Saylor v. Commonwealth Banking Co.

Mr. Chief Justice Bean, after stating the facts, delivered the opinion of the court. 1. It is insisted that the answer of Sliter and others, denominated a “plea in abatement,” was in fact a plea to the merits, and that the court erred in allowing the defendants to further plead after the issues made thereby were determined against them. The pleading seems to have been treated by the court and parties until after the trial as a plea in abatement, and, whether properly so or not, we think it quite clear that it was within the discretion of the trial court to permit the defendants to further answer after it had been disposed of: Talbot v. Garretson, 31 Or. 256 (49 Pac. 978). 2. It is next contended that the judgment recovered by Hawkins against the defendant corporation is conclusive as to the amount and validity of the note upon which it was based, as against the defendant stockholders. The courts are practically agreed that, in a suit by a creditor of a corporation tO' reach and subject to the payment of the debts of the company the amount remaining unpaid upon the shares of the capital stock, a judgment against the corporation is, in the absence of fraud, conclusive against the stockholders as to the validity of the claim. Mr. Thompson, in his work on Corporations (volume 3, §3392), says that, although the stockholder is denied the privilege of appearing and contesting the action upon the merits, “yet, when a judgment is rendered against the corporation, it establishes, as conclu [209] sively as any judgment can establish the matter in litigation, the liability of the corporation to- pay the debt. Like any other judgment, it may be impeached for fraud, or for want of jurisdiction, by a party entitled to question it, but it cannot be assailed collaterally by a stockholder for any other cause, when sought to be charged in respect of it. It is valid until reversed in a direct proceeding, and concludes the stockholder, who- is in privity with the corporation.” Mr. Mo-rawetz says: “The recovery of a judgment against a corporation establishes conclusively the plaintiff’s right to satisfy his judgment out of any assets belonging to- the corporation, and the validity of the judgment cannot be collaterally attacked, either by the corporation or by persons who- may be in possession of its assets. This rule applies with full force where a judgment creditor of a corporation seeks to recover the canital subscribed by the shareholders; for the shareholders, being represented by the corporation, have really had their day in court” : 2 Morawetz, Priv. Corp. (2 ed.), § 865. And Mr. Cook says: “That a judgment conclusively settles all matters of controversy involved in the suit, so- far as parties or their privies are concerned, excepting where it may be impeached for fraud or want of jurisdiction, is well-established law”: 1 Cook, Corp. (4 ed.), §209. This doctrine proceeds upon the view that the unpaid stock is assets of the corporation, liable to the payment of its debts, and that the stockholders are represented by the corporation, and bound by the judgment against it by representation. But, while a judgment against the corporation is binding upon and conclusive as against the stockholders in a suit to subject the unpaid balance due from them on their subscription to the capital stock to the payment thereof, yet, as appears from the foregoing quotations, the stockholder may in such a proceeding go> behind the judgment, and impeach it for fraud: 3 Thompson, Corp., § 3400; Bissit v. Kentucky River [210] Navigation Co. (C. C.), 15 Fed. 353; Bohn v. Brown, 33 Mich. 258. It is argued, however, that such a defense cannot be made in this case, because it amounts to a collateral attack upon the judgment. In Morrill v. Morrill, 20 Or. 96 (11 L. R. A. 155, 23 Am. St. Rep. 95, 25 Pac. 362), it was'said that “a collateral attack on a judgment is any proceeding which is not instituted for the express purpose of annulling, correcting, or modifying such decree”; and while, as said by Mr. Freeman in his note to that case (23 Am. St. Rep. 104), the definition as given may “be accepted as being as nearly correct as a general definition can be, but, like many other general definitions, it is of little or nO’ aid in determining such special cases as are involved in doubt sufficient tO' require particular consideration. * * * The question most worthy of attention is not, what is a collateral attack ? but is, when may an attack, though collateral, be made with success?” It is immaterial, as we view it, whether the attack in this case is strictly direct or collateral. The suit is instituted for the purpose of enforcing the judgment against persons who were not actually parties to’ the record on which it was rendered, and we cannot perceive why they should not be allowed to set up, by way of answer, as a reason why it should not be enforced against them', that it was obtained by fraud, and, especially, that it is invalid on its face. Such a defense seems to have been permitted in Bank of Wooster v. Stevens, 1 Ohio St. 233 (59 Am. Dec. 619); Conway v. Duncan, 28 Ohio St. 102; Mandeville v. Reynolds, 68 N. Y. 528; Warrington v. Ball, 32 C. C. A. 609 (90 Fed. 464). Whether the doctrine of these cases, that the stockholders in such a suit may impeach the judgment for fraud aliunde the record, is the better view, need not be now considered. Here the invalidity of the judgment appears upon its face. The note upon which it was based is manifestly void unless it was authorized by the directors of the corporation, and it [211] is sufficient on its face to' charge an assignee thereof with notice of a want of authority in the president and secretary to execute it: Smith v. Los Angeles Co-op. Assoc., 78 Cal. 289 (12 Am. St. Rep. 53, 20 Pac. 677); Claflin v. Farmers,’ etc., Bank, 25 N. Y. 293. 3. Some of the courts hold to the broad doctrine that a president or director of a corporation cannot be allowed to contract with it, for the reason that the relation between them is that of a trustee and cestui que trust, and the law will not allow a trustee, for his own private advantage, to do that which may place him in a position where his interest is antagonistic to that of the beneficiaries of the trust. But the view which generally prevails in this country seems to be that there is no sound principle of law or equity that prohibits a director or the executive officers of a corporation from entering into contracts and dealing with the corporation, provided they act in good faith, and the contract is properly authorized. But, whatever the true rule may be, the courts that sanction such a contract unite on the doctrine that it will be regarded by a court of equity with suspicion and distrust, and unless satisfied by the proof that it was entered into in good faith and by authority of the corporation, or has been subsequently ratified, will not lend their aid to the enforcement thereof. In other words, such a contract is prima facie fraudulent and void, and whoever asserts its validity must show that it was made in good faith and by authority of the proper corporate officers: Jones v. Hale, 32 Or. 465 (8 Am. & Eng. Corp Cas. [N. S.], 150, 52 Pac. 311); 3 Thompson, Corp., §§ 4062, 4063; Richardson’s Ex’r v. Green, 133 U. S. 30 (10 Sup. Ct. 280). Applying this rule to the contract set out in the complaint in this suit and in the judgment roll in the action brought by Hawkins, it is obviously not binding upon the corporation. It was entered into by White, as president of the corporation, with himself as an individual, without consideration, and [212] without the knowledge or authority of the directors, so far as the proof shows. It therefore could not be enforced against the corporation, and the subsequent judgment recovered by Hawkins does not add anything to its' validity. It was a judgment by default, based upon a service made upon White, the person who executed the contract, in whose favor it was made, and who- was liable thereon as an indorser. We have, therefore, an attempt to enforce against the stockholders of a corporation a judgment recovered by default upon a contract made by the president with himself as an individual, and based upon the service of process upon him. In our opinion, such a judgment is prima facie fraudulent and void upon its face, as against the defendant stockholders, and they are entitled to make such defense in a suit of this character. It follows that the decree of the court below must be affirmed, and it is so ordered. Affirmed.