Preston National Bank v. George T. Smith Middlings Purifier Co.

Cahill, J. The bill in this cause was filed to enforce the following agreement entered into July 10, 1889, by George T. Smith, claiming to act for and on behalf of' the George T. Smith Middlings Purifier Company, and to be authorized as its president and treasurer to execute the same: “Whereas, The George T. Smith Middlings Purifier Company is indebted to the Preston National Bank on its own paper, and for indorsements on commercial paper, and will hereafter be likewise indebted; and— “Whereas, The George T. Smith Middlings Purifier Company has on its books not less than three hundred thousand ($300,000) dollars in good and collectible accounts: “Now, therefore, said George T. Smith Middlings Purifier Company does hereby set aside and assign to the — 376 — Preston National Bank of Detroit one hundred and fifty thousand ($150,000) dollars of such good and collectible accounts now existing, or that shall hereafter accrue or be acquired in the conduct of the business of the said George T. Smith Middlings Purifier Company, which said one hundred and fifty thousand ($150,000) dollars of the good and collectible accounts shall be held by said Preston National Bank as collateral for any indebtedness of any kind or nature which may now or hereafter be due and payable from the said George T. Smith Middlings Purifier Company to the said Preston National Bank of Detroit. “Geo. T. Smith Middlings Purieier Co., “By Geo. T. Smith, President and Treasurer. “Dated Detroit, Mich,., Jvdy 10, 1890.” The facts material here to be considered are, substantially, as follows: The 'complainant is a national bank organized and doing business in Detroit. The George T. Smith Middlings Purifier Company is a corporation duly ■organized for manufacturing purposes under Act No. 41, Laws of 1853, p. 53, How. Stat. chap. 122, and doing business at Jackson, Mich. It was engaged in manufacturing mill machinery. It also took contracts for building mills. These contracts ran from $2,000 to $30,000 each. Its business was large, and amounted to from $400,000 to $500,000 annually. Section.9 of the act under which it is incorporated (How. Stat. § 4009) provides that— “The stock, property, and affairs of such corporation shall be managed by not less than three nor more than' nine directors, as the articles Shall determine.” The articles as filed provide for three directors. Section 1 of the act authorizes it to — • “ Elect, in such manner as they shall determine, all necessary officers, * * * and determine their duties, :and make from time to time such by-laws, not inconsistent with the Constitution and laws of this State, as a majority of the stockholders shall direct.” The by-laws adopted relating to the officers and their duties are as follows: — 377 — “1. The officers of this corporation shall be a president, secretary, treasurer, and general superintendent. “2. Any person may hold two or more offices at the same time. “3. The president shall be the presiding officer at all meetings of the board of directors, .and shall have, general supervision over the property and affairs of this corporation. * * * * * . * * * * * ,c5. The treasurer shall have charge of all the funds, deeds, patents, leases, contracts, notes, securities, and all other valuable papers of this company; - shall collect and pay out all moneys, and sign all acceptances and notes in its behalf. “6. The general superintendent shall have general supervision and management of the affairs of the corporation, subject to the president and board of directors, and shall make all contracts in behalf of the corporation except when the by-laws otherwise provide.” The by-laws relating to the meetings are as follows: “ 7. The annual meeting of the stockholders shall occur on the first Monday in May of each year. “ 8. The board of directors shall have regular meetings on the first Monday in May of each year, immediately after the adjournment of the stockholders* meeting, and at such other times and places as the president may direct.” 'On May 5, 1884, stockholders* and directors* meetings were held. George T. Smith was elected president, treasurer, and general superintendent. No other meeting of the stockholders was held until May 13, 1889. At this stockholders’ meeting there were present George T. Smith, Frank M. Smith, his son, Alonzo Bennett, George S. Bennett, Francis D. Bennett, and M. Harmon. Eliza B. Smith was represented by George T. Smith, holding her proxy. George T. Smith, Frank M. Smith, and Francis D. Bennett were unanimously elected directors. Special meetings of the board of directors, called by the president, were held on November 8, 1884, on December 29, 1887, and on October 1, 1888. At each of these meet — 378 — ings some special matter of business, not material to this case,' was transacted, but no directors’ meeting for the election of officers was held from May, 1884, to May 13, 1889. A directors’ meeting for the election of officers-immediately followed that of the stockholders on May 13. All of the directors were present. George T. Smith was elected president and treasurer, Francis D. Bennett, vice-president, and Milford Harmon, secretary. No superintendent was elected. As the statute provides that officers shall hold until their successors are chosen, George T. Smith must be considered as holding over in the office of superintendent. The next meeting of the directors was held October 3, 1889, at which the only business transacted related to the plat of the George T. Smith addition to the city of Jackson, which was-approved, and the president authorized to sell lots at the prices fixed, and to sign necessary deeds and contracts-for the same in the name of the company. The corporation made an assignment under the statute-for the benefit of its creditors on January 14, 189Ó, to-the defendants Emerson and Eldred, who have since, for reasons not material here, been removed as assignees, and appointed receivers, upon a bill filed by some of the creditors in the circuit" court for the county of Wayne, to which county the proceedings relating to such assignment had been removed. Kittridge v. Circuit Judge, 80 Mich. 200. It is apparent from the record- that, during the last five years the corporation did business, George T. Smith was permitted to manage the affair^ of the company very much as he pleased. There were no meetings of the stockholders, and no regular meetings of directors. As president, treasurer, and superintendent, he had, by the bylaws, been invested with extensive powers of management and control, and such power had been exercised by him — 379 — freely, and if not without advice, certainly without objection, on the part of any of the stockholders or directors. It appears undisputed that the corporation was in the habit of bori’owing large sums of money from the banks on its own paper, and on the paper of its customers indorsed by it. George T. Smith testified that it was xiecessary to the successful operation of the business that this money should be borrowed, and that he had been accustomed, since the organization of the company, to make .loans, and give the company’s paper therefor, whenever the exigencies of the business, in his judgment, required. No question.is made here of his right to make such loans and give the company’s notes. ' Among other banks with which he ‘did business was the complainant, with whom he had an understanding prior to July 10, 1889, by which the company he represented was to have a line of discounts up to $50,000. But it appears that the. transactions with complainant bank greatly exceeded that amount, so that on July 10, 1889, the amount had actually reached about $70,000. At this time the bank wanted security. At an interview had with Mr. Smith by Mr. Hayes, vice-president of the bank, the subject of security was discussed, and Mr. Smith expressed himself as entirely willing to give it. He had been in the habit of leaving, as collateral to the company’s paper, the paper of its customers. He now suggested that the company had a large number of accounts on its books that were -good and collectible, which he estimated at $300,000, and he offered to give security on these accounts. As a result of this interview, the agreement of July 10 was drawn up by Mx*. Hayes, executed by Mr. Smith, and left with Mr. Hayes. At the time this agreement was entered into, there was about $70,000 of the company’s paper in the bank. Subsequently this paper was renewed from time to time as it — 380 — fell due, and the amount was increased to 185,000. No action was taken to select out from the body of the accounts those which the complainant claimed under the agreement, nor were they ever set apart by the company as belonging to the complainant. At the beginning of the year, Mr. Emerson had been elected vice-president and treasurer of the company, and the management of the business of the company was practically transferred to him. On January 10, 1890, Mr. Hayes, acting for the complainant, visited Jackson and called on Mr. Emerson, showed him the agreement of July 10, 1889, and told him that the bank was anxious to have these accounts to secure the bank’s indebtedness. It does not appear that Mr. Hayes expressly requested Mrs Emerson to turn out to him any specified accounts under such agreement, but it is clear that Mr. Emerson must have understood that Mr. Hayes was there for the purpose of taking some steps that would secure to the bank whatever right was needed to make its agreement good. Mr. Emerson testified that this was the first knowledge that he had of the existence of the agreement, and it does not appear that, prior to this time, any of the directors, or officers of the company, aside from Mr. Smith, had any knowledge of its existence. After taking time to consider, Mr. Emerson denied 'the validity of the agreement, and Mr. Hayes, on January 11, caused the agreement, or -a copy of it, to be filed in the office of the city clerk, as a chattel mortgage is required to be filed. On January 14 following, the assignment was made, as before stated. Three questions are discussed by counsel: 1. Did George T. Smith have authority to execute the agreement of July 10 so as to bind the company? ,2. Is” the agreement such a one as can be enforced, conceding it to have been made by due authority? — 381 — 3. Conceding the agreement to be valid as between the parties, is it void as to creditors who became such between July 10, 1889, and January 11, 1890, because the instrument was not filed? 1. As to the authority of Mr. Smith to execute the agreement for the company. We have seen that the general powers conferred upon Mr. Smith by the by-laws were very extensive, and that the powers so conferred were actually exercised by him with very little supervision by the board of directors from 1884 to 1890. The language of the by-law defining his duties as president is quite as broad as the provision of the statute concerning the powers of the directors. The statute saj^s the stock, property, and affairs of the corporation shall be managed by a board of directors. How. Stat. § 4009. The by-law says the president “shall have general supervision over the property and affairs of • the corporation.” By section 1 of the statute, the stockholders have power to determine what the officers shall be, and to define their duties. How. Stat. § 4001. Conceding' that the president must exercise his • powers of management in subordination to the board, yet, when, as in this case, the stockholders, being the owners, have seen fit to vest certain extraordinary powers of management in the president, and certain other powers in the treasurer and superintendent, and the directors, with full knowledge of this, elect a man to fill all those offices, and thereafter put no restraint upon his management, the board must be held to have consented to his exercising all the power reasonably included in the language by which it was conferred. Bank v. Comegys, 12 Ala. 772. The right of the directors to make the security in question is not disputed, yet their authority is given in language no broader than that which defines the duties of the president. If it be said that the stockholders could not thus usurp — 382 — the powers of the board and confer them on the president, it may be said that the right of the directors to delegate certain of their powers of management to the officers is undoubted, and, if the consent of the board was needed to fully invest the president with the power given to him in the by-laws, that consent has been given in this case. The question of Mr. Smith's power is largely one of intention on the part of the stockholders and directors. As bearing upon this question of intention, the fact that no corporate meetings were held for five years after the by-laws were adopted is an important circumstance. It is claimed that the neglect to hold corporate meetings can have no bearing in this case, because it is not shown that complainant knew of this fact, or was influenced by it; and we are referred to the case of New York Iron Mine v. Negaunee Bank, 39 Mich., on page 655, where some language of Mr. Justice Cooley to that effect is found. In that case the only question was whether the bank had been influenced to rely upon 'Wet-more's apparent authority, which did not in fact exist, to make the paper in question. The question is different here. It is not one of apparent power to do an act conceded to be fraudulent and void unless the corporation was estopped by its conduct to allege the fraud, but it is a question of actual power in Mr. Smith, as the president, treasurer, and manager of this corporation, to perform an act entirely legal and proper if authorized. The intention to confer such power may be evidenced by their failure to act in opposition to or in restraint of a course of business they have themselves permitted if not established. It is an ordinary occurrence for manufacturing or trading concerns, whose products have sometimes to be carried to await a favorable market, to draw against such products for the money needed to carry them, and, if requested, some form of security upon such products is — 383 — given. If this be permissible, shall the right to give security exist only so long as the goods are in store, or may they be sold on credit, and the accounts due for such sales be substituted -with the consent, of the creditor? If not, then trade is hampered, the debtor is put into the hands of the creditor, and the latter cannot release him, if he would, without risk. The right of Mr. Smith as president and treasurer to borrow money for the legitimate needs of the business, and to give the company’s paper, is not contested. The duty to pay is involved in the power to incur debts. In the case of this corporation, its power to pay its debts depended on the profitable sale of its products, and the collection of the money due on such sales. If it could not otherwise dispose of its products, it could turn them out to its creditors in payment of or as security for such debts. If its goods were sold on credit, these credits stood as the representatives of the goods, and the same use could legitimately be made of them. This is not like giving security upon all the corporate property, the enforcement of which may involve the corporate existence. The giving of this security or its enforcement did not necessarily interfere with the prosecution of the corporate business. It was given upon property and credits already devoted in equity and good conscience to the payment of its creditors, of whom the bank was one. The effect of it was simply to give complainant priority of lien. We have been cited to a large number of decisions to show that no such power as was here assumed by Mr. Smith can be exercised by any agent of a corporation without express authority to do that act from the board of directors.' It is not necessary to review them here. I have examined them with care.'" They are not altogether free from conflict, although if the exact point necessary to be decided in each case be kept in mind, and the — 384 — language used be given no broader meaning than the facts of the particular case require, the conflict will be found to be more apparent than real. Kimball v. Cleveland, 4 Mich. 606; Joy v. Plank-road Co., 11 Id. 155; Peninsular Bank v. Hanmer, 14 Id. 208; Adams Mining Co. v. Senter, 26 Id. 73; New York Iron Mine v. Negaunee Bank, 39 Id. 644; Star Line v. Van Vliet, 43 Id. 364; New York Iron Mine v. Citizens’ Bank, 44 Id. 357; Eureka Iron & Steel Works v. Bresnahan, 60 Id. 332; Dwight v. Lumber Co., 67 Id. 507; Delta Lumber Co. v. Williams, 73 Id. 86; Genesee Co. Sav. Bank v. Michigan Barge Co., 52 Id. 438; Kendall v. Bishop, 76 Id. 634; Stokes v. Pottery Co., 46 N. J. Law, 237; Bank v. Bank, 48 Id. 527 (7 Atl. Rep. 327); Fay v. Noble, 12 Cush. 1. In this connection it need scarcely be said that the strict limitations that govern public corporations and their officers are not to be applied with the same strictness to private business corporations. There are no questions of public interest to be affected by the exercise of corporate power by one agent rather than another in a private corporation. No questions of public policy are involved. The concern is purely private, affecting no one but the owners. What the owners consent to expressly or permissively they ought not to be allowed afterwards to deny. Mor. Priv. Corp. § 632; Steel Works v. Bresnahan, 60 Mich. 332. In Genesee Co. Sav. Bank v. Michigan Barge Co., 52 Mich. 443, Judge Sherwood uses this language: “All the stockholders having any interest in the Barge Company had knowledge of the transaction; substantially that Ferry & Brother ran the Barge Company.” The same is true of Mr. Smith in this case. Every stockholder and director knew, or would have learned if they looked into its affairs, as they were bound to do, that George T. Smith ran the purifier company; that he — 385 — assumed to do this by force of the by-laws, which on their face gave full authority; and that by years of practice his construction of the by-laws had been acquiesced in. 2. Is the agreement such a one as can be enforced by a court of equity, conceding it to have been made by due authority? It is urged by defendants’ counsel that it contains infirmities which render its meaning doubtful, if they do not wholly prevent its taking effect as a valid contract. The thing principally relied on in support of this position is that the agreement is not sufficiently certain in its description of the property. It is said that no particular accounts were designated in the instrument, and no steps were provided for or taken by the parties afterwards to select out such accounts as were intended to be covered; that there is now no way of identifying those which the complainant claims. The accounts are designated as $150,000 of good.and collectible accounts now existing, or that shall hereafter accrue or be acquired in the conduct of the business. The objection to this description is that, as these accounts were to be selected out of a mass of not less than $300,000 of similar accounts, there is no way of making the selection without the further concurrence or acts of both the parties; that to make such selection requires the exercise of judgment upon the part of some one, and the instrument does not designate whose judgment shall control. The important thing to be determined is— 1. What the parties intended. 2. Whether they have so expressed their intentions that the court can execute them. It was not supposed by the parties that the security would cover all the good accounts on the books of the company. It was estimated that they would aggregate — 386 — not less than $300,000, and of these there were set aside ■for the bank $150,000. It was contemplated that the accounts were good, and that the bank should have them at their face value, and not necessarily enough of them to realize that amount in cash. ' This indicates that it was not intended to wind up or cripple the. company in its business. It is equally clear that it was expected the particular accounts intended to be assigned were to be at some time, if it became necessary to enforce the security, selected from the body of similar, accounts, and turned over to the bank for collection. How was it expected the selection would be made? It must be made in such a way, of course, as to give neither party any advantage over the other. If there were sevei-al grades from which the selection was to be made, the task might be difficult, as' in the case of lumber and other commodities that are graded in the markets into several classes greatly varying in value. But there can be only two grades of accounts, the good and collectible, and the bad and uncollectible. If an account is good and collectible it cannot be any better, and if it is bad and uncollectible it cannot be any worse. If the selection be left to agreement between the parties, the security might be defeated altogether by a failure to agree, and, if left to the company, the bank might be defrauded by having poor accounts set off to it, whereas the bank was entitled to the best accounts on the books to the extent called for by the agreement, because by no process of selection could it secure any better than the contract called for.' Equity would require the selection to be made so as to give neither party an advantage. As this could only be accomplished by allowing the bank to make the selection, the parties must be held to have so intended. It is clear also that it was not intended that the security should be confined to the — 387 — accounts standing on the books of the company on July 10, 1889, but that it should extend to and include accounts that should afterwards accrue or be acquired in the conduct of the business. Having ascertained what the parties intended by their agreement, we have, by the same process, determined the second proposition. If the agreement is sufficiently definite and certain so that the intention of the parties can be determined, then the' courts can specifically enforce it, if it be also one that ought to be enforced. If the agreement had contained the words “to he selected by the bank,” and the bank, immediately upon the execution of this agreement, had called on the company to allow it to select out the accounts assigned to it, and such request had been refused, I have no doubt of the power of a court of equity to compel the company to give the permission. If that was the intention, how is the difficulty any greater? The intention was that the security should be a continuing one, giving the same lien upon accounts afterwards accruing as upon those actually existing when the contract was made. The right of a debtor to give security upon property to be by him afterwards acquired in the course of business has been recognized in this State in numerous cases, commencing with Leland v. Collver, 34 Mich. 418. See, also, Cigar Co. v. Foster, 36 Mich. 368; Robson v. Railroad Co., 37 Id. 70; Eddy v. McCall, 71 Id. 497; Fuller v. Rhodes, 78 Id. 36. I can see no reason that will support those cases which will not apply with equal force to this. 3. The last point urged against the validity of this agreement is that it was in effect a chattel mortgage, and is therefore void as to the creditors of the company represented by the receivers, because not filed in the office — 388 — of the city clerk, under How. Stat. § 6193, which reads as follows: “Every mortgage, or conveyance intended to operate as a mortgage, of goods and chattels, which shall hereafter -be made, which shall not be accompanied by an immediate delivery, and followed by an actual and continued change of possession, of the things mortgaged, shall be absolutely void as against the creditors of the mortgagor, and as against subsequent purchasers or mortgagees in good faith, unless the mortgage, or a true copy thereof, shall be filed in the Office of the township clerk of the township, or city clerk of the city, or city recorder of cities having no'officer known as city clerk, where the mortgagor resides, except when the mortgagor is a non-resident of the State, when the mortgage, or a true copy thereof, shall be filed in the office of the township clerk of the township, or city clerk of the city, or city recorder of cities having no officer known as city clerk, where the property is.” This statute, cannot be construed to apply to the agreement in this case. It applies only to goods and chattels which are capable of delivery, and the filing of the security is to take the place of such delivery, when it is not made, as it might have been. There is no way in which an account can be delivered. It has no tangible entity, and exists only as an incorporeal right. Neither the thing itself nor any evidence of it is capable of delivery. Similar statutes in other states have received this construction. Monroe v. Hamilton, 60 Ala. 226, 233; Kelly v. Thompson, 2 Heisk. 278, 281; Bank v. Huth, 4 B. Mon. 423, 449; Newby v. Hill, 2 Metc. (Ky.) 532; Brady v. State, 26 Md. 296; Marsh v. Woodbury, 1 Metc. (Mass.) 436; Williamson v. Railroad Co., 26 N. J. Eq. 398, 403; Booth v. Kehoe, 71 N. Y. 341, 344; Bacon v. Bonham, 27 N. J. Eq. 209, 212; Kirkland v. Brune, 31 Grat. 127; Bank v. Gettinger, 3 W. Va. 317; Tingle v. Fisher, 20 Id. 497. The duty to file arises under the statute, and of — 389 — course only such instruments need to be filed as are covered by the statute. No fault is found with the form of the decree, if complainant is entitled to the relief payed for. The decree will be affirmed, with costs. Long and Grant, JJ., concurred with Cahill, J.