ; that it, together with other corporations, in violation of law and in abuse of its powers became a party to and carried out an agreement, the material parts of which are mentioned below.^ Finch, J. The judgment sought against the defendant is one of corporate death. The State, which created, asks us to destroy ; and the penalty invoked represents the extreme rigor of the law. Its infliction must rest upon grave cause, and be warranted by material misconduct. The life of a corporation is indeed less than that of the humblest citizen, and yet it envelopes great accumulations of ' Facts restated ; portions of opinion omitted. ^ The agreement constituted a board of eleven persons. Its alleged objects were to promote economy of administration and in cost of refining ; to give each party the benefit of appliances and processes used by the others ; to furnish protectioii"against unlawful combinations of labor ; to maintain the standard of refined sugars and to generally promote the interests of the parties in all lawful ways. All the shares of the subscribing corporations were to be transferred to the board, to hold as joint-tenants. Their membership, meetings, by-laws, quorum and officers were prescribed. In lieu of the shares transferred, certificates not exceeding $50,000,000, divided into 500,000 shares, were to be issued by the board and distributed among the parties in agreed proportions. Of the shares so allotted to each corporation, 15 per cent, was to be retained by the board for the acquisition of other refineries, payment for additional capacity, or appropriation to the several refineries ; the remaining 85 per cent was to be divided among its stockholders in proportion of their respective stock holdings. The corporations were to maintain their separate organizations and conduct their own business. Profits from the business of each corporation were to be paid over by it to the board, and the aggregate thereof, or such amount designated for dividends, to be pro- portionately distributed by the board to the holders of its certificates aforesaid. The board was given power to transfer shares to qualify directors for the several corporations ; also to raise funds by mortgage to be made by the corporations, or either, any, or all of them, on their property. 788 CONSOLIDATION. [CHAP. II. property, moves and carries in large volume the business and enter- prise of the people, and may not be destroyed without clear and abundant reason. That would be true even if the legislature should debate the destruction of the corporate life by a repeal of the cor- porate charter ; but is beyond dispute where the State summons the offender before its judicial tribunals, and submits its complaint to their judgment and review. By that process it assumes the burden 0^ establishing the charges which it has made, and must show us warrant in the facts for the rehef which it seeks. Two of the charges preferred in the complaint have dropped out of sight. They were of httle importance, and have been prudently dismissed from the inquiry for that reason ; and we are left to consider the one grave and serious accusation to which alone the proofs and argument have been directed. That accusation is adequate to the purpose for which it was framed, but upon two conditions, which dictate the line of inquiry and Umit the area of discussion. It ap- pears to be settled that the State as prosecutor must show on the part of the corporation accused some sin against the law of its being which has produced, or tends to produce, injury to the public. The transgression must not be merely formal or incidental, but material and serious; and such as to harm or menace the pubhc welfare. For the State does not concern itself with the quarrels of private litigants. It furnishes for them sufficient courts and remedies, but intervenes as a party only where some public interest requires its action. Corporations may, and often do, exceed their authority where only private rights are affected. When these are adjusted, all mischief ends and all harm is averted. But where the transgres- sion has a wider scope and threatens the welfare of the people, they may summon the offender to answer for the abuse of its franchise or the violation of its corporate duty. Two questions, therefore, open before us : first, has the defendant corporation exceeded or abused its powers, and, second, does that excess or abuse threaten or harm the pubhc welfare. H The first question requires us to ascertain what the defendant corporation has done in violation of its duty, or omitted to do in performance of its duty. We find disclosed by the proof that it has become an integral part and constituent element of a combina- tion which possesses over it an absolute control, which has absorbed most of it^ corporate functions, and dictates the extent and manner and terms of its entire business activity. Into that combination, which drew into its control sixteen other corporations engaged in the refining of sugar, the defendant has gone, in some manner and by some process, for as an unquestionable truth we find it there. All its stock has been transferred ^ to the central association of eleven ' Neither identity of stockholders, nor control exercised through ownership of stock) makes one corporation the agent of another, or merges them, at law or in equity. Pitts- CHAP. II.] PEOPLE V. NORTH EIVER SUGAR REPINING CO. 789 individuals denominated a "Board;" in exchange it has taken and distributed to its own stockholders certificates of the board carrying a proportionate interest in what it describes as its capital stock ; the new directors of the defendant corporation have been chosen by the board, made eligible by its gift of single shares, and liable to removal under the terms of their appointment at any moment of independent action. It has lost the power to make a dividend, and is compelled to pay over its net earnings to the master whose servant it has become. Under the orders of that master it has ceased to refine sugar, and by so much, has lessened the supply upon the market. It cannot stir unless the master approves, and yet is entitled to receive from the earnings of the other refineries, massed as profits in the treasury of the board, its proportionate share for division among its own stock- iiolders holding the substituted certificates. In return for this ad- vantage it has become liable to be mortgaged, not for its own cor- porate benefit alone, but to supply with funds the controlling board when reaching out for other and coveted refineries. No one can look these facts fairly in the face without being compelled to say that the defendant is in the combination and in to stay. Indeed, so much is with great frankness admitted on the part of the appellant. But that truth does not alone solve the problem presented. We are yet to ascertain whether the corporation became the subordinate and. servant of the board by its own voluntary action, or the will a,nd power of others than itself ; by force of a contract to which it was in reahty a party, or as the simple consequence of a change of owners ; by its fault or its misfortune ; by a sale or by a trust. For, if it has done nothing, if what has happened, and all that has hap- pened, is ascertained to be that the stockholders of the defendant, one or many, sold absolutely to the eleven men who constituted the board their entire stock, and the latter, by force of their proprietor- ship and as owners, have merely chosen directors in their own in- terest, and are only managing their property in their own way as any absolute owners may ; if that is the truth, and the entire and exact truth, it is difficult to see wherein the corporation has sinned, or what it has done beyond merely omitting for a time to carry on its business. That is the theory upon which the appellant stands, and which it submits to our examination. On the other hand it is contended that there never was a sale, but a trust constituted by mutual agreement ; that they who agreed were the whole body of stockholders in each corporation necessarily- representing and binding the corporation itself; that they trans- ferred their shares to the board upon the trusts declared in the deed ; burgh & Buffalo Co. v. Duncan, 232 Fed. 584. And see Button v. Hoffman, ante, page 24 ; Gallagher v. Germania Brewing Co., ante, page 27 ; State v. Missouri Pacific Ry. Co., dted in note 2, page 274, ante. Cf. United States v. Milwaukee &c. Transit Co., ante, page 55 ; United States v. Lehigh Valley R. R. Co., ante, page 65. 790 CONSOLroATION. [chap. II. that the certificates issued by the board were the formal deblaration of the trust ; that the corporate stockholders parted with the legal title of their stock to the chosen trustees with the power to vote upon it, but retained, nevertheless, its beneficial ownership through the operation of the certificates; and so the corporations entered into a partnership with each other, vesting the partnership power in a board of control. I have brought these two theories face to face where they may confront each other, because, when a choice is made between them, we have gone a long distance towards the end of the controversy. . . . [The court examines the agreement.] The combination, therefore, framed by the deed was a trust; and, if created by the corporations, or in any respect the consequence or product of their action, some inevitable results would be certain to follow. But here we encounter the stronghold of the appellant's argument which is, that if the corporations are in some manner in the combination, they are there solely as the result of a contract other than their own ; are there without corporate action on their part ; and so are sufferers and not sinners. The reasoning leading to that result is so severely technical as to have suggested a justifica- tion almost reminding one of an apology. We are called upon to sever the corporation, the abstract legal entity, from the living and acting corporators ; as it were, to separate in our thought the soul • from the body, and admitting the sins of the latter to adjudge that the former remains pure. Let us first recall the facts in the order of their occurrence. ■% [The court finds that the stockholders of defendant at first unani- mously authorized its president and secretary to put its signature to the agreement and appointed a committee to perfect the con- soHdation in its behalf; that, later, through repentance or fear, the stockholders revoked their original resolutions, but after the agreement had been signed pursuant thereto ; that this repentance, if such, proved to be only a prelude to the exact sin claimed to have been avoided, for, three weeks later, the stockholders formally re- solved to sell their stock to one Searles for $325,000 to whom, they did individually transfer their shares, and who, being thus the sole stockholder, in turn, transferred the shares to the board. The specified sum was divided among the stockholders. Who furnished that sum, and what Searles did with the $700,000 of certificates he received from the board did not appear. New directors were chosen for the defendant by the board ; Searles became its president ; it has wholly ceased to refine sugar, but was allotted, nevertheless, its share of the regular dividend for its certificate holders, whoever they might be.] And yet it is argued that the corporation, the legal entity, has done nothing ; that Searles was guilty, but the corporate robe that CHAP. II.] PEOPLE V. NORTH RIVER SUGAR REFINING CO. 791 enveloped him was innocent, and so he must be left to wear it un- disturbed ; that while all that was human and could act had sinned, yet the impalpable entity had not acted at all and must go free. I believe that the history of what occurred, as I have already described it, furnishes a sufficient answer, assuming that stockholders and trustees acting together can do a corporate act at all. There was corporate action in making the combination agreement which bound the defendant. The revocation of an executed authority left the contract standing. The corporation thus helped to make the trust and became an element of it. If there was anything imperfect in its action, the new stockholder and his associates waived the im- perfection by acting upon the agreement of the corporation, and so confirming it in all particulars. But the assumption underlying the view I have expressed is itself contested, and a proposition asserted which denies the possibility of any corporate action, except by the trustees or directors acting formally as such; a proposition -which, if sound, dominates the whole field of controversy, and, establishing that there has been no corporate -action at all, effectually shuts out every question of illegal- ity or public injury. I cannot admit that proposition. I think there may be actual corporate conduct which is not formal corporate action; and where that conduct is directed or produced by the whole body, both of officers and stockholders, by every living instru- mentality which can possess and wield the corporate franchise, that conduct is of a corporate character, and if illegal and injurious may deserve and receive the penalty of dissolution. There always is, and there always must be, corporate conduct without formal cor-, porate action where the thing challenged is an omission to act at all. A corporation organized in the. public interest, with a view to the public welfare, and in the expectation of benefit to the community, which is the motive of the State's grant, may accept the franchise and hold it in sullen silence, doing nothing, resolving nothing, fur- nishing no formal corporate action upon which the State can put its finger and say, this the corporation has done by the agency through which it is authorized to act. That is corporate conduct which the State may question and punish without searching for a formal cor- porate act. The directors of a corporation, its authorized and active agency, may see the stockholders perverting its normal purposes by handing it over, bound and helpless, to an irresponsible and foreign authority, and omit all action which they ought to take, offer no resistance, make no protest, but silently acquiesce as directors in the wrong which as stockholders they have themselves helped to commit. That again is corporate conduct, though there be an utter absence of directors' resolutions. Is it asked what they could have done to prevent the organization of the trust ; how they were negligent and unfaithful as corporate officers by their omission to. 792 CONSOLIDATION. [CHAP. II. act ; what good a mere protest or objection would have accomplished ; what effective form their resistance could have assumed? The answer is that they could have refused to recognize the illegal trust transfer of the §tock ; they could have declined to register the new ownership upon their stock-books ; ' they could have said, and acted upon their words, that the original stockholders remained not only the beneficial, but the legal owners of the stock ; and, if the board trustees appealed to the law, the resisting directors could challenge the legality of the transfer as moulded by the combination agree- ment, and might have defeated the trust and shattered it at the outset of its career. So much they could have done as corporate . officers ; so much it was their duty to have done as representatives of the corporation ; and when, beyond that corporate neglect, they recognized the validity of the stock transfers in trust, put the new and unlawful ownership upon their books, and accepted its votes in the choice of new directors who were to throttle the independence of the corporation and chain it to the will of the trust, I think we must shut our eyes in willful blindness if we fail to see both corporate neglect and corporate action. It is true, as we are reminded, that the statute confers upon trustees and directors general authority to manage the stock, property and concerns of manufacturing corporations; and equally true that, as a general rule and as l?etween the companies and those with whom they deal, the corporate action must be manifested through and by the directors ; but other statutes indicate with equal plainness that there are corporate acts which'the trustees cannot perform, and which affect and bind the corporation only upon the condition that they proceed from the stockholders, or from them and the trustees acting together. 2 In increasing or diminishing the capital stock, the cor- porate act is wholly that of the corporators, and in consolidating two or more companies into one, there must be the joint action of both trustees and stockholders. The trust of the reWeries, in substance and effect, approached very near to these two corporate acts, so far as the resultant consequences affected the corporators acting. The trust stipulations practically doubled their corporate stock through the agency of the certificates issued, and the combina- tion in its result is largely the equivalent of a substantial consolida- tion. If these things had been done lawfully, they would have been accomplished by the united action of trustees and corporators, and beyond any question would have been corporate acts. Having been done unlawfully, but by the same united agency aiming at similar results, they must still constitute corporate conduct, unless the bare fact of their illegality takes away their corporate character. I • Cf. Franklin Bank v. Commercial Bank, cited in note 1, page 570, ante. 2 See Book IV, Chap. 3, Sec. 2, ante; also Continental Securities Co. a. Belmont, ante, page 634. CHAP. II.] PEOPLK V. NORTH RIVER SUGAR REPINING CO. 793 To say that, would disarm the state in every case of misuse or abuse of chartered powers. The abstract idea of a corporation, the legal entity, the impalpable and intangible creation of human thought is itself a fiction, and has been appropriately described as a figure of speech. It serves very well to designate in our minds the collective action and agency of many individuals as permitted by the law ; and the substantial in- quiry always is what in a given case has been that collective action and, agency. As between the corporation and those with whom it deals, the manner of its exercise usually is material, but as between it and the State, the substantial inquiry is only what that collective action and agency has done, what it has, in fact, accomplished, what is seen to be its effective work, what has been its conduct. It ought not to be otherwise. The State gave the franchise, the charter, not to the impalpable, intangible and almost nebulous fiction of our thought, but to the corporators, the individuals,^ the acting and - Uving men, to be used by them, to redbund to their benefit, to strengthen their hands and add energy to their capital. If it is taken away, it is taken from them as individuals and corporators, and the legal fiction disappears. The benefit is theirs, the punish- ment is theirs, and both must attend and depend upon their conduct ; and when they all act, collectively, as an aggregate body; without the least exception, and so acting, reach results and accomplish purposes clearly corporate in their character, arid affecting the vitality, the independence, the utiUty, of the corporation itself, we cannot hesitate to conclude that there has been corporate conduct which the state may review, and hot be defeated by the assumed innocence of a convenient fiction.^ As was said in People ex rel. v. K. & M. T. R. Co. (23 Wend. 193), "though the proceeding by information be against the corporate body, it is the acts or omissions of the individual corporators that are the subject of the judgment of the court." It remains to determine whether the conduct of the defendant in participating in the creation of the trust and becoming an element of it was illegal and tended to the public injury,3'and we may consider the two questions together and without formal separation. It is quite clear that the effect of the defendant's action was to divest itself of the essential and vital elements of its franchise * by placing them in trust ; to accept from the State the gift of corporate life only to disregard the conditions upon which it was given ; to re- ceive its powers and privileges merely to put them in pawn ; and to 1 Cf. Fietsam v. Hay, ante, page 83. But see Society for Savings v. Coite, ante, at page 80. And see Lord v. Equitable Life Assur. Soc, cited in note 1, page 204, ante. ' See State i). Standard Oil Co., cited in note at page 64, ante. ' Cf. McCarter v. Firemen's Ins. Co., ante, page 327. < See Thomas v. West Jersey R. R. Co., ante, page 141 ; Central Transportation Co. V. Pullman's Palace Car Co., ante, page 303. Cf. Gooch v. MoGee, ante, page 666. 794 CONSOLIDATION. [CHAP; II. give away to an irresponsible board its entire independence and seK-contrbl.i When it had passed into the hands of the trust, only a shell of a corporation was left standing, as a seeming obedience to the law, but with its internal structure destroyed or removed. Its stockholders, retaining their beneficial interest, have separated from it their voting power,^ and so parted with the control which the charter gave them and the State required them to exercise. It has a board of directors nominally and formally in office, but qualified by shares which they do not own,^ and owing their official life to the , board which can end their power at any moment of disobedience. It can make no dividends whatever may be its net earnings, and must encumber its property at the command of its master, and for purposes wholly foreign to its own corporate interests and duties.^ At the command of that master it has ceased to refine sugar, and without any doubt for the purpose of so far lessening the market supply as to prevent what is termed "over production." In all these respects it has wasted and perverted the privileges conferred by the charter, abused its powers, and proved unfaithful to its duties. But graver still i^ the illegal action substituted for the conduct which the State had a right to expect and require. It has helped to create an anomalous trust which is, in substance and effect, a partnership of twenty separate corporations. The State permits in many ways an aggregation of capital, but mindful of the possible dangers to the people, over-balancing the benefits, keeps upon it a restraining hand, and maintains over it a prudent supervision, where such aggregation depends upon its permission and grows out of its corporate grants.' It is a violation of law for corporations to enter into a partnership. (N. Y. & S. C. Co. v. F. Bank, 7 Wend. 412 ; Clearwater v. Meredith, 1 Wall. 29 ; Whittenton Mills v. Upton, 10 Gray, 596.) The case last cited furnishes the reasons with precision and at length.^ It shows the utter inconsistency of a double al- legiance by those who act for the corporation to two different prin- cipals, and demonstrates that the vital characteristics of the cor- poration are of necessity drowned in the paramount authority of the partnership. That the combination of the refineries partakes of the nature of a partnership is not denied. Indeed, in one of the papers added to the appellant's brief, it is not only admitted but asserted and defended. That paper shows quite clearly, that by force of the arrangement, there was a community of interest in the fund created by the corporate earnings before division, and that each * Cf. McCarter v. Kremen's Ins. Co., ante, page 327. 2 See Book IV, Chap. 4, Sec. 8, ante. ' See Matter of George Ringler & Co., ante, page 440. ' Cf. Greene v. Middlesborough &c. Lands Co., ante, page 214 ; also State v. Atlan- tic City &c. E. R. Co., cited in note on page 282, ante. ' See opinion of Baktlett, J. in Hibbs v. Brown, cited in note 1, page 18, ante. ' Reported ante, page 220. CHAP. II.] PEOPLE V. NORTH EIVER SUGAR REFINING CO. 795 member of the trust shared in the profit and loss of all. It is said, however, that a consolidation of manufacturing corporations is per- mitted by the law, and that the trust or combination or partnership, however it may be described, amounts only to a practical ^ consolida- tion which public policy does not forbid because the statute permits it. (Laws of 1867, chap. 960 ; Laws of 1884, chap. 367.) The re- fineries did not avaU themselves of that statute. They chose to disregard it, and to reach its practical results without subjection to the prudential restraints with which the State accompanied its per- mission.2 If there had been a consolidation under the statute, one single corporation would have taken the place of the others dissolved. They would have disappeared utterly,' and not, as under the trust, remained in apparent existence to threaten and menace other organizations and occupy the ground which otherwise would be left free. Under the statute the resultant combination would itself be a corporation deriving its existence from the State,^ owing duties and obhgations to the State, and subject to the control and super- vision of the State, and not, as here, an unincorporated board, a colossal and gigantic partnership, having no corporate functions and owing no corporate allegiance. Under the statute the consolidated company taking the place of the separate corporations could have as capital stock only an amount equal to the fair aggregate value of the rights and franchises of the companies absorbed ; ^ and not as here a capital stock double that value at the outset and capable of an elastic and irresponsible increase. The difference is very great and serves further to indicate the inherent illegality of the trust combination. And here I think we gain a definite view of the injurious tendencies developed by its organization and operation, and of the public in- terests which are menaced by its action. As corporate grants are always assumed to have been made for the public benefit, any conduct which destroys their normal functions, and maims and cripples their separate activity, and takes away their free and independent action, > Cf. Chicago &c. R. R. Co. v. Heidenreich, cited in note 1, page 132, ante. 2 Cf. State V. Atlantic City &c. R. R. Co., cited in note 1, page 95, ante. ' See note 1, page 786, ante. Consolidation, under most statutes, is an implied surrender of the separate franchises under an omnibus statutory consent. See State V. Rutland &c. Light &c. Co., 85 Vt. 91, Ann. Cas. 1914A 1305. But as sovereignty may determine for itself whether a particular body created under its laws shall exist as a corporation or not, Thomas i). Board of Trustees, cited in note 1, page 21, ante, and this irrespective of the normal attributes of a corporation, Edwards ». Warren &c. Works, ante, page 18, conversely, legislative intention is decisive of the effect to be attributed to consolidation. Central R. R. &c. Co. v. Georgia, 92 U. S. 665, Keokuk &e. Ry. Co. ». Missouri, 152 U. S. 301, or to any other manner of dissolution, Thornton ». Marginal Freight Ry. Co., ante, page 750. It is as difficult to ascertain essential, as distinguished from normal or characteristic, effects of dissolution and consolidation, as it was to distinguish between being and having in respect to the question whether a given institution was a corporation or not. See Book I, Chap. I. * See Ashley ». Ryan, ante, page 73. ' Cf. note 1, page 720, ante. 796 CONSOLIDATION. [CHAP. II. must so far disappoint the purpose of their creation as to affect unfavorably the public interest ; and that to a much greater extent when beyond their own several aggregations of capital they compact them all into one combination which stands outside of the ward of the State, which dominates the range of an entire industry, and puts upon the market a capital stock proudly defiant of actual values, and capable of an unlimited expansion. It is not a sufficient answer to say that similar results may be lawfully accomplished ; that an individual having the necessary wealth might have bought all these refineries, manned them with his own chosen agents, and managed them as a group at his sovereign will ; for it is one thing for the State to respect the rights of ownership and protect them out of regard to the business freedom of the citizen, and quite another thing to add to that possibility a further extension of those conse- quences by creating artificial persons to aid in producing such aggre- gations. The individuals are few who hold in possession such enormous wealth, and fewer still who peril it all in a manufacturing enterprise ; but if corporations can combine, and mass their forces in a solid trust or partnership, with little added risk to the capital already embarked, without limit to the magnitude of the aggregation, a tempting and easy road is opened to enormous combinations, vastly exceeding in number and in strength and in their power over industry any possibilities of individual ownership ; * and the State by the creation of the artificial persons constituting the elements of the combination, and failing to limit and restrain their powers, becomes itself the responsible creator, the voluntary cause of an aggregation of capital which it simply endures in the individual as the product of his free agency. What it may bear is one thing, what it should cause and create is quite another. And so we have reached our conclusion, and it appears to us to have been established, that the defendant corporation h%s violated its charter and failed in the performance of its corporate duties, and that in respects so material and important as to justify " a judg- ment of dissolution. Having reached that result, it becomes need- less to advance into the wider discussion over monopolies and competition and restraint of trade and the problems of political economy. Our duty is to leave them until some proper emer- gency compels their consideration. Without either approval or disapproval of the views expressed upon that branch of the case by the courts below, we are enabled to decide that in this State there can be no partnerships of separate and independent corpora- tions, whether directly, or indirectly through the medium of a trust ; no substantial consolidations which avoid and disregard the statutory permissions and restraints, but that manufacturing cor- ' See note 5, page 794, ante. ' Cf. State D. Creamery Package Mfg. Co., ante, page 767. Chap, ii.] people v. north river sugar refining co. 797 porations must be and remain several as they were created, or one under the statute. The judgment appealed from should be affirmed with costs. All concur. Judgment affirmed} • This case, the inclusion of which in this chapter may be justified because it deals with de facto consolidation, might have been profitably utilized, it is true, in any one of several preceding chapters. It has been reserved, primarily, because it excellently mobilizes, reviews and applies principles that have necessarily or expediently been developed separately. The scholar, whether student or practitioner, as well as the court, must do the same whenever confronted with a new scheme, device, or problem. To master concepts of the law, to bring order out of chaos, to classify correctly and summarize succinctly is an end in itself only so far as it enables us to proceed with minimum of error from the old base to a new position ; to dominate and not play the slave to precedents ; to solve the future by application, recasting, or even discard of the past ; to worship the reason and not the golden calf of rule. So the captions as- signed to any given book, chapter, or section, are without value save as a sign board to guide us from the known into the unknown. INDEX. [Reference to the initial page of a case is a reference to the whole case ; to other pages, is a reference to the particular page. Notes are indicated by the suffix — n.] ACKNOWLEDGMENT, by notary who is officer of corporate mortgagee, 431 n. ACTIONS, See PoBEiGN Corporations; De Facto Corporations; Pro- moters ; and specific heads, against corporation in name of an officer, 10. by corporation in name of an officer, 2, 10. creditors, see Creditors. receivers, see Receivers. stockholders, see Stockholders. corporate action, what constitutes, see Corporate Action. effect of dissolution upon, see Dissolution. AGENTS, actions by, for wrongful discharge, 432, 436 n. appointment, see Directors. not made by identity of stockholders or by stock control, 788 n. to accept service of process in behalf of foreign corporations, 245 n. authority, eoi^porate seal unnecessary, 226 n, 366, 464. impUed warranty of, 137 n, 364 n, 685, 586. limitations in by-laws, 428 n. not provable by acts or declarations of agents, 462. of special agents, 463, 463 n, 465 n. scope, 352, 352 n, 356, 367. to make contracts, 151, 690 n. when inferable, 245 n, 467. crimes, liability of corporation for, 353, 357. misappropriation of stock certificate, 581 n. custody, distinguished from possession, 583 n. distinction between corporate action per se and per alium, 38, 431. distinguished from directors, see Directors. officers, see Officers. duties, fiduciary doctrine appUoable, 471. liability, of directors for acts of, see Directors. notice, when imputed, 579 n, 620 n. process, service upon, 245 n, 432. torts, liabiUty of agents for, 690 n. HabiUty of corporation for, 298, 346 352, 362 n, 356. under power of attorney to transfer stock, see Transfer of Stock. AMENDMENT, See Charter. 799 800 INDEX. ARTICLES OF ASSOCIATION, as a certificate of incorporation, 8. by-laws, 287. ASSESSMENTS, See Stock ; Sttbsceiptions to Stock ; Capital Stock. ATTORNEY, POWER OP, See Transfer op Stock. ATTORNEY GENERAL, See De Facto Corporations; Dissolution; Quo Warranto; Ultra Vires Acts. election of remedies for ultra vires acts, 328, 328 n. idtra vires acts, standing to enjoin, 320, 325, 327, 328, 328 n, 329 n, 332. 342. property transactions, standing to challenge, 337, 338, 342, 343, 788. BANKRUPTCY, See Creditors ; Insolvency ; Receivers. BILLS AND NOTES, See Powers ; Ultra Vires Acts. BONUS, See Stock. BOOKS, Inspection of, see Stockholders. BULK SALES ACT, applied to vendor corporation, 256 n. BUSINESS, doing business, by foreign corporation, see Foreign Corporation. under tax laws, see Federal Corporation Tax Law. franchise of doing, distinguished from franchise of being a corporation, 412 n. resuming, defined, 679. similar business, effect of engagement in, 261 n, 274 n. BY-LAWS, as a contract with the stockholders, 420 n, 422, 428 n, 596, 596 n. distinguished from rules and regulations, 424, 425 n. stockholders' agreement embodied in charter, 183. notice, actual, 428 n. constructive, 428 n. power to alter or amend, see Powers. make, see Powers. requisites and validity, function of court or jury to determine, 424, 425, 425 n. interference with charter, 287, 290, 418, 419 n. corporate law, 419 n, 422, 423. public poUey, 419 n, 595. right of inspection, 544 n. transfer, 595, 596, 596 n, 597, 597 n. vested rights, 419 n, 420 n, 544 n. lien upon stock transfers, 598 n. scope and operation, 289, 426, 428, 428 n, 583 n, 593, 596 n, 597 n. when directors may enact, 422 n. who may make, 422 n. INDEX. 801 CALLS, See Stjbscriptions to Stock. CAPACITY, CORPORATE, See PowpRS ; Ultra Vires Acts. CAPITAL STOCK, as a trust fund, see Creditors ; Sitbscriptions to Stock. an accountability, 412 n, 608. tte corporate capital, 401, 402, 404, 405, 708 n, 712. the property of the corporation, 402, 712. depreciation, 404, 410 n, 411 n, 557. derived from convertible bonds, 609. distinguished from share stock, 401, 404, 409, 557, 708 n, 713. surplus, 402, 405, 411 n, 557, 559, 608, 609. division upon dissolution, 752, 753, 755, 762. not a liability in determining solvency, 721 n. once issued remains outstanding, 413, 416, 417. premium on sale, disposal of, 609. right to increase, 559, 564, 565, 715 n. right to reduce, 266 n, 416. source of, 390, 609. stock dividends of, see Dividends. taxation of, 401, 404. unla-wful increase of, what constitutes, 280, 283, 417 n, 722. unlawful reduction of, what constitutes, 256 n, 267 n, 408, 408 n, 409, 411 n, 415, 416, 417, 417 n, 556, 609, 728. CERTIFICATE OF INCORPORATION, See Charter ; Formation ; Franchise. approval, 1. as a charter, 95 n, 141 n, 227, 309. deed of settlement as, 8. defects in, cannot be patched up by parol, 96, 97 n. enabling act, relation of, 273 n, 282 n. non-business corporations, 1. objects, feasibility, 1. forbidden, 95 n. identity, how determined, 774 n. permissible, 273 n, 282 n. provisions defining directors' powers, 256 n. limiting corporate powers, 180, 181. under general enabling acts, see Formation. CERTIFICATE OF STOCK, See Stock. CERTIORARI, as a prerogative writ, 529 n. CHARTER, See Certificate of Incorporation ; Franchise ; Powers. absence of, in limited partnerships, 19. as a contract between the corporation and its stockholders, 166, 167, 169 n, 175, 175 n, 179 n, 180, 261 n, 267, 273 n, 604. as a contract between the corporation and the State, 168, 184, 190, 194, 198, 201, 206, 207 n, 745. as a contract between the stockholders, 167, 17? n, 180, 182, 261 n, 273 n, 282 n, 748, 774. • 802 INDEX. CHARTER — Continued. as a measure of corporate power, 141, 147, 149, 152, 216, 227, 228, 286, 289, 298 n, 308. as a notice of limited powers, see Ultea Vires Acts. as a test of ultra vires, see Ultra Vires Acts. amended, effect on subscriptions, see Subscriptions to Stock. scope of reserved right to amend, 205 n, 209 n. construction, rules of, 95 n, 144, 149, 185, 185 n, 186 n, 228, 286, 309. corporations chartered in two or more states, 774 n. expiration of, as a method of dissolution, see Dissoltttign. memorandum of association as a, 287. necessity of acceptance, 88, 88 n, 95. of de facto corporation', see Db Facto Corporations. of de jure corporation, see Formation. organic change in, contemplated by, 178, 748. ■ effect upon stock subscription, see Subscriptions to Stock. ) how accepted, 167, 211 n, 212 n. right of majority to make, 173, 211 n, 212 n, 748, 774. stockholder to restrain, 167, 172, 211 n, 212 n. what constitutes, 167, 168, 170 n, 171, 172, 172 n, 176 n. provisions, different from by-laws, 183. subject to eminent domain, 208, 208 n. police power, 194, 198. reserved power to repeal, alter, and amend, 201, 209 n. surrender, as a method of dissolution, see Dissolution. CITIZEN, corporation as a, 43 n, 44 n, 61, 629. joint-stock company not a citizen, 21 n. partnership not a citizen, 21 n. COLLATERAL ATTACK, See De Facto Corporations ; Dissolution ; Formation ; Ultra Vires Acts. COMITY, applied between states as well as nations, 246 n. to determination of status of foreign institution, 22 n. foreign limited partnership, 21. laws of sister state, 246 n. extra-territorial effect of foreign laws, 21, 21 n, 247 n, 331, 694. invocation by foreign corporation, effect of, 48, 49, 77. when extended, 76 n, 246 n. when not extended, 76, 331. COMPROMISE, Power to, see Powers. CONDITIONS, See Formation. CONSOLIDATION, See Formation. de facto consoUdation, 132 n, 331, 787, 788 n, 796, 797 n'. distinguished from merger, 778, 782, 786. sale of property, 78] , 786. effect in general, as impUed surrender of franchise, 795 n. characteristic distinguished from essential effects, 795 n. creditors, rights upon, 775, 780, 784. INDEX. 803 CONSOLIDATION — Continued, effect in general ^ Continued. debts, liability for upon, 256 n, 775, 779, 780, 782, 783. upon constituent corporations, 782, 783, 795, 795 n. effected by unlawful means, 331, 772, 787, 796. identity of objects, see Certificate of Incorporation. merger, effect in general, 777, 778, 780, 782. how effected, 788 n. right of merger is a franchise, 82, 774, 777, 788 n. rights of creditors, 775, 780, 784. methods, 774, 776, 777. power of, as a basis of derivative powers, 274 n. effect upon subscription, see Subscriptions to Stock. is a franchise, 76, 77, 82, 132 n, 774. rights of preferred stockholders, to subscribe to new stock, 612 n. when permissible, 175, 772, 774 n, 775. CONSTITUTIONAL LAW, citizens' privileges and immunities, 43 n. citizenship, diversity of, 21 n, 44 n, 61. delegation of legislative functions, 81, 82, 91, 93. due process of law, 43 n, 45, 49 n, 354. effect of unconstitutional law, see De Facto Corporations. equal protection of the law, 43 n. full faith and credit, 48, 49 n, 692, 693, 694, 698. impairment of contract obligations, 168, 178, 185, 187, 193, 195, 197, 197 n, 206, 206 n, 209 n, 698, 752 n, 753 n. interstate commerce, 65, 67, 77, 194 n, 243 n, 357. police power, see State. taxation of federal instrumentalities, 79, 404. CONTRACTS, CORPORATE, See Powers ; Ultra Vires Acts. charter as a contract, see Charter. consideration, right of stockholders to question, 157, 257, 457 n, 624 n. implied in law, see Qtjasi-Contracts. liability upon of&cers executing, 34 n, 690 n. power of agents to make, see Agents. of&cers to make, see Officers. ultra vires, see Ultra Vires Acts ; Powers. CONVEYANCES, See Property ; Acknowledgment ; Fraudulent Conveyances. CORPORATE ACTION, as distinguished from acts of its shareholders, 64 n, 292 n, 298 n, 461 n, 631, 789, 790, 791, 792. per se distinguished from per alium, 38, 524 n. presumption of regularity attending, 462. quorum of stockholders may take, 525, 617. stockholders must act as a body, 461 n. what constitutes, 791, 792, 793. CORPORATE CAPACITY, See Powers ; Ultra Vires Acts. CORPORATE CONCEPT, See Nature of a Corporation. '804 INDEX. CORPORATE CONTRACTS, See Contracts, Corporate. CREATION, See Certificate of Organization ; Charter ; Formation. CREDITORS, See Capital Stock ; Property ; Subscriptions to Stock. claims, proof of, against corporation, 678 n. stockholders, 699. distinguished from preferred stockholders, see Preferred Stock. fraud upon, what constitutes, 255 n, 256 n, 374 n, 690 n, 712, 715, 716, 717, 721 n, 736. privity, with directors, 681, 683, 690. relation, to stockholders, see Stockholders. rights, against corporation assets as a trust fund, 265 n, 256 n, 670, 676 n, 677 n, 683, 696, 700 n, 707, 708 n, 709 n, 712, 713, 724, 726. by simple contract creditors, 255 n, 256 n, 669, 670, 676 n, 709 n, 785, 786. capital stock as a trust fund, 268, 270, 408 n, 559, 706, 708 n, 711, 712, 713, 715 n, 762. execution against corporate property, 666, 668 n. interference with corporate management, 669, 670 n. to have receiver appointed, see Receivers. upon acquisition by corporation of its own stock, 266, 266 n, 267, 268 n, 269, 270. aUenation of corporate property, 255 n, 266 n, 677, 781. consolidation or merger, see Consolidation. dissolution, see Dissolution. reorganization, see Reorganization. • when organized in fraud of, 51, 64, 256 n. directors, common law liability, 681, 690 n. fiduciary doctrine, 256 n, 681. for fraud, 683. statutory liability, 690. offlcers, considered as penalties, see Penal Laws. for uttering false reports or certifications, 696, 697. ■ stockholders, personal liability for corporate debts* distinguished from liability on stock subscriptions, 703 n. unpaid subscriptions, 271 n, 389, 389 n, 393, 394, 396 n, 699, 700 n, 701 n, 703, 708 n, 709 n, 710, 718. until capital stock is paid in, 696. i when necessary to marshal assets, 700 n, 702, 703 n, 738, 739. personal liability is preserved by the enabling act, 702, 730. unnecessary to marshal assets, 700 n, 703 n. transferees of stock, see Transfer of Stock. transferrers of stock, see Transfer op Stock. creditor's bUl, nature and grounds, 680 n, 700 n, 701 n, 709 n, 711, 763, 780. seppe and operation, 699, 700 n, 701 n. in penal laws, 698. subrogation, see supra rights ; also Directors. who are, 678 n, 762. CRIMES, corporate capacity to commit, see Ultra Vires Acts. liability for, 363, 355, 356, 366 n, 367, 367 n. INDEX. 80& DEBTS, See Ceeditors. assumption of, effect of, 256 n, 779. when inferred, 783 n. necessary by statute, 783. extinction of, upon dissolution, see DissoLxmoN. liability for, of vendor corporation, 256 n, 779, 781. upon consolidation or merger, see Consolidation. personal liability for corporate debts, see Stockholdees. pattnersMp. debts, 9, 12, 16. in limited partnership, 19. of oflcers for corporate debts, see Officers. stock taken as security for, see Powers ; Transfer of Stock. in liquidation of, see Powers. what constitutes, 762. DEED OF SETTLEMENT, as a certificate of incorporation, see Certificate of Incorporation. DE FACTO CORPORATIONS, are not phantoms but realities, 124. as affected by estoppel. 111, 111 n, 112, 114, 115, 116, 116 n, 117 n, 118 n, 119, 124, 129 n, 132 n, 134, 388, 764, 766. public poUcy, 104, 111, 111 n, 116 n, 128, 133 n. judicial legislation, 118 n, 445. collateral attack upon, 103, 110, 111 n, 116 n, 117 n, 119 n, 125, 127, 132 n, 387, 387 n, 439, 764, 766, 766 n. dealings upon corporate basis, 103, 106, 113, 117, 117 n, 119 n, 124, 129, 136. partnership basis, 113 n, 117 n, 129, 136. distinguished from mere usurpation, 104, 106 n, 110, 118 n. doctrine applies to foreign corporations, 240. effect of constitutional prohibition, 132 n. fraud vitiates incorporation, 118 n. liability of associates, as partners, 106 n, 109, 113, 137, 137 n. other grounds, 137, 137 n. shareholders, 109, 117, 137 n, 388. mece appellation as a corporation not sufficient, 118 n, 135. name indicative of a corporation, 118 n, 135. necessity of color, 104, 105, 105 n, 108, 127, 133, 765. necessity of good faith, 117 n, 118 n, 124, 134. law, 104, 115, 117 n, 132 n, 134, 764, 765, 766. user, 104, 108, 119, 134. notice or knowledge of de facto character, 113 n, 117, 117 n, 118 n, 119, 135. partnership not necessary consequence of abortive attempt to incorpo' rate, 112, 137 n. power, in general, 98. to acquire and hold property, 113, 116 n, 117 n, 126, 128. exercise right of eminent domain, 128, 128 n, 387 n, 444 n; sue, 117 n, 126, 127. • requisites, 104, 106 n, 108, 117 n, 118 n, 132 n, 134, 764.. subject to quo warranto, 104, 116. subscriptions to stock of, see Subscriptions to Stock. the doctrine of, 103, 106, 106 n, 114, 117, 120, 129, 137. title vested in associates in absence of de facto requisites, 117 n. under unconstitutional laws, 116, 117 n, 132, 132 n. 806 INDEX. DE FACTO DIRECTORS, See Ofpicbes. DB FACTO OFFICERS, See Officers. DE JURE CORPORATION, See FoKMATiON. DELEGATION, See CoNSTiTTiTioNAL Law ; Directors. DIRECTORS, as an organic part of the corporation, 29, 222, 223, 330, 455, 457, 457 n, 460, 461, 461 n, 627, 637, 792, 794. consent of or ratification by stockholders of acts of, 458, 465, 465 n, 470 n, 474 n, 482, 483, 484, 487, 488, 631, 638, 639, 791. de facto, see Officers. disquaUflcation, available only to corporation, 257 n, 472, 505, 690 n. common directors, 472, 479 n, 480, 480 n, 482. contracts with corporation, 469, 470, 471, 487. fiduciary relationship, rights of credtiors, 257 n, 690 n. the doctrine of, 468 n, 469, 470 n, 472, 472 n, 475 n, 480, 484, 490, 492 n, 493, 496, 501, 506 n, 569 n, 626 n, 690 n. loaning money and taking security, 490, 491, 492, 492 n, 493 n. must be promptly claimed, 470 n, 495. property transactions, 470 n, 476 n, 489 n, 493 n. purchase of corporate debts or securities, 494, 495, 569 n. transactions with stockholders, 496, 601, 501 n, 503, 505 n. distinguished from agents, 432, 457, 465 n, 619 n, 637, 683, 684. dummy, 37, 60, 330, 330 n, 368 n, 372 n, 373 n, 442, 442 n, 443, 444 n, 471 n, 480 n, 626. duties, delegation, 335, 336, 398, 460 n, 463 n, 465 n, 684, 685, 686. must direct, 222, 223 n, 330, 330 n, 455, 794. not abdicate, 222, 223 n, 331, 336, 685, 686, 794. to declare dividends, see Dividends. exercise reasonable care, see infra liabilities, elections, see Elections. eligibUity, see infra quahflcations ; also Elections. liabiUties, breach of trust or wilful misconduct or crime, 510, 536 n, 569 n, 620, 621, 621 n, 690 n. by whom enforceable, 522 n, 617, 619 n. degree of care required, 510, 511 n, 518, 519, 520, 522 n, 684, 689. error of judgment, 510, 511 n, 513, 516 n, 520, 522. mismanagement, 508, 509, 511 n, 517, 620. nature of, 507, 512, 517, 536 n, 683. negUgenee, 509, 510, 517 n, 683. prospectus, 364 n, 620 n. to creditors, 681, 683, 690, 690 n. torts, 517 n. ultra vires acts, 512, 513, 514, 515 n, 516 n, 517 n, 690 n. management, deadlock, 457 n. when subject to challenge, 457 n, 564, 623, 624 n. not governed by agreement of electors, 29, 330 n, 626, 626 n, 627. powers, in emergencies, 686, 687. of single director, 686, 687. to appoint agents, 435, 436 n. declare dividends, see Dividends. determine membership of corporation, 598 n, 792. INDEX. 807 DIRECTORS — Continued, powers — Continued. to forfeit stock, 396, 400. inake by-laws, see By-laws. calls on subscriptions, 396 n, 397 n. manage the corporate affairs, 268 n, 435, 455, 456, 457, 460, 598 n, 623, 792. mortgage property, 458. remove directors, 435 n. remove ofELeers, see Opficees. vested in board only as a body, 460, 461, 461 n, 464, 683, 791. when exclusive of stockholders, 455, 455 n, 456, 457, 457 n, 458, 459 n, 477, 564, 564 n, 623, 624 n, 625, 637, 638, 683, 792. subject to control of stockholders, 422 n, 455 n, 456, 456 n, 458, 564. privity, when agents or trustees for creditors, 683. with creditors, 681, 683, 690, 690 n. pledgor of stock, 536 n. stockholders, see Stockholders. quaUflcations, effect upon elections, 525, 529. eligibility of municipal representative, 444 n. ownership of stock, 437, 441, 442, 442 n, 443, 443 n, 444 n, 445 n, 499, 529, 530, 531, 535 n, 597 n. quorum, powers of convened quorum, 439. what constitutes, 471 n, 479 n. rights, commission, 467 n. compensation, 466, 468 n, and see infra salaries, salaries, when proper, 466 n, 467 n, 468 n, 484, 486, 487, 489 n, 490 n, 622, 640 n. DISSOLUTION, See Quo Wahranto. as a cover to reorganization, 755, 772, 775. by death of all members, as a method of, 743, 744. expiration of charter, as a method of, 754, 763, 764, 765, 766, 766 n. effect, upon causes of action, 755, 756, 757, 765 n, 766, 766 n. property, 763, 767. forfeiture of franchise, as a method of, 743, 744, 767. causes, 744, 744 n, 767, 788, 796. effect, as corporate death, 680 n, 763, 765, 767, 787. no collateral attack, 101 n, 744 n, 745 n, 765. penalties, 767, 787. waiver, 101 n. when self-executing, 101 n, 764, 765. repeal of charter, as a method of, 743, 744. effect on powers, 204, 204 n, 751. property, 204, 204 n, 751. surrender of charter, as a method of, 744, 745, 752 n, 795 n. effect, upon obligation of contracts, 752 n, 753 n. collateral attack, 101 n, 744 n, 745 n, 764. dismemberment, acts effecting, 280. dividend upon, see Dividends. effect in general, actions at law, 743 n, 752, 753, 755, 756, 757, 765, estoppel, 764, 766. extinction of debts, 745, 752 n, 755, 757, 757 n, 761, 762, 763. upon contracts, 752, 752 n, 753 n, 755, 759, 761. corporate torts, 754, 758, 759, 766. title to corporate property, 752 n, 756, 757, 757 n. 808 INDEX. DISSOLUTION — Continued. fact of, distinguished from cause for, 101 n, 254 n, 744 n, 745 n, 764, 765. ipso facto, 101 n, 764, 765. ' , matters precedent, sale of property with view of winding up, 250, 269, 746, 772. motive, effect of evil, 626 n, 748, 749. not effected by appointment of receiver, 680 n, 761. insolvency, 746, 761. lack of directors or offlcers, 746. or disposal of property, see Powers ; Property. single ownership of stock, 26 n. right to dissolve, at instance of majority, 254 n, 625 n, 626 n, 746, 748, 750 n, 772. minority, 625 n. rights of preferred stockholders, see Preferred Stock. DIVIDENDS, cash dividends, distinguished from property dividends, 560, 560 n, 561. contracts in respect to, who entitled, 544. declaration, duty of directors to declare, 410, 560, 560 n. effect as aflfirmation of it's validity, 728, 729. creating a debt, 552, 553, 553 n, 554, 555. trust fund, 653, 553 n, 554. matters precedent, 410 n, 551, 552. power of directors to declare, 546, 549 n, 559, 560. revocation, 551, 554, 555, 555 n. withotit reference to nominal or par value, 412 n. dissolution, final dividends, 402 n, 410 n, 412 n. employed in two senses, 410 h, 412 n. improper, liability for, when paid out of capital, see Directors. recovery, when paid out of capital, 725, 729 n. injunction against, where stock was issued without consideration, 721 n. liability, of directors for dividends paid out of capital, 513, 514, 515 n, 516 n. nature of, 402, 410 n, 412 n, 545, 551, 554. ownership, as between corporation and stockholder, 553, 553 n, 570 n. legatee of stock and personal representative, 552, 553. life tenant and remainderman, 561 n. transferrer and transferee of stock, 544, 547 n, 552, 570 n, 579. pajrment, when proper out of borrowed money, 560. preferred stock, see Preferred Stock. property dividends, see supra cash dividends ; also infra stock dividends, right of stockholder, to compel declaration of, 549, 560 n, 614 n. declared, 548, 549, 549 n, 550, 570 n, 614 n, 725. source, net profits, 408, 410 n. surplus or surplus profits, 408, 410 n, 411 n, 412 n, 567, 568, 559, 559 n, 608, 609, 610. stock dividends, distinguished from dividends of stock or other prop- erty, 560, 560 n, 661. matters precedent, 555 n. nature and effect, 555 n, 557, 557 n, 558, 559. not necessarily a division or reduction of capital stock, 656. recovery of improper, 729 n. revocation, 555 n. surplus as the source, 568, 659, 660. validity, 556, 560, 729. n. unpaid, not to escheat to state, 757 n. INDEX. 809 DUMMY CORPORATION, See Formation. DUMMY DIRECTORS, See Directors. ELECTIONS, See Meetings ; Voting. eligibility, in general, corporate books not conclusive, 530, 531. effect of votes cast for disqualified candidate, 628, 531. not to be determined by inspectors, 531. of directors, see Directors. equity iurisdiction, no original ground, 450, 451, 452, 453, 454, 454 n. when arising collaterally, 453, 454 n. inspectors of election, functions, 527, 531. subject to court control by means of prerogative writs, 529. summary proceedings to set aside, parties aggrieved, 527. scope, 452, 452 n, 528, 529. when set aside, 396, 400, 440, 528, 531. ELIGIBILITY, See Directors ; Elections. EMINENT DOMAIN, charter subject to, 208, 208 n. power of de facto corporations, see De Facto Corporations. ENABLING ACTS, See Formation ; Sanction, Legislative. ENTITY, See Nature op a Corporation ; Fiction. destroyed through abuse ofstock ownership, 72. quasi-corporate, 18 n, 21 n. where transferee is comprised of same stockholders as vendor corpora- tion, 257 n. ESTOPPEL, applied to de facto corporation, see De Facto Corporations. oflcers, see Officers. dissolved corporation, see Dissolution. foreign corporation, see Foreign Corporations. pledgees, see Pledgees. stock certificates, see Stock. subscriptions, see Subscriptions to Stock. transfer of stock, see Transfer of Stock. ultra vires transactions, see Ultra Vires Acts. as a basis of liability to creditors upon stock subscriptions, see Sub- scriptions to Stock. an ingredient of laches, see Laches. EXECUTION, See Creditors; Transfer op Stock. EXPIRATION OF CHARTER, See Dissolution. FEDERAL CORPORATION TAX LAW, "Doing business ", what constitutes, 243 n, 244 n. 810 INDEX. FEES, payment of, as a condition of corporate existence, 102 n. contract for corporate existence, 190, 194. license subject to police power, 194. FICTION, of corporate entity, justified, 28, 29, 35, 64 n, 371, 480 n, 793. not to be disregarded in contract relations, 34 n. when disregarded, 53, 54, 60, 61, 62, 63, 64, 64 n, 480 n, 793. de facto officers, when justified, 447. withdrawing from ultra vires acts, 334. FIDUCIARY RELATIONSHIP, See Agents ; Directors ; Promoters ; Powers op Majority ; Stock- holders. FOREIGN CORPORATIONS, See Comity. actions against, when maintainable, 45, 46, 245 n, 669 n, 770. by, 46, 47, 50 n. appointment of agent to accept service in domestic state, 245 n. as citizens, 43 n. attachments against property of, 669 n. consolidation with domestic corporation, 772, 776." de facto doctrine applies to, 240. determination of status of, 5, 22 n. doing business in domestic state, by contract with it, 190, 193, 245. effect of, 45, 49 n, 50 n, 243 n, 245 n. right of, 75, 76, 77, 331. the penalty, 243 n, 244 n. what constitutes, 242 n, 243 n, 244 n. engaged in inter-state commerce, not amenable to state, 243 n, 771. primarily a question of fact, 243 n. intra-state commerce, amenable to state, 243 n, 244 n, 770, 771. transactions violative of state policy, 327, 770. estoppel to deny compliance with local requirements, 245 n. internal affairsi inspection of corporate books, 544 n. , no visitorial power over, 37, 544 n, 654, 656 n. transfer of stock, 656 n, 657 n. judgment against, admissibility, 49 n. organization of, not a fraud upon domestic state, 239. power to acquire land in domestic state, 239, 339 n. process against, 45, 49 n, 50 n, 245 n, 669 n. stock subscriptions, rights of trustee in bankruptcy to collect, 701 n. taxation of foreign joint stock company, 10. under statutory contract, 190. FORFEITURE, of corporate existence, see Dissolution. lands held ultra vires, see Ultra Vires. stock for non-pa3rment of calls, see Stock. FORMATION, See Consolidation. by prescription, 92. royal charter, 92, 93. conditions, ambiguous, how construed, 101 n. directory, 90, 90 n, 97 n, 101 n. distinguished from limitations, 101 n. INDEX. 811 FORMATION — Continued, conditions — Continued. mandatory, 89, 90, 90 n, 97 n. precedent, 89, 96, 97, 99, 101, 101 n, 102 n, 106 n. subsequent, 101, 101 n, 102, 102 n. substantial or literal compliance, 98, 99, 100. collateral attack, conditions precedent, 101, 102, 387, 387 n. subsequent, 101, 102. defective incorporation, see De Facto Corporations. de facto, see De Facto Corporations. defective, see supra conditions; also De Facto Corporations; also StFBSCRIPTIONS TO StOCK. de jure, by general enabling acts, 91, 95 n, 96, 97, 100, 101 n, 104, 106 n. special act, 86, 89, 92. estoppel, see De Facto Corporations ; Subscriptions to Stock." for purposes forbidden by implication, 95 n, 416. not conferred by enabling acts, 95 n. legislative requirements, see supra conditions, of corporation by another, 280. for fraudulent purpose, 51, 118 n, 292 n, 444 n. dummy corporation, 59, 60, 69. proof of corporate existence, 89, 90, 100, 115. time of creation, 88, 90, 100. under laws of two or more states, 61, 774 n. FRANCHISE, See Charter. absence of franchise, effect of, 12, 13 n. appointment of receiver has no effect on, 680 n, 761. cannot be aliened, 84, 85, 146, 263, 309, 793. pawned, 793. collateral attack upon, see Formation ; De Facto Corporations ; ' Dissolution. considered as powers and faculties, 2. conveyance of property essential to existence forbidden, 251, 257, 263, . 309, 669 n. not a transfer of franchise, 250. corporation viewed as a, 73, 78, 81, 83, 793. creditor's bill has no effect on, 680 n. distinction between general and special, 205 n. distinguished from other property, 250. expiration of, as a method of dissolution, see Dissolution. forfeiture of, as a method of dissolution, see Dissolution. is corporate death, 680 n. in fieri until acceptance, 88, 88 n. in whom vested, 80, 84, 205 n, 402, 793. incorporation under enabUng acts is result of, 95, 96. limits of exercise of, 76, 77. nature of, 75, 80, 83, 95 n, 96, 250, 744. of corporate ofl&cers in their ofSce, see Ofpicbhs. of doing business distinguished from franchise of being a corporation, 412 n. reconveyance of, to corporation, when decreed, 680 n. repeal, see State ; also Dissolution. special franchises, 204 n, 205 n. statutory suit to enjoin exercise of, 680 n, 761. 812 INDEX. FRANCHISE — Continued. subject to eminent domain, see Eminent Domain. execution in certain instances, 666, 668, 668 n. police power, see State. reserved power to repeal, alter and amend, see State. surrender, 752 n. surrender of, as a method of dissolution, see Dissolution. taxation of, 80, 205 n, 412 n, 417. when valued in determining rates, 205 n. FRAUD, corporation formed for fraudulent purpose, see Formation. proof of, 256 n, 687. upon creditors, see Creditors. minority stockholders, see Stockholders. GENERAL LAWS, See CERTincATB op iNCORpaRATioN ; Formation; Sanction, Legis- lative. GOING CONCERN, See Dissolution ; Powers ; Powers op Majority. GOOD WILL, See Stock. GUARANTEE, distinction from conditional purchase, 281. power to, see Powers. ultra vires, relief, see Ultra Vires. INCORPORATION, See Formation. INDEMNITY, See Directors ; Promoters. INDICTMENT, See Crimes. INFORMATION, See Quo Warranto. INSOLVENCY, See Receivers. acts in contemplation of, 727. adjudication of, scope, 680 n, 761. affirmation of solvency, when implied, 685, 689. capital stock not a liability in determining fact of, 721 n. corporate assets treated as a trust fund in event of, see Creditors ; Subscriptions to Stock. distinguished from dissolution, see Dissolution. , effect of, 673, 674, 675, 676 n, 677, 677 n, 681, 683, 689, 701 n, 702, 707, 708 n, 709 n, 727, 729 n, 732, 738, 761. sale of property while insolvent, see Powers ; Dissolution. statutory liability of stockholders, 270. what constitutes, 678, 678 n, 679, 727. when a jurisdictional fact, 677, 680 n. INDEX. 813 INSPECTION, by-laws, validity of by-laws interfering with, 544 n. common-law right, as dependent upon stockholder's interest, 541, 541 n. subject to court's discretion, 539, 539 n, 542, 643. nature and requisites, 538, 538 n, 539, 539 n, 541. scope, 540, 542. foreign corporation's books, not an interference with internal affairs, 544 n. motive, see Motive. statutory right, whether unlimited, 541, 542, 543, 543 n. INSPECTORS, See Elections. INTERNAL AFFAIRS, See Powers op Majority ; Stockholders ; Visitorial Powers. no regulation of internal affairs of foreign corporations, 37, 544 n, 654, 656 n. regulation of, what constitutes, 544 n, 654, 656 n. INTERPRETATION, See Charter. INTERSTATE COMMERCE, See Constitutional Law; Foreign Corporations. JOINT ADVENTURERS, remedies of, not available to stockholders, 37. JOINT-STOCK COMPANY, See Nature of a Corporation. as a citizen, 21 n. partnership, 13, 20. quasi-corporate entity, 13, 18 n. personal Uabihty of members for debts, 15, 18 n. suits by, 21 n. JUDGMENT, See Creditors ; Dissolution ; Quo Warranto. LACHES, '• acquiescence prevents dilatory challenge, 274 n. conduct as equivalent to consent, 325, 645 n. effect on defenses to stock subscriptions, see Subscriptions to Stock. fiduciary doctrine, see Directors. estoppel as an essential ingredient, 646 n. in representative suits, 645 n, 646 n. LEGISLATIVE SANCTION, See Sanction, Legislative. LEGISLATURE, See State ; Sanction, Legislative. LIABILITY, of corporation for ultra vires acts, see Ultra Vires Acts. in quasi-contract, see Quasi-Conteact. directors, see Directors. ofScers, see Officers. promoters, see Promoters. stockholders, see Stockholders. subscribers, see Subscriptions to Stock. 814 INDEX. LIABILITY — Continued. personal liability of members for debts, see Debts ; Creditoes ; Stock- holders. oflBcers for debts, see Officers. LIEN, See By-Laws ; Transfer of Stock. MAJORITY, See Powers of Majority. MANDAMUS, as a discretionary writ, 541, 542, 543, 543 n. prerogative writ, scope, 529, 529 n. scope, to compel transfer of stock, 571. re-instate ofQcer, 432, 432 n. Meetings, ^ee Elections; Voting. notice, waiver of, 524 n. when required, 524, 524 n. of directors, see Directors. participation in, what constitutes, 524 n. place, 624, 524 n. quorum, powers, 624, 525. what constitutes, 524, 525. MERGER, See Consolidation. minority. See Powers of Majority; Stockholders. MORTGAGES, See Powers. MORTMAIN, See Property. MOTIVE, in dissolving corporation, 626 n, 748, 749, 750. equivocal acts, proof of, 64. inspection of corporate books, 539, 541, 642, 543, 543 n. institution of suits in federal courts, 629. purchase of stock, 274 n, 595. suits by stockholders on behalf of corporation, 650. transfer of stock, 595, 653 n. trusts, pools or combinations inimical to state poKcy, 327, 657, 659, 767, 787. voting trusts, 669 n. MUNICIPAL CORPORATIONS, Dartmouth College rule does not apply to, 197, 197 n. ordinances, requisites and validity, 198. , NAME appellation as notice of incorporation, see De Facto Corporations. power to have one or more names, see Powers. NATURE OP A CORPORATION, See Powers; Property. INDEX. 815 NATURE OF A CORPORATION — Continued, as a citizen, see Citizen. collection of individuals, 51, 55, 63, 64 n, 65, 298 n, 369, 370. franchise, see Feanchisb. person, 23, 24, 27, 29, 38, 43 n, 45, 63, 64 n, 280, 298 n, 369, 375 n, 376 n, 709 n. entity apart from its stockholders, 3, 9, 26 n, 27, 27 n, 29, 34, 34 n, 37, 53, 54, 60, 62, 63, 64 n, 369, 370, 371, 375 n, 376 n, 673, 793. attributes, 2, 14, 16, 795 n. determinable by powers and faculties, 2, 11 n. distinguished from a joint-stock company, 10, 13, 18 n. partnership, 9, 12,18, 20. liability of members for its debts, 9, 15. properties, 2, 16. stockholders cannot be partners inter sese, 35. subject to visitorial power of state, see State. NEGOTIABLE INSTRUMENTS, See Powers; Ultra Vires Acts. NET PROFITS, See Dividends; StrRPLXjs. NON-BUSINESS CORPORATION, IM objects, feasibility, 1. a ^ /- V M I i- , iK-flCE.r-*^-^'*-^'^ ^t«n=:§:. (' ' See By-Laws; Meetings. ^ OBJECTS, See Certificate of Incorporation. OBLIGATION OF CONTRACTS, See Constitutional Law. OFFICERS, as such are the corporation, 431. authority, when delegated by directors, see Directors. stockholders, 460 n. inferred from name of oflS.ce, 463, 463 n. contracts, authority to make, 151. de facto, color of ofQce, 438 n, 449. defined, 438, 438 n, 439 n, 445, 447, 449 n. estoppel, 438, 439, 439 n. powers, in respect to third parties, 437, 438, 439, 439 n, 447, 449 n. powers, to create de jure directors, 445, 446, 447. forfeit stock, 400 n, 449 n. mortgage property, 437. remove ofl&cers, 449 n. protection of unconstitutional law, 132 n, 133 n. the doctrine, as judicial legislation, 445. its limits, 447, 448, 449 n. distinguished from agents, 431, 432, 463 n. general manager not necessarily an ofllcer, 432. liability, for corporate debts, 89, 445 n, 690 n. torts, 690 n. ultra vires acts, see Ultra Vires Acts. to creditors, see Creditors. upon corporate contracts, see Contracts, Corporate. 816 INDEX. OFFICERS — Continued, ministerial, 435, 436. ofl&oe, removal from, 434, 449 n. what constitutes, 431. when a franchise, 435. rights, against de facto ofQcers, 449 n, 450. compensation, 466 n. salaries, when proper, 466 n, 467 n. when the corporation acts per alium, 38. per se, 38, 431. ORDINANCES, See Municipal Corporations ; Rules and Regulations. ORGANIC CHANGE, See Charter. ORGANIZATION, See Formation ; Promoters ; Subscriptions to Stock ; Capital Stock. OUSTER, See Quo Warranto. OVERVALUATION, See Promoters ; Stock. PARTNERSHIP, analogy to corporation, 564, 596 n, 597 n, 675, 676 n. corporation as agency or instrumentaUty of a, 29. may not enter into, see Powers. distinguished from corporation, 9, 11 n, 12, 13 n, 18. liability in defectively organized corporation, see Db Facto Corpo- rations. limited partnership not a citizen, 21 n. corporation, 19. not a necessary consequence of abortive attempt to incorporate, see De Facto Corporations. remedies of partners not available to stockholders, 37. stockholders not liable as partners for ultra vires acts, see Ultra Vires Acts. voting by partners, see Voting. PENAL LAWS, defined, 693, 694, 695, 697, 698. distinguished from remedial laws, 696, 697. enforcibiHty, beyond state limits, 692, 693, 694, 695, 696. statutory liability of corporate ofBoers, when considered as, 696, 697, 698. PERPETUAL SUCCESSION, See Powers. provisions in partnership articles for, 12, 13 n. PERSON, See Nature op a Corporation. PERSONALITY, See Entity; Nature op a Corporation. INDEX. 817 PLEDGES, estoppel, to deny ownership when pledge is of record, 731 n. liability of pledgee, as a stockholder, 276 n, 731, 731 n. right of corporation to accept stock as collateral, 275 n. pledgee, as to certificates endorsed but not transferred, see Trans- fer OP Stock. stock carried on margin, 636 n. to vote, 444 n, 636, 536, 636 n, 537. pledgor, against directors', 636 n. POLICE POWER, See State. POWER OF ATTORNEY, See Tkanspeb op Stock. POWERS, charter as measure of, see Charter. construction, rules of, see Charter. derivative, 147, 147 n, 148 n, 150, 159, 160, 218, 226, 228, 237, 268 n, 273 n, 274 n, 286. enumerated, operate to exclusion of other, 95 n, 144, 144 n, 280, 308. implied, necessary implication, 148 n, 160, 228, 238, 268 n, 274 n, 418. incidental, in general, 5, 144 n, 148 n, 150, 160, 218, 228, 418, 418 n. of corporation de facto, see De FacTo Corporations. directors, see Directors. foreign corporations, see Foreign Corporations. majority, see PowEps op Majority. minority stockholder, see Stockholders. of&cers, see Oppicers. presumption of corporate! power, 157, 158, 226. to acquire property, 2, 161, 227, 235, 239, 292, 336, 339, 342. stock in another corporation, 65, 71, 168, 159, 161, 256 n, 260 n, 271, 273 n, 274 n, 275 n, 277, 281 n, 314 n, 517 n. itself, 265, 266, 266 n, 267 n, 268 n, 270 n, 413, 414, 415. alienate franchise, see Franchise. property, 249, 264 n, 257, 261, 261 n, 295 n, 638 n, 746, 760 n, 772. as affected by rights of creditors, see Creditors. alter or amend by-laws, 289, 419 n, 420, 422, 422 n. assume payment of a mortgage, 299. borrow money, 147. build and operate saloons, 235, 237. compromise, 164, 164 n, 275 n. consolidate, see Consolidation. contract, 161, 214, 217, 220, 224, 224 n, 226 n, 286, 286, 292, 295, 299, 303, 317, 323, 327, 333. dedicate streets and parks, 220 n. dissolve, see Dissoltttion. donate property, 220 n. enter into partnership, 220, 223 n, 794, 795, 796. erect oi&oe building, 228, 229. guarantee, 162, 214, 217 n, 220 n, 316 n. have a seal, 2. one or more names, 4, 8, 9. perpetual succession, 2, 8. hire hotel, 217. 818 INDEX. POWERS — Continued. hold property in co-ownership, 224 n. insure, 220. issue bonds, 147 n. promissory notes, 147, 296. lease property of quasi-public corporation, 141, 145, 295 n. maintain eating houses, 219. make by-laws, 2, 418, 418 n, 422. or endorse accommodation notes, 147 n, 295, 296. political donations, 220 n. traffic agreements, 224 n. merge or consolidate, see Consolidation. mortgage its property, 147 n. operate employees' reUef fund, 224. paternalize employees, 230, 231, 232, 233, 234. ratify, 151, 284, 291, 292, 301, 302, 303, 314, 324, 326, 458, 465, 465 n, 470 n, 474 n, 482, 483, 484, 487, 488, 638, 639. sell surplus steam-power, 235. sue and be sued, 2, 8, 9. subscribe funds to independent enterprises, 220 n. take stock as security for a debt, 275 n. in liquidation of a debt, 270, 270 n, 275, 275 n. where lodged, see Dihbctoes. POWERS OF MAJORITY, See Stockholders. correlative duties, good faith, 624 n, 625 n, 748, 749. cumulative voting not an invasion of, 533 n. limits upon, see Stockholders. to accept amendments, 211 n, 212 n. control lawful exercise of corporate powers, 168 n, 488, 617, 623, 624 n, 625, 625 n, 632j 663. make organic change in charter, see Charter. sell property, if business is profitable, 254 n, 749, 750 n. unprofitable, 254 n. without reason assigned, 257, 638 n, 748, 750 n. vote according to interest, 488, 489 n, 490 n, 626 ri, 663, 750 n. PREFERRED STOCK, distinguished from creditors, 600 n, 603, 603 n, 604 n. dividends, cumulative, 605 n, 613, 614 n, 616 n. funds available, 411 n, 412 n, 607, 610, 611, 612, 613, 614. to compel declaration of, 614 n, 615 n, 616 n. guaranteed stock, nature, 605 n. identified as stockholders, 606. rights, determination of preference, 598, 699 n, 600 n, 604, 605, 605 n, 607. in the corporate surplus, 598, 599 n, 602, 607. to compel establishment of sinking fund, 605 n. dividends, against common stockholders, 600 n, 605, 605 n, 606, 613. subscribe to new issues of stock, 569 n, 612 n. upon dissolution, -598, 611, 612. when limited by contract, 605, 610, 611. voting, may be excluded from voting by charter provision, 533. PREROGATIVE WRITS, See Certiorari ; Mandamus ; Quo Warranto. INDEX. 819 PROCESS, against foreign corporations, see Foreign Corporations. service upon corporation, how made, 43, 44. PROFITS, See Dividends ; Surplus. PROMISSORY NOTES, See Powers. PROMOTERS, contracts, personal liability upon, 364 n. ratification or adoption by corporation, 363, 363 n. corporate consent to or ratification of acts of, 367 n, 368, 370, 371, 372, 372 n, 374, 375 n, 377 n. duties, disclosure, 368 n, 373 n, 376 n, 377 n. to subsequent subscribers, 368, 368 n, 369, 373 n, 376 n, 377. fiduciary relationship, 367, 367 n, 373 n, 375 n. organization of corporation, compensation, 359, 362, 364 n, 367 n. indemnity, 362, 364 n. profits, liabihty for, 367 h, 368 n, 377 n. right to,. 367 n. prospectus, liability upon, 364 n, 620 n. quasi-contractual liability of corporation to, 363 n, 364 n. sales to corporation, 367 n, 372 n, 374 n, 375 n, 376 n. who constitute, 362, 366 n. PROPERTIES, See Nature op a Corporation. PROPERTY, acquisition of real property, see Powers ; Ultra Vires Acts. alienation of, power to, see Powers. as a trust fund or as held in trust, see infra title of corporation ; also Creditors ; and Subscriptions to Stock. conveyance of corporate property, manner, 26 n. effect of dissolution upon corporate title to, see Dissolution. execution against, see Creditors. fraudulent conveyances, to corporation, see- Creditors. mortmain statutes, construction and operation, 341, 342. nature of corporate ownership of, 255 n, 673, 676, 676 n, 677 n, 712, 726. possession of, not essential to corporate existence, 250, 251, 745, 778. sale of, distinguished from consolidation, 781, 785. with view of winding up, see Dissolution. VoBJus disponendi as an incident of ownership, 250, 595, 596 n, 597, 597 n. title of corporation, 23, 24, 673, 675, 676 n, 677 n, 712, 726. stockholders to corporate, see Stockholders. ultra vires transactions in, see Powers ; Ultra Vires. PROSPECTUS, See Directors ; Promoters ; Subscriptions to Stock. PROXY, See Voting. PUBLIC CORPORATIONS, Dartmouth College rule does not apply to, 197, 197 n. QUASI-CONTRACTS, liability of corporation upon its, 226 n, 227 n. recovery by promoters on, see Promoters. ultra vires acts, recovery on, see Ultra Vires Acts. 820 INDEX. QUASI-PUBLIC CORPORATIONS, acts tending to public injury, 332, 791. cannot absolve themselves from performance of obligations, 145, 146, 218, 251, 254 n, 309, 320. execution against property of, 666, 668 n. interest of the state in, 251, 252, 254 n, 309, 329, 667, 791. obligations different from those of private corporation, 250, 251, 252, 254 n, 791. ultra vires lease, see Ultra Vires Acts. what constitutes, 309, 329, 667. when amenable to injunctive relief at suit of attorney-general, 328, 328 n. QUO WARRANTO, See Attorney-General; De Facto Corporations. analogy to bill for statutory receivership of insolvent corporation, 680 n. as a prerogative writ, scope, 529, 529 n. inadequacy of, as a remedy, 328 n. information in nature of, defined, 86 n. judgment, discretionary punishment, 769, 770. penalties, 86 n, 752 n, 767, 787. scope, 123, 127. parties defendant, 97, 98. proceedings, when proper, 788. to reinstate officer, 432 n. QUORUM, See Directors ; Meetings. RECEIVERS, appointment, at instance of creditors of insolvent corporation, 677, 679, 680 n, 761. general railes, 679. in supplementary proceedings, 680 n. on execution of judgment against quasi-public corporation, 669 n. to marshal assets or enforce contribution from fellow subscribers, 700 n. upon creditor's biE as distinguished from statutory receivership, 680 n. dissolution of corporation, 750 n, 763. when directorate is deadlocked, 457 n. inimical to stockholders, 621. duties, similar to trustee in bankruptcy, 389 n. powers, similar to trustee in bankruptcy, 389 n, 522 n, 680 n. to prosecute corporate causes qf action, 522 n, 619. receivership denied in aid of liquidating assets preparatory to dissolu- tion, 750 n. partnership agreement to dominate corporation, 29. represent creditors as well as the corporation, 389 n, 390. REDUCTION OF STOCK, See Capital Stock. REGULATIONS, See RtTLEs and Regulations. REORGANIZATION, distinguished from dissolution, 772. powers of committee on, 774 n. INDEX. 821 REORGANISATION — Continued, rights of bondholders, 774 n. creditors, 755, 774 n. dissenting stockholders, 654, 772, 774 n. unlawful, what constitutes, 774. REPEAL OF CHARTER, See Dissolution. RULES AND REGULATIONS, distinguished from by-laws, see By-laws. requisites and validity, 424, 425, 425 n, 428. scope and operation, 428. SALE, by promoters to corporation, see Promoters. in ordinary course of business, what constitutes, 264. of franchise, see Franchise. property, see Potters ; Dissolution. stock, see Transfer of Stock. what constitutes, 258, 259. SANCTION, LEGISLATIVE, See Comity ; Formation ; Franchise ; Nature of a Corpora- tion. a corporate requisite, 10, 12, 17, 132 n. applied to Umited partnership, 19. as exhibited in unconstitutional laws, 132 n, 133 n. SEAL, no necessity for, 226 n. power to have, see Powers. SET-OFF AND COUNTERCLAIM, no right by stockholders upon claim against their corporation, 28. unpaid stock subscription, 706, 707, 713. right ceases upon insolvency, 707, 713. SHAREHOLDERS, See Stockholders. SHARES OF STOCK, See Stock. SINKING FUND, See Dividends; Preferred Stock. SPECIFIC PERFORMANCE, See Transfer of Stock. STATE, control over trusts, pools and combinations, 327, 767, 787. corporate powers and existence, right to challenge, see De Facto Cor- porations ; Ultra Vires Acts. corporations can act per se only within, 524 n. chartered in two or more states, 774 n. eminent domain, see Eminent Domain. escheat, when available to, 757 n. impairment of contractual obUgations, see Constitutional Law. injunction of ultra vires acts, see Ultra Vires' Acts; Attorney- General. interest in quasi-public corporations, see Quasi-public Corporations. ' 822 INDEX. STATE — Continued. legislative sanction, see Sanction, Legislative. legislature, limitations upon, 194, 195 n, 209 n, 210 n, 213 n. penal laws, see Penal Laws. police power, cannot be bargained away, 194, 197. extent and boundaries, 196, 196 n, 198, 200 n. power of taxation, see Taxation. proceedings for dissolution, see Quo Wakranto ; Dissolution. public policy, how ascertainable, 246. reserved power to repeal, alter and amend, 201, 206, 207 n, 209 n, 389 n, 744. visitorial powers over corporations, 18 n, 529, 529 n. STOCK, See Capital Stock ; Stockholdees ; Subscriptions to Stock ; Transfer op Stock. acquisition of its own or other stock by corporation, see Powers. attachment of, at suit of creditor, 588, 589, 590 n. capital, see Capital Stock. certificate, as a contract with the corporation, 596, 596 n, 597, 723, 725, 740 n. an estoppel against corporation, 584, 584 n, 585 n, 740 n. lost or destroyed, 570 n. nature of, 379, 380 n, 589, 740 n. remedies of stockholder for refusal to issue, 380 n, 570 n. right to, 378, 379, 379 n, 380, 380 n. when treated as negotiable, see Transfer op Stock. conversion, what constitutes, 380 n, 570 n, 571 n, 792. execution upon, at suit of judgment creditor, 690 n. forfeiture, as a cumulative remedy, 400 n. by de facto officers, see Officers. non-payment of calls, 396, 400, 400 n. fuU paid, what constitutes, 367 n, 393, 706, 720 n, 723, 740 n, and see infra, issuance, issuance, as a bonus or gratuity, 710, 714, 716, 721 n, 724. for good will, 721 n. money at a discount, 414, 714, 714 n, 715, 715 n, 720. property purchased, 414, 415, 558, 720, 721, 721 n, 723. services, 721 n. surplus belonging to corporation, 558. good faith rule, 415, 719, 720 n, 721 n. overvaluation, 720 n, 721, 721 n. true value rule, 415, 720, 720 n, 721 n. when ultra vires, 714, 720 n, 721 n. original or forinative stock, distinguished frpm new stock, 378 n, 379 n, 568 n. ownership, as between life tenant and remainderman, 561. not the equivalent of merger or agency, 788 n. use and abuse by corporate holder, see Powers. par value, see infra share stock, preferred, see Preferred Stock. share stock, distinguished from capital stock, see Capital Stock. of what representative, 402, 402 n, 403 n, 547 n, 548, 552, 563, 566, 619 n, 620 n, 647, 707, 774. par and actual value distinguished, 402, 402 n, 403, 403 n. subscription, as the basis of a liability to creditors, see Creditors. rights and defenses of subscriber, see Subscriptions to Stock. INDEX. 823 STOCK — Continued. transfer, remedies of stockholder for refusal to transfer, see Transfer of Stock. voting, see Voting ; Meetings ; Voting Trust ; Elections. of stock owned by corporation, see Voting. without par value, 412 n. STOCKHOLDERS, See Charter; Preferred Stock; Stock; StTBscRiPTioNS to Stock; Transfer of Stock. conduct, as equivalent to assent, see Laches. consent, see Powers ; Ultra Vires Acts ; Directors. corporate action, see Corporate Action. contracts, right to question consideration, see Contracts, Cor- porate. management, right to question, see Directors; also infra, suits on behalf of corporation, laches, see Laches. liability, for receipt of improper dividends, see Dividends. preservation of common law Uability, 16, 17, 702. statutory, for corporate debts, 9, 15. to creditors, see Creditors. privity, with directors, 496, 499, 501, 501 n, 502, 503, 506 n, 508, 619 n, 684. quorum, see Corporate Action; Meetings. ratification, see Powers ; Ultra Vires Acts ; Directors. relation, to corporation, 390, 564, 564 n, 615, 774. creditors, 390, 394, 618, 619, 619 n. fellow stockholders, 390, 488, 489 n, 490 n, 602 n, 774. restraint of fraud upon minority stockholders, 257 n, 258, 260 n, 274 n, 275 n, 488, 489 n, 622, 623 n, 624, 624 n, 625 n, 626 n, 630, 632, 749, 774. organic change in charter, see Charter. sale of corporate property, see Powers ; Dissolution. ultra vires acts, see Ultra Vibes Acts. rights, cannot be forced out of corporation, 173, 174, 175, 506 n, 774. to accept dividends, 561. equitable ownership of corporate property, 26 n, 538. of preferred stockholders, see Preferred Stock. ■ title to corporate property, 23, 23 n, 24, 26 n, 563. to certificate of stock, see Stock. dissolve, see Dissolution. dividends, see Dividends. exercise the corporate powers, see Directors. increase the capital stock, see Capital Stock. inspect the corporate books, see Inspection. preserve proportionate interest in surplus, 561, 566, 568, 612 n. voting powers, 561, 564, 564 n, 566, 567, 568, 612 n. subscribe to convertible bonds, 569 n. stock, nature and extent, 281, 283, 648, 561, 565, 567, 568, 612 n. measure of damages, 568. waiver, 667, 568. vote, see Voting ; Meetings ; Elections. upon statutory sales of corporate property, 257, 260 n, 261, 277, 638 n, 749, 750 n. 824 INDEX. STOCKHOLDERS — Continued. strikers and blackmailers, 480 n, 539 n. subscribers, relation to stockholders, 378 n, 379, 379 n, 380. frauds upon minority, see supra, restraint of fraud upon minority's stockholders, injuries to stock interest, 506 n, 536 n, 617, 619, 619 n, 620, 620 n, 621, 623 n, 624, 626 n, 640. organic change in charter, see Charter. suits in own right, remedies, for refusal to issue certificates of stock, see Stock. transfer stock, see Transfer of Stock. remedies of partners not available to, 37. sale of corporate property, see Powebs ; Dissoltttion. ultra vires acts, see Ultra Vires Acts. on behalf of corporation, against the corporate will, 615, 623. collusive, 644. essential allegations, 636. exhaustion of intra-oorporate remedies, 623, 625, 626, 627, 627 n, 633, 634 n, 636, 637, 640, 641. injuries to corporation, 506 n, 536 n, 617, 619 n, 620, 620 n, 622,632,636. laches, 645 n, 646 n. motive of plaintiff, 650, 653 n. nature and grounds, 369, 560 n, 621, 621 n, 622, 623 n, 627, 630 n, 631 n, 632, 634, 634 n, 636, 640, 645. participation in proceeds, 370, 370 n, 621. parties defendant, 621, 631 n, 641, 642 n. representative distinguished from derivative suits, 644 n. res adjudicatur, 640, 643, 644. stock acquired after injury complained of, 634 n, 645, 646, 647, 648, 648 n, 649. tender as on rescission, 635. transferee's rights as affected by acts of transferrer, 645, 648 n, 649. transferees, rights and liabihties, see Transfer of Stock. ultra vires acts, liability for, see Ultra Vires Acts. restraint, see Ultra Vires Acts. who are, 378, 378 n, 388, 394, 442,, 442 n, 443, 443 n, 530, 531, 597 n, 731. SUBSCRIPTIONS TO STOCK, See Stock ; Stockholders. calls, requisites and validity, 396 n, 397 n. when a condition precedent to action to enforce, 396 n, 397 n, 428 n. defenses, acquiescence of creditors, 723. defective incorporation, 97 n, 128, 128 n, 129 n, 387, 387 n. delivery or tender of certificate of stock, 374, 378, 378 n, 379, 379 n. failure of consideration, 381. false representations, 391, 392, 392 n, 393, 394. fraud, wliat constitutes, 392 n, 393. marshalling assets, see Creditors. necessity of proper calls, 396 n, 397 n, 428 n. negligent or fraudulent management, 389 n. non-oompUance with by-laws, 428 n. non-reliance by corporate creditors, 716, 717, 717 n, 719, 723. INDEX. 825 SUBSCRIPTIONS TO STOCK — Continued, defenses — Continued. organic change contemplated by charter, 178, 389 n. in charter, .166, 177, 178, 389 n. under power reserved to alter or amend, 389 n. Other changes in charter, 169, 389 n. payment to corporate creditor, 700. rescission, 391, 391 n, 393, 394, 395, 396 n. revocation, 382, 382 n, 383 n, 384, 385, 3&1, 393. secret stipulations, 388, 389. set-off, see Set-off. speculation by corporate creditors, 717, 718. ultra vires acts, 389 n. distinguished from contract to sell stock, 378, 378 n, 380. forfeiture of stock for non-payment of calls, see Stock. full paid, what constitutes, see Stock. liability of subscriber, as resting on a statutory contract with corporate creditors, 699, 701 n, 714. the corporation, 701 n, 714, 720, 721 n, 722, 724. an estoppel, 716, 717- n, 719, 720, 722. fraud, 716, 719. his actual contract with corporation, 699, 701 n, 707, 708 n, 714, 717, 721 n. trust fund theory, 701 n, 705, 706, 707, 708 n, 712, 713, 716, 719, 720 n, 721 n. is several and not joint, 700 n. to creditors, see Cbeditobs ; also sub-heads supra. acquiescing, see supra, defenses, prior creditors, 717, 720, 723, 724. subsequent creditors, 713, 714, 717, 717 n, 720, 723. payment, upon creditor's biU, see supra, defenses. what constitutes, see Stock. release, in general, 389, 389 n. where creditors are prejudiced, see Creditors. requisites and validity, 379, 379 n, 382, 383, 383 n, 384. right to enforce, by corporation, see supra, liability of subscriber. creditors, see Creditors ; also supra, liability of subscriber, estoppel, 388. laches, 393, 395. make, see Stockholders. rights of subscriber, as a stockholder, see Stockholders. in presence of fraud, 391, 391 n, 392, 392 n, 393, 394, 395, 395 n, 620 n. to challenge acts of promoters, see Promoters. creditors to unpaid, see Creditors. SUITS, See Actions^ Stockholders. power to sue and be sued, see Powers. SUMMARY proceedings; See Elections. SURETY, See Powers. SURPLUS, as a source of dividends, see Dividends. the basis of stock dividends, see Dividends. 826. INDEX. SURPLUS — Continued. derived from original subscribers, 610. premium on convertible bonds, 609. reduction of capital stock, 610 n. distinguished from capital stock, see Papital Stock. net profits, 408, 409. resulting from appreciation in assets, 411 n. right of preferred stockholders to, see Preferred Stock. stockholder to preserve proportionate share in, 561. what constitutes, see Dividends. SURPLUS PROFITS, See Dividends ; SuBPLtrs. SURRENDER, See Dissolution. TAXATION, See Foreign Corporations. limitations upon power of, by contract, 190, 193. of capital stock, see Capital Stock. requisites and validity of exemption from, 184, 187, 188, 189, 189 n, 197. TORTS, committed in ultra vires undertaking, liability, 348 n. corporate capacity to commit, see Ultra Vires Acts. liability for, 298, 346, 348, 348 n, 349, 350, 351, 352, 352 n, 355. effect of dissolution upon corporate, see Dissolution. liability of directors for, 517 n. TRANSFER OF STOCK, dividends upon, who entitled, see Dividends. effect, as estoppel against transferee to deny ownership, 731 n. to transferrer and transferee, see sub-heads herein, endorsement in blank, as conferring indicia of title, 576, 577, 579, 579 n, 582, 583 n. bona fide purchasers, 573, 574, 575, 579, 581, 581 n, 582, 588, 589, 590, 590 n. estoppel, 677, 579, 579 n, 581 n, 582. negligence, 574, 575, 580, 581, 582, 583 n. normal effect, 573, 574, 575, 578, 579 n, 580 n. foreign corporation, suit to compel, not an interference with internal affairs, 656 n, 657 n. liabilities of corporation, estoppel to deny its certificates of stock, 584, 584 n, 585 n, 740 n. failure to cancel surrendered certificates, 583 n. observe by-laws relating to, 583 n. forged assignment or power of attorney, 571 n, 583, 584, 584 n. transfer without surrender of certificate, 571, 572 n. lost certificates, compelling transfer, 570 n. or stolen certificates, see supra endorsement in blank, made to qualify transferee as director, 442, 443, 443 n, 444 n. power of attorney to make, effect, 575, 577, 579, 579 n, 586, 590. form, 575. to have perpetual succession by, see Powers. powers of corporation, to assert lien upon, 598 n. insist upon proper identification of transferee, 572 n. transfer only upon its books, 578, 588. recognize as stockholders only those upon its books, 530, 578, 588. restrict transfer, 593, 595, 596, 596 n, 597, 597 n, 730. INDEX. 827 TRANSFER OF STOCK — Continued. requisites and validity, as against creditors of corporation, 730, 731 n, 740 n, 741 n. transferrer, 588, 589, 590, 590 n. previous transferee, 571, 572, 587, 590. the corporation, 571, 578, 579. as between the parties, 571, 577, 578, 588, 589, 590. restrictions upon, see By-laws; also supra, powers of corporation, rights of corporation, against party presenting transfer, 585, 586, 587, 792. transferee, liabilities, in respect to acts or omissions of transferrer, 721 n, 737, 740 n. to corporate creditors, 737, 740 n, 741. remedies, equitable, 569, 570, 570 n, 571, 572 n, 593. for refusal to transfer stock, 548, 569, 570, 570 n, 571, 572 n. measure of damages, 670 n. rights, as a stockholder despite no beneficial interest, 444 n. transfer on books, 442 n, 570 n, 588, 589, 590. as a voter at corporate elections, 530, 531. affected by acts of transferrer, 326, 490 n, 634 n, 645, 648 n, 649, 665. knowledge of acts challenged, 490 n, 645, 648 n, 649, 665. motive, 595, 653. to transfer upon the corporate books, 569, 570, 570 n, 571 , 590, 593. transferrer, liabilities, notwithstanding transfer, 445 n, 721 n, 731, 731 n, 732, 733, 734, 735, 736, 738, 739, 740 n. to subsequent corporate creditors, 735, 738, 739. uniform stock transfer act, 590 n, 591 n, 592 n, 593 n. TRUST FXJND, See Capital Stock; Creditors; Dividends; Subscriptions to Stock. ULTRA VIRES ACTS, See Powers ; Laches. as a defense upon stock subscription, see Subscriptions to Stock. void acts, 291, 302, 308, 311, 312, 314, 314 n, 316, 327, 328, 345. charter as notice, 223, 295 n, 297, 302, 309. collateral attack, see infra, doctrine that state only may complain, consent, effect of, 287 n, 291, 292, 292 n, 301, 302, 303, 312, 314, 324, 325, 326, 623 n, 645 n, 690 n. contracts, see Powers. corporate capacity to commit, 293 n, 298 n, 314, 314 n, 315, 339, 346, 350, 352 n, 353, 355, 356. crimes, see Crimes. different senses in which employed, 287 n, 301, 325. disaffirmance, 315, 315 n, 316 n. doctrine that state only may complain, 241, 242, 293 n, 294, 303, 320, 337, 338, 338 n, 339, 340, 342, 343, 344. to be applied reasonably, 219, 297, 322. estoppel, 293, 293 n, 296, 297, 301, 302, 303, 315, 321 n, 325, 325 n, 326, 326 n, 343, 344, 493. executed transactions, liability, 276, 293, 293 n, 294, 311, 344. part performance, 311, 317, 319, 321 n, 493. executory transactions, liability, 276, 293, 293 n, 294, 299, 303, 321 n, 338 n, 344. 828 INDEX. ULTRA VIRES ACTS — Continued. illegality, coincidence with, 294, 295 n, 313, 316 n. distinction from, 290, 292, 297 n, 313, 315, 319, 320, 321, 325, 333. issuance of stock in contravention of statutory prohibition, 714. lease, by quasi-pubKc corporation, 145, 303, 320. liability of directors for, 690 n. officers for, 292 n, 690 n. stockholders for, 292 n. plea, when made by corporation itself, 293, 295 n, 311, 319. prohibited acts, 296, 297, 301, 303, 314, 315 n, 319, 340. property, see Pboperty ; Powers. punishment, see Dissolution ; Quo Wabeanto. ratification, see supra consent ; also Powers. relief on quasi-contract, 312, 313, 314, 315, 315 n, 316, 316 n, 322. . rescission, 295 n, 311. restraint of, at instance of stockholders, 156, 325, 329 n, 623 n, 632, 645 n. the state, see Attorney-general. rights of transferees to challenge, see Transfer op Stock. test, comparison with charter, 297, 297 n, 298 n. power to make and not to break contract, 332. torts, see Torts. VISITORIAL POWERS, See State ; Foreign Corporations. VOLUNTARY ASSOCIATION, See Charter ; Partnership. VOTING, See Elections ; Meetings ; Voting Trust. by executors and administrators, 444 n, 530 n. partners, 530 n. pledgees, see Pledges. proxy, requisites and validity of proxy, 527, 527 n, 658, 663, 665 n, right of, 418, 527, 527 n, 658, 664 n. trustees, 444 n, 530. duty to vote, 658, 659 n, 662, 662 n. injunction against, where stock was issued without consideration, 721 n. number of votes, cumulative, 533, 533 n. per share, 532 n. stockholder, 532 n. of shares owned by corporation itself, 266 n, 530, 534, 535, 535 n, 536. right to vote, as an essential attribute of ownership of stock, 564 n. corporate books as evidence, 530, 530 n. exclusion by charter, 532, 533, 534. separation of voting power from stock, 657, 661, 662, 662 n, 664 n. VOTING TRUST, certificate holder, when regarded as a stockholder, 442 n, 665 n. requisites and validity, 657, 659, 659 n, 662 n, 664 n, 665 n.