Bowman v. Foster & Logan Hardware Co.

ROGERS, District Judge. It is contended that, in subscribing for stock in'the plaintiff building and loan association the Foster & Logan Hardware Company exceeded its charter powers, and the act was therefore ultra vires and void. Cases are found to that effect. Franklin Co. v. Lewiston Inst. for Savings, 28 Am. Rep. 9, and cases cited in note on page 15; End. Bldg. Ass’ns, § 323. Whether it be true that an ordinary corporation, authorized by its charter to do a general merchandise business, can become a shareholder in a building and loan association, in order to borrow money to carry on its business, in the opinion of the court is not decisive of this case; indeed, the question is not necessary to its decision. If it be admitted that it cannot, still, underlying this question, is another, about which there cannot be much doubt in the light and trend of modern decisions. The Foster & Logan Hardware Company complied with the rules and regulations required by the plaintiff building and loan association in order to become a borrower, and executed the note and mortgage sued on, and accepted the stock. It used the money so borrowed in constructing its business house. So far as the plaintiff building and loan association was concerned, the contract was an executed contract. All the plaintiff building and loan association could do was done. Can the Foster & Logan Hardware Company, after having received and used the plaintiff's money under this executed contract, be heard to say that it had no power to become a member of the association, and that its act was therefore ultra vires ? I think not. This subject is fully discussed in 5 Thomp. Corp. §§ 6015-6042, inclusive. The author says (section 6016): “The great mass of judicial authority seems to he to the effect that where a private corporation has entered into a contract in excess of its granted powers, and has received the fruits or benefits of the contract, and an action is brought against it to enforce the obligation on its part, it is estopped from setting up the defense that it had no power to make it.” See note 3, where a great number of cases are cited supporting the text. See, also, Railroad Co. v. Johnson (Kan. Sup.) 48 Pac. 847. In that case the court say: “While an executory contract made by a corporation without authority cannot be enforced, yet where the contract has been executed, and the corporation has received the benefit of it, the law interposes an estoppel, and will not permit the validity of the contract to be questioned.” Blue Rapids Opera-House Co. v. Mercantile Building & Loan Ass’n (Kan. Sup.) 53 Pac. 761, is a case precisely in point. In that case the opera-house company had taken stock in the building and loan association, and made a loan to finish the construction of the opera house. It got the money, and gave its bond and mortgage. When sued on the bond and mortgage, the opera-house company set up want of power to become a shareholder and to make the loan. The court say: [597] “"Whatever in ay have ln:en the powers of the officers of the opera-house company in this respect, the defense of ultra vires is not available to the company. The contract has been, in good fail'll, fully performed by the oilier parly, the money has been paid, and the opera-house company has had the full benefit of the payment and the performance of the contract. The law now interposes an estoppel, and will not permit the validity of the loan contract to be questioned.” idee, also, Illinois Trust & Savings Rank v. Pacific Ry. Co. (Cal.) 49 Pac. 197. Franklin Co. v. Lewiston Inst. for Savings, supra, cited by defendants’ counsel, is not in conflict with the cases cited, fa that case the contract sued on was executory, and that fact is distinctly recognized by the court in the last paragraph of ihe opinion. Mechanics’ & Working Men’s Mut. Sav. Rank & Bldg. Ass’n of New Haven v. Meriden Agency Co. (decided in 1855) 24 Conn. 159, seems to support defendants’ consi ruction, and there are doubtless other cases to the same effect; but they must yield to the weight of modem judicial authority. I am aware that quasi public corporations — as, for instance, railroad corporations — which owe importan! duties to the public are governed by a different rule. They will not be allowed to do any rdira vires act which, in effect, disqualifies them from discharging their duties to the public; aud, if they do, they are not estopped to invoke the doctrine of ultra vires. Central Transp. Co. v. Pullman’s Palace-Car Co., 139 U. S. 24, 11 Sup. Ct. 478; Id., 171 U. S. 150, 18 Cup. Ct. 898. The supreme court do not extend this rule, however, so as to do injustice. Hitchcock v. Galveston, 96 U. S. 341; Railway Co. v. McCarthy, Id. 258; Arms Co. v. Barlow. 63 N. Y. 62; Railway Co. v. Sidell, 35 U. S. App. 160, 14 C. C. A. 477, and 97 Fed. 464. The cases cited, 139 U. S. 24, 11 Sup. Ct. 478, and 171 U. S. 150, 18 Cup. Ct. 808, supra, are distinguishable from cases like that under consideration, and the different United dates circuit courts of appeals have recognized that distinction, and, 3 think, have settled the law in accordance with right and justice and the trend and weight of modern judicial authority. In Gorrell v. Insurance Co., 24 U. S. App. 198, 11 C. C. A. 210, and 63 Fed. 371, the court said: "In New York, however, as elsewhere, the rule is established that the contracts of corporations, made in excess of their rightful powers, but free from any other vice, are not illegal in the sense of the maxim, ‘Ex turpi causa,’ etc.,” — in support of which is cited a large number of authorities, including several cases by the supreme court of the United Stales. See, also, Bensiek v. Thomas, 27 U. S. App. 765, 13 C. C. A. 457, and 66 Fed. 104; Coffin v. Kearney Co., 12 U. S. App. 562, 6 C. C. A. 288, and 57 Fed. 137; Railway Co. v. Sidell, 35 U. S. App. 152, 14 C. C. A. 477, and 67 Fed. 464. The court is of opinion that the Foster & Logan Hardware Company, if in existence, and a defendant, could not avail itself of the plea of ultra viren, and, if it could not, neither can its vendees, assignees, or mortgagees. They cannot acquire any stronger position than the Foster & Logan Hardware Company, under which they claim, held. Rut it is not necessary to rest the opinion upon the point decided supra. Ry 1he terms of the deed from the Foster & Logan Hardware Company to the Logan Hardware Company, the latter expressly assumed and agreed to pay all the debts and liabilities of the Foster & Logan Hard [598] ware Company in full. • The mortgage and note sued on was a liability of the Foster & Logan Hardware Company, and the defense of ultra vires now interposed, if available at all, could only be invoked by the Foster & Logan Hardware Company) or by some stockholder or creditor thereof. 27 Am. & Eng. Enc. Law, p. 396 et seq., and notes; Railroad Co. v. Ellerman, 105 U. S. 166. Hone of the defendants were either creditors or stockholders of the Foster & Logan Hardware Company, and the Foster & Logan Hardware Company itself passed out of existence when it sold its entire assets to the Logan Hardware Company. The Logan Hardware Company could not, therefore, interpose the defense of ultra vires, and, having assumed to pay the debt, is estopped now to deny either its validity of question its liability to pay it. Millington v. Hill, 47 Ark. 311, 1 S. W. 547; Freeman v. Auld, 44 N. Y. 50; Cramer v. Lepper, 26 Ohio St. 59; Hough v. Horsey, 36 Md. 181; Pickett v. Bank, 32 Ark. 346. • The instrument sued oh was a very peculiar one. The Foster & Logan Hardware Company only borrowed $2,000 from the plaintiff corporation. To get it, it had to and did become a shareholder of 40 shares of $100 each, amounting, in the aggregate, to $4,000. To secure said loan and the premiums to be paid on the stock, it executed a mortgage, by which it obligated itself to mature the $4,000 in stock by paying the monthly dues thereon. It also obligated itself to pay 6 per cent, interest on the loan of $2,000. Evidently, $2,000 of this stock covered the $2,000 borrowed, and may be, for convenience, called “loan stock.” The other $2,000 in stock, for convenience,' may be called “premium stock.” The full dues required on the $4,000 stock and 6 per cent, interest was paid up to the time the plaintiff building and loan association became insolvent, which was in January, 1897; and on the 1st of February, 1897, the receiver was appointed by this court. It will be seen on the fifth page of the pamphlet which is made an exhibit to the answer of O. R. McDaniel, receiver, that all dues were payable on the last Saturday in each month, so that, at the time the receiver was appointed, the dues and interest for the month of January, 1897, had not been paid. The plaintiff corporation had, by becoming insolvent, become incapable of carrying out its part of the contract, and the settlement of its business remitted to a court of equity. In view of the facts, by what rule should a court of equity adjust the rights of the parties under this contract? The question has been decided differently by different courts, and it is not certain that exact justice has been reached by any of them. Indeed, I am not sure that any arbitrary rule which can be stated would accomplish that end in every case. After the most careful consideration in a former case, presenting the same question, I-concluded to follow the Pennsylvania and Tennessee decisions (Rogers v. Hargo [Tenn. Sup.] 20 S. W. 430, and Strohen v. Association [Pa. Sup.] 8 Atl. 843), and in that case laid down the following rule as the correct rule of settlement in this district: (1) All loans in arrears prior to January 1, 1897, shall be charged with dues to that date on the actual amount-received by the borrower from the association. (2) Charge the borrower with the cash loan obtained, and 6 per cent, per annum inter [599] est thereon. (->) Credit the loan with all interest paid and one-half of all flues and one-half of the stock dues paid, with interest on the same at G per cent, per annum; also credit the borrower with full amount of stock dues paid since January 1, 1897, if such payments hare been made, with interest at 6 per cent, per annum. Make all calculations according to the partial payment plan. After deducting the aggregate of credits, supra, the remainder will constitute the sum due on the mortgage. (4) The aggregate of stock dues paid in on the stock, which represents the actual cash loan, will constitute the amount of paid-up slock upon which the borrower will draw dividends from the association, and the balance of the stock will be canceled. (5) In foreclosures, if the borrower and receiver can agree upon the present cash value of such paid-up stock, such value will be allowed as a credit on the mortgage debt, and all the stock of the borrower be canceled. It will be seen by this rule that- all dues paid on the premium stock and all interest are treated as credits on the note, and the stock representing the loan is treated as loan stock, and remains as .stock paid up, to the aggregate amount of the dues, upon which the holder might draw dividends like any oilier creditor upon the winding up of the estate of the plaintiff association by the receiver thereof. The five shares of stock, not covered by the mortgage, held by the .Foster & Logan Hardware Company, and conveyed by deed with its other assets to the Logan Hardware Company, it is conceded by the pleadings are subject to a lien in favor of the plaintiff corporation for the payment of the loan of $2,090; but it should not be subjected to sale for the payment of said debt until the $2,000 of stock representing the loan has been sold, and, in the event the receiver of the Logan Hardware Company should pay off the debt due the plaintiff corporation, that slock would remain the property of said company in the hands of the receiver as jiaid-up stock to the aggregate amount of the dues paid thereon, upon which that company would be entitled to draw dividends like other creditors of the plaintiff corporation upon settlement of its affairs by the receivers thereof. In this case, however, the rights of third persons have intervened, and render it necessary, in foreclosing the mortgage or obligation sued on, to have regard for their rights. No portion of the real estate covered by the mortgage should be sold until the stock, including the Ave shares of premium stock held by the Logan Hardware Company, lias been sold, and that portion of the real estate held by White Bros, should not be sold until the property covered by the Nevada County Bank has been sold. The stocks must also be sold at public auction, unless a price therefor should be agreed upon by all the par-ties to the suit, in which event such price should be credited on the debt before any portion of the real estate is sold. Applying the rule above stated, I find that there is due the plaintiff building’ and loan association, alter allowing all just credits, principal and interest, the sum of $-, and that the same is a first lien on all the real property covered by the mortgage, and upon the £2,000 stock of the Logan Har-dware Company representing the loan of £2,000, and also on the five shares still held by it. The Nevada County Bank, under the trust deed and the decree rendered [600] thereon, under which it purchased, took subject to the plaintiff’s mortgage, and therefore acquired no title as against the plaintiff corporation. In the event the debt found due is not paid, and a 'sale is made, the “loan stock” shall first be sold and appropriated to the payment of the debt, and, if not sufficient to pay the debt, the property not purchased by White Bros, will be sqld, and, in the event it is insufficient to pay the' debt, then the property purchased by White Bros, shall be sold, and sufficient thereof appropriated to satisfy this decree, and the residue thereof brought into court for further disposition. The decree of the court therefore will be for the foreclosure of the mortgage on all the property, and an order for the sale, the property to be sold in the order stated, and in conformity with this opinion.