McCutcheon v. Merz Capsule Co.

After stating the facts as above, LURTON, Circuit Judge, deliver* >d the opinion of the court. The solution ot this case depends upon the validity of the agreement of November, 3893, and the subsequent contracts and conveyances made in furtherance thereof. The appeal perfected, and the errors assigned, involve, not only the propriety of the decree granting any relief to the complainant, but the decree dismissing the cross bill of the United States Capsule Company. The object of that cross bill was to have the agreement of November 29, 1893, and all the proceedings taken and conveyances made in pursuance thereof, decreed to be valid, and specifically enforced, by placing the United States Capsule Company in full possession and control of all the property of the Merz Capsule Company, and by enjoining’ the latter corporation from interfering with the possession or usé of same by the cross complainant. These several agreements, contracts, and conveyances are but parts of one plan, and must be read and construed together. The validity of the instrument passing title to the property of the Merz Capsule Company depends upon tim objects and purposes of the conveyance. Having been made in express furtherance of the combination scheme inaugurated November 29, 1.893, its validity must depend upon the legality of that agreement. Both the original and cross complainant, in their pleadings, have distinctly recognized this, and sought relief upon that basis. The invalidity of this agreement and conveyance has been urged upon several grounds: First, it has been said, that the scheme embodied in the agreement for a combination is illegal, as tending to create a common-law monopoly. Much of the evidence found in a very large record has been addressed to this aspect of the question, and appellee earnestly insists that the evidence establishes the fact that the sole object and purpose of the two corporations and two firms, in undertaking to bring about a consolidation of their several manufacturing interests, was to advance and control prices, through a monopoly of the business of making empty gelatine — 792 — capsules; Second, it has been also insisted that the whole scheme involved the creation of an unlawful combination or trust, within the prohibition of the Michigan statute on that subject. Laws Mich. 1889, Act, No. 225, § 3; 3 How. Ann. St. § 9354j. Finally, it is urged that whether the combination plan, and the instruments in furtherance thereof, be illegal, as tending to a monopoly, or as a combination unlawful under the Michigan antitrust statute, it is null and void, as to the Merz Capsule Company, as in excess of its corporate powers under the law and policy of Michigan in respect of its domestic corporations. We have no difficulty in assenting to this latter position, and therefore find it unnecessary to express an opinion upon either of the first two propositions, although they involve, and have elicited, a learned discussion concerning monopolies, competition, restraint of trade, and like problems of political economy. The general rule is that, without express, authority, a corporation cannot invest its funds in the stock of another corporation. Mor. Priv. Corp. § 431; Cook, Stock & S. § 315; Marbury v. Land Co., 10 C. C. A. 393-401, 62 Fed. 335; Freestone Co. v. Harvey, 92 Tenn. 115-118, 20 S. W. 427; Talmage v. Pell, 7 N. Y. 328; Central R. Co. v. Pennsylvania R. Co., 31 N. J. Eq. 475; Hazlehurst v. Railroad Co., 43 Ga. 57; People v. Chicago Gas Trust Co., 130 Ill. 268-284, 22 N. E. 798. To this rule there are certain exceptions, due in part to strong implication from the powers expressly granted, or to the objects and purposes for which stock had been acquired. Thus under the rule that the implied powers of a corporation are only such as are necessary to the exercise of its corporate franchises, it has been held that, where a debt was collected in the stock of another company, it was a valid transaction, under the implied authority to collect its debts in the most efficient way. Talmage v. Pell, supra; Howe v. Carpet Co., 16 Gray, 493; Hodges v. Screw Co., 1 R. I. 312-347. So, in Treadwell v. Manufacturing Co., 7 Gray, 393-405, it was held that, for the purpose of retiring from business, it was competent for a manufacturing corporation to sell the whole property of the corporation, taking payment in the shares of a new corporation, to be distributed among the stockholders of the old company. Confessedly, the act under which the Merz Capsule Company was organized confers no express authority under which it would be authorized to invest capital stock in the shares of another corporation. Neither can it be insisted that there is any legislative permission whatever in the statutory law of Michigan which confers any such power upon the corporations of that state. That the facts of this case do not bring it within any well-recognized exception to the general rule inhibiting such investments is to us a most obvious proposition. By the agreement of November 29, 1893, which we are asked to sanction and specifically enforce, the Merz Capsule Company contracted, not only to sell its entire manufacturing plant, including patents, processes, and good will, to the new corporation, when organized, but that it would never again engage in the same business. If its purpose had been in good faith to wind up its affair^, and distribute — 793 — the price to be paid among its stockholders, or to convert the same into money for purposes of distribution, the transaction might be supported under the authorities heretofore cited, although payment was to be received in the stock and bonds of the new company. The implied power to wind up its business and to make a sale of its property would probably authorize a sale for stock in another corporation. Holmes & Griggs Manuf’g Co. v. Holmes & Wessell Metal Co., 127 N. Y. 252, 27 N. E. 831. But here there was no purpose to wind up, and abandon the field. The avowed object was to continue corporate life and activity through the instrumentality of another corporation. There was to be a corporation within a corporation. individual'activity was to cease, but corporate energy was to be exercised through a living corporation, whose life and functions were to be controlled through the shares held by its corporate creator and master. Forbidden to exercise the very functions for which the breath of corporate life had been breathed into it by the state, there would remain standing only the shell of a corporation, retaining corporate existence only for the, purpose, of controlling and directing the new corporation, in which was invested its corporate capital, and to receive and distribute its aliquot proportion of those earnings as dividends among its own shareholders. The effect of this action of the appellee was to divest itself of the power to exercise the essential and vital elements of its franchise, by a renunciation of the right to engage directly and individually in the very business which it was organized to carry on, and is a disregard of the conditions upon which corporate existence was conferred. The state is presumed to grant corporate franchises in the public; interest, and to intend that they shall be exercised through the proper officers and agencies of the corporation, and does not contemplate that corporate powers will be delegated to others. Any conduct: which destroys their functions, or maims or cripples their separate activity, by taking away the right to freely and independently exorcise the functions of their franchise, is contrary to a sound public policy. Central Transp. Co. v. Pullman’s Palace Car Co., 139 U. S. 24, 11 Sup. Ct. 478; Thomas v. Railroad Co., 101 U. S. 71; People v. North River Sugar Refining Co., 121 N. Y. 582-625, 24 N. E. 834; Mallory v. Oil Works, 86 Tenn. 598, 8 S. W. 396. The evils incident to such a perversion of corporate capital and stifling of corporate franchises are further aggravated by the peculiar circumstances attendant upon the combination scheme now under consideration. In the execution of this plan, a New Jersey charter of incorporation was secured, though it was never contemplated to carry on business in that state. The active functions of the Michigan corporation, it was contemplated, would be exercised alone under color of this foreign “tramp corporation.” This substitution of a New Jersey charter and corporation was not without purpose. The Michigan statutes, under which the Merz Capsule Company had been organized, provided for a stockholders’ liability for labor debts. It also required public reports, at stated intervals, showing the character of the corporation business, such aa — 794 — amount of its capital stock, amount of debts and assets, and a list of stockholders. All of these provisions are eminently calculated to bring about prudent and conservative conduct of corporate business, and to advise the public, in some degree, as to the solvency of the corporation with which they may have dealings. The New Jersey corporation law contains none of these features, and in no way undertakes to safeguard either the shareholders or the public. These differences in the law and policy of the two states was, on the evidence of appellants themselves, a determining feature in procuring a New Jersey charter under which to thereafter carry on the enlarged and combined business. Another remarkable feature deserves comment. This New Jersey corporation, under color of which the combining corporations and firms were to carry on business, contemplated no capital stock other than that contributed by the promoters of the scheme. This was, as mentioned in the second paragraph of the agreement, to consist of “their respective plants, operated by them in the manufacture of hard, empty gelatine capsules, including all real estate owned and used by them for such purpose, together with all machinery and appliances of every kind pertaining theieto, stock in trade, good will, all patentable devices, labels, trade-marks, trade secrets (except processes for treating gelatine.)” The sellers themselves were to appraise this property, through one appraiser selected by the National Capsule Company, one selected by the three other promoters, and a third selected by the. two thus appointed. When the value was thus fixed by the sellers, the so-called buyer was to make a mortgage upon the whole of this property, and issue bonds bearing 8 per cent, interest, to be divided among the contributors in proportion to their several contributions. The capital stock of the corporation was also to be divided, in agreed proportions, among the parties organizing and controlling this new instrumentality for carrying on business. Having thus secured their contributions to the capital stock against any possible hazards of the business, by taking a mortgage to secure themselves against loss, and having also provided for the management and control of the business, by the practically free distribution of the stock in proportions agreed upon, the corporation was launched upon the business public without a dollar of capital responsible for its general engagements. As a plan for doing business, with the chance of loss reduced to a minimum, it is quite as unique as the instance reported in the case of Morrow v. Steel Co., 87 Tenn. 262, 10 S. W. 495. Nothing, it seems to us, need be added to justify the conclusion that the agreement of November 29, 1898, as to the Merz Capsule Company, and the subsequent conveyance and bill of sale to the United States Capsule Company made in furtherance of that agreement, are inoperative, null, and void, as in excess of its corporate powers. Being ultra vires, the consent of its stockholders cannot legalize or vitalize the transaction. The final objection urged by appellants is that if the agreement between the Merz Capsule Company and its associates is subject to the objection that it was unauthorized by its organic law, and con — 795 — trary to the public policy of Michigan, the objection cannot be urged by that corporation as a ground for affirmative relief in a court of equity. Undoubtedly, if the parties are in pari delicto, and the contract has been fuliy executed on the part of the plaintiff, and has not been repudiated by the defendant, neither a court of law nor equity will lend its active assistance to the recovery of property or money paid on such a contract, or aid in bringing about its surrender or cancellation. The doctrine of the courts applicable was stated very aptly by Mr. Justice Gray in St. Louis. V. & T. H. R. Co. v. Terre Haute & I. R. Co., 145 U. S. 407, 12 Sup. Ct. 953, when he said: “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 or to sot it aside. If the contract is Illegal, affirmative relief against it will not be granted, at law or in equity, unless the contract remains executory, or unless the parties are considered not in equal fault, as where the law violated is intended for the coercion of the one party and the protection of the other, or where there has been fraud or oppression on the part of the defendant. Thomas v. Richmond, 12 Wall. 349, 355; Spring Co. v. Knowlton, 103 U. S. 49; Story, Eq. Jur. § 298. While an unlawful contract, the parties to which are in pari delicto, remains ex-ecutory, its invalidity is a defense in a court of law; and a court of equity will order its cancellation only as an equitable mode of making that defense effectual, and when necessary for that purpose.” But this rule by which the defense of particeps criminis is sanctioned by courts, as stated by Lord Truro in Benyon v. Nettlefold, 8 Macn. & G. 102, and approved by Lord Selborne in Ayerst v. Jenkins, L. R. 16 Eq. Cas. 283; is rested “on the ground of public policy, namely, that those who violate the law must not apply to the law for protection.” But, in the case last cited, Lord Selborne notices a very obvious limitation by saying: “When the immediate and direct effect of an estoppel in equity against relief to a particular plaintiff might be to effectuate an unlawful object, or to defeat a legal prohibition, or to protect a fraud, such an estoppel may well be regarded as against public policy.” The contract in the case at bar between the parties in pari delicto is, in a large degree, still executory. Though a deed and bill of sale had been executed and delivered in furtherance of the original agreement, possession has not been surrendered, and the bonds to be delivered in payment have neither been delivered nor executed. The conveyee under the deed has indeed applied to this court, through its cross bill, for the specific performance of the agreement, by being placed in possession under the deed, and for an accounting with the appellee. There is an obvious distinction between the attitude of a complainant asking relief against an unexecuted agreement, illegal for reasons not. appearing upon its face, and where it is sought to recover back money or property paid upon a contract fully executed. The cases stating this distinction are referred to and commented upon by Lord Cottenham in Simpson v. Lord Howden, 3 Mylne & C. 99 et seq.; by Lord Selborne in Ayerst v. Jenkins, L. R. 16 Eq. Cas. 275; and Justice Gray in St. Louis, V. & T. H. R. Co. v. Terre Haute & I. R. Co., 145 U. S. 393, 12 Sup. Ct. 953. In Whaley v. Norton, 1 Vern. 483, the master of the rolls said “that there would — 796 — be a difference in these cases between a contract executed and ex-ecutory, and that this court would extend relief as to things executory, which, if done, it may be might stand.” The case of Spring Co. v. Knowlton, 103 U. S. 49, is highly instructive, and supports the proposition that affirmative relief may be extended to one of the parties in pari delicto, where the contract is unexecuted, and he be desirous of rescinding it, provided the contract was not one malum in se. The specific performance sought under the cross bill has rendered necessary the expression of a definite opinion as to the validity of the contract thus set up by the United States Capsule Company. In view of this opinion, necessitating an affirmance of the decree, so far as it dismissed the cross bill, ought we to stop at this point, and decline to grant any part of the relief sought by the appellee? The Merz Capsule Company does not seek to recover back either property or money paid or delivered under its agreement or deed. Before actually surrendering possession of its premises, machinery, and appliances, or transferring its patents and processes, it repudiated the whole scheme, and tendered back all that it had ever received, and has kept that 'tender good. But it has neither lost possession, nor received the bond payment it was entitled to receive. Having given notice of its purpose to go no further in an illegal scheme, it remained in the peaceable possession of its property, and in the ordinary conduct of its business. Without resorting to legal proceedings, the United States Capsule Company sought to obtain possession of the property of the recalcitrant grantor, and, when prevented by force from accomplishing its unlawful object, avowed its purpose by a repetition of the trespass to obtain a possession which it could not secure by a resort to legal procedure. The effect of a continuance of these unlawful methods to obtain possession, as shown by pleadings and proof, would be most injurious to the business of the complainant, and the remedy at law inadequate. Under all these circumstances, to hold that the complainant is estopped to rely upon the illegality of the agreement and conveyance to which it was a party would be to effectuate an unexecuted, unlawful object, and aid in the defeat of a legal prohibition. The door of this court should not be closed against one seeking to extricate himself from an unlawful connection, provided relief is sought without delay, and before the contract is executed, or other persons have irrevocably acted in reliance upon its supposed legality. The decree of the court declaring the illegality of the agreement of November 29,1893, and of the deed of December, 1893, and restraining the appellants from interfering with the title or possession of appellee under color thereof, should be, and accordingly is, affirmed.