Georgia Southern & Florida Railroad v. Mercantile Trust & Deposit Co.

Lumpkin, Justice. The controlling questions presented in these cases are-indicated in the head-notes. How these questions arose-will appear from an examination of the reporter’s statement. We have not decided, and will not discuss, whether or not a special charter granted by the General Assembly to-a railroad company after the passage of the general law for the incorporation of railroad companies is unconstitutional and therefore void. Among many good reasons-which might be stated for pursuing this course, and which’would doubtless be accepted as satisfactory, we deem it sufficient to say it is not now necessary to pass upon this question, it not being essential to a proper disposition of the present cases. We wish it distinctly understood, however, that we do not intend in anything which follows to intimate any opinion whatever upon this question, and if any expression we may use should seem to do so, it must not be so construed. 1. If such a charter is unconstitutional, is not a company organized under it, at least, a de facto corporation,, and as such capable of making contracts, acquiring and owning property, and of becoming bound to its creditors by all acts which would have been binding upon it had it been duly incorporated under the general law? We-entertain no doubt at all, and will presently endeavor to show, that this question should be answered in the314 affirmative; and. if so, it will follow that bonds, deeds and mortgages executed by the defacto corporation are valid, not only as against the corporation itself, but also as against any one making a claim upon its assets, whether as a creditor directly of the corporation, or as a creditor of its creditors or stockholders. It is too well settled, both upon.principle and authority, to require argument, that neither a de facto corporation, nor those who recognize and deal directly with it as a corporation, will be heard to deny its rightful corporate existence; and there is no good reason for applying a different rule to one claiming assets of a de facto corporation acquired solely in the exercise of corporate functions, but for the assumption of which there would have been no company of any kind, and, of course, no assets. Nor is it at all material whether the claim be made directly or indirectly. Whatever may be the manner in which it is presented, if the assets sought to be reached were in fact assets of a de facto corporation, the very act of making the claim puts the claimant in the same legal attitude as a direct creditor of the corporation ; fqr such claimant has no better rights in the premises than his debtor of whose rights he seeks to get the benefit, and consequently can no more dispute the existence of the corporation than could the latter. So far, therefore, as the parties to this record are concerned, we have only to show that railroad companies operating in Georgia under special legislative charters granted after the passage of the general law referred to, are at least corporations de facto. The fact that this very law was in force at the time the railroad companies involved in the present litigation obtained their special charters, makes it absolutely certain that even if these charters are mere nullities, lawful and valid charters might have been obtained for just such companies. In other words, there was beyond doubt legal authority in this State for incorporating — 315 — railroad companies with substantially the same rights, powers, duties and liabilities as those specified in the special charters. This is a most important fact, for where there cannot lawfully be a corporation de jure, there cannot be one defacto. This was distinctly ruled in Evenson et al. v. Ellingson et al., 67 Wis. 634. “ If an organization is completed when there is no law, or an unconstitutional law, authorizing such organization as a corporation,” one who contracted with the organization is not estopped from denying its corporate existence. Heaston v. Cin. & Ft. W. R. R. Co., 16 Ind. 276. See, also, Snyder v. Studebaker, 19 Ind. 462, and cases there cited. In St. Louis &c. Ass’n v. Hennessy, 11 Mo.App. 555, it was held that one who had subscribed for stock in a supposed corporation prohibited by the State constitution was not estopped from denying its lawful existence. “ Corporations cannot exist except by force of express law. A society that cannot be incorporated because organized to resist the enforcement of laws, cannot sue in its society name for the collection of a debt.” The Detroit Schuetzen Bund v. The Detroit Agitations Verein, 44 Mich. 313. “ A corporation organized under a void law camlot enforce a mortgage made to it; but if not organized for an unlawful purpose, a receiver for it can demand in equity an accounting for the debt purporting to be secured thereby.” Burton v. Schildbach, 45 Mich. 504. “ A corporation de facto cannot exist in the absence of a law authorizing its organization ; and in such a case, the carrying on of the business in the corporate name is no evidence of user which can be considered in aid of corporate existence.” Eaton v. Walker et al., 76 Mich. 579. In this connection see, also, Scovill v. Thayer, 105 U. S. 143, and Norton v. Shelby County, 118 U. S. 425. One of the head-notes in the latter case is as follows: “An unconstitutional act is not a law; it confers no rights; it imposes no duties; it — 316 — affords no protection; it creates no office; it is, in legal contemplation, as inoperative as though it had never been passed”; and accordingly, it was held that the acts of a person assuming to perform the duties of an office which was created by an unconstitutional law, and therefore having no de jure existence, were utterly void. "We may assume, without further citation of authorities, and without attempting any argument on the subject, that where the existence of a corporation of a given kind is positively forbidden by law, or where there is no valid, constitutional law authorizing the creation of such a corporation, it cannot exist even as a corporation defacto. The rule thus stated does not, by any means, however, negative the.soundness of the proposition that an organization assuming to be a corporation de jure but for sufficient reasons not so in fact, may be a corporation defacto when it is of such a character that it could, under existing laws, have full and complete corporate being and powers. The doctrine is thus broadly stated in Snider’s Sons Co. v. Troy, 91 Ala. 224: “A corporation de facto exists when, from irregularity or defect in the organization or constitution, or from some omission to comply with conditions precedent, a corpoi’ation de jure is not created, but there has been a color-able compliance with the requirements of some law under which an association might lawfully be incorporated for the purpose and with the powers assumed, and a user of the rights claimed to be conferred by the law; that is, when there is an organization with color of law, and the exercise of corporate franchises and functions.” In Stout et al. v. Zulick et al., 48 N. J. Law, 601, s. c. 7 Atl. Rep. 362, it is said : “ "Where it is shown that there is a charter or a law under which a corporation, with the powers assumed, might lawfully be incorporated,, and there is a colorable compliance with the requirements of the charter or law, and a user of the rights — 317 — claimed under the charter or law, the existence of a corporation defacto is established.” The Supreme Court of Illinois, in McCarthy v. Lavasche, 89 Ill. 270, held, in substance, that even where a corporation has been formed under a charter which is unconstitutional and void, the stockholders would be estopped from urging this fact in order to defeat the collection of a bona fide debt against the corporation which a creditor is seeking to enforce under a provision of the charter making the stockholders liable individually. And see Hudson v. Green Hill Seminary, 113 Ill. 618, as to what will constitute pz’oof of the existence óf a de facto corporation. “ A defacto coz'poz’ation, that by regularity of pz’oceeding might be ozze de jure, cazz sue and be sued; and a party who contracts with such coz’poi’ation, while it is acting under its defacto organization, is estopped, in a suit ozi such contract, from denyizzg such organizatiozi at the date of the contract.”, Heaston’s Case, supra. The case of East Norway Lake &c. Church v. Froislie et al., 37 Minn. 447, is strongly in support of the proposition that there may be a de facto eorporatiozi whez’e there is a law under which a eorporatiozi of the particular kind might be formed; and the decision seems to have beezi made irrespective of the question whether, in organizing the- corporation, there was an attempt to comply with the requisite legal forms or not. This case also holds that zio private person will be allowed to attack collaterally the regularity of the oz’ganization of such corporation. “ A party is estopped to deny the existence of a corporation at the time he contracted with it as such, if the corporation could constitutionally exist.” Brookville &c. Turnpike Company v. McCarty et al., 8 Ind. 392. In Missouri it had been held that even where a corporation is organized under a special charter, void because of a constitutional provision for •incorporation by general law, a private party cannot — 318 — question its rightful existence when it is recognized by the State, the latter alone being allowed to raise the question. City of St. Louis v. Shields et al., 62 Mo. 247. We find the following in Central A. & M. Ass’n v. Ala. Gold Life Ins. Co., 70 Ala. 120: “When an association of persons is found in the exercise and user of corporate franchises, under color of legal organization, their existence as a corporation cannot be inquired into collaterally ; if the State acquiesces in the usurpation, individuals cannot complain.” The general rule that private persons will not be allowed to attack collaterally the validity of a de facto corporation is supported by many authorities, among which maybe mentioned 7 Atl. Rep., supra, and cases there cited in note; Duggan v. Colorado M. & I. C. Co., 11 Colo. 113, s. c. 17 Pac. Rep. 105, and cases cited; Tar Riv. Nav. Co. v. Neal, 3 Hawks (N. C.) 520; Hasselman v. U. S. Mortgage Co. et al., 97 Ind. 365, and authorities cited. In addition to the numerous cases above noticed, we have examined a very large number of others decided in States other than our own, many of which are more or less pertinent to the question in hand. In some, there are expressions and rulings not entirely in harmony with the conclusion we have reached, but we think we have settled upon and announced the true law. Before concluding this division of the present opinion, we will briefly refer to a few of our own cases which support the doctrine here laid down. McDougald, admx., v. Bellamy, admr., 18 Ga. 411, recognizes the rule that a corporation, though unlawfully organized, is so far a valid corporation as to make it liable to creditors for its own acts. See, also, Georgia Ice Co. v. Porter & Meakin, 70 Ga. 637. In Planters and Miners Bank v. Padgett et al., 69 Ga. 159, it was held that although a charter granted by the superior court to a manufacturing company was void, one who dealt with the company as a corporation — 319 — could not deny its corporate existence. "Where one corporation has dealt with another company as a corporation, recognizing it as such, the first corporation is es-topped from denying the existence of the second. Imboden et al. v. E. & B. B. Mining Co., 70 Ga. 86. On page 107 Chief Justice Jackson says: “This court, as indeed all civilized courts, has ruled that such recognition of a being — even of an artificial being — will stop the mouth of any other being, natural or artificial, from denying, in a case growing out of such recognition, that the being thus recognized ever had being.” See, in this connection, Lester v. G., C. & N. Ry. Co., 90 Ga. 802. Our decision is not based upon the idea that the organization of these railroad companies under unconstitutional charters would make them defacto corporations, but upon the idea that the purpose for which they were organized being lawful and proper, if they had obtained charters under the general law and organized under them, which they might have done, they would, in substance, have done what they actually did; that is, they would have observed about the same forms and requirements in the one case as in the other. They undoubtedly attempted to organize according to some law, and did not set up to be corporations without pretense of legal authority. If the laws under which they proceeded were not good, they may, in our judgment, avail themselves of the existence of the general law on our statute book, and of its terms, at least so far as to enable them to be regarded as de facto corporations, because they have done practically what that general law required, though not actually following it nor professing to do so. 2. No question was raised as to the power of either of the railroad companies, under its special charter, to embrace in a mortgage property acquired after the execution of the mortgage. The right to mortgage “fu — 320 — ture acquired property” was denied solely on the ground •that these companies, being without legal charters, had no charter power for so doing, and that there was no •other source from which such right could be lawfully •derived. While it is true that section 1954 of the code •in effect restricts (except as to stocks of goods or other things in bulk, but changing in specifics) the property which a mortgage may embrace to that “in possession, or to which the mortgagor has the right of possession,” it is also true that the general law of this State for incorporating railroad companies expressly provides that a company created thereunder may, by mortgage or trust •deed executed to secure bonds issued to provide funds for constructing its railroad, bind property acquired .after the execution of the instrument. If we have succeeded in showing that these railroad companies, supposing their special charters to be void, are de facto corporations because of the existence of the general law, it would seem that they could make any contracts authorized by that law, and become bound by such contracts to those with whom the same were made. As a practical proposition, it is well known that most, if not .all, of the railroads of any length in the United States ■which have been built for years past, have been constructed by issuing, in advance, bonds upon their entire lines, including the unbuilt' portions as well as those ■already constructed, with mortgages to secure the bonds ■covering the whole. If a de facto railroad company is .a corporation for any purpose at all, it ought, on general principles, to have the power to mortgage “ future •acquired property,” and this seems to be the doctrine very generally recognized by the courts. Upon this question, see: Wright v. Bircher’s ex’r, 72 Mo. 179; City of Quincy v. C., B. & Q. R. R. Co., 94 Ill. 537; Wade v. C. S. & St. L. R. R. Co., 149 U. S. 327; Williams v. Winsor et al., 12 R. I. 9; Branch Sons & — 321 — Co. v. A. & G. R. R. Co. et al., 3 Woods (U. S. Circuit Ct.) 630; Seymour et al. v. C. & N. F. R. R. Co., 25 Barb. 284; Holroyd v. Marshall, 10 H. L. Cases (Eng.), 191. And these citations might be indefinitely multiplied. 3. The third head-note expresses the views we entertain of the usury question presented. A calculation will show that if the bonds ran to full maturity, as contemplated, the lender of the money would not receive, in the .aggregate, as much as 8 per cent, per annum for the use of the money, although at the beginning he put out on each bond only $850.00, and at the end received $1,000. The $150.00 added to the 6 per cent, interest annually received would not amount to as much as 8 per cent, per annum on $850.00 for the full term. That the bonds by their terms bore interest from a date previous to their delivery, makes no difference, because, notwithstanding this fact, the gross amount of interest for the full term would not have been equal to 8 per cent, per annum. So the •original contract, if the bonds ran forty years, was not usurious; and it does not appear that they contained any ■.stipulation which would prevent a fair and legal adjustment of the interest between the parties in case the bonds became due earlier because of a default in paying interest. Nor does in appear that in providing for the maturity of the bonds in case of such default, there was any device or contrivance to cover up usury. The above is applicable if the railroad company issued the bonds and borrowed money directly on them. If that company delivered the bonds to the construction company under a contract with it, the latter, of course, had a right to sell them at any discount it pleased, and there would be no usury in such a transaction. 4. Had the decree foreclosing the mortgage on the ■Georgia Southern and Florida Railroad Company and-•directing a sale of all its property in both States been -.made by a court of the United States, its validity could — 322 — hardly be doubted. The following Federal cases are conclusive upon this question, and we are confident there are others to the same effect: Randolph v. Wilmington & Reading R. R. Co., 11 Phila. 502; Blackburn v. Selma. &c. R. R. Co., 2 Flippin, 525; Wilmer v. Atlanta & Richmond A. L. Ry. Co., 2 Woods, 409, 447; Muller v. Dows, 94 U. S. 444. The opinion of Mr. Justice Strong, in the case last cited, is so clear and pertinent, we feel justified in making copious extracts from it: “If such a foreclosure and sale cannot be made of a railroad which crosses.a State line and is within two States, when the entire line is subject to one mortgage, it is certainly to be regretted, and to hold that it cannot be would be disastrous, not only to the companies that own the road, but to the holders of bonds secured by the mortgage. Multitudes of bridges span navigable streams in the' Bnited States, streams that are boundaries of two States. These bridges are often mortgaged. Can it be that they cannot be sold as entireties by the decree of a court which has jurisdiction of the mortgagors? A vast number of railroads, partly in one State and partly in an adjoining State, forming continuous lines, have been constructed by consolidated companies, and mortgaged as entireties. It would be safe to say that more than one hundred millions of dollars have been invested on the faith of such mortgages. In many cases, these investments are sufficiently insecure at the best.. But if the-railroad, under legal process, can be only sold in fragments ; if, as in this case, where the mortgage is upon the whole line and includes the franchises of the corporation which made the mortgage, the decree of foreclosure and sale can reach only the part of the road which is within the State, — it is plain that the property must be comparatively worthless at the sale. A part of a railroad may be of little value when its ownership is severed from the ownership of another part. And the323 franchise of the company is not capable of division.” The learned Justice further says that it is “ undoubtedly a recognized doctrine that a court of equity, sitting in a State and having jurisdiction of the person, may decree a conveyance by him of land in another State, and may enforce the decree by process against the defendant. True, it cannot send its process into that other State, nor can it deliver possession of land in another jurisdiction, but it can command and enforce a transfer of the title. And there seems to be no reason why it cannot, in a proper case, effect the transfer by the agency of the trustees, when they are complainants. In McElrath v. The Pittsburg & Steubenville Railroad Co., 55 Penn. St. 189,—a bill for foreclosure of a mortgage,— in which it appeared that a railroad company, whose road was partly in Pennsylvania and partly in West Virginia, had mortgaged all their rights in the whole road, the court decreed that the trustee who had brought the suit, being within its jurisdiction, should sell and convey all the mortgaged property, as well that in the State of West Virginia as that in Pennsylvania. This case is directly in point, and tends to justify the decree made in the present case. The mortgagors here were within the j urisdiction of the court. So were the trustees of the mortgage. It was at the instance of the latter the master was ordered to make the sale. The court might have ordered the trustee to make it. The mortgagors who were foreclosed were enjoined against claiming property after the master’s sale, and directed to make a deed to the purchaser in further assurance. And the court can direct the trustees to make a deed .to the purchaser in confirmation of the sale. We cannot, therefore, declare void the decree which was made.” The remaining question is, can a State court, in a case of the kind now under consideration, with all the parties at interest before it and having jurisdiction of the — 324 — corporation, decree a foreclosure and direct a sale of the entire railroad and the assets of the company in both States? We think that, taking the precautions and following the course indicated in the head-note, it can. The leading case in support of this proposition is that of McElrath v. Pittsburg & Steubenville R. R. Co., 55 Pa. St. 189, mentioned by Mr. Justice Strong. It is, for our purpose, squarely in point; and the fact that it was cited approvingly in a case decided by the Supreme Court of the United States, makes it a very strong authority. It would therefore seem immaterial whether the jurisdiction in question is exercised by a State or a Federal court. We deem it unnecessary to say more on this subject except to cite the following authorities which, to a greater or less extent, sustain the conclusion we have reached: Meade et al. v. N. Y. H. & N. R. R. Co., 45 Conn. 199; Hand v. S. C. R. R. Co. et al., 12 So. Car. 314; Wood v. Goodwin et al., 49 Me. 260; 3 Wood’s Ry. Law, §474; Jones, R. R. Sec. §§413, 414. If the foregoing views are sound, it follows, of course, that in admitting the evidence referred to in the headnote, no error was committed by our gifted brother Gamble, of the circuit bench, who handled” with great skill these important and somewhat complicated cases. Judgment affirmed.