Law LIBRARY CORNELL Law SCHOOL , pac Sete, Lh, [2 Cornell University Library KF 1384.A7W28 1916 authorities on th Ht Z ‘SELECT CASES AND OTHER AUTHORITIES ON THE LAW OF PRIVATE CORPORATIONS BY we es EDWARD H. WARREN Story Professor of Law in Havel University LANGDELL HALL, CAMBRIDGE PUBLISHED BY THE EDITOR 1919 COPYRIGHT, 1916, BY EDWARD H. WARREN PREFACE. Tue first edition of Cases on Corporations was published seven years ago. In this second edition there are large changes. The following subjects are considered at much greater length: Unincorporated Associations; Issues of Stock at a Discount or for Overvalued Property; Offenses Against the Sherman Anti-Trust Act; Reorganizations of Corporations. The more important cases decided since 1909 are set forth, or cited in the notes. There are numerous notes by the editor. E. H. W. LANGDELL Haut, CAMBRIDGE, April, 1916. TABLE OF CONTENTS. BOOK I~ THE NATURE OF A CORPORATION. — CHAPTER I. THE ForRMATION OF A CORPORATION: A. Necessity of Authority from the State . . . «© » » » we OL B. Grant of Authority from the State . . 2 1 0 1 se ee 9 CHAPTER II. DisTINGUISHING A CORPORATION FROM AN UNINCORPORATED ASSOCIATION: : A. Where there is no Legislative Enactment. . .... +... dl B. Where there is some Legislative Enactment. . . ..... Ol CHAPTER III. UNDER WHAT, IF ANY, CIRCUMSTANCES THE CORPORATE FIc- TION SHOULD BE DISREGARDED... + « + + « 82 BOOK II. THE PROMOTION OF CORPORATIONS. CHAPTER I. SUBSCRIPTIONS TO STOCK OF A CORPORATION TO BE FORMED 173 CHAPTER II. CONVEYANCES TO PROMOTERS, AND CONTRACTS WITH PRo- MOTERS RELATING TO PROPERTY OR SERVICES . . .« 183 CHAPTER III. Issuzs or Stock aT A Discount oR FOR OVERVALUED Prop- ERTY s e J ci} e ° e e . e e J e e s s e 200 CHAPTER IV. TRANSACTIONS BETWEEN PROMOTERS AND THE CoRPORATION ~ PROMOTED ee @ e a 8 8 @ #@ © © 8 #8 @ 8 334 vi CONTENTS. BOOK III. THE POWERS OF CORPORATIONS. CHAPTER I. EXTENT OF THE PoWERs: Section 1. InGeneral . .. . oe 4&8 we ee ow we B80 Section 2. To enter into a Partnarship goto, Bee meas alee A0D Section 3. To hold Stock in other Corporations . . ... . . 409 Section 4. To hold their own Stock . . . . 1. 2. 2 «© « « + 489 CHAPTER II. Tur EXERCISE: OF THE POWERS: Section 1. In-whom the Powers are vested . ...... . 464 Section 2. Mode of exercising the Powers. . . . . . . « « 487 BOOK, IV. LIABILITY FOR TORTS AND CRIMES. CHAPTER I. In GENERAL «oo 4 «6 & 8 © 6 8 &% © © e ® » » » » 600 CHAPTER II. OFFENSES UNDER THE SHERMAN ANTI-TRUST AcT ... . 514 BOOK V. UNAUTHORIZED CORPORATE ACTION. CHAPTER I. CoLLATERAL ATTACK UPON THE FORMATION OF A CORPORATION. HEREIN OF THE Expression ‘Dr Facto CorPORATION”’: SECTION 1. Where there have been Dealings between the Parties on a Corporate Basis . . . . 598 Section 2. Where there have been no Dealings inven the Paorlite ona Corporate Basis . . . 1 1. ew ee ee. 688 CHAPTER II. CoLLATERAL ATTACK UPON THE POWERS OF A CORPORATION. HEREIN OF THE Expression “ULTRA VIRES”’: Section 1. The English Authorities .. 2... 2. . 2. . 655 CONTENTS. vil SscTion 2. United States Authorities: A. B Cc D. E. F. Torts i: 4 « «© «mY eS ew we we we we we 2 BIT . Transfers of Property Rights . ..... . « 686 Contracts sis. A. Goa a Ge a. we el FD Quasi Contracts . . . . 1 2 1 we wee 740 Liability of Human Beings . . . « « « « (48 Setting aside an Ultra Vires Tranasoiion ow e 4758 BOOK VI. OFFICERS, STOCKHOLDERS, AND CREDITORS. CHAPTER I. DIRECTORS AND OTHER OFFICERS: A. Unauthorized Action by de jure Officers . . . «2... . 61 B. De Facto Officers . . . gi Sete Maney yee See C. Liability of Directors for Ketion or Taaption el tne ew) a we TOO D. Contracts with the Corporation . . . abies we ie a 482 E. Purchases of Corporate Property or Oblinations oa we we x « 798 F. Relation to Stockholders . . . 1... 2 1 ee es . 198 G. Dealings with Third Persons . . ..... 2... . 818 H. Executive Officers . 2. 2. 1. 1 1 1 1 6 w @ we «sw es 82 CHAPTER II. STOCKHOLDERS: Section 1. Rights of a Stockholder even when he is in the Minority: yoaowpr H. . To inspect the Corporate Books and Records. . . 827 . To Dividends .... SB be te 882 . To subscribe to New Issues of Stock. ore x a @848 . To enjoin any Act which the Corporation is dianuthe: rized to do, or which it was unauthorized to do when Plaintiff became a Stockholder. . . . . 850 . To prevent and redress an Appropriation of Corpo- rate Assets by the Majority . . . . 857 . To compel the Corporation to assert Valid Glan: and to resist Invalid Claims. . .. . . 859 . Procedure in a Suit by Stockholder to sacar a Cor- porate Right. ... . : . 873 Rights of Persons who became Stockholders a a ities subsequent to the Conmiesion of the Alleged Wrong 881 Section 2, Transfer of Shares . . . 1 .’. 1 « we ee - 888 Secrion 3. Voting Trusts . 2. 2. 1 6 1 2 we ee ee ee OD viii CONTENTS. CHAPTER III. CREDITORS ». 2. 0 ee ee ew ww we we ee ew we 925 BOOK VII. THE REORGANIZATION OF CORPORATIONS. CHAPTER I. IssuES OF STOCK BY A CORPORATION WITH IMPAIRED CAPITAL . 937 CHAPTER II. Ricut oF STOCKHOLDERS TO PREVENT A SALE, OR LEASE, OF CoRPORATE ASSETS . . . 1... ee we es OAT CHAPTER III. Ricuts oF CREDITORS AS AFFECTED BY REORGANIZATIONS . 982 APPENDIX OF CORPORATE FORMS. CERTIFICATE OF INCORPORATION OF UNITED Stares STEEL CORPORATION . . . . e ew we ws ew we we. 1007 By-LAWS: 2: 2. Gee. Ss ew we ew es 2 1008 Minutes oF First MEETING oF INcorporaTorS . . . . 1019 Minutss or First Mrrtine or Directors .... . 1022 LIsTING OF SECURITIES . . . .. . . ee we «ss 1026 SYNDICATE AGREEMENT . .... . «ss. « « « « « 1030 Votinc Trust AGREEMENT. . ....... . . . 1037 CERTIFICATE OF ComMMoN Stock. . ...... . . 1042 CERTIFICATE OF PREFERRED STOCK. . . . ... . . 1044 BOND: 40% @ 468 ee Soe YA ee ee oe 6 ow 2 046 Coupon .... ee ee we ie we ee OAS Voting Trust CERTIFICATE. . . « 1 6 6 0 « e « 1050 TABLE OF CASES. Andrews Bros. Co. ». Youngstown Coke Co. . . Ashbury Railway Carriage and Iron Co. v. Riche . Athol Music Hall Company v. Carey Attorney-General for Canada ». Standard Trust Co. . Automatic Self-Cleansing ‘Filter Co. v. Cuninghame Ayers v. The South Australian Banking Co. 3 one & San Francisco Ry Co., Baldwin &: “Canfield | Bank v. Trebein . Bank of Topeka v. Eaton. . Bank of United States v. Deveaux . Parpness Wenlock v. River Dee On es Bartholomew v. Derby’ Rubber Co. Bates v. Coronado Beach Co. Bath Gas Light Co. ». Claffy_. Boston & Albany R.R. Co. v. Heel ardson . Boyce v. Towsontown ‘Station | Brewer v. Boston Theatre . Brewer v. The State Brightman v. Bates . . A British South Africa Co. v. De Beers Consolidated Mines, “ed. Broderip v. Salomon . Brown v. Winnisimmet Co. Bryant’s Pond Steam Mill Co. ». Felt . Burroughs v. North Carolina R.R. Ose diario ud clan alnce ow Bushnell v, Consolidated Ice Me chine Co, 2 Butler Paper Co. ». ‘Cleveland : California Bank v. Kennedy California Bank v. Kennedy . Callender v. Painesville R.R. Co. Carmichael’s Case . st hig Railroad Company v. Col- ns . ‘ Central R.R. Co. v. Smith | Central Transportation Co. v. Pullman’s Car Co. . ‘ Chambers v. McKee & Bros. . . . 657 . 173 337 477 . 664 - 901 - 488 . 125 108 668 - 961 - 407 . 731 . 902 - 600 - 857 - 645 - 921 655 . 148 . 393 176 841 603 25 . 415 . 694 . 598 179 . 410 . 682 . 728 859 Charlestown Boot Co. v. Duns- MMOLE. ge ee wd ee Chestnut Hill Turnpike Co. »v. Rutter. . 500 Chicago City Railway ‘Co. v. Aller- ton . 466 Citizens National Bank ». Apple- ton... ‘ . 740 Clapp v. Peterson. . . . . . 446 Clewsv. Friedman. . .. . . 897 Coffin v. Ransdell . . . 230 Coit v. Gold Amalgamating ‘Co. | 242 Cole v. Millerton Iron Co. . . 989 Commercial National Bank v. Weinhard. . 468 Continental Securities Co. v. Bel- mont . 875 Continental Tyre & Rubber Co. * Ltd., v. Daimler Co., Ltd. . . 157 Cook v. Burlington . . 90 Coppin v. Greenlees & Ransom Co. 8 . 442 Cottentin v. Meyer os . 63 Cotton v. Imperial Corporation . 970 Crowellv. Jackson. . . . . . 798 Davenport v. Dows . . . 873 Dayenport v. Peoria Tnsurance . . 487 DaviiPayne&Co., ‘Ltd. vinre . . 666 Davis v. Las Ovas Co. . 346 Davis v. Stevens . . . 628 Denny Hotel Co. v. Schram | | 409 Denver Fire Insurance Co. v. Mc- Clelland .. aw ew £20) Dodge v. Woolsey . soe ew ws 868 Douglass v. Ireland |. . . 265 Downing v. Mount Washington Road Company . Dunphy »v. Traveller Newspaper Association . . 874 Dupee v. Boston Water Power Co. 449 East Birmingham Land Co. ». Dennis . . 890 East Norway Lake Church’ ». Froislie . Easton National Bank v. Ameri- can Brick Co. . . . . . . 300 Eliot v. Freeman . .... . 48 Ellis v. Marshall . . . 17 Elyton Land oe v Birmingham Co. . 255 x TABLE OF CASES. Elyton Land Co. v. Dowdell . 947 | John Foster & Sons, Ltd., v. Com- Erlanger v. New Sombrero Phos- missioners of Inland Revenue . 94 phate Co. . 334 | Joint Stock Discount Co. v. Brown 418 ive * vw Composite | Brake » Shoe ass Jourdan v. Long Island R.R. Co. 494 Co. . 98: Kelner v. Baxter . . 187 Finley Shoe & Leather Co. v. Kurtz 491 | Kerfoot v. Farmers’ Bank . 689 First National Bank v. National Kraft v. Griffon Co. . 948 Exchange Bank . 3 | Kuser v. Wright . 764 Ford »v. Easthampton " Rubber Thread Co. . 837 | Lake Superior Iron Co. v. Drexel . 250 Fort Payne Rolling Mill v. ‘Hill - 785 | Lantz v. Moeller. . 290 Foss v. Harbottle . . ., . 862| Linn Timber Co. v. United States | 137 Franklin Bridge Co. v. Wood. . 9 Liverpool Insurance Co. v. Massa- Franklin National Bank v, White- chusetts eo ace we SDL head . . . . 402] Luthy v. Ream 4 . 912 Furnivall v. Coombes . 670 Malone v. Lancaster Gas-Light a 388 Gallagher v. Germania Brewing Co. 98) Marvin v. Anderson 451 General Rubber Co. v. Benedict . 809} Mason v. Pewabic Mining Co. Je | 955 Gilbert v. Finch. 779 | MacGregor v. Dover & Deal Ry. Gillett v. Chicago Title & Trust Co. . 672 Co. 276 | McArthur v. Times Printing Co. | 184 Goodnow_ ». American Writing McClure v. Law... . 818 ’ Paper Co. 832 | McDonald v. Dewey . . 908 Great Southern Fire Proof Hotel alan Receiver, v. Williams . 932 Co. v. Jones... McGraw, Matterof . . . 699 Groel v. United Electric Company Bh6 McNab». McNab & Harlin Mtg. Guarantee Trust aa v. Dilworth Co. . 835 Coal Co. . Se . 222| McNeil ». Tenth National Bank | 894 Guckert ». Hacke . . 653 | Meyer v. Mining & Milling Co. . 303 Middlesex Husbandmen v. Davis . 20 Hall’s Safe Co. ». Peerae all: Minnesota Gas-Light Co. v. Dens- Marvin Safe Co. . . 145] low . 605 Handley v. Stutz . 937 | Mobile & Ohio R.R. Co. ». Nicho- Harris v. Gas Co. . 756| las . 917 Heckman’s Estate . 191 | Mobile Improvement Co. v.Gass | 782 Henry v. Babcock & Wilson Co. : 829| Mokelumne Co. v. Woodbury . 28 Herron Co. v. Shaw . . . .« 270|}Monk v. Barnett . 237 Hibbs v. Brown : 63 | Monument National Bank v. Globe Hill v. Nisbet. . 429! Works 712 Hodges v. New England Screw Co. 777|Moore & Handley Co. d. ». Towers Hoisting Machinery Co. v. Goeller Hardware Co. 140 Tron Works . . 492| Morgan v. Lewis. ; : 456 Hong Kong & China Gas Co., Lid., Munson v. Syracuse R.R. Co. . 784 v. Glen’. . 216 Hospes_»v. Northwestern Mtg. & National Bank v. Matthews . . 686 Car Co. . 292| National Home Building Ass’n v. Hubbard »v. Woreester Art Mu- Home Savings Bank . 714 seum_ . 7 . . « . 704)Natusch v. Irving . 850 Hun v. Cary i . 772| New Bedford Hailroad v. Old Col- utohingan ©: Green | 473| ony Railroad. 983 New England Trust Co. v. Abbott. 905 Imperial Building Co. v. Chicago New York Cable Co. »v. Mei, etc., Open Board of Trade . . 618] of New York . . 651 Indianapolis Furnace Co. v. Herk- Nims ». Mount Hermon Boys’ imer - 649} School . . 677 Irvine v. New York Edison Co. | 984| North Milwaukee Town Site No. 2 v., Bishop . . 464 Jackson ». Hooper. 100 Ne Pacific Railway Co. v. Jacobus v. Jamestown Mantel Co. 821 995 Janney v. Minneapolis Industrial Norther Securities Co. v. United Exposition . .. - . . 7931 States... .. . . « 532 TABLE OF CASES. Northwestern Popmepere om v. Beatty . . . . 787 Oakes v. Turquand . 930 O’Conner Mining Co. v. Coosa Fur- nace Co. 791 ole Dominion Copper Co. v. Bige- ‘ 349 old Dominion Copper Co. v. Lewi- sohn. . . 841 Ooregum Gold Mining Co., Ltd., v. Roper ; . 201 Parker v, Bethel Hotel Co. . 84 Parsons v. Joseph . . 885 Pell’s Case 200 Penfield v. Dawson Town & Gas Co. 2 . . . 244 183 . 992 Pennell v. Lothrop - ‘ Pennsylvania Transportation Com- pany’s Appeal . Penobscot Boom Corporation d. Lamson . 14 People v. Coleman. | 59 People ex rel. Manice v. Powell . | 484 People v. North River aa Refin- ing Co. . . 128 People ». Pullman Car Co. . . 390 People v. Pullman Car Co. . 417 People v 2 Hoe Railway & Ligh 2 . . 510 ee v Biedelan RR. Co. ; 24 People ex rel. Hea & ae v Campbell . sey . 382 Phillips v. Blatchford 33 Phillips v. Providence Steam En- gine Co. 951 Pollitz v, Gould” : 881 Provident Bank & Trust Co. # Saxon . . . 631 Reee v. The Richmond eee R. x ai Richards v. Wiener Co. . . . . "454 Richardson v. Williamson . 673 Richardson Fueling Co. ». Sey- mour . 611 Riker & Son Co, ». United Drug Co. . 963 Royal British Bank ». Turquand 761 Russell v. Temple . ‘ 82 St. Louis Railroad v, Terre Haute Railroad . . 753 Salomon v. Salomon & Co., Ltd. . 148 Sanford», McArthur. . . . 743 Sawyer v.Hoag .... . + 925 Schwab v. Potter Co. . 2 « 974 Scovillv. Thayer . . . « « + 220 Seaton v. Grimm See v. Heppenheimer . Seeberger v. McCormick Seymour v. Spring Forest Ceme- tery Association . ae: Skerman v. Fitch . . Small 2. See Matrix Co. . . . Smith». Hurd . . ‘ Snider’s Sons’ Co. v. Troy ‘ Society Perun v. Cleveland . Southworth v. Morgan Spering’s Appeal ._. Standard Oil Co. »v. United States . State v. Atlantic City and Shore R.R. Co... Bk State v. Bank of Hemingford : State v. Dawson. ee State v. Eastern Coal Co. . ; State v. Missouri Pacific Ry. Co. Stevens v. Rutland & Burlington R.R. Co. ; Stokes v. Continental Trust Co. Stoutimore ». plans a 6 Strong v. Repid Swift & Co. v. United States ; Electro- Tappan v. Bailey . Thomas v. Dakin . Timmis, Matter of Tisdale v. Harris . . Trevor v. Whitworth . ve States v. American Tobacco Oi ae a Bae, We United States v. E. C. Knight Co. . United States v. Freight Associa- tion . 3 United States v, John Kelso Co. United States v. Milwaukee Be frigerator Transit Co... . United States v. Winslow U.S. Brewing Co.v. Dolese . U.S. Express Co. v. Bedbury | U.S. Steel Corporation »v. Hodge Varney v. Baker. Vent ». Duluth Coffee Co. Wathen v, Jackson Oil Co... . Weatherford Ry. Co. v. Granger Whittenton Mills v. Upton. . Wilder Bs Co. v. Corn Hnduels Co. Williams v. Johnson Williams v. Milton . Winget ». Quincy Building 4 Ass'n . Wood v. Whelen P Wragg, Ltd, inre. . 2... 384 | 786 . 827 . 462 . 878 . 192 405 . 622 . 897 : 615 . 476 . 213 CASES ON CORPORATIONS. BOOK I. THE NATURE OF A CORPORATION. CHAPTER I. _ THE FORMATION OF A CORPORATION. A. Necessity of Authority from the State. BLACKSTONE, COMMENTARIES. Book 1, pp. 468, 469, 470, 472, 473. Tuer honor of originally inventing these political constitutions en- tirely belongs to the Romans. They were introduced, as Plutarch says, by Numa; who finding, upon his accession, the city torn to pieces by the two rival factions of Sabines and Romans, thought it a prudent and politic measure to subdivide these two into many smaller ones, by instituting separate societies of every manual trade and profession. They were afterwards much considered by the civil law, in which they were called universitates as forming one whole out of many individuals; or collegia, from being gathered together: they were adopted also by the canon law, for the maintenance of ec- clesiastical discipline; and from them our spiritual corporations are derived. But our laws have considerably refined and improved upon the invention, according to the usual genius of the English nation: particularly with regard to sole corporations, consisting of one per- son only, of which the Roman lawyers had no notion; their maxim being that “tres faciunt collegium.” Though they held, that if a corporation, originally consisting of three persons, be reduced to one, “si umiversitas ad unum redit,” it may still subsist as a corporation, ‘et stet nomen universitatis.” Before we proceed to treat of the several incidents of corporations, as regarded by the laws of England, let us first take a view of the several sorts of them; and then we shall be better enabled to appre- hend their respective qualities. The first division of corporations is into aggregate and sole. Cor- porations aggregate consist of many persons united together into one society, and are kept up by a perpetual succession of members, so 2 BLACKSTONE, COMMENTARIES. [cHaP. I. as to continue forever: of which kind are the mayor and commonalty of a city, the head and fellows of a college, the dean and chapter of a cathedral church. Corporations sole consist of one person only and his successors, in some particular station, who are incorporated by law, in order to give them some legal capacities and advantages, particularly that of perpetuity which in their natural persons they could not have had. In this sense the king is a sole corporation; so is a bishop; so are some deans, and prebendaries, distinct from their several chapters; and so is every parson and vicar. And the neces- sity, or at least use, of this institution. will be very apparent, if we consider the case of a parson of a church. At the original endow- ment of parish churches, the freehold of the church, the churchyard, the parsonage house, the glebe, and the tithes of the parish, were vested in the then parson by the bounty of the donor, as a temporal recompense to him for his spiritual care of the inhabitants, and with intent that the same emoluments should ever afterwards continue as a recompense for the same care. But how was this to be effected? The freehold was vested in the parson; and, if we suppose it vested in his natural capacity, on his death it might descend to his heir, and would be liable to his debts and encumbrances: or at best, the heir might be compellable, at some trouble and expense, to convey these rights to the succeeding incumbent. The law therefore has wisely ordained, that the parson, guatenus parson, shall never die, any more than the king; by making him and his successors a corporation. By which means all the original rights of the parsonage are preserved entire to the successor; for the present incumbent, and his predeces- sor who lived seven centuries ago, are in law one and the same per- son; and what was given to the one was given to the other also. . . . Corporations, by the civil law, seem to have been created by the mere act, and voluntary association of their members: provided such convention was not contrary to law, for then it was illicitum col- legium. It does not appear that the prince’s consent was necessary to be actually given to the foundation of them; but merely that the original founders of these voluntary and friendly societies, for they were little more than such, should not establish any meetings in opposition to the laws of the state. But, with us in England, the king’s consent is absolutely necessary to the erection of any corporation, either impliedly or expressly given. The king’s implied consent is to be found in corporations which exist by force of the common law, to which our former kings are supposed to have given their concurrence; common law being nothing else but custom, arising from the universal agreement of the whole community.- Of this sort are the king himself, all bishops, parsons, vicars, churchwardens, and some others; who by common law have ever been held, as far as books can shew us, to have been corporations, virtute officii: and this incorporation is so inseparably CHAP. I.] BLACKSTONE, COMMENTARIES. 3 annexed to their offices, that we cannot frame a complete legal idea of any of these persons, but we must also have an idea of a corpora- tion, capable to transmit his rights to his successors at the same time. Another method of implication, whereby the king’s consent is pre- sumed, is as to all corporations by prescription, such as the city of London, and many others, which have existed as corporations, time whereof the memory of man runneth not to the contrary; and there- fore are looked upon in law to be well created. For though the mem- bers thereof can shew no legal charter of incorporation, yet in cases of such high antiquity the law presumes there once was one; and that by the variety of accidents which a length of time may produce, the charter is lost or destroyed. The methods by which the king’s con- sent is expressly given are either by act of parliament or charter. By act of parliament, of which the royal assent is a necessary in- gredient, corporations may undoubtedly be created: but it is observ- able, that, till of late years, most of these statutes which are usually cited as having created corporations do either confirm such as have been before created by the king, as in the case of the College of Physi- cians, erected by charter 10 Hen. VIII, which charter was after- wards confirmed in parliament; or they permit the king to erect a corporation in futuro with such and such powers, as is the case of the Bank of England, and the society of the British Fishery. So that the immediate creative act was usually performed by the king alone, in virtue of his royal prerogative. All the other methods, therefore, whereby corporations exist, by common law, by prescription, and by act of parliament, are for the most part reducible to this of the king’s letters patent, or charter of incorporation. Nortr. — From very early times the courts recognized some cor- porations as existing by force of the common law alone. See Y.B. 11 Hen. IV,2; Y.B. 37 Hen. VI, 30; Y.B. 8 Edw. IV, 6; Y.B. 20 Edw. IV, 12; Y.B. 14 Hen. VIII, 2; Co. Lit. 3a; Finch’s Law, c. xvi; Keilw. 32a; 2 P. Wms. 125; 4 Vin. Abr. 525. There is also evidence tending to show that, in early times, the Court of Exchequer, in revenue matters, allowed unchartered bodies of men to be sued, and even to sue, as a unit. Madox, Firma Burgi, 85, 91. “ Anciently a Gild either Religious or Secular could not legally be set-up without the Kings Licence. If any Persons erected a Gild without Warrant, that is, without the Kings leave, it was a Trespass, and they were lyable to be punished for it. For example. In the Twenty-sixth year of K. Henry II (1179), several Gilds in London were amerced to the Crown as Adulterine, that is, as set-up without Warrant from the King.” Madox, Firma Burgi, 26. In De Libertates, Lib. 11, c. 24, fol. 56, Bracton puts the case that . the king should grant some liberty ‘“‘ut si alicut universitati, sicut 4 BLACKSTONE, COMMENTARIES. [cHAP. I. civibus vel burgensibus vel aliquibus alis g. mercatum habeant.” It appears, from the chapter as a whole, that he considered this liberty, or franchise, together with various other liberties, to be under the control of the King (“in manu sua”) ; and that private persons might enjoy it, “sed de gratia ipsuis Regis speciali.” Y.B. 49 Edw. III, 3 (1375). A devised lands to B for life, re- mainder “a deux des meliour homes de la Guild de la Fraternity de Whitawyers en Londres” forever. A died without heirs, and on the death of B the king claimed the land by escheat. The court held that the devise (after B’s life estate) was void. BeLKNap expressed his opinion that, even if the devise had been to ‘“‘the Fraternity,” it would not have been good, because the commonalty of London can- not by their own act create a community within the community without the charter of the king. A “Fraternity” is not a term known to the law, nor can’a community exist without a charter. (‘Le commen de Londres ne poet my d’eux mesme faire comen deins cest comen sans chartr le Roy... . Fraternity n’est my terme de ley, ne comen ne puit my estre sans chre.”’) Knyver, Chancellor, with greater precision of thought, said that this commonalty of the gild, which is not confirmed by the king, could not be adjudged a body capable of taking an estate by purchase. (‘Il ne poet pas estre p. la ley q. c. cominalty de la Guilde, q. n’est affirme p. chre le Roy, purrott etre adjudgee un corps de purchace estate.’’) Y.B. 20 Edw. IV, 2 (1480). B, alderman of the X gild, brought debt against C, and counted upon an obligation made to A, some- time alderman of the gild, and his successors. Objection that the plaintiff had not shown how the corporation was formed. Littleton took. a distinction between a “corporation of common right” and a gild. The judges were all of opinion that, if suit could be main- tained, it would be by the executor of A. See also Y.B. 22 Edw. IV, 34. In Y.B. 14 Hen. VIII, 2 (1522), Fineux remarked: ‘There is a corporation by the Pope alone, as those mendicant brothers who cannot purchase.” But Brooke, writing after the Reformation, laid it down that if the Pope purports to create a corporation, “ideo ceo est usurpation et voyd a cest jour et fuit imperpetuum.” 1 Brooke, Abr. Corp. 33. See also Dyer, 81, pl. 64. In Terrett v. Taylor, 9 Cranch, 43, Story, J., said (p. 46): “Ata very early period the religious establishment of England seems to have been adopted in the colony of Virginia; and, of course, the common law upon that subject, so far as it was applicable to the circumstances of that colony. The local division into parishes for ecclesiastical purposes can be very early traced; and the subsequent laws enacted for religious purposes evidently presuppose the exist- ence of the Episcopal church with its general rights and authorities growing out of the common law. What those rights and authorities CHAP. 1.] ST. 6 GEORGE I. 5 are, need not be minutely stated. It is sufficient that, among other things, the church was capable of receiving endowments of land, and that the minister of the parish was, during his incumbency, seized of the freehold of its inheritable property, as emphatically persona ecclesiae, and capable, as a sole corporation, of transmitting that in- heritance to his successors. The church wardens, also, were a cor- porate body clothed with authority and guardianship over the repairs of the church and its personal property; and the other temporal con- cerns of the parish were submitted to a vestry composed of persons selected for that purpose.” In The Governor v. Allen, 8 Humph. (Tenn.) 176, the court held that the governor of the State was, by force of the common law, a corporation sole. In People v. Mackey, 255 Ill. 144, Mr. Justice Vickmrs said (p. 156): ‘A private corporation is an organization for the benefit of __its members. When brought into being it enjoys certain rights and _privileges of great value that are not enjoyed by natural persons. The right to be a corporation is not a natural or a civil right of any person, and_s j ired from the sovereign . It is a matter exclusively within the power ‘islature to determine whether it will grant or withhold the privilege of form- ing corporations. If the legislature determines to exercise its discre- tion and grant the privilege it may prescribe the terms and condi- tions upon which the right is to be exercised.” This general statement by Mr. Justice VickERS must, it is sub- mitted, be qualified in so far as, but only in so far as, the ancient doctrine of corporations at the common law still has virility. ST. 6 GEORGE I. C. 18, §§ xvit and xrx (1719). xvi. And whereas it is notorious, that several undertakings or projects of different kinds have, at some time or times since the four and twentieth day of June one thousand seven hundred and eighteen, been publicly contrived and practised, or attempted to be practised, within the city of London and other parts of this kingdom, as also in Treland, and other his Majesty’s dominions, which manifestly tend to the common grievance, prejudice, and inconvenience of great numbers of your Majesty’s subjects in their trade or commerce, and other their affairs; and the persons who contrive or attempt such dangerous and mischievous undertakings or projects, under false pretences of public good, do presume, according to their own devices and schemes, to open books for public subscriptions, and draw in many unwary persons to subscribe therein towards raising great sums of money, whereupon th¢ 6 ST. 6 GEORGE I. [cHaP. 1. subscribers or claimants under them do paysmall proportions thereof, and such proportions in the whole do amount to very large sums; which dangerous and mischievous undertakings or projects do relate to several fisheries, and other affairs, wherein the trade, commerce, and welfare of your Majesty’s subjects, or great numbers of them, are concerned or interested: and whereas in many cases the said un- dertakers or subscribers have, since the said four and twentieth day of June one thousand seven hundred and eighteen, presumed to act as if they were corporate bodies, and have pretended to make their shares in stock transferable or assignable, without any legal au- thority, either by act of parliament, or by any charter from the crown for so doing; and in some cases the undertakers or subscribers, since the said four and twentieth day of June one thousand seven hundred and eighteen, have acted or pretended to act under some charter or charters formerly granted by the crown for some particular or special purposes therein expressed, but have used or endeavored to use the same charters for raising joint stocks, and for making transfers or assignments, or pretended transfers or assignments for their own private lucre, which were never intended or designed by the same charters respectively; and in some cases the undertakers or sub- scribers, since the said four and twentieth day of June one thousand seven hundred and eighteen, have acted under some obsolete charter or charters, although the same became void or voidable by non-user or abuser, or for want of making lawful elections, which were neces- sary for the continuance thereof; and many other unwarrantable practices (too many to enumerate) have been, and daily are and may hereafter be contrived, set on foot, or proceeded upon, to the ruin and destruction of many of your Majesty’s good subjects, if a timely remedy be not provided: and whereas it is become absolutely neces- sary, that all public undertakings and attempts, tending to the com- mon grievance, prejudice, and inconvenience of your Majesty’s sub- jects in general, or great numbers of them, in their trade, commerce, : or other lawful affairs, be effectually suppressed and restrained for the future, by suitable and adequate punishments for that purpose to be ascertained and established: now for suppressing such mis- chievous and dangerous undertakings and attempts, and preventing the like for the future, may it please your most excellent Majesty, at the humble suit of the said lords spiritual and temporal and com- mons, in this present parliament assembled, that it may be enacted; and be it enacted by authority of this present parliament, that from and after the four and twentieth day of June one thousand seven hundred and twenty, all and every the undertakings and attempts described, as. aforesaid, and all other public undertakings and at- tempts, tending to the common grievance, prejudice, and inconven- ience of his Majesty’s subjects, or great numbers of them, in their trade, commerce, or other lawful affairs, and all public subscrip- CHAP. I.] ST. 6 GEORGE I. 7 tions, receipts, payments, assignments, transfers, pretended assign- ‘ments and transfers, and all other matters and things, whatsoever, for furthering, countenancing or proceeding in any such undertak- ing or attempt, and more particularly the acting or presuming to act as a corporate body or bodies, the raising or pretending to raise transferable stock or stocks, the transferring or pretending to transfer or assign any share or shares in such stock or stocks, without legal authority, either by act of parliament, or by any charter from the crown, to warrant such acting as a body corporate, or to raise such transferable stock or stocks, or to transfer shares therein, and all acting or pretending to act under any charter, formerly granted from the crown, for particular or special purposes therein expressed, by persons who do or shall use or endeavor to use the same charters, for raising a capital stock, or for making transfers or assignments, or pretended transfers or assignments of such stock, not intended or de- signed by such charter to be raised or transferred, and all acting or pretending to act under any obsolete charter become void or voidable by non-user or abuser, or for want of making lawful elections, which were necessary to continue the corporation thereby intended, shall (as to all or any such acts, matters, and things, as shall be acted, done, attempted, endeavored, or proceeded upon, after the said four and twentieth day of June one thousand seven hundred and twenty) forever be deemed to be illegal and void, and shall not be practised or in any wise put in execution. , xix. And be further enacted by the authority aforesaid, that from and after the said four and twentieth day of June one thousand seven hundred and twenty, all such unlawful undertakings and at- tempts, so tending to the common grievance, prejudice, and incon- venience of his Majesty’s subjects, or a great number of them, in their trade, commerce, or other lawful affairs, and the making or taking of any subscriptions for that purpose, the receiving or paying of any money upon such subscriptions, the making or accepting of any assignment or transfer, or pretended assignment or transfer, of any share or shares upon any such subscription, and all and every other matter and thing whatsoever, for furthering, countenancing, or proceeding in any such unlawful undertaking or attempt, and more particularly the presuming or pretending to act as a corporate body, or to raise a transferable stock or stocks, or to make transfers or assignments of any share or shares therein, without such legal au- thority, as aforesaid, and all acting or pretending to act under any charter formerly granted from the crown for any particular or special purposes therein expressed, by persons making or endeavoring to make use of such charter for any such other purpose not thereby intended, and all acting or pretending to act under any such obsolete _ charter as is before described, and every of them (as to all or any such acts, matters or things as shall be so acted, done, attempted, en- 8 ST. 6 GEORGE I. [cHAP. 1. deavored or proceeded upon, after the said four and twentieth day of June one thousand seven hundred and twenty) shall be deemed to be a public nuisance, and nuisances, and the same, and all causes, matters, and things relating thereto, and every of them, shall forever hereafter be examined, heard, tried, and determined as common nui- sances are to be examined, heard, tried, and determined by or accord- ing to the laws of this realm; and all offenders therein, being thereof lawfully convicted upon information or indictment, in any of his Majesty’s courts of record at Westminster, or in Edinburgh, or in Dublin, shall be liable to such fines, penalties, and punishments, whereunto persons convicted for common and public nuisances are, by any of the laws and statutes of this realm, subject and liable; and moreover shall incur and sustain any further pains, penalties, and forfeitures, as were ordained and provided by the statute of provi- sion and premunire made in the sixteenth year of the reign of King Richard the Second. Nort. — This statute was repealed in 1825, 6 Geo. IV, c. 91. In Kinder v. Taylor, L.J. Ch. (Old Series) vol. 111, p. 68, decided in 1825, Lord Expov, in speaking of this statute, said (p. 81) that the courts had not explained or defined what it was that constituted acting as a corporation; that the statute supposes, and he himself confidently believed, that to act as a corporation, not being a cor- poration, was an offense at common law; that in dealing with trans- actions of this kind it should never be forgotten that there is com- mon law as well as a statute law; and that what may not be within the comprehension of the statute may, nevertheless, be within the prohibition of the common law. In Garrard v. Hardey, 5 Man. & Gr. 471, Tinpat, C. J., said (p. 483): ‘The raising and transferring of stock in a company can- not be held, in itself, an offence at common law.... We find no authority for holding that an allegation that the parties raised and transferred stock is simply, and per se, without any statement of the mode by which it injures or defrauds the public, an indictable offence at common law.” See, accord, Harrison v. Heathorn, 6 Man. & Gr. 81, 140; Re The Mexican & South American Co., 27 Beav. 474, 480. . This statute has, it is submitted, never been in force in any juris- diction in the United States, although it was not repealed until after the Revolution. See Phillips v. Blatchford, 137 Mass. 510. The legal possibility and consequences of corporate action, un- authorized by the State, are considered below in the Book on ‘Un- authorized Corporate Action.” CHAP, I.] FRANKLIN BRIDGE CO. v. WOOD. 9 B. Grant of Authority from the State. FRANKLIN -BRIDGE CO. v. WOOD. 14 Ga. 80. 1853. Assumpsit in Heard Superior Court. Tried before Judge Hint, May Term, 1853. Tye Franklin Bridge-Campany was incorporated under the Act of the Legislature of 1843, to prescribe the mode of incorporating com- “panies for-certain purposes, by an order of the Inferior Court of “Heard County. The company sued the defendant, Wood, for his cription to their stock. The defendant pleaded that the company was not legally in- corporated; contending that the act of the legislature, referred to, was unconstitutional and void. Upon argument, the court held that the act aforesaid, was uncon- stitutional, and non-suited the plaintiffs. To this decision plaintiff excepted. By the Court. — Lumpkin, J., delivering the opinion. Is the act of 1843, and that of 1845, amendatory thereof, pointing out the manner of creating certain corporations and defining their rights, privileges and liabilities, unconstitutional? By the first section of the act of 1843, it is provided “That when the persons interested, shall desire to have any church, camp ground, manufacturing company, trading company, ice company, fire com- pany, theatre company, or hotel company, bridge company, and ferry company, incorporated, they shall petition in writing the Su- perior or Inferior Court of the county where such association may have been formed, or may desire to transact business for that pur- pose, setting forth the object of their association, and the privilege they desire to exercise, together with the name and style by which they desire to be incorporated; and said court shall pass a rule or order, directing said petition to be entered of record on the minutes | of said court.” Section 2 enacts “That when such rule or order is passed, and said petition is entered of record, the said companies or associations shall have power respectively, under and by the name designated in their petition, to have and use a common seal; to contract, and be con- tracted with; to sue, and be sued; to answer, and be answered unto in any court of law, or equity; to appoint such officers as they may deem necessary; and to make such rules and regulations as they may think proper for their own government: not contrary to the laws of 10 FRANKLIN BRIDGE CO. ¥. WOOD. [cHAP. I. this State: but shall make no contracts, or purchase, or hold any property of any, kind, except such as may be absolutely necessary to carry into effect the object of their incorporation. Nothing herein contained shall be so construed as to confer banking or insurance privileges on any company or association herein enumerated; and the individual members of such manufacturing, trading, theatre, ice, and hotel companies, shall be bound for the punctual payment of all the contracts of said companies, as in case of partnership.” By the act of 1845, the provisions of the act of 1843 are extended to all associations and companies whatever, except Banks and In- surance companies: and the individual members of all such incor- porations are made personally liable for all the contracts of said as- sociations or companies. (Lbid.) The argument against the validity of the charter of the Franklin Bridge Company, created under these statutes, is this: [1.] That in England, corporations are created and exist by pre- scription; by royal charter; and by Act of Parliament. — With us, they are created by authority of the legislature, and not otherwise. That to establish a corporation, is to enact a law; and that no power eee poe can do this. ; at legislative power is vested, under our constitution, in the General Assembly, to consist of a Senate and House of Repre- sentatives, to be elected at stated periods, by the citizens of the re- spective counties. [3.] And that the General Assembly is bound to exercise the power of making laws, thus conferred upon them, by the people, in the primordial compact, in the mode therein prescribed, and in none other; and that a law made in any other mode is unconstitutional and void. That the legislature is but the agent of their constituents; and that they cannot transfer authority delegated to them to any other body, corporate or otherwise — not even to the judiciary, a coérdinate department of the government, unless expressly empow- ered by the constitution to do so. That to do this, would be to violate one of the fundamental maxims of jurisprudence, as well as of political science, namely: delegata potestas, non potest delegari. That to do this, would not only be to disregard the constitutional inhibition, which is binding upon the representative, but by shifting respon- sibility, introduce innovations upon our system, which would result in the overthrow and ultimate destruction of our political fabric. The constitutional inquiry thus presented is an exceedingly grave one. It reaches far beyond the case made in the bill of exceptions, and extends to the whole range of topics which fall under legislative cognizance. In the view we take, however, of the statutes before us, no such proposition as that which has been discussed, is presented for our adjudication. And we rejoice that it is so — not only on ac- count of the delicacy of the task, in pronouncing an act of the legis- CHAP. 1.] FRANKLIN BRIDGE CO. v. WOOD. 11 lature unconstitutional and void; one which is never justifiable, un- less the case is clear and free from doubt; and even then, one might almost be forgiven for shrinking from the performance of a duty, which would be productive of such incalculable mischief and con- fusion. Bridges have been built at a heavy expense; manufacturing and innumerable other associations, have been formed in Georgia, and are in-full operation, under charters incorporated under this law. And in view of the consequences, any court might hesitate, unless the repugnance between the statute and the constitution was so: pal- pable as to admit of no doubt, and produce a settled conviction of their incompatibility with each other. [4.] It was formerly asserted, that in England, the act of incor- poration must be the immediate act of the king himself, and that he could not grant a license to another, to create a corporation. (10 Reports, 27.) But Messrs. Angell and Ames, in their treatise on corporations, state that the law has since been settled to the con- trary; and that the king may not only grant a license to a subject to erect a particular corporation; but give a general power, by charter, to erect corporations indefinitely; on the principle that qui facit per alium, facit per se; that the persons to whom the power. is delegated, of establishing corporations, are only an instrument in the hands of the Government. (1 Kyd 50; 1 Black. Comm. Ang. & Am. 63.) Before the Revolution, charters of incorporation were granted by the proprietaries of Pennsylvania, under a derivative authority from the Crown; and those charters have since been recognized as valid. (8 Wilson’s Lectures, 409.) A similar power has been delegated by the legislature of Pennsylvania, with regard to churches. (7 8. & R. 517.) The acts of the instrument in these cases, become the acts of the mover, under the familiar maxim above mentioned. (See also 1 Missouri R. 5.) [5.]_Our opinion is, that no legislative power is delegated to the courts by the acts under consideration. There is simply a ministerial act to be performed — no discretion is given to the courts. The duty of passing the rule or order, directing the peiition of the corporators ip e entered of record on the minutes of the court, setting forth to the public the object of the association, and the privilege they desire to exercise, together with the name and style by which they areto-be called and known, is made obligatory upon the courts; and should they refuse to discharge it, a mandamus would lie to coerce them. ‘Tris true, the legislature has seen fit to use the courts for the purpose of giving legal form to these companies. But it might have been done in any other way. Under the free banking law of 1838, instead of petitioning the court, and having the order passed and entered upon its minutes, the certificate, specifying the name of the association; its place of doing business; the amount of its capital stock; the names and residence of the shareholders; and the time for which the com- 12 FRANKLIN BRIDGE CO. v. WOOD. [CHAP. I. pany was organized, is required merely to be proven, and acknowl- edged, and recorded in the office of the clerk of the Superior Court, where any office of the association is established, and a copy filed with the comptroller-general. (Cobb’s Digest, 107, 8.) And so under the act of 1847, authorizing the citizens of this State, and such others as they may associate with them, to prosecute the business of manufacturing, with corporate powers and privileges. The persons who propose to embark in that branch of business are required to draw up a declaration, specifying the objects of their association, and the particular branch of business they intend carry- ing on, together with the name by which they will be known as a corporation, and the amount of capital to be employed by them; which declaration is required to be first recorded in the clerk’s office of the Superior Court of the county where such corporation is located, and published once a week for two months in the two nearest ga- zettes: which being done, it is declared that said association shall become. a body corporate and politic, and known as such, without being specially pleaded in all courts of law and equity in this State; to be governed by the provisions, and be subject to the liabilities therein specified. (Cobb’s Digest, 439, 440. ) In these two instances, and others which might be cited, the leg- islature have dispensed with the action of the courts, or of any other agency to carry out their enactments, with regard to these various associations; which have become the usual and favorite mode of con- ducting the industrial pursuits of the civilized world in modern times. All these statutes were complete as laws when they came from the hands of the legislature; and did not depend for their force and efficacy upon the action or will of any other power. It is true that they could only take effect upon the happening of some event, such as the filing the petition or declaration, and giving publicity to the urpose of the association, in the mode prescribed by the act. But i this were a good reason for regarding these statutes as invalid, then how few corporations could abide the test. For it requires the ac- ceptance of the charter, to create a corporate body; for the Govern- ment cannot compel persons to become an incorporated body, without “their consent. And this consent, either express or implied, is generally subsequent, in point of timé, to the creation of the charter. And yet, no charter that we are aware of, has been adjudged invalid, because the law creating it and previously defining its powers, rights, capaci- ties and liabilities, did not take effect until the acceptance of the corporate body, or at least a majority of them was signified. The result, therefore, of our deliberation upon this case is, that the acts of 1843 and 1845, vesting in all associations, except for bank- ing and insurance, the power of self-incorporation, do not impugn the constitution; and that the charter of the Franklin Bridge Com- CHAP. I.] FRANKLIN BRIDGE CO. v. WOOD. 13 ny, and all others, created under them, and in conformity to their prove ope legal aa valid, Waele policy of these statutes, we ‘have nothing to do. The province of this, and all other courts, is jus “dicere, not jus dare. Judgment reversed. Notr. — Matter of N. Y. Elevated R. R. Co., 70 N. Y. 327. The legislature authorized certain commissioners to determine whether ‘elevated and underground railroads were necessary, and, if any -particutar- proposed railroad was found to be necessary, to fix the route, prescribe the plan of construction, and fix the amount of capital stoc € formed for the purpose of build- ing such railroad. The court held this act to be constitutional. Hart, J., said (p. 348): “It is objected that the act is unconstitutional, be- cause it delegates legislative power to the mayor’s commissioners. . . The act’ rests upon the legislative will, and in no way depends for its vitality upon the action o: ers. Corporati der the act derive their franchises from the legislature, _and in no proper sense from the commissioners. The commissioners “perform no legislative acts; they enact no laws; they simply perform administrative acts in carrying the law into effect and applying it. The legislature is required by the Constitution to pass general laws for the formation of corporations (art. 3, § 18;_art. 8), and. it has— —passed general taws for the formation of sll kinds of corporations m such cases, it does not directly confer corporate franchises; it ‘simply provides the mode in which such franchises may be acquired by those desiring them. Ordinarily, individuals desiring to’ incor- porate under a general law determine for themselves the necessity of a corporation, their corporate name, what business they will carry on, where they will transact it, the amount of their capital and the duration of their corporating. In making such determinations, it, was never supposed that they were engaged in acts of legislation, or that “they conferred upon themselves corporate franchises. They simply “act under, apply and carry into effect a law in reference to which legislative power has been properly evoked. But suppose, instead of leaving the determination of these matters to individua __ Provides a tribunal to make the determination for the individuals 1s there any more delegation of legislative power to the tribunal than to the individuals, under the general laws as they are now usually framed? Cannot the_legislature_confer_upon_a_commission_the — power, upon the application of i : mination for the individuals which they could make for Hhemedlves? e proper answers to these questions are not doubtful. The argu- ments made to show that the legislature was not competent to devolve upon these commissioners the powers given to them in this act, if sound and logically applied, would nullify every general law 14 PENOBSCOT BOOM CORPORATION ¥v. LAMSON. [CHAP. L found upon our statute books for the formation of corporations, and thus nullify the Constitution itself, which commands the passage of such general laws.” See also Granby Mining Co. v. Richards, 95 Mo. 106, 112. But cf. State v. Armstrong, 3 Sneed (Tenn.) 634, 652. PENOBSCOT BOOM CORPORATION v. LAMSON. 16 Me. 224. 1839. CHAPTER 236 of the Special and Private Acts for 1832, passed by the legislature of Maine, provided: ‘Rufus Dwinal, his associates and successors, be and hereby are constituted a body corporate, by the name of the Penobscot Boom Corporation, and shall so continue for the term of thirty years — and by that name may sue and be sued; have a common seal, make by-laws not repugnant to the laws of this State for the management of their corporate concerns, and have and enjoy all the rights and powers of similar corporations.”’ Permission to erect a boom across the Penobscot River was given to such cor- poration. __/ Suit was brought in thename of the Penobsoot Boom Corpora tion for boomage of logs, asserted _to belong to the defendants.The —defendants denied there was such a corporation, alleging there had been no organization under the said act, and no officers elected. SuepLey, J. The existence of such a corporate body is denied, and it is said that it does not come within the legal description of a corporation, either sole or aggregate, as defined by any code of laws. Corporations originating according to the rules of the common law, must be governed by it in their mode of organization, in the manner of exercising their powers, and in the use of the capacities conferred. And when one claims its origin from such a source, its rules must be regarded in deciding upon its legal existence. The legislature may however create a corporation, not only without conforming to such rules, but in disregard of them; and when a corporation is thus created, its existence, powers, capacities, and the mode of exercising them, must depend upon the law of its creation. Jt was the pleas- ure of the legislature in this case to create a corporate body, without requiring a conformity to the usual mode of organization known to “the taw. The prantisto-one person, who was at liberty to associate others, or to have a succession without it. No provision is made for a division of the property allowed to be held into shares, or for the call of any meeting, or the choice of a clerk, or any other officer, or the keeping of any records, or any mode of organization. And yet many important powers and privileges are granted with an evident design to permit their exercise. The grant being to one person and without CHAP. 1.]} STATE UY. DAWSON. 15 any such provisions, the inference necessarily is, that it was the in- . tention of the legislature to permit that one person or his successor to exercise all the corporate powers, and to make his acts, when acting upon the subject matter of the corporation and within its sphere of “action and grant of power, the acts of the corporation. There does not appear to be any other mode of carrying into effect the intention of the legislature. STATE v. DAWSON. 16 Ind. 40. 1861. Apprat from the Clark Circuit Court. Perkins, J. Information against the defendants, charging that they are pretending to be a corporation, and to act as such, when they are not a corporation. It charges that in January, 1849, the legisla- ture of the State of Indiana enacted a special charter of incorpora- tion (which is set out at length) for a railroad from Fort Wayne, Indiana, to Jeffersonville, to be called the Fort Wayne and Southern Railroad; that the persons named in the charter as directors did not accept said charter till June 2, 1852, when they did meet and accept — the same, and organize under it. It is alleged that the defendants are assuming to act under said charter, never having organized under any other. The court below sustained a demurrer to the information; thus holding the defendants to be a legal corporation. The present constitution of Indiana took effect on November 1, 1851. It contains these provisions: — =< Gee “All laws now in force and not inconsistent with this constitu- tion, shall remain in force, until they shall expire or be repealed.” Sched. (1 sub. sec.) of Const. “Corporations, other than banking, shall not be created by special act, but may be formed under general laws.” Art. 11, sec. 13. All acts of mcorporation for municipal purposes shall continue in force under this constitution, untit such time ‘as the General As- sembly shall, in its discretion, modify or repeal the ‘same. ” Sched. supra, sub. sec. 4. The charter for the Fort Wayne and Southern Railroad was not a charter for municipal purposes, and, hence, was not specially con- tinued in existence. Art. 11, sec. 13, above quoted, prohibits the ion of a corporation by special act or charter, that is, as we con- strue the prohibition, through, or by virtue of, such special act or charter, after November 1, 1851. The policy that induced the pro- hibition, as well as its literal import, demands this construction. It is necessary for us to ascertain, then, when the defendants, if ever, were created a corporation. The simple enactment of the charter for the corporation, by the legislature, did not create the corporation. 16 STATE v. DAWSON. [cHAP. I. It required one act on the part of the persons named in the charter to do that, viz.: acceptance of the charter enacted. ays Grant, in his work on Corporations (vide p. 13): “Nor can a charter be forced on any body of persons who do not choose to “aecept it.” And again, at page 18, he says, ‘The fundamental rule is this: no charter of incorporation is of any effect until itis accepted by a majority of the grantees, or persons who are to be the corporators under it. Bagge’s case, 2 Brownl. & G. 100; s. c. 1 Roll. Rep. 224; Dr. Askew’s case, 4 Burr. 2200; Rutter v. Chapman, 8 M. & W. 25; per Witmort, J., Rex v. Vice-Chancellor of Cambridge, 3 Burr. 1661. This is analogous to the general rule that a man can not be obliged to accept the grant or devise of an estate. Townson v. Tickell, 3 B. & Ald. 31.” See, also, Ang. & Am. sec. 83, where it is said, if a charter is granted to those who did not apply for it, the grant is said to be in fiert till acceptance. We need not inquire whether this rule ex- tends to municipal corporations in this country. As to what may constitute an acceptance we are not here called on to decide, as the information expressly shows that there was none in this case till June, 1852, which fact is admitted by the demurrer. The grant of the charter in question, then, to those who had not applied for it, was but mn offer, on the part of the Btster a consent that the persons named in the charter might become a corporation, “might be created such an artificial betng, by accepting the charter. offered. But an offer, till accepted, may be withdrawn. _In this case, “the offer made by the State, in 1849, was withdrawn by the State, November 11851, by then declaring that no corporation, aiter that ate, should be created except pursuant to regulations which she, ‘in future, through her legislature would prescribe. This pretended corporation, then, was not created before No- vember 1, 1851; and it could be created afterward only by the concur- rent consent of the State and the corporators. But, at that date, the constitution prohibited both the State and corporators from giving consent to such a corporation, to wit: one coming into existence “through a special charter; and hence necessarily prohibited the crea- tion thereof. This decision accords with that of the Supreme Court ~of the United States in Aspinwall v. Daviess County, 22 How., p. 364; where it was held that the new constitution prohibited a subscrip- tion of stock to the Ohio and Mississippi Railroad Company, au- thorized by the charter of the corporation, granted under the former constitution, and actually voted by the people of the county, under that constitution. Whether, as a matter of fact, the charter in this case was accepted under the old constitution, must be determined on a trial of the cause below. . Had the provision in our constitution, like that on this subject in the Constitution of Ohio, ordained that the legislature should “pass CHAP. I.] ELLIS . MARSHALL. 17 no special act conferring corporate powers,” the restraint would clearly have been imposed alone upon future legislative action; but, in our constitution, the restraint is plainly imposed upon the creation, the organization, of the corporation itself. See The State v. Roosa, 11 O. St. R. 16. Per Curiam. — The judgment is reversed, with costs. Cause remanded for further proceedings in accordance with this opinion. ELLIS v. MARSHALL 2 Mass. 269. 1807. EsectmEent. The plaintiff claimed under a sale by the “Front Street Corporation in the town of Boston,” established by a law of the Commonwealth, passed March 6, 1804. 3 Mass. Special Laws, 375. By this statute sundry persons, and amongst them the de- fendant, Marshall, described as ‘being owners and proprietors of the. lands and flats over which the said street will pass, and of the lands and flats adjoining thereto,” are incorporated for the purpose of making a street in the town of Boston. By the third section of the statute, the corporation are authorised to assess upon all the owners and proprietors of said land and flats, according to the proportion they severally hold therein, such sums of money as shall be agreed upon by the said proprietors, or the major part of such of them as shall be assembled at any legal meeting to be called for that purpose; and if any of the said proprietors shall neglect or refuse to pay the sums of money duly assessed upon him therefor, for the space of three months, the proprietors are authorised to sell, at public auc- tion, so much of such delinquents share of said lands and flats as shall be sufficient to pay the sums so assessed, and the charges of sale: and the said proprietors may, by their clerk or committee, exe- cute a good deed to the purchaser in fee simple. At the last March term the parties agreed on the following state of facts, viz. “That the act, creating the Front Street Corporation, was passed in consequence of the petition to the General Court, of the major part in number and interest of the owners of the land over and ad- joining to which the said Front Street is built, but that the said Marshall, who was one of the said owners, did not subscribe the said petition. “That a committee of the General Court, to whom the said peti- tion was duly referred, to hear all persons interested, and to report, after giving public and general notice to all persons, heard such per- sons as appeared, and reported that the said petition be granted, pursuant whereto, the said act was passed; but that the said Mar- 18 ELLIS ?. MARSHALL. (CHAP. I. shall did not appear before the committee, nor by word or in writing assent to the said petition, or to the passing of the said act. “That there is no other William Marshall, proprietor of lands and flats, adjoining said street, but the defendant, and none other known to the parties, to whom the said act can apply; and that the Court shall consider the defendant and William Marshall, named in the said act, as the same person, if the facts before agreed to should, in the opinion of the court, be sufficient for a jury so to find. “That, after the said act passed, the said Marshall was regularly notified to attend at all the meetings of the said corporation, but did not attend at any of them; and that the said Marshall’s land adjoining said Front Street is benefited by the said street in the same proportion, as the other lands adjoining the said street are benefited. “That on the twelfth day of May, a.p. 1804, being after the said street was begun to be built, and before it was finished, the said Mar- shall was requested by the said proprietors to join them in a cove- nant, wherein they mutually agreed not to erect any buildings within ten feet of the western side of said street, which he refused; but, as a substitute, a separate instrument was signed by him for that pur- pose, which contains the following provision, ‘Provided however, that this instrument, or any thing herein contained shall not be con- sidered as binding the said William Marshall to pay any part of the expence of making the road aforesaid, but the legal rights and rem- edies of all parties concerned in that respect shall remain the same as if this instrument had not been made.’ “That on the tenth day of October last the land demanded in this action, being part of said Marshall’s estate adjoining said street, was sold at public auction, according to the rules and regulations of the Corporation, and the powers granted in said act, for the purpose of raising the amount of the assessment taxed on him by said Corpora- tion, as being towards his proportionate part of the expence of mak- ing said street, which, though often requested, he had refused to pay, and a deed of conveyance thereof was accordingly given by said Corporation to said Ellis, to hold the premises demanded, to him in fee simple. ‘—“*TT¥ on the foregoing facts the court should be of opinion that the said Corporation could, by virtue of the said act, legally assess the said Marshall, and sell his lands for non-payment thereof, then it was agreed that the defendant should be defaulted, and judgment should be rendered for the plaintiff; otherwise the plaintiff was to become nonsuit, and judgment be rendered for the defendant. And it was further agreed that, if any facts contained in the above statement could not by law be given in evidence to a jury in the trial of the cause, then such facts are to be considered as no part of the state- ment. CHAP. I.] ELLIS v. MARSHALL. 19 Parker, J., after a brief recapitulation of the facts in the cause, delivered the opinion of the court as follows. From the foregoing facts and the arguments thereon by the coun- sel, it appears that all the proceedings of the corporation relative to the assessment and sale were correct; so that if Marshall were, at the time thereof, a member of the corporation, the title to the demanded premises in Ellis could not be disputed. We are therefore necessarily brought to the question, indeed the only one in the case, whether Marshall, by virtue of the act aforesaid, “became a member of the said corporation, subject to its rules and regulations, and liable to be assessed for the purpose of building said “street. = The counsel for the plaintiff have contended. That by virtue of the act itself, Marshall being named therein, he became ipso facto a member of the corporation, the legislature haying competent power to compel him thereto: dly. That should this not be the case, the foregoing facts con- tain sufficient evidence of his consent, tacit at least, to the passing of said act, and the insertion of his name therein. The determination of the first point requires that we should ascer- tain the true nature and character of this legislative proceeding. If it were a public act, predicated upon a view to the general good, the question would be more difficult. If it be a private act, obtained at the solicitation of individuals, for their private emolument, or for the improvement of their estates, it must be construed, as to its effect and operation, like a grant. We are all of opinion that this was a grant or charter to the individuals who prayed for it, and those who should associate with them; and all incorporations to make turnpikes, canals, and bridges must be so considered. Can then one, whose name is by mistake or misrepresentation in- serted in such an act, refuse the privileges it confers, and avoid the —purthens it imposes? If he cannot, then the legislature may, at all “times, press into the service of such corporations those whose lands may be wanted for such objects, whenever they may be prevailed on to insert the names of such persons, by the intrigue or mistake of those more interested in the success of the object. No apprehension exists in the community that the legislature has such power. That the land of any person, over or through which a turnpike or canal may pass, may be taken for that purpose, if the legislature deem it proper, is not doubted. The constitution gives power to do this, pro- vided compensation is made. But it was never before known, that they have power over the person, to make him a member of a cor- poration, and subject him to taxation, nolens volens, for the promo- see ante at a man may refuse a grant, whether from the government or an individual, seems to be a principle too clear to require the sup- 20 MIDDLESEX HUSBANDMEN J. DAVIS. [CHAP. I. port of authorities. That he may decline to improve his land, no one will doubt. Although the legislature may wisely determine that acer- tain use of his property will be highly beneficial to him, he has a right Ist. Because these estates can only exist in the corporation, which alone can acquire it, alone be seized or possessed of it, alone pass it away, manage or repair it, and so must hold it entire; and that the corporation is a moral person to all the purposes of property. Its tenure is to their successors, or to their successors and assigns; these estates never can vest in or be divided among the individual mem- bers, to hold as tenants in common, etc., in their private capacities. Only the corporation can forfeit the estate, and that only by for- feiting their charter; and only the corporation can be taxed for it on common law principles; and on these can it alone be taken in execu- tion for the debts of the corporation; and on a dissolution of the cor- poration, ‘‘its lands revert to the grantor, or his heirs, and the debts due to or from it are totally extinguished; so that the members of it cannot recover or be charged with them in their natural capacities.” CHAP. I11.] RUSSELL v. TEMPLE. 83 And a grant to a corporation can only be for its life or continuance. 2 Bl. Com. 484; 1 Lev. 239; 1 Bac. Abr. 510. The case of the Royal Exchange Insurance Company v. Vaughan, 1 Burr. 155, and Cowper, 79 to 86, Gardner’s Case. 2d. Because the share is personal estate, though the corporation hold real estate; for the individual member has no estate, but only a right to such dividends as the corporation, from time to time, assign to him. He is unknown on the grants made to it, and he cannot grant any part of the estate; nor can he be taxed for it but by statute law; nor can any private member of a corporation be distrained for a public concern of it; his only remedy for his dividend is case in as- sumpsit, or an action on the case for a wrongful refusal or neglect to pay or allow.him his part of the profits. 4 Wood’s Con. 489, etc.; Cowp. 85; Impey’s Modern Pleader, 83; 1 Vent. 351; Dutch v. War- ren, 1 Stra. 406; same case, 2 Burr. 1011. So lands may be real estate in one, yet the trees or corn growing on them may be personal estate in another. Lifford’s Case, 6 Co. 46 to 50; Imp. M. P. 167. For the heirs it was urged that these shares were real estate, be- cause it was said the estates were real in the corporations; annexed to the soil; and that if these estates in the corporations were real, the estates of the individual members in them followed their nature, and were real; and that the frequent declarations of the legislature de- claring such shares personal estate, at least shew a doubt: that when one has a right to receive rent, he has only a right to receive a sum of money; yet it does not follow that his estate is not real estate, out of which his rent issues. The judgment of the court was, that these shares were personal estate, and distribution was ordered accordingly. The principal rea- son of the decision appears to be, because the court considered that the individual member, or shareholder, had only a right of action for a sum of money, his part of the net profits, or dividends. And so the law has been ‘held to be since this decision was made. Note. — While, in a broad sense, the corporation holds its prop- erty for the benefit of its shareholders, the relation between the cor- poration and its shareholders is a legal, not an equitable, relation. The property of the corporation cannot be attached to recover a debt against a shareholder. Williamson v. Smoot,7 Martin (La.) 31. Service upon the X corporation does not bring the Y corporation before the court, even though the Y corporation owns practically all the stock of the X corporation. Peterson v. Chicago Ry. Co., 205 US. 364. 84 PARKER v. BETHEL HOTEL CO. [CHAP. III. PARKER ». BETHEL HOTEL CO. 96 Tenn. 255. 1896. Appra from Chancery Court of Maury County. On May 24, 1880, P. C. Bethel, W. D. Bethel, Lucius Frierson, Eugene Pillow, J. M. Mayes, and L. W. Black became incorporated, under the laws of the State of Tennessee, as the Bethel Hotel Com- pany. The business of this corporation, as declared in its charter, was the erection, furnishing, and operation of a hotel in the town of Columbia, Tenn., the hotel building to include storehouses and a con- cert hall. The charter was taken out under chapter 142 of the acts of 1875, and was in the form prescribed for hotel companies, except that words were added authorizing it to build and own storehouses and a concert hall. The corporation was duly and regularly organ- ized, with a capital stock of $100,000, divided into shares of $50 each. After its organization, the building contemplated by the charter was erected on a*lot owned by the corporation. The building was used partly for a hotel, and partly for other purposes. September 1, 1885, the Bethel Hotel Company and Lucius Frierson conveyed to Mayes & Dodson the “hotel proper part” of the building, by deed signed “Bethel Hotel Company, W. D. Bethel, President; Lucius Frierson, Secretary and Treasurer; and Lucius Frierson.” This conveyance was authorized by a vote of the stockholders at the last meeting ever held by them. No business seems to have been transacted by the corporation after this time. On or about August 28, 1886, Frierson became the owner of all the stock of the company; but, both before and after that date, he pledged various shares as security for debts of his which are still outstanding. The stock so pledged was not trans- ferred on the books of the company. He used the remainder of the building as his own up to January 12, 1892, when he executed a deed in his own name, purporting to convey to Webster, in trust, the real estate owned by the Bethel Hotel Company and certain stock in that company. The purpose of this deed was to secure the payment of. certain debts owing by Frierson, preferring one creditor and pro- viding for pro rata payment of the others. Most of the creditors of Frierson who had loaned him money on the stock of the Bethel Hotel Company were not provided for in the deed of trust. Parker et al., creditors of Frierson and pledgees of said stock, filed a bill in equity, praying (inter alia) to annul the trust deed to Webster. The cause was heard before the Chancellor of Maury County, and afterwards before the Court of Chancery Appeals, from which the case was taken to the Supreme Court. J. C. Braprorp, Sp. J. It may be regarded as settled, therefore, that the legal title to the property conveyed to defendant, Webster, was, at the date of that instrument, in the Bethel Hotel Company, CHAP. 111.] PARKER v. BETHEL HOTEL Co. 85 where it had been, unquestioned and undisturbed, since 1880, the year of its incorporation and organization. Defendants insist that, although Frierson may not have been invested with the legal title, he, nevertheless, had such an equitable estate and interest as entitled him to sell and dispose of the property. In other words, that he was the real owner of the property, and, as such, had the absolute right to use or dispose of it. This alleged equitable estate was not the creation of any deed or written contract, executed by the Bethel Hotel Company, or of any corporate act or resolution adopted by the stockholders or directors, which in terms referred to or defined it, but is rather the result and consequence of certain facts and conditions, the existence of which is affirmed by the defendants. It is said that the Bethel Hotel Company, by the alienation of that part of its property built for and adapted to the uses and purposes of a hotel, deprived itself of the means of conducting a hotel business, and that, since 1885, the date of the sale to Mayes & Dodson, it had ceased to exercise its corporate franchises; that the stockholders, at the meeting held in September, 1885, passed a resolution, or agreed among themselves, that the corporation should go into liquidation, and that Lucius Frierson, being then the owner of all the capital stock of the corporation, became, in consequence, the equitable owner of all its property, with full power to use it or dispose of it in such manner as he might choose to do. The position of the defendants seems to be that all rights of the corporation in the property were extinguished, that it had ceased to be affected with any corporate uses, and that it belonged absolutely to Frierson. The facts affirmed by defendants are not all of them exactly as found by the Court of Chancery Appeals. It is true that the corpora- tion sold and conveyed the hotel part of its building to Mayes & Dodson, retaining only the stores and opera house, and never after- wards engaged in the business of owning and operating a hotel. Lucius Frierson was not the sole stockholder in 1885, when the hotel wassold, and did not become such until August 28, 1886, when he purchased the Bethel stock. His stock, or a large part of it, at that time and subsequently, was held as collateral security by other par- ties. It is not true that a resolution was ever adopted by the stock- holders directing the liquidation or winding up of the affairs of the corporation, or that they were ever wound up. The facts, as found by the Court of Chancery Appeals on this point, are stated in its opinion in the following words: “It may be fairly inferred, though it does not distinctly appear in terms in the proof, that when the deed was made to Mayes & Dodson it was then understood between W. D. Bethel and Lucius Frierson, they then owning practically all, or nearly all, of the stock, that Bethel should take the proceeds of the sale to Mayes & Dodson, amounting to $22,500, and a sufficient 86 PARKER v. BETHEL HOTEL Co. [CHAP. III. amount, in addition, from Lucius Frierson, personally, to make $30,- 000, and for this he would transfer his stock, $61,000, to Frierson, and that this arrangement was consummated, so far as it could be done without direct corporate action of the corporation itself, by the paper of August 28, 1886, made by Bethel to Frierson, and this is what they understood by the resolution to go into liquidation, there being no debts due by the corporation, and, following out this idea, from the date of the sale to Mayes & Dodson, Lucius Frierson proceeded to treat the property as his own, on the idea that he himself constituted the corporation. We do not think that he entertained the idea that the corporation was defunct, but simply that he was, himself, the corporation, and could do what he wished with the assets.” i In considering the position of the defendants, that Frierson be- came the equitable owner of the assets of the corporation, we must, therefore, leave out of view the idea that there was any corporate action looking to a dissolution of the corporation and winding up of its affairs. Frierson’s estate or interest in the property, if he had any, rests on the postulate that, in consequence of the nonuser of its fran- chises and his sole proprietorship of ail its capital stock, the corpora- tion was dissolved, and he became the equitable owner of all its property. A corporation can be dissolved, and its existence wholly termi- nated, only. by the extinguishment of the corporate franchises con- ferred by the State. An ordinary business corporation, where its charter specifies no definite time for its continuance, may sell its property and wind up its affairs whenever a majority of the stock- holders may deem it advisable (Treadwell v. Salisbury Mfg. Co., 7 Gray, 393; Black v. Delaware & C. Canal Co., 22 N.J. Eq. 416); but the franchises conferred upon the stockholders by the State are not extinguished by the cessation from business thus brought about. 2 Morawetz on Corp., § 1004. It is claimed by the defendants that the dissolution of the corpora- tion was effected by the fact that Lucius Frierson became the sole owner of all its capital stock. Admitting it to be true that he was the owner of all the stock of the corporation, it by no means follows that the corporation was thereby dissolved and forfeited its fran- chises. On this question the latest text writer on corporation law has this to say, viz.: ‘Contrary to early opinion, it is now generally held that the fact that all the shares in a joint-stock company have passed into the hands of two members, or even into the hands of a single person, does not, tpso facto, work a dissolution of the corporation, since such sole owner may so dispose of the shares, as, by the election of the necessary directors and officers, to continue the corporate existence.” 5 Thompson’s Commentaries on the Law of Corpoza- tions, § 6653. And, in 2 Morawetz on Corporations, § 1009, it is said:. “Tt is well settled that all the shares of a corporation may be held CHAP. 111.] PARKER V. BETHEL HOTEL CO. 87 by a single person, and yet the corporation continue to exist, and, if the charter or by-laws should require certain acts to be done by more than one shareholder, the sole owner may transfer a portion of his shares to other persons, so as to conform to the letter of the rule.” It has been held that a corporation which has sold all its assets, with the intention of putting an end to its business, whose officers had all resigned, and whose stockholders had all transferred their shares to a single person, was, nevertheless, not dissolved, and that its exist- ence could be terminated only by judgment of forfeiture or by sur- render accepted by the State. Russell v. McLellan, 14 Pick. (Mass.) 69, 70; Newton Mfg. Co. v. White, 42 Ga. 148; Baldwin v. Canfield, 26 Minn. 48. : ; The dissolution of a pecuniary or business corporation is effected in one of the following ways, viz.: (1) by the expiration of its charter; (2) by Act of the Legislature, where power is reserved for that pur- pose, or there is no constitutional inhibition; (3) by surrender of charter which is accepted; (4) by forfeiture of the franchises and judgment of dissolution pronounced by a Court having jurisdiction. 2 Morawetz, § 1004; Taylor on Private Corporations, § 430. It is not pretended that the Bethel Hotel Company was dissolved in either of the ways indicated. The charter of the corporation has not expired, neither has it been repealed by the Legislature, or been sur- rendered to the State by its members or stockholders. It may be true that there was a nonuser of its franchises by the corporation for a period of seven years or more, occasioned by the sale of the only property it owned which could have been used for hotel purposes. Undoubtedly the nonuser of its franchises by a corporation is ground for dissolution and forfeiture of its charter, at the instance of the State; but until sentence of dissolution has been pronounced by a court of competent jurisdiction, in a proper proceeding instituted for the purpose, the corporation will continue to exist, notwithstand- ing its failure to use its franchises. And forfeiture can only be de- creed in a proceeding directly instituted for the purpose, by the State granting it. Code (M. & V.) § 1712; State v. Butler, 15 Lea, 104, 110; Jersey City Gaslight Co. v. Consumers’ Gas Co., 40 N.J. Eq. 427; Broadwell v. Merritt, 87 Mo. 95. Until dissolution has been thus judicially pronounced, neither the existence of the corporation nor its title to its property can be questioned collaterally. We are bound to conclude, therefore, that the Bethel Hotel Com- pany was not dissolved, or its franchises extinguished for any of the reasons alleged by the defendants, and that it is now a corporation endued with life, with authority to own property and exercise all the powers conferred on it by its charter. Defendants insist that the alleged equitable estate of Lucius Frier- son in the property of the Bethel Hotel Company did not depend alone upon the dissolution of the corporation, but resulted also from 88 PARKER v. BETHEL HOTEL CO. [CHAP. III. the fact that he was the sole owner of all its capital stock. The proposition is, that if one person owns all the shares of stock of a cor- poration which owes no debts, he, in virtue of such ownership, be- comes the equitable owner of all its property, or, at least, may sell and dispose of it by deed, if he choose to do so. This proposition is argued by counsel for defendant with force and ability, and is sup- ported by some authority. It has found favor with the Supreme Court of Maryland (Swift v. Smith, 65 Md. 428, 433); but the de- cision of that learned court is opposed by the current of authority, and seems to us to overlook and ignore certain principles that are fundamental. A corporation and its shareholders are distinct legal entities. In Keith v. Clark, 4 Lea, 718, this court held that, notwithstanding the State owned all the stock in the Bank of Tennessee, ‘‘the bank and the State are entirely different legal entities,” and, in Ivllard v. Porter, 2 Head, 175, it was said, ‘stockholders are totally distinct from the corporation.” Important consequences result from this rule. The shareholders are neither responsible for the debts nor for the torts of the corporation. In the absence of special circumstances, the shareholders cannot be parties, either plaintiffs or defendants, in actions respecting corporate rights, nor have they any title or direct interest in the property of the corporation. “Shareholders,” says Thompson, “are not joint tenants or in any other sense co-owners of the corporate property, either before or after its dissolution. The title to it rests exclusively in the legal en- tity called the corporation. A share of the capital stock merely gives the right to partake, according to the amount put into the fund, of the surplus profits of the corporation, and ultimately, on the dissolu- tion of it, of so much of the fund thus created as remains unimpaired’ and is not liable for debts of the corporation.” Commentaries on the Law of Corporations, § 1071. As the shareholders have no direct interest in the corporate property, they cannot convey the real-estate of the corporation, though all join in the deed. In Wheelock v. Moulton, 15 Vt. 519, Rupriexp, J., stated the rea- sons for the rule in his usual clear and accurate style. In that case, Moulton and Hutchinson, sole proprietors and owners of all the stock of a corporation, conveyed its real estate, in mortgage, to secure the repayment of money borrowed of the plaintiff, Wheelock. He brought suit to enforce his mortgage. Judge Reprietp said: ‘The fact that the signers of this deed owned the whole of the shares will make no difference in regard to the necessity of a vote of the corpo- ration, in order to convey the land. The title to the land was in the corporation, not in the individual shareholders. The deed of one, or of any number of the stockholders, will not affect the title to the land. The share owners are not tenants in common of the land. They have no title whatever to any of the property of the corporation. It CHAP. I11.] PARKER ¥. BETHEL HOTEL CO. 89 is true that one who owned all the shares might control the corpora- tion, and so he could if he owned a majority of the shares; but he could, in either case, do it only by a vote of the corporation, at a meeting held in strict accordance with the statutes of the corpora- tion.” And in Humphreys v. McKissick, 140 U.S. 304, Mr. Justice Frep, discussing the same question, said: “The property of a corporation is not subject to the control of individual members, whether acting separately or jointly. They can neither incumber nor transfer that property, nor authorize others to do so. The corporation — the artificial being created — holds the property, and alone can mort- gage or transfer it, and the corporation acts only through its officers, subject to the conditions prescribed by law.” A very instructive case on this question is Baldwin v. Canfield, 26 Minn. 43. The facts of that case were very similar to those of this case, and the direct question now under consideration was passed upon. The opinion of the court was in accord with the cases above cited. See also Button v. Hoffman, 61 Wis. 20. We are thus led, both by reason and authority, to the conclusion that Lucius Frierson, as sole stockholder of the Bethel Hotel Com- pany, had no title, legal or equitable, to its property. The title to the property was in the Bethel Hotel Company, and could only be con- veyed by it. The conveyance of its real estate is one of the most solemn acts of a corporation, and it can only be done in pursuance of a vote of the corporation, and by deed executed in the form and mode prescribed by law. Thompson’s Commentaries on the Law of Cor- porations, § 5096. At common law a corporation could not execute a deed to realty except under seal; and the general corporations Act of 1875, under which the Bethel Hotel Company was organized, provides that, if the corporation have no seal, it shall be bound by the signature of its name by a duly authorized officer. To have made a valid conveyance of the real estate of the com- pany, it was necessary, therefore, that the deed should have been executed in the name of the corporation, under seal, if it had one, and, if not, its name should have been signed by an agent duly au- thorized by its governing agency, its board of directors, Garrett v. Belmont Land Co., 94 Tenn. 460. As we have seen, nothing of this kind was done. The deed to defendant, Webster, was executed by Lucius Frierson, in his own name and under his own signature. The Bethel Hotel Company, although it owned the property, was in no sense a party to it, For this and other reasons given, the deed of Lucius Frierson, conveying the real estate of the Bethel Hotel Com- pany to defendant, W. J. Webster, was void, and conveyed to him no title or interest therein, Nore, — The owner of all the stock of a corporation is not entitled 90 COOK v. BURLINGTON. [CHAP. III, to replevy the property of the corporation from a stranger. Button v. Hoffman, 61 Wis. 20. Nor sue on a cause of action belonging to the corporation. Fitzgerald v. Missouri Pacific Ry. Co., 45 Fed. 812. Nor is he liable for the debts of the corporation. Whiting v. Malden & Melrose Railroad, 202 Mass. 298, 304; Atchison R.R. Co. v. Cochran, 43 Kan. 225. See also Stone v. Cleveland Ry. Co., 202 N.Y. 352. A court of equity, on winding up the affairs of a corporation on the expiration of its charter, cannot order a sale of the property of an- other corporation, although all the stock of the latter belongs to the former corporation. Stewart v. Pierce, 116 Iowa, 733. An English company, owning 98% of the stock of an American corporation, is not assessable to income tax upon the full amount of the profits of the American corporation. Kodak, Limited v. Clark, [1902] 2 K.B. 450. COOK »v. BURLINGTON. 59 Iowa, 251. 1882. Tue plaintiffs are the executors of the estate of James W. Grimes, deceased. They are residents of the city of Burlington, where the estate is situated. Part of the estate consists of shares of stock in the Dunleith and Dubuque Bridge Co., which is a corporation of that name, incorporated under the general incorporation laws of the State of Iowa, and having its principal place of business in Dubuque county. The corporation owns a bridge across the Mississippi River, from the city of Dubuque, Iowa,.to the eastern shore of the river in the State of Illinois, and said bridge is all the tangible property owned by the corporation. The bridge was assessed for taxation at Dubuque, and the taxes were paid. The shares of stock in the bridge company held and owned by the estate of Grimes were also as- sessed for taxation for the same year at the city of Burlington. The plaintiffs claimed that the stock was not liable to taxation, and ap- pealed from the board of equalization of the city of Burlington to the Circuit Court. Upon a trial in the Circuit Court it was held that the oe of the stock was authorized by law, and plaintiffs ap- peal. Roturocg, J. The assessment of the bridge as the property of the corporation was authorized by law. Appeal of The Des Moines Water Company, 48 Iowa, 324. Whether the shares of stock can be legally assessed and taxed as the property of the stockholders for the same year for which the property of the corporation is assessed and taxed was not determined in that case. It was said, however, that “the statute provides that the stock of such corporations shall be as- sessed at its cash value. When assessed and taxed under the statute, CHAP. III] COOK v. BURLINGTON. 91 stock must be taxed as the property of the respective owners, and there is no provision making the corporation liable therefor.” We have then the question in this case whether the shares of stock may be taxed in addition to the taxation of the property of the cor- poration. And we may say, once for all, at the outset, that our views, as ex- préssed in the case just cited, that the statute provides that the stock shall be assessed and taxed, remains unchanged. This conclusion is not founded upon any doubtful construction of the statute, but upon its plain, certain and unequivocal language and meaning. The statute imposing this burden upon the stock is found in section 813 of the Code, and is as follows: ‘‘Depreciated bank notes and the ree of corporations and companies shall be assessed at their cash value... .” It is idle to contend in the face of this plain and explicit language that the legislature has not required that stock in corporations shall be assessed, and the only question now for determination is, does the legislature have the power to determine that the property of a cor- poration and the stock shall both be taxed. Counsel for appellants contend that no such power exists, because it is duplicate or double taxation of the same property, and it is in- sisted that “this court has over and over again declared that double taxation is forbidden ‘by our Constitution.” If this statement were correct, and we should concede that the question here presented were one of duplicate taxation, the case could easily and speedily be dis- posed of by a prompt reversal. But, while it is true that this court in Tallman v. Butler County, 12 Iowa, 534, said that it “is neither the policy nor the justice of the law to tolerate double taxation,” and in U.S. Express Co. v. Ellyson, 28 Id. 378, that ‘double taxation would be so unjust as to excite disfavor of both courts and legisla- ture,” and in McGregor’s Executors v. Vanpel, 24 Id. 436, that mort- gages upon real estate should be held to be taxable ‘unless this will lead to double taxation,” yet it never has been held in this State, that what is denominated duplicate taxation is in excess of the legis- lative power. The most that can be said of these utterances of this court is, that it should be held in disfavor by courts and legislatures. In Cooley on Taxation, 165, it is said: ‘‘It has properly and justly been held that a construction of the laws was not to be adopted that would subject the same property to be twice charged for the same tax, unless it was required by the express words of the statute or by necessary implication.” Upon the question as to whether the imposition of taxes upon the property of a corporation and upon the shares of stock in the hands of stockholders, the general observations upon the subject of duplicate taxa4ion found in Cooley on Taxation, page 159, seem to us to be ap- propriate to be here quoted. It is there said: “A system of indirect 92 COOK v. BURLINGTON. [CHAP. III. taxes, combined with a system of general taxation by value, must often have the effect to duplicate the burden upon some species of property or upon some persons, and the taxation of stockholders of a corporation and also of the corporation itself, must sometimes pro- duce a like result. There is also, sometimes, what seems to be double taxation of the same property to two individuals, as where the pur- chaser of property on credit is taxed on its full value while the seller is taxed to the same amount on the debt... . Now, whether there is injustice in the taxation, in every instance in which it can be shown that one individual, who has been directly taxed his due proportion, is also compelled indirectly to contribute, is a question we have no occasion to discuss. It is sufficient for our purposes to show that the decisions are nearly, if not quite, unanimous in holding that taxation is not invalid because of any such unequal results.” It must be conceded that the taxation of the property of the cor- poration and also of the stock bears no resemblance to taxing the same tract of land twice to the same person, nor once to A, and again to B. That would be a double taxation, which we suppose would not be allowable in any State in the Union. It would be a direct dis- crimination and inequality in the exercise of the taxing power, which would impose a greater burden upon one citizen than upon another upon the same kind of property. But the case at bar is quite differ- ent. The corporation is a person distinct from the stockholder. It is true, it is what is denominated an artificial person, and may be said to be ideal and intangible. But that it is a person in law is the first principle learned by the student in opening any book on corpora- tions. Its stockholders are distinct and different persons. They are usually not liable for its debts, and have no right to the enjoyment or possession of its property during the period of its duration or until it be dissolved by some procedure known to the law. The stock- holder is entitled to dividends upon his stock, if there be any dividends, and the value of his stock depends upon prospéctive dividends, and the dividends depend upon the net earnings of the corporation. If the bridge in this case be taxed; the tax must be paid from the income, and this reduces the value of the stock, so that there is no duplicate taxation, so far at least as the tax upon the bridge reduces the value of the stock. In McGregor’s Exec’rs v. Vanpel, supra, this court held that a mortgage given to secure the payment of the purchase-money of the premises mortgaged is not exempt from taxation. In that case it is said that “a system of assessments operating with entire equality and with absolute justice is a desideratum in government yet unattained, and perhaps unattainable.” And in Finley v. Phila- delphia, 32 Pa. St. 381, it is said: “There is nothing poetical about tax laws, whenever they find property they claim contribution for its pro- tection without any special respect to the owner or his occupation.” CHAP. III.] COOK v. BURLINGTON. 93 The best devised system of taxation based upon the values of -property must, of necessity, produce unequal results, so long as the attempt is made to tax all property including real estate, personal chattels, and moneys and credits. One person will be taxed upon the real estate bought upon credit, and another upon the obligation which he holds for the purchase-money. And this must necessarily be so or there would be but little taxation upon credits, because, for the most part, they are either the representative of money or prop- erty of some kind held by another. If as is said in Cooley on Taxa- tion, p. 100, “‘all the property in a town is sold on credit and the prop- erty is taxed to the purchasers, and the debts to sellers, it is manifest that the town taxes twice as much wealth as lies within its borders.” And yet under the system of taxation adopted by the State of Iowa, it cannot be claimed that the assessor must inquire of the owner of promissory notes, or mortgages, whether they are credits for taxable property which has been sold by the holder of these credits. In the case at bar the stockholders paid to the corporation a cer- tain sum of money. The corporation used this money in the con- struction of a toll-bridge from which the corporation derived an income. The agreement between the contracting parties is that the corporation is to manage and control the bridge, make the necessary repairs, and pay the taxes assessed against the bridge, and after de- ducting these legitimate and necessary expenses pay to the stock- holder his proportionate share of the net earnings, and upon the dis- solution of the corporation the stockholder is to be repaid his money advanced from the property belonging to the dead corporation. Now, suppose this very contract were made with a natural person instead of a corporation, and the stockholder or creditor should make a claim that the obligation held by him was not taxable. There would be no more grounds for such claim under our system of taxa- tion than there would be for the claim that if A loans B $100, which is invested in merchandise, the debt is not taxable because the mer- chandise is taxable. These illustrations, it appears to us, demonstrate that if we were to determine that the legislature has no constitutional power to impose this tax upon the stockholder, it would open a door into a sea of trouble in the administration of the revenue laws of the State. In disposing of this important question we have not reviewed the authorities cited by the respective counsel of the parties. It is suf- ficient to say that these views are supported by the very great ma- jority of adjudged cases upon this subject. We think the circuit court correctly determined that the shares of stock are taxable. And if the public interests of this State require that either the property of a corporation of this character, or the stock therein be exempt from taxation, that relief must come from the law-making power. It will be understood that the decision in this case will have no applica- 94 FOSTER & SONS v. COM’RS OF INLAND REVENUE. [cHAP. III. tion to capital stock in manufacturing companies. By chapter 57 of the laws of 1880 such stock is exempt from assessment and taxation. Affirmed. Nots. — People v. Williams, 198 N.Y. 54. A, “for his personal convenience,” conveyed real estate to a corporation, and nearly all of the stock was held by A. Taxes were paid on the real estate. Held, the corporation must also pay a tax on its capital stock. Cf. Benedict v. Dakin, 243 Ill. 384, 388. A contract to find a pur- chaser for the assets of a corporation is satisfied by finding a pur- chaser for all the stock of the corporation. JOHN FOSTER & SONS, LIMITED ». COMMISSIONERS OF INLAND REVENUE. [1894.] 1 Q.B. 516. CasE stated by Commissioners of Inland Revenue. The Stamp Act imposes an ad valorem duty ‘upon conveyance or transfer on sale of any property.”’ The consideration, as appears from another clause of the Act, need not always be money, but may be stock or marketable securities. The Act provides that the term “con- veyance on sale” includes every instrument ‘whereby any prop- erty upon the sale thereof is legally or equitably transferred to or vested in the purchaser or any other person on his behalf or by his direction.” Hight persons, who had for many years carried on business in part- nership as John Foster & Son, being desirous that the firm should be reconstructed as a Limited Company (registered with limited lia- bility under the Companies Acts), agreed to terminate their part- nership, and to transfer all the firm property to a Limited Company, styled John Foster & Son Limited, to be formed of all the partners exclusively for the purpose of taking over the same subject to all the liabilities; the whole of the ordinary shares, preference shares, and debenture stock of the company to be allotted among the partners in proportion to their respective shares in the partnership estate. In accordance with this agreement, by deed of indenture between the eight persons who composed the partnership and the Limited Com- pany, registered under the Companies Acts under the name of John Foster & Son Limited, all the partnership property was conveyed to the Limited Company. The Commissioners assessed an ad valorem duty upon the deed, as coming under the head of a “conveyance or transfer on sale.” In the Queen’s Bench Division, Cave, J., held that the assessment was erroneous, and Wriaur, J., took the opposite view. Wricut, J., CHAP. 111.) FOSTER & SONS ¥. COM’RS OF INLAND REVENUE. 95 withdrew his judgment, and the appeal from the Commissioners was allowed. : From this decision of the Divisional Court, the defendants ap- pealed to the Court of Appeal. Counsel for respondents contended that in order to constitute a sale there must be two different parties capable of making an agree- ment, and there must be two different things, the property sold and the price given for it. In the present case there has merely been a re-arrangement of ownership. The parties remained the same, and. nothing was parted with, and nothing was given. It was like a con- veyance of property to trustees upon trust to carry on the business, and divide the proceeds arising from it amongst the conveying per- sons. Linpiey, L.J. I confess that, with great deference to Cavs, J., I cannot see the difficulty in this case. The material sections of the Act of 1870 must first be considered. [The Lord Justice then read §§ 70 and 71 of the Stamp Act, 1870, and continued]: The importance of § 71, to my mind, is this: it shews that there may be a conveyance on sale, although the consideration for it is not cash or money, but may include or consist of stock or market- able securities. The definition of ‘‘stock” and ‘‘marketable securi- ties” will be found in § 2. Then § 78 imposes a stamp duty on con- veyances not otherwise charged, and the schedule shews what the stamps are that are imposed upon conveyances that are charged. First we have ‘conveyance or transfer whether on sale or otherwise” of certain stocks and dividends. The present case does not come within that head. Then we have ‘‘ conveyance or transfer on sale, of any property”’... ‘‘where the amount or value of the considera- tion for the sale does not exceed £5.” That fits in with §§ 70 and 71. Then we come to “Conveyance or transfer by way of security of any property or of any security’’; and then we have “Conveyance or transfer of any kind not hereinbefore described.”” We must accord- ingly consider under which of these heads the particular deed in this case comes. It certainly does not come under the first, nor under “conveyance or transfer by way of security of any property,” and the alternative is between ‘‘conveyance or transfer on sale” and “conveyance or transfer of any kind not hereinbefore described.” Now, the document in this case is an indenture made between eight gentlemen of the first eight parts, and “John Foster & Sons Limited (hereinafter called ‘the company’), of the 9th part.” Paus- ing there for a moment: although the persons of the first eight parts may be, and were members, and the only members, of John Foster & Co. Limited, John Foster & Co. Limited is not those eight indi- viduals; John Foster & Co. Limited, is a corporation. We have ac- cordingly two parties, one party consisting of several individuals, and the other party consisting of a corporation. Whether they are or are 96 FOSTER & SONS v. COM’RS OF INLAND REVENUE. [CHAP. III. not the members, or the only members of the corporation, is wholly immaterial. The corporation is a totally different person from them in any capacity you choose to assign to them except a corporate one. [The Lord Justice then stated the recitals in and the operative part of the conveyances, and continued]: — Then the parties of the first eight parts put their seals to the in- strument, and the company puts its seal to it. Now, what is that instrument? It is certainly a conveyance of property; that is obvious. In order to amount to a conveyance of property there must be a per- son conveying and a person taking, and you have them both here. The persons conveying are the persons named in the first eight parts, and the persons taking are the corporation named in the ninth part. Now, what is the consideration? The consideration for the transfer of this property is, I agree, not money, but it is stocks and securities, which for this purpose are to-be regarded as equivalent to money by reason of § 71 of the Act to which I have already alluded. Then what have we got? To sum it up shortly, it is a conveyance of property from one person to another, for money, or what is, according to the provisions of the statute, equivalent to money. What is that except a conveyance on sale? What else can you call it? It is certainly not a gift; it is not an exchange; it is not a partition; it is not a mortgage. I do not know what it is unless it is a conveyance on sale. I do not know what is necessary to constitute a sale, except a transfer of prop- erty from one person to another for money, or for the purposes of the Stamp Act, for stock or marketable securities. But then it is argued that it is only a redistribution of property. I do not consider it a redistribution at all. It is an entire transfer of property from one set of people to another person altogether, and whether there are, as there may well be hereafter, additional persons taking shares in this company, is perfectly immaterial. Again it is argued on behalf of the appellants that this instrument is in substance nothing more than a conveyance to a trustee to carry on the business in trust for the grantor. Just try that. Supposing there is a conveyance by half-a-dozen people, transferring their prop- erty to a trustee on trust to carry on the business for them, can you in any sense of the word, legal or business-like, or otherwise, call that trustee a buyer? There is no buying, there is no sale to him at all, nor is there any money, or stock, or securities, or anything else parted with by him. Then it was urged that these shares can derive no value unless the company gets this property transferred to them. That is possible enough. That is to say, in other words, that the shares in the company would be valueless unless the company had assets. Of course they would be, but that does not affect the question whether there is a sale or a conveyance or not.’ I think myself that Cave, J., has attached too little importance to the fact that you have here a CHAP. 11.] FOSTER & SONS ¥. COM’RS OF INLAND REVENUE. 97 distinct seller, and a distinct buyer, and that in point of law it is immaterial that in the present case the buyer is a corporation which consists of the eight persons who formed, and who are, the partners. The appeal must be allowed. Nore. — Jordan Marsh Co. v. Beals, 201 Mass. 163. A guaranty in writing ‘‘to pay all bills ... which may hereafter be contracted at your house by W,” addressed to Jordan Marsh and Company, a copartnership, does not bind the guarantor to pay a bill, contracted by W. with the Jordan Marsh Company, a corporation, which, after the guaranty was executed and delivered, was organized by and composed of the same persons who formerly made up the copartner-. ship and which carried on business at the same place and in the same manner that the copartnership had. Brighton Packing Co. v. Butchers’ Association, 211 Mass. 398. A made a lease to the Batchelder & Snyder Company, a South Dakota corporation. Later the Batchelder & Synder Company, a Maine corporation, was formed, and the lease assigned to it by the South Dakota corporation. Thereafter a modification and exten- sion of this lease was executed by A and the Maine corporation. A was ignorant of the formation of the Maine corporation, and sup- posed that he was contracting with the South Dakota corporation. The court held that the modification and extension was not binding upon A. SHELDON, J., said (p. 403): ‘The claim has been made also that it is only in a technical sense that these two companies could be called distinct entities. They had the same capital stock and practi- cally the same stockholders, officers and agents; the Maine company had taken over all the assets and assumed all the liabilities of the other, and was carrying on the same business, at the same stand, in the same manner and under the same management. The master has found that for practical purposes the two companies were the same. Accordingly the plaintiff contends that an agreement with the one is the same as an agreement with the other, that the defendant’s igno- rance of their separate identity was immaterial, that the agreement may be treated as made with either company indifferently, was cap- able of enforcement by either or at least by the Maine company, and is valid in the hands and for the benefit of the plaintiff. But we cannot assent to this reasoning. These are two distinct corporations, created by the laws of two different States. The powers of each cor- . poration are limited and controlled by the statutes of the State which created it, and it is scarcely conceivable that the statutes of the two States are the same or that the franchises and powers of the two cor- porations are identical. But if this were so, it would remain true that they are the creation of two different governments, the offspring of different parents, and not only distinct legal entities, but having separate and distinct existences. They could and did make contracts 98 GALLAGHER v. GERMANIA BREWING CO. [CHAP. III. with each other; they might bring suits against each other. They are in no respect the same person.” Cf. New York & Brooklyn Ferry Co. v. New York, 146 N.Y. 145. GALLAGHER v. GERMANIA BREWING CO. 53 Minn. 214. 1893. Mrrcuett, J. The plaintiff, as assignee of one Westphal under a general assignment for the benefit of creditors, brought this action to recover for goods sold and delivered by his assignor to the defend- ant corporation. Jacob Barge and John Vander Horck intervened, and set up in their complaint that they owned, and for nearly two years had owned (each one half), all the capital stock of the defend- ant, no other person but themselves having any interest in the stock or property of the corporation; that each of them had a valid and unsatisfied judgment against Westphal upon a cause of action which accrued before the assignment to plaintiff; that Westphal was, and for over two years had been, utterly insolvent; and that his estate, of which plaintiff is the assignee, was so hopelessly insolvent that it was insufficient to pay even the expenses of administering the assign- ment. The relief sought was that their claims against Westphal might be allowed, in equal amounts, as equitable set-offs to the claim of the plaintiff against the defendant corporation. From an order overruling a demurrer to the complaint, the plaintiff appeals, his con- tention being — First, that Barge and Vander Horck had no such interest in the litigation as to entitle them to intervene; second, that their claims cannot be set off against a claim against the corporation, because a corporation is a legal entity, entirely distinct from its stockholders. These two propositions amount really to the same thing, for, if Barge and Vander Horck cannot set off their claims against that of plaintiff against the corporation, they have no such interest in the subject of litigation as would entitle them to intervene; on the other hand, if their claims are proper equitable set-offs, their right to intervene for the purpose of setting them up is very clear. The case is certainly a novel one, for we doubt whether an instance can be found in the books where stockholders ever attempted to set up their several equities by way of set-off to claims against the cor- poration. Of course, the want of a precedent is by no means control- ing with courts, especially in administering equitable relief; but it would seem that, if the relief here asked was consistent with legal or equitable principles, some case would be found where it had been granted. The facts of the present case appeal to a natural sense of justice, for while, by action of law, a corporation is a distinct entity, yet in CHAP. 111.] GALLAGHER J. GERMANIA BREWING CO. 99 reality it is an association of persons who are in fact the beneficial owners of all the corporate property. Hence, if interveners cannot set off their claims, the practical result is that Westphal’s estate will collect its entire claim out of what is really their property, while the estate is at the same time indebted to them on claims of greater amount, which they will wholly lose because of Westphal’s insol- oy but, as has been often said, hard cases are liable to make bad aw. The right of equitable set-off is, of course, not derived from, or dependent upon, statute, but rests upon a distinctly equitable doc- trine, which courts of equity have applied on certain well-recognized equitable grounds, the object being to effect. a clear equity and pre- vent irremediable injustice; and it may be stated as a general rule that, whenever necessary to accomplish that end, the courts will permit an equitable set-off, although the debts accrued in different rights; as, for example, by allowing a separate debt to be set off against a joint debt, or, conversely, a joint debt against a separate debt. They will also disregard the nominal parties to the record, and consider the real parties in interest; as, for example, when the assignor of a chose in action sues for the benefit of the assignee, or a trustee for the benefit of the cestui que trust. Hence, had the plain- tiff’s claim been a joint one against the interveners, there would have been no doubt of their right to set off their separate claims against it, for insolvency is well recognized as a distinct equitable ground for allowing such a set-off. But-such a case is not analogous to the pres- ent. To allow the set-off here, it is necessary to wholly ignore the legal doctrine, or fiction, whichever you may call it, that a corpora- tion is an entity separate and distinct from the body of its stock-. holders, and to treat it as a mere association of individuals who are the real parties in interest. In dealing with the rights of creditors, and the obligations existing between a corporation and its share- holders by reason of their contract of membership, undoubtedly the courts often find it necessary to consider the real parties in interest as the individual shareholders; but it may be laid down as a rule that, except in such cases, it has been found absolutely essential, for the administration of justice, to treat a corporation as a collective entity, without regard to its individual shareholders. In no other way can the title to corporate property be kept free from complica- tion and uncertainty. The transferable nature of stock in a corpora- tion is also a good reason why the theory of a corporate entity should be preserved, and why it is necessary to discriminate sharply be- tween corporate rights and obligations and those of shareholders per- - sonally. If the rights or liabilities of a corporation could be affected by the acts of the stockholders, except when acting in the corporate name, or if shareholders could set up their several equities against persons having claims against the corporation, or, conversely, if 100 JACKSON v. HOOPER. [CHAP. ITI. claims in favor of the corporation could be set off against claims against individual stockholders, it can easily be seen into what con- fusion and chaos corporate affairs would inevitably fall. Inasmuch as the two interveners own all the stock of this corpora- tion, the facts of this case seem comparatively free from embarrass- ments, and the contention of respondent quite plausible. But, sup- pose there were fifty other stockholders (which would not alter the principle), what would be the result? Could interveners then inter- pose their claims as set-offs, and, if so, could they do so to the full amount of their claims, or only in the proportion which their shares bore to the whole capital stock? And, if the former, would they have a claim for the excess against the corporation, or a right to call on the other stockholders for contribution? Again, the right of set-off, if any exists, must be mutual. Hence, if stockholders can interpose their individual demands as set-offs to a demand against the corporation, it follows that a defendant can set up demands against the individual stockholders as set-offs to demands in favor of the corporation. Illustrations might be multiplied indefinitely to show that to recognize any such right would result in the worst sort of complica- tions, and that the only safe or sound rule is to adhere strictly, in such cases, to the doctrine of a corporate entity distinct from the indi- vidual stockholders. What means, if any, the interveners might have had, or may here- after have, of protecting themselves, it is not now our business to inquire, but we are clear that their claims against plaintiff’s as- signor are not the subjects of equitable set-off to a claim against the defendant corporation. Order reversed. Notre. — Cf. Gay v. Hudson River Co., 187 Fed. 12, where the officers of a subsidiary corporation agreed that claims by it might be offset by claims against the parent corporation. JACKSON v. HOOPER. 76 N.J. Eq. 592. 1909. Diu, J. The bill and injunction in this case rest upon the theory that the complainant, who united with the defendant Horace E. Hooper in acquiring in equal shares all the stock of two foreign cor- porations, pursuant to an agreement claimed to create a partnership or joint adventure, is entitled to treat the two corporations, organ- ized under foreign laws, as mere agencies or instrumentalities in the conduct of the joint business and to subject not only the stock Sar CHAP. II1.] JACKSON v. HOOPER. os Ga owned by both parties, but all the corporate property to the contral. Vea of the court of chancery according to the principles of the law ‘of 3) {4 4 reek partnership. Ee Prior to 1900 the complainant and the defendant Horace E. Hooper had been associated in London, England, in the business of publishing and selling subscription books, “through the agency of a company known as ‘The Clarke Company, Ltd.,’” an English cor- poration. In 1900 they acquired in equal portions all the stock of that company under an agreement that ‘upon the acquisition of the Clarke interests and so long as they might be associated together in business, their general policy in respect of their joint undertakings should be determined by mutual assent, each to have and exercise the authority and control of equal partners.” In 1902, to avoid the English tax law, the business transacted in England was separated from that conducted elsewhere. The Clarke Company, Ltd., was dissolved, and its assets and all the business carried on by the parties in interest were conveyed to two corpora- tions, one ‘‘Hooper & Jackson, Ltd.,” of England, to carry on the business in the United Kingdom; the other, a New York corporation, “The Encyclopedia Britannica Company,” to operate elsewhere. The stock and securities of these corporations were issued to the two parties equally in payment for the property thus acquired by the corporations from these parties. The bill alleges that both these corporations were “‘intended to become merely instrumentalities or agencies for carrying out certain partnership purposes,” and to be subject to the original agreement. In 1908, for reasons of their own, the parties dissolved the New York corporation and transferred its assets to an IJinois corporation of the same name and under the same general understanding that the business should be carried on as a partnership, with five directors, of whom the complainant and’ Hooper were two, the other three being ‘“‘nominal”’ directors. As to the ‘‘nominal”’ directors the bill alleges in the plainest lan- guage that they were mere dummies, both in the New York com- pany and its successor, the Illinois corporation, and says: “It was clearly understood that the election of particular persons to these three positions was not intended to, and did not, confer upon them any authority or control or the management of the business of the plaintiff and Hooper, but that at all times such persons, employes or others, should have no right or authority whatever in corporate matters other than to vote as directed by Hooper and the plaintiff acting jointly.” From 1902 to 1908 the business in which the companies were engaged, including the publication of the Encyclopedia Britannica, extended all over the civilized world and ran up into millions, the accounts receivable alone, at the time of the filing of the bill, amount- 102 JACKSON v. HOOPER. [CHAP. III. ing to over $2,000,000. During all this time, according to the bill, the business was conducted in the names of corporations but always in accordance with the original agreement as to equal ownership, interest, authority and control, the three nominal directors being mere employes and automatons of the parties, and the existence of the corporations being always disregarded ‘‘except as agencies and instrumentalities created by them for carrying out certain of their co-partnership purposes.” In 1908 the complainant and Hooper quarreled as to the business policy, and their differences having become irreconcilable the thereto- fore dummy directors voted with Hooper and against the complain- ant. This, as the bill puts it, constituted a breach of the so-called partnership agreement that Jackson and Hooper should have equal control and equal voice in the management of the companies and that the other three directors should be and remain dummies. The charge of the bill is that Hooper and the three nominal di- rectors passed corporate resolutions and amended by-laws which changed the complainant’s alleged partnership control, contrary to his wish, or, in other words, that the three dummy directors, assist- ing Hooper, practically ousted the complainant from his alleged partnership control over the corporation. This was done by the passage of resolutions, as, for example, requiring checks to be signed by two officers, thus putting it out of the complainant’s control to draw on the assets of the company, as a partner would, whenever he saw fit and by his own check. The relief asked for is that the court appoint a receiver of all the assets and joint property of the complainant and the defendant Horace E. Hooper, including their stock in the two corporations, such receiver to have the usual powers of receivers of assets of a copartnership; that the defendants — directors of the Illinois cor- poration — be restrained from selling any of the assets of the copartnership, including such stock, or from voting upon the same; from withdrawing from the business heretofore conducted by Hooper and the complainant or from any one of their bank accounts, in what- ever name the same may be, any money otherwise than in the ordi- nary course of business; that defendants be restrained from prevent- ing complainant from participating, as prior to 1908, in the conduct of the business carried on by the complainant and Hooper, whether the said business is carried on in the name of themselves or their com- panies; that the defendants be enjoined from causing any assets of the copartnership to be transferred to or by the Illinois corporation, irrespective of the name in which such assets stand, from selling either the English or American rights of the Encyclopedia Britan- nica, eleventh edition, or disposing, except in the ordinary course of business, of any other assets of the copartnership, whether they stand in individual or corporate names; that the copartnership be dis- CHAP. II] JACKSON v. HOOPER. 103 solved, that an account be taken and that the assets of the copart- nership be sold and distributed between the complainant and Horace E. Hooper. After a careful review of the facts the vice-chancellor concluded that while the complainant had been unable to establish the exist- ence of a copartnership between himself and Horace E. Hooper, he did prove that “the series of transactions set out in the bill . . . be- longed to that class of transactions which are known by the name of joint adventures” and are subject to the same rules of law which apply to partnerships. He held that the complainant was entitled to a preliminary “injunction broad enough to hold the status quo and yet so limited as not to interfere with the orderly, regular and usual conduct of the business.” He granted an injunction which, although reciting that nothing therein should “interfere or be deemed to interfere with the integrity or autonomy of the two corporations mentioned in the bill of com- plaint, to wit, Hooper and Jackson, Ltd., an English corporation, and the Encyclopedia Britannica Company, an Illinois corpora- tion, or either of them, or to interfere with the business or property of either of said corporations, except as herein specifically stated,” forth- with proceeds to enjoin the defendants, who, with the complainant, constitute the entire boards of directors of the English and Illinois corporations, from transferring. any of the shares of stock therein, from withdrawing from the business of the complainant and Hooper or “from any one of the bank accounts of the said business, in what- ever name the same may be, any money or moneys for the private or personal use of the defendants . . . or otherwise than in the payment in the ordinary course of business,’’ except that such defendants as are employes may receive their respective salaries. He further issued a mandatory injunction that: the complainant and the defendant Horace E. Hooper may withdraw such sums for their private use as they may mutually agree upon, or, in absence of an agreement be- tween them, that each may draw $5000 per month; that either com- plainant or said Hooper shall have the right to sign checks for such amount, except that any debt of the business may be paid out of the funds thereof in whatever name standing. The order further enjoins the defendants from interfering with the complainant in his entrance and exit to and from any office where the business is carried on or in his examination of its books and accounts, and proceeds to enjoin the defendants from transferring or causing to be transferred any of the assets of the English corporation to the Illinois corporation, or vice versa, except in the regular course of business, and from ‘‘selling or causing to be sold ” the rights of the Encyclopedia Britannica Com- pany in the eleventh edition, or ‘any assets of the said business carried on by the complainant and the defendant Horace E. Hooper, in whosesoever name the same may stand.” 104 JACKSON v. HOOPER. [cHaP. III. In our view of the case the fundamental question is not whether the complainant has established the agreement alleged, but whether, assuming that he has, the court has the power to enforce it. The first question to be discussed is whether, assuming the fact of the partnership or joint adventure as alleged to be satisfactorily proven, the complainant and the defendant, after the organization of the foreign corporations, were, as matter of law, partners or merely shareholders. It is conceded that the corporations in question were legally or- ganized, existing and doing business under foreign laws. It is not disputed that when the corporations were formed and the stock and bond interests acquired the parties retained no legal title to the prop- erty or business transferred. It is not questioned that the forms of law were complied with by the election of directors and officers and the prosecution of the corporate business. Indeed, the record abounds with evidence establishing the fact that the corporations as such, through their officers and agents, made contracts and in gen- eral transacted the business for which they were organized. Thus, from 1904 to 1909, promissory notes for over a million dollars were executed by and in the name of the Illinois corporation. It is true that directors’ and stockholders’ meetings were seldom held and that the financial and other business affairs of the corpora- tion were often informally and loosely conducted; yet, on the whole, the operations of the companies were the same as those of innumer- able other so-called ‘‘ close corporations” in which all the stock is held by a few persons who are as one in the conduct and policy of corporate action. It is claimed, however, that these owners of all the stock were really copartners, doing business in corporate form for their own con- venience, and that a court of equity has the power to control the property and affairs of the companies even to the extent of eliminat- ing the corporate functions and powers as mere incidents and wholly disregarding the substantive law governing the creation, supervision and dissolution of corporations. We cannot subscribe to any such doctrine. An agreement or course of dealing by which corporations are or- ganized for the purpose of using them merely as agencies or instru- mentalities, or forms in the conduct of a copartnership or joint busi- ness, and by the consent of the parties in interest to be independent of statutory control, cannot be recognized, enforced or perpetuated by the court of chancery in this state. It is fundamental that, no matter how the shares of stock are held, the corporation itself is an entity wholly separate and distinct from the individuals who compose and control it. The complainant and the defendant, though owning the entire capital stock of the two corporations, are not, as expressed by CHAP. 111.] JACKSON 0. HOOPER. 105 Chief Justice Warre in the leading case of Pullman Palace Car Co. v. Missouri Pacific Railway Co., 115 U.S. 587, “the corporation, in the sense of that term as applied to the management of the corporate business or the control of the corporate property.” The law never contemplated that persons engaged in business as partners may incorporate, with intent to obtain the advantages and immunities of a corporate form and then, Proteus-like, become at will a copartnership or a corporation, as the exigencies or purposes of their joint enterprise may from time to time require. The policy of the law is to the contrary. If the parties have the rights of partners they have the duties and liabilities imposed by law and are responsible in solido to all creditors. If they adopt the corporate form, with the corporate shield ex- tended over them to protect them against personal liability, they cease to be partners and have only the rights, duties and obligations of stockholders. They cannot be partners inter sese and a corporation as to the rest of the world. Furthermore, upon grounds of public policy, the doctrine con- tended for cannot be tolerated as it renders nugatory and void the authority of the legislature — a co-ordinate branch of the govern- ment — established by the constitution in respect to the creation, supervision and winding up of corporations. These views are amply sustained by abundant authority. “A corporation is a legal person just as much as an individual,” said the court in Sheffield, etc.; Building Society, 22 Q.B.D. 476. And in Society v. Abbott, 2 Beav. 567, Lord Lanepauz, master of rolls, held that, as in this case, great confusion arises by failure to distin- guish the body corporate from the individuals who constitute, ‘‘not the corporation, but all the members of the corporation.” The doctrine repeatedly urged by the complainant and adopted by the vice-chancellor, viz., that “the English and Illinois corpora- tions were, respectively, agencies by which they (Jackson and Hooper) accomplished their results,’ was expressly repudiated by the House of Lords in Salomon v. Salomon, Limited, 45 Week. Rep. 193; L.R. App. Cas. (1897) 22, where Lord Hatspury met this argument, saying: ‘I will, for the sake of argument, assume the proposition that the court of appeal lays down, that the formation of the company was a mere scheme to enable Salomon to carry on busi- ness in the name of the company... . Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Salomon. If it was not, there was no person and no thing to be an agent at all, and it is impossible to say at the same time that there is and there is not a company.” And Lord MacnaGHren thus concurred: “The company is at law a different person altogether from the subscribers to the memoran- dum, and, though it may be that after incorporation the business is 106 JACKSON v. HOOPER. [CHAP. III. precisely the same as it was before, and the same persons are man- agers, and-the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them.” Two years earlier Lord-Justice LinptEy asserted the same rule in the case of Newman & Co., [1895] 1 Ch. 674, 685: ‘It is true that this company was a small one, and is what is ealled a private com- pany, but its corporate capacity cannot be ignored. Those who form such companies obtain great advantages, but accompanied by some disadvantages. ... An incorporated company’s assets are its prop- erty and not the property of the shareholders for the time being. .. The court is bound to recognize the company as incorporated, and to give effect to all the consequences of such incorporation.” The same theory and the same argument urged upon this court by the complainant’s counsel were presented to the court of last resort of Massachusetts more than seventy-five years ago, and in a case strikingly similar to and on all fours with the case at bar. That court characterized the argument as ingenious but declared the theory fallacious and the conclusions unsound. Russell v. M’Lellan, 14 Pick. 63. The Massachusetts court said of the bill in that case: ‘This was a bill in equity, setting forth that the plaintiff and the defendant were owners of a manufactory in Framingham from 1823 to the time of filing the bill; that in 1826 they organized themselves, un- der an act of incorporation passed in 1813, by the name of the ‘Framingham Manufacturing Company, and that the business, both before and after such organization, was carried on by them jointly as partners, and praying for an account and for general relief.” The plaintiff and the defendant purchased in equal portions the entire stock of a manufacturing company pursuant to a written agreement that they should thereby become partners in the business thus carried on. “During the period from 1823 to 1826 the business of manufac- turing was carried on in the factory under the direction of the parties, sundry goods were manufactured and sold, sundry parcels of stock were purchased, and moneys were advanced and received by the parties, respectively, and some accounts were rendered by one to the other purporting to set forth some of their dealings. No regular cor- porate meetings were held during that period, but such formal pro- ceedings as were had appear from two books produced by the de- fendant as the records of the corporation.” The issue was as to whether the plaintiff and the defendant were partners or shareholders. The court, after discussing the difference in law between a shareholder and a partner, said: — “Tt was argued that the proposal of the defendant to the plaintiff to become jointly interested in this concern, each taking eight shares, made them partners or joint tenants or tenants in common, CHAP. I11.] JACKSON v. HOOPER. 107 tpso facto, upon its adoption. But we cannot perceive that infer- ence, for the corporation continued. The parties did not, by the new arrangement, acquire a legal title to the corporate property. They had, indeed, joint and equal control over it, but their acts and doings must appear thr®ugh the proceedings of the corporation in the due forms of the law. “Tt is said that the parties held for two years without doing any corporate act. If it were so, we cannot perceive that they would be- come partners instead of corporators. “Upon the whole, we are of opinion that these parties are not partners, tenants in common or joint tenants, and that the bill must be dismissed.”’ The court: cited Pratt v. Bacon, 10 Pick. 123, likewise a decision of the court of last resort and to the same effect. The Pratt Case has been cited with approval in Von Arnim v. American Tube Works, 188 Mass. 515, and the Russell Case in Welch v. Bank, 122 N.Y. 189. In this state, Einstein v. Rosenfeld, 38 N.J.Eq. (11 Stew.) 309, an- nounces the same rule. The facts were similar to those in the case at bar, excepting that the corporation was a domestic one. Chancellor Runyon said: ‘It is urged, however, that in this case the corporation was but a mere form which the partners gave to what was, in fact, only a copartnership, and that this court is there- fore at liberty to treat and deal with it as a copartnership. The bill alleges that the corporation is a quasi partnership. It appears by the answer that a partnership was at first agreed upon between the parties, but it was afterwards agreed between them to form a cor- poration instead. It is entirely clear that the court, in dealing with the subject, must treat the company as a corporation, and it cannot, . in order to acquire jurisdiction over it to dissolve it, disregard and ignore its form and character.” This decision was quoted with approval by this court in Stern- berg v. Wolff, 56 N.J. Eq. (11 Dick.) 389, which appeared again in chancery, 56 N.J. Eq. (11 Dick.) 555. Two sets of stockholders were contending for control. Complainant owned one half of the stock and defendant the other half. Suit was filed to restrain the defend- ant from acting as treasurer and for a receiver. In denying an order for an injunction and receiver, Vice-Chancellor Prrney held that the remedies available as between partners and “joint adventurers” cannot be applied to stockholders of corpora- tions. [The court then considered two further questions: (1) whether the alleged agreement that the directors of the Illinois corporation, other than Jackson and Hooper, should be mere nominal directors without the right to exercise independent judgment and subject to their joint dictation and control, was enforceable; and (2) whether the {08 BANK OF UNITED STATES 0. DEVEAUX. [CHAP. III. injunction did not improperly assume to regulate the management of the internal affairs of foreign corporations.] We hold that the parties are not partners as to the corporate prop- erty, but merely stockholders in two foreign corporations, distinct legal entities; that the agreement whereby these dummy directors were bound to act in accordance with the will of the complainant and Hooper was illegal and therefore unenforceable in any court; that the whole subject-matter of the controversy relates to, and the injunction attempts to regulate, the management of the internal affairs of two foreign corporations; that the court of chancery has no jurisdiction to entertain the bill and that the injunction and all proceedings thereunder should be vacated and held for naught. For the reasons already given the order appealed from is reversed, with costs. Nots. — Cf. In re Rieger, 157 Fed. 609, in which the bankruptcy vourt, after appointing receivers of the property of certain partners, extended the receivership over the property of a corporation, sub- stantially all the stock of which was owned by the partners. See also Cole v. Price, 22 Wash. 18. BANK OF UNITED STATES v. DEVEAUX. 5 Cranch (U.S.) 61. 1809. Error to the Circuit Court for the District of Georgia. The declaration, or petition, as it is there called, was as follows: — District of Georgia. To the honourable the judges of the sixth circuit court of the United States, in and for the district aforesaid. The petition of The President, Directors and Company, of the Bank of the United States, which said bank was established under an act of Congress entitled ‘‘ An act to incorporate the subscribers to the Bank of the United States,” passed the 25th day of February, 1791, showeth, That Peter Deveaux and Thomas Robertson, both of the city of Savannah, Esquires, have endamaged your petitioners in the sum of three thousand dollars, for this, to wit, that the said Thomas Robert- son, then acting under authority from the said Peter Deveaux, on the 20th day of April, 1807, at Savannah, in the district aforesaid, and within the jurisdiction of this honourable court, with force and arms entered into the house and premises of your petitioners, at Savannah aforesaid, and then and there seized, took, and detained, two boxes (the goods and chattels of your petitioners) containing each one thousand dollars in silver, then and there found in the pos- CHAP. IIt.] BANK OF UNITED STATES v. DEVEAUX. 109 session of your petitioners, and being of the value of two thousand and four dollars, and carried the same away, and converted and dis- posed thereof to their own use, and other wrongs to your petitioners then and there did against the peace of the district, and to the great damage of your petitioners; therefore your petitioners say they are injured, and have sustained damage to the value of three thousand dollars, and therefore they bring suit. And your petitioners aver that they are citizens of the State of Pennsylvania, and the said Peter Deveaux and Thomas Robertson are citizens of the State of Georgia. Wherefore your petitioners pray process, etc. And the said Peter and Thomas, by R. L. their attorney, come and defend the force and injury, when, etc., and pray judgment of the declaration aforesaid, because they say that the sixth circuit court of the United States ought not to have and entertain jurisdiction of the said declaration, and the matters therein contained, for that the said president, directors and company of the bank of the United States aver themselves to be a body politic and corporate, and that in that capacity these defendants say they cannot sue or be sued, plead or be impleaded in this honourable court, by any thing con- tained in the constitution or laws of the same United States, and this they are ready to verify; wherefore, for want of jurisdiction in this behalf, they pray judgment, and their costs, etc. To this plea there was a demurrer and joinder, and judgment in favour of the defendants upon the demurrer. MarsHAtu, Cu. J., The jurisdiction of this court being limited, so far as respects the character of the parties in this particular case, “‘to controversies between citizens of different States,” both parties must be citizens, to come within the description. That invisible, intangible, and artificial being, that mere legal entity, a corporation aggregate, is certainly not a citizen; and, con- sequently, cannot sue or be sued in the courts of the United States, unless the rights of the members, in this respect, can be exercised in their corporate name. If the corporation be considered as a mere faculty, and not as a company of individuals, who, in transacting their joint concerns, may use a legal name, they must be excluded from the courts of the union. The duties of this court, to exercise jurisdiction where it is con- ferred, and not to usurp it where it is not conferred, are of equal obligation. The constitution, therefore, and the law, are to be ex- pounded, without a leaning the one way or the other, according to those general principles which usually govern in the construction of fundamental or other laws. A constitution, from its nature, deals in generals, not in detail. Its framers cannot perceive minute distinctions which arise in the prog- ress of the nation, and therefore confine it to the establishment of broad and general principles. 110 BANK OF UNITED STATES U0. DEVEAUX. [CHAP. III, The judicial department was introduced into the American con- stitution under impressions, and with views, which are too apparent not to be perceived by all. However true the fact may be, that the tribunals of the States will administer justice as impartially as those of the nation, to parties of every description, it is not less true that the constitution itself either entertains apprehensions on this subject, or views with such indulgence the possible fears and apprehensions of suitors, that it has established national tribunals for the decision of controversies between aliens and a citizen, or between citizens of dif- ferent States. Aliens, or citizens of different States, are not less sus- ceptible of these apprehensions, nor can they be supposed to be less the objects of constitutional provision, because they are allowed to sue by a corporate name. That name, indeed, cannot be an alien or a citizen; but the persons whom it represents may be the one or the other; and the controversy is, in fact and in law, between those per- sons suing in their corporate character, by their corporate name, for a corporate right, and the individual against whom the suit may be instituted. Substantially and essentially, the parties in such a case, where the members of the corporation are aliens, or citizens of a dif- ferent State from the opposite party, come within the spirit and terms of the jurisdiction conferred by the constitution on the na- tional tribunals. Such has been the universal understanding on the subject. Re- peatedly has this court decided causes between a corporation and an individual without feeling a doubt respecting its jurisdiction. Those decisions are not cited as authority; for they were made without con- sidering this particular point; but they have much weight, as they show that this point neither occurred to the bar or the bench; and that the common understanding of intelligent men is in favour of the right of incorporated aliens, or citizens of a different State from the defendant, to sue in the national courts. It is by a course of acute, metaphysical and abstruse reasoning, which has been most ably em- ployed on this occasion, that this opinion is shaken. As our ideas of a corporation, its privileges and its disabilities, are derived entirely from the English books, we resort to them for aid, in ascertaining its character. It is defined as a mere creature of the law, invisible, intangible, and incorporeal. Yet, when we examine the subject further, we find that corporations have been included within terms of description appropriated to real persons. The statute of Henry VIII, concerning bridges and highways, enacts, that bridges and highways shall be made and repaired by the “inhabitants of the city, shire, or riding,”’ and that the justices shail have power to tax every “inhabitant of such city,” etc., and that the collectors may ‘‘distrain every such inhabitant as shall be taxed and refuse payment thereof, in his lands, goods and chattels.” Under this statute those have been construed inhabitants who hold CHAP. III.] BANK OF UNITED STATES v. DEVEAUX. 111 lands within the city where the bridge to be repaired lies, although they reside elsewhere. Lord Coks says, “‘every corporation and body politic residing in any county, riding, city, or town corporate, or having lands or tene- ments in any shire, gue propriis manibus ef sumptibus possident et habent, are said to be inhabitants there, within the purview of this statute.” The tax is not imposed on the person, whether he be a member of the corporation or not, who may happen to reside on the lands; but is imposed on the corporation itself, and, consequently, this ideal existence is considered as an inhabitant, when the general spirit and purpose of the law requires it. In the case of The King v. Gardner, reported by Cowper, a cor- poration was decided, by the court of king’s bench, to come within the description of ‘‘ occupiers or inhabitants.”’ In that case the poor rates, £0 which the lands of the corporation were declared to be liable, were not assessed to the actual occupant, for there was none, but to the corporation. And the principle established by the case appears to be, that the poor rates, on vacant ground belonging to a corporation, may be assessed to the corporation, as being inhabitants or occupiers of that ground. In this case Lord MansrFiExp notices and overrules an inconsiderate dictum of Justice Yatss, that a corporation could not be an inhabitant or occupier. : These opinions are not precisely in point; but they serve to show that, for the general purposes and objects of a law, this invisible, in- corporeal creature of the law may be considered as having corporeal qualities. It is true that as far as these cases go they serve to show that the corporation itself, in its incorporeal character, may be considered as an inhabitant or an occupier; and the argument from them would be more strong in favour of considering the corporation itself as en- dowed for this special purpose with the character of a citizen, than to consider the character of the individuals who compose it as a sub- ject which the court can inspect, when they use the name of the cor- poration, for the purpose of asserting their corporate rights. Still the cases show that this technical definition of a corporation does not uniformly circumscribe its capacities, but that courts for legitimate purposes will contemplate it more substantially. There is a case, however, reported in 12 Mod. which is thought pre- cisely in point. The corporation of London brought a suit against Wood, by their corporate name, in the mayor’s court. The suit was brought by the mayor and commonalty, and was tried before the mayor and aldermen. The judgment rendered in this cause was brought before the court of king’s bench and reversed, because the court was deprived of its jurisdiction by the character of the indi- viduals who were members of the corporation. 112 BANK OF UNITED STATES J. DEVEAUX. [cHaP. m1. In that case the objection, that a corporation was an invisible, in- tangible thing, a mere incorporeal legal entity, in which the characters of the individuals who composed it were completely merged, was urged and was considered. The judges unanimously declared that they could look beyond the corporate name, and notice the character of the individual. In the opinions, which were delivered seriatim, several cases are put which serve to illustrate the principle, and fortify the decision. The case of The Mayor and Commonalty v. Wood is the stronger, because it is on the point of jurisdiction. It appears to the court to be a full authority for the case now under consideration. It seems not possible to distinguish them from each other. If, then, the Congress of the United States had, in terms, enacted that incorporated aliens might sue a citizen, or that the incorporated citizens of one State might sue a citizen of another State, in the federal courts, by its corporate name, this court would not have felt itself justified in declaring that such a law transcended the constitution. The controversy is substantially between aliens, suing by a cor- porate name, and a citizen, or between citizens of one State, suing by a corporate name, and those of another State. When these are said to be substantially the parties to the controversy, the court does not mean to liken it to the case of a trustee. A trustee is a real person capable of being a citizen or an alien, who has the whole legal estate in himself. At law, he is the real proprietor, and he represents him- self, and sues in his own right. But in this case the corporate name represents persons who are members of the corporation. If the Constitution would authorize Congress to give the courts of the Union jurisdiction in this case, in consequence of the character of the members of the corporation, then the judicial act ought to be construed to give it. For the term citizen ought to be understood as it is used in the-constitution, and as it is used in other laws. That is, to describe the real persons who come into court, in this case, under their corporate name. That corporations composed of citizens are considered by the legislature as citizens, under certain circumstances, is to be strongly inferred from the registering act. It never could be intended that an American registered vessel, abandoned to an insurance company composed of citizens, should lose her character as an American ves- sel; and yet this would be the consequence of declaring that the members of the corporation were, to every intent and purpose, out of view, and merged in the corporation. The court feels itself authorized by the case in 12 Mod. on a ques- tion of jurisdiction, to look to the character of the individuals who compose the corporation, and they think that the precedents of this court, though they were not decisions on argument, ought not to be absolutely disregarded, CHAP. 111] BANK OF UNITED STATES U. DEVEAUX. 113 If a corporation may sue in the courts of the union, the court is of opinion that the averment in this case is sufficient. Being authorized to sue in their corporate name, they could make the averment, and it must apply to the plaintiffs as individuals, be- cause it could not be true as applied to the corporation. Judgment reversed; plea in abatement overruled, and cause remanded. Nors. — In Strawbridge v. Curtiss, 3 Cranch, 267, the Supreme Court decided that, where there are two or more joint plaintiffs and two or more joint defendants, each of the plaintiffs must be capable of suing each of the defendants in the federal courts, in order to sup- port the jurisdiction. Strawbridge was a citizen of Massachusetts. One of the defendants was a citizen of Vermont; the other defend- ants were citizens of Massachusetts; and it was held that the fed- eral court had not jurisdiction. A logical application of the combined principles of Strawbridge v. Curtiss and Bank v. Deveaux was made in Commercial Bank v. Slocomb, 14 Pet. 60. The plaintiffs, citizens of Louisiana, brought an action in a federal court against a Mississippi corporation. The de- fendant pleaded that two of the members of the corporation were citizens of Louisiana, and it was held that, upon the facts thus pleaded, the court had not jurisdiction. In Louisville, Cincinnati, Hic., RR. Co. v. Letson, 2 How. 497, a citizen of New York brought a suit in a circuit court against a corpo- ration of South Carolina, two shareholders in which were citizens of North Carolina. The statute provided that the circuit courts should have jurisdiction where “‘the suit is between a citizen of the State where the suit is brought, and a citizen of another State.” The defendant contended that under this statute the court had no juris- diction where the suit was by a citizen of one State against citizens of a second and a third State; and that the suit in question was such a suit. The court held that the circuit court had jurisdiction. Mr. Justice WayYNE said (p. 555): “‘ After mature deliberation, we feel free to say that the cases of Strawbridge and Curtis and that of the Bank and Deveaux were carried too far, and that consequences and infer- ences have been argumentatively drawn from the reasoning em- ployed in the latter which ought not to be followed. Indeed, it is difficult not to feel that the case of the Bank of the United States and . the Planters’ Bank of Georgia is founded upon principles irreconcil- able with some of those on which the cases already adverted to were founded. The case of the Commercial Bank of Vicksburg and Slo- comb was most reluctantly decided upon the mere authority of those cases. We do not think either of them maintainable upon the true principles of interpretation of the Constitution and the laws of the United States. A corporation created by a State to perform its func- tions under the authority of that State and only suable there, though 114 BANK OF UNITED STATES v. DEVEAUX. [CHAP. III. it may have members out of the State, seems to us to be a person, though an artificial one, inhabiting and belonging to that State, and therefore entitled, for the purpose of suing and being sued, to be deemed a citizen of that State. We remark too, that the cases of Strawbridge and Curtis and the Bank and Deveaux have never been satisfactory to the bar, and that they were not, especially the last, entirely satisfactory to the court that made them. They have been followed always most reluctantly and with dissatisfaction. By no one was the correctness of them more questioned than by the late chief justice who gave them. It is within the knowledge of several of us, that he repeatedly expressed regret that those decisions had been made, adding, whenever the subject was mentioned, that if the point of jurisdiction was an original one, the conclusion would be different. We think we may safely assert, that a majority of the members of this court have at all times partaken of the same regret, and that whenever a case has occurred on the circuit, involving the application of the case of the Bank and Deveaux, it was yielded to, because the decision had been made, and not because it was thought to be right. We have already said that the case of the Bank of Vicksburg and Slocomb, 14 Peters, was most reluctantly given, upon mere authority.” Marshall v. Baltimore & Ohio R.R. Co., 16 How. 314. The plain- tiff averred that he was a citizen of Virginia, and that the defendant was a corporation by the act of the General Assembly of Maryland. It was objected that this averment was insufficient to show jurisdic- tion in the federal court: The court held it was sufficient. Mr. Jus- tice GRIER said (pp. 328, 329): ‘“‘The persons who act under these faculties, and use this corporate name, may be justly presumed to be resident in the State which is the necessary habitat of the corporation, and where alone they can be made subject to suit; and should be estopped in equity from averring a different domicil as against those who are compelled to seek them there, and can find them there and nowhere else. .. . The presumption arising from the habitat of a cor- poration in the place of its creation being conclusive as to the resi- dence or citizenship of those who use the corporate name and exer- cise the faculties conferred by it, the allegation that the ‘defendants are a body corporate by the act of the General Assembly of Mary- land’ is a sufficient averment that the real defendants are citizens of that State.” St. Louis & San Francisco Ry. Co. v. James, 161 U.S. 545. The plaintiff below was a citizen of Missouri. The defendant was a Mis- souri corporation, which had been reincorporated as an Arkansas corporation. The action was brought in the federal court in Arkan- sas, and it was held that such court did not have jurisdiction. Mr. Justice Surras said (p. 562): “To fully reconcile all the expressions used in these cases would be no easy task, but we think the following CHAP. I1I.] BANK OF UNITED STATES v. DEVEAUX. 115 propositions may be fairly deduced from them: There is an indis- putable legal presumption that a state corporation, when sued or suing in a Circuit Court of the United States, is composed of citizens of the State which created it, and hence such a corporation is itself deemed to come within that provision of the Constitution of the United States which confers jurisdiction upon the Federal courts in ‘controversies between citizens of different States.’ “Tt is competent for a railroad corporation organized under the laws of one State, when authorized so to do by the consent of the State which created it, to accept authority from another State to extend its railroad into such State and to receive a grant of powers to own and control, by lease or purchase, railroads therein, and to sub- ject itself to such rules and regulations as may be prescribed by the second State. Such legislation on the part of two or more States is not, in the absence of inhibitory legislation by Congress, regarded as within the constitutional prohibition of agreements or compacts between States. “Such corporations may be treated by each of the States whose legislative grants they accept as domestic corporations. “The presumption that a corporation is composed of citizens of the State which created it accompanies such corporation when it does business in another State, and it may sue or be sued in the Federal courts in such other State as a citizen of the State of its original creation. : “We are now asked to extend the doctrine of indisputable citizen- ship, so that if a corporation of one State, indisputably taken, for the purpose of Federal jurisdiction, to be composed of citizens of such State, is authorized by the law of another State to do business therein, and to be endowed, for local purposes, with all the powers and priv- ileges of a domestic corporation, such adopted corporation shall be deemed to be composed of citizens of the second State, in such a sense as to confer jurisdiction on the Federal courts at the suit of a citizen of the State of its original creation. “We are unwilling to sanction such an extension of a doctrine which, as heretofore established, went to the very verge of judicial power. That doctrine began, as we have seen, in the assumption that State corporations were composed of citizens of the State which created them; but such assumption was one of fact, and was the sub- ject of allegation and traverse, and thus the jurisdiction of the Fed- eral courts might be defeated. Then, after a long contest in this court, it was settled that the presumption of citizenship is one of law, not to be defeated by allegation or evidence to the contrary. There we are content to leave it.” See also Missouri Pacific Ry. Co. v. Castle, 224 U.S. 541, 545. In Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, Mr. Justice HaRuan said (p. 456): “The rule that for purposes of 116 U.S. v. MILWAUKEE REFRIGERATOR TRANSIT CO. [CHAP. III. jurisdiction and within the meaning of the clause of the Constitu- tion extending the judicial power of the United States to contro- versies between citizens of different States, a corporation was to be deemed a citizen of the State creating it, has been so long rec- ognized and applied that it is not now to be questioned.” In Northern Securities Co. v. United States, 193 U.S. 197, Mr. Justice BrEwsEr spoke (p. 362) of a corporation as “by fiction of law recognized for some purposes as a person and for purposes of juris- diction as a citizen.” In Doctor v. Harrington, 196 U.S. 579, the plaintiffs, citizens of New Jersey, as shareholders in a New York corporation, brought suit in a federal court against the corporation and certain other defend- ants who were citizens of New York. It was contended that the plaintiffs must be presumed to be citizens of New York and therefore that the court was without jurisdiction. This contention was not upheld. Washington Insurancs Co. v. Price, 1 Hopkins, Chancery Reports (N.Y.) 1. The statute provided that ‘‘ where the chancellor shall be a party to a suit in chancery, tlic bili shall be filed before the Chief Justice of the State.” The chancellor was a shareholder in a corpora- tion which filed a suit in chancery. He declined to determine the suit: “The chancellor is a party to a suit in this court by or against a corporate company, in which he is a stockholder. . .. The Chief Justice has jurisdiction of such suits.” Cf. Stuart v. Mechanics’ Bank, 19 John (N.Y.) 496, 501. UNITED STATES v. MILWAUKEE REFRIGERATOR TRANSIT CO. 142 Fed. 247. 1905. Sanzory, District Judge. This is a bill in equity for an injunction to prevent the payment of alleged rebates on freight, brought under Elkins Act, February 19, 1903, c. 708, 32 Stat. 847 [U.S. Comp. St. Supp. 1905, p. 599]. The defence outlined in argument of the demur- rers is that it appears on the face of the bill that the alleged rebates were not paid back to the shipper (the brewing company), but to the Refrigerator Transit Company, and, in substance and effect, nothing more is shown than the payment to a soliciting agent (the transit company) of a commission of an eighth or tenth of the published tariff rates, thus showing, in real effect, acts neither unlawful, im- moral, nor injurious. A motion is also made on behalf of the brewing company to strike out certain allegations averring prior and discon- nected illegal acts on its part, said to be material in proof, to charac- terize the acts of its principal officers and managers in organizing CHAP. IIt.] U.S. ¥. MILWAUKEE REFRIGERATOR TRANSIT co. 117 the transit company, and rebut the theory that the moneys paid by the carriers to the transit company were paid as commissions for obtaining the business and not as prohibited rebates. The provisions of section 10 of the Interstate Commerce Act, the Act of 1889 (Act March 2, 1889, 25 Stat. 857 [U.8. Comp. St. 1901, p. 3160]), and the Elkins Act, may be thus summarized: — Section 10, Interstate Commerce Act. Common carriers, and the officers of such as are corporations, re- eeivers, agents, etc., of such corporations, are prohibited from giving rebates, preferences, and advantages, and making unjust discrim- inations, and are punishable by fine and imprisonment. Under this section only the agents of corporate carriers, and not the carriers themselves, were punishable. U.S. v. Mich. Cent. R. Co., (D. C.) 43 Fed. 26. Act of 1889. Agents of carriers: Any common carrier, and officers and agents of corporation carriers, who by means of false billing, classification, weighing, or other device or means, shall assist, suffer, or permit any one to obtain transportation at less than established rates, shall be guilty of a misdemeanor, punishable by fine and imprisonment. Shippers: Any person or corporation agent shipping property, who shall knowingly, by false billing, classification, etc., or other de- vice or means, with or without the carrier’s consent or connivance, obtain carriage at less than such established rates, shall be deemed guilty of fraud, declared to be a misdemeanor, punishable by fine and imprisonment. Bribery to obtain unjust discrimination: Any such person, officer, etc., who shall by paying money or thing of value, or by solicitation, induce a carrier to discriminate unjustly in his favor as against other shippers, or aid or abet such discrimination, shall be deemed guilty of a misdemeanor, punishable by fine and imprisonment. Tort action: Shippers discriminated against are given action for damages against such person, officer, etc., as well as the carrier. Corporation carriers themselves, it will be noticed, are not within the penalties of these acts; and the defence that the supposed dis- crimination was made not under like circumstances and conditions was always available. Elkins Act of 1903. Corporation carriers are made liable to the same extent as were their agents under the earlier statutes, but subject to fine only, not imprisonment. Their wilful failure to publish tariffs or rates, or strictly observe them, is a misdemeanor punishable by fine. It is made unlawful and punishable for any person or corporation to offer, 118 U.S. ¥. MILWAUKEE REFRIGERATOR TRANSIT CO. [cHAP. III. grant, or give, or to solicit, accept, or receive, or offer so to do, any rebate, concession, or discrimination in respect of transportation in interstate or foreign commerce by common carriers within the former statutes, whereby any such property shall, by any device whatever, be carried at less than the published tariff rate. Offences under the earlier acts, followed by convictions after this act, are punishable only by fine. The acts or omissions of agents are deemed the acts or omissions of the carrier also. The published rate is made conclusive, and any departure therefrom punishable. Suits in equity by the com- mission, as well as those directed by the Attorney-General, are au- thorized, and the provisions of the expedition act and anti-trust act are made applicable. It will be observed that this act makes the cor- poration carriers themselves liable, eliminates the question of like circumstances and conditions by making the published rate con- clusive, and abolishes punishment by imprisonment. In effect the bill in this case is claimed to charge the creation by a shipper of a dummy corporation as a device to cover rebates on large shipments of beer in interstate and foreign traffic. The carriers which are charged with paying the rebates are joined as defendants, and some of them have filed general demurrers for want of equity in the bill. The Pabst Brewing Company has also moved to strike out the following paragraph: — “That until the passage and promulgation of the act of Congress entitled ‘An act to further regulate commerce with foreign nations and states,’ approved February 19, 1903, said defendant Pabst Brewing Company had, through the agency of said Gustav G. Pabst and Frederick Pabst, habitually received from many of the railroads and common carriers, which so transported the beer and other articles so shipped by it from the State of Wisconsin into for- eign countries and states other than Wisconsin, rebates and conces- sions and other discriminations.” The bill, after stating that the Pabst Brewing Company, ,Mil- waukee Refrigerator Transit Company, and Wisconsin Central Rail- way Company are Wisconsin corporations, and the other defendants foreign corporations, that the Attorney-General has directed these proceedings, that the shipments originate in Milwaukee and con- tinue in other states and countries, contains the following allegations, here given in brief outline (the figures refer to the numbered para- graphs of the bill): — (11) The transit company was, on October 7, 1903, organized, inter alia, to operate refrigerator cars on defendants’ and other lines. It owns or controls 540 such cars. It was conceived, and is operated, as defendants’ carriers well knew, ag a device to cover the receiving of rebates, concessions, and discriminations, to wit, an eighth or tenth of the published rate; whereby the traffic is carried at less than published rates. Such rebates are paid and accepted under the pre- CHAP. I1l.] U.S. ¥. MILWAUKEE REFRIGERATOR TRANSIT co. 119 tence, claim, and guise of “‘commissions,”’ and amount to large sums to complainants unknown. (12) The transit company was incorporated by procurement of the attorneys of the brewing company, and at its instance and request, with a capital of $150,000, having five directors, and with power to acquire and operate refrigerator cars, and contract for the supply and operation of refrigerator transportation by land and water. (13) The brewing company is a Wisconsin corporation operating a large brewery, and selling and shipping beer into all the states and territories and to purchasers in foreign countries. It has a capital of $10,000,000 or 10,000 shares. Gustav Pabst and Fred Pabst are brothers, owning 2000 shares, and with their mother and sisters over half of the stock. They vote and control a majority of the stock, and have always directed and controlled the election of directors, and their action; they have been and are its president, vice-president, and general managers, and have always controlled all its sales, purchases, and shipments. (14) (Here occurs the passage above quoted as to rebates prior to the Elkins Act.) Upon the passage of that act the brewing company was no longer able to directly secure rebates, and cast about for some device to evade the statute, and the Pabsts, as such officers, and one Howe, as traffic manager, intending to contrive and operate a device for such evasion, caused the transit company to be formed. Of its 1500 shares, 1340 were issued to the two Pabsts, 35 shares to Fred Pabst’s wife, and the balance to dummy directors, to give color to the claim that its stock was not owned by the brewing company. After investigation by the interstate commerce commission in May, 1905, Gustav Pabst transferred his stock in the transit company to Fred Pabst, and had some person elected director in his place; but such acts were colorable merely, he still retaining a large pecuniary interest in the corporation, and participating in its control. (15) Immediately on the creation of the transit company the Pabsts, as controlling officers of the brewing company, contracted with themselves as executive officers of the transit company, for a term not yet expired, to give the latter exclusive control of the ship- ment of all freight of the brewing company moving in interstate and foreign commerce, which it is still exercising. The contract was made to enable the transit company to route the shipment of such freight on the lines of such companies as will pay rebates, and withhold it from such as will not; and all the rebates, concessions, and discrim- inations charged in the bill have been exacted by threats of such diversion. Many thousand tons of said freight have been hauled by defendant carriers since the contract was made. On such shipments the brewing company pays to the carriers the full tariff rate, and the carriers pay the transit company for use of its refrigerator cars for mileage three fourths of a cent to a cent per mile, and in addition 120 U.S. v. MILWAUKEE REFRIGERATOR TRANSIT CO. [CHAP. III. an eighth or tenth of the sums paid them by the brewing company; and in every instance the property is transported by defendant car- riers at an eighth or tenth less than the published tariff. Such re- bates amount to many thousands of dollars, the exact sum unknown to complainants. (16) All the defendant carriers well knew that the transit com- pany was organized in the interest of the brewing company, and for the purpose of evading the law, and paid such rebates with the like purpose and intent. (18) The transit company claims and pretends that such repay- ments were made and acce mpensation for its services in SoTieiting and procuring freight for cariage-by defenda liciting and procuring freight for carriage by defendants; but such claim or pretence is untrue. The transit company has entire control entire business of the transi ich it does not solicit; the possible consideration movi i ier being its Forming 10 divert the business, All such repayments have always en Known to all said parties to be a device for unlawful rebate, concession, and discrimination. But such payments constitute un- lawful concession and discrimination, whether or not the transit company solicits the shipments, which, if not so solicited and pro- cured, would be diverted from the carrier so paying. [After disposing of another point.] It is further essential, to bring the case within the law, that the repayments be made to the brewing company, or for its benefit, directly or indirectly, and not merely to third persons for obtaining the business; otherwise the repayment is no more than a salary or other expense incident to the carrier’s busi- ness. The remaining question, then, is whether this is sufficiently shown in the bill. It is forcibly argued that the bill carefully avoids the statement that the brewing company received the money re- paid, or even that it was paid back for its benefit; and that the two corporations are not only distinct legal entities, but have different stockholders. The bill shows the creation, by the controlling in- terests of the brewing company, of a dummy corporation, with dummy directors, and scienter of its character by the carriers, with intent to evade the law. It is argued that these averments show that the transit company is merely the alter ego of the brewing corpora- tion; both being substantially identical in interest and control, and the brewing company the ultimate beneficiary, in some form, of the operations in question. Now is not this the usual device of a shipper securing discrimination by manipulation of carriers in which it is interested? That the transit company is controlled by the managing agents of the brewing company is entirely clear. But is it controlled by the shipper corporation? The solution of this question depends on whether the brewing corporation, in a case like this, is an association . CHAP. IlI.] U.S. ¥. MILWAUKEE REFRIGERATOR TRANSIT co. 121 of individuals, rather than a legal entity apart from those who own and control it. No doubt the general rule that a corporation is a legal entity, an institution, artificial, intangible, existing only by legal contemplation, and separate and apart from its constituents, is firmly imbedded in the common law of this country. It has been so laid down in hundreds of cases. In the Dartmouth College Case, Chief Justice MArsHALL adopted and expressed it, almost in the exact language of Lord Coke, in Coke on Littleton, 27b; and this definition has been universally approved, especially in cases in- volving the extent of the corporate powers. It is, however, most significant that the Supreme Court of the United States was the first to break away from the notion that a corporation is only a legal entity, when its literal application would operate with injustice. If a corporation is only a legal entity, of course it cannot be a citizen of a state. Hence the Supreme Court, in order to sustain the most important and far-reaching jurisdiction of the national courts over corporations, depending on the citizen- ship of the parties, was obliged to adopt some other theory of cor- porate constitution than that laid down by the great chief justice. This was accomplished by holding that a corporation is an associa- tion of persons who may have citizenship, and following this with the adoption of a fiction of law, supported by a conclusive presump- tion, by which the members of a corporation are conclusively pre- sumed to be citizens of the state creating it. Hope Ins. Co. v. Board- man, 5 Cranch, 57, 3 L. Ed. 36; Louisville, etc., R. Co. v. Letson, 2 How. 497, 11 L. Ed. 353; Marshall v. R. Co., 16 How. 314, 14 L. Ed. 953. In reaching these results, the court, in answering the argument that a corporation is an artificial person, a mere legal entity, in- visible and intangible, said that it was not reasonable that those who deal with corporate affairs or agents should be deprived of the valu- able privilege of litigating in the federal courts by a syllogism, or rather sophism which deals subtly with words and names, without regard to the things or persons they are used to represent. 16 How. 327, 14 L. Ed. 953. “For all purposes of acting, contracting, and judicial remedy,” said Mr. Justice Grip, ‘they can speak, act, and plead only through their representatives or curators.’’ Id. Thus the idea that a corporation is, for some purposes, an aggregation of in- dividuals, and not a legal entity, was adopted, through a fiction of law, and given full effect. It was the same kind of fiction by which the English Court of Exchequer usurped jurisdiction by permitting an allegation that plaintiff was the king’s debtor, and then allowing no one to deny it. But when the case of a consolidated corporation incorporated in two or more states, having the same stockholders, arose, the Su- preme Court partially returned to the rule that a corporation is a legal entity, existing only in contemplation of law. And it was held . 122 «U.S. ¥. MILWAUKEE REFRIGERATOR TRANSIT CO. [CHAP. IIL. that there are as many corporations as there are states in which the same group of persons is incorporated. In each of such states it is conclusively presumed that the shareholders are, for jurisdictional purposes, citizens of that state alone. Hence, a citizen of Illinois cannot in Illinois sue in a federal court the Chicago & Northwestern Railway Company, consolidated by incorporation in both Illinois and Wisconsin; but he may do so in Wisconsin. Ratlroad Co. v. Wheeler, 1 Black, 286,17 L. Ed. 130; Railway Co. v. Whitton, 13 Wall. 270, 283, 20 L. Ed. 571. This result was reached by applying the rule that the legal entity existing by force of law can have no exist- ence beyond the state or sovereignty which brings it into life and indues it with its faculties and powers. Id. “It is true that for cer- tain purposes the law will recognize the corporation as an entity dis- tinct from the individual stockholders; but that fiction is only re- sorted to for the purpose of working out the lawful objects of the corporation. It is never resorted to when it would work an injury to any one, or allow the corporation to perpetrate a fraud upon any- body.” Held that stock in one corporation directed by another cor- poration to be issued to the stockholders of the latter, and paid for by it, was in reality received by the corporation. The Sportsman Shot Co. v. American Shot & Lead Co. (Superior Court of Cincin- nati) 30 Wkly. Law Bul. 87; State v. Standard Oil Co., 49 Ohio St. 137, 177, 30 N.E. 279, 15 L. R. A. 145, 34 Am. St. Rep. 541. ‘The abstract idea of a corporation, the legal entity, the impalpable and intangible creation of human thought, is itself a fiction, and has been appropriately described as a figure of speech. It serves very well to designate in our minds the collective action and agency of many in- dividuals as permitted by the law; and the substantial inquiry al- ways is what in a given case has been that collective action and agency?” People v. North River Sugar Refining Co., 121 N.Y. 582, 621, 24 N.E, 834, 9 L. R. A. 33,18 Am. St. Rep. 843. ‘A corporation is an artificial person, created by law as the representative of those persons, natural or artificial, who contribute to and become the holders of shares in the property intrusted to it for a common pur- pose... . . It is exclusively the work of the law.” In re Gibb’s Estate, 157 Pa. 59, 27 Atl. 383, 22 L. R. A. 276, 281. “Corporations are but associations of individuals.” Hightower v. Thornton, 8 Ga. 492, 52 Am. Dec. 412; 1 Kyd on Corp. 13, “Who, in law, constitute the company, if it be not the stockholders?” Gelpcke v. Blake, 19 Iowa, 268. “A private corporation is, in fact, but an association of indi- viduals united for a lawful purpose and permitted to use a common name in their business, and to have a change of members in their business.” Frexp, J., in Kansas Pacific v. Atchison Railroad, 112 U.S. 414, 5 Sup. Ct. 208, 28 L. Ed. 794. On the other hand, when dealing with the question of corporate power, the Supreme Court has gone so far as to hold that a contract ultra vires of the corporation, CHAP. II] U.S. U. MILWAUKEE REFRIGERATOR TRANSIT co. 123 although assented to by all the stockholders, is void. Oregon Rail- way & Navigation Co. v. Oregonian Ry. Co., 130 U.S. 1, 9 Sup. Ct. 409, 32 L. Ed. 837. A stockholder owning nearly all the stock cannot bind the cor- poration by a contract made in his individual capacity. Donoghue v. I. & L. M. Ry. Co., 87 Mich. 18, 49 N.W. 512; Finley Shoe & Leather Co. v. Kurtz, 34 Mich. 89; England v. Dearborn, 141 Mass. 590, 6 N.E. 837. It seems that an act of all the stockholders, as in- dividuals, binds the corporation, as no one can object. Bundy v. Iron Co., 88 Ohio St. 300 (mortgage by all but one stockholder, to the remaining one, of corporate property, executed in the individ- ual names of the stockholders, held valid). A corporation, from one point of view, may be considered an entity, without regard to its shareholders, yet the fact remains self-evident that it is not in reality @ person or thing distinct from its consistent parts. The word cor- poration is but a collective name for the members who compose the association. Home Fire Ins. Co. v. Barber (Neb.) 93 N.W. 1024, 60 L. R. A. 927; City of Nashville v. Ward, 16 Lea, 27; People v. North River, etc., Co. (Sup.) 3 N.Y. Supp. 401, 2 L. R. A. 33; Ford v. Chicago Milk Shippers’ Ass’n, 155 Ill. 166, 39 N.E. 651, 27 L. R. A. 298; First Nat. Bk. v. Trebein Co., 59 Ohio St. 316, 52 N.E. 834; Buffalo Loan, etc., Co. v. Medina Gas, etc., Co. (Sup.) 42 N.Y. Supp. 781. If any general rule can be laid down, in the present state of au- thority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public conven- ience, justify wrong, protect fraud, or defend crime, the law will re- gard the corporation as an association of persons. This much may be expressed without approving the theory that the legal entity is a fiction, or a mere mental creation; or that the idea of invisibility or intangibility is a sophism. A corporation, as expressive of legal rights and powers, is no more fictitious or intangible than a man’s right to his own home or his own liberty. . Applying the rule here laid down to the circumstances shown to surround the brewing company and transit company, can it be doubted that there really is, in substance and effect, an identity of interest, or that the brewing company, considered as an association of individuals, really owns and fully controls the transit company? Or that the payment of the eighth or tenth of the rate is in reality, and in some form, a payment to, or for the benefit of, the shipper? I think sufficient is alleged to show this. Moreover, it clearly ap- pears that the shipper practically controls the transit company, and I think this shows a sufficient identity of interest among the share- holders of both in these repayments to make them rebates, if paid and received with unlawful intent. It is said that the procurement of the shipments through the contract is the mere soliciting of them for | | Se 124 U.S. ». MILWAUKEE REFRIGERATOR TRANSIT co. [CHAP. IM. the carriers, for which they are lawfully authorized to pay a part of the rate, in order to get the business; and the transit company, own- ing a large number of refrigerator cars, and wishing to keep them employed, simply gives the freight to those competing shippers who will make the best terms, the business being of great volume, and the sums paid for freights large. But this theory of innocence is ex- ploded by the fact, as alleged (whatever the actual proof may show), that the transit company is a mere separate name for the brewing company, being in fact the’ same collection of persons and interests. Assuming the truth of the averments, the device adopted is “neither new, nor deserving of new success.” As the patent lawyers say of an aggregation, there is no new mode of operation, new use, or new re- sult — simply the use of old things in a different situation. There is,-no doubt, some tendency in these days to accept general and vague charges of wrong-doing on the part of the corporations at a premium. Much has happened to arouse public feeling on this sensitive subject. For many years transportation development was encouraged in every possible way. The municipal aid craze was an early form of such stimulation. Praise for those who were seeking command of the trade of the world was unstinted and without dis- sent, and criticism forgotten. But now that we are beginning to feel the tyranny of arbitrary and overwhelming industrial and com- mercial power, the tendency is to go to the other extreme, and it be- comes.easy to excite prejudice leading to injustice. The courts will no doubt be somewhat influenced by such tendency; but so far as possible it is for them to keep fundamental rules steadily in view, and with discrimination and careful reflection see to it that injustice is prevented. Joseph Cooke once facetiously said that he had never travelled in Pennsylvania, but had often visited the domains of the Pennsylvania Railroad Company. These and other like domains are now subject to widespread attack; but it will not be forgotten that they are our domains, and, if they are being despoiled, the spoliation is the work of our trustees, who must indeed be brought to book, but the trust property at the same time preserved. Nots. — United States v. Delaware & Hudson Co., 213 U.S. 366. The Hepburn Act (Act of June 29, 1906, c. 3591, 34 Stat. 584) made it unlawful for any railroad company to transport, in interstate com- merce, “any article or commodity, other than timber and the manu- factured products thereof, manufactured, mined, or produced by it, or under its authority, or which it may own in whole or in part, or in which it may have any interest direct or indirect.’’ It was held (p. 418) that this did not make it unlawful for the railroads to trans- port commodities owned “by a bona fide corporation in which the transporting carrier holds a stock interest.’’ But in United States v. Lehigh Valley R.R. Co., 220 U.S. 257, the co e@ at It was open CHAP. IIt.] BANK ¥. TREBEIN. 125 to the Government i i ailroad company to ransport commodities of a corporation in which the company owns stock and_uses its power as a stockholder to obliterate all -distine- tions between the two corporations. Enos v. Hanff, 95 Neb. 184. By chapter 82 of the Laws of Ne- braska for 1907 it was made unlawful to conduct a saloon in a build- ing owned or controlled by a manufacturer of beer. The Storz Brew- ing Company, a manufacturer of beer, transferred a building to the Independent Realty Company, and a license to sell liquors in such building was granted by the municipal authorities authorized to © issue licenses. Gottlieb Storz owned 3061 out of 3065 shares of the stock of the Storz Brewing Company. His wife owned 3058 out of 3060 shares of the stock of the Independent Realty Company. The court held that the license should not have been granted, as the build- ing was controlled by the Storz Brewing Company, saying (p. 187): “Where the financial interests of husband and wife are thus united, “re, Took beyond the Tegal axity ofa corporation to the vela- tions of the individuals behind it and enforce the law according to “its terms.” But the court, on rehearing, reversed this decision (152 “"N-W. 397). The court said that if the Storz Brewing Company or- ganized or promoted the Realty Company and transferred the prop- erty for the purpose of enabling the brewing company to continue to control it for the purpose of leasing it as a saloon, there could be no doubt that the company so formed would be for an illegal pur- pose, and might be dissolved by quo warranto; this question, however, was not one which the licensing authorities were fitted to pass upon. ‘““The licensing board may exercise its discretion, and is not required to grant a license if a doubt is entertained as to the good faith in the proceedings in any respect. On the other hand, it seems clear that the Legislature never intended that the licensing board should be compelled to enter upon such investigations as are suggested by this objection.” Northern Securities Co. v. United States, 193 U.S. 197, is considered, infra, in the chapter on Offenses under the Sherman Anti-Trust Act. BANK v. TREBEIN. 59 Ohio St. 316. 1898. MinsHALL, J. We are unable to see how, as against his creditors, the transaction by which F. C. Trebein, with his wife, his daughter, his son-in-law, and his brother-in-law, formed ‘‘The F. C. Trebein Company” and then conveyed to it every vestige of property he had not before conveyed, either to his wife or to his daughter, can be sus- 126 BANK v. TREBEIN. (CHAP. III. tained, against the justice of their demand to have the property so transferred administered for the benefit of all his creditors under the insolvent laws of this state. He was at the time liable in a large sum of money on indorsements he had made for the accommodation of the Straw Paper Company, of which he was a member and one of its directors. He knew it was about to fail and that he would have to respond to these indorsements. This fact induced the conveyances he had before made to his wife and to his daughter, whether for a valid consideration or not, was not considered by the court for the reasons stated in its finding, that there were suits then pending to set them aside. The capital of The F. C. Trebein Company was fixed at $60,000, divided into 600 shares of $100 each, Trebein taking 596 of the shares and each of the other persons named taking one share. It was formed on January 22, 1895, Trebein being made the presi- dent, treasurer, and general manager, and he conveyed to the com- pany the property in question, estimated to be worth $60,000, and received therefor the shares above stated, and at once placed all of them, except one, in pursuance of his original purpose, with three of the banks who held his indorsements of the paper of the Straw Paper Company, for the purpose of securing them on his indorsements; and he continued in the control and management of the milling and grain business as he had before the corporation was formed and the con- veyance made. The court found that this was all done in good faith. But, in view of the facts, we are unable to see how the court could have meant more than that he meant no wrong by it. Good faith in law, however, is not to be measured always by a man’s own stand- ard of right, but by that which it has adopted and prescribed as a standard for the observance of all men in their dealings with each other. When one conveys all his property to another with the inten- tion of hindering and delaying his creditors, or a part of them, in pursuing their legal remedies against him and his property, his con- duct in law is deemed fraudulent, however honestly he may have in- tended to deal with all his creditors in the future. Trimble v. Doty, 16 Ohio St. 118. The good faith of a party under such circumstances must be determined by the legal effect of what he deliberately does. Brinkerhoff v. Tracy, 55 Ohio St. 558; Lee v. Hennick, 52 Ohio St. 177; Gashe v. Young, 51 Ohio St. 376, 389. The formation of the cor- poration and the conveyance to it by Trebein of all the property he then had, necessarily hindered and delayed all his creditors in the pursuit. of their claims against him. The formation of the corporation in no way facilitated the transaction of his milling business and that connected with it. Nothing was added to his capital, unless we re- gard the few hundred dollars that may have been paid for the four shares of stock taken by the other members of his family such an addi- tion. Evidently an addition to capital was not the controlling object. The transaction cannot be likened to a conveyance to a third person CHAP. I1.] BANK Uv. TREBEIN. 127 for a valuable consideration; considered in the light of the facts, it __wasno more than a conveyance from himself fo himself The corpo- ration was in substance another F. C. Trebein. His identity as owner of the property was no more changed by his conveyance to the com- pany than it would have been by taking off one coat and putting on another. He was as much the substantial owner of the property after the conveyance as before; and had substantially the same use of it as if the conveyance had not been made. The only purpose the creation of the corporation and the conveyance to it subserved, was to hinder creditors in levying upon the property and selling it on execution at law; and it is this hindrance the law will not permit, and, when ascertained in a proper proceeding, requires the convey- ance to be set aside and the property administered for the benefit of all the creditors of the fraudulent grantor. It is suggested that the property may be levied on. This is true, but it cannot be sold on execution until the conveyance is set aside; for it is not the policy of the law to sell a law suit. It is also suggested that the stock of Trebein may be reached by a proceeding provided by statute. This is true, but it is not the simple proceeding of an execution at law; besides few persons, at this day, would care to take stock in a manufacturing or any similar company, with its statutory liability attached, as a substitute for tangible property. The fiction by which an ideal legal entity is attributed to a duly formed incorporated company, existing separate and apart from the individuals composing it, is of such general utility and application, as frequently to induce the belief that it must be universal, and be in all cases adhered to, although the greatest frauds may thereby be perpetrated under the fiction as a shield. But modern cases, sus- ~{ained by the best text writers, confine the fetion to the purposes or which it was adopted — convenience in the transaction of business and in Suing and being sued in “tion. Thus in Brundred v. Rice, 49 Ohio St. 540, where an incorpora~ tion had been formed for the purpose of giving effect to an illegal agreement between it and a railroad company for a discrimination in freights between it and other shippers, the fiction was disregarded, and a recovery allowed against the promoters by one who had been thus discriminated against, in like manner as if the corporation had no existence. See also the following citations: Morawetz on Corpo- rations, §§ 1 and 227; Railway Co. v. Miller, 51 N.W. 981; Gas Com- pany v. West, 50 Iowa, 16; Booth v. Bunce, 33 N.Y. 139; State ex. rel. Atty.-Gen. v. Standard Oil Co., 49 Ohio St. 1387; Bennett v. Minott, 28 Oregon, 339, 348. In Montgomery Web Co. v. Dienelt, 133 Pa. St. 585, which was a 128 PEOPLE v. NORTH RIVER SUGAR REFINING CO. [CHAP. III, suit by a creditor of one company to set aside a conveyance by it to another, as in fraud of his rights, it appeared that the latter was formed substantially by the stockholders of the former, who relin- quished their stock in it for stock in the latter; this being substan- tially all the consideration given by the purchasing company. This was held to be a fraud on the creditors of the former company, called the Aronia. The case does not differ in principle from the one before us. Here the conveyance was by an individual, and in consideration of stock taken in the The judge, delivering the Opinion, said: ‘Is the Montgomery Company so completely a new and different company from the Aronia Company that the law must close its eyes to the fact that the difference is a mere jungle of names? We do not think there is any compulsion to such legal blindness. Settled general principles, and the analogies of the law, are against such a contention. If the corporation had merely changed its name, there could have been no doubt of the continued liability of the property.” cf Judgment reversed. Norte. — See, accord, Kellogg v. Douglas Co. Bank, 58 Kan. 43; Bennett v. Minott, 28 Or. 339. Gonville’s Trustee v. Patent Caramel Co., Ltd., [1912] 1 K.B. 599. A conveyance of property by A, a failing debtor, to a company, formed by himself and a confederate to receive the property, was set aside on the ground that the company, through its directors, knew that the conveyance was intended to hinder the creditors of A. The ! court did not speak of disregarding the corporate fiction. See also In re David & Adlard, [1914] 2 K.B. 694. In Noble v. Burnett Co., 208 Mass. 75, the court said (p. 83): ‘The corporation was not a purchaser without notice. The officers and —erganizers were members of the firm, and they held nearly all the —stock. Their knowledge was the knowledge of the corporation.” PEOPLE v. NORTH RIVER SUGAR REFINING CO. 121 N.Y. 582. 1890. Tuts action was brought by the attorney-general to have the de- fendant ‘dissolved, its charter vacated and its corporate existence annulled.” The complaint alleged, and it was found, that defendant is a cor- poration organized under the General Manufacturing Act; that it, together with other corporations engaged in the business of sugar refining, in violation of law and in abuse of its powers, became a party to and carried out a certain agreement. Some of the material fea- tures of this agreement are, in substance, as follows: — CHAP. III.) PEOPLE v. NORTH RIVER SUGAR REFINING CO. 129 All the shares of the capital stock of all the corporations shall be transferred to a board consisting of eleven persons. In lieu of the capital stock of each corporation, certificates not exceeding $50,000,000 shall be issued by the board, and allotted in certain proportions to the respective corporations. 15 per cent of the certificates thus allotted to each corporation shall be left with the board; the remaining 85 per cent shall be divided among the former stockholders in proportion to the amount of stock formerly owned by each. The board of eleven persons, holding all the stock of all the cor- porations, may transfer shares to persons whom it may desire should be constituted directors of such corporations. The several corporations shall maintain their separate organiza- tions, and each shall carry on and conduct its own business. The profits arising from the business of each corporation shall be paid over by it to the board hereby created, and the aggregate of said profits, or such amount as may be designated for dividends, shall be proportionately distributed by said board, at such times as it may determine, to the holders of the certificates issued by said board for capital stock. No action shall be taken by the board which shall create liability by it or by its members. The certificates retained by the board (15 per cent of the entire issue) shall be subject to be disposed of by the board either for the acquisition of other refineries to become parties to this agreement, payment for additional capacity, or by appropriations to the several refineries. The funds necessary to enable the board to make the payments herein provided to be made by it may be raised by mortgage to be made by the corporations, or either, any, or all of them, on their property, and by such other means as shall be satisfactory to such board. Vacancies in the board by expiration of office shall be filled at an annual meeting of the holders of certificates, at which said holders shall vote according to the number of shares for which they hold certificates. Fincu, J. The judgment sought against the defendant is one of corporate death. The State, which created, asks us to destroy; and the penalty invoked represents the extreme rigor of the law, Its infliction must rest upon grave cause, and be warranted by material misconduct. The life of a corporation is indeed less than that of the humblest citizen, and yet it envelopes great accumulations of prop- erty, moves and carries in large volume the business and enterprise of the people, and may not be destroyed without clear and abundant reason. That would be true even if the legislature should debate the destruction of the corporate life by a repeal of the corporate charter; 130 PEOPLE v. NORTH RIVER SUGAR REFINING CO. [CHAP. III. but is beyond dispute where the State summons the offender before its judicial tribunals, and submits its complaint to their judgment and review. By that process it assumes the burden of establishing the charges which it has made, and must show us warrant in the facts for the relief which it seeks. Two questions, therefore, open before us: first, has the defendant corporation exceede i Wwers, and, second, does excess or abuse threaten or harm the public welfare. The first question requires us to ascertain what the defendant cor- poration has done in violation of its duty, or omitted to do in per- formance of its duty. We find disclosed by the proof that it has be- come an integral part and constituent element of a combimation —wihich possesses over it an absolute control, which has absorbed most Of its corporate functions, and dictates the extent and manner and terms of its entire business activity. Into that combination, which drew into its control sixteen other corporations engaged in the re- fining of sugar, the defendant has gone, in some manner and by some process, for as an unquestionable truth we find it there._ All its stock has been transferred to the central association of eleven individuals denominated a “Board;”’ in exchange it has taken and distributed to its own stockholders certificates of the board carrying a proportionate “interest in what it describes as its capital stock; the new directors of the defendant—corporation have been chosen by the board, made eligible by its gift of single shares, and liable to removal under the aang ot thes apoaint at any moment of independent action. 7It has lost the power to make-a dividend, and is compelled to pay over its net earnings to the master whose servant it has become. “Under the orders of that master it has ceased to refine sugar, and by so much, has lessened the supply upon the market. It cannot stir unless the master approves, and yet is entitled to receive from the earnings of the other refineries, massed as profits in the treasury of the board, its proportionate share for division among its own stock- holders holding the substituted certificates. In return for this ad- vantage it has become liable to be mortgaged, not for its own cor- porate benefit alone, but to supply with funds the controlling board when reaching out for other and coveted refineries. No one can look these facts fairly in the face without being compelled to say that the defendant is in the combination and in to stay. Indeed, so much is with great frankness admitted on the part of the appel- lant. Its counsel concedes that the stock was transferred “to the board mentioned in the agreement and on the terms and for the purposes mentioned in the agreement; and that this action effect- ually lodged the control of the defendant company, so far as such control can be secured by the voting power, in that board.” But that truth does not alone solve the problem presented. We are yet to ascertain whether the corporation became the subordinate CHAP. 1I.] PEOPLE v. NORTH RIVER SUGAR REFINING CO. 131 and servant of the board by its own voluntary action, or the will and power of others than itself; by force of a contract to which it was in reality a party, or as the simple consequence of a change of owners; by its fault or its misfortune; by a sale or by a trust. For, if it has done nothing, if what has happened, and all that has happened, is ascertained to be that the stockholders of the defendant, one or __ many, sold absolutely to the eleven men who constituted the board their entire stock, and the latter, by force of their proprietorship and as owners, have merely chosen directors in their own interest, and are only managing their property in their own way as any absolute owners May ; if that is the truth, and the entire and exact truth, itis ms difficult to see wherein the corporati . ond merely omitting for a time to carry on its business. That is ‘the theory upon which the appellant stands, and which it submits to our examination. On the other hand it is contended that there never was a sale, but a trust constituted by mutual agreement; that they who agreed were the whole body of stockholders in each corporation necessarily rep- resenting and binding the corporation itself; that they transferred their shares to the board upon the trusts declared in the deed; that the certificates issued by the board were the formal declaration of the trust; that the corporate stockholders parted with the legal title of their stock to the chosen trustees with the power to vote upon it, but retained, nevertheless, its beneficial ownership through the operation of the certificates; and so the corpofations entered into a partnership with each other, vesting the partnership power in a board of control. I have brought these two theories face to face where they may confront each other, because, when a choice is made between them, we have gone a long distance towards the end of the controversy. [The court held that the transaction was not a sale, but a trust oe e combination, therefore, framed by the deed was a trust, and, if created by the corporations, or in any respect the consequence or product of their action, some inevitable results would be certain to follow. But here we encounter the stronghold of the appellant’s argument which is, that if the corporations are in some manner in the combination, they are there solely as the result of a contract other than their own; are there without corporate action on their part; and so are sufferers and not sinners. The reasoning leading to that result is so severely technical as to have suggested a justification almost reminding one of an apology. We are called upon to sever the corporation, the abstract legal entity, from the living and acting corporators; as it were, to separate in our thought the soul from the body, and admitting the sins of the latter to adjudge that the former remains pure. Let us first recall the facts in the order of their occur- rence. 132 PEOPLE v. NORTH RIVER SUGAR REFINING CO. [CHAP. III. {The court _here recapitulated the facts; which were, in substance, _ that the stockholders unanimously directed the secretary to sign the _ agreement in behalf of the corporation; that he accordingly did so sign; that a subsequent vote to revoke this action was _ineffective:— that, at a later date, the stockholders voted to sell all the stock to —Fohn-B- Searles; Jr., for $325,000; that the stock was so conveyed to Searles; and that Searles thereafter conveyed all the stock to the board of eleven persons receiving therefor certificates for $700,000; deducting the 15 per cent retained by the board. The opinion then What Searles did with the certificates, we do not know, nor is it important to ascertain. We do know that new directors were chosen by the vote of the board; that Searles became President of the cor- poration; that its share of the regular dividend has been allotted to it for its certificate holders, and that it has wholly ceased to refine sugar. And thus its baptism in the pool of the board became com- plete and final. And yet it is argued that the corporation, the legal entity, has done nothing; that Searles was guilty, but the corporate robe that enveloped him was innocent, and so he must be left to wear it un- disturbed; that while all that was human and could act had sinned, yet the impalpable entity had not acted at all and must go free. I believe that the history of what occurred,.as I have already described it, furnishes a sufficient answer, assuming that stockholders and trustees- acting together can do 8 corporate act at all. There was corporate action in making the combination agreement which bound the defendant. The revocation of an executed authority left the con- tract standing. The corporation thus helped to make the trust and became an element of it. If there was anything imperfect in its ac- tion, the new stockholder and his associates waived the imperfection by acting upon the agreement of the corporation, and so confirming it in all particulars. ? But the assumption underlying the view I have expressed is itself contested, and a proposition asserted which denies the possibility of any corporate action, except by the trustees or directors acting formally as such; a proposition which, if sound, dominates the whole field of controversy, and, establishing that there has been no cor- porate action at all, effectually shuts out every question of illegality or public injury. I cannot admit that proposition. I think th y _teltinl eorpomts indus shih snot ornal- corporal stan and where that conduct is directed or produced by the whole body, ‘both of officers and stockholders, by every living instrumentality which can possess and wield the corporate franchise, that conduct is SE Oe eee ee if illegal and injurious may deserve and . There always is, and there always: uae be, corporate cana without formal corporate action where CHAP. Ill.] PEOPLE v. NORTH RIVER SUGAR REFINING CO. 133 the thing challenged is an omission to act at all. A corporation or- ganized in the public interest, with a view to the public welfare, and in the expectation of benefit to the community, which is the motive of the State’s grant, may accept the franchise and hold it in sullen silence, doing nothing, resolving nothing, furnishing no formal cor- porate action upon which the State can put its finger and say, this ~the corporation has done by the agency through which it is authorized to-actThat is corporate conduct which the State may question and — —punish without searching for a formal corporate act. The directors Of acorporation, its authorized and active agency, may see the stock- _ holders perverting its normal purposes by handing it over, bound and “helpless, to an irresponsible and foreign authority, and omit all ac- tion which they ought to take, offer no resistance, maké io protest, but silently acquiesce as directors in the wrong which as stockholders they have themselves helped to commit. That again is corporate conduct, though there be an utter absence of directors’ resolutions. Is it asked what they could have done to prevent the organization ‘of the trust; how-they-were negligent-and-unfaithful as-corporate —officers by their omission to act; what good a mere protest or objec=— tion would have accomplished; what effective form their resistance could have assumed? The answer is that they could have refused to recognize the illegal trust transfer of the stock; they could have de- clined to register the new ownership upon their stock-books; they _ —eould have said, and acted upon their words, that the original stock- holders remained not only the beneficial, but the legal owners of the < ——stock; and, if the board trustees appealed to the law, the resisting : directors could challenge the legality of the transfer as moulded by the combination agreement, and might have defeated the trust and shattered it at the outset of its career. 80 much they could have done as corporate officers; so much it was their duty to have done as Tép- resentatives of the corporation; and when, beyond that corporate — neglect, they recognized the validity of the stock transfers in trust, put the new and unlawful ownership upon their books, and accepted its votes in the choice of new directors who were to throttle the in- dependence of the corporation and chain it to the will of the trust, I think we must shut our eyes in wilful blindness i J oth corporate neglect and corporate action. It is true, as we are reminded, that the statute confers upon trus- tees and directors general authority to manage the stock, property, and concerns of manufacturing corporations; and equally true that, as a general rule and as between the companies and those with whom they deal, the corporate action must be manifested through and by the directors; but other statutes indicate with equal plainness that there are corporate acts which the trustees cannot perform, and which affect and bind the corporation only upon the condition that they proceed from the stockholders, or from them and the trustees acting 134 PEOPLE J. NORTH RIVER SUGAR REFINING Co. [CHAP. III. together. In increasing or diminishing the capital stock, the cor- porate act is wholly that of the corporators, and in consolidating two or more companies into one, there must be the joint action of both trustees and stockholders. The trust of the refineries, in substance and effect, approached very near to these two corporate acts, so far as the resultant consequences affected the corporators acting. The trust stipulations practically doubled their corporate stock through the agency of the certificates issued, and the combination in its re- sult is largely the equivalent of a substantial consolidation. If these things had been done lawfully, they would have been accomplished by the united action of trustees and corporators, and beyond any question would have been corporate acts. Having been done unlaw- fully, but by the same united agency aiming at similar results, they must still constitute corporate conduct, unless the bare fact of their illegality takes away their corporate character. To say that, would disarm the State in every case of misuse or abuse of chartered powers. The abstract idea of a corporation, the legal entity, the impalpable and intangible creation of human thought is itself a fiction, and has been appropriately described as a figure of speech. It serves very well to designate in our minds the collective action and agency of many individuals as permitted by the law; and the substantial in- quiry always is what in a given case has been that collective action and agency. As between the corporation and those with whom it deals, the manner of its exercise usually is material, but as between it and the State, the substantial inquiry is only what that collective action and agency has done, what it has, in fact, accomplished, what is seen to be its effective work, what has been its conduct. It ought not to be otherwise. The State gave the franchise, the charter, not to the impalpable, intangible, and almost nebulous fiction of our “thought corporator liv- ing men, to be used by them, to redound to their benefit, to strengthen ~ their hand, and add energy to their capital. Ifit is taken away, it is taken from them as individuals and corporators, and the legal fiction disappears. The benefit is theirs, the punishment is theirs, and both ‘must attend and depend upon their conduct; and when they all act, collectively, as an aggregate body, without so acting, reach results and accomplish purposes clearly corporate in their character, and affecting the vitality, the independence, the utility, of the corporation itself, we cannot hesitate to conclude that there has been corporate conduct which the State may review,and not be defeated by the assumed innocence of a convenient, fiction. ~ As was saidin People ex rel. v. K. & M. T. R. Co., 23 Wend. 193, “though the proceeding by information be against the corporate body, it is the acts or omissions of the individual corporators that are the subject of the judgment of the court.” It remains to determine whether the conduct of the defendant in CHAP. IIl.] PEOPLE ¥. NORTH RIVER SUGAR REFINING CO. 135 participating in the creation of the trust, and becoming an element of it, was illegal and tended to the public injury, and we may con- sider the two questions together and without formal separation. ~It is quite clear that the effect of the defendant’s action was to divest itself of us essential and vital elements of its eee ise by “life only to aceanl the conditions upon which it was ae to re- ~Ceive its powers and privileges merely to put them in pawn; and to give away to an irresponsible board its entire independence and _self- control” When it had passed into the hands of the trust, only a shell —of a corporation was left standing, as a seeming obedience to the law, but with its internal structure destroyed or removed. Its stock- holders, retaining their beneficial interest, have separated from it their voting power, and so parted with the control which the charter gave them and the State required them to exercise. It has a board of - directors nominally and formally in office, but qualified by shares which they do not own, and owing their official life to the board which can end their power at any moment of disobedience. It can make no dividends whatever may be its net earnings, and must en- cumber its property at the command of its master, and for purposes wholly foreign to its own corporate interests and duties. At the command of that master it has ceased to refine sugar, and without any doubt for the purpose of so far lessening the market supply as to prevent what is termed ‘‘over production.” In all these respects it has wasted and perverted the privileges conferred by the charter, abused its powers, and proved unfaithful to its duties. But graver still is the illegal action substituted for the conduct which the State had a right to expect and require. It has helped to create an anomal- ous trust which is, in substance and effect, partnership of-twenty— separate corporations. The State permits in many ways an aggrega- “tion of capital, but mindful of the possible dangers to the people, over-balancing the benefits, keeps upon it a restraining hand, and Smintatis overt a prident Supervision, where such ageropation de= pends upon 1ts an. Ss orate grants. It is a violation of law for corporations to enter into a partnership. WY. & S.C. Co. v. F. Bank, 7 Wend. 412; Clearwater v. Meredith, 1 Wall. 29; Whittenton Mills v. Upton, 10 Gray, 596. The case last cited furnishes the reasons with precision and at length. It shows the utter inconsistency of a double allegiance by those who act for the corporation to two different principals, and demonstrates that the vital characteristics of the corporation are of necessity drowned in the paramount authority of the partnership. That the combination of the refineries partakes of the nature of a partnership is not denied. Indeed, in one of the papers added to the appellant’s brief, it is not only admitted but asserted and defended. That paper shows quite clearly, that by force of the arrangement, there was a community of 136 PEOPLE v. NORTH RIVER SUGAR REFINING co. [CHAP. IIL interest in the fund created by the corporate earnings before division, and that each member of the trust shared in the profit and loss of all. It is said, however, that a consolidation of manufacturing corpora- tions is permitted by the law, and that the trust or combination or partnership, however it may be described, amounts only to a practi- cal consolidation which public policy does not forbid because the statute permits it. Laws of 1867, chap. 960; Laws of 1884, chap. 367. The refineries did not avail themselves of that statute. They chose to disregard it, and to reach its practical results without sub- jection to the prudential restraints with which the State accompanied its permission. If there had been a consolidation under the statute, one single corporation would have taken the place of the others dis- solved. They would have disappeared utterly, and not, as under the trust, remained in apparent existence to threaten and menace other organizations and occupy the ground which otherwise would be left free. Under the statute the resultant combination would itself be a corporation deriving its existence from the State, owing duties and obligations to the State, and subject to the control and supervision of the State, and not, as here, an unincorporated board, a colossal and gigantic partnership, having no corporate functions and owing no corporate allegiance. Under the statute the consolidated com- pany taking the place of the separate corporations could have as capital stock only an amount equal to the fair aggregate value of the rights and franchises of the companies absorbed; and not as here a capital stock double that value at the outset and capable of an elastic and irresponsible increase. The difference is very great and serves further to indicate the inherent illegality of the trust combi- nation. And here I think we gain a definite view of the injurious tend- encies developed by its organization and operation, and of the public interests which are menaced by its action. As corporate grants are always assumed to have been made for the publ beaeiti, ane'oon —duct which destroys their normal functions, and-maims—andcrip- ples their separate activity, and takes away their free and independ- ~ ent action, must so far disappoint the purpose of their creation as to affect unfavorably the public interest; and that_to a much ereater extent when beyond théir own several aggregations of capital they compact them all into one combination which stands outside of the ward of the State, which dominates the range of an entire industry, and puts upon the market a capital stock proudly defiant of actual values, and capable of an unlimited expansion. It is not a sufficient answer to say that similar results may be lawfully accomplished; that an individual having the necessary wealth might have bought all these refineries, manned them with his own chosen agents, and managed them as a group at his sovereign will; for it is one thing for the State to respect the rights of ownership and protect them out of CHAP, II1.] LINN TIMBER CO. 0. UNITED STATES. 137 regard to the business freedom of the citizen, and quite another thing to add to that possibility a further extension of those consequences by creating artificial persons to aid in producing such aggregations. The individuals are few who hold in possession such enormous wealth, and fewer still who peril it all in a manufacturing enterprise; but if corporations can combine, and mass their forces in a solid trust or partnership, with little added risk to the capital already em- barked, without limit to the magnitude of the aggregation, a tempt- ing and easy road is opened to enormous combinations, vastly ex- ceeding in number and in strength and in their power over industry any possibilities of individual ownership; and the State by the crea- tion of the artificial persons constituting the elements of the com- bination, and failing to limit and restrain their powers, becomes it- self the responsible creator, the voluntary cause of an aggregation of capital which it simply endures in the individual as the product of his free agency. What it may bear is one thing, what it should cause and create is quite another. And so we have reached our conclusion, and it appears to us to have been established, that the defendant corporation has violated its charter and failed inthe performance of tts corporate duties, and arate meepecisn material art tit por antes lus audgmental dissolution. Having reached that result, it becomes needless to ad- "vance into the wider discussion over monopolies and competition and restraint of trade and the problems of political economy. Our duty is to leave them until some proper emergency compels their consid- eration. Without either approval or disapproval of the views ex- pressed upon that branch of the case by the courts below, we are enabled to decide that in this State there can be no partnerships of separate and independent corporations, whether directly, or in- directly through the medium of a trust; no substantial consolida- tions which avoid and disregard the statutory permissions and re- straints, but that manufacturing corporations must be and remain Several as ‘they were created,or-one under the statute. ~~ ~The judgment appealed from should be affirmed with costs. All concur. Judgment affirmed. Nors. — See, accord, State v. Standard Oil Co., 49 Ohio St. 187. LINN TIMBER CO. v. UNITED STATES. 236 U.S. 574. 1915. Mr. Justice Hotmzs delivered the opinion of the court. These are suits in equity brought by the United States against the appellants to annul patents issued under the Timber and Stone Act 138 LINN TIMBER CO. ¥. UNITED STATES. {CHAP, IIi. of June 3, 1878, c. 151, 20 Stat. 89, on the ground that the entries were fraudulent. Both of the courts below have found that the en- tries were fraudulent, that the defendant Smith was either a party to the fraud or chargeable with notice of it, and that the Linn & Lane Timber Company stood in no better position than Smith. The Cir- cuit Court of Appeals made decrees for the United States in respect of all the lands concerned. 181 Fed. Rep. 545. 196 Fed. Rep. 593; 116 C.C.A. 267. 203 Fed. Rep. 394; 121 C.C.A. 498. The main question here concerns the statute of limitations: ‘‘suits to vacate and annul patents hereafter issued shall only be brought within six years after the date of the issuance of such patents.” Act of March 3, 1891, c. 561, § 8; 26 Stat. 1095, 1099. See Act of March 3, 1891, c. 559; 26 Stat. 1093. In No. 46 the twenty-eight patents in contro- versy were issued on August 12, 1902. In No. 159, nine of the pat- ents were issued on August 12, 1902, and eight on July 9, 1902. The bills were filed and subpoenas were taken out and delivered to the Marshal on May 25, 1908. On July 20 the Marshal returned non est inventus as to Smith. An order of notice was applied for on the same day, suggesting that he was residing in Minneapolis, and was granted on July 27. Smith was served with process on August 11, 1908, and the corporation was made a party on November 16, and was served on November 18, 1908; so that it will be seen that the corporation was not brought into the suit until more than six years had run after the issue of all the patents and that Smith was served more than six years after the issue of eight of the patents involved in No. 159. On the other hand the bills were filed within six years. The patented lands had been conveyed to various persons in trust for Smith in 1900, shortly after the making of final proof._In May, _ 1906, Smith, still having the equitable or legal title, organized a “Minnesota corporation, the appellant, with [000 shares of $100 each, Tor the purpose Of receiving and holding the title to these and other lands. He took 998 shares, his wife one, and his attorney one. He _then offered to pay tor the stock wi é land, and subsequently caused to be executed oO corporati a corded until September 9, 1908, after the beginning of these suits, “and more than six years after the issue of the patents. It is found, it “would seem reasonably, that one purpose of Smith was to keep the titles concealed until the statute of limitations should have run.: The United states was ignorant of the transaction. But a month from the recording of the conveyances to the corporation Smith and other defendants pleaded it in abatement, and in November, as we have said, the United States filed amended bills. Upon the facts as found by the two courts below we must take it that the corporation was the mere tool of Smith, that his knowledge was its knowledge, McCaskill Co. v. United States, 216 U.S. 504, and CHAP. I1I.] LINN TIMBER CO. ¥. UNITED STATES. 139 that it was party to an effort to keep the title concealed until it was too late for the United States to complain. It even is open to some doubt whether the deeds ever were delivered until they were re- corded, and it seems open to none that, as was said by the Circuit Court of Appeals, recording the deeds was the first business the cor- poration did. This being so, the difference in legal personality be- tween Smith and the corporation gives the corporation no greater rights than Smith. It cannot be privy to a fraud and on the ground of its success set up a title of which, if that be material, Smith is to have substantially the whole advantage, and thus defeat the adju- dication against Smith that otherwise would undo the fraud. There is no question of creditors’ rights and the only ground for hesitation is that before the bill was filed some of the shares had been pledged by Smith, and fifteen shares had been transferred to one Johnson and also pledged for Smith’s debt. But we are of opinion with the findings that the position was not changed as between the United States, Smith and the corporation in such a way as to give the last a better standing in this case. Those who took the stock as security did not deal with the corporation as outsiders, but became a part of it while it still was under the manifest domination of Smith and charged with participation in Smith’s fraud. The corporation cannot derive any new right from them. Wilson Coal Co. v. United States, 110 C.C.A. 348; 188 Fed. Rep. 545. Whether they have a remedy is not a question here. We now are not considering the effect of a fraudulent_conceal- ment of a cause of action. We are considering whether-a man-whe— knows that his title is bad and will be attacked can call into being a corporation which he owns, in order to save the property, make a deed to it, put the deed into his pocket, leave it unrecorded and, without the need of trusting even an accomplice, can keep it with erfect security until the statute tas run, and then set up that his GaaTEe OWE TI Ed We ars deciding that if a secret transfer of wrongfully held Iand is made in this way for the purpose of busying _the United States with the wrong person until the title shall be made _good by time, service on the man thus put forward is sufficient te avoid the statute and the trick must fail. The bills were filed and subpcenas were taken out and delivered to the Marshal for service before the statute had run, reasonable dili- ence was in getting servic e rights of the United States against all the patents were saved. For when so fol- lowed up the rule is pretty well established that the statute is inter- rupted by the filing of the bill. Coppin v. Gray, 1 Y. & C., C.C. 205, 207. Purcell v. Blennerhassett, 3 Jo. & Lat. 24, 45. Foster v. Thomp- son, 4 Dr. & Warr. 303, 318. Hele v. Lord Bexley, 20 Beav. 127. Hayden v. Bucklin, 9 Paige (N.Y.), 512. Aston v. Galloway, 38 No. Car. 126. Dilworth v. Mayfield, 36 Mississippi, 40, 52. United 140 MOORE & HANDLEY CO. v. TOWERS HDW. CO. [CHAP. III. States v. American Lumber Co., 85 Fed. Rep. 827, 830. United States v. Miller, 164 Fed. Rep. 444. There was an attempt made in argument to reopen the questions of fact upon which the two courts below agreed, but we see no reason to depart from the common rule and therefore we do not advert to any of those matters. It also was argued that the decision of the Secretary of the Interior that the patents should be issued is con- clusive. But the decision was obtained by such frauds that the matter was open for reconsideration by the courts. Washington Securities Co. v. United States, 234 U.S. 76. Decrees affirmed. Nors. — See also Rickey Land & Cattle Co. v. Miller, 218 U.S. 258. As to the criminal liability of a person who controls a corporation, for the misapplication of money entrusted in form to the corporation see Milbrath v. State, 188 Wis. 354; King v. Grubb, [1915] 2 K.B. 683. MOORE & HANDLEY CO. ». TOWERS HARDWARE CO. 87 Ala. 206. 1888. ‘Tue bill in this case was filed on the 3d December, 1888, by the Towers Hardware Company.a_private corporation, against_the ore andley Hardware Company, another private corpora- tion; and sought an injunction to restrain the defendant from setting ~—~plow-stocks and plow-blades,”’ in violation of a contract made be- —tween the complainant and a partnership doing business under the name of Moore, Moore & Handley, which was composed of James “~D. Moore, Benj. F. Moore, and William A. Handley, who, as the bill “alleged, afterwards formed the defendant corporation. The com- —pintkisct Was Invorporated;-under the general statutes, on the Ist February, 1887, and the defendant on the 12th March, 1888; each having its principal place of business in Birmingham, and selling hardware throughout the northern counties of the State mostly on orders effected through their travelling salesmen. The partnership of _Moore, Moore & Handley had been engaged in the same business, and on the 27th May, 1887, they sold out their entire stock of plow- Stocks and plow-blades at. the price of $728 paid in cash, to the eon ks and plow-blades, at the price of $728 paid in cash, to the ¢ plainant; signing an agreement, which was written at the foot of the memorandum, or bill of sale, in these words: “In consideration of above sale, we agree not to handle any more plow-stocks or plow- blades, except railroad plows.” The bill alleged that the price paid was about $100 more than the market value of the articles, and that complainant was induced to make said purchase “‘solely by said CHAP. 111.) MOORE & HANDLEY CO. v. TOWERS HDW. Co. 141 written promise and undertaking of said Moore, Moore & Handley.” By the_terms of defendant’s articles of incorporation, its capital stock was $100,000, of which said partners each subscribed $25,000, and one Thos. P. Wimberly $25,000; but the bill alleged that, “if said Wimberly ever really had any interest in said corporation, or the capital stock thereof, by virtue of having paid anything on his sub- scription, he no longer has any interest therein, nor has had since before (to-wit) August 8th, 1888;” also, on information and belief, that said Moores and see “are the sole owners of the capital stock of said corpora éen since August 10th, 1888,” J. D. Moore bein: i y_ vice-president, and-BP. Moore secretary, ever since its organization; that the defendant cor- eh for the purpose of carrying on the same busi- ness which the partnership had carried on; that its capital stock “was paid for wholly and entirely in the stock of goods and assets of said partnership;” that it ‘succeeded to all the property rights and assets of said partnership, as well as all the liabilities thereof;” that said defendant corporation ‘‘is none other than said J. D. Moore, B. F. Moore and Wm. A. Handley, who constituted said partnership, a ee Conse Said _Catporeeoay Your orator can not say whether or not said Moores and Handley organized said corporation for the purpose of evading the force and effect of their said agree- ment with your orator, but does say and charge that the effect of their doing so would be to perpetrate a fraud on your orator, if they _should be allowed to handle plow-blades and plow-stocks; that the ~ defendant’s business, as now conducted, is identically the same as__ that conducted by said Moores and Handley, is conducted by the same persons, and in substantially the same manner as before, and _ ‘that the only change in fact has been in the name of the concern. And your orator alleges that said Moores and Handley, in making said agreement with your orator, thereby meant and intended, and such was your orator’s intention, that they would not again engage in selling or handling plow-blades or plow-stocks in connection with their said business in the city of Birmingham, so long as your orator was engaged in the like business.” The defendant answered the bill, admitting its allegations as to the contract between the complainant and Moore, Moore & Handley, and the nature of the business carried on by the several parties; deny- ing that it assumed, or in any manner became liable for, the obli- gations of said partnership, or of its individual partners, or that it acquired any interest in the outstanding notes and accounts due to said partnership, or the real estate owned by the partners, which was more than sufficient to pay all their outstanding debts and lia- bilities; alleging that Wimberly owned a one-fourth interest in the corporation at its organization, and for some time acted as its treas- urer, but admitting that the Moores and Handley had since bought 142 MOORE & HANDLEY CO. v. TOWERS HDW. CO. [CHAP. III. out his interest; insisting that said contract was illegal and void, be- cause in restraint of trade, and, if valid, was not binding on the de- fendant; and demurring to the bill for want of equity. After answer filed, the defendant submitted a motion to dissolve the temporary injunction, and to dismiss the bill; and this appeal is taken from the decree of the chancellor overruling and refusing these motions. McCuettan, J. The equity of the bill, so far as the injunction is concerned, and the sufficiency of those of its allegations which are not denied by the answer to sustain the injunction, depend primarily on two questions: first, whether the contract relied on is void, as being in unreasonable restraint of trade; and, second, whether a nega- tive undertaking entered into by persons who subsequently or- ganize, and for the time constitute, a corporation for the prosecu- tion_of the business with respect to which the contract was made, can be enforced by injunction against the corporation. [The contract was held to be valid.] “The general doctrine is_wettestablished, and obtains both at law — shin equity, that-a comoration is a distinct entity, 12 be considered separate and apart from the individuals who compose it, and is not “to be affected by the personal rights, obligations and transactions of its stockholders; and this, whether said rights accrued, or obligations were incurred, before or Subsequent to incorporation. Morawetz on Priv. Corp. 227-234, 547-549; Morrison v. Gold Mt. G. M. Co., 52 Cal. 309; Hawkins v. Mansfield G. M. Co., Ib. 515; Gent v. M. & Mut. Ins. Co. 107 Ill. 658; Caledonian R. Co. v. Helensburgh, 2 Macg. 391; Penn. Mat. Co. v. Hapgood, 141 Mass. 147. There is a class of contracts, however, which are entered into be- tween the promoters or prospectors of a contemplated corporation and third persons, on the faith of the corporation, intended to enure to its benefit, and which in point of fact do enure to its benefit, on which the corporation will be charged, even in the absence of an ex- press promise to perform, or ratification on the part of the company after it is in esse; on “the familiar principle, that one who accepts the benefit of a contract, which another volunteers to perform in his name, and on his behalf, is bound to take the burden with the ben- efit.” Redfield on Railways (5th ed.), 18; Edwards v. Grand June. R., 1M. & Cr. 650; Stanley v. Birkenhead R., 9 Sim. 264; L. R. & Fet. S. R. Co. v. Perry, 87 Ark. 164; Perry v. L. R. & Fet. 8. R. Co., 44 Ark. 383; Bommer v. Am. Spiral Co., 81 N.Y. 468. And in those cases where ‘‘associates combine together to create a paper corporation, to cover a partnership or joint venture, and where the stockholders are partners in intention,’”’ and have resorted to the fiction of separate corporate entity to free themselves from individual obligations which had attached to them, with respect to the business they propose to carry on, prior to the organization of CHAP. Iil.| MOORE & HANDLEY CO. v. TOWERS HDW. CO. 143 the company, courts of equity, when the ends of justice require it, will disregard and look beyond the fiction of corporate entity, and hold the corporation to a discharge of the liabilities resting on its members; and this may be done, although some of the shareholders had not originally incurred the obligation sought to be enforced, provided they had notice of it before entering the corporation, and participated in the effort to avoid it. Davis Imp. Wrought Iron W. W. Co. v. Davis Wrought Iron W. Co., 20 Fed. Rep. 700; Beal v. Chase, 31 Mich. 490, 495, 532. The contract of Moore, Moore & Handley, sought to be enforced against the Moore & Handley Hardware Company, was not an un- dertaking between promoters of the company and third parties, nor made on the faith of the corporation, nor intended to enure to its benefit, nor did it enure, in point of fact, to the benefit of the corpora- tion. It is not of that class of contracts which courts enforce against corporations, on the ground that they were made in the corporate name by anticipation, and that the corporation received and ac- cepted the benefits resulting from them. There is no allegation of fraud made against the corporation, or its shareholders, and the implication of the fraudulent effect of the corporate action complained of is denied. _It is not shown that this is a mere “paper corporation,” to cover a joint venture, in which the corporators are partners in intention, and have resorted to this form _for the purpose of evading and avoiding obligations which they had taken upon themselves as individuals, or for the purpose of evading ‘the promise reed on here. If these things had appeared in the case, we should not-hesitate to hold the corporation answerable for the individual obligation. But, in the absence of fraud, ‘‘no authorities have gone the length of holdi act made with indi- viduals, exclusively upon individual credit, will become the contract “of any future corporation that may be formed for the more con- venient management and use of the benefits of it.” L. R. & Ft. 8. R. Co. Cases, supra. If the case of Beal v. Chase, supra, goes beyond this doctrine, we can not indorse it. We do not think it does. In that case, the cor- poration had been formed for the purpose of violating a contract not to engage in a certain business. All the corporators were held to have participated in this purpose. The business was to be conducted by ‘the corporation, in connection with the promisor in his individual capacity. He had an interest in it, both individually and as the principal shareholder of the company; and the court enjoined the Erponatioa nol genarallyy- but fram cone on The PSEC WHtCOr Tor the individual contracting party. To put the case at bar in line with that case, it would have to appear, not o a zed for the purpose, and with the intention of evading their contract, through the separ j cor Iso 144 MOORE & HANDLEY CO. ¥. TOWERS HDW. co. [CHAP. III. that they reserved an interest in the business distinct from their intere of these facts are shown. The effect of allowing the injunction in this case to continue, would neces- sarily be to hold all future shareholders in the corporation to the per- formance of a contract which neither they nor the corporation had ever entered into, and of which they may not even have had notice. Such a result could only be justified on the ground of bad faith in the creation of the company. To thus hamper a bona fide corporation, would be inequitable, and have the effect of establishing a doctrine fraught with much danger to corporate rights, powers and property. The allegations going to show a ratification, by the corporation, of this contract of Moore, Moore & Handley, are denied by the an- swer, and hence can not be considered in passing on the decree over- ruling the motion to dissolve the injunction. Those allegations of the bill which are not denied, were not sufficient to authorize a con- tinuance of the injunction, and the decree on that point was errone- ous, and is reversed. The contract relied on here is such a one as the respondent cor- poration could have made under its charter. It is, therefore, one which, being already in existence between complainant and the in- dividuals composing the defendant company, the corporation had the power to ratify and adopt. The bill, in our judgment, sufficiently avers such ratification or adoption. These allegations give equity to the bill, and the decree overruling the demurrer is affirmed. The cause will be remanded, with instructions to the chancellor to dissolve the injunction, unless the complainant amends its bill so as to entitle it to a continuance of the writ, under the principles we have announced. Reversed and remanded. Norr. — Beal v. Chase, 31 Mich. 490. Chase contracted_not to engage in a certain business. He thereafter, with other persons who_ ew of his contract, formed a corporation of which he was a large shareholder and the president, witch engaged in the business, It was formed for that purpose. Te ae doing said business with or for Chase, directly or indirectly.” See also Gormully Co. v. Bretz, 64 Fed. 612. Hagy v. McGuire, 147 Pa. 187. Defendants contracted not to sell certain products ex i ed a corporation which dealt in such products the plaintiffs. This was held to be a breach of the defendants’ contract. cramer v. Old, 119 N.C. I. A,B, and C covenanted not to en- gage in a business. They subsequently organized a corporation, ito engage in the business, and became the principal stockholders and he managing officers of such corporation. There were other stock- ~Bolders who knew of the covenant by A, B, and C before they put CHAP. III.] HALL’S SAFE CO. Y. HERRING-HALL-MARVIN SAFE CO. 145 any money into the corporation..The court enjoined A, B, and C from taking stock or assisting in the organization of_a cor j fonnec Wit the DUNDose Gf SATIRE Ge ah Busines, bat it ctased to enjom X from engaging in such business. See also Towa Wire Co. v. Southern Wire Co., 30 Fed. 128. HALL’S SAFE CO. ». HERRING-HALL-MARVIN SAFE CO. 146 Fed. 37. 1906. SEVERENS, Circuit Judge. From about the year 1847 to 1867, one * Joseph L. Hall had, in successive co-partnerships with other persons, been engaged at Cincinnati, Ohio, in the manufacture and sale of fire and burglar proof safes. In this business he had been the prin- cipal and managing member of his firms. In the latter year (1867) he with other persons organized a corporation under the laws of Ohio by the name of “‘Hall’s Safe & Lock Company,” for the purpose of carrying on the same business. Its factory and principal office were located at Cincinnati, and its business of selling safes extended throughout the United States and into foreign countries. Its safes were known as ‘‘Hall’s Safes” and “‘Hall’s Standard Safes,” and certain styles of them were marked ‘‘Hall’s Standard Safes,” and the safes had a good reputation. In March, 1889, the said Joseph L. Hall, who was at that time the principal stockholder in the corpora- tion last mentioned, died. His sons, Edward C., William H., and Charles O. Hall, were also stockholders. The first two became, suc- cessively, presidents of the corporation._The stock of Joseph L. Hall continued part of his estate, and the business went on as before until _ “Way 4, 1892, when the corporation sold to the Herring-Hall-Marvin Company, a New Jersey corporation, allits ‘‘real estate and lease- hold interests, tools, machinery, fixtures, merchandise, trade-marks and £00 g covenantedand- agreed that it would close up its affairs and be dissolved and would not in the future engage or continue in said business. This sale and "agreement _was assented to-by the above-named-sons of Joseph 1. Hall, who are the individuals made defendants in this cause. Ed- ward ©. Halland William H. Hallat or about the date of the transfer became stockholders (as we must suppose), directors, and, respec- tively, president and treasurer, of the Herring-Hall-Marvin Com- pany, at stated salaries agreed upon at the time of said transfer. But in 1895 these persons were deposed from their offices, and their sala- ries reduced, and on August 1, 1896, they resigned their offices as directors. Their resignations were accepted, and they withdrew from the company. At the time when these parties became associated 146 HALL’s SAFE CO. v. HERRING-HALL-MARVIN SAFE CO. [CHAP. II. with the Herring-Hall-Marvin Company, a written agreement with that company was entered into by each of them, which, after sta- ting the terms of their employment, contained the following stipula- tion: — “And in consideration as aforesaid, I, the said Edward C. Hall (in the other contract, William H. Hall), do hereby covenant, promise, and agree that I will not, so long as the Herring-Hall- 4 Marvin Company may_desiré my_-Services_as_above, én- \ Fame agrer ati a oe ONG rin the as of New Jersey, or in any of the states east of the Mississippi river, in the business of man- ufacturing, selling, buying, or dealing in fire or burglar proof vaults and safes, or in any business or occupation such as the said corpora- tion known as the Hall’s Safe & Lock Company has heretofore been engaged in, or such as the Herring-Hall-Marvin Company is au- thorized or impowered to engage in, or in any other business which will or may compete or interfere in any manner with the business of the said Herring-Hall-Marvin Company.” In September, 1896, Edward C. Hall, William H. Hall, Charles O. Hall, and other persons organized a corporation under the laws of Ohio by the name of the “‘Hall’s Safe Company,” the corporate | defendant herein, and this company shortly thereafter went into the business of manufacturing and selling safes. {Counsel for complainant contended that the contract of Hall’s Safe & Lock Company bound the individuals Edward C., William H., and Charles O. Hall.] Upon this contention it becomes important to determine what were and are the relations between the complainant and its prede- cessor in title and the several Soe tet ee the Herring- Hall-Marvin Company_a e 1ase with_ e Hall Safe & Lock anna all its obese propentied and the good will which it had acquired in its business, as well as the right to use such trade-names as had been customarily used to identify its — products. Tt aequired-atso the tight to require that the Halrs Sate “—& Lock Company should go out of business, or, in substance, that 1t Should not longer engage in business of the kind which it sold to the Herring-Hat-Marvin Company. But it is contended that the con- tract reaches beyond the corporation, the Hall Safe & Lock Company, and bi and officers of the corporation, and prevents them and any corporation of which they ‘may become stockholders and managers from doing what the Hall ‘Safe & Lock Company could not do; and the principal reason for this contention 18 the fact that these individual detentamts participated in the sale, and as stockholders received its benefits. We are of opin- —ton that this proposition cannot be sustained. ‘The contratt which the Herring-Hall-Marvin Company had was with the corporation only, and not with its stockholders or officers. The officers who con- CHAP. IIl.] HALL’S SAFE CO. ¥. HERRING-HALL-MARVIN SAFE Co. 147 ducted the business of the selling company were not parties to the contract. It is a familiar rule that an agent, who, having lawful au- "thority, makes a contract with another for a known principal, does not bind himself, but his principal only (Story on Agency, § 261; Mechem on Agency, § 555; Whitney v. Wyman, 101 U.S. 392, 25 L. Ed. 1050); and the officers of a private corporation, in respect to their liability on contracts entered into by them in behalf of the cor- poration, stand upon the same footing as agents of private individ- uals (21 Am. & Eng. Ency. of Law [2d Ed.] 879; Whitney v. Wyman, supra). If the purchaser desired to make the offi and agents of the galling corporattort subject $6 the atipulations of the company in the contract of sale, it should have required their personal agreement to that eifect. a The cases cited by counsel for the complainant to support their contention that the court may look through the form of a corporate organization, and fasten upon the stockholders a liability for the acts of the corporation, do not support such a doctrine as applicable to contract relations. These are State v. Standard Oil Co., 49 Ohio St. 137, 30 N.E. 279, 15 L.R.A. 145, 34 Am. St. Rep. 541; McKinley v. Wheeler, 130 U.S. 630, 9 Sup. Ct. 638, 32 L. Ed. 1048; and Anthony v. American Glucose Co., 146 N.Y. 407, 41 N.E. 23. They were all cases where, for special purposes and in special circumstances, the court held that it was competent and proper to regard the rights and duties of stockholders in corporations—None_of them impugns the __general rule above stated that in matters of contract the officers and agents of a corporation are not bound personally by stipulations made by them in behalf of their principal. This rule is not affected by the circumstance that they are indirectly interested as stockholders in the contracts of thelr corporation It it were so, it would break down all distinction between the corporate entity and its component parts. Note. —In Donnell v. Herring-Hall-Marvin Safe Co., 208 U.S. 267, Mr. Justice Houmss said (p. 278): ‘‘ But it was said that if a partnership had sold out by a conveyance in like terms the members would have given up the right to use their own names if they appeared in the firm name, that in this case the Halls received the consideration for the good will they had attached to their name, that they ratified the sale and necessarily assented to it, since otherwise the corpora- tion could not have sold its property or have carried out its agree- ment to dissolve, and that under such circumstances a court ought to look through the corporation to the men behind it. “Philosophy may have gained by the attempts in recent years to look through the fiction to the fact and to generalize corporations, partnerships and other groups into a single conception. But to gen- eralize is to omit, and in this instance to omit one characteristic of the complete corporation, as called into being under modern statutes, 148 BRODERIP v. SALOMON. [CHAP. III. that is most important in business and law. A leading purpose of such statutes and of those who act under them is to interpose @ non- conductor, through which in matters of contract it is impossible to see the men behind. However it might be with a partnership, Russia Cement Co. v. Le Page, 147 Massachusetts, 206, 211, when this cor- poration sold its rights everybody had notice and knew in fact that it was not selling the rights personal to its members, even if, as al- ways, they really received the consideration, or, as usual, they all assented to its act. That it contracted for such assent, if it did, by its undertaking to dissolve, does not make the contract theirs. But the case does not stop there. The purchasing company had_ the possibility of competition from the Halls before its mind and gave the measure of its expectations and demands by the personal con- tracts that it required. Those contracts were limited in time and scope and have-been discharged.” BRODERIP v. SALOMON. [1895.] 2 Ch. 323. SALOMON »v. SALOMON & CO., LTD. [1897.] A.C. 22. In 1892 Aron Salomon was carrying on business as a leather mer- chant, etc., and was solvent. On July 28, 1892, a limited company __Was registered under the Companies Act-of 1802.—‘The memorandum Of assoclati as_subseri Salomon and his wife and aughter and four sons, each subscribing for one share. €8 Act provide at ‘any seven or more per- sons, associated for a lawful purpose may, by subscribing their names to a memorandum of association, and otherwise complying with the provisions of the act in respect of registration, form a company with or without limited liability.” ‘No subscriber shall take less than one share” (§ 8). The act prescribed no minimum value for shares, and hence the shares might be of as small a value as those who formed the company pleased. Nor did the Act impose any limit upon the num- ber of shares which a single member might subscribe for. § 30 pro- vided that no notice of any trust should be entered on the register. Upon thé registration of the memorandum of association, and of the articles (where required), the registrar was required to certify that the company was incorporated. ‘‘The subscribers of the memoran- dum of association, together with such other persons as may from time to time become members of the company, shall thereupon be a body corporate by the name contained in the memorandum of as- sociation, capable forthwith of exercising all the functions of an in- CHAP. III.] BRODERIP ¥. SALOMON. 149 corporated company, and having perpetual succession and a com- mon seal, with power to hold lands.” . . . (§ 18.) Salomon conveyed his business to ‘this company, and the com- pany f f es. The net result was that the company had the business, and Salomon had certain debentures, _and 20,001 shares out of a total of the 20,007 issued. The total “number of Shares authorized was 40,000, but the remaining 19,993 were not issued, nor offered to the public. Nor were any of the 20,007 shares offered to the public. The company became insolvent. The assets which remained after paying one Broderip, whose right to be paid in priority to the un- secured creditors was not questioned, were not sufficient to pay the debentures held by Salomon. If these remaining assets were applied on the debentures held by Salomon, the unsecured creditors of the company would receive nothing. The unsecured creditors, other than Salomon himself, had claims for 77331. 8s. 3d. The matter came before VauGHAN WILLIAMS, J., and the follow- ing is an abridgment of his opinion: — There was no fraud on the shareholders, inasmuch as they were all perfectly cognizant of the conditions under which the company was formed, and as there was no intention to allot further shares at a later period to outsiders. But the company was a mere nominee of Salomon’s; and the case is to be dealt with as if the nominee, in- Stet of Demg the company. had_been some individual agent of alomon’s to whom he had purported to sell this business. In that case the trustee in bankruptcy of the agent would have had a right to make Salomon indemnify the agent against the debts that he had contracted by the direction of his principal. The right of the li- quidator in the present case is precisely the same, notwithstanding the debentures which were a mere form, intended to give an ap- pearance of reality to a sale which, in fact, was no sale at all, be- cause it was a sale by a man to an agent for his own profit. This busi- ness was Salomon’s business, and no one else’s. The creditors of the company could, in my opinion, have sued Salomon. Their right to do so would depend on the circumstances of the case, whether the company was a mere alias of the founder or not. ‘The relationship of principal and agent existed between Salomon and the en Salon i € company, the creditors of the company t Sail are shown to be the creditors of Salomon>and although it is neces- sary, in order to get rid of the priority given to Salomon by these de- bentures, that one should fall back upon the lien of the company as his agent, whom he was bound to indemnify, I do not mean to ex- clude from my judgment that the debentures were given to Salo- mon by his agent, the company, and that the necessary effect of Salomon as principal, taking these debentures from his agent, the 150 BRODERIP v. SALOMON. [CHAP. III. company, was that his creditors — for, according to my view, the creditors of the company were his creditors — were defeated and delayed by the debentures. His Lordship made the following order: — Declare that the plaintiffs, A. Salomon & Co. Limited, or the liqui- dator thereof are, or is entitled to be indemnified by the defendant —xk- Satomon against the sum of 77331. 8s. 3d... . —— Order and adjudge that the plaintiffs, A. Salomon & Co. Limited, do recover against defendant A. Salomon the said sum of 77381. 8s. 3d. Declare that plaintiffs, A. Salomon & Co. Limited, are entitled to a lien for the said sum of 77331. 8s. 3d., upon all sums which would be payable to defendant A. Salomon out of the assets of the plain- tiffs A. Salomon & Co. Limited. Linpiry, L.J. This is an appeal by Mr. Aron Salomon against an order made by VauGHAN WItutIams, J., and which, in effect, directs Mr. A. Salomon to indemnify a limited company formed by him against the unsecured debts and liabilities incurred by or in the name of the company whilst it carried on business. The appeal raises a question of very great importance, not only to the persons immediately affected by the decision, but also to a large number of persons who form what are called ‘one-man companies.” Such companies were unheard of until a comparatively recent period, but have become very common of late years. There can be no doubt that in this case an attempt has been made to use the machinery of the Companies Act, 1862, for a purpose for which it never was intended. The legislature contemplated the en- couragement of trade by enabling a comparatively small number of persons — namely, not less than seven — to carry on business with a limited joint stock or capital, and without the risk of liability be- yond the loss of such joint stock or capital. But the legislature never contemplated an extension of limited liability to sole traders or to a fewer number than seven. In truth, the legislature clearly intended to prevent anything of the kind, for § 48 takes away the privilege conferred by the Act from those members of limited companies who allow such companies to carry on business with less than seven mem- bers; and by § 79 the reduction of the number of members below seven is a ground for winding up the company. Although in the present case there were, and are, seven members, yet it is manifest that six of them are members simply in order to enable the seventh “himself to carry on Dusiness with limited Iiability. The object of the whole arrangement is to do the very thing which the legislature in- ~ tended not to be done; and, ingenious as the scheme is, 1t cannot ~ have the effect desired so long as the law remains unaltered. This —was evidently the view taken by VAUGHAN WILLIAMs, J. The incorporation of the company cannot be disputed. (See § 18 CHAP, I1I.] BRODERIP v. SALOMON. “151 of the Companies Act, 1862.) Whether by any proceeding in the nature of a scire facias the Court could set aside the certificate of incorporation is a question which has never been considered, and on which I express no opinion; but, be that as it may, in such an action as this the validity of the certificate cannot be impeached. The com- pany must, therefore, be regarded as a corporation, but as a corpo- ration created for an illegitimate purpose. Moreover, there having always been seven members, although six of them hold only one 11. share each, Mr. Aron Salomon cannot be reached under § 48, to which I have already alluded. As the company must be recognized as a corporation, I f ifficulty in saying that the company di not carry on business as a principal, and that the debts and liabili- ties contracted m 1ts name are nou entorceable against if in its cor- porate capacity. But it does not follow that the order made by VAUGHAN WILLIAMS, J., is wrong. A person may carry on business as a principal and incur debts and liabilities as such, and yet he entitled to be indemnified against those debts and liabilities by the person ~~ for whose benefit he carries on the business. The company in this case —has been regarded by VAUGHAN WILLIAMS, J., as the agent of Aron Salomon. i should rather Hen the company to 5 trustee for lim a trustee improperly brought into existence by him to ena i to do what the statute prohibits. It is manifest that the other mem- bers of the company have practically no interest in it, and their names have merely been used by Mr. Aron Salomon to enable him to form a company, and to use its name in order to screen himself from liability. This view of the case is quite consistent with In re George Newman & Co., [1895] 1 Ch. 674. In a strict legal sense the business may have to be regarded as the business of the company; but if any jury were asked, Whose business was it? they would say Aron Sal- omon’s, and they would be right, if they meant that the beneficial interest in the business was his. I do not go so far as to say that the creditors of the company could sue him. In my opinion, they can only reach him through the company. Moreover, Mr. Aron Salo- mon’s liability to indemnify the company in this case is, in my view, the legal consequence of the formation of the company in order to attain a result not permitted by law. The liability does not arise simply from the fact that he holds nearly all the shares in the com- pany. A man may do that and yet be under no such liability as Mr. Aron Salomon has come under. His liability rests on the purpose for which he formed the company, on the way he formed it, and on the use which he made of it. There are many small companies which will be quite unaffected by this decision. But there may possibly be some which, like this, are mere devices to enable a man to carry on trade with limited liability, to incur debts in the name of a registered com- pany, and to sweep off the company’s assets by means of debentures which he has caused to be issued to himself in order to defeat the 152 BRODERIP v. SALOMON. [CHAP. III. claims of those who have been incautious enough to trade with the company without perceiving the trap which he has laid for them. It is idle to say that persons dealing with companies are protected by § 43 of the Companies Act, 1862, which requires mortgages of limited companies to be registered, and entitles creditors to inspect the register. It is only when a creditor begins to fear he may not be paid that he thinks of looking at the register; and until a person is a creditor he has no right of inspection. As a matter of fact, persons do not ask to see mortgage registers before they deal with limited -companies; and this is perfectly well known to every one acquainted with the actual working of the Companies Acts and the habits of business men. Mr. Aron Salomon and his advisers, who were evi- dently very shrewd people, were fully alive to this circumstance. If the legislature thinks it right to extend the principle of limited liability to sole traders it will no doubt do so, with such safeguards, if any, as it may think necessary. But until the law is changed such attempts as these ought to be defeated whenever they are brought to light. They do infinite mischief; they bring into disrepute one of the most useful statutes of modern times, by perverting its legitimate use, and by making it an instrument for cheating honest creditors. Mr. Aron Salomon’s scheme is a device to defraud creditors. Agreeing as I do in substance with VaucHan Wituiams, J., I do not think it necessary to investigate the question whether the so- called sale of the business to the company ought to be set aside. The only object of setting it aside is to obtain assets wherewith to pay the creditors, and this object can be attained on sound legal principles by the order which he has made. In the event, however, of this case going further, I will add that I regard the so-called sale of the business to the company as a mere sham, and that in my opinion it might, if necessary, be set aside by the company in the interest of its creditors, although all the shareholders, such as they were, knew of and assented to the arrangement. They were simply assisting Mr. Aron Salomon to carry out his scheme. I cannot regard In re Brit- ish Seamless Paper Box Co., 17 Ch.D. 467, as an authority against a rescission of such a transaction as this. We have carefully considered the proper form of order to be made on this appeal, and the order of the Court will be as follows: The Court, being of opinion that the formation of the company, the agreement of August, 1892, and the issue of debentures to Aron Salomon pursuant to such agreement, were a mere scheme to en- able him to carry on business in the name of the company with limited liability, contrary to the true intent and meaning of the Companies Act, 1862, and, further, to enable him to obtain a prefer- ence over other creditors of the company by procuring a first charge on the assets of the company by means of such debentures, dismiss the appeal of Aron Salomon with costs; and, it being unnecessary to CHAP. I11.] BRODERIP ¥. SALOMON. 153 make any order on the liquidators’ cross-notice of appeal, discharge the order directing the liquidator to pay costs of the counter-claim, and give him those costs. Lopss, L.J. This is a case of very great importance, and I wish shortly to state my reasons for concurring in the judgment just de- livered. I do not propose to restate the facts so fully and clearly de- tailed by Linpuey, L.J.: I shall content myself with shortly stating the impression they have produced on my mind. The incorpora- tion of the company was perfect —the machinery by which it was formed was in every respect perfect, every detail had been observed; but, notwithstanding, the business was, in truth and in fact, the business of Aron Salomon; he had the beneficial interest in it; the company was a mere nominis umbra, under cover of which he car- ried on his business as before, securing himself against loss by a limited liability of 11. per share, all of which shares he practically possessed, and obtaining a priority over the unsecured creditors of the company by the debentures of which he had constituted himself _ the holder. ‘ ~—Tt would be lamentable if a scheme like this could not be defeated. - If we were to permit it to succeed, we should be authorizing a per- version of the Joint Stock Companies Acts. We should be giving vitality to that which is a myth and a fiction. The transaction is a device to apply the machinery of the Joint Stock Companies Act to a state of things never contemplated by that Act — an ingenious device to obtain the protection of that Act in a way and for objects not authorized by that Act, and in my judgment in a way inconsis- tent with and opposed to its policy and provisions. It never was intended that the company to be constituted should consist of one substantial person and six mere dummies, the nominees of that per- son, without any real interest in the company. The Act contemplated the incorporation of seven independent bond fide members, who had —# mind and a will of their Own, and were not the mere puppets of an individual adopting the i his 0 legalize such a transaction would be a scandal, But to what relief is the liquidator entitled? In the circumstances of this case it is, in my opinion, competent for the Court,to set aside the sale as being a sale from Aron Salomon to himself — a sale which Tat none of the incidents of a sale, was a fiction, and therefore in- valid; or to d ee for Aron Salomon, whom Aron Salomon, the cestui_que trust, was bound to indemnify; or to declare ion of the company, the agreement of Aug- ust, 1892, and the issue of the debentures to Aron Salomon pursuant_ ~to such agreement, to be merely devices to enable him to carry on ~pisines fe the name of the company with limited liability, contrary “to the true intent and meaning of the Companies Act, 1862, and 154 BRODERIP v. SALOMON. [CHAP. III. further, to enable him to obtain a preference over other creditors of the company by obtaining a first charge on the assets of the com- pany by means of such debentures. I wish to add that I am in- clined to think that a scire facias would go to repeal the certificate of incorporation; but I express no decided opinion on the point. The appeal will be dismissed with costs. [Kay, L.J., delivered a concurring opinion.] From the above decision, Salomon appealed to the House of Lords. His appeal was brought in forma pauperis. Lord Herscueu. [After stating the facts, and reciting the pre- vious proceedings. ] It is to be observed that both courts treated the company as a legal entity distinct from Salomon and the then members who com- posed it, and therefore as a validly constituted corporation. This is, indeed, necessarily involved in the judgment which declared that the company was entitled to certain rights as against Salomon. Under these circumstances, I am at loss to understand what is meant by saying that A. Salomon and Company Limited is but an alias for A. Salomon. It is not another name for the same person; the company is ex hypothesi a distinct legal persona. As little am I able to adopt the view that the company was the agent of Salomon to carry on his business for him. In a popular sense a company may in every case: be said to carry on business for and on behalf of its shareholders, but this certainly does not in point of law constitute the relation of prin- cipal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs. Here, it is true, Salomon owned all the shares except six, so that if the business were profitable he would be entitled substantially to the whole of the profits. The other shareholders, too, are said to have been “dummies,” the nominees of Salomon. But when once it is conceded that they were individual members of the company distinct from Salomon, and sufficiently so to bring into existence in conjunction with him a validly constituted corporation, I am unable to see how the facts to which I have just referred can affect the legal position of the company, or give it rights as against its members which it would not otherwise possess. The Court of Appeal based their judgment on the proposition that the formation of the company, and all that followed it, was a mere scheme to enable the appellant to carry on business in the name of the company, with limited liability, contrary to the true intent and meaning of the Companies Act 1862. The conclusion which they drew from this premiss was, that the company was a trustee and Salomon their cestui que trust. I cannot think that the conclusion fol- lows even if the premiss be sound. It seems to me that the logical result would be that the company had not been validly constituted, CHAP, 111.] BRODERIP v. SALOMON. 155 and therefore had no legal existence. But, apart from this, it is neces- sary to examine the proposition on which the court have rested their judgment, as its effect would be far reaching. Many industrial and banking concerns of the highest standing and credit have, in recent years, been, to use a common expression, converted into joint-stock companies, and often into what are called “private” companies, where the whole of the shares are held by the former partners. It appears to me that all these might be pronounced “schemes to en- able’ them ‘to carry on business in the name of the company, with limited liability,” in the very sense in which those words are used in the judgment of the Court of Appeal. The profits of the concern carried on by the company will go to the persons whose business it was before the transfer, and in the same proportions as before, the only difference being that the liability of those who take the profits will no longer be unlimited. The very object of the creation of the company, and the transfer to it of the business, is that, whereas the liability of the partners for debts incurred was without limit, the liability of the members for the debts incurred by the company shall be limited. In no other respect is it intended that there shall be any difference; the conduct of the business and the division of the profits are intended to be the same as before. If the judgment of the Court of Appeal be pushed to its logical conclusion all these companies must, I think, be held to be trustees for the partners who transferred the business to them, and those partners must be declared liable, without limit, to discharge the debts of the company. For this is the effect of the judgment as regards the respondent company. The position of the members of a company is just the same whether they are declared liable to pay the debts incurred by the company, or by way of indemnity to furnish the company with the means of paying them. I do not think that the learned judges in the court below have contemplated the application of their judgment to such cases as I have been considering, but I can see no solid distinction between those cases and the present one. It is said that the respondent company is a ‘‘one-man” company, and that in this respect it differs from such companies as those to which I have referred. But it has often happened that a business transferred to a joint-8tock company has been the property of three or-four-persons onty, and that the other subscribers of the memo- randum have been clerks or other persons who possessed little or no imterest-in the concer. 1 am unable to see how it can be lawful for three or four or six persons to form a company for the purpose of employing their capital in trading, with the benefit of limited lia- bility; and not for one person to do so, provided in each case the requirements of the statute have been complied with, and the com- any_h ] i d. How does it concern the creditor whether the capital of the company is owned by seven persons in 156 BRODERIP v. SALOMON [cHAP. III. equal shares, with the right to an equal share of the profits, or whether it is almost entirely owned by one person who practically takes the whole of the profits? The creditor has notice that he is dealing with a company the liability of the members of which is limited, and the register of shareholders informs him how the shares are held, and that they are substantially in the hands of one person, if this be the fact. The creditors in the present case gave credit to and contracted with a limited company; the effect of the decision is to give them the benefit as regards one of the shareholders, of unlimited liability. I have said that the liability of persons carrying on business can only be limited provided the requirements of the statute be complied with, and this leads naturally to the inquiry what are those require- ments? The Court of Appeal has declared that the formation of the re- spondent company and the agreement to take over the business of the appellant, were a scheme “‘contrary to the true intent and mean- ing of the Companies Act.’”’ I know of no means of ascertaining what is the intent and meaning of the Companies Act except by examin- ing its provisions and finding what regulations it has imposed as a condition of trading with limited liability. The memorandum must state the amount of the capital of the company and the number of shares into which it is divided, and no subscriber is to take less than one share. The shares may, however, be of as small a nominal value as those who form the company please; the statute prescribes no minimum, and though there must be seven shareholders, it is enough if each of them holds one share, however small its denomination. The Legislature therefore clearly sanctions a scheme by which all the shares, except six, are owned by a single individual, and these six are of a value little more than nominal. It was said that in the present case the six shareholders other than the appellant were mere dummies, his nominees, and -held their shares in trust for him. I will assume that this was so. In my opinion it makes no difference. The statute forbids the entry in the register of any trust, and it certainly contains no enactment that each of the seven persons subscribing the memorandum must be beneficially en- titled to the share or shares for which hesubscribes. The persons who subscribe the memorandum or who have agreed to become members of the company, and whose names are on the register, are alone re- garded as, and, in fact, are, the shareholders. They are subject to all the liability which attaches to the holding of the share. They can be compelled to make any payment which the ownership of a share involves. Whether they are beneficial owners or bare trustees is a matter with which neither the company nor creditors have anything to do; it concerns only them and their cestui que trust if they have any. If, then, in the present case all the requirements of the statute were complied with, and a company was effectually constituted, and CHAP, IIt.] CONTINENTAL TYRE CO. v. DAIMLER CO. 157 this is the hypothesis of the judgment appealed from, what warrant is there for saying that what was done was contrary to the true in- tent and meaning of the Companies Act? It may be that a company constituted like that under considera- tion was not in the contemplation of the Legislature at the time when the Act authorizing limited liability was passed; that if what is pos- sible under the enactments as they stand had been foreseen, a mini- mum sum would have been fixed as the least denomination of share permissible, and it would have been made a condition that each of the seven persons should have a substantial interest in the com- pany. But we have to interpret the law, not to make it; and it must be remembered that no one need trust a limited liability company unless he so please, and that before he does so he can ascertain, if he so please, what is the capital of the company, and how it is held. In the original appeal, order appealed from reversed. In the cross appeal, order appealed from affirmed. Nott. — Booth v. Helliwell, [1914] 3 K.B. 252. Booth formed a company of which he was practically the only shareholder. The “company carried on & business, i in the course of which a sale of butter was made by an assistant in the shop which was a violation of the Sale of Food and Drugs Act Held, that the assistant was the servant of the company, and not fervent of the company, and not. of Booth, Mfg. Co., 51 La. Ann. 64. CONTINENTAL TYRE & RUBBER CO. LTD. ». Vint DAIMLER CoO., LTD. [1915.] 1 K.B. 893. Lorp Rzapine, J.C. These two actions are brought for the pur- pose of determining whether during the war payment of a debt can be enforced by a company of which all the shareholders and di- rectors are alien enemies. In the first action Scrutron, J., affirmed the order of the Master giving leave to sign final judgment under Order xtv. In the second, the action was tried before Lusu, J., who decided in favour of the plaintiff company. The present appeals are against both judgments and by consent were heard together. They have been ably and elaborately argued and raise points of consider- able importance. The plaintiffs are a limited liability company incorporated under the Companies Acts. They carry on business in London at the regis- tered office of the company and have a number of agencies through- out the United Kingdom. The company was formed in 1905 with a 158 CONTINENTAL TYRE CO. v. DAIMLER CO. [CHAP. III. capital of 10,0001., increased in 1908 to 25,000/., to trade in motor car tyres made in Germany by a company incorporated under German law. The German company formed a number of subsidiary com- panies in various parts of the world for the sale of these tyres. The plaintiff company was formed for the purpose of selling such tyres in the United Kingdom. At the date of the writ the German com- pany held 23,398 shares in the plaintiff company, and the remaining shares (except one) are now held by subjects of the German Empire residing in Germany. The one share is registered in the name of the secretary of the company,.who was born in Germany, resided in London, and in January, 1910, became a naturalized subject of the Crown. The directors are subjects of the German Empire and are resident in Germany. The business is managed according to the evidence of the secretary by two managers and himself, all three being resident in this country. In the first case the plaintiff company is the drawer and holder of bills accepted by the defendants for goods supplied before the declaration of war. The bills matured for payment and were pre- sented after the declaration of war. In the second case the plaintiffs’ claim is for a balance of account for goods supplied before the war. It is admitted by both defendants (except as to a small amount in the second action) that the goods have been delivered and that payment for them is due, but both defendants have resisted payment on the ground that in the circumstances above stated the plaintiff company was not entitled to receive and could not enforce payment of the debt. The appellants contend that the plaintiff company must be regarded as an alien enemy notwithstanding that it is a limited lia- bility company, and that as commercial intercourse between per- sons under the protection of the Crown and persons who are alien enemies is illegal, payment to the plaintiff company must be illegal. They further contend that the Court should look at the substance and not the technicalities of the matter. If the plaintiff company is to be regardéd as an alien enemy the payment would be illegal under the common law and also under paragraph 5, sub-paragraph 1, of the Royal Proclamation relating to Trading with the Enemy issued on September 9, 1914, which forbids payment to or for the benefit of an alien enemy, and is a Proclamation in force within s. 1, sub-s. 2, of the Trading with the Enemy Act, 1914. The appellants further contend that the directors, having become alien enemies at the out- break of the war, ceased to be directors of the company, and that as no other directors had been appointed no.authority had been or could be given to bring these actions. These contentions require careful consideration. It cannot be disputed that the plaintiff company is an entity created by statute. It is a company incorporated under the Com- panies Acts and therefore is a thing brought into existence by virtue CHAP. I1I.] CONTINENTAL TYRE CO. v. DAIMLER CO. 159 of statutory enactment. At the outbreak of war it was carrying on business in the United Kingdom; it had contracted to supply goods, it delivered them, and until the outbreak of the war it was admittedly entitled to receive payment at the due dates. Has the character of the company changed because on the outbreak of war all the share- holders and directors resided in an enemy country and therefore became alien enemies? Admittedly it was an English company before the war. An English company cannot by reason of these facts cease to be an English company. It remains an English company regardless of the residence of its shareholders or directors either before or after the declaration of war. Indeed it was not argued by Mr. Gore- Browne that the company ceased to be an entity created under English law, but it was argued that the law in time of war and in reference to trading with the enemy should sweep aside this ‘‘techni- cality’’ as the entity was described and should treat the company not as an English company but as a German company and therefore as an alien enemy. If the creation and existence of the company could be treated as a mere technicality, there would be considerable force in this argument. It is undoubtedly the policy of the law as administered in our courts of justice to regard substance and to dis- regard form. Justice should not be hindered by mere technicality, but substance must not be treated as form or swept aside as tech- nicality because that course might appear convenient in a particular case. The fallacy of the appellants’ contention lies in the suggestion that the entity created by statute is or can be treated during the war as a mere form or technicality by reason of the enemy character of its shareholders and directors. A company formed and registered under the Companies Acts has a real existence with rights and lia- bilities as a separate legal entity. It is a different person altogether from the subscribers to the memorandum or the shareholders on the register (per Lord MacnacuTen in Salomon v. Salomon & Co., [1897] A.C. 22, at p. 51. It cannot be technically an English company and substantially a German company except by the use of inaccurate and misleading language. Once it is validly constituted as an Eng- lish company it is an artificial creation of the Legislature and it re- tains its existence for all intents and purposes. It is a living thing with a separate existence which cannot be swept aside as a technical- ity. It is not a mere name or mask or cloak or device to conceal the identity of persons and it is not suggested that the company was formed for any dishonest or fraudulent purpose. It is a legal body clothed with the form prescribed by the Legislature. In determining whether a company is an English or foreign cor- poration no inquiry is made into the share register for the purpose of ascertaining whether the members of the company are English or foreign. Once a corporation has been created in accordance with the requirements of the law it is an English company notwithstanding 160 CONTINENTAL TYRE CO. ¥. DAIMLER CO. [CHAP. III. that all its shareholders may be foreign. Just as a foreign corpora- tion does not become British and cease to be foreign if all its mem- bers are subjects of the British Crown (per Lord Macnacuten, Lord Brampton, and Lord Linpuey in Janson v. Driefontein Consolidated Mines, [1902] A.C. 484, at pp. 497, 501, and 505). For the appellants’ contention to succeed payment to the company must be treated as payment to the shareholders of the company, but a debt due to a company is not a debt due to all or any of its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22. The company and the company alone is the creditor entitled to enforce payment of the debt and empowered to give to the debtor a good and valid discharge. Once this conclusion is reached it follows that payment to the plaintiff company is not payment to the alien enemy shareholders or for their benefit. The same result is arrived at under paragraph 3 of the above men- tioned Proclamation. It defines “enemy” in paragraph 3. ‘The ex- pression ‘enemy’ in this Proclamation means any person or body of persons of whatever nationality resident or carrying on business in the enemy country, but does not include persons of enemy na- tionality who are neither resident nor carrying on business in the enemy country. In the case of incorporated bodies, enemy char- acter attaches only to those incorporated in an enemy country.” Therefore although payment is forbidden “‘to or for the benefit of an enemy” this prohibition does not apply when payment is made to a company incorporated in this country. Under this Proclama- tion it appears clear that the test of residence or place of carrying on business to determine whether an incorporated body was enemy or not is not to be applied. The company only becomes enemy if in- corporated in the enemy country, and as the plaintiff company was not incorporated in the enemy country, enemy character does not attach to it. Further it is provided by § 1, sub-section 2, of the Trading with the Enemy Act, 1914, that any transaction permitted by or under any Proclamation issued by His Majesty dealing with trading with the enemy shall not be deemed to be trading with the enemy. As by the Proclamation enemy character attaches only to those incorporated in a foreign country it follows that payment to a company incorporated in this country is not only not forbidden, but is in our opinion impliedly permitted. (Both in the Proclamation and the statutes relating to trading with the enemy the adjective “alien” is not used, doubtless because it was thought superfluous when once “enemy” had been defined.) It must, however, be clearly understood that any person who on behalf of the plaintiff company paid money to shareholders resident or carrying on business in Germany or to a company incorporated in Germany would be acting in defiance of the law, and none the less be- .cause payment is made in the name of the company. That would be CHAP. I1t.] CONTINENTAL TYRE CO. v. DAIMLER CO. 161 a criminal offence and would be within the express prohibition of paragraph 5, sub-paragraph 1, as defined by paragraph 3. The plain- tiff company has never claimed any such right and has explicitly disclaimed any such intention. According to the evidence money re- ceived is paid into the plaintiffs’ banking account and 9000I. per month is drawn out and paid into another account of the plaintiff company at the bank for the purpose of meeting expenses and estab- lishment charges throughout the United Kingdom; the remainder of the money received is left to accumulate in the bank. It is to be observed that if payment to a company would be pay- ment ‘‘to or for the benefit of an enemy” because all the share- holders are enemies and because payment to the company must be regarded as payment to the shareholders it would seem to follow that payment of a debt to a company which had some enemy share- holders -would equally come within the forbidden area. The appel- lants’ answer is that their contention extends at most to those com- panies in which enemy shareholders are in the majority and in such circumstances as would lead to the conclusion of fact that substan- tially the company is enemy. Further if this contention were re- jected it is urged that when as in the present case all the shareholders and directors are enemies there is no room for doubt as to the fact and a decision in the appellants’ favour could be confined to the special facts. There does not appear to be any logical ground for these distinctions. If it were permissible to look behind the exist- ence of the entity and to regard the character of the individual share- holders in order to determine whether or not the payment is “‘to or for the benefit of an enemy” the suggested line of demarcation would be wholly arbitrary. If payment to a company with a majority of enemy shareholders is to be regarded as payment to an enemy com- pany, what is the position of the other shareholders? Can it be sug- gested that the minority consisting of British or neutral shareholders cease to be shareholders in an English company and become members of an enemy corporation? There is no judicial authority for the proposition of the appellants and indeed there is a weight of judicial opinion against it. See Salo- mon v. Salomon & Co., [1897] A.C. 22, and Janson v. Driefontein Consolidated, Mines, [1902] A.C. 484. Gramophone and Typewriter v. Stanley, [1908] 2 K.B. 89, is a recent instance of the refusal of the court to treat the entity of a company as a mere form or technicality. The Commissioners of Inland Revenue sought to make the Gramo- phone Company, which was an English company, liable to pay in- come tax in respect of profits made by a German company in which the English company held all the shares. None of such profits had been received by the English company in this country, but it was sought to treat the profits of the German company for the purpose of income tax as if they were the profits of the English company. The 162 CONTINENTAL TYRE CO. ¥. DAIMLER CO. [CHAP. III. Court of Appeal was of opinion that the business of the German com- pany had not become the business of the English company. Not- withstanding that the English company held all the shares in the German company, the English company could not be treated as hav- ing any right to the undistributed profits of the German company. A fortiori it could not have any right to the payment of a debt due to the German company. See also Kodak v. Clark, [1902] 2 K.B. 450; [1903] 1 K.B. 505. The argument of the appellants that, although the plaintiff com- pany was an English company in times of peace, it could not be so regarded in time of war was further supported by Mr. Leslie Scott on the ground that the plaintiff company could not be regarded as a subject of the Crown. He said the company could not be a subject, it had no mind, it could not be loyal or disloyal to the State. He urged that alone the character of the shareholders must determine whose subject the plaintiff company is, and that when all the share- holders are enemy the plaintiff company isenemy. This point was discussed in Janson v. Driefontein Consolidated Mines, [1902] A.C. 484. The litigation arose out of the South African war. The re- spondent corporation was formed and registered in the Transvaal Republic; most of the shareholders were resident outside the Repub- lic, and were not subjects of it. The appellant, an underwriter and a British subject, objected that the corporation was alien enemy and could not sue. It was argued for the respondents that the corpora- tion should not be regarded as subject to the laws of the Transvaal and as alien enemy. None of their Lordships favoured that view. Some of their Lordships assumed for the purpose of the case, but did not decide, that the company remained an alien enemy notwith- standing that most of the shareholders were not alien enemies (see Lord Hatssury, p. 490, Lord Macnacuten, p. 497, and possibly Lord Davey only assumed it, p. 498). Lord Linpumy (p. 505) was of opinion that the company must be regarded as resident and tarry- ing on business in the Transvaal and subject to the laws of that country, and he added: “‘ When war broke out the company became an alien enemy of this country: see the American case of Society for the Propagation of the Gospel v. Wheeler, 2 Gallison (U.S.) 105. If it becomes material to attribute nationality to the company it would, in my opinion, be correct to say that the company was 2 Transvaal company and a subject of the Transvaal Government, although al- most all its shareholders were foreigners resident elsewhere and sub- jects of other countries.” Lord Brampton, at p. 501, said: ‘The company clearly must be treated as a subject of the Republic, not- withstanding the nationality of its shareholders.” These opinions are not to be taken as part of the actual decision, nevertheless they are opinions of great weight. In Daniel v. The Award of the Com- missioners for Liguidating British Claims on France, 2 Knapp, P.C. CHAP, III.| CONTINENTAL TYRE CO. v. DAIMLER CO. 163 23, and in Long v. the Same, 2 Knapp, P.C. 51, it was held by the Privy Council that a corporation of British subjects existing in a foreign country and under control of a foreign Government must be considered as a foreign corporation, and was, therefore, not entitled to claim compensation under a treaty giving this right to British subjects. The corporation was the subject of the foreign State, and not of the British Crown. Even in reference to the ownership of a ship it was held in The Queen on the Prosecution of the Pacific Steam Navigation Company v. Arnaud and Powell, (1846) 16 L.J. (Q.B.) 50, that, notwithstanding that some of the members of the corpora- tion were not British subjects but foreigners, the British corporation was the sole owner of the ship and a British subject. None of these authorities lend support to the appellants’ argument; they tend rather to assist the plaintiff’s case. There remains, however, the case decided in 1809, Bank of the United States v. Deveaux, 5 Cranch, 61, upon which much reliance was placed by Mr. Leslie Scott. The Supreme Court of the United States there decided that the Court could look beyond the corpo- rate name and notice the character of the individuals who composed the corporation and treat them substantially as parties to the con- troversy. The question at issue arose from a peculiarity of the Con- stitution of the United States. The State Courts alone have juris- diction to try all civil actions except in certain cases reserved by the Constitution and the Judiciary Law to the Federal Courts. One of these reserved cases is where a citizen of one State sues a citizen of another. A suit having been brought in the Federal Court in the cor- porate name of the bank; it was held by the Supreme Court that a corporation aggregate cannot in its corporate capacity be a citizen, and, therefore, had no right of access to the Federal Court, though it was incorporated in and by one State and was suing the citizen of another State. However, MarsHatt, C.J., who delivered the opinion of the Court, held that, although the corporation could not be a citizen, the Court could look behind the corporate name to ascertain the individuals composing it, so as to determine whether they were citizens of one State suing the citizens of another. The learned Chief Justice based his judgment upon City of London v. Wood, (1701) 12 Mod. 669, which he treated as an authority for his decision that the Court could look behind the corporate name. Upon an examina- tion of that case, and notwithstanding the high authority of the learned Chief Justice, it does not support so sweeping a proposition. It was a case of a very special character. An action was brought by the Mayor and Commonalty of the City of London in the Court of the Mayor and Aldermen of London. Objection was taken that the Mayor, who was the head of the City, without whom the City had no ability or capacity to sue, was also the very person before whom the action was brought for trial. The Court of King’s Bench natur- 164 CONTINENTAL TYRE CO. v. DAIMLER CO. [CHAP. III ally shrank from upholding a judgment given under such circum- stances, and held that the objection was fatal, upon the principle that a judge must not be an interested party in the suit before him. A person cannot be both party and judge in the same suit. The familiar instance is that of a judge who is a shareholder in a railway company sued for damages. It is the judge’s duty to declare his interest to the parties, and unless they agree to waive any objection he cannot try the case. The absence of such declaration and assent of the parties is the explanation of this case. It is to be observed that in the decisions of our Courts this case has not been relied upon, and certainly has not been followed, as an authority for any such proposition as was argued before us. Since the argument an examination of American authorities has disclosed that the case of Bank of the United States v. Deveaux, 5 Cranch, 61, has not since its decision found favour in the Supreme Court of the United States. In 1844, in the case of Lowisville Rail- road Co. v. Letson, (1844) 2 Howard 497, at p. 555, the Supreme Court thought that that case had gone too far and held that “a corporation created by a State to perform its functions under the authority of that State and only suable there, though it may have members out of the State, seems to us to be a person, though an artificial one, inhabiting and belonging to that State; and therefore entitled, for the purpose of suing and being sued, to be deemed a citizen of that State. We remark too that the cases of Strawbridge and Curtis and the Bank and Deveaux have never been satisfactory to the Bar, and that they were not, especially the last, entirely satis- factory to the Court that made them. They have been followed al- ways most reluctantly and with dissatisfaction. By no one was the correctness of them more questioned than by the late Chief Justice who gave them. It is within the knowledge of several of us that he repeatedly expressed regret that those decisions had been made, adding, whenever the subject was mentioned, that if the point of jurisdiction was an original one, the conclusion would be different. We think we may safely assert that a majority of the members of this Court have at all times partaken of the same regret, and that whenever a case has occurred on the circuit involving the application of the case of the Bank and Deveaux it was yielded to, because the decision had been made, and not because it was thought to be right.” In 1895, in the case of St. Louis and San Francisco Railway v. James, (1896) 161 U.S. 545, the Supreme Court again approved the view that the Bank and Deveaux had gone too far, and held that there was an indisputable legal presumption that a corporation is com- posed of citizens of the State which created it and that presumption of citizenship is one of law not to be defeated by evidence to the con- trary. Although not binding upon us, the decision of MARSHALL, C.J., and of the Supreme Court is entitled to our very high respect, and CHAP. 111.] CONTINENTAL TYRE CO. v. DAIMLER CO. 165 this has caused us to give our most careful consideration to this judgment. It is satisfactory to find in the result that the law of the United States is that the corporation i is regarded as a citizen of the State in which it is created, and is, therefore, not in conflict but in harmony with our law. It was further contended on behalf of the appellants that such technicalities have not been allowed to bind the decisions of the Prize Court, and the case of The Tommi, [1914] P. 251, was cited. The President there said: ‘‘The decision as to when property passes is often very difficult when dealing with municipal law. It depends upon fine technicalities; but the like technicalities have not been allowed to bind the decisions of the Prize Courts when transfers of property are attempted when war is actual or imminent. They have been treated as gossamer, which can be wiped entirely aside, be- cause the Prize Court regards the essential qualities of a transac- tion, and tries to arrive at the realities of the case... .” It is suffi- cient for the purpose of this case to say that in this Court we are administering the municipal law and must follow it. Inthe later case of The Rowmanian, [1915] P. 26, decided on December 7, 1914, a point more closely resembling that in these appeals came before the President. It was a claim to resist condemnation of the cargo ex the vessel on the ground that the owner of the cargo, the Europdische Petroleum Union, though a company incorporated at Bremen un- der the laws of the Empire of Germany, was in substance and reality a company owned and controlled by companies or firms in allied or neutral countries. In fact only 10 per cent. of the shareholders of the company were alien enemies, the other 90 per cent. being allies or neutrals. The learned President in giving judgment says: “‘ Neu- tral bodies and subjects are shareholders to a considerable extent in this company. It is a corporate body duly incorporated under the laws of Germany and as such entered an appearance in these pro- ceedings. There was some discussion in argument as to its constitu- tion, but it was not really denied that it was a German company. It clearly is.” The owner of the cargo of oil being therefore an enemy company, the decree for condemnation was made and the German company’s claim failed. The decision in The Roumanian, [1915] P. 26, shows that the character of the entity and not of the shareholders was regarded. That is in accordance with the municipal law and is unfavourable to the appellants’ argument before us. Lastly we were invited to decide against the plaintiff company on the ground that to allow it to recover debts during the war would be against public policy. A somewhat similar argument was ad- dressed to the House of Lords in Janson v. Driefontein Consoli- dated Mines, [1902] A.C. 484, but it found no favour with any of their Lordships. If the law on this subject had hitherto been in doubt, which it was not, it was firmly and finally settled in that case. Noth- 166 CONTINENTAL TYRE CO. ¥. DAIMLER CO. [CHAP. III. ing would more easily tend to create uncertainty and confusion in our law than to allow considerations of public policy as distinguished from law based upon public policy to be a ground of judicial de- cision: see Janson v. Driefontein Consolidated Mines, [1902] A.C. at p. 496. The law is admirably laid down by Parks, B., in Egerton v. Lord Brownlow and Others, (1853) 4 H.L.C. 1, at p. 123, and quoted by Lord Hauspury in Janson’s Case, [1902] A.C. at p. 496. “It is the province of the statesman, and not the lawyer, to discuss, and of the Legislature to determine, what is the best for the public good, and to provide for it by proper enactments. It is the province of the judge to expound the law only; the written from the statutes: the unwritten or common law from the decisions of our predecessors and of our ex- isting Courts, from text-writers of acknowledged authority, and upon the principles to be clearly deduced from them by sound reason and just inference; not to speculate upon what is the best, in his opinion, for the advantage of the community. Some of these decisions may have no doubt been founded upon the prevailing and just opinions of the public good; for instance, the illegality of covenants in restraint of marriage or trade. They have become a part of the recognised law, and we are therefore bound by them, but we are not thereby authorised to establish as law everything which we may think for the public good, and prohibit everything which we think otherwise.” These weighty and well chosen words uttered by a master of the common law and approved in 1902 by the House of Lords are a con- clusive answer to the argument addressed to us on public policy. [The court then considered the question whether there was author- ity in the solicitor to issue a writ or to continue the action in behalf of the plaintiff company; and held that there was such authority.] In our opinion both appeals must be dismissed with costs. This is the judgment of all the members of the Court except BuckKLEY, L.J. The late Kmnnepy, L.J., had read the judgment I have just delivered and approved it before his death. Bucktey, L.J. I regret that I am unable to concur in the judg- ment just delivered. I regard the question as so momentous that I make no apology for stating as clearly as I am able my reasons for arriving at a contrary conclusion. The artificial legal entity created by incorporation under the Com- panies Acts is a legal person existing apart from its corporators. This proposition is true without exception, and nothing in this judg- ment questions the proposition in any way. If there be twelve corporators one of them is not a twelfth or any other part of the corporation. The total number of twelve do not in the aggregate constitute the corporation. On the other hand the corporation can- not exist without corporators. If there are no corporators there can be no corporation. Corporators are essential to the existence of but form no part of the corporation. CHAP. III.] CONTINENTAL TYRE CO. v. DAIMLER CO. 167 The artificial legal person called the corporation has no physical existence. It exists only in contemplation of law. It has neither body, parts, nor passions. It cannot wear weapons nor serve in the wars. It can be neither loyal nor disloyal. It cannot compass treason. It can be neither friend nor enemy. Apart from its corporators it can have neither thoughts, wishes, nor intentions, for it has no mind other than the minds of the corporators. These considerations seem to me essential to bear in mind in determining the present case. The corporation if it be a British corporation stands in the same position for most purposes as a British subject. For instance as re- gards rights of ownership of property and the right to protection and assistance by the law. But while it stands for most purposes in the position of a British subject it cannot, I think, be correctly described as a British subject. A subject must, I conceive, be one who can owe and pay allegiance to the King, who can serve the King physi- cally, for instance if he be a male by wearing weapons and serving in the wars, who has a mind and can be either loyal or disloyal to the King. None of these can be predicated of the abstract legal entity. It has no existence at all except in contemplation of law. If these propositions be true, as I think they are, they seem to me to go to the root of the question which has in this case to be determined. This corporation is one which as a corporation certainly has in law an independent legal existence and that legal person is British. But on the other.hand all its directors are Germans resident in Ger- many. The holders of all its 25,000 shares except one share are Ger- mans resident in Germany. The artificial legal thing is British, resi- dent in England. But all its corporators who can have thoughts, wishes, or intentions are Germans resident in Germany. The question for determination is whether when all the natural persons who express and give effect to their wishes through the cor- poration as a legal abstraction are Germans resident in Germany the corporation can sue in this country because those persons who could not sue are as matter of law absorbed in a separate legal person which is British and which (regarding the corporation as a legal person existing apart from and irrespective of its corporators) can sue. The contractual relations constituted by membership in a cor- poration under the Companies Acts are singular. The relation be- tween each corporator and the corporation is a contractual relation governed by the statute, involving rights within the corporation, rights against the corporation, and liabilities towards the corporation. Where the corporator is an alien enemy these relations may be vitally affected by a state of war. The motive power of the corporation (which in itself apart from its corporators, or its agents *- ap- pointed and authorized through acts done by the corporators — has no life and no power of action) may become paralysed and suspended 168 -CONTINENTAL TYRE CO. 0. DAIMLER CO. [CHAP. III. by the existence of war in a case where every corporator is as an alien enemy under disability as such. Suppose the case of a corporation sole. A private company may be formed consisting of only two persons. It was much debated a few years ago whether the law should not be so altered as to allow a sole person to incorporate himself as a company with limited liability. Suppose that were the law, and an individual German resident in Germany, an alien enemy in fact, became incorporated here as a British company, could it be seriously contended that in time of war that alien enemy because he had acquired a legal corporate name and had an artificial legal existence in this country was consequently for the present purpose not an alien enemy? Does it make any difference that there must be two persons, or again does it make a difference that the number is seven or ten? The number of corporators in the present company is six. The immense importance of the question whether it is impossible for any purpose to look behind the corporation at the person of the corporator may be illustrated by the case of merchant shipping. Under § 1 (d) of the Merchant Shipping Act, 1894, ships owned by a shipping company incorporated in this country are British ships. The individual members of that body corporate may be aliens. If the personality of the corporators can for no purpose be regarded there is nothing to prevent alien enemies from owning and sailing British ships under the British flag. If this judgment be (as having regard to the judgment of the other members of the Court I must assume that it is) wrong, the matter is one which calls urgently for legislation. The proposition that an alien enemy cannot sue rests, I conceive, upon the proposition that such an one cannot approach the King, has no resort to the King, and cannot invoke the assistance of the King. The Court is the King’s Court. The alien enemy cannot come into that Court or have the assistance of that Court because the Court is for judicial purposes the King sitting in his Court and the alien enemy cannot approach him. Take the assumed case of the sole person incorporated as I have supposed; can that sole person be en- titled to access to the King and assistance from the King because in contemplation of law he is entitled to clothe and has clothed him- self in a British dress and notionally but not in fact is British? Take the case of two Germans who had formed a private company; can they approach the King? Take the present case of six Germans; can they approach the King? To say that they can because it is not they but the British corporation which approaches the King seems to me to be unsound. The proposition that it is the British corporation and not the corporators which as matter of legal intendment comes into Court is true, but for the relevant purpose it is not true. The artificial legal entity has no independent power of motion. It is moved by the corporators. It is the German corporator who, under CHAP. II.] CONTINENTAL TYRE CO. v. DAIMLER CO. 169 the corporate name but still German for the relevant purpose of friendliness or enmity, is the person who comes. He is German in * fact although British in form. The question is not wholly without authority which may be a guide. In City of London v. Wood, 12 Mod. 669, the City of London brought a suit against Wood by their corporate name in the Mayor’s Court. Objection was taken that the Court had no jurisdiction by reason of the fact that the Court was held before the Mayor and Aldermen and the action brought in the names of the Mayor and Commonalty and that it is against all law that the same person should be party and judge in the same cause. The objection rested therefore upon the character of the individuals who were members of the Corporation. The judges were unanimous in holding that they could look beyond the corporate name and notice the character of the individual. In Bank of the United States v. Deveaux, 5 Cranch, 61, the principle of that case was followed in the United States in the case of a suit brought by a corporation aggregate composed of citi- zens of one State against the citizens of another State in the Circuit Court of the United States. The jurisdiction of that Court was limited to controversies between citizens of different States. The Court affirmed (see p. 86) that the artificial legal entity, the corporation aggregate, was not a citizen and could not sue unless the rights of the members in this respect could be exercised in their corporate name, and that the Court had consequently no jurisdiction unless it could regard the rights of the members in the corporation, for they were citizens. The view the Court took was (see p. 91) that the con- troversy was substantially between aliens suing by a corporate name and a citizen; or between citizens of one State suing by a corporate name and those of another State. “That name,” said MarsHatt, C.J., at p. 87 (meaning the corporation by the corporate name), “cannot be an alien or a citizen; but the persons whom it represents may be the one or the other; and the controversy is, in fact and in law, between those persons suing in their corporate character, by their corporate name, for a corporate right, and the individual against whom the suit may be instituted.’”’” The Court accordingly upheld the jurisdiction. Referring to this case, Story, J., in giving judg- ment in Society for the Propagation of the Gospel v. Wheeler, 2 Gallison, 105, at p. 133, said: “‘But in the character of its members, as aliens, we have incontestable authority to enforce the corporate rights; and it has been solemnly settled by the Supreme Court, that for this purpose the Court will go behind the corporate name, and see who are the parties really interested. And if, for this purpose, the Court will ascertain who the corporators are, it seems to follow, that the character of the corporators may be averred, not only to sustain, but also to bar, an action brought in the name of the corporation. It might therefore have been pleaded in this case, even if the cor- 170 CONTINENTAL TYRE CO. J. DAIMLER CO. — [CHAP. III. poration had been established in a neutral country, that all its mem- bers were alien enemies; and upon such a plea, with proper aver- ments, it would have deserved great consideration, whether it was not, pendente bello, an effectual bar.” In my opinion the principles laid down in those cases are correct, and none the less because they have, as the Lord Chief Justice has pointed out, been subsequently observed upon in the United States. In Janson v. Driefontein Consolidated Mines, [1902] A.C. 484, I do not find any decision to the contrary. The decision there was against the underwriter. The objection that the company was an alien enemy was in his favour. The House made the assumption in his favour and nevertheless decided against him. It was therefore unnecessary to decide the point, and what was said by the noble and learned Lords was only dictum. Lord Hauspury (p. 490), Lord MacnaGHTEN (p. 497), and Lord Davey (as I read his judgment) at p. 498 in fact assumed it, as distinguished from deciding it. Lord Brampton (p. 501) may be read as deciding it, and Lord LinpLEy (p. 505) perhaps even more plainly so. But it cannot be said that the House decided it when it did not arise for decision, and some at any rate of its members plainly abstained from deciding it and stated that they assumed it for the purpose of the decision. . An argument has been advanced that some language in the Act of 1914 and the Proclamation made under it bears upon the question — TI think not. I find in § 2, sub-section 2 (6), of the Trading with the Enemy Act, 1914, neither licence nor recognition relevant in the matter. The subjects of the enemy State there spoken of may be subjects resident in Great Britain and consequently not alien enemies. They may be British subjects resident or carrying on business in the foreign State and thus alien enemies by residence and not by nationality. There are many cases to which the sub-section may relate without making the assumption that it relates to a company in which all the cor- porators are subjects of the enemy State residing in the enemy State. To operate as a licence or recognition the words of the statute ought, I apprehend, to be plain. So far from their being plain it seems to me that it is only by a strained construction that the words can be made relevant to the subject-matter at all. The definition of enemy in the Proclamation of September 9, 1914, has in my opinion no bearing upon the matter. A Proclamation can neither make nor declare the law, and even if it could that definition does not affect so to do. It does no more than attribute a, meaning to a particular word in a particular document. The last words of the article upon which the question arises seem to me, moreover, very obscure. Strictly read it would seem that according to the de- finition enemy character would not attach to a British corporation resident (as it may be) or carrying on business (as it may do) in the CHAP. III] CONTINENTAL TYRE CO. ¥. DAIMLER CO. 171 enemy country when it does attach to a natural person so resident or carrying on business. The reason of the difference is far to seek. For the above reasons I am of opinion that the Continental Tyre Company stand for the present purpose in the position of alien enemies, for that, to use the language of Bank of the United States v. Deveaux, 5 Cranch, at p. 91, the action is by “aliens suing by a corporate name.” I therefore think that these appeals should be allowed. The riglit form of order I think would be to set aside the service of the writ and to order the plaintiffs to pay the costs of the action. ee Appeals dismissed. Nors. — Peoples Pleasure Co. v. Rohleder, 109 Va. 439. A re- striction in the conveyance of land to the effect that “the title of this land is never to rest in a person or persons of African descent,’’ or “colored persons” is not violated by a subsequent conveyance of the land to a corporation, organized ‘to establish and develop a pleasure park for the amusement of colored people,” and composed exclu- sively of colored persons. Rex v. London County Council, [1915] 2 K.B. 466. The London County Council refused to grant to the London and Provincial Elec- tric Theatres, Limited, the renewal of licences for the exhibition of inflammable cinematograph films and for the performance of music at three theatres. The Council, in taking this action, was influenced by the fact that a majority of the shares of the company were held by alien enemies. On an application for the issue of a writ of mandamus to compel the Council to grant such renewals, the Court of Appeal, by Reapine, C.J., said (p. 475): ‘The second and more serious con- ‘tention is that the Council have not exercised their discretion in a judicial spirit in the sense that they have allowed extraneous con- siderations to affect their decisions. If they have allowed themselves to take into consideration matters which had no bearing upon the merits of the case before them, but which nevertheless influenced their minds in arriving at their decision, they have not exercised their discretion properly and have not heard and determined the case ac- cording to law: see Reg. v. Bowman, [1898] 1 Q.B. at p. 666, per Wits, J. The discretion vested in the Council must be exercised within regular limits; in particular, regard should be had only to the merits of the matter before the Council. Although the Council does not sit as a court of law, they must exercise their discretion in a judicial spirit: see Sharp v. Wakefield, [1891] A.C. at p. 179, per Lord Hatssury. The difficulty lies in the application of these principles to the present case. The Council came to the conclusion that a com- pany whose directorate and shareholding were constituted as the directorate and shareholding of the London and Provincial Electric Theatres, Limited, was not a suitable company to which or to whose representative in their discretion and opinion licences should be 172 CONTINENTAL TYRE CO. ¥. DAIMLER CO. [CHAP. III. granted. It must be borne in mind that this Court, in determining whether or not the mandamus should issue, is not exercising appel- late jurisdiction. We are not entitled to decide according to the view we should have taken in the first instance had the matter come before us. We should only order the mandamus to issue if we came to the conclusion that the Council, by taking into consideration the enemy character of the constitution of the company, had allowed their minds to be influenced by extraneous considerations. The Council in these matters are the guardians of the public interest and welfare. If the Council are of opinion that the exhibition of cinematograph films accompanied by music should not be entrusted to a company so largely composed of persons whose interest or whose desire at the present time is or may be to inflict injury upon this country, can it be held as a matter of law that the Council have travelled beyond the limits allowed to them? I think not. I cannot hold that such considerations are extraneous or extra-judicial. These exhibitions exercise a powerful influence, often too powerful an influence, upon the minds of the young; sometimes also upon the minds of others. T cannot think that a Court of law would be justified in treating such considerations as beyond the limits to which a man could look who was desirous of discharging his duty honestly to the best of his ability and with this mind directed solely to the public interest. of the realm at a critical period of its history. At such a time suspicion as to the possible action or influence, direct or indirect, of enemies is naturally very rife, and an honest man might well think it wise to run no risk and to take precautions to guard against even the remote possibility of injury being caused to this country’s interests which to others might appear wholly unnecessary and even unwise, perhaps unjust. If the majority of the members of the Council came to the conclusion that it was not suitable that such a company should at such a time be licenced to carry on such exhibitions, it cannot, in my opinion, be said to be an arbitrary exercise of discretion or to be based upon extraneous considerations. “The case of Continental Tyre and Rubber Co. v. Daimler Co., [1915] 1 K.B. 893, recently decided by the full Court of Appeal, has been to some extent relied upon in support of the company’s contention. That decision has only a remote bearing, if any, upon the present case. In that case the Court held that a company formed under our laws and carrying on business in this country could recover a debt due to the company notwithstanding that its directors and shareholders were alien enemies, on the ground that the entity alone could be re- garded and that in no circumstances could the debt be treated as a debt to the individual shareholders. The Court was pronouncing upon the legal right of the company to sue and enforce its claims for payment of a debt. No question of the exercise of discretion by the Court arose or could arise in such a case.” See also Robson v. Premier Oil Co. Ltd., [1915] 2 Ch. 124. BOOK II. THE PROMOTION OF CORPORATIONS. CHAPTER I. SUBSCRIPTIONS TO STOCK OF A CORPORATION TO BE FORMED. ATHOL MUSIC HALL COMPANY »v. CAREY. 116 Mass. 471. 1875. Contract on the following agreement: “We, the undersigned, severally promise and agree to and with each other that we will associate ourselves into a corporation, the name whereof shall be detérmined by the members thereof, and pay to the treasurer of said corporation the amount of the several shares set against our respective names, for the purpose of purchasing the homestead of Washington H. Amsden, in Athol, on Main Street, and erecting a public hall thereon. The amount of the capital stock of said corporation to be not less than twenty thousand dollars. Names. No. of shares. Amount. , John Carey, One, $100.” The declaration alleged that the defendant entered into and signed the above contract, (a copy whereof was annexed,) and thereby agreed, in consideration of other parties signing similar agreements, to pay to the treasurer of the Athol Music Hall Com- pany, the sum of $100, for one share in the capital stock of said cor- poration when it should be organized. It then alleged the organiza- tion, the purchase of the homestead of Amsden, the building of a public hall thereon, a demand for the $100, readiness to deliver the stock, and the refusal of the defendant to pay. At the trial in the Central District Court of Worcester, the de- fendant asked the judge to rule that the action could not be main- tained on the pleadings. This request was refused. It appeared in evidence that the action was commenced August 11, 1873, under the instructions of the treasurer, by George W. Horr. The only au- thority therefor was the following votes of the board of directors: “May 15, 1873. Voted that the treasurer be authorized and in- structed to obtain the assistance of George W. Horr, Esq., in mak- ing collections of unpaid subscriptions to the capital stock.” 174 ATHOL MUSIC HALL COMPANY Jv. CAREY. [CHAP. I. “June 10, 1872. Voted that the treasurer be authorized and in- structed to obtain such legal counsel as he may see fit as to the proper legal manner to be pursued to collect unpaid assessments to the capital stock, and also as to the legal status of the corporation.” The defendant, at the close of the evidence, moved to dismiss on the ground that the suit was not authorized by a vote of the directors of said company, or by any legal authority. This motion was over- ruled by the judge. There was evidence tending to show that in December, 1870, the defendant signed the agreement declared upon; that the act of in- corporation was passed on March 8, 1871; that the corporation was duly organized on March 18, 1871, and that the name of the de- fendant was entered on the books of the corporation as a stockholder and notices were issued and directed to him of all the meetings. The defendant then asked the judge to instruct the jury that if they were satisfied upon the evidence that the defendant never at- tended any meeting of the corporation at the time of its organiza- tion, or after its organization, the action could not be maintained, although the corporation still retained his name upon its books, and sent him notices of the meetings; that it was not enough for the plaintiff to show that it retained Carey’s name upon its books, and otherwise considered him as entitled to a share in the capital stock, unless they are also satisfied that Carey did some act after its organi- zation in ratification of his agreement. The judge refused to give these instructions, but instructed the jury that if the plaintiff entered the defendant’s name on the books of the corporation, as a stockholder, issued and directed notices to him of all its meetings, and gave him the same opportunities to at- tend the meetings and participate in the proceedings thereof as were given to other stockholders, they were authorized to find that the defendant’s offer was accepted, and that he was received as a mem- ber of the corporation. The jury found for the plaintiff, and the defendant alleged exceptions. Wetts, J. In agreements of this nature, entered into before the organization is formed, or the agent constituted to receive the amounts subscribed, the difficulty is to ascertain the promisee, in whose name alone suit can be brought. The promise of each sub- scriber, ‘to and with each other,” is not-a contract capable of being enforced, or intended to operate literally as a contract to be en- forced between each subscriber and each other who may have signed previously, or who should sign afterwards, nor between each sub- scriber and all the others collectively as individuals. The undertak-. ing is inchoate and incomplete as a contract until the contemplated organization is effected, or the mutual agent constituted to represent the association of individual rights in accepting and acting upon the propositions offered by the several subscriptions. When thus ac- neers CHAP. I.] ATHOL MUSIC HALL COMPANY Jv. CAREY. 175 cepted, the promise may be construed to have legal effect according to its purpose and intent, and the practical necessity of the case; to wit, as a contract with the common representative of the Severae as= sociates. ——In Thompson v. Page, 1 Met. 565, and Ives v. Sterling, 6 Met. 810, individuals subsequently selected by voluntary associations to receive and expend subscriptions, in accordance with the terms of the agreement of association, were allowed to maintain actions against individual subscribers for the amount of their several sub- scriptions. Being thus constituted the payees, they were construed to have become also the promisees under the written agreement. The same principle applies where the agreement contemplates the or- ganization of a corporation, and refers the payment of the sub- scriptions to the proper officers of such corporation. See People’s Ferry Co. v. Balch, 8 Gray, 303, 311. In this agreement the treasurer of the corporation to be estab- lished is expressly made payeé. The corporation is the aggregate of the several individuals entering into the agreement, one of whose terms was that they should thus associate and confer their indi- vidual rights upon the corporation. We are of opinion that the cor- _ poration, and the corporation alone, is the proper party to bring an action upon such an agreement. The corresponding agreements of the other subscribers, the or- ganization of the corporation, and the allotment to the defendant of the shares for which he subscribed, furnish sufficient considera- tion for his promise to take and pay for those shares. Although his promise was originally voluntary, or in the nature of a mere open proposition, yet having been accepted and acted on by the party authorized so to do, before he attempted to retract it, he has lost the right to revoke. His proposition has become an accepted mutual contract, and is binding upon him as well as upon the corporation. The votes of the corporation indicate sufficient authority for the institution of this suit in the corporate name and behalf. These considerations dispose of all the objections, taken in vari- ous forms, to the maintenance of the action. Exceptions overruled. Nore. — See, in accord as to the result, Planters & Merchants Co. v. Webb, 144 Ala. 666; Horseshoe Pier Co. v. Sibley, 157 Cal. 442 (promise to subscribe made to a trustee; corporation, when formed, may maintain action thereon as real party in interest); Richelieu Hotel Co. v. International Encampment Co., 140 Il. 248 (ef. Thrasher v. Pike County R.R. Co., 25 Ill. 393); Hughes v. Antietam Mfg. Co., 34 Md. 316; International Fair Association v. Walker, 83 Mich. 386; Yonkers Gazette Co. v. Taylor, 30 N.Y. App. Div. 334 (cf. Avon Springs Sanitarium Co. v. Weed, 189 N.Y. 557, reversing 119 App. 176 BRYANT’S POND STEAM MILL CO. v. FELT. [cHapP. I. Div. 560, on the dissenting opinion of McLzwnan, P.J.); Greater Pittsburgh Real Estate Co. v. Riley, 210 Pa. 283 (incorporator held to his statements in a certificate for charter); Steely v. Texas Im- provement Co., 55 Tex. Civ. App. 463. Cf. Coppage v. Hutton, 124 Ind. 401; Mé. Sterling Coal Road Co. v. Little, 14 Bush (Ky.) 429. If the defendant simply agreed with a promoter to apply for a certain proportion of the shares of a new company not taken by the public, he may refuse to become a member of the company, merely exposing himself to liability for any damages which the promoter may have sustained from such breach of contract. Electric Welding Co. v. Prince, 195 Mass. 242, 254. BRYANT’S POND STEAM MILL CO. »v. FELT. 87 Me. 234. 1895. ON REPORT. This was an action of assumpsit brought to recover of the defend- ant the sum of two hundred dollars as appeared by his alleged sub- scription upon an original subscription book, and upon the outer cover of which was the following writing, ‘‘Subscription for a steam mill to be erected at or near Bryant’s Pond.” The original agree- ment was as follows: “We, the undersigned, hereby agree to pay for the number of shares set opposite our names, said shares to be ten dollars each, and non-assessable, for the purpose of erecting suitable buildings, with steam power, for the manufacturing of the various kinds of wood to be used in the contract of one C. H. Adams, he paying three per cent annually as rent on all money so paid, said monies to be paid when needed for the purpose above named, providing the town will abate taxes on said buildings and stock for the term of ten years.’’s Watton, J. The only question we find it necessary to consider is whether a subscriber to the capital stock of an unorganized cor- poration has a right to withdraw from the enterprise, provided he exercises the right before the corporation is organized and his sub- scription is accepted. We think he has. Such a subscription is not a completed contract. It takes two parties to make a contract. A non-existing corporation can no more make a contract for the sale of its stock than an unbegotten child can make a contract for the pur- chase of it. The right of subscribers to the capital stock of a proposed cor- poration to withdraw their subscriptions at any time before the organization of the corporation is completed has been affirmed in several recent and well considered opinions. The right rests upon the impregnable ground of the legal impossibility of completing a CHAP. 1.] BRYANT’S POND STEAM MILL CO. v. FELT. 177 contract between two parties only one of which is in existence. There can be no meeting of the minds of the parties. There can be no ac- ceptance of the subscriber’s proposition to become a stockholder. There can be no mutuality of rights or obligations. There can be no consideration for the subscriber’s promise. As said in one of our own decisions, it is a mere nudum pactum, — a promise without a prom- isee, — a contractor without a contractee. In fact, every element of a binding contract is wanting. If the subscriber’s promise to take and pay for shares remains unrevoked till the organization of the pro- posed corporation is effected, and his promise has been accepted, then we have all the elements of a valid contract. Competent parties. Mutuality of duties and obligations. A valid consideration, the promise of one party being a sufficient consideration for the promise of the other. A promisee as well as a promisor. A contractee as well as a contractor. In fact, all the elements of a valid contract are pres- ent, and the subscription has become binding upon both of the parties. But, till the corporation has come into existence, all these elements are necessarily wanting, and the subscriber’s promise amounts to no more than an offer, which, like all mere offers, may be withdrawn at any time before acceptance. When accepted, it becomes binding. Till accepted, it remains revocable. This con- clusion is sustained by reason and authority. In Starrett v. Rockland Co., 65 Maine, 374, the plaintiff sought to recover a portion of the dividends of a successful insurance company. He had subscribed for five shares of the stock before the organiza- tion of the company was effected; but the evidence of acceptance of his subscription by the corporation after its organization was not satisfactory; and the court held that without such acceptance there was no completed or binding contract; that the minds of the parties never met; that the plaintiff’s subscription, being made before the corporation came into existence, amounted to no more than a pro- posal to take so many shares, — a mere nudum pactum, — imposing no obligations and securing no rights. And in Carr v. Bartlett, 72 Maine, 120, the right of subscribers to withdraw from such undertakings while they remain inchoate and incomplete is recognized and affirmed. In Muncy Traction Engine Co. v. Green, 143 Pa. St., 269; 13 At. Rep. 747, decided in 1888, the defendant had been active in procur- ing subscribers to the capital stock of a proposed corporation, and had himself subscribed for twenty shares: but he wrote to the chair- man of the meeting for the organization of the corporation that, for reasons satisfactory to himself, he withdrew his subscription. The court ruled that the defendant had a right to withdraw his subscrip- tion at any time before the organization of the corporation was com- pleted; and the jury having found as a matter of fact that the with- drawal was before the organization of the corporation was completed, 178 BRYANT’S POND STEAM MILL CO. 0. FELT. [CHAP. I. a verdict for the defendant was affirmed, and judgment rendered thereon. In Hudson Real Estate Co. v. Tower, 156 Mass. 82 (1892), the action was founded on a subscription to the capital stock of an unorganized corporation, and the defense was based on an alleged withdrawal of the subscription. The right to withdraw was controverted. The court held that at the time when the defendant signed the subscrip- tion paper declared on, it was not a contract, for want of a contract- ing party on the other side; that while such a subscription may be- come a contract after the corporation has been organized, still, until the organization is effected, and the subscription is accepted, it is a mere proposition or offer, which may be withdrawn, like any other unaccepted proposition or offer. It is urged by the counsel for the plaintiff corporation that such subscriptions create binding and enforceable contracts between the subscribers themselves, and are therefore irrevocable, except with the consent of all the subscribers; and some of the authorities cited by him seem to sustain that view. But we find, on examination, that such views, when expressed, are in most cases mere dicta, and that the cases are very few in which such a doctrine has been acted upon. Reason and the weight of authority are opposed to such a'view. Of course, subscription papers may be so worded as to create binding speaking of such subscriptions; or of voluntary and gratuitous sub- scriptions to public-or charitable-objects, which, when accepted and ~ ~acted upon, become binding. We are now speaking only of subscrip- “tions to the capital stock of proposed business corporations. With regard to such subscriptions, we regard it as settled law that they do not become binding upon the subscribers till the corporations have been organized and the subscriptions accepted; and that, till then, the subscribers have a right to revoke their subscriptions. And, in view of the fact that such subscriptions are often obtained by over persuasion, and upon sudden and hasty impulses, we are not prepared to say that the rule of law which allows such a revocation is not founded in wisdom. We think it is. In the present case, an old man, upwards of eighty years of age, and now dead, was induced to subscribe for twenty shares of stock in a proposed, but not then organized, manufacturing corporation; but after a little reflection, he determined to revoke his subscription and withdraw from the enterprise. He notified the agent of the promoters, through whom his subscription had been obtained, of his determination to withdraw, and requested him to take his name off the subscription paper. And he again sent word by his son to have his name taken off. And notice of his withdrawal, and of his request to have his name taken off of the subscription paper, was given to the other subscribers at one of their meetings, and before the cor- CHAP. 1.] CARMICHAEL’S CASE. 179 poration was organized. We think his withdrawal was legal and complete, and that no action to recover the amount of his subscrip- tion is maintainable. Other grounds are urged in defense of the action, but it is un- necessary to consider them. Judgment for defendant. Note. — But in Minneapolis Machine Co. v. Davis, 40 Minn. 110, Mircue.., J., said (p. 114): ‘A subscription by a number of persons to the stock of a corporation to be formed by them_has in law a double character: First. It is a contract between the subscribers themselves to become stockholders without further act on their part immediately upon the formation of the corporation. As such a con- tract it is binding and irrevocable from the date of the subscription (at least in the absence of fraud or mistake), unless cancelled by con- sent of all the subscribers before acceptance by the corporation. Second. It is also in the nature of a continuing offer to the proposed corporation, which, upon acceptance by it after its formation, be- comes as to each i t im and the cor- poration.”’ CARMICHAEL’S CASE. [1896.] 2 Ch. 643. TuIs was an appeal by Carmichael from a decision of Strruine J., refusing an application to strike his name out of the register of shareholders. The company was brought out in February, 1896, and was formed to purchase from Mr. C. B. Phillips and work certain mining prop- erty of his. The price was 145,0001. The company was to have a nominal capital of 175,0001. in 11. shares. The purchase-money was to be paid, as to 58,3331. in fully paid-up shares, as to 30,000I. in cash, and as to 56,6671. in cash or shares. . On February 21, 1896, Carmichael signed an underwriting con- tract in the form of a letter addressed to Phillips: ‘‘I agree, for the consideration below stated, to subscribe for 1000 shares of the above issue, and to pay for the same on the conditions named in the pro- spectus, or any modification thereof, or of the title of the company, or the directors or officers, so long as the capital of the company and the purchase price of the property are not altered; and I hereby en- close my application for such shares and a cheque for 2s. 6d. per share deposit in respect of such shares, which deposit I authorize and request you to pay over to the above-named company; and I undertake to pay the further moneys payable in respect of any shares . 180 CARMICHAEL’S CASE. (CHAP. I. I have to take up under the terms of this contract. If, on or before the public issue of the prospectus, there are 60,000 shares of the above issue bond fide and duly applied for by the public, then no allotment is to be made to me in respect of this agreement, and my application and the said deposit is to be forthwith returned to me by the said company. If less than such 60,000 shares are applied for by the public, then I am only to be allotted my proportion of the de- ficiency between the amount so subscribed for by the public and such 60,000 shares, pro rat4 with any other persons who have signed or may sign underwriting contracts in connection with the above issue. If on the public issue of the prospectus, and before the closing of the list, I deliver to you applications for shares from responsible persons to your satisfaction, such applications shall go primarily in relief of my obligation under this contract. In either case, I am to receive from you a commission of 74 per cent. in cash and 7} per cent. in fully paid shares of the said company upon the total shares hereby underwritten by me within fourteen days after the comple- tion of the purchase by the above company, if the whole of such 60,000 shares are applied for by the public; but in the event of the public not applying for the whole of such 60,000 shares, then such commission is to be payable by you within fourteen days after payment by me to the company of the allotment-money in respect of my proportion of the deficiency of such shares, or the completion of the purchase by the above company, whichever event shall be last; and I authorize you, if you think fit so to do, to apply my said com- mission or any part thereof in payment to the company of or on account of the said allotment-moneys. I further agree that this -agreement and my said application shall be irrevocable on my part, and shall, notwithstanding any withdrawal on my part or any repudiation of my responsibility hereunder or thereunder, be suf- ficient to authorize and empower you to make any further or other application on my behalf, and also be sufficient to authorize and empower the directors of the company to allot to me the before- mentioned shares, and to enter my name on the register of members in respect thereof.” On February 22 Carmichael signed and handed in an application for 1000 shares, and gave a cheque payable to the company for 125l., the amount of the deposit payable on application. On the same day Phillips sent to Carmichael a letter headed with the name of the company: “I accept your underwriting contract on the terms mentioned to the extent of 1000 shares. C. B. Phillips.” | On March 24 the company was incorporated, and advertisements were issued stating that the subscription list would open on the 27th and close on the 30th of that month. On the 27th Carmichael directed his bankers not to pay the cheque, which accordingly they refused to pay. On the 30th he wrote to CHAP. 1.] CARMICHAEL’S CASE. 181 Phillips repudiating his underwriting contract, and on the same day wrote to the secretary of the company the following letter: ‘‘ Please take notice that I withdraw my underwriting in above company, and withdraw any authority contained in the underwriting letter to apply for any shares on my behalf.” At a board meeting of directors on April 2 the secretary produced the last-mentioned letter. Mr. Phillips, who was present, then pro-. duced the underwriting letter, insisted that Carmichael had no right to withdraw, and handed in on his behalf a fresh application for 980 shares in pursuance of the underwriting contract, that being the number which, according to the contract, ought, in the events which had happened, to be allotted to him. They were accordingly allotted to him, and he was placed on the register in respect of them. Sririine, J., held that the authority given to Phillips by the under- writing letter was an authority coupled with an interest, and there- fore irrevocable. His Lordship, therefore, refused. to remove Carmi- chael’s name from the register. Carmichael appealed. Linptey, L.J. I do not think there is any difficulty in this case. Mr. Bramwell Davis has asked us to treat this as a complex trans- action consisting of two parts — one a contract and one an authority, and he says, “Although I agree that I cannot revoke my contract, still I am at liberty to revoke my authority.” Now, I do not mean to say that there may not be cases as to which that contention would be well founded; but when we look at this case and see the purpose for which the authority is given and the object of it, which is to en- able a contract to be performed in which Mr. Phillips was interested, his argument will not hold. Let us look at the document itself. It : is a letter, or, as it is called, an underwriting contract. Of course, it is not a contract until it is accepted. It is addressed to Mr. Phillips, the vendor of some property to this company, who was to be paid out of money raised by the issue of shares. He had, therefore, a clear and ‘direct interest in raising the capital, out of which he was to be paid, and Mr. Carmichael knew that. That is common ground. Under these circumstances he signs this document, which is called an un- derwriting contract, and it is addressed to Mr. Phillips. It is in these terms: [His Lordship read the material parts of the document ‘down to the last clause.] Then comes this clause, whichis very important: “I further agree that this agreement and my said application shall be irrevocable on my part, and shall, notwithstanding any withdrawal on my part or any repudiation of my responsibility hereunder or thereunder, be sufficient to authorize and empower you to make any further or other application on my behalf, and also be sufficient to authorize and empower the directors of the company to adlot to me the before- mentioned shares, and to enter my name on the register of members in respect thereof.” Now, what is the true meaning of that? It is 182 CARMICHAEL’S CASE. [cHaP. I. part of a bargain by which, for valuable consideration, Mr. Carmi- chael agrees to take certain shares, and that is for the benefit of Mr. Phillips as he knows; and in order to enable Mr. Phillips the better to secure the performance of the contract Mr. Carmichael authorizes Mr. Phillips to apply for shares in his name, and he agrees not to revoke that authority even if he could do it without such a clause. Now, Mr. Phillips acted with perfect bona fides, and upon the terms of that authority he does apply in Mr. Carmichael’s name for 980 shares, which are allotted to him. Why is Mr. Carmichael not to be held a member of this company? Can it under the circumstances be said, in the language of § 35 of the Companies Act, 1862, that his name is ‘without sufficient cause entered in the register of mem- bers’? It appears to me there is ample cause. The attempt to make out that he is entitled to revoke the authority although he cannot revoke the contract entirely fails. Srirtine, J., in deciding this case has referred to an observation of WrLuraMs, J., in the case of Clerk v. Laurie, 2H. &. N. 199, 200, which runs thus: ‘‘What is meant by an authority coupled with an interest being irrevocable is this — that where an agreement is en- tered into on a sufucient consideration, whereby an authority is given for the purpose of securing some benefit to the donee of the authority, such an authority is irrevocable.” That is the principle Ton which Strruine, J., decided this case, and it appears to me the principle properly applicable to it. The appeal must be dismissed with costs. Lorss, L.J. The question in this case is whether the company had authority to allot these shares to Mr. Carmichael. That question depends on whether the authority given to Mr. Phillips, who was the vendor, was revocable or not. If it was an authority coupled with an interest, it would be irrevocable. The question that really arises is whether in this case it is an authority coupled with an interest. I think the answer is a very short and a very complete one. What was the object? The object was to enable Mr. Phillips, the vendor, to obtain his purchase-money, and, in the language of W1ILL1ams, J., it therefore conferred a benefit on the donee of the authority. I think, therefore, the judgment of Strriine, J., is perfectly right, and that Mr. Carmichael is a member of this company, and is not en- titled to have his name struck out. CHAP. 11.] PENNELL ». LOTHROP. 183 CHAPTER II. CONVEYANCES TO PROMOTERS, AND CONTRACTS WITH PROMOTERS RELATING TO PROPERTY OR SERVICES. PENNELL ». LOTHROP. 191 Mass. 357. 1906. Tue bill was founded upon an agreement in part as follows: “Articles of indenture entered into this fifth day of April, a.p. 1894, by and between Harriet M. Lothrop of Concord, in the County of Middlesex and Commonwealth of Massachusetts, party of the first part and Edmund H. Pennell of Medford in the County of Mid- dlesex, Harry E. Morrell of Hyde Park in the County of Norfolk, and Frank M. Hoyt of Chelsea in the County of Suffolk, all in the Com- monwealth of Massachusetts, parties of the second part, Witnesseth: That the said party of the first part in consideration of One Dollar and other valuable considerations to her paid by the said parties of the second part hereby covenants and agrees with said parties of the second part, that she will allow the Lothrop Publishing Company, a corporation to be organized by said parties of the second part under the laws of the State of Maine, the exclusive right to publish in book form all writings of said party of the first part which now are or have been published in any form, and the exclusive right to publish in book form all writings for publication which the said party of the first part shall produce for a period of five years from the date of this instrument if they elect to publish them; otherwise the party of the first part has the right to place them where she chooses.’’ Knowtton, C.J. Let us first consider the contract on which the suit is founded. It is a contract between the defendant and the in- dividual plaintiffs, and not a contract with any corporation. When it was made the Lothrop Publishing Company was not in existence, and could not be a party to a contract. In Abbott v. Hapgood, 150 Mass. 248, it was said that “if a contract is made in the name and for the benefit of a projected corporation, the corporation after its organization cannot become a party to the contract, even by adop- tion or ratification of it.”” This does not mean that after the organi- zation of the corporation it cannot enter into a contract such as previously had been prepared. Holyoke Envelope Co. v. United States Envelope Co. 182 Mass. 171. Penn Match Co. v. Hapgood, 141 Mass. 184 McARTHUR Vv. TIMES PRINTING CO. [CHAP. II. 145. Abbott v. Hapgood, ubi supra. Such a contract, as between the corporation and any other party, would have its inception when en- tered into by the corporation, and would require, to make it valid, the existence of all such elements as are necessary in other contracts. Note. — In Munson v. Syracuse R.R. Co., 103 N.Y. 58, ANDREWS, J., said (p. 75): “But the promoters of a corporation are not the cor- poration. The legal body is distinct from the individuals who com- pose it. The statute confers no authority upon the promoters of a corporation to enter into preliminary contracts binding the corpora- tion when it shall come into existence. Such contracts may bind the individuals who make them. If adopted by the corporation, and they are within the corporate powers, and are not otherwise subject to objection, they may become the contracts of the corporation and enforceable as such. In respect to contracts of promoters Judge REDFIELD says: ‘The promoters are in no sense identical with the corporation, nor do they represent it in any relation of agency, and theircontracts could, of course, only bind the company so far as they should be subsequently adopted by it, as their successors.’”’ McARTHUR »v. TIMES PRINTING CO. 48 Minn. 319. 1892. AppEAL by defendant, Times Printing Company, from an order of the district court of Hennepin County, Canry, J., made August 4, 1891, denying its motion for a new trial. Action brought by D. A. McArthur to recover damages sustained by him from the breach of a contract made by defendant with him. He was employed by it for a year from October 1, 1889, to solicit advertisements for its newspaper, and was to receive $20 a week during October, and $30 a week for the residue of the year, and was also to receive, at the end of the year, five shares of its stock, of $100 each. He was discharged April 12, 1890. After the year ex- pired he brought this suit. It was tried May 5, 1891, and plaintiff had a verdict for $450. Defendant moved for a new trial. The mo- tion was denied, and it appealed. : Mircue 11, J. The complaint alleges that about October 1, 1889, the defendant contracted with plaintiff for his services as advertis- ing solicitor for one year; that in April, 1890, it discharged him, in violation of the contract. The action is to recover damages for the breach of the contract. The answer sets up two defenses: (1) that plaintiff's employment was not for any stated time, but only from week to week; (2) that he was discharged for good cause. Upon the trial there was evidence reasonably tending to prove that in Septem- CHAP. 11.] McARTHUR v. TIMES PRINTING CO. 185 ber, 1889, one C. A. Nimocks and others were engaged as promoters in procuring the organization of the defendant company to publish a newspaper; that, about September 12th, Nimocks, as such pro- moter, made a contract with plaintiff, in behalf of the contemplated company, for his services as advertising solicitor for the period of one year from and after October Ist, — the date at which it was expected that the company would be organized; that the corpora- tion was not, in fact, organized until October 16th, but that the publication of the paper was commenced by the promoters October Ist, at which date plaintiff, in pursuance of his arrangement with Nimocks, entered upon the discharge of his duties as advertising solicitor for the paper; that after the organization of the company he continued in its employment in the same capacity until discharged, the following April; that defendant’s board of directors never took any formal action with reference to the contract made in its behalf by Nimocks, but all of the stockholders, directors, and officers of the corporation knew of this contract at the time of its organization, or were informed of it soon afterwards, and none of them objected to or repudiated it, but, on the contrary, retained plaintiff in the em- ployment of the company without any other or new contract as to his services. ff There is a line of cases which hold that where a contract is made in behalf of, and for the benefit of, Q projected corporation, the cor- poration, after its organization, cannot become a party to the con- “tract, either by adoption or ratification of it. Abbott v. Hapgood, 150 Ae ae Oo NE ee Oe om, § 198. This, however, seems to be more a question of name than of substance; that is, whether the liability of the corporation, in such cases, is to be placed on the grounds of its adoption of the contract of its promoters, or upon some other ground, such as equitable estoppel. This court, in accordance with what we deem sound reason, as well as the weight of authority, has held that, while a corporation is not bound by engagements made on its behalf by its promoters before its organiza- tion, it may, after its organization, make such engagements its own “contracts. And this it may do precisely as it might make similar original contracts; formal action of iis board of direetors-being neces- sary only where it woul ecessary in the case of a similar original “contract, That it is not requisite tha tion or acceptance e expressed, but it may be inferred from acts or acquiescence on part_of the corporation, or its authorized agents, as any similar original contract might be shown. Battelle v. Northwestern Cement Concrete Pavement Cv; 37 Minn. 89 (33 N.W. Rep. 327). See, also, Mor. Corp. § 548. The right of the corporate agents to adopt an agreement originally made by promoters depends upon the pur- poses of the corporation and the nature of the agreement. Of course, the agreement must be one which the corporation itself could make, 186 McARTHUR Jv. TIMES PRINTING CO. (CHAP. II. and one which the usual agents of the company have express or im- plied authority to make. That the contract in this case was of that kind is very clear; and the acts and acquiescence of the corporate officers, after the organization of the company, fully justified the jury in finding that it had adopted it as its own. ‘The defendant, however, claims that the contract was void under the statute of frauds, because, “‘by its terms, not-to. be -performed “within one year from the making thereof,” which counsel assumes to be September 12th, — the date of the agreement between plaintiff End Wie promiatar. “This ‘proceeds upon the erroneous theory that the act of the corporation, in such cases, is a ratification, which re- lates back to the date of the contract with the promoter, under the familiar maxim that ‘‘a subsequent ratification has a retroactive effect, and is equivalent to a prior command.” But the liability of the corporation, under such circumstances, does not rest upon any principle of the law of agency, but upon the immediate and volun- tary act of the company. Although the acts of a corporation with reference to the contracts made by promoters in its behalf before its organization are frequently loosely termed ‘‘ratification,” yet a “ratification,” properly so called, implies an existing person, on whose behalf the contract might have been made at the time. There cannot, in law, be a ratification of a contract which could not have been made binding on the ratifier at the time it was made, because the ratifier was not then in existence. In re Empress Engineering Co., 16 Ch. Div. 128; Melhado v. Porto Alegre, N.H. & B. Ry. Co., L.R. 9 C.P. 505; Kelner v. Baxter, L.R. 2 C.P. 185. What is called ~adoption, "in such cases, is, in legal effect, the making OF 2 contract of the date of the adoption, and not as of some former date. The *pontractin this tase was, Uierelors nob @iihma Wie siete of aude The trial court fairly submitted to the jury all the issues of fact in this case, accompanied by instructions as to the law which were ex- actly in the line of the views we have expressed; and the evidence justified the verdict. The point is made that plaintiff should have alleged that the con- tract was made with Nimocks, and subsequently adopted by the de- fendant. If we are correct in what we have said as to the legal effect of the adoption by the corporation of a contract made by a pro- moter in its behalf before its organization, the plaintiff properly pleaded the contract as having been made with the defendant. But we do not find that the evidence was objected to on the ground of variance between it and the complaint. The assignments of error are very numerous, but what has been already said covers all: that are entitled to any special notice. Onden eiteried: Note. — See, accord, Brautigam v. Dean & Co., 85 N.J.L. 549; Pratt v. Oshkosh Match To, 89 Wis 206, CHAP. 11] KELNER J. BAXTER. 187 KELNER ». BAXTER. L.R. 2 C.P. 174. 1866. Tue declaration was for goods sold and delivered, goods bargained and sold, interest, and upon accounts stated. At the trial before Eruz, C.J., at the sittings in London after last Trinity Term, the following facts appeared in evidence: The plaintiff was a wine merchant, and the proprietor of the Assembly Rooms at Gravesend. In August, 1865, it was proposed that a company should be formed for establishing a joint-stock hotel company at Graves- end, to be called the Gravesend Royal Alexandra Hotel Company, Limited, of which the following gentlemen were to be the directors, viz. Mr. L. Calisher, Mr. T. H. Edmands, Mr. M. Davis, Mr. Mac- donald, Mr. Hulse, Mr. N. J. Calisher (one of the defendants), and the plaintiff. The plaintiff was to be the manager of the proposed company, and Mr. Dales (another of the defendants) was to be the permanent architect. One part of the scheme was that the company should purchase the premises of the plaintiff for a sum of 50001., of which 30001. was to be paid in cash, and 20001. in paid up shares, the stock, etc., to be taken at a valuation; and this was carried into effect and completed, the other defendant (Baxter) being the nomi- nal purchaser on behalf of the company. In December a prospectus was settled. On the 9th of January, 1866, a memorandum of associa- tion was executed by the plaintiff and the defendants and others. Pending the negotiations the business had been carried on by the plaintiff, and for that purpose additional stock had been purchased by him; and on the 27th of January, 1866, an agreement was entered into for the transfer of this additional stock to the company, in the following terms. “January 27th, 1866. “To John Dacier Baxter, Nathan Jacob Calisher, and John Dales, on behalf of the proposed Gravesend Royal Alexandra Hotel Company, Limited. “Gentlemen, — I hereby propose to sell the extra stock now at the Assembly Rooms, Gravesend, as per schedule hereto, for the sum of 900l., payable on the 28th of February, 1866. (Signed) “JoHn KELNER.”’ Then followed a schedule of the stock of wines, etc., to be pur- chased, and at the end was written as follows: — “To Mr. John Kelner. “Sir, — We have received your offer to sell the extra stock as above, and hereby agree to and accept the terms proposed. (Signed) “J. D. Baxtsr, “N. J. CALISHER, “J. DALEs. ‘“‘On behalf of the Gravesend Royal Alexandra Hotel Company, Limited.” 188 KELNER v. BAXTER. [CHAP. II. In pursuance of this agreement the goods in question were handed over to the company, and consumed by them in the business of the hotel; and on the 1st of February a meeting of the directors took place, at which the following resolution was passed: ‘‘That the ar- rangement entered into by Messrs. Calisher, Dales, and Baxter, on behalf of the company, for the purchase of the additional stock on the premises, as per list taken by Mr. Bright, the secretary, and pointed out by Mr. Kelner, amounting to 900/., be, and. the same is_ hereby ratified.” There was also a subsequent ratification by the company, viz. on the 11th of April, but this was after the commence- ment of the action. , The articles of association of the company were duly stamped on the 13th of February, and on the 20th the company obtained a cer- tificate of incorporation under the 25 & 26 Vict. ¢. 89. The company having collapsed, the present action was brought’ against the defendants upon the agreement of the 27th of January. On the part of the defendants oral evidence was tendered for the purpose of showing that it never was intended that they should be personally liable; but his Lordship rejected it. It was then submitted that, inasmuch as the agreement was not entered into by the de- fendants personally, but only as agents for the hotel company, they thereby incurred no personal obligation to the plaintiff, who was himself one of the promoters. For the plaintiff it was insisted that, there being no company in existence at the time of the agreement, the parties thereto had ren- dered themselves personally liable; and that there could be no ratifi- cation of the contract by a subsequently created company. A verdict was taken for the plaintiff for 9001., subject to leave re- served to the defendants (upon giving security) to move to enter a nonsuit, on the ground that the agreement of the 27th of January did not make them personally liable. Erez, C.J. I am of opinion that this rule should be discharged. The action is for the price of goods sold and delivered: and the ques- tion is whether the goods were delivered to the defendants under a contract of sale. The alleged contract is in writing, and commences with a proposal addressed to the defendants, in these words: ‘I hereby propose to sell the extra stock now at the Assembly Rooms, Gravesend, as per schedule hereto, for the sum of 900I., payable on the 28th of February, 1866.” Nothing can be more distinct than this as a vendor proposing to sell. It is signed by the plaintiff, and is followed by a schedule of the stock to be purchased. Then comes the other part of the agreement, signed by the defendants, in these words, ‘Sir, We have received your offer to sell the extra stock as above, and hereby agree to and accept the terms proposed.” If it had rested there, no one could doubt that there was a distinct pro- posal by the vendor to sell, accepted by the purchasers. A difficulty CHAP. 11.] KELNER v. BAXTER. 189 has arisen because the plaintiff has at the head of the paper addressed it to the plaintiffs ‘‘on behalf of the proposed Gravesend Royal Alexandra Hotel Company, Limited,” and the defendants have repeated those words after their signatures to the document, and the question is, whether this constitutes any ambiguity on the face of the agreement, or prevents the defendants from being bound by it. T agree that if the Gravesend Royal Alexandra Hotel Company had een an existing company at this time, the persons who signed the. agreement wo ave Signed as agents of the company: But, as- ~ there was no company in existence at the time, the agreement would be wholly inoperative unless it were held to be binding on the de- fendants personally. The cases referred to in the course of the argu- ment fully bear out the proposition that, where a contract is signed by one who professes to be signing “‘as agent,” but who has no principal existing at the time, and the contract would be altogether inoperative unless binding upon the person who signed it, he is bound thereby: and a stranger cannot by a subsequent ratification relieve him from that responsibility. When the company came after- wards into existence it was a totally new creature, having rights and obligations from that time, but no rights or obligations by reason of anything which might have been done before. It was once, in- deed, thought that an inchoate liability might be incurred on behalf of a proposed company, which would become binding on it when subsequently formed: but that notion was manifestly contrary to the principles upon which the law of contract is founded. There must be two parties to a contract; and the rights and obligations which it creates cannot be transferred by one of them to a third person who was not in a condition to be bound by it at the time it was made. The history of this company makes this construction to my mind perfectly clear. It was no doubt the notion of all the parties that success was certain: but the plaintiff parted with his stock upon the faith of the defendants’ engagement that the price agreed on should be paid on the day named. It cannot be supposed that he for a moment contemplated that the payment was to be contingent on the formation of the company by the 28th of February. The paper expresses in terms a contract to buy. And it isa cardinal rule that no oral evidence shall be admitted to show an intention different from that which appears on the face of the writing. I come, there- fore, to the conclusion that the defendants, having no principal who was bound originally, or who could become so by a subsequent rati- fication, were themselves bound, and that the oral evidence offered is not admissible to contradict the written contract. Wiis, J. I am of the same opinion. Evidence was clearly inad- missible to show that the parties contemplated that the liability on this contract should rest upon the company and not upon the per- sons contracting on behalf of the proposed company. The utmost it 190 KELNER v. BAXTER. [CHAP. II. could amount to is, that both parties were satisfied at the time that all would go smoothly, and consequently that no liability would ensue to the defendants. The contract is, in substance, this, “I, the plaintiff, agree to sell to you; the defendants, on behalf of the Graves- end Royal Alexandra Hotel Company, my stock of wines;” and, “We, the defendants, have received your offer, and agree to and accept the terms proposed ; and you shall be paid on the 28th of February next.”” Who is to pay? The company, if it should be formed. But, if the company should not be formed, who is to pay? That is tested by the fact of the immediate delivery of the subject of sale. If payment was not made by the company, it must, if by any- body, be by the defendants. That brings one to consider whether the company could be legally liable. I apprehend the company could only become liable upon a new contract. It would require the assent of the plaintiff to discharge the defendants. Could the com- pany become liable by a mere ratification? Clearly not. Ratifi- cation can only be by a person ascertained at the time of the act done, — by a person in existence either actually or in contemplation of law; as in the case of assignees of bankrupts and administrators, whose title, for the protection of the estate, vests by relation. The case of an executor requires no such ratification, inasmuch as he takes from the will. It is unnecéssary, however, to pursue this further. In addition to the cases cited at the bar, I would refer to Gunn v. London and Lancashire Fire Insurance Company, 12 C.B. N.S. 694 (E.C.L.R. vol. 104), where this Court, upon the authority of Payne v. New South Wales Coal and International Steam Navi- gation Company, 10 Ex. 283, 24 L.J. Ex. 117, held that a contract made between the projector and the directors of a joint-stock com- pany provisionally registered, but not in terms made conditional on the completion of the company, was not binding upon the sub- sequent completely registered company, although ratified and con- firmed by the deed of settlement: and Wiuuiams, J., said that <‘to make a contract valid, there must be parties existing at the time who are capable of contracting.” That is an authority of extreme importance upon this point; and, if ever there could be a ratifica- tion, it was in that case. Both upon principle and upon authority, therefore, it seems to me that the company never could be liable upon this contract: and, as was put by my Lord, construing this document ut res magis valeat quam pereat,. Georgia. Allen v. Grant, 122 Ga. 552 (1905). If stock is issued for property known to be worth not more than 10 per cent of the par value of the stock, the holders are liable to creditors. “If the con- tract to receive less in money than the face of the stock will not defeat 310 NOTE. [CHAP. III. his right to recover, neither should it be defeated by a fraudulent agreement to receive less in property. . . . Neither the corporation nor the subscriber, nor the two together, can defeat the creditor’s rights. They can not do so by an express contract to issue non-assessable fully paid-up stock for any number of dollars less than the amount of the subscription. Neither can they bring about such a result by agreeing to receive property whose value is less than the amount of the subscription.” Idaho. Section 9 of Art. 11 of the Constitution provides: ‘‘ No cor- poration shall issue stocks or bonds, except for labor done, services performed, or money or property actually received; and all fictitious increase of stock or indebtedness shall be void.” Section 2769 of the Revised Codes, as amended by the Laws of 1909, p. 164, provides: ‘“‘When any corporation shall issue stock or bonds for labor done, services performed or property actually re- ceived, the judgment of the directors of such corporation as to the yalue of such labor, services, or property shall, in the absence of fraud in the transaction, be conclusive.” See Wail v. Basin Mining Co., Ltd., 16 Idaho, 313. Illinois. Bates v. Great Western Tel. Co, 134 Ill. 5386 (1890). Holders of stock issued as fully paid at a discount are liable to creditors. Coleman v. Howe, 154 Til. 458 (1895). Holders of stock issued as fully paid for overvalued property are liable to creditors. Here prop- erty worth $75,000 was capitalized at $300,000, and the parties knew that the property was being overvalued. An extract from the opinion is set forth, supra, in the note to Douglass v. Ireland. Gillett v. Chicago Title & Trust Co., 230 Ill. 373 (1907). Extracts from the opinion are set forth, supra. Section 25 of chap. 32 of the Revised Statutes of 1913 (Hurp) provides: ‘If any corporation ... shall allow any execution or de- cree of any court of record, for a payment of money, after demand made by the officer, to be returned ‘No property found’ . . . suits in equity may be brought against all persons who were stockholders at the time, or liable in any way, for the debts of the corporation, by joining the corporation in such suit; and each stockholder may be required to pay his pro rata share of such debts or liabilities to the extent of the unpaid portion of his stock, after exhausting the assets of such corporation.” Sprague v. National Bank of America, 172 Ill. 149 (1898). The rights of creditors are not dependent, in any degree, upon their knowledge, at the time of extending credit, that subscriptions to stock were not paid in full. The statute [the provisions, now sec- tion 25 of chap. 32 of Revised Statutes of 1913, given above, were CHAP. II.] NOTE. 311 then.in force] expressly declares that the creditor shall be invested with a right to recover if the stock has not been fully paid. “The leg- islative intent was, that any amount unpaid upon subscription to the capital stock of a corporation should constitute a fund, to which a creditor of the corporation might resort to obtain satisfaction of his demand against the corporation” (p. 169). Parmalee v. Price, 208 Ill. 544 (1904). “The stock of appellees was paid for partly in cash and partly in property, and this property was fraudulently overvalued to such an extent that in fact only forty per cent of the subscription was paid. While this transaction was voidable as to creditors or other stockholders prejudiced thereby, it was binding upon the corporation.” People v. Sterling Mfg. Co., 82 Ill. 457 (1876). Stock was issued as full paid, upon the receipt of a fraction of the par value. Later the corporation resolved that all the fictitious stock should be can- celed. One stockholder refused to comply with the resolution, and it was held that he could not compel the corporation to transfer his stock to his assignee. Indiana. Bent v. Underdown, 156 Ind. 516 (1900). Where it was provided in the articles of association of a corporation that only 15 per cent of the par value of each share of stock should be paid, this was held binding on creditors on the ground that they were affected with notice of the contents of the articles. Coffin v. Ransdell, 110 Ind. 417 (1886). The opinion in this case is'set forth, supra. Brown v. Clow, 158 Ind. 403 (1901). Where mortgage bonds of the corporation and substantially all its capital stock are issued for prop- erty which is worth less than the amount of the mortgage bonds, this is an improper issue of stock, and the directors are responsible for the consequences. It would seem to follow from Marion Trust Co. v. Blish, 170 Ind. 686 (1908), that, if a receiver should be permitted to recover from stockholders for unpaid subscriptions, all the creditors would share in the amounts recovered. Iowa. Sections 1641b of the Code Supplement, 1907, provides that no stock shall be issued “until the corporation has received the par value thereof. If it is proposed to pay for said capital stock in property or in any other thing than money, the corporation pro- posing the same must, before issuing capital stock in any form, apply to the executive council of the state of Iowa for leave so todo. Such application shall state the amount of capital stock proposed to be issued for a consideration other than money, and set forth specifically the property or other thing to be received in payment for such stock. Thereupon, it shall be the duty of the executive council to make 312 NOTE. [CHAP. III. investigation, under such rules as it may prescribe, and to ascertain the real value of the property or other thing which the corporation is to receive for the stock; and shall enter its finding, fixing the value at which the corporation may receive the same in payment for capi- tal stock; and no corporation shall issue capital stock for the said property or thing in a greater amount than the value so fixed and determined by the executive council.”” This provision was enacted in 1907. See chap. 71, Acts 32 G.A. Boulton Carbon Co. v. Mills, 78 Iowa, 460 (1889). Holder of stock issued as a bonus was held liable to creditors. State Trust Co. v. Turner, 111 Iowa, 664 (1900). Stock had been issued as full paid in payment of a patent. The court reviewed the authorities and said that holders of stock issued for overvalued prop- erty were liable to creditors to the extent of the overvaluation. “The parties have the right in good faith to agree on the value of the property taken, but this should not be a speculative or fictitious one. An honest mistake in judgment will not necessarily destroy the value agreed upon, but it must be such a valuation as prudent and sensible business men would approve” (p. 671). But the holders are not liable to creditors who extended credit to the corporation with knowledge of the facts. - Sykes v. Pure Food Cider Co., 157 Iowa, 601 (1912). Stock was issued for property in 1909, without leave from the Executive Council. The parties seem to have gone through the form of paying in money to the corporation and paying it out again for the property. The certificates of stock recited that they had been paid in cash. The corporation became insolvent. A purchaser of some of the stock so issued was allowed to recover the amount paid for his stock from an officer of the corporation who had taken part in authenticating and issuing the certificates. Kansas. Bank v. Northup, 82 Kan. 638 (1910). Stockholders in a corporation decided that certain property could be handled to better advantage by a separate corporation. They agreed among themselves that the property was worth $25,000 and that any stock- holder not desiring to take his share of the stock of the new company should be entitled to his share of $25,000. The property was capi- talized at $1,000,000, and the stockholders were held liable to cred- itors. The court treated the case as substantially the same as a case of issue of stock at a discount. It cited with approval tthe decisions that creditors cannot com- plain who extend credit with a knowledge of the facts, but held that . the creditor in question had no knowledge of the facts. And see Walburn v. Chenault, 43 Kan. 352 (1890). Kentucky. Section 193 of the Constitution provides: “No cor- poration shall issue stocks or bonds except for an equivalent in CHAP. I11.] NOTE. 313 money paid or labor done, or property actually received and applied to the purposes for which such corporation was created, and neither labor nor property shall be received in payment of stock or bonds at a greater value than the market price at the time such labor was done or property delivered, and all fictitious increase of stock or indebt- edness shall be void.” And see Ky. Stat., section 568. Haldeman v. Ainslie, 82 Ky. 395 (1884). The court said that if stock is issued at a discount the holders are liable to creditors. But a creditor cannot complain who extended credit with knowledge of the facts. Muller v. Higgenbotham’s Adm’r, 93 S.W. 655. Kentucky Mutual Co. v. Schaefer, 120 Ky. 227 (1905). The court said (p. 229) that stockholders “must be held liable [to creditors] for the difference between the amount they actually paid and the amount of stock they received, at par value. The fact that they did not pay any money, but paid in something else, is immaterial.” Horton v. Sherrill-Russell Lumber Co., 147 Ky. 226 (1912). The question considered by the court was whether the stockholders of a foreign corporation to whom stock had been issued as full-paid for overvalued property were liable to creditors ‘‘at common law.’”’ The court, relying on Cook on Corporations, held that they were not. But the question remains whether the statement in Cook is justified by the authorities; in the opinion of the editor it is not. Louisiana. Section 3 of Act 267, 1914, provides: ‘‘Where sub- scriptions to the capital stock of a corporation organized under this act consist, in whole or in part, of property or good will, there must appear in, or be annexed to, the articles of incorporation and be read in connection therewith, an accurate detailed and itemized description of such property, as to amount, location, extent, character and state of improvement, together with a statement of its value as appraised by the directors, and a statement of the value placed upon any good will included in the capital stock... . Stock so issued shall, in the absence of fraud, be full-paid stock.” And see Art. 266 of the Constitution. Belknap v. Adams, 49 La. Ann. 1350 (1897). Holders of stock issued without consideration are liable to creditors, even if the stock had been purchased by the corporation and reissued. Dilzell Engineering Co. v. Lehmann, 120 La. 273 (1907). The value of the labor or property received in payment of the stock must be equal to the face value of the stock. “To the extent, there- fore, of the difference between the value of the lease and charred ruins given for the stock and the face value of the 602 shares of stock, defendants are liable to the creditors of the corporation.” And see Webre v. Christ, 130 La. 450 (1912). Maine. Section 50 of chap. 47 of the Revised Statutes (1904) provides: “Any corporation may purchase mines, manufactories 314 NOTE. [CHAP. III. and other property necessary for its business, and the stock of any company or companies owning, mining, manufacturing or pro- ducing materials or other property necessary for its business, and issue stock to the amount of the value thereof in payment therefor, and may likewise issue stock for services rendered to such corporation and the stock so issued shall be full-paid stock and not liable to any further call or payment thereon; and in the absence of actual fraud in the transaction, the judgment of the directors as to the value of the property purchased, or services rendered, shall be conclusive.” This provision was enacted in 1901. In the report of the Commis- sioner on the Revision of the Public Laws, dated December 15, 1914, this provision is drafted as section 54 of chap. 49. : Barron v. Burrill, 86 Me. 66 (18938). Persons to whom stock is issued at a discount are liable to creditors. Gillin v. Sawyer, 93 Me. 151 (1899). The court was construing an earlier statute, and held that the creditors might ‘go behind even the honest opinion of the directors of the corporation and question the actual sufficiency of the consideration paid for the shares.” Maryland. Sections 35 and 36 of chap. 240 of Acts of 1908 (sections 35 and 36 of Art. 23 of Bagby’s Annotated Code) provide that stock may be issued for services or for property; “that the value of such services and property, and the propriety of issuing stock therefor, shall be agreed upon and the issue authorized by the affirmative vote of a majority of all the stock’’; that a certificate particularly specifying the nature and character of such property or services shall be filed in a designated public office; and “that the valuation placed by the stockholders upon such services or property . . . shall in the absence of actual fraud be conclusive against and binding upon any and all creditors of the corporation.” Hooper v. Central Trust Co., 81 Md. 559, 580 (1895). Persons to whom stock was issued without consideration are liable to creditors. And see Hughes v. Hall, 117 Md. 547 (1912). Brant v. Ehlen, 59 Md. 1 (1882). Creditors were pursuing the stockholders of a West Virginia corporation, most of the stock of which had been issued for property. The court said (p. 29) that “so long as the transaction stands unimpeached for fraud, courts will treat as a payment that which the parties themselves have agreed shall be a payment, and this too in cases where the rights of cred- itors are involved.” Crawford v. Rohrer, 59 Md. 599 (1882). The court said (p. 604): “Any arrangement, therefore, among the stockholders, or those in charge of the affairs of the corporation, by which the stock is but nominally paid for, whether in money or property, the corporation not in fact getting the benefit of the price in good faith, will be re- garded as a sham, and not as a valid payment, as against the cred- CHAP. u1.] NOTE. 315 itors of the corporation, however it may be regarded as between the corporation and the subscriber.” Massachusetts. Section 14 of chap. 437 of the Acts of 1903 pro- vides that stock “may be issued for cash, property, tangible or in- tangible, services or expenses.” Sections 11 and 14 provide, in case stock is issued for property or services that a statement of the de- scription of the property shall be prepared and filed in a designated public office. “If such property consists in any part of real estate, its location, area and the amount of stock to be issued therefor shall be stated; if any part of such property is personal, it shall be described in such detail as the commissioner of corporations may require, and the amount of stock to be issued therefor stated. If any part of the capital stock is issued for services or expenses, the nature of such services or expenses and the amount of stock which is issued therefor shall be clearly stated.” Under the statute in force prior to the adoption of chap. 437 of the Acts of 1903, if stock were paid in property, the commissioner of cor- porations was required to certify that he was satisfied that the valua- tion put upon the property was a fair and reasonable one. (Section 23 of chap. 109 of R.L.) Cabot Bridge v. Chapin, 6 Cush. 50 (1850). Where the defendant subscribed to stock on the condition that a total of 400 shares should be subscribed for, he cannot be held on his subscription where some of the other subscriptions were payable in property worth less than the par of the shares. : New Haven Horse Nail Co. v. Linden Spring Co., 142 Mass. 349 (1886). The court declined to determine the liability to creditors of stockholders of a Connecticut corporation by reason of receiving stock issued in payment of overvalued property. There is a dictum by Devens, J., as follows: “That, in the absence of fraud, an-agree- ment may ordinarily be made by which stockholders can be allowed to pay for their shares in patents, mines, or other property, to which itis not easy to assign a determinate value, appears to be well settled. The bill does not aver any fraud actually committed, or intended to be committed, upon the public or the plaintiff, by these defendants, by obtaining from those with whom the corporation dealt a false credit.” Anthony Co. v. Metropolitan Art Co., 190 Mass. 35 (1906). The court was considering the liability of the officers and stockholders of a foreign corporation, doing business in Massachusetts, under a stat- ute which imposed liability to creditors if the capital stock of the corporation had been paid by a conveyance to the corporation of property at an unfair valuation. The court held that the liability was incurred. The defendants did not have any fraudulent intent, or actual knowledge that the values were false, or wilful intent to 316 NOTE. [CHAP. III. make a false statement, but did have reasonable cause to know, and they ought to have known, that the valuation was an unfair one. Harvey-W atts Co. v. Worcester Umbrella Co., 193 Mass. 138 (1906). The court was considering the liability of officers of a corporation formed while R.L. chaps. 109 and 110 were in force. It held that, if a stockholder gave to the corporation a check in payment of his sub- scription, and the corporation then gave the stockholder a check of a like amount for an assignment of property, the stock was not paid in cash within the meaning of the statute. On the propriety of ever speaking of a stockholder’s liability to creditors as “‘a common-law obligation,” see New Haven Horse Nail Co. v. Linden Spring Co., 142 Mass. 349, 353. Michigan. Section 2 of Act 146 of the Laws of 1907 (section 9533 of Howell’s Annotated Statutes, 1913) provides: ‘Such capital stock may be paid in, either in cash or in other property, real or personal; but where payment is made otherwise than in cash there shall be included in the articles an itemized description of the property in which such payment is made, with the valuation at which each item is taken, which valuation shall be conclusive in absence of actual fraud: Provided, That only such property shall be so taken in pay- ment for capital stock as the purposes of the corporation shall re- quire, and only such property as can be sold and transferred by the corporation, and as shall be subject to levy and sale on execution, or other process issued out of any court having competent jurisdiction, for the satisfaction of any judgment or decree against such corpora- tion: And Provided further, That there shall be made and attached to any such articles of association an affidavit by at least three of the organizers of such corporation, that they know the property de- scribed in such articles of association and that the same has been actually transferred to such corporation, and that such property is of the actual value therein stated.” Utica Fire Alarm Co. v. Waggoner Clock Co., 166 Mich. 618 (1911). Persons to whom stock is issued at a discount are liable to creditors. Graves v. Brooks, 117 Mich. 424 (1898). Patents worth $20,000 were capitalized at $100,000. The court held that the stockholders were not liable to creditors; that it was not enough to show that the property was overvalued, "but that it was necessary to establish “either an intentional fraud in fact, or such reckless conduct in fix- ing the value of the property conveyed, without regard to its actual value, that an intent to defraud may be inferred.”’ Dieterle v. Paint & Enamel Co., 143 Mich. 416 (1906). Stock was paid for in the stock of another corporation which was in fact in- solvent, and in a secret formula. Stockholders were held liable to creditors. ‘‘However much the original shareholders may have CHAP. I11.] NOTE. 317 acted in good faith as to the creditors, what was done was as to them a fraud” (p. 422), And see Wood v. Sloman, 150 Mich. 177 (1907). Minnesota. See section 6193 of General Statutes, 1913. McConey v. Belton Oil Co., 97 Minn. 190 (1906). The corporation in question was an Arizona corporation. A person to whom stock was issued at a discount was held liable to creditors. Otherwise, as to mining companies, owing to provisions in the General Statutes of 1878, peculiar to mining corporations: Ross v. Kelly, 36 Minn. 38 (1887). Hastings Malting Co. v. Iron Range Co., 65 Minn. 28 (1896). Per- sons to whom stock was issued for overvalued property were held liable to creditors. Hospes v. Northwestern Car Co., 48 Minn. 174 (1892). Extracts from the opinion in this case are set forth, supra. State v. Minnesota Thresher Mfg. Co., 40 Minn. 218, 226 (1889). The court refused to declare the franchise of a corporation forfeited because it had issued stock for overvalued property. Mississippi. Section 921 of Code of 1906 provides: “A note, obligation, or security of any kind given or transferred by any sub- scriber for stock in any corporation shall not be considered, taken, or held as payment of any part of the capital stock of the company.” Alford v. Improvement Co., 86 Miss. 375 (1905). The court, com- menting on the statutory provision which is now section 921 of the Code of 1906, said: “The plain intendment of the law being that all stock must be fully and actually paid for.” Lee v. Cutrer, 96 Miss. 355 (1909). The majority of the court con- strued a statute requiring the payment of the capital stock in cash as permitting it to be paid in property or services. There seems to have been no question but that the property and services were taken at a fair valuation. Missouri. Section 8 of Art. x11 of the Constitution provides: “No corporation shall issue stock or bonds, except for money paid, labor done or property actually received, and all fictitious increase of stock or indebtedness shall be void.” Same, Revised Statutes, 1909, section 2981. . Skrainka v. Allen, 76 Mo. 384 (1882). A person to whom stock is issued at a discount is liable to creditors. Van Cleve v. Berkey, 143 Mo. 109 (1897). See extract from the opinion in this case cited in Meyer v. Mining Co., supra. Berry v. Rood, 168 Mo. 316 (1901). Lands in which were certain onyx deposits were capitalized (with other property) at a figure largely in excess of their value. But the trier of the facts found that the incorporators acted without any intent to defraud; that they d 318 NOTE. [CHAP. IIL valued the properties as a whole believing that the corporation could earn a dividend of at least six per cent on the valuation; and that if the lands “had been really lands having large deposits of onyx of good quality, they might well have been thought worth the par value of the stock issued for them.’ The court held that the stock- holders were liable to creditors for the difference between the par value of their stock and the actual value of the property transferred. Property could not be capitalized at its imagined future worth. The inquiry “is not whether the stockholder believed or had reason to believe that the property was equal in value to the par value of the- capital stock; but whether, in point of fact, it was such equivalent.” Colonial Trust Co. v. McMillan, 188 Mo. 547 (1905). A creditor who knew the facts when he extended credit is not entitled to com- plain. Montana. Section 10 of Art. xv of the Constitution provides: “No corporation shall issue stocks or bonds, except for labor done, services performed, or money and property actually received; and all fictitious increase of stock or indebtedness shall be void.” Section 3824 of the Revised Codes, 1907, provides: “The di- rectors of any corporation may purchase mines, manufactories and other property necessary for its business and issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be declared and taken to be full-paid stock and not liable to any further call, neither shall the holders thereof be liable for any , further payments under the provisions of § 3853 this Code; Provided, That on mines any arbitrary value may be fixed and such value shall, regardless of the actual value, be deemed the value thereof, so as to make the stock issued in payment therefor at such arbitrary value, full-paid stock as above defined.” See Kelly v. Clark, 21 Mont. 291 (1898). Nebraska. See Gilkie Co. v. Dawson Gas Co., 46 Neb. 333 (1895), and Penfield v. Dawson Gas Co., 57 Neb. 231 (1898). The opinion in the latter case is set forth, supra. York Park Bld’g Ass’n v. Barnes, 39 Neb. 834 (1894). If stock is issued without consideration, the corporation may compel the holder to pay therefor. : State v. Atchison R.R. Co., 24 Neb. 143 (1888). The improper issue of stock is a cause for the forfeiture of the corporate franchise. Nevada. Sections 1155 and 1156 of the Revised Laws, 1912, pro- vide: “Any corporation existing under any law of this state may issue stock for labor done or- personal property or real estate or leases thereof; in the absence of fraud in the transaction, the judg- ment of the directors as to the value of such labor, property, real CHAP. 111.] NOTE. 319 estate or leases shall be conclusive. All [such] stock ... shall be fully paid and not liable to any further call or assessment (and this shall be so stated on the face of the certificate). But it shall be the duty of the corporation to have its minutes or other permanent records to show, with reasonable detail, the items and character of property (and of the labor or services) for which any stock or bonds were so issued.” As to mining corporations, see sections 1200, and 1332 to 1335, and State v. Manhattan Verde Co., 32 Nev. 474. New Hampshire. Sections 9 and 10 of chap. 149 of the Public Statutes (1901) provides: “No corporation shall sell or dispose of any of the shares of its capital stock at a price less than the par value thereof, except in sales of shares at auction for nonpayment of as- sessments. .. . No certificate shall be issued until the par value of the shares mentioned in it has been fully paid to the corporation.” Section 9 of chap. 150 provides: “No note or obligation given by a stockholder, whether secured by pledge or otherwise, shall be con- sidered as payment of any part of the capital stock.” Inbby v. Mt. Monadnock Co., 67 N.H. 587 (1893). Stockholders are liable to pay.for their stock in full, although there was an oral agreement with the promoters that they were to pay only a fraction of the par value. Peterborough R.R. Co. v. Nashua R.R. Co., 59 N.H. 385 (1879). A corporation may borrow money and pledge an amount of its stock’ as collateral equal to the amount borrowed, and if on default the pledgee sells, the corporation is liable for the deficiency. Kimball v. Grate Co., 69 N.H. 485 (1898). 2997 shares of stock were issued in payment of a patent. On the same day 1497 of these shares were transferred to a trustee for the benefit of the corpora- tion. The referee found that the pretended issue of the 1497 shares was without consideration, and the court said that no part of such shares could be reissued, even to bona fide purchasers, except upon payment of the par value. The bill was by stockholders in the cor- poration, who prayed that a part of these 1497-shares should be canceled. This relief was granted. The court said that the validity of this issue was open to several objections, of which the objection * noted above was one. New Jersey. Sections 48 and 49 of an act concerning corporations (Revision of 1896) provided: “Nothing but money shall be consid- ered as payment of any part of the capital stock of any corporation organized under this act, except as hereinafter provided in case of -the purchase of property... .” Section 49: “Any corporation formed under this act may pur- chase mines, manufactories or other property necessary for its busi- jut 320 NOTE. [CHAP. III. ness, or the stock of any company or companies owning, mining, manufacturing or producing materials, or other property necessary for its business, and issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be full-paid stock and not liable to any further call, neither shall the holder thereof be liable for any further payment under any of the provisions of this act; and in the absence of actual fraud in the transaction, the judg- ment of the directors as to the value of the property purchased shall be conclusive; and in all statements and reports of the corporation to be published or filed this stock shall not be stated or reported as being issued for cash paid to the corporation, but shall be reported in this respect according to the fact.” Section 49 was amended by chap. 15 of the Acts of 1913 so as to read as follows: ‘‘Any corporation formed under this act may pur- chase property, real and personal, and the stock of any corporation, necessary for its business, and issue stock to the amount of the value thereof in payment therefor, subject to the provisions hereinafter set forth, and the stock so issued shall be full-paid stock, and not liable to any further call; and said corporation may also issue stock for the amount it actually pays for labor performed. ““ Provided, that when property is purchased the purchasing cor- poration must receive in property or stock what the same is rea- sonably worth in money at a fair, bona fide valuation; and provided further, that no fictitious stock shall be issued; that no stock shall ‘be issued for profits not yet earned, but only anticipated; and pro- vided further, that when stock is issued on the basis of the stock of any other corporation it may purchase, no stock shall be issued thereon for an amount greater than the sum it actually pays for such stock in cash or its equivalent; and provided further, that the property purchased or the property owned by the corporation whose stock is purchased shall be cognate in character and use to the prop- erty used or contemplated to be used by the purchasing corporation in the direct conduct of its own proper business; and in all cases when stock is to be issued for property purchased, or for the stock of other corporations purchased, a statement in writing, signed by the directors of the purchasing company or by a majority of them, shall be filed in the office of the Secretary of State, showing what property has been purchased, and what stock of any other corpora- tion has been purchased, and the amount actually paid therefor.” [Signing a false statement is made a misdemeanor.] Hebberd v. Southwestern Land & Cattle Co., 55 N.J. Eq. 18, 31 (1896). Persons to whom stock is issued as a bonus are liable to creditors. See v. Heppenheimer, 69 N.J. Eq. 36 (1905). Extracts from the- opinion in this case are set forth, supra. Holcombe v. Trenton White City Co., 80 N.J. Eq. 122 (1912). The CHAP. 111.] NOTE. 321 court held that the provision of section 49 of the Act of 1896, that “in the absence of actual fraud in the transaction, the judgment of the di- rectors as to the value of the property purchased shall be conclusive,” was merely declaratory, and that the standards fixed by See v. Hep- penheimer applied where the stock was issued after the enactment of such provision. Easton National Bank v. American Brick Co., 70 N.J. Eq. 732 (1906). Extracts from the opinion in this case are set forth, supra. Arnold v. Searing, 73 N.J. Eq. 262 (1907). Holder of stock is- sued as a bonus has a standing to bring a suit as a stockholder. New Mezico. Sections 56 and 57 of chap. xxi of the Statutes (1915) contain, in substance, the same provisions as sections 48 and 49 of the Corporation Act of New Jersey, set forth above, prior to the amendments made in 1913. Medler v. Hotel Co., 6 N.M. 331, 344 (1892). It was held that the facts did not show either an intentional overvaluation of the prop- erty taken in payment of stock, or such a great discrepancy between the actual value of the property and the amount of the stock as to raise a presumption of fraud in law. New York. Section 55 of the Stock Corporation Law (Consoli- dated Laws of 1909) provides: ‘‘No corporation shall issue either stock or bonds except for money, labor done or property actually received for the use and lawful purposes of such corporation. Any corporation may purchase any property authorized by its certifi- cate of incorporation, or necessary for the use and lawful purposes of such corporation, and may issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be full- paid stock and not liable to any further call, neither shall the holder thereof be liable for any further payment under any of the provisions of this chapter; and in the absence of fraud in the transaction the judgment of the directors as to the value of the property purchased shall be conclusive; and in all statements and reports of the corpora- tion, by law required to be published or filed, this stock shall not be stated or reported as being issued for cash paid to the corporation, but shall be reported as issued for property purchased.” Section 42 of chap. 564 of the Laws of 1890 provided: ‘‘No cor- poration shall issue either stock or bonds except for money, labor done, or property actually received for the use and lawful purposes of such corporation, at its fair value, and all stock issued in violation of the provisions of this section shall be void.”” This was amended in 1892 so as to read: “No corporation shall issue either stock or bonds except for money, labor done or property actually received for the use and lawful purposes of such corporation. No such stock shall be issued for less than its par value. No such bonds shall be 322 NOTE. {CHAP. III. issued for less than the fair market value thereof.’”’ Section 42 of chap. 688 of the Law of 1892. This was amended in 1901 into a pro- vision substantially the same as the existing provision. Chap. 354 of the Laws of 1901. The substance of the provisions of chap. 40 of the Laws of 1848, and chap. 333 of the Laws of 1853 appears from the opinions in Douglass v. Ireland, 73 N.Y. 100, and Lake Superior Iron Co. v. Drexel, 90 N.Y. 87, extracts from which are set forth, supra. Chap. 351 of the Laws of 1912 makes it legal to form some cor- porations having stock without a par value. Section 10 of the Stock Corporation Law contains special provisions relating to the issue of securities by a corporation formed to take over the properties of a corporation bought at foreclosure sale. Southworth v. Morgan, 205 N.Y. 293 (1912). Extracts from. the opinion in this case are set forth, supra. : Douglass v. Ireland, 73 N.Y. 100 (1878). Extracts from the opinion in this case are set forth, supra. , Lake Superior Iron Co. v. Drexel, 90 N.Y. 87 (1882). Extracts from the opinion in this case are set forth, supra. Flour City National Bank v. Shire, 88 N.Y. App. Div. 401, aff’d 179 N.Y. 587 (1904). The corporation in question was formed, and the stock issued, in 1899. Hiscock, J., said (p. 407): ‘In our judg- ment the evidence fully justified the referee in finding such a dis- parity between the actual value of the property thus transferred and the amount of capital stock issued therefor, as to take the transaction outside of the rule making allowance for discretion and even honest error in the judgment of directors executing such a transaction, and to take it within the rule which governs where such directors have been guilty of willful and intentional overvaluation and resultant fraud.” As to the persons entitled to require the stockholders to make further payments, where stock has been issued for overvalued prop- erty, see Bostwick v. Young, 118 N.Y. App. Div. 490, aff’d 194 N.Y. 516 (1909), and In re Jassoy Co., 178 Fed. 515 (1910). As to issues of stock made after the amendment in 1901 see Peo- ple v. Public Service Commission, 158 N.Y. App. Div. 251 (1913), and Archer v. Hesse, 164 N.Y. App. Div. 493 (1914). In the latter case McLaueu.in, J., said (p. 496): ‘It could issue the same pro- vided full value were received for services rendered, property pur- chased, or money paid.” As to section 10 of the Stock Corporation Law see People v. Public Service Commission, 203 N.Y. 299 (1911). North Carolina. Sections 1159 and 1160 of the Statutes (Pell’s Revisal, 1908) provide: ‘“‘When any corporation shall issue stock for labor done or personal property or real estate, or leases thereof, CHAP. II1.] NOTE. 323 which stock may be so issued by any corporation, in the absence of fraud in the transaction, the judgment of the directors as to the value of such labor, property, real estate or leases shall be con- clusive. | “Nothing but money shall be considered as payment of any part of the capital stock of any corporation organized under this chapter, except as herein provided in case of the purchase of property or labor performed.” Bernard v. Carr, 167 N.C. 481 (1914). A person to whom stock is issued as a bonus is liable to creditors. Hobgood v. Ehlen, 141 N.C. 344 (1906). The stock was issued by a Delaware corporation, the Delaware statute making the judgment of the directors conclusive, in the absence of actual fraud. The stock- holder was held liable to creditors. The court said (p. 354): “The property must be taken at its reasonable monetary value. Although a margin may be allowed for an honest difference of opinion as to value, a valuation grossly excéssive, knowingly made, while its ac- ceptance may bind the corporation, is a fraud on creditors and they may proceed against the stockholder individually, who sells the property, as for an unpaid subscription.” See Whitlock v. Alexander, 160 N.C. 465 (1912). North Dakota. Sections 4527 and 4528 of the Civil Code (Compiled Laws, 1913) provide: “No corporation shall issue any certificates of stock under an agreement or with the understanding that the full par value shall not be paid. Any officer of a corporation who issues certificates of stock in violation of the provisions of this chapter, or who has knowledge thereof, and does not at the time dissent there- from in writing shall be liable to the creditors of the corporation and to purchasers in good faith of such stock for all damages they may sustain thereby. “No corporation shall issue stock or bonds except for money, labor done or property, estimated at its true money value, actually received by it, and all the officials of a corporation who consent to the issuance of stock or bonds for labor or property in excess of its actual cash value, or who have knowledge thereof and do not at the time dissent therefrom in writing shall be jointly and severally lable to the creditors of such corporation for the difference between the actual cash value of such labor or property at the time such stock or bonds were issued and the par value of the stock or bonds issued therefor.” Ohio. Gates v. The Tippecanoe Stone Co., 57 Ohio St. 60 (1897). Property was capitalized at twice its value. The trier of the facts found that the parties acted in good faith, and without an intent to defraud the creditors of the corporation or any one else. A stock- 324 NOTE. [CHAP. III. holder was held liable to creditors. “Notwithstanding the frequency with which corporations are created with fictitious capital, persons who have occasion to deal with those organized under the laws of this state and doing business within its borders, are not bound to anticipate this condition of its affairs, but may assume that it is what it purports to be.” Oklahoma. Section 39 of Art. ix of the Constitution provides: “No corporation shall issue stock except for money, labor done, or prop- erty actually received to the amount of the par value thereof, and all fictitious increase of stock or indebtedness shall be void, and the Legislature shall prescribe the necessary regulations to prevent the issue of fictitious stock or indebtedness.” See Webster v. Webster Refining Co., 36 Okl. 168 (1912). Oregon. See section 3 of Art. x1 of the Constitution and section 5833 of Lord’s Oregon Laws (1910). McAllister v. American Hospital Ass’n, 62 Or. 5380 (1912). Holders of stock issued as a bonus or at a discount are liable to creditors. Dictum, that no creditors may complain except those who have relied upon the representation that the capital stock was paid in full. Macbeth v. Banfield, 45 Or. 553 (1904). The owners of a business associated with themselves other persons who put $5000 cash into the business. Those who advanced the cash were to have a one-half interest in the business. Then forthwith the assets of the business (other than the $5000 cash) were capitalized at $16,000. The court found that there was conscious overvaluation, and that the stock- holders were liable to creditors. Pennsylvania. Section 7 of Art. xvi of the Constitution provides: “No corporation shall issue stocks or bonds except for money, labor done, or money or property actually received; and all fictitious in- crease of stock or indebtedness shall be void.” Section 17 of Act of April 29, 1874, P.L. 73 (Purden’s Digest, vol. 1, p. 803), provides: ‘‘Every corporation created under the provi- sions of this act, or accepting its provisions, may take such real and personal estate, mineral rights, patent rights, and other property, as is necessary for the purposes of its organization and business, and issue stock to the amount of the value thereof, in payment thereof, and the stock so issued shall be declared and taken to be full-paid stock, and not liable to any further calls or assessments; and in the charter and the certificates and statements to be made by the sub- scribers and officers of the corporation, such stock shall not be stated or certified as having been issued for cash paid into the company, but shall be stated or certified in this respect according to the fact. CHAP. III.] NOTE. 325 No such corporation shall issue either bonds or stock except for money, labor done, or money or property actually received; and all fictitious increase of stock or indebtedness in any form shall be void.” [This section was amended in 1876, but not so as to alter the provi- sions set forth above.] By the same law it is also provided: “No note or obligation given by a stockholder, whether secured by pledge or otherwise, shall be considered as a payment of any part of the capital stock.” Guarantee Trust Co. v. Dilworth Coal Co., 235 Pa. 594 (1912). The opinion in this case is set forth, supra. It is apparently the law of Pennsylvania that property may be capitalized at any value which the incorporators believe it will de- velop, rather than the present cash value. See Carr v. Le Fevre, 27 Pa. 413, 417 (1856); Commonwealth v. Central Passenger Ry., 52 Pa. 506, 515 (1866); American Tube Co. v. Baden Gas Co., 165 Pa. 489 (1895); and Finletter v. Acetylene Light Co., 215 Pa. 86 (1906). Rhode Island. The editor has found nothing coming within the scope of this note. South Carolina. Section 2836 of the Civil Code, 1912, provides: “All subscriptions to the capital stock of any corporation organized under this Article shall be payable in money, or in labor or in prop- erty at its money value, and shall be listed, the labor or the property and the value thereof to be specified in the list of subscriptions; but no subscription in labor or in property shall be received unless such labor or property and the value thereof, so to be specified as afore- said, be approved by said Board of Corporators.” The Board of Corporators are two or more of the persons petitioning for the forma- tion of the corporation; they are designated by the Secretary of State. South Dakota. Section 8 of Art. xvi of the Constitution provides: “No corporation shall issue stocks or bonds except for money, labor done, or money or property actually received; and all fictitious in- crease of stock or indebtedness shall be void.” See Rogers v. Mining Company, 21 8.D. 412 (1907). Tennessee. Section 2335 of Shannon’s Code, 1896, dealing with mining, quarrying, boring, and manufacturing companies, provides: “Nothing but cash shall be taken in payment of any part of the capital steck, or land at a fair cash valuation.” But section 2351 provides: “Any manufacturing company hereafter or heretofore in- corporated may receive the assignment of any patent in payment of any stock subscribed to the amount of the value of said patent, as 326 NOTE. (CHAP. III. agreed on by the subscriber and the corporation.” And see section 1 of chap. 474 of the Acts of 1903. Section 1 of chap. 174 of the Acts of 1905 provides “that nothing but cash at not less than par valuation be received in payment for preferred stock.” Morrow v. Iron & Steel Co., 87 Tenn. 262 (1889). Each subscriber was, by the terms of the subscription, to have bonds and also stock of the company, each to the amount of his subscription. A sub- scriber was obliged to pay for his stock, and the stipulation that he should also have bonds was treated as separable, and unenforcible. Jones v. Whitworth, 94 Tenn. 602 (1895). A representative of creditors sought to fasten liability on persons to whom stock had been issued for land. The court held that an allegation that the property was “not conveyed at a fair cash value, but very far in excess of it” was so general as to be demurrable, and that it must be alleged and proved ‘that the property was sold at an overvaluation which was intentionally fraudulent, or which was so gross as to be construc- tively fraudulent, as against corporate creditors.” The court also held (p. 608) that all creditors — even those who had extended credit prior to the issue of stock — would be entitled to share in the amount recovered. Texas. Section 6 of Art. x1 of the Constitution provides: “No corporation shall issue stock or bonds except for money paid, labor done or property actually received, and all fictitious increase of stock or indebtedness shall be void.” Articles 1125 et seq. of the Revised Civil Statutes, 1911, provide that, before a corporation is chartered, the full amount of its au- thorized capital stock shall be subscribed, and fifty per cent be paid; that satisfactory evidence must be furnished to the secretary of state that the fifty per cent has been ‘‘paid in cash, or its equiva- lent in other property or labor done, the product of which shall be to the company of the actual value at which it was taken, or property actually received”; that the incorporators must submit to the secretary of state their affidavit showing ‘“‘the cash value of any property received, giving its description, location and from whom and the price at which it was received, [and] the amount, character and value of labor done, from whom, and price at which it was re- ceived’’; and that the secretary of state may require, at the ex- pense of the incorporators, other and more satisfactory evidence than such affidavit. Certain corporations are exempted from these provisions. These provisions were enacted in 1907 ae of 1907, Chap. CLXVI). Mathis v. Pridham, 1 Tex. Civ. App. 58, 83 (1892). Persona to. whom stock is issued at a discount are liable to creditors. O’Bear-Nester Glass Co. v. Antiexplo Co., 101 Tex. 431 (1908). CHAP. IIt.] NOTE. 327 A corporation was formed in 1904. Stock was issued in payment of an unpatented secret formula of a compound to be mixed with gaso- line, etce., to prevent explosion. Held, that this was not “ property actually received’’ within the meaning of the Constitution, and that the persons who received the stock were liable to creditors of the cor- poration for the par value of their shares. But contract rights may be received in payment of stock. Cole v. Adams, 92 Tex. 171 (1898). Cole v. Adams, 19 Tex. Civ. App. 507 (1898). The contention was made that holders of stock ‘issued for property at an overvalua- tion are not liable to creditors, as for unpaid stock, if said valuation was bona fide and without intent to defraud on the part of said cor- poration and those receiving the stock.” The court said (p. 512): “While it is true this proposition is sustained by the decisions of courts of high respectability, we think the wiser and better rule is that, as to creditors without notice, property conveyed in payment of stock is not to be considered as a payment except to the extent of its money, or actual value.” Utah. Section 5 of Art. x11 of the Constitution provides: ‘‘Cor- porations shall not issue stock, except to bona fide subscribers thereof or their assignee, nor shall any corporation issue any bond, or other obligation, for the payment of money, except for money or property received, or labor done. ... All fictitious increase of stock or in- debtedness shall be void.” Section 316 of the Compiled Laws, 1907, provides: ‘Where sub- scriptions to the capital stock of any corporation formed under the provisions of this chapter shall consist, in whole or in part, of prop- erty necessary to the pursuit agreed upon, there must appear in the articles of incorporation a description of the property so taken, with a statement of the fair cash value thereof, which statement, except in the case of corporations organized for mining or irrigating pur- poses, shall be supplemented by the affidavits of three persons, to the effect that they are acquainted with said property, and that it is reasonably worth the amount in cash for which it was accepted by the corporation; and the owners of such property shall be deemed to have subscribed such amount to the capital stock of such corporation as will represent the fair estimated cash value of so much of such property, or of such interest therein, as they may have conveyed to such corporation by deed actually executed and delivered.” Rolapp v. Ogden R.R. Co., 37 Utah, 540 (1910). Bonds issued as a bonus, and which have not passed into the hands of bona fide pur- chasers, are unenforcible. The court said (p. 554): “If we keep in mind all of our own constitutional and statutory provisions, we think it is manifest that it was the intention both of the people who adopted the Constitution and the Legislature who passed the fore- going sections that the capital stock of corporations, excepting those 328 NOTE. [CHAP. III. created for mining and irrigation, shall represent full actual value, either in money or property, and further that the subscribers for stock shall pay one hundred cents on the dollar, or its equivalent, for the stock subscribed for by them, and until so paid that they are liable to creditors of the corporation in a proper proceeding for any balance remaining unpaid on their subscriptions.” Henderson v. Turngren, 9 Utah, 432 (1893). If stock is issued in payment of conveyances of mining claims and properties in which the grantors had in fact no interest, the stockholders are liable to creditors. Evidence that the incorporators honestly thought the claims were valuable was rejected at the trial as immaterial. And see Salt Lake Hardware Co. v. Tintic Milling Co.,13 Utah, 423 (1896). Richardson v. Mining Co., 23 Utah, 366 (1901). Stock of a mining corporation may be paid in mining property “at its estimated fair cash market value, whatever its actual cash value may be, and this is so even where the property has no ascertainable market value. The fixing of such value is a matter of opinion. It requires the exer- cise of judgment, and the exercise of judgment for such purposes, it is clear, the legislature left to the incorporators, where the corporation is organized for mining purposes. An opinion thus formed must be one honestly entertained, but it is subject to no other qualification.” Vermont. Section 19 of no. 141 of the Acts of 1915 provides: ‘‘Cap- ital stock shall be issued only for (1) cash to the amount of each share of stock at par; or (2) real or personal property, rights or fran- chises at such value and to such an amount as may be determined by vote of the incorporators at a meeting held at the time of the or- ganization of the corporation; and subsequent to such organization capital stock shall be so issued for said consideration at such value and to such an amount as may be determined by a vote of the stock- holders. No stock shall be issued until after there has been filed with the secretary of state an affidavit executed by a majority of the in- corporators or directors of the corporation, setting forth specifically (a) the amount of stock proposed to be issued; and (b) the property or consideration which is to be received for such stock; and (c) that ‘in their judgment the property for which such stock is issued is actually worth in money the par value of such stock. The descrip- tion of such property or consideration shall be sufficient in detail to satisfy the secretary of state that the same can be readily identified. Stock so issued shall be for all purposes full-paid stock and not liable to further call. An officer or director of a corporation who issues or consents to the issue of any shares of capital stock before having filed such affidavit, or who makes or consents to the making of any false statement in any such affidavit, shall be fined not more than one thousand dollars, or imprisoned not more than twelve months, or both.” CHAP. I11.] ; NOTE. 329 [In 1915 the editor was employed by the state of Vermont to draft a General Corporation Act for submission to the Legislature. The provision, as to the issue of stock, which he recommended should be adopted was as follows: — “Capital stock may be issued pursuant to the vote of the di- rectors. “Capital stock shall not be issued, directly or indirectly, except for (1) cash equal to the par value of the stock so issued; or (2) property other than cash (including patents, copyrights, franchises, privileges, contract. rights, good will and other intangible property) of a value, ascertained as hereinafter provided, not less than the par value of the stock so issued; or (3) promotion expenses, to the extent here- inafter permitted. “The governor and secretary of state and the state commissioner of taxes shall by virtue of their offices be commissioners of corpora- tions. “The market value of property is the amount of cash which such property would presently bring at a sale from a seller who desires to sell but is under no pressure to sell to a buyer who is able to pay in cash and who desires to buy but is under no pressure to buy. “Tf stock is to be issued for property other than cash the cor- poration shall present a petition to the commissioners of corpora- tions describing the property and asking for authority to issue a specified amount of stock for such property. An affidavit verified by at least three directors shall be annexed to such petition declaring that each of the subscribers to such affidavit (speaking for himself but not for the other subscribers) believes himself competent to ap- praise with substantial accuracy the market value, as defined in this act, of such property, and that he believes that the market value of such property is not less than the par value of the stock which the corporation seeks authority to issue. “The commissioners may in their discretion employ competent persons to make an independent appraisal of the property. In such case they may fix the amount to be paid such appraisers for their services and expenses; but such amount shall not exceed one-half of one per cent, of the par value of the stock which the corporation seeks authority to issue. If such par value amounts to more than fifty thousand dollars it shall not exceed a maximum to be agreed upon by the commissioners and the corporation before further proceedings relating to the petition are had. Such appraisers may in an action on this statute recover the amount so fixed from the corporation, or, if such amount is not paid by the corporation within thirty days after it is fixed by the commissioners, from the directors who sub- scribed such affidavit, and such directors shall be jointly and sever- ally liable therefor. “The commissioners may authorize such property to be received 330 NOTE. [CHAP. III. in payment of an amount of stock to be specified by them in a writing under their seals, and they shall in such writing state the names and addresses of the independent appraisers, if any, who were employed. The petition, affidavit of directors, and such authorization shall be filed with, and recorded by, the secretary of state. “A corporation may issue stock for promotion expenses, which shall include compensation to the promoters; the organization fee and the amount paid to appraisers under the provisions of this sec- tion within one year after it is formed; legal expenses relating to the :,rmation of the corporation and the issue of stock issued within one year after it is formed; and the commission paid for underwrit- _ ing its stock issued within one year after it is formed. The amount of stock issued for promotion expenses shall not, in any event, exceed twelve and one-half per cent of the whole amount of stock lawfully issued by the corporation within one year after it is formed. “A corporation may carry its corporate franchise as an asset equal to the amount of stock issued for’promotion expenses. But it shall annually mark off ten per cent of the value originally set upon such asset until it is no longer carried as an asset. These provisions shall not be held to fix the value of the corporate franchise, if it is taken by an exercise of the power of eminent domain. “Tf stock is paid in cash but the cash or some part thereof is used, pursuant to any agreement or understanding had at the time such stock was paid in cash and with intent to evade the provisions of this section, in the payment of property or promotion expenses, so that, in substance, the stock is issued for such property or promo- tion expenses, all persons to whom or for whose benefit or account such stock was issued shall be jointly and severally liable to pay the corporation the difference between the par value of the stock and the actual value of the property, if any, for which, in substance, it was issued, with interest at ten per cent. Such amount may be re- covered in an action or actions on this statute and no lapse of time shall bar the bringing of such action or actions.”’] Virginia. Section 167 of the Constitution provides: ‘Whenever stock or bonds are to be issued by a corporation, it shall, before is- suing the same, file with the State Corporation Commission a state- ment (verified by the oath of the president or secretary of the cor- poration, and in such form as may be prescribed or permitted by the commission) setting forth fully and accurately the basis, or financial plan, upon which such stock or bonds are to be issued; and where such basis or plan includes services or property (other than money), received or to be received by the company, such statement shall ac- curately specify and describe, in the manner prescribed, or permitted, by the commission, the services and property, together with the valuation at which the same are received or to be received.” CHAP. 11.] NOTE. 331 By Subd. 9 of section 1105e of the Code, 1904, this constitutional provision 1s enacted, and it is further provided that “the judgment of the directors as to the value of such land or other property... in the absence of fraud, participated in by both parties to the trans- action, shall be conclusive.” For a violation of this provision a penalty may be imposed upon the corporation. Martin v. South Salem Land Co., 94 Va. 28 (1896). Persons to whom stock is issued at a discount are liable to creditors who ex- tended credit without notice of the facts. Monk v. Barnett, 113 Va. 635 (1912). The opinion in this case is set forth, supra. , Washington. Section 6 of Art. x11 of the Constitution provides: “Corporations shall not issue stock, except to bona fide subscribers therefor, or their assignees; nor shall any corporation issue any bond or other obligation for the payment of money, except for money or property received or labor done. .. . All fictitious increase of stock or indebtedness shall be void.” As to mining corporations, see section 7347 of Remington & Bal- inger’s General Statutes. Cox v. Dickie, 48 Wash. 264 (1908). Persons to whom stock is issued at a discount are liable to creditors. Lantz v. Moeller, 76 Wash. 429 (1918). Extracts from the opinion in this case are set forth, supra. Adamant Mfg. Co. v. Wallace, 16 Wash. 614, 622 (1897). Cred- itors cannot complain who dealt with the corporation with knowl- edge of the facts. West Virginia. Section 2253 of the Code, 1906, provides: “In no case shall stock be sold or disposed of at less than par, except by a vote of three-fourths of all the stock of the corporation outstand- ing at the time the vote is taken. . . . But nothing herein contained shall be so construed as to prevent any mining or manufacturing corporation subject to the provisions of this chapter, from issuing stock or bonds, and negotiating the sale of same, in payment of real and personal estate for the use of such corporation, and for its other corporate purposes and business, at such price and upon such terms and conditions as may be agreed upon by the owners and the di- rectors or stockholders of such corporation. And any subscriber to the capital stock of any such mining or manufacturing corporation may pay for the same by the transfer and conveyance to such cor- poration of real or personal property, or both, proper or necessary for the uses and purposes of the corporation, upon such terms as may be mutually agreed upon. All stock so issued shall be fully paid and not liable to any further call or assessment, and, in absence of actual fraud in the transaction, the valuation of the property so 332 NOTE. (CHAP. III. purchased shall be conclusive; but it shall be the duty of the corpo- ration to have its minutes or other permanent records to show with reasonable detail the items of the property in payment for which stock or bonds were so issued.” Bank v. Belington Coal Co., 51 W.Va. 60 (1902). Holders of stock issued for overvalued property are not liable to creditors, if no fraud has been practised upon the corporation. ‘‘ Property should be purchased by corporations at reasonably fair valuation even if paid for in the capital stock of the company. But our statute throws the gate wide open for the sale of stock and purchase of property in payment therefor at such price and on such terms and conditions as contracting parties may agree upon” (p. 80). And see In re Charles Town Light Co., 199 Fed. 846 (1912). There was a dictum in Bank v. Belington Coal Co. that when stock is issued, at the formation of a corporation, “for cash at less than par, parties taking that stock are liable to creditors for the unpaid value thereof” (p. 80). And see Security Trust Co. v. Ford, 75 Ohio St. 322 (1906). Wisconsin. Section 1753 of the Statutes, 1911, provides: ‘No corporation shall issue any stock or certificate of stock except in con- sideration of money or of labor or property estimated at its true money value, actually received by it, equal to the par value thereof, nor any bonds or other evidences of indebtedness except for money or for labor or property estimated at its true money value, actually received by it, equal to seventy-five per cent of the par value thereof, and all stocks and bonds issued contrary to the provisions of law and all fictitious increase of the capital stock of any corporation shall be void.” Gager v. Paul, 111 Wis. 6388 (1901). A holder of stock which the corporation had agreed should be full-paid, although in fact only part had been paid, was held liable to creditors. Gogebic Investment Co. v. Iron Chief Mining Co., 78 Wis. 427 (1891). Persons to whom stock is issued for overvalued property are liable to creditors. The complaint alleged that the property was not worth 10 per cent of the par value of the stock, and that this fact was known to the stockholders when they received their stock. The case further held that if creditors extended credit to the corporation with knowledge of the facts, the burden of proving this was upon the stockholders. And see Whitehill v. Jacobs, 75 Wis. 474 (1890). National Bank of Merrill v. Illinois Lumber Co., 101 Wis. 247 (1898). If property is purchased for $20,000 and capitalized at $80,000, it is for the jury to say whether the stock is full-paid. “It must appear that the corporation and the stockholders fraudulently agreed that stock should be issued and property should be received therefor at a valuation substantially in excess of its real value for CHAP. I1t.]. NOTE. 333 the very purpose of creating apparently full-paid stock, and falsely holding the same out to the world as such. A gross and obvious over- valuation of property would be strong evidence of such fraud.” Wyoming. Section 3989 of the Compiled Statutes, 1910, provides: “The directors of such company may purchase mines, manufac- tories and other property necessary for their business, and issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be declared and taken to be full stock, and not liable to any further calls, neither shall the holders thereof be liable to any further payments [under other sections of the Statutes], but in all statements and reports of the company this stock shall not be stated or reported as being issued for cash paid into the company, but shall be reported in this respect according to the facts.” Nore. — Statutes providing that public service corporations shall not issue stock without the approval of a public board are now com- mon. See Fall River Gas Co. v. Gas Commissioners, 214 Mass. 529 ; People v. Stevens, 197 N.Y. 1; People v. Stevens, 203 N.Y. 7; People v. Public Service Commission, 203 N.Y. 299; People v. Public Serv- ace Commission, 210 N.Y. 456. 334 ERLANGER J. NEW SOMBRERO PHOSPHATE CO. [CHAP. IV. CHAPTER IV. TRANSACTIONS BETWEEN PROMOTERS AND THE CORPORATION PROMOTED. ERLANGER v. NEW SOMBRERO PHOSPHATE CO. L.R. 3 A.C. 1218. 1878. APPEAL against a decision of the Court of Appeal which had re- versed a decree of Vice-Chancellor Matins. Sombrero, a small island in the West Indies, the property of the Crown, had boon leased out by the Crown for tyenty-one years from “1865. This Tease had been assigned to “‘The Sombrero Company,” which undertook to work the beds of phosphate of lime with which the island abounded.—This-company_was ordered to be wound up. The lease was ordered _to be sold by the official liquidator, Mr. Chat- teris. Erlanger and others formed a syndicate to purchase it, and did purchase it for £55,000. The purchase was effected bya _pro- ~visional contract August 30, 1871, though not formally concluded “until later. The syndicate desired to resell the lease at a profit; and with that view proceeded to get up a company to purchase it from the syndicate. rlanger, who acted for the syndicate, took steps to form a com- pany, under the Companies Act. A memorandum of association was drawn up by the solicitor of the syndicate, and was signed by seven persons all of whom were mere nominees of the syndicate. The articles of association for the company were drawn by the same solici- tor, and bore date September 20, 1871. These articles provided that the first board of directors should consist of five specified persons; that two directors should be a quorum for the transaction of busi- ness; and that the directors might without any further authority from the members, adopt and carry into effect the contract, of even date, for the assignment to the company of the island of Sombrero for the residue of the term of the lease. A contract had also been drawn up, and dated September 20, for the sale of the lease to the new company. This SOntTACt was between ‘Evans as vendor and Pavy as purchaser on behalf of the new coni- pany. Evans was a trustee or agent for the members of the syn- dicate. The contract was, on the face of it, a provisional one, to the’ “extent ¢ that it was subject-to the formation of the company, and the CHAP. Iv.] ERLANGER v. NEW SOMBRERO PHOSPHATE CO. 335 _adoption of the contract by it. This contract recited the purchase “by the syndicate on August 30, but did not name the price then given. The price to the new company was to be £110,000, of which ~ £80,000 was to be paid in cash, and the remaining £30,000 to be sat- ished by fully paid-up shares in the new company. The money was to be obtained by the subscriptions for the shares, which were to be ~ 13,000 in number, of £10 each. ‘The five persons specified in the articles as directors were all named by the syndicate. Two of them were persons not likely to act, and who did not act, in the early proceedings of the board. | The other three were Evans, Macdonald and Dakin. Evans’s shares" were given to him by Erlanger. Macdonald held shares only as trustee for Erlanger. Dakin had not sufficient knowledge of the facts to form an independent judgment. The first-meeting of the Giwchars was held September 20, 1871; and was attended by Evans, Macdonald and Dakin. It was resolved that the contract of pur- ~chase for £110,000 “be approved and confirmed.” A prospectus was soon issued; and after its publication the number of applications for shares became considerable. On or before November 2, -1871, 30,000 full-paid shares and £80,000 in cash were issued or paid by the company to the vendors. There was never any confirmation of the purchase by vote of the stockholders. Subsequently, after new directors had been chosen, the bill in this suit was filed by the company against Erlanger and all the members of the syndicate; one prayer being that the contract of September 20 might be set aside, and the purchase money repaid to the com- pany. The case was heard before Vice-Chancellor Matins, who ordered the bill to be dismissed, but without costs. On appeal by the com- pany, the contact masons 1a besescinded as to all member of the syndicate, the purchase money paid by the company repaid, and, on payment of the money so ordered to be repaid to the company, the island was to be restored by the company to the syndicate. Erlanger ef al. then brought the present appeal to the House of Lords. The case was twice argued. Lorp Penzance. Can a contract so obtained be allowed to stand? The bare statement of the facts is, I think, sufficient to condemn it. From that: statement I invite your Lordships to draw two conclu- sions: first, that the company never had an opportunity of exercis- _ing, through independent directors,_a_{air and independent _judg- ment upon the subject of this purchas d,. econdly, that this” —~tremscives TE-Was the vendors, in their character of promoters, —who had the power and the opportunity of creating and forming the . 336 ERLANGER v. NEW SOMBRERO PHOSPHATE co. [CHAP. IV. company in such a manner that with adequate disclosures of fact, an independent judgment on the company’s behalf might have been formed. . But instead of so doing they used that power and oppor- tunity for the advancement of their own interests. Placed in this position of unfair advantage over the company which they were about to create, they were, as it seems to me, bound according to the principles constantly acted upon in the Courts of Equity, if they wished to make a valid contract of sale to the company, to nominate independent directors and fully disclose the material facts. The obligation rests upon them to shew they have not made use of the position which they occupied to benefit themselves; but I find no proof in the case that they have discharged that obligation. There isno proof that either Sir Thomas Dakin or Admiral Macdonald was aware of the price at which the property had just been brought under the authority of the Court of Chancery, nor, indeed, that they even knew that the real vendors were also the promoters of the company. And there is certainly no proof that in the selection of the directors who were to be the company’s agents for accepting and affirming the proposed purchase, the vendors used their power as promoters in such a way as to create an independent body capable of acting im- partially in defence of the company’s interests. A contract of sale effected under such circumstances is, I conceive, upon principles of equity liable to be set aside. The principles of equity to which I refer have been ‘illustrated in a variety of relations, none of them perhaps precisely similar to that of the present parties, but all resting on the same basis, and one which is strictly applicable to the present case. The relations of principal and agent, trustee and cestwi que trust, parent and child, guardian and ward, priest and penitent, all furnish instances in which the Courts of Equity have given protection and relief against the pressure of unfair advantage resulting from the relation and. mu- tual position of the parties, whether in matters of contract or gift; and this relation and position of unfair advantage once made appar- ent, the Courts have always cast upon him who holds that position, the burden of shewing that he has not used it to his own benefit. Lorp Carrns. It is now necessary that I should state to your lordships in what position I understand the promoters to be placed with reference to the company which they proposed to form. They stand, in my opinion, undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company; they have the power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin to act as a trading corporation. If they are doing all this in order that the company may, as soon as it starts into life, become, through its managing directors, the purchaser of the property of themselves, the promoters, it is, in my opinion, incumbent upon the promoters to . CHAP. IvV.] ATTORNEY-GENERAL V. STANDARD TRUST co. 337 take care that in forming the company they provide it with an execu- tive, that is to say, with a board of directors, who shall both be aware that the property which they are asked to buy is the property of the promoters, and who shall be competent and impartial judges as to whether the purchase ought or ought not to be made. I do not say that the owner o not pr and form a jomt- stock company, and then sell his property to it, but I do say that if _he “does he is bound to take care that he sells it to the company through the medium of a board of directors who can and do exercise an independent and inteIigent judgment on the transaction, and who are not left under the belief that the property belongs, not to the promoter, but to some other person. .. . [cannot but regard a meet-~ ing at which two of the principal directors did not and could not at- tend, at which one who did attend and take part in the deliberations was at once a person buying and selling, where the legal adviser present and assisting was virtually another vendor, and where the two remaining directors are not shewn to have had the means of exercising, or to have exercised, any intelligent judgment on the sub- ject, as Tittle else than a mockery and a delusion. ATTORNEY-GENERAL FOR CANADA »v. STANDARD TRUST CO. [1911] A.C. 498. Viscount Haupane. In this appeal the question which has to be decided is whether the appellant, the Attorney-General for the Dominion of Canada, can successfully object to a claim by the re- spondents to be admitted as creditors of the South Shore Railway Company for a sum of $348,000. The material facts of the case are these: — In the year 1893 a railway, extending from St. Lambert, opposite Montreal, to Sorel, a distance of about forty-five miles, had been built, and belonged to the Montreal and Sorel Railway Company. Bonds for 1001. each had been issued by the company to the extent of about 1500. The company had become bankrupt and the railway was not being worked. On March 1 in that year Messrs. Tourville, Leduc, Fortier, and Beauchemin agreed to form themselves into a syndicate for the purpose of acquiring the railway and of completing and equipping it and putting it into good condition. They bought up 1453 of the bonds at a price amounting to about 34,0001. They also bought up a judgment against the company for a substantial sum, and they spent a good amount of their own money in improving the railway. Under an Act of the Quebec Legislature, assented to on January 8, 1894, a company known as the South Shore Railway 338 ATTORNEY-GENERAL v. STANDARD TRUST CO. [CHAP. IV. Company was incorporated, with power to construct and acquire railways in the locality of the Montreal and Sorel Railway. This Act and the incorporation under it of the South Shore Company were procured by the four members of the syndicate. The whole of the shares in the company in reality belonged to them, and there were no independent shareholders. Hach of them subscribed for $75,000 of the company’s stock. Along with three other persons, nominees whom they had qualified, they were elected directors, and Mr. Tour- ville was elected president. On January 16 a meeting of the share- holders was held, at which the directors were authorized to enter into agreements with railway companies and with other persons in accordance with the provisions of the Act. On June 1, 1894, the Montreal and Sorel Railway was sold by the Sheriff of Montreal under a judgment obtained by the Collector of Taxes, and it was bought, at-a nominal price of $1600, by Mr. Tourville, a member of the syndicate, and the president of the South Shore Company. On June 4, at a meeting of the directors, Mr. Tourville, on the narration that the real value of the railways was represented by the bonds of the Montreal and Sorel Company acquired by the members of the syndicate and by them transferred in part to the South Shore Com- pany in payment for the stock they had subscribed for, agreed to transfer the railway to the South Shore Company at a purchase price to be settled at a later period. The deed of sale to the company from the sheriff was executed on July 7. On October 8, 1895, the directors and their nominees, the only persons interested in the company, fixed the sale price at $648,000, and took credit in their own favow?' for the $300,000 subscribed by the members of the syndicate and paid in bonds as already stated. This price has not been shewn to be excessive, although it amounted to much more than the syndi- cate had actually spent in acquiring and improving the railway. The indebtedness of the company, after taking credit for the $300, 000 of subscription money, thus amounted to $348,000, and this sum was allocated as an indebtedness of $87,000 to each of the four members of the syndicate, with interest at 6 per cent. A formal agreement to this effect between the members of the syndicate and the South Shore Company was executed on December 2, 1895. These debts were subsequently transferred to the respondents. In 1902 the South Shore Railway Company was amalgamated with the Quebec Southern Railway Company. In 1904, the com- panies having become insolvent and having failed to work the rail- ways, the Minister of Railways and Canals for the Dominion of Canada instituted proceedings in the Exchequer Court of Canada, under the provisions of the Canadian statute 3 Edw. 7, ec. 21, against the amalgamated companies for a sale. Under the provisions of this and a subsequent statute passed for the purpose, a sale was ordered on September 11, 1905, and the railways were sold for $1,051,000. CHAP. Iv.] ATTORNEY-GENERAL ¥. STANDARD TRUST CO. 339 By a subsequent order it was referred to the referee of the Court to investigate the claims of the creditors of the companies. The re- spondents put in a claim on the basis above indicated. The At- torney-General of the Dominion, as an unsecured creditor of the amalgamated railway companies, intervened and contested this claim, as did also the Bank of St. Hyacinthe. The case put forward by the Attorney-General, the present ap- pellant, and by the bank, was that the proceedings of the members of the syndicate as directors of the South Shore Company, authoriz- ing the purchase of the Montreal and Sorel Railway and the transfer of bonds in payment for the stock subscribed for by the syndicate, was ultra vires and a breach of duty. It was said that Mr. Tourville and his associates in the syndicate were promoters of the South Shore Company and occupied a fiduciary position towards it, and that the resolution of the directors fixing the price of the railway at $648,000 was not binding and that the price was unfair. The re- spondents’ answer was that the price was not in excess of the real value, and that the Attorney-General and the bank had no title to object. The referee, after hearing evidence and argument, by his final report, dated May 25, 1908, dismissed the case of the Attorney-Gen- eral and the bank and allowed the claim of the respondents. The Attorney-General and the bank both moved to vary this report, but the Exchequer Court, by order dated October 31, 1908, dismissed the motions. From this order the Attorney-General and the bank both appealed to the Supreme Court of Canada, which, by a judgment dated February 15, 1910, dismissed the appeals, IptneTon, J., dissent- ing. The Attorney-General alone now appeals to the Privy Council. The appellant contends, on the footing of being an unsecured creditor of the Quebec Southern Railway Company as amalgamated, that the fund arising from the sale directed by the Exchequer Court ought not to be diminished by admitting the claim of the respondents. He alleges that the price of $648,000 paid in 1894 to the syndicate for the railway was excessive, that the transaction was ultra vires, and that, apart from this, the members of the syndicate, being also directors, were in a fiduciary position towards the South Shore Company, such that the transaction cannot stand. In the view of the case taken by their Lordships, it is not necessary to enter into the question whether the price of $648,000 was excessive. The re- feree, after hearing evidence, decided that it was not, and this find- ing of fact is not dissented from by any of the judges in the Courts below, except Ip1neTon, J. But whatever may have been the char- acter of this transaction, it was approved, with full knowledge of the facts, by all of those who owned, or were beneficially interested in, the stock of the company at the time. It, therefore, does not matter, for the purposes of a case such as the present, that these 340 ATTORNEY-GENERAL J. STANDARD TRUST CO. [CHAP. IV. persons were also promoters and vendors. If the transaction had been ultra vires in the sense of being outside the legal capacity of the company, and accordingly not its act, the case would have been different. But, although this has been suggested, their Lordships can find no foundation for the argument. Under the provisions of the statute of the Quebec Legislature incorporating it, the company had power to purchase the Montreal and Sorel Railway, and was au- thorized to take payment for the amount subscribed for its stock in bonds of any railway company. The transaction was actually carried out in this form, and was on the face of it within the powers con- ferred by the statute on the company. If, therefore, what the di- rectors did is to be impeached, it must be on the ground, not of its having been ultra vires of the company, but of its having been a breach of duty by the directors. Now, although the capital of the company was $1,000,000, the only stock issued was to the amount of $300,000, and this was taken up and owned by the members of the syndicate and no one else. They and they alone were interested in the capital of the company. This is not a case of winding up, but even if it were, it would make no difference. In proceedings of the character of the present the title of a liquidator as representing cred- itors cannot be higher than the title of the company against whom the creditors claim. In this case the interests of the company and of the syndicate were identical. The only persons beneficially in- terested in the company were the four members of the syndicate. The law gave them the complete control of its action. Under that control the company gave effect to the policy of the only persons who had any beneficial interest in its capital. The case is not one in which the apparent procedure can be said to have been unreal, or to have been a cloak under which a conspiracy to defraud was con- ‘cealed. Under these circumstances, their Lordships are of opinion that the company, notwithstanding that no general meeting, apart from the meeting of directors, appears to have been held for thé pur- pose, was completely bound by the transactions sought to be im- peached, and that the appellant, who has certainly no title higher than that of the company against the assets of which he claims, is bound likewise. In the course of the argument for the appellant the well-known case of Erlanger v. New Sombrero Phosphate Co., 3 App. Cas. 1218, was much relied on, as shewing that the action of the directors could not stand. It is sufficient to observe that, for the reasons given in the House of Lords in Salomon v. Salomon [1897], A.C. 22, the doc- trine of the former case has no application to circumstances such as those of the present case, where every one interested in the capital cf the company has, with full knowledge, concurred in the act im- peached. Their Lordships will humbly advise His Majesty that the appeal should be dismissed. The costs must be paid by the appellant. CHAP. Iv.] OLD DOMINION COPPER CO. v. LEWISOHN. 341 OLD DOMINION COPPER CO. »v. LEWISOHN. 210 U.S. 206. 1908. Mr. Justice Hoimss delivered the opinion of the court. This is a bill in equity brought by the petitioner to rescind a sale to it of certain mining rights and land by the defendants’ testator, or in the alternative to recover damages for the sale. The bill was demurred to and the demurrer was sustained. 136 Fed. Rep. 915. Then the bill was amended and again demurred to, and again the demurrer was sustained, and the bill was dismissed. This decree was affirmed by the Circuit Court of Appeals. 148 Fed. Rep. 1020; 79 C.C.A. 534. The ground of the petitioner’s case is that Lewisohn, the deceased, and one Bigelow, as promoters, formed the petitioner that they might sell certain properties to it at a profit, that they made their sale while they owned all the stock issued, but in con- templation of a large further issue to the public without disclosure of their profit, and that such an issue in fact was made. The Su- preme Judicial Court of Massachusetts has held the plaintiff entitled to recover from Bigelow upon a substantially similar bill. 188 Mas- sachusetts, 315. The facts alleged are as follows: The property embraced in the plan was the mining property of t ini a pany of Baltimore, and_also the mining rights_and_land now in question, the latter being held by one Keyser, for the benefit of him- self and of the executors of one Simpson, who with Keyser owned The Hock of the Baltimore company Bizelow and Lewisohn, in May and June, 1895, obtained options from Simpson’s executors and “Keyser for the purchase of the stock and the property now in ques- “tion. They also formed a syndicate to carry out their plan, with the “agreement that the money subscribed by the members should be used for the purchase and the sale to a new corporation, at_a large advance, and that the members, in the proportion of their subscrip- tions, should receive in cash or in stock of the new corporation the “profit made by the sale. On May 28, 1895, Bigelow paid Simpson’s executors for their stock on behalf of the Syndica: of himself and Lewisohn, and in June Keyser was paid in the same way. On July 8, 1895, Bigelow and Lewisohn started the plaintiff cor- poration, the seven members being their nominees and tools: The next day the stock of the company was increased to 150,000 shares” _of twenty-five dollars each, officers were elected, and the corporation became duly organized. July 11, pursuant to instructions, some of “THe OHIGES resigned, aid Bigelow and Lewisohn and three other absent members of the syndicate came in. Thereupon an offer was Teceived trom the Baltimore company, the stock of which had been 342 OLD DOMINION COPPER CO. v. LEWISOHN. [CHAP. Iv. bought, as stated, by Bigelow and Lewisohn, to sell substantially all its property for 100,000 shares of the plaintiff company. ‘The offer was accepted, and then Lewisohn offered to sell the real estate now in question, obtained from Keyser, for 30,000 shares, to be issued - “to Bigelow and himself. This also was accepted and possession of all the mining property was delivered the next day. The-sales “were —consummated’ by telivery-of deeds_and afterwards, on July 18, to raise working capital, it was voted to offer the remaining 20,000 shares to the public at par, and they were taken by subscribers who did not know of the profit made by Bigelow and Lewisohn and the “syndicate On September 18, the 100,000 and 30,000 shares were issued, and it was voted to issue the 20,000 when paid for. The bill alleges that the property of the Baltimore company was not worth more than $1,000,000, the sum paid for its stock, and the property “here concerned not over $5,000, as Bigelow and Lewisohn knew. "The market value of the petitioner’s stock was [not] less than par, so that the price paid was $2,500,000, it is said, for the Baltimore company’s property and $750,000 for that here concerned. Whether this view of the price paid is correct, it is unnecessary to decide. Of the stock in the petitioner received by Bigelow and Lewisohn or their Baltimore corporation, 40,000 shares went to the syndicate “as profit, and the members had their choice of receiving a like ad- ditional number of shares or the repayment of their original sub- scription. As pretty nearly all took the stock, the syndicate +s- ceived about 80,000 shares. The remaining 20,000 of the stock paid “to the Baltimore company, Bigelow and Lewisohn divided, the “piaimtitt-believes-without the Enowledge of the syndicate. The "30,000 Shares sequived Tor the proverte now in Gestion they ala ~divided. Thus the plans of Bigelow and Lewisohn were carried out: ~The argument for the petitioner is that all would admit that the promoters (assuming the English phrase to be well applied) stood in a fiduciary relation to it, if, when the transaction took place, there were members who were not informed of the profits made and who did not acquiesce, and that the same obligation of good faith extends down to the time of the later subscriptions, which it was the pro- moters’ plan to obtain. It is an argument that has commanded the assent of at least one court, and is stated at length in the decision. But the courts do not agree. There is no authority binding upon us and in point. .The general observations in Dickerman v. Northern Trust Co., 176 U.S. 181, were obiter, and do not dispose of the case. Without spending time upon the many dicta that were quoted to us, we shall endeavor to weigh the considerations on one side and the other afresh. The difficulty that meets the petitioner at the outset is that it has assented to the transaction with the full knowledge of the facts. It is said, to be sure, that on September 18, when the shares were issued CHAP. Iv.] OLD DOMINION COPPER CO. v. LEWISOHN. 3438 to the sellers, there were already subscribers to the 20,000 shares that the public took. But this does not appear from the bill, unless it should be inferred from the ambiguous statement that on that day it was voted to issue those shares ‘to persons who had subscribed therefor,” upon receiving payment, and that the shares “‘ were there- after duly issued to said persons,” etc. The words “had subscribed” may refer to the time of issue and be equivalent to “should have subscribed” or may refer to an already past event. But that hardly matters. The contract had been made and the property delivered on July 11 and 12, when Bigelow, Lewisohn and some other members of ’ the syndicate held all the outstanding stock, and it is alleged in terms that the sales were consummated before thé vote of July 18 to offer the stock to the public had been passed. At the time of the sale to the plaintiff, then, there was no wrong done to any one. Bigelow, Lewisohn and their syndicate were on both sides of the bargain, and they might issue to themselves as much stock in their corporation as they liked in exchange for ther— ~eonveyanee-of then-tand:_Satomon v. Salomon & Co. {1897}; AG — 22; Blum v. Whitney, 185 N.Y. 282; Tompkins v. Sperry, 96 Mary- land, 560. If there was a wrong it was when the innocent public subscribed. But what one would expect to find, if a wrong happened then, would not be that the sale became a breach of duty to the cor- poration nunc pro tunc, but that the invitation to the public without disclosure, when acted upon, became a fraud upon the subscribers from an equitable point of view, accompanied by what they might treat as damage. For it is only by virtue of the innocent subscribers’ position and the promoter’s invitation that the corporation has any pretense for a standing in court. If the promoters after starting their scheme had sold their stock before any subscriptions were taken, and then the purchasers of their stock with notice had invited the public to come in and it did, we do not see how the company could main- tain this suit. If it could not then, we do not see how it can now. But it is said that from a business point of view the agreement was not made merely to bind the corporation. as it then was, with only forty shares issued, but to bind the corporation when it should have a capital of $3,750,000; and the implication is that practically this was a new and different corporation. Of course, legally speak- ing, a corporation does not change its identity by adding a cubit to its stature. The nominal capital of the corporation was the same when the contract was made and after the public had subscribed. Therefore what must be meant is, as we have said, that the corpora- tion got a new right from the fact that new men who did not know what it had done had put in their money and had become members. It is assumed in argument that the new members had no ground for asuit in their own names, but it is assumed also that their position changed that of the corporation, and thus that the indirect effect of 344 OLD DOMINION COPPER CO. ¥. LEWISOHN. [CHAP. IV. their acts was greater than the direct; that facts that gave them no claim gave one to the corporation because of them, notwithstanding its assent. We shall not consider whether the new members had a personal claim of any kind, and therefore we deal with the case with- out prejudice to that question, and without taking advantage of what we understand the petitioner to concede. | But, if we are to leave technical law on one side and approach the case from what is supposed to be a business point of view, there are new matters to be taken into account. If the corporation recovers, all the stockholders, guilty as well as innocent, get the benefit. It is answered that the corporation is not precluded from recovering for a fraud upon it, because the party committing the fraud is a stock- holder. Old Dominion Copper Mining and Smelting Co. v. Bigelow, 188 Massachusetts, 315, 327. If there had been innocent members at the time of the sale, the fact that there were also guilty ones would not prevent a recovery, and even might not be a sufficient rea- son for requiring all the guilty members to be joined as defendants in order to avoid a manifest injustice. Stockton v. Anderson, 40 N.J. Eq. 486. The same frinciple is thought to apply when innocent members are trought in later under a scheme. But it is obvious that this answer falls back uron the technical diversity between the cor- poration and its members, which the business point of view is sup- posed to transcend, as it must, in order to avoid the objection that the corporation has assented to the sale with full notice of the facts. It is mainly on this diversity that the answer to the objection of in- justice is based in New Sombrero Phosphate Co. v. Erlanger, 5 Ch. D. 73, 114, 122. Let us look at the business aspect alone. The syndicate was a party to the scheme to make a profit out of the corporation. Whether or not there was a subordinate fraud committed by Bigelow and Lewisohn on the agreement with them, as the petitioner believes, is immaterial to the corporation. The issue of the stock was apparent, we presume, on the books, so that it is difficult to suppose that at least some members of the syndicate, representing an adverse in- terest, did not know what was done. But all the members were en- gaged in the plan of buying for less and selling to the corporation for more, and were subject to whatever equity the corporation has against Bigelow and the estate of Lewisohn. There was some argu- ment to the contrary, but this seems to us the fair meaning of the bill. Bigelow and Lewisohn, it is true, divided the stock received for the real estate now in question. But that was a matter between them and the syndicate. The real estate was bought from Keyser by the syndicate, along with his stock in the Baltimore company, and was. “sold by the syndicate to the petitioner along with the Baltimore com- pany’s property, as part of the scheme. The syndicate was paid for it, whoever received the stock. And this means that two-fitteenths CHAP. Iv.] OLD DOMINION COPPER CO. v. LEWISOHN. 345 Ee Oo ore Se OO share Sal ahs aa, are to be allowed to use’ the name of the corporation to a _rights against Lewisohn’s estate that will enure to the benefit of thirteen- fifteenths of the stock that are totally without claim. It seems to us that the practical objection is as strong as that arising if we adhere to the law. Let us take the business point of view for a moment longer. To the lay mind it would make little or no difference whether the 20,000 shares sold to the public were sold on an original subscription to the articles of incorporation or were issued under the scheme to some of the syndicate and sold by them. Yet it is admitted, in ac- cordance with the decisions, that in the latter case the innocent pur- chasers would have no claim against any one. If we are to seek what is called substantial justice in disregard of even peremptory rules of law, it would seem desirable to get a rule that would cover both of the almost equally possible cases of what is deemed a wrong. It might be said that if the stock really was taken as a preliminary to selling to the public, the subscribers would show a certain confidence in the enterprise and give at least that security for good faith. But the syndicate believed in the enterprise, notwithstanding all the profits that they made it pay. They preferred to take stock at par rather than cash. Moreover, it would have been possible to issue the whole stock in payment for the property purchased, with an understanding as to 20,000 shares. Of course, it is competent for legislators, but not, we think, for judges, except by a quast-legislative declaration, to establish that a corporation shall not be bound by its assent in a transaction of this kind, when the parties contemplate an invitation to the public to come in and join as original subscribers for any portion of the shares. It may be said that the corporation cannot be bound until the con- templated adverse interest is represented, or it may be said that promoters cannot strip themselves of the character of trustees until that moment. But it seems to us a strictly legislative determination. It is difficult, without inventing new and qualifying established doctrines, to go behind the fact that the corporation remains one and the same after once it really exists. When, as here, after it really exists, it consents, we at least shall require stronger equities than are shown by this bill to allow it to renew its claim at a later date because its internal constitution has changed. To sum up: In our opinion, on the one hand, the plaintiff cannot _recover_without departing trom the fundamental conception em- bodied in the law that created it; the conception that a corporation remains unchanged and unaffected in its identity by changes in its members. Donnell v. Herring-Hall-Marvin Safe Co., 208 U.S, 267, - Salomon v. Salomon & Co. [1897], A.C. 22, 30. On the other hand, if we should undertake to look through fiction to facts, it 346 DAVIS v. LAS OVAS CO. [CHAP. IV. appears to us that substantial justice would not be accomplished, but rather a great injustice done, if the corporation were allowed to dis- regard its previous assent in order to chargé @ single member with —the-whole results of a transaction to which thirteen-fitteenths of its stock were parties, for the benefit of the guilty, if there was guilt in any one, and the innocent alike. We decide only what is necessary. We express no opinion as to whether the defendant properly is called a promoter, or whether the plaintiff has not been guilty of laches, or whether a remedy can be had for a part of a single transaction in the form in which it is sought, or whether there was any personal claim on the part of the innocent subscribers, or as to any other question than that which we have discussed. The English case chiefly relied upon, Erlanger v. New Sombrero Phosphate Co., 3 App. Cas. 1218, affirming 8.C., 5 Ch.D. 73, seems to us far from establishing a different doctrine for that jurisdiction. There, to be sure, a syndicate had made an agreement to sell, at a profit, to a company to be got up by the sellers. But the company, at the first stage, was made up mainly of outsiders, some of them instruments of the sellers, but innocent instruments, and, according to Lord Carrns, the contract was provisional on the shares being taken and the company formed (p. 1239). There never was a mo- ment when the company had assented with knowledge of the facts. The shares, with perhaps one exception, all were taken by sub- scribers ignorant of the facts, 5 Ch.D. 118, and the contract seems to have reached forward to the moment when they subscribed. As it is put in 2 Morawetz, Corp. (2d ed.) §.292, there was really no company till the shares were issued. Here thirteen-fifteenths of the stock had been taken by the syndicate, the corporation was in full lifé and had assented to the sale with knowledge of the facts before an outsider joined. There most of the syndicate were strangers to the corporation, yet all were jomed as defendants (p. 1222). Here the members of the syndicate, although members of the corporation, are not Joined, and it is sought to throw the burden of their act upon ‘a single one. Gluckstein v. Barnes [1900], A.C. 240, certainly is no stronger for the plaintiff, and in Yeiser v. United States Board & Paper Co., 107 Fed. Rep. 340, another case that was relied upon, the transaction equally was carried through after innocent subscribers had paid for stock. Decree affirmed. aad DAVIS v. LAS OVAS CO. 227 U.S. 80, 1912. Mr. Justicz Lurton. This is a bill by the appellee to recover from appellants secret profits made by them as promoters of the Las Ovas Company in the purchase of a part of a tract of land known CHAP. Iy.] DAVIS v: LAS OVAS CO. 347 as Las Ovas in the Republic of Cuba, and also for the cancellation of certain shares of stock issued to them as promoters. The facts essential to judgment are not in serious dispute. They are found clearly and fully stated in the opinion by Mr. Justice Goutp of the Supreme Court of the District of Columbia, and again = the opinion of the Court of Appeals of the District by Mr. Justice OBB. F From the facts found by both courts it appears: — a. That the appellants and certain other persons, not parties to this suit, signed an agreement on March 19, 1904, by which they agreed to purchase for a corporation which they were to organize a specified part of a tract of land in Cuba called the Las Ovas planta- tion, for the price of $34,000, to which it was later agreed to add an- other small parcel at an additional price of $1,000. b. It was further agreed that they should organize a corporation, of which they should be the incorporators, with a capital stock of $150,000, and that 40 per cent of the shares should be issued to them for service as promoters and that the remaining stock should be subscribed for by them. For this subscribed stock they were to pay an amount sufficient to cover the purchase money of $35,000 and to create an expense fund of $5,000. c. It was agreed that the property should, when acquired, be placed in the hands of one of the group of promoters until the forma- tion of the company, and then conveyed to it. d. The scheme was one originated and engineered by the ap- pellants, who at the time of this agreement had already secretly secured an option for themselves for the purchase of this property at the price of $20,000. To conceal the true consideration from their associates they caused the property to be conveyed by the vendor to one Escalante, a stranger selected by them. The deed to Escalante recited the true consideration. Later, in pursuance of the promoters’ agreement, they caused Escalante to convey to the member of the syndicate selected to hold the title until organization, reciting a con- sideration of $35,000. ‘ The corporation was organized as planned. The promoters’ shares were duly issued and the remaining shares taken by the pro- moters upon the agreed terms, its officers and directors being com- posed exclusively of the members of the syndicate. Thereupon the property was transferred to the company and paid for, through ap- pellants, out of the proceeds of the subscribed stock. The result of the transaction was that the corporation was re- quired to pay to those who had assumed to act for and represent it, a secret profit of fifteen thousand dollars and also to compensate them for their services in buying the land and organizing the com- pany by issuing to each of them fifteen thousand dollars in non- assessable shares of its stock. 348 DAVIS Vv. LAS OVAS CO. [CHAP. Iv. The decree below required the appellants to account for the pro- fits realized by them, in part traced to certain shares in their hands, and to surrender for cancellation the shares issued to them as pro- moters. It is now said that the corporation was ‘‘a mere convenient re- ceptacle for the property, erected for the convenience of the syndi- cate.” That the property was bought by the syndicate for their own advantage and that the corporation included only the members of the syndicate. That the stock of the company was all taken by the syndicate, who, for property which was their own, agreed to pay enough to cover the purchase price and create a small expense fund. Upon this contention it is urged that the corporation has no right to’ the relief sought, as the whole transaction was a mere form adopted by the parties for their own convenience as owners of the property and owners of the corporation. It is then said: “If we admit, for the purposes of this point, that appellants did deceive some of the syndicate, what has the company to do with it?” For this they cite Old Dominion Copper Company v. Lewisohn, 210 U.S. 206, where it was held that a subordinate fraud practiced by some of the promoters of a corporation upon some of their associates was a matter wholly between them and the syndicate which gave rise to no corporate right of action in the absence of innocent incorpora- tors or stockholders. But that is not this case. Some of those, if not all, interested by appellants in the property and in its purchase for a proposed con- sideration were ignorant of the real price which they were to pay for it, and were not, therefore, in complicity with their scheme to make a secret profit. These innocent members of the syndicate became stock subscribers and directors of the company, as did appellants. The buyers and sellers were not the same. Those of the syndicate assuming to act for the corporation in acquiring the property were under obligation to disclose the truth and deal openly. In the absence of such disclosure the corporate assent was obtained on false grounds. The wrong was done when those members of the syndicate not in complicity with appellants subscribed to the stock of the company and aided their guilty associate managers in the corporate action necessary to the corporate acquisition of the property at the exag- gerated price placed upon it by those who were to realize a secret profit. Thus, the original fraud practiced upon some of those as- sociated with them in the promoters’ arrangement became operative against the corporation itself. The standing of the corporation re- sults from the fact that there were innocent and deceived members of the corporation when the property was taken over by it. Neither is the corporate right of action defeated by the fact that . the recovery will inure to the guilty as well as to the innocent, nor is the fact that all of the parties who may have shared in the secret CHAP. Iy.] OLD DOMINION COPPER CO. v. BIGELOW. 349 profits are not sued fatal to the case. The corporation may well sue either one or all of those who received secret profits. There is no want of necessary parties because all are not here sued. The distinction between a case in which all of the owners of the property and all of the members of the buying corporation are the same persons, and participate in the profit realized, and the case here presented is fully recognized in Old Dominion Copper Com- pany v. Lewisohn, supra, as well as in Phosphate Company v. Er- langer, 5 Ch. Div. 73, and in the well considered opinion of Judge SEVERENS in Yeiser v. U.S. Paper Co., 107 Fed. Rep. 340. There was no error in cancelling the shares issued to the plaintiffs in error for promotion of the corporation. They and the other mem- bers of the syndicate received these shares upon the assumption that they had in good faith served the corporation in the procurement of the property. Obviously appellants were serving themselves to the detriment of the corporation and innocent subscribers to its stock. In such a situation the corporation may recover the shares. The decree will be affirmed. OLD DOMINION COPPER CO. v. BIGELOW. 203 Mass. 159. 1909. Rueaa, J. These are suits in equity, by which the plaintiff seeks to recover secret profits made by the defendant as one of its organiz- ers, in selling to it while under the absolute control and management _of himself and his associate, one Lewisohn, certain mining properties belonging to him and Lewisohn. The allegations of the bills are set out at Jength mn [88 Mass. 315, where one of the cases was considered upon demurrer. After the overruling of the demurrer the defendant answered, and the cases were heard before a single justice, who en- tered decrees in favor of the plaintiff in both cases and filed a report of the facts found by him. Except as to matters immaterial so far as the questions of law are involved, he found that the allegations were sustained. Briefly recapitulated, the facts appearing in the re- port upon which the plaintiff rests its claim are that in April, 1895, the defendant and Lewisohn formed a device to secure the control of the stock (the p i ; of the o- minion Copper Company of Baltimore City, called the Baltimore _Company, and the title to certain other neighboring mining prop- erties, called the outside properties, and to cause these properties _and the real estate of the Baltimore Company to be transferred to a new corporation (which they should procure to be organized with a much larger capital), for an increased price. O tions were secured upon these properties, and the price agreed to be paid by the de- 350 OLD DOMINION COPPER CO. v. BIGELOW. [CHAP. IV. fendant and Lewisohn to the owners was $1,000,000, divided in the” proportion of 547/1000 by the defendant, and 453/1000 by Lewisohn. “The outside properties were regarded by all parties as of little or no value and were thrown In as a makeweight in the purchase of the “stock of the Baltimore Company. The single justice, while finding ~~ that they could not be said to be of no value, was satisfied that their value did not exceed $50,000. No examination to ascertain their Value was made by the defendant or Lewisohn, or by any one in be- half of the plaintiff. For the purpose of providing himself with funds to meet in part his financial obligations for the purchase of the prop- erties, the defendant, before taking up the options, organized an underwriting syndicate and another syndicate called the Old Do- minion Syndicate. It is not necessary to state the details of these arrangements, further than to say that it is found as a fact that the defendant did not deal fairly with the members of the syndicate in the division of his profits, and did not disclose to the great majority of them the fact of the secret profit. The obligation of s assumed wholly by the defendant and Lewisohn, and the device for ‘the Organization of the new corporation was entirely theirs. Al- though, as first conceived, it was the avowed intention of the de- fendant and Lewisohn (which the defendant expressed to various members of the syndicate) to form a new corporation with a capital stock of $2,500,000 which should take the property of the Baltimore Company and the outside properties for $2,000,000 of its capital stock and procure a working capital of $500,000 by the sale of the i rest of the capital stock to the public for cash at par, they proceeded to organize the plaintiff corporation under the laws of New Jersey, with a capital stock of $3,750,000, divided into one hundred and fifty thousand shares of the par value of $25 each. But it was the intention of the defendant and Lewisohn (as found by the single justice) that “twenty thousand shares of the capital stock of the plaintiff should be issued to new subscribers at par; and this was done in the summer and fall of 1895.” This organization was con- ducted and controlled wholly by the defendant and Lewisohn through themselves and their agents and representatives. Without providing ‘the plaintiff with on independent. hoard of officers or representatives they, as the responsible and only managers of the plaintiff, acting in its name, contracted wi ves a8 mine owners to sell to it the “reatestate-of the-Baltimore-Company for $2,500,000 of the capital stock of the plaintiff and the outside properties, of trifling value at™ best, for $750,000 of such capital stock, and to sell to the general public for working capital the remaining $500,000 of capital stock of the plaintiff at par, without disclosing that they had sold prop-— rty costing the quarter times its cost. : The first meeting of the stockholders was held on July 7, 1895, CHAP. Iv.] OLD DOMINION COPPER CO. ¥. BIGELOW. 351 at which $1,000, — the lowest amount of capital with which a cor- poration organized under the laws of New Jersey could begin busi- ness, — was paid in by Lewisohn. This money, although deposited to the credit of the plaintiff company upon its organization, was afterwards returned by it to Lewisohn in an accounting with him. A meeting of the directors was held in New York on July 11, 1895, at_which the defendant became a director and the president of the plaintiff and Lewisohn a director. Votes were passed to increase the capital stock and two separate votes for the purchase of the mining properties for the prices in stock before indicated. The stock, the market value of which was fully as great as its par value, was issued to the defendant and Lewisohn and one Dumaresq, their nominee, by votes of September 18, 1895, on that or the following day. At the same time a certificate for the remaining twenty thousand shares of stock of the par value of $500,000 was made out in the name of “Thomas Nelson, treasurer,’’ but this stock is found to have be- longed to the corporation, and Nelson had no right to act respecting it, as it was taken up by direct subscriptions of the public. The con- veyances of the mines by the Baltimore Company and of the out- "__Side properties by Lewisohn were not made until December, 1995, or January, 1896. The intrinsic value of the property conveyed by the Baltimore Company is found to have been not more than $1,000,- 000, although its market value, largely due to the skilful manipula- —tion of the defendant and Lewisohn, and ‘‘the ingenious manner in which: they created a desire on the part of men interested in mines, as investors or speculators, to be allowed to join in the transaction they were carrying out,’’ was something less than $2,000,000. The © report proceeds: “But, taking the most favorable view of the situa- tion possible for the defendant, he and Lewisohn did, by reason of their failure to disclose the real facts as aforesaid, make out of their sale to the plaintiff company a secret profit of fifty thousand shares of its capital stock, of which the defendant’s portion was twenty- seven thousand three hundred and fifty shares, and Lewisohn’s por- tion was twenty-two thousand six hundred and fifty shares._If he had fully disclosed the facts to the plaintiff company and secured for it independent~advice;it-would not have given to him this secret Prost Lewisohn and he were acting in the formation and execu- tion of the scheme together and in concert. Each of them was doing his part to carry out a joint scheme, which was intended to inure to the advantage of both. The control exercised by them over the plaintiff company was a joint control, and was exercised by them for the benefit of both. A proper disclosure of the real facts by either would have frustrated the schemes of both; they both acted together in pursuance of a common design, and for the profit of both.” “During all these transactions the full control of the plaintiff com- pany was in the hands of and was exercised by the defendant and 352 OLD DOMINION COPPER CO. Uv. BIGELOW. [CHAP. IV. Lewisohn, who were its promoters and who themselves determined upon and dictated, under the advice of their counsel, everything that was done by the plaintiff company or in its behalf; it had no directors, representatives, or advisers other than themselves or their agents; and they did not disclose to it any of the facts which have been stated. This continued to be the case until April,.1902.... “The result of his and Lewisohn’s transactions with the plaintiff company was that for the $1,000,000 of their own and their asso- ciates’ money which they invested, they received, subject to the pay- ment of legitimate expenses of not over $20,000, stock to the par value of $3,250,000, and of the actual value of at least that amount: that is, at the rate of more than three dollars for one. He gave to the members of his syndicate two dollars for one, either wholly in stock or half in cash and half in stock, as they elected. With a few individual exceptions he did not disclose the facts to them. The very great majority of the members of his syndicate did not become aware of the details of what he and Lewisohn had done.” The capi- tal stock issued to defendant and Lewisohn was stamped “Issued for property purchased.’”’ The law of New Jersey required that such stock be issued only ‘‘to the amount of the value”’ of the property so purchased. Pub. Laws of New Jersey, 1889, p. 414, § 4; 1893, p. 444, § 2. The vote of July 11, 1895, to purchase the mining prop- erties was in fact passed by a majority only of the board of directors, for three do not appear to have been present at that time. At the directors’ meeting of September 18, 1895, when the votes to issue thirty thousand full paid shares to the defendant and Lewisohn and one hundred thousand like shares to their nominee Dumaresq were passed, seven directors were present, the five aside from Bigelow and Lewisohn being their tools, and at the end of the record of that meeting all the directors signed an assent to the acts done, and Bige- low and Lewisohn, signing for thirty thousand shares of capital stock, Dumaresq signing for one hundred thousand shares of the capital stock, and “Thomas Nelson, Treasurer,” signing for twenty thousand shares of capital stock, being the whole number of shares, signified a written approval of the acts of that meeting. The single justice found that the twenty thousand shares were the property of the plaintiff, and that Nelson had no right to attempt to act as their holder. ... The next inquiry is as to the liability of the defendant. The plaintiff seeks to establish this on the ground that the defendant and Lewisohn framed a scheme, which was an entirety and which as a whole comprised the organization and continued management of the plaintiff by themselves, their agents and representatives, until the completion of the project; this scheme was the capitalization of the plaintiff for $3,750,000; the sale to it of their property, costing and intrinsically worth $1,000,000, but having in the market a value not CHAP. Iv.] OLD DOMINION COPPER CO. v. BIGELOW. 353 over $2,000,000, for $3,250,000; the sale to the general public at par for cash of the remaining $500,000 of stock; and all this without pro- viding the plaintiff with any independent board of officers or advisers to pass upon the wisdom of the purchase and without disclosing the substance of the transaction and their extraordinary profit to the purchasers of its stock for cash at par. This scheme was an entity, one part of it was just as essential as any other part, and one part was the procurement of $500,000 in cash from the unenlightened public as a working capital for the new company. It has been decided, apparently by a unanimous court, that such a transaction creates a liability on the part of the defendant to ac- count for his profits to the plaintiff in this proceeding. Hayward v. Leeson, 176 Mass. 310. One of the present suits was before the court as reported in 188 Mass. 315, and after an elaborate review of the authorities and examination of the grounds for judgment, it was held that the defendant was liable, notwithstanding the opposing decision on the precise point by the United States Circuit Court in Old Dominion Copper Mining & Smelting Co. v. Lewisohn, 136 Fed. Rep. 915. Since the decision reported in 188 Mass. 315, the above en- titled case against Lewisohn has been considered by the United States Circuit Court of Appeals. (148 Fed. Rep. 1020) and by the Supreme Court of the United States (210 U.S. 206) and without dis- sent a conclusion has been reached contrary to that of this court. The deference due to a decision by the highest court in the land and the intrinsic importance of the question at issue require a reconsidera- tion of our own cases, a re-examination of the authorities and a care- ful consideration of the principles involved. The plaintiff seeks to recover a secret profit made by the pro- moters in the sale of their own property to the corporation, basing its claim on the general and well recognized proposition that a pro- moter cannot take lawfully a secret profit and will be held to ac- count for it if he does. Fundamentally the action is to recover profits obtained by a breach of trust. There is a distinct finding by the single justice that the defendant and Lewisohn were the promoters of the plaintiff. This finding is amply justified by the evidence. In their brains it was conceived, by their direction the formalities of its incorporation were carried out, their resources provided its mines, their influence and reputation with those desiring to invest in mines procured its working cash capital. The word “promoter” has no precise and inflexible meaning in this country. In England it is defined by statute. St. 7 & 8 Vict. c. 110, § 3. See also St. 30 & 31 Vict. c. 131, § 38. But even there the duties of promoters as fidu- ciaries to the company are matters of common law cognizance. Erlanger v. New Sombrero Phosphate Co., 3 App. Cas. 1218, 1269. In a comprehensive sense “promoter” includes those who under- take to form a corporation and to procure for it the rights, instru- 354 OLD DOMINION COPPER CO. v. BIGELOW. [CHAP. Iv. mentalities and capital by which it is to carry out the purposes set forth in its charter, and to establish it as fully able to do its business. Their work may begin long before the organization ofthe corporation, in seeking the opening for a venture and projecting a plan for its development, and may continue after the incorporation by attract- ing the investment of capital in its securities and providing it with the commercial breath of life. It is now established without excep- tion that a promoter stands in a fiduciary relation to the corporation in which he is interested, and that he is charged with all the duties of good faith which attach to other trusts. In this respect he is held to the high standards which bind directors and other persons oc- cupying fiduciary relations. That the promoter stands in the relation of a fiduciary to the cor- poration which he organizes seems to be conceded in Old Dominion Copper Mining & Smelting Co. v. Lewisohn, 210 U.S. 206. The questions to be answered are, whether this rule is applicable, and if it is, whether the plaintiff is in a position to assert its claim. Notwithstanding this fiduciary relation the promoter may sell property to the company which he is promoting. But in order that the contract may be absolutely binding he must pursue one of four courses: (a) He may provide an independent board of officers in no respect directly or indirectly under his control, and make full dis- closure to the corporation through them; (6) He may make a full disclosure of all material facts to each original subscriber of shares in the corporation; (c) He may procure a ratification of the contract after disclosing its circumstances by vote of the stockholders of the completely established corporation; (d) He may be himself the real subscriber of all the shares of the capital stock contemplated as a part of the promotion scheme. The defendant does not contend upon this report that either of the first two courses was followed. He does rest his claim chiefly upon the third and fourth courses. As applied to the facts of this case these two come to the same thing, for the reason that on the findings of the single justice the defend- ant and his associate were subscribers for only one hundred and thirty thousand shares out of a total one hundred and fifty thousand and in the light most favorable to them they held all the shares which had been issued at the time of the ratification, but not all which it was proposed to issue as a part of the scheme of promotion. | The point to be determined, therefore, is whether the promoter is immune from liability if he and his associates are owners of all the , issued stock at the time of the act complained of, although intending as a part of their plan the immediate issue of further stock to the public without disclosure, and whether, while a substantial portion of the stock intended to be issued to the public remains unissued, a vote of ratification of the breach of trust will protect him. A review of the authorities seems to demonstrate that there is a CHAP. Iv.] OLD DOMINION COPPER CO. v. BIGELOW. 855 liability of the promoter to the corporation when further original subscribers to capital stock, contemplated as an essential part of the scheme of promoters, came in after the transaction complained of, even though that transaction is known to all the then stockholders, that is to say, to the promoters and their representatives. Erlanger v. New Sombrero Phosphate Co., 3 App. Cas. 1218, is one of the most important and thoroughly considered cases, and, as it has been said to be a case often misunderstood (Lord Davey in Salomon v. Salomon [1897], A.C. 22, 57), it is well to consider it at length. It was first heard by Vice-Chancellor Mains under the name of New Sombrero Phosphate Co. v. Erlanger (5 Ch.D. 73), then by the justices of appeal (5 Ch.D. 102), and finally by the House of Lords, where it was twice argued. The facts were these: Erlanger and his associates, hereafter spoken of as the syndicate, bought of the official liquidator of a broken down company the lease of a phos- phate island, for £55,000. The agreement for purchase was signed on September 11, and was subject to the approval of the judge, which was given on September 15, 1871. By its terms the contract was to be completed on November 15, 1871. The syndicate then organized the New Sombrero Phosphate Company under St. 25 & 26 Vict. c. 89 (8 App. Cas. 1264). The articles of association of the new corporation were signed on September 20, 1871, and the com- pany registered on September 20 or 21 (5 Ch.D. 76). On registration the corporation was created under 25 & 26 Vict. c. 89, § 18 of which provided that upon registration “the subscribers . . . shall t hereupon be a body corporate .. . capable forthwith of exercising all the func- tions of an incorporated company.’”’ The signers of the articles of association were tools of the syndicate. The members of the first ‘board of directors were named in the articles of association. Two were out of the country and would not attend meetings; others were an employee of Erlanger, a retired admiral of the English navy, whose shares necessary to qualify him as a director were paid for by Erlanger (5 Ch.D. 107, 108), and the mayor of London; three di- rectors made a quorum, and the last three named attended the meet- ings. The syndicate anticipated its payments required by its con- tract and acquired the lease of the island on September 21, 1871. The first meeting of the directors was held on September 29, 1871, at which was produced and approved by resolution an agreement between one Evans (in whose name in behalf of the syndicate the contract for the purchase of the lease from the official liquidator was made), and one Pavy (acting for the new company), dated September 20, whereby Evans sold and Pavy for the company bought the lease of the island for £80,000 in cash and £30,000 in paid‘up stock. In the discussion of this case in 210 U.S. at p. 216 this contract is stated to have been “provisional on the shares being taken and the company formed,” but we do not so understand it as 356 OLD DOMINION COPPER CO. v¥. BIGELOW. [CHAP. IV. set forth in 5 Ch.D. 75, 76 and 95. It was subject to the new com- pany being registered (which was done on September 20 or 21), and to the contract with the official liquidator being approved by the judge (which was done on September 15) and duly performed (which was done on September 21) and to the confirmation by the com- pany (which was given by vote of the directors on September 29, who were in this regard clothed by the articles of association with all the authority of the corporation itself, 3 App. Cas. 1278, 1274), but it contained no other provisional features. The directors adopted the contract between Evans and Pavy without investigation into its merits, and in ignorance of the profit made by the syndicate except as Evans had such knowledge. After this the public over-sub-_ scribed. The stock was issued, £30,000 to the syndicate and £100,- 000 to the public; and on November 2 £80,000 was paid to the syn- dicate by the company. 5 Ch.D. 96. Respecting this agreement for sale by the syndicate it is further said in 210 U.S. at p. 217, that “the contract seems to have reached forward to the moment when they [the public] subscribed. As it is put in 2 [1 is meant] Morawetz, Corp. (2d ed.) § 292, there was really no company till the shares were issued,” and on this ground it is stated by the court at p. 216 that the English case ‘‘seems to us far from establishing a different doctrine for that jurisdiction.” We cannot accede to this interpreta- tion. The company was fully formed the moment it was registered. The subscription for the shares required as a prerequisite to registra- tion under the English statute established the company as fully as the forty shares subscribed and the $1,000 for capital stock, paid into the plaintiff’s treasury on or before July 11, 1895, established it. It was enabled to make any contract within the scope of its powers. That is settled by the plain language of 25 & 26 Vict. c. 89, § 18, quoted above. But it also has been expressly so decided. It was said in Salomon v. Salomon [1897], A.C. 22, at p. 51: “When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate ‘capable forthwith,’ to use the words of the enactment, ‘of exercising all the functions of an incorporated company.’ Those are strong words. The company attains maturity on its birth. There is no period of minority — no interval of incapacity.” This apparently demon- strates the error of the further statement in 1 Morawetz, Corp. (2d ed.) 279, that ‘Before any shares were issued the existence of the corporation was a fiction.” The remark of Lord Carrns (3 App. Cas. at p. 1239) to the effect that the contract for the sale of the island was “provisional on the shares being taken and the company com- pletely formed” was made in connection with the defense of laches and not in the discussion as to the liability of the defendants (which he had concluded on an earlier page), and refers only to the fact that the scheme of the defendants to get £80,000 in cash out of the new CHAP. Iv.] OLD DOMINION COPPER CO. v. BIGELOW. 857 company under their contract with it was dependent as a practical matter on the shares being taken by the public, and does not and cannot apply to the phraseology of the contract itself, for respecting that it is not correct. The only conditions named in the contract were that the company should be registered and confirm the con- tract and the contract of the syndicate with the official liquidator be performed. (See 5 Ch.D. 75, 76 and 95.) The distinction which ap- pears to be established between the Erlanger case and the present one, by the decision of the United States Supreme Court, 210 U.S. 206, is that if promoters organize a company with a capital of $3,750,000 and sell to it through their dummy directors property bought by them for this purpose, for $3,250,000, in paid up shares, and then get by public subscription $500,000 for working capital, the transaction is valid. But if promoters, having bought property .or £55,000, organize a company with a capital of £130,000, and while they are the only bona fide stockholders by vote of their directors vell to it their property for £110,000, to be paid £80,000 in cash and £30,000 in paid up shares, £100,000 being subscribed in cash by the public, the transaction is void. The only difference between the two cases is that in the Erlanger case the promoters were paid a part of the purchase price in money, the proceeds of public subscription, and received paid up shares, which they took in payment of the balance of the purchase price when the stock was issued to subscribers, while in the present case the whole purchase price was paid in stock, which was issued before any stock was issued to the public although after a substantial public subscription. In other words, the order in which the transaction is carried out, and not its substantial nature, makes the difference between liability and immunity of the pro- moter. It is true that in the Erlanger case, until after ratification by . the company of the contract previously made in its behalf for the purchase of the lease of the island, the mayor of London by acting as a director was liable to take shares of stock and intended to, and did subsequently, take and pay for fifty shares. He and possibly one other (3 App. Cas. 1228) appear to have been the only persons up to that time connected with the company, who subsequently became stockholders, who were not agents of the promoters. But it is also the fact (as stated by Jessen, M.R., in 5 Ch.D. at p. 112) that “Up to this time there was not really a single bona fide shareholder dis- tinct from the promoters,” and of course all these assented to the transaction. If this is a vital circumstance, that case is distinguish- able in principle from the one at bar and from the case decided by the United States Supreme Court. This appears to us to be a differ- ence upon an immaterial matter. It is of no consequence whether in fact the dummy directors know of the terms of sale and the breach of trust of the promoters. It does not appear in the present case that the nominees of Bigelow and Lewisohn knew any more about the 3858 OLD DOMINION COPPER CO. ¥. BIGELOW. [CHAP. IV. profit the latter were making than did the directors of the New Sombrero Company of the profits of the syndicate. The point is that in both cases the directors were selected with the purpose that they should be the mere instruments of the promoters, and they carried out the will of their masters. Under the English statute the instruments of the promoters in the New Sombrero Company, while its directors, were as fully clothed with all the powers of the cor- poration and as much the holders of all its stock as were the seven directors of the plaintiff holding in all forty shares of the plaintiff at the time the contract of sale in the present case was made. If the assent of all the stockholders is good in the one case, by the same token it should be equally good in the other; and the breach of trust in the one is equally a breach of trust in the other. This case seems to us an authority in favor of the plaintiff. In New Sombrero Phosphate Co. v. Erlanger, 5 Ch.D. 78, 123, it was said by Bagcauuay, L.J.: “The syndicate were, in substance, not only the vendors of the property, but also the promoters of the company, and in such a case the syndicate, as promoters, being in a fiduciary relation to.the company, it was essential that the public, who were invited to become, and who were expected to become, the shareholders of the company, and to constitute the company, should have the fullest information as to all the surrounding circumstances.” See also Jussi, M.R., s.c. at p. 118. In In re British Seamless Paper Box Co., 17 Ch.D. 467, at p. 471, it was said by JesseL, M.R.: “If promoters make an arrangement to get a profit for themselves out of what is apparently paid to the vendors, it is immaterial whether the contract with the vendors is approved of by the directors of the comn- pany, who are the promoters, just before the allotment or just after: in both cases it is intended to cheat the future shareholders; and of course it makes no difference whatever that the persons who, at the . time the allotment was made, were in fact the promoters or their nominees, knew of the fraud. You can defraud future allottees as well as present allottees.”’ In the same case on appeal Corton, L.J., said (17 Ch.D. at p. 479): “The directors stand in a fiduciary rela- tion to the whole company, that is, not only to the existing mem- bers but to all whom they intend to bring in.” In Broderip v. Salo- mon [1895], 2 Ch. 323, at p. 329, it was said by VaucHan WILLIAMs, J. (whose conclusion was approved in s.c. sub nomine Salomon v. Salomon [1897], A.C. 22): “Of course, purchasing at an exorbitant price may be a fraud, even if all the shareholders know of it, if there is an intention to allot further shares at a later period to future al- lottees.”” This point was apparently left open in the House of Lords [1897], A.C. at p. 37. In In re Leeds & Hanley Theatres of Varieties [1902], 2 Ch. 809, at p. 823, occurs this language: ‘‘ At first there were only four directors ... and the seven necessary signatories of the memorandum of the assoeiation. When it is said that the promoters CHAP. Iv.] OLD DOMINION COPPER CO. v. BIGELOW. 359 stood in a fiduciary position towards the company, that does not mean that they stood in such a relation to these directors and these seven signatories. It means that they stood in a fiduciary relation to the future allottees of shares — to the persons who were invited to come and take up the shares of the company.” In Gluckstein v. Barnes [1900], A.C. 240, 257, Lord Roprrtson says: ‘The people for whom these gentlemen [the promoters] were bound to act were their coming constituents, the persons out of whose money they proposed to make their gain.” In Densmore Owl Co. v. Densmore, 64 Penn. St. 43, at p. 50, it is said: ‘Where persons form such an association, or begin or start the project of one, from that time they do stand in a confidential relation to each other, and to all others who may subsequently become members or subscribers, and it is not competent for any of them to purchase property for the purposes of such a company, and then sell it at an advance without a full dis- closure of the facts.” This language is quoted with approval and applied in Burbank v. Dennis, 101 Cal. 90, 98, and in South Joplin Land Co. v. Case, 104 Mo. 572, 580. To the same point, Pittsburg Mining Co. v. Spooner, 74 Wis. 307, 321-323. In Pietsch v. Milbrath, 123 Wis. 647, at p. 656, it is held that ‘“‘Persons who act as pro- moters of a corporation do not necessarily cease to be such when the corporation is organized to do business....So long as there are prospective original subscribers for stock and the promoters and those concerting with them remain in control of the corporation, it is in a position to be deceived. ... It is deceived in a legal sense when it is rendered helpless by its managers as to protecting those invited to subscribe for its stock, and is then used to aid in defraud- ing them.” This is supported by Fred Macey Co. v. Macey, 143 Mich. 138, 152, a case singularly like the one at bar in its essential features, where relief was granted to the corporation against the promoters although they subscribed for all the capital stock. Other cases which in principle reach the same result are Yeiser v. United States Board & Paper Co., 107 Fed. Rep. 340, 348; London Trust Co. v. Mackenzie, 62 L.J. Ch. (N.S.) 870; Hinkley v. Sac Oil & Pipe Line Co., 132 Towa, 396. It was said in Groel v. United Electric Co., 4 Robbins, 616, 622: ‘There can be no question that promoters are liable to the corporation for profits secretly made by them in its promotion, and that such liability arises in cases where future al- lottees of stock are concerned. Knoop v. Bohmrich, 4 Dick. 82. Plaquemines Tropical Fruit Co. v. Buck, 7 Dick. 219. Loudenslager v. Woodbury Heights Land Co., 18 Dick. 556, affirming the principle established in the court of chancery in Woodbury Heights Land Co. v. Loudenslager, 10 Dick. 78.” In Central Trust Co. v. East Ten- nessee Land Co., 116 Fed. Rep. 743, and Camden Land Co. v. Lewis, 101 Maine, 78, 95, Hayward v. Leeson, 176 Mass. 310, to this point is cited with approval. St. Louis, Fort Scott & Wichita Railroad v. 360 OLD DOMINION COPPER CO. v. BIGELOW. [CHAP. IV. Tiernan, 37 Kans. 606, and Stewart v. St. Louis, Fort Scott & Wichita Railroad, 41 Fed. Rep. 736, were both decided on the assumption that the promoters took all the stock, although it appears that later some stock was issued to municipalities through which the tracks of the promoted railroad corporation ran, but whether as a part of the original plan of promotion does not appear, and no weight is attached to this circumstance in the opinions. Numerous other cases which have been cited do not bear upon this point for the reason that in each of them the owners of the property conveyed have owned either the entire capital stock of the corporation or all that it was contem- plated to issue. See Foster v. Seymour, 23 Fed. Rep. 65; McCracken v. Robison, 57 Fed. Rep. 375; Barr v. New York, Lake Erie & West- ern Railroad, 125 N.Y. 263; Blum v. Whitney, 185 N.Y. 232. In re Ambrose Lake Tin & Copper Mining Co., 14 Ch.D. 390; Salomon v. Salomon [1897], A.C. 22; In re British Seamless Paper Box Co., 17 Ch.D. 467; Seymour v. Spring Forest Cemetery Association, 144 N.Y. 333; Hutchinson v. Simpson, 92 App. Div. (N.Y.) 382; Tompkins v. Sperry, 96 Md. 560; Langdon v. Fogg, 18 Fed. Rep. 5; Flagler En- graving Machine Co. v. Flagler, 19 Fed. Rep. 468; Insurance Press v. Montauk Fire Detecting Wire Co., 103 App. Div. (N.Y.) 472; Hig- gins v. Lansingh, 154 Il. 801; In re Baglan Hall Colliery Co., L.R. 5 Ch. 346. In all these cases it was also true that no shares were ever issued (so far as appears) other than those to the promoters, except that in In re British Seamless Paper Box Co., 17 Ch.D. 467, at a time considerably subsequent to the organization of the corporation, a change in the scheme was made in good faith by which others were brought in as subscribers. In this respect the question is one of intention of the promoters. If they actually intend at the time the company is brought out to remain its sole owners and that it shall not receive the money of in- nocent shareholders in the future, then although thereafter the exi- gencies of the company may be such as to require the issue of addi- tional stock, they may not be responsible. In re British Seamless Paper Box Co., 17 Ch.D. 467, is an illustration of this principle. There it was found that the promoters were and intended to remain the sole proprietors of the property of the company and the sole members of the company. Corron, L.J., at p. 479, said: “Here it is an established fact that when the company was formed it was in- tended to be a private company, that is, it was intended to carry it on without calling in the public, or issuing any shares except to the then existing shareholders. Therefore the doctrine that directors may not take a profit for themselves is inapplicable, because all the members knew that they intended to make a profit. It is true that some new members were subsequently taken in. If shortly after this transaction a prospectus had been issued and the public had been invited to come in and take shares, no court would have listened to CHAP. Iv.] OLD DOMINION COPPER CO. v. BIGELOW. 361 directors who said that it was not intended to take in fresh members. But this was commenced and carried on entirely as a private com- pany, and a considerable time elapsed before they asked any one to join them.” In Wills v. Nehalem Coal Co., 52 Ore. 70, a corporation was or- ganized by promoters with a capital of $150,000. More than half was issued to promoters and their tools in return for property of one of them conveyed at an overvaluation. Afterwards shares were sold to the public without disclosure of the great profit made by pro- moters. Relief was granted. The contention that the corporation had assented with full knowledge of the facts by all who were the stockholders at the time of the sale was disposed of on the ground that in substance a wrong was done the corporation in diminishing the common fund held for the benefit of all the stockholders by issuing a part of its capital stock for property worth less than its face value. In Richlands Oil Co. v. Morriss, 108 Va. 288, the facts as stated in the opinion were that the promoters, having acquired the control of certain oil leases for an insignificant price, ‘proceeded to transfer these leases to a company which they organized upon a capitalization of 1,000,000 shares (the par value of each share being $1), and distributed 600,000 of those shares to themselves; and hav- ing perfected the organization of the company by making themselves the president, secretary, treasurer, and directors undertook to market the residue of the shares of stock, amounting to 400,000, without in- forming the public as to the true condition of affairs.” The suit of the corporation was upheld. Upon the point we are now discussing these two cases are indistinguishable in principle from the cases at bar. This review of decisions seems to establish abundantly the prop- osition that promoters stand in a fiduciary position toward the corporation, as well when as a part of the scheme of promotion unin- formed stockholders are expected to come in after the wrong has been perpetrated, as when at that time there are shareholders to whom no disclosure is made. We find no authority opposed except the Lewisohn cases in the federal courts (210 U.S. 206). If the question is examined on principle apart from authority, the same result appears clear. The starting point is that a promoter is a fiduciary to the corporation. To use the words of Lord Carrns in Erlanger v. New Sombrero Phosphate Co.,3 App. Cas. 1218, at p. 1236: Promoters “have in their hands the creation and moulding of the company: they have power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin business.” The corporation is in the hands of the pro- moter like clay in the hands of the potter. It is to this person, absolutely helpless and incapable of independent initiative or uncon- trolled action, that the promoter stands as trustee. It is not neces- 362 OLD DOMINION COPPER CO. v. BIGELOW. [CHAP. IV. sary to inquire how far he may be trustee also for shareholders or associates. In the present case the inquiry relates wholly to his obligation to the corporation. The fiduciary relation must in reason continue until the promoter has completely established according to his plan the being which he has undertaken to create. His lia- bility must be commensurate with the scheme of promotion on which he has embarked. If the plan contemplates merely the organization of the corporation his duties may end there. But if the scheme is more ambitious and includes beside the incorporation, not only the conveyance to it of property but the procurement of a working capital in cash from the public, then the obligation of faithfulness stretches to the length of the plan. It would be a vain thing for the law to say that the promoter is a trustee subject to all the stringent liabilities which inhere in that character and at the same time say that, at any period during his trusteeship and long before an es- sential part of it was executed or his general duty as such ended, he could, by changing for a moment the cloak of the promoter for that of director or stockholder, by his own act alone, absolve himself from all past, present or future liability in his capacity as promoter. The plaintiff was fully organized and authorized to do business on July 8 and 11, 1895, when only $1,000 in capital stock had been paid in. It would be an idle ceremony indeed to establish for promoters the obligations of trustees, and at the same time hold that by their tools and with only $1,000 paid in, and that as a mere form (for it was soon after repaid to one of them) they could vote to themselves a wholly unwarranted profit of $1,250,000, kept secret from other initial shareholders, because at that moment they were the only stockholders. By such a course the law would be holding out apples of Sodom to the wronged corporation. Corporations can be formed through irresponsible agents with ease. If these agents can vote away a substantial part of the capital stock for property of compara- tively small value, and still with immunity to themselves and their principals receive from the uninformed public cash subscriptions for the rest of the capital stock, the organization and management of corporations might readily become a ‘‘system of frauds.” Peabody v. Flint, 6 Allen, 52, 55. It is answered that the plaintiff has as- sented to the transaction with full knowledge of the facts. But it has not assented when it stood where it could act independently. The assent to the wrongful act of the promoters was given at the behest and by vote of the promoters themselves, while still occupying the position of protectors to their own creature, while it was bound hand and foot by them and prevented from taking any action except through them as a step in its further exploitation, and while their trust was uncompleted. The corporation although by law fully organized was still in its swaddling clothes, so far as the plans of the promoters were concerned. The value of their stock taken in return CHAP. IV.] OLD DOMINION COPPER CO. v. BIGELOW. 363 for their mining property was dependent in a substantial degree upon the corporation having $500,000 in cash for a working capital. They could not perfect their plans nor reap their contemplated profit, except by retaining their hold upon the corporation until the public had made this contribution. In one sense it is true that the plaintiff was completely organized on July 11 and on September 20, 1895. It was fully competent to be bound by its contracts and ratification of contracts with those dealing with it at arm’s length. But it was not free from its wardship to its promoters, whose scheme from the first looked forward to a corporation with treasury filled by sub- scriptions from the unenlightened public. The corporation was not dealing with these fiduciaries upon an independent ground. The plaintiff, although a legal corporation from July 8, leaned wholly upon its promoters, because they made it so to lean, until long after the events here in controversy. An assent under these conditions can be of no greater effect than the assent of a minor under guardian- ship to the breaches of trust of his guardian. The situation is akin to the conveyance of property by a man solvent but in contemplation of insolvency. Such conveyance is not wrong until the contemplated indebtedness is incurred which makes him an insolvent. Then the executed evil intent stretches back and invalidates the original conveyance. Here the conveyance to the corporation with the secret profit, when there are no uninformed subscribers to stock, if nothing more is ever done, is not an action- able tort. But the vicious intent looks forward to the procurement of money from the ignorant public by means of original subscriptions and the execution of this evil intent extends backward to contaminate the sale and its profit. Stress has sometimes been laid upon the fact that the promoters were paid a part of their purchase price out of the public subscrip- tions. But there is no difference in principle between such a case and the present, where a substantial, part of the value of the stock taken by the defendant and Lewisohn depended upon the cash subscrip- tions to be made by the public for the remaining shares not issued to the promoters. But it is further argued that, the entire capital stock outstanding at the time being in the hands of the promoters, the sale of the prop- erty to the corporation was merely changing the form of title of the promoters from owners of real estate to that of shares of stock, and that, there being then no other shareholders, no wrong was done. It has been decided that where persons own the entire authorized capi- tal stock of the company and take it in payment for the conveyance of their property at a grossly exaggerated price, nobody can be heard to complain. The leading English cases upon this point are In re Gold Co., 11 Ch.D. 701, In re Ambrose Lake Tin & Copper Mining Co., 14 Ch.D. 390, In re British Seamless Paper Box Co., 17 Ch.D. 864 OLD DOMINION COPPER CO. v. BIGELOW. [CHAP. IV. 467, and Salomon v. Salomon [1897], A.C. 22. But these and many other like cases cited on pages 185 and 186 ante are where the pro- moters owned all the outstanding capital stock and intended to re- main the sole proprietors and did not purpose that there should be, as a part of the promotion plan, a substantial issue of stock for cash to the public. This is pointed out in London Trust Co. v. Mackenzie, 62 L.J. Ch. (N.S.) 870, 875. The distinction is clear between cases of that class and those like the present, where the promoters took for themselves a large number of shares of stock without adequate consideration and without disclosure to the detriment of the cor- poration and all its future shareholders, at the same time planning that there should be immediate public subscriptions. It is one thing to take all the shares of a corporation in payment for physical prop- erty conveyed. It does not much matter to the stockholders in such a case whether the total is one hundred and thirty thousand shares or one hundred and fifty thousand shares. But it is a very different thing to take 139-229 of capital stock of a corporation whose assets consist of the same physical property, and in addition $500,000 in money subscribed by others. The latter course affects the other stockholders and the corporation itself, and it gives the promoters -something appreciably more valuable than what they contribute. It is true that in Salomon v. Salomon and in some other cases there was a part of the authorized capital stock which was not issued, but it was not proposed to be issued as a part of the scheme of promotion and the original shareholders intended to remain the only share- holders. It was to be issued or not in the remote future, as the exi- gencies of the corporation in the actual conduct of its business might require, but, in any event, it was not to be issued for the purpose of starting the corporation on its course. This circumstance materially affects the question here to be considered. Most, if not all, corpora- tion laws provide in some form for an increase of capital stock. It is of no consequence upon such a point as this, whether the capital stock originally authorized is large but not all issued or whether it is at first small and subsequently an increase is authorized. This seems to be the view taken by the English courts, for it is said by JAMEs, L.J., in In re British Seamless Paper Box Co., 17 Ch.D. 467, “If they [the promoters] were intending, although then constituting the whole company, that other people should come in afterwards to whom what had been done would be injurious, the court would feel no difficulty in saying as Lord Lanepate did in Society of Practical Knowledge v. Abbott, 2 Beav. 559, that they intended to commit a fraud,” The fundamental reasoning upon which these cases can rest is not that no wrong has been committed, but there is no one to enforce the remedy. All courts recognize the soundness of the doctrine that no man can be on both sides of the same bargain with justice to all CHAP. Iv.] OLD DOMINION COPPER CO. v. BIGELOW. 365 interests. The principle that one cannot rightfully sell property, be- longing to him in his private right, to himself in a trust capacity is universal. If this aspect alone is looked at and the corporation is regarded as a distinct person, it cannot be said that the corporation is not wronged by such a breach of duty by promoters. It is only when the corporate personality is disregarded and its component elements as stockholders alone are considered that it can be said that no harm is done on the ground (as was said in Salomon v. Salomon [18971, A.C. at p. 57) that ‘the company is bound in a matter intra vires by the unanimous agreement of its members.” But looking through the form of the corporation to the stockholders and treating them as the corporation is an exception to the otherwise firmly established uni- versal rule that the corporation is a separate legal entity for all pur- poses, even though all its stock be held by a single interest and.it be to all practical intents merely the instrument of the stockholder. Conley v. Mathieson Alkali Works, 190 U.S. 406. Peterson v. Chicago, Rock Island & Pacific Railway, 205 U.S. 364, 390. We perceive no reason for extending this exception to a case like the present. The real ground of the decisions of which Salomon v. Salomon is _a type is that the corporation is estopped by the circumstance that all persons with financial concern in the matter have assented with — knowledge, and thus the lips of everybody are seated-it ts not that~ ——t10- wrong has been done, but that whatever-wrong has been done has been condoned. The maxim “Volenti non fit injuria” is in- voked. This, however, is setting up confession and avoidance and not a bar to the main cause of action. The theory upon which corporations are founded is that they are artificial persons, distinct and separate from officers and stock- holders. Corporate liabilities do not attach to the latter. The wrong which the defendant and his associate did in this case was in selling property worth intrinsically $1,000,000 and in the market at most $2,000,000 for $3,250,000 without revealing that they were making a secret profit. The wrong was done to the corporation. It affected all its shareholders, present and future alike. It is generally admitted that if there are existing stockholders ignorant of the wrong, redress may be had. But it is had through the corporation or for the benefit of the corporation and not by the stockholder in his own right. The wrong is not done to the shareholders as individuals, nor to the share- holders collectively, it is done to the corporation as an independent being, and thus indirectly the rights of those who are or who may become stockholders are affected. In buying the promoters’ mine, the directors of the corporation acted for the corporation, as such, without regard to who were the then stockholders, or even if there were no stockholders. Whoever becomes an originally contemplated shareholder coming in afterwards has as much right to say that the 366 OLD DOMINION COPPER CO. v. BIGELOW. [CHAP. IV. rights of the corporation were not protected and to insist that it should assert its remedy for the wrong done it, as one in at first but not informed. Subsequent subscriptions to original stock as a part of the scheme of promotion do not change the identity of the corpora- tion, but remove an impediment to the enforcement of a remedy for a wrong previously done the corporation. The wrong is not done when the innocent public subscribes, but when the sale was made to the corporation at a grossly exaggerated price with secret profit. The ‘oecasion for complaining of this wrong comes when the promoters issue to the public the balance of the stock in order to provide the money necessary to set the corporation on its feet and to give thereby the contemplated value to the stock taken by themselves in payment for their mines. The exemption of the promoter from liability to the corporation for a sale without disclosure when he.takes the entire issue of capital stock is an exception to the general rule imposing upon him the liabilities of a trustee. If this exception is to be ex- tended to a case like the present, it leaves nothing of substantial value in the original rule. It might still reach small and grosser forms of want of fidelity to corporations, but would leave unharmed the vastly greater and more refined variety illustrated by the present case. It would point the way to general immunity for the wary. It is also urged that the maintenance of this suit works an in- justice to the defendant in requiring a repayment to the corporation, which will result in a benefit to the thirteen fifteenths of the capital stock taken by the defendant and Lewisohn (who condoned the wrong) as well as to the two fifteenths subscribed for by the innocent public. The size of the repayment which may be required of the defendant is due to the enormous profit taken at the outset. Apart from the unjust profit taken by the promoters, their interest in the plaintiff was only eight seventeenths, or, tested by the cost and in- trinsic value of the property conveyed, four seventeenths. The true answer, however, is given by JesseL, M.R., in New Sombrero Phos- phate Co. v. Erlanger, 5 Ch.D. 73, at p. 114: “It is said that is not doing justice, and that the suit cannot be maintained in this form, because it will not do justice. But that argument goes too far, be- cause it would apply to a case of the grossest fraud in every instance in which one or more of the actual shareholders of a company took part in that fraud. If the argument were once allowed to prevail, it would only be necessary to corrupt one single shareholder in order to prevent a company from ever setting the contract aside. It may be said you give to the shareholder, who was a party to the fraud, a profit, because he will take it in respect of his shares, and since as between co-conspirators there is no contribution, therefore his brother conspirators, who are made liable for the fraud, cannot make him repay his proportion. But the doctrine of this court has never been to hold its hand and avoid doing justice in favor of the in- CHAP. Iv.] OLD DOMINION COPPER CO. v. BIGELOW. 367 nocent, because it cannot apportion the punishment fully amongst the guilty. A dozen parties to a fraud may be defendants, and one decree or judgment go against all, and if it is a fraud of such a char- acter that none of them can bring an action for contribution, the plaintiff may at his will and pleasure enforce that judgment against any one of them, and perhaps pass over the most guilty of them; still there is no remedy as between those who commit the fraud. It is one of the punishments of fraud that there is no such remedy, and that a guilty party, though not the most guilty, may suffer the great- est amount of punishment. It is one of the deterrents to men to prevent their committing fraud.” See also Stockton v. Anderson, 13 Stew. (N.J.) 486. _ It is said further that the result reached is harsh from the business man’s point of view. A discussion of this aspect of the case involves ethical considerations. Courts are constantly dealing with the vari-. ous relations of the business world. Legal principles are applied to these transactions, but such’ principles “have almost always been the fundamental ethical rules of right and wrong.” Robinson v. Mollett, L.R. 7 H.L. 802, 817. Upon its distinctly moral side, there is little to the credit of the defendant and his associate. The offering by the defendant as promoter for public subscription for cash at par a substantial part of the capital stock of a corporation, the rest of whose capital stock had been issued for property conveyed to it under a law which permitted such stock to be issued only for the real value of property, was equivalent to a representation that no fictitious value had been placed upon the property so acquired. But the dis- tinct finding of the single justice is that the real value was less than one third the price for which the defendant and Lewisohn sold it. Nothing can be said in support of a business enterprise carried on by promoters, which involves the purchase by them of mines, costing and intrinsically worth $1,000,000, with money in substantial part solicited from associates on representations that a corporation is to be formed with a capitalization of $2,500,000, of whose stock $2,000,- 000 is to be issued for the conveyance to it by them of the mines, and the rest for cash; the actual organization of the corporation under the laws of a State which permitted the issuance of capital stock for property conveyed only to the real value of the property, with a capital stock of $3,750,000, of which $3,250,000 is issued as fully paid for the conveyance of the mines; the settlement with a very great majority of the associates on the basis of a sale for $2,000,000 of stock as at first represented, the promoters retaining $1,250,000 of shares as a secret profit, intending also to procure from the public subscriptions for $500,000 of stock in cash at par and actually carry- ing out this purpose, the promoters themselves during all these manipulations having entire control of all executive offices of the corporation. In the absence of compelling anthority, we cannot set 368 OLD DOMINION COPPER CO. ¥. BIGELOW. _ [CHAP. IV. the seal of judicial approval upon such business policies. See Bigelow v. Old Dominion Copper Mining & Smelting Co., 4 Buch. (N.J.), 71 Atl. Rep. at pp. 176 and 177. Both on authority outside of our own cases and on principle, it appears to us that the defendant should be held liable. But in this jurisdiction the matter does not stand quite on the basis of an original proposition. In two thoroughly considered opinions in recent years, Hayward v. Leeson, 176 Mass. 310, and Old Dominion Copper Min- ing & Smelting Co. v. Bigelow, 188 Mass. 315, this court has held that liability existed in a case like this. It is not necessary to repeat the arguments of these decisions. There is thus added to considera- tions which otherwise exist, the force of the doctrine of stare decisis. One or both of these cases have frequently been cited by courts of other jurisdictions and always with approval until Old Dominion Copper Mining & Smelting Co. v. Lewisohn, 148 Fed. Rep. 1020; s.c. 210 U.S. 206. No arguments have been adduced not considered in those cases, and no points now brought forward were not there discussed. While the rule of stare decisis does not prevent the over- ruling of those cases, they should not be disturbed unless they now appear to be so clearly wrong as to have no sound support. Ma- bardy v. McHugh, 202 Mass. 148. It must appear that the law was “misunderstood or misapplied.” 1 Kent Com. 475. There was no: misconception of the points involved when these cases were decided, nor any lack of discernment in their application to the affairs of corporations. It does not appear that they have become archaic or inapplicable by reason of business evolution since they were an- nounced. On the contrary, the tendency of custom since the first case was decided has been rather in the direction of more strict accountability of those owing duties to corporations and their stock- holders. At all events, we perceive no occasion to relax these prin- ciples of accountability for breaches.of trust. The mere fact that the Supreme Court of the United States has since decided the question differently is not alone a sufficient consideration for reversing our decisions. It is only when the reasoning of its decision is of convinc- ing power and compels the conclusion that our cases were wrongly decided that it must command our support in other branches of the law than those where it is supreme under the Federal Constitution. With great respect to the decision in 210 U.S. 206, we are constrained to adhere to the law as laid down in the earlier cases in this Com- monwealth. We have discussed the question as if the same legal principles are involved now as were presented upon the demurrer. There are, how- ever, certain aspects of the evidence which seem to us to make it essentially different and materially stronger for the-plaintiff. When the votes to purchase the mines of the promoters were passed on July 11, only forty shares of stock had been subscribed for or issued. CHAP. IVv.] OLD DOMINION COPPER CO. v. BIGELOW. 369 The votes were passed by the directors alone and there was no vote by the stockholders at this time. It is true that the directors com- prised all the stockholders, but on that date they were acting wholly in their capacity as directors, that is, as trustees. They did not at- tempt, so far as any records show, to shift their character as trustees for that of individual stockhclders. They did not pursue the careful course of separation of these dual capacities by calling a stock- holders’ meeting; which was followed in North-West Transportation Co. v. Beatty, 12 App. Cas. 589, nor did they assent in writing as stockholders. So far as the records show up to this point, there was only a directors’ vote for the purchase. Moreover, the records of the plaintiff show that at the opening of this meeting only six of the seven directors were present. Four of these six directors resigned as did also the absent seventh director, their resignations were accepted and their successors were chosen. But of the five newly chosen di- rectors, only two were present and took their seats. Thus there were four directors, a bare quorum and majority, present when the offers for the sale of the mines were presented and the votes for their pur- chase were passed. These votes to purchase were not consummated until December, 1895, and January, 1896, when the deeds were de- livered to the plaintiff. The vote to issue the certificates of stock in payment for the conveyances of mines was passed on September 18, 1895. Under date of July 18, 1895, the only subscription list of the plaintiff was signed. Upon this list appear the names of those out- side persons who subscribed for the $500,000 of working capital for the plaintiff. The money was paid by some of the outside stockholders before September 18, and at least as early as September 10, 1895. Stock certificates were made out for the number of shares allotted to each under date of September 18. The rights of all these persons as subscribers had become fixed at least as early as September 10, 1895, before which date the subscriptions were all received, and when notices of their acceptance and demands for payment were sent out. These circumstances amply support the finding of the single justice that issuance of the twenty thousand shares to the public was in the summer or fall of 1895. These stockholders were entitled to have a disclosure made to the corporation through independent officers. There is'no pretense that any disclosure was made to these subscribers. On September 18, 1895, the directors of the plaintiff voted to issue the stock as before stated — thirty thousand shares to Bigelow and Lewisohn, one hundred thousand to their nominee Dumaresq, and there was made out the certificate for the remaining twenty thousand shares to ‘‘Thomas Nelson, Treasurer,” and these four, professing to represent all the stock of the plaintiff, signed the written approval of all previous acts of the directors. This is the first attempt of the stockholders to act respecting this subject. As before pointed out, the certificate to Nelson was wrongfully issued; 370 OLD DOMINION COPPER CO. ¥. BIGELOW. [CHAP. IV. except as it belonged to outside subscribers, it was treasury stock. There were then other stockholders of the plaintiff who had paid for their stock, although they had not received their certificates, but the plaintiff had their money and they were entitled to be treated as stockholders. Chester Glass Co. v. Dewey, 16 Mass. 94. Chaffin v. Cummings, 37 Maine, 76. Hawes v. Anglo-Saxon Petroleum Co., 101 Mass. 385, 395. ‘Their certificates were dated September 18, 1895, and issued directly. These circumstances show that at the first and only time when there was an effort on the part of the promoters to secure a ratification of their wrongful acts, there were certain share- holders who were not represented and who did not themselves sign in assent and who were in fact ignorant of the wrong done the cor-- poration. Further, they do not show that at any time from the or- ganization of the corporation onward was there a moment when all the stockholders or directors knew of the material facts as to the de- fendant’s relation to the corporation. In this view of the facts, which is supported fully by the evidence, there appears to be no assent by the corporation with knowledge of the facts by all those who at any time constituted all the stockholders, except by assuming the knowl- edge of Bigelow and Lewisohn on July 11, 1895, when there were only forty shares of stock for which the latter had paid, to be the knowledge of all the stockholders, although there were then seven shareholders as to whose actual knowledge of the scheme there is no evidence, although all were the tools of the defendant and Lewisohn. It is only by treating these subscriptions as a sham that knowledge even of the owners of the forty shares can be found. But these sub- scriptions were necessary to the organization under the New Jersey law. Hence the rule of Salomon v. Salomon [1897], A.C. 22, and like cases has no application to these facts, nor does the difficulty meet “the petitioner at the cutee} thal pas RiSenzat ae the-camaction wi e full knowledge of the facts ” (210 U.S. 211, 212), unless it is — that in fact knowledge by the plaintiff’s dominant stockholders owledge by the corp ~ But the defendant was commit- cing a breach of trust on his principal, the plaintiff, and where one is committing a wrong in his own interest his knowledge does not bind the corporation, which might in an innocent transaction be affected by his knowledge. Indian Head Natiorsal Bank v. Clark, 166 Mass. 27. Produce Exchange Trust Co. v. Bieberbach, 176 Mass. 577, 588. These considerations mark the case as different in material respects from that which was stated in Old Dominion Copper Mining & Smelting Co. v. Lewisohn, 210 U.S. 206, and bring it clearly within the well recognized rule of promoters’ liability, laid down in the numerous and undisputed cases, before cited. The Supreme Court of the United States has never passed upon these facts nor upon such a case as is thus presented. We know of no authority which counte- nances a different decision upon them than that here reached. The CHAP. Iv.] OLD DOMINION COPPER CO. v. BIGELOW. 371 conflict between the federal courts and this court in this respect ap- pears to be not upon the merits of the case as disclosed upon the present record. See Bigelow v. Old Dominion Copper Mining & Smelting Co., 4 Buch. (N.J.), 71 Atl. Rep. 153, 175. But there is still another aspect in which the case differs from that presented in the federal court and in our previous decision. The de- fendant held out to subscribers of his syndicate, before the incorpora- tion of the plaintiff, that its capital stock was to be $2,500,000 and that they would get for one share in the Baltimore Company two in the new company and that the rest would be sold to furnish the working capital. The right of these parties to become stockholders in the plaintiff company was fixed before its first meeting of stock- holders was held, because they had signed the syndicate agreement and had made two payments on account of their subscriptions. They were sharers thus in the profit of $1,000,000 above the costs of mines. But they were also entitled. to disclosure of the secret profit of $1,250,000 more taken by the defendant and Lewisohn and it is found that most of them were ignorant of it. Respecting any sale to the plaintiff in which they had agreed to become shareowners on any other basis than that of two for one, they were entitled to dis- closure. This is quite aside from any rights they may have had against Bigelow for not treating them fairly on the division of prof- its. It stands on different ground. In that relation they were sharers in promoters’ profits and they received what they expected. But they had also agreed to be subscribers to stock of the plaintiff. In that character they were not promoters, but stockholders and en- titled to all their rights. That they knew there was to be a sale for $2,000,000 and a profit of two for one was no reasonable ground for expectation that the defendant would take a large additional secret profit. As to this secret profit, the members of the syndicate had the same rights as the outside public, that is, they were entitled to a disclosure to an independent and impartial board of officers who should be in a position to act for the interests of the corporation as opposed to those of the promoters. In this regard the case is like Arnold v. Searing, 3 Buch. (N.J.) 262, where the defendants were held liable. ... It follows from what has been said as to the nature of the wrong done by the defendant that he is liable in solido. The act of the de- fendant and Lewisohn was a joint act for the benefit of both. Their subdivision of the profits made cannot affect the right of the plaintiff. The breach of trust, which they as promoters committed, was in the nature of a tort. This renders them liable severally as well as jointly and for the whole damage. Hayward v. Leeson, 176 Mass. 310, 324, and cases cited 188 Mass. at p. 329. Feneff v. Boston & Maine Ratlroad, 196 Mass. 575,581. Gluckstein v. Barnes [1900], A.C. 240. Bigelow v. Old Dominion Copper Mining & Smelting Co., 4 Buch. (N.J.), 71 Atl. Rep. 158, 176. 372 OLD DOMINION COPPER CO. v. BIGELOW. (CHAP. IV. _ As to the character of relief which can be afforded, it is said first that rescission is the only remedy open to the petitioner. The single justice has found that the situation of the parties and the properties is not such as to make it just at this time to order a rescission. The evidence justifies this finding. It was decided in this case at its earlier stage, 188 Mass. 315, 329, that rescission is not the only remedy. Hayward v. Leeson, 176 Mass. 310, 321. Parker v. Nicker- son, 187 Mass. 487. We are not disposed to question the correctness of the decision upon this point. When one has committed a breach of trust, there is no occasion to be over-solicitous to see that the faithless fiduciary should not make reparation for the wrong done. In re Olympia [1898], 2 Ch. 153, 169. Lyndney & Wigpool Iron Ore Co. v. Bird, 33 Ch.D. 85, 94. The essence of the suit is that a secret profit was taken by the promoters. The obvious remedy is a return of the secret profit. The difficulty of ascertaining the amount of that profit, which troubled the court in In re Cape Breton Co., 29 Ch.D. 795, does not exist here. See Bentinck v. Fenn, 12 App. Cas. 652; Gluckstein v. Barnes [1900], A.C. 240; In re Leeds & Hanley Theatres of Varieties [1902], 2 Ch. 809; Yale Gas Stove Co. v. Wilcox, 64 Conn. 101. The plaintiff has also appealed from the decrees in its favor. It presses its appeals on the ground that it is entitled to recover the difference between the market value of the shares received by the defendant and Lewisohn and the cost to them of the property con- veyed to it. This is the measure of recovery where there is a fidu- ciary relation at the time of the purchase. But there is no finding here that such relation existed at the time the defendant and Lewi- sohn purchased the property. There is no evidence which requires such a finding. The corporation was not organized until a consider- able period after the options had been secured. The defendant and Lewisohn were, during all this time, free to do as they chose with their purchase so far as the plaintiff was concerned. This has been before decided, 188 Mass. 321. The plaintiff contends in the alter- native that its measure of damage is the difference between the intrinsic value of the property conveyed and the value of the stock issued therefor. Market value is the standard commonly applied where property has such value. It is only in cases where the value of property cannot be fairly ascertained by the application of this test that resort is had to any other. The single justice appears to have experienced no difficulty in determining that value of these mines. There are no exceptional circumstances which call for the application of any other than the ordinary rule. Nore. — Lorine, Bratty, and Sueipon, JJ., concurred, Kwow tron, C.J., and Morton and Hammonp, JJ., dissented. CHAP. IV.] OLD DOMINION COPPER CO. v. BIGELOW. 373 Hughes v. Cadena Co., 13 Ariz. 52. A corporation, with outstand- ing stock, issued stock to its promoters, without consideration. One of the existing stockholders knew nothing about the transaction. The court ordered these shares cancelled. There is a dictum that, if all the existing shareholders had consented, the corporation could not have been heard to complain, even if after the transaction other stock was sold to the public. There is also a dictum that the issue by a corporation, having no assets, of its shares of stock without consideration constitutes the obtaining of a profit by the promoters. Burbank v. Dennis, 101 Cal. 90. If promoters represent that they are conveying property to the corporation at cost, and cash is paid to them in excess of their expenditures, the corporation is entitled to recover the difference. Yale Gas Stove Co. v. Wilcox, 64 Conn. 101. A promoter had pro- cured subscriptions to the stock of a corporation organized to buy certain patents owned by A. These patents were paid for, partly in stock, and partly in cash. A then gave part of the consideration to the promoter. The subscribers had no knowledge that the promoter was making this profit. He was required to account. Hinkley v. Oil Co., 132 Iowa, 396. The promoters of a corporation caused stock to be issued to them for a contract right. The facts were such that the court treated this as substantially an issue of stock without consideration. Part of the stock so issued was returned to the treasury and sold to the public. A purchaser brought an ac- tion for the amount paid for the stock, and to cancel said stock. The defendants were the corporation and one of the promoters. Relief was given as prayed. Higgins v. Lansingh, 154 Tll. 301, 332, 337. By the issue ‘of the stock to a promoter for overvalued property the company is not defrauded, where it has no assets except the property so received. Holders of preferred stock, issued at a subsequent date, were not, on the facts, entitled to complain. Camden Land Co. v. Lewis, 101 Me. 78. There is a dictum (p. 95) that promoters of a corporation stand in a fiduciary relation to the corporation, and to its subscribers for. stock, and to those who it is expected will afterward buy stock from the corporation; that if they undertake to sell their own property to the corporation they are bound to disclose the whole truth; and that if they receive secret profits, either in cash or by way of allotments of stock, when there are other stockholders, or it is expected that there will be other holders of new and additional stock, the corporation may elect to avoid the purchase, or hold the promoters accountable for the secret profits, if in cash, or may require a return of the stock if unsold; “or, if sold, an accounting for the profits of its sale.” Mason v. Carrothers, 105 Me. 392. The owners of certain patents contracted with promoters of a corporation to be formed to transfer 374 OLD DOMINION COPPER CO. ¥. BIGELOW. [cHAP. IV. , the patents to the corporation for a specified consideration, includ- ing $100,000 par value of the preferred stock and $50,000 of the common stock. The promoters caused the corporation to be formed. Six shares of stock were subscribed by persons dominated by the promoters. The directors also were dominated by the promoters. The promoters thereupon, assuming to be owners of the patents, sold them to the corporation for the consideration mentioned in the con- tract with the owners of the patents, except that they received $799,400 of common stock. They gave $50,000 of the common stock to the owners of the patents, donated $200,000 to the corporation, and retained $549,400. Subsequently persons who subscribed and paid for preferred stock (the authorized issue was $200,000 and only $100,000 had been issued to the promoters) without knowledge of the contract between the promoters and the owners of the patents brought a bill praying that the $549,400’stock should ‘be cancelled. This relief was granted (except as promoters were found to be en- titled to stock for their services and expenses). The court held that the relief could not be granted on the ground that there was no con- sideration for the issue of the stock, and it approved a finding that the promoters were the equitable, if not the legal, owners of the patents when they assumed to transfer them to the corporation. But the court held that the relief could be granted on the ground that the promoters had made a secret profit. “Here the parties sell- ing are the promoters, and the parties buying are not the existing dummy stockholders but the future real stockholders’ whose cash alone will go into the treasury of the corporation and enable it to begin and carry on business” (p. 399). The court said its decision was not inconsistent with Old Dominion Copper Co. v. Lewisohn, 210 U.S. 206, because the preferred stockholders, and not the cor-.- poration, were suing; but it then proceeded to hold that it was proper for the plaintiffs to bring the suit, because the guilty parties were in control of the corporation. It is to be noted that the court did not proceed on the ground that the patents had been overvalued and that a profit had thereby been made at the expense of the corporation. Tompkins v. Sperry, Jones & Co., 96 Md. 560. Promoters pur- chased various breweries, the purchase price to be paid largely in securities of a corporation to be formed. They conveyed these prop- erties, with a certain amount of working capital, to a corporation, formed and controlled by them, in consideration of: the issue to them of its stock and bonds. The promoters then made sales of the securi- ties so issued, but the public was not invited by the corporation to subscribe to its stock. It was held that, even if the promoters secured a greater amount of securities for themselves than was con- templated in their contracts with the owners of the various breweries, this gave the corporation no cause of action. “Assuming that these contracts called for the delivery by them to the respective brewers of ‘CHAP. IV.] OLD DOMINION COPPER CO. ¥. BIGELOW. 375 bonds and stock of the company capitalized upon a certain basis and that they delivered securities issued upon a different basis of capitalization, that might afford to each individual brewer a right of action against Sperry & Jones for such damage as he suffered under the terms of his particular contract, but these various contract rights of the different brewers cannot be asserted collectively in this suit by the receiver” (p. 583). And see Granite Roofing Co. v. Michael, 54 Md. 65. United Zinc Companies v. Harwood, 216 Mass. 474. The right of a corporation to maintain a suit in equity against promoters to re- cover secret profits is not assignable at law or in equity. South Joplin Land Co. v. Case, 104 Mo. 572. A promoter caused a corporation to be formed and its stock was subscribed by members of the public. The cash of the corporation was then used in payment of property on which the promoters had an option. But the vendor returned to him $2000 of the purchase price and gave him certain assets which he did not transfer to the corporation. The promoter concealed these facts. He was required to disgorge. Arnold v. Searing, 78 N.J. Eq. 146. Where promoters buy prop- erty and transfer it toa corporation formed and controlled by them in consideration of the issue to them of all its stock and bonds then authorized, they owe a duty of full disclosure to the members of the syndicate who provided the funds necessary to carry through the transaction, and who were to receive stock and bonds in considera- tion of their cash payments, such persons being equitable stock- holders. Such disclosure not having been made, the promoters are jointly and severally liable, in a suit by the corporation, to account for the profits made. In determining these profits the value of the securities obtained must be determined, and bonus stock must be treated as having no value, if all persons interested in the transac- tion so treated it. Tooker v. National Sugar Refining Co., 80 N.J. Eq. 305. The- stockholders of three sugar refining companies, which were engaged in destructive competition with the American Sugar Refining Co., of which Havemeyer was president, transferred their stock to a new corporation formed and controlled by an agent of Havemeyer, and took in payment shares of its preferred stock. The common stock was issued to a trustee for Havemeyer. The court held that this stock was issued without consideration, and that the holders were not entitled to vote or receive dividends thereon. The court gave the holders the right to retire such stock in any legal manner. Parsons v. Hayes, 14 Abb. N.C. (N.Y.) 419. All the stock of a cor- poration is issued for overvalued property. A transferee, without notice of this fact, of some of the stock cannot complain. His trans- feror participated, and therefore could not complain, and he stands no better. 376 OLD DOMINION COPPER CO. v. BIGELOW. [CHAP. Iv. Blum v. Whitney, 185 N.Y. 232. The Distillmg Company of America was formed to acquire certain properties, chiefly by issues of its stock. The persons who took the initiative in its organization held an option on one of these properties, and (apparently) this property was conveyed to the corporation at a price higher than the price named in such option. The complaint alleged that they did not disclose to the owners of the other properties that they held such option, and that they did not state the amount which the corporation was to pay therefor. Some of the stock of the Distilling Company was to be left in its treasury “‘ for future purposes.” The report of the case does not show that any of this stock was subsequently issued, and it does not appear how the plaintiff acquired his stock in the Distilling Company. The court dealt with the case as though all the stock of the corporation had been issued for the properties in question. The. court was apparently of opinion that if any fraud had been practised by the defendant upon any of the persons who took the original issue of stock, that would not give rise to a corporate right (pp. 241, 242). It cites with approval Tompkins v. Sperry, Jones & Co., 96 Md. 560. See also Hutchinson v. Simpson, 92 N.Y. App. Div. 382; Insurance Press v. Montauk Wire Co., 103 N.Y. App. Div. 472 Gf promoters receive stock for overvalued property, the corporation cannot retain the property, and cancel all the stock except that equal to the real value of the property). Wills v. Nehalem Coal Co., 52 Or. 70. Part of the stock of a cor- poration is issued to promoters for overvalued property. Then other stock was issued to the plaintiffs for cash at par. A demurrer to the complaint was overruled. Relief will be either to require the pay- ment of the par value of the stock, less the value of the property, or the cancellation of the stocks “according as one or the other may seem to the court to be more equitable when the facts are before it” (p. 91). Densmore Oil Co. v. Densmore, 64 Pa. 48. Owners of property em- ployed promoters to procure subscriptions to the stock of a corpora- tion formed to purchase such property, and paid them out of the proceeds. The court said the owners could set any price they pleased on their property, without disclosing its cost, and that the pro- moters could retain whatever they were paid by the owners. The subscribers ‘‘supposed, as they state, that these gentlemen were to receive compensation for their services. What it was to be they did not inquire, because it was none of their business.” Richlands Oil Co. v. Morriss, 108 Va. 288. The promoters of a cor- poration issued a majority of its stock to themselves for rights of exploration. These rights cost $52 and stock of the par value of $600,000 was issued in payment. Then other stock was sold to the public. The stock in the hands of a promoter was cancelled. Richardson v. Graham, 45 W.Va. 134. A promoter, having an CHAP. Iv.] OLD DOMINION COPPER CO. v. BIGELOW. 377 option on property for $6000, sold the property to the corporation for $8500, without disclosing the profit. The court said: “It could not concern the company or any of its stockholders what the property originally cost Graham” [the promoter] (p. 140). But the court also said: ‘The only fraud claimed . . . was in concealing the price paid for the property by Graham: but it is apparent on the face of the record that after the facts were made known, and the company char- tered and organized, it contracted to purchase the property for eight thousand five hundred dollars” (p. 142). Pietsch v. Milbrath, 128 Wis. 647. The facts are obscure. Ap- parently, the promoters represented that they had subscribed for 1472 shares at $34 a share; the general public was induced to sub- scribe to 562 shares at $34 a share; the promoters conveyed property to the corporation, which they had acquired by paying some cash, and giving purchase money mortgages; they reimbursed themselves for the cash out of the amounts paid by the general public, and therefore obtained the 1472 shares without any consideration. The defendants were required to pay $50,048 (1472 X $34), with interest, the court holding that the corporation had been defrauded out of that amount. See also Dickerman v. Northern Trust Co., 176 U.S. 181, 203; Foster v. Seymour, 23 Fed. 65; Stratton’ 8 Independence, Lid. v. Dines, 135 Fed. 449. BOOK III. THE POWERS OF CORPORATIONS. NOTE. Tue stockholders of a business corporation may be said to be per- sons who would be partners, except for their incorporation, and who are, by their incorporation, enabled to carry on business with certain facilities and with a protection against liability not enjoyed by partners. When the powers, or objects, or purposes of a corporation are stated in its organization papers, the statement has a double sig- nificance. On the one hand, it evidences the compact between the members, and, in this respect, is closely analogous to articles of partnership. On the other hand, it marks the limits within which the State consents that the members may engage in business with the corporate facilities and protection. Many acts done in the name of the corporation prove to be un- authorized both as against the State, and as between the members. An act, however, may be unauthorized as against the State, al- though not as between the members. Thus, if all the members agreed that an act should be done which the State had not authorized. An act, moreover, may be unauthorized as between the members, although it is no usurpation as against the State. Suppose it is pro- vided that no money is to be borrowed, and no mortgage placed on the corporate property without the consent of the holders of, say, two thirds of the capital stock. It is submitted that the proper con- struction of such a provision ought usually to be that it was designed solely as a protection to the stockholders. ' The expression “ultra vires” is frequently used in the reports to indicate a transaction which is beyond the scope of corporate ac- tivity authorized by the State. But it is also quite frequently used to indicate a transaction which is not authorized by the compact of the members inter se. The question as to the proper use of this expression is merely a question as to the desirable use of language. For the sake of clear- ness, this work will be constructed on the conception that no trans- action is ultra vires, unless such transaction is beyond the scope of corporate activity authorized by the State. The cases given in Chapter I, infra, are designed to show what NOTE. 379 transactions are intra vires, as contrasted with ultra vires, used in the sense stated in the preceding paragraph. That is to say, what trans- actions are within the scope of corporate activity authorized by the State. Acts which violate the compact between the members will be con- sidered in the chapter on Stockholders. Acts which are ultra vires will be considered in the book on Un- authorized Corporate Action. 380 DOWNING v. MOUNT WASHINGTON ROAD COMPANY. [CHAP. I. CHAPTER I. EXTENT OF THE POWERS. SECTION 1. IN GENERAL. DOWNING v. MOUNT WASHINGTON ROAD COMPANY. 40 N.H. 230. 1860. AssumpsiT to recaver the price of certain articles, among them eight omnibuses and 4 baggage wagon. The omnibuses and baggage wagon were intended to be used in conveying passengers up and down the mountain, after the road was completed. The omnibuses were constructed in a peculiar way, and were not fit for use on ordi- nary roads. _ By their act of incorporation, passed July 1, 1853, the corporation ; was empowered to tay out, make and keep in repair, a road from such point in the vicinity of Mount Washington as they may deem most favorable, to the top of said mountain, etc., and thence to some point on the northwesterly side of said mountain, etc., to take tolls of pas-_ ~sengers and for carriages, to build and own toll-houses, and to take — land for their road. It appeared that by an additional act, passed July 12, 1856, the corporation were authorized “to erect and maintain, lease and dispose “of any building or buildings, which may be found convenient.for the accommodation of their business, and of the horses and carriages and travelers passing over said road.” One question presented was whether the purchase of such omni- buses and baggage wagon was within the power of the corporation. Betz, C.J. Corporations are creatures of the legislature, having no other powers than such as are given to them by their charters, or such as are incidental, or necessary to carry into effect the purposes for which they were established. Trustees v. Peaslee, 15 N.H. 330; Perrine v. Chesapeake Canal Co., 9 How. 172. In giving a construc- tion to the powers of a corporation, the language of the charter should in general neither be construed strictly nor liberally, but according to the fair and natural import of it, with reference to the purposes SECT. 1.] DOWNING UV. MOUNT WASHINGTON ROAD COMPANY. 381 and objects e the corporation. Enfield Bridge v. Hartford R.R., 17 mn. s é Co., 5 Ohio (N.S.) 39. If the powers conferred are against common right, and trench in any way upon the privileges of other citizens, they are, in cases of doubt, to be construed strictly,! but not so as toi impair or defeat the objects of the incorporation.? In the present case the power to take the lands of others, and to take tolls of travelers, must be strictly construed, if doubts should arise on those points; but it is not seen that the other grants to the defendant corporation should not receive a fair and natural construc- tion. The charter of the Mount Washington road empowers them to lay out, make and keep in repair, a road from Peabody River Val- ley to the top of Mount Washington, and thence to some point on the northwest side of the mountain. It grants tolls on passengers and carriages, and authorizes them to take lands of others for their road, and to build and own toll-houses, and erect gates, and appoint toll-gatherers to collect their tolls. The remaining provisions contain the ordinary powers of corporations, relating to directors, stock, dividends, meetings, etc. Laws of 1853, chapter 1486. This charter confers the usual powers heretofore granted to turn- _pike corporations, and no others. The most natural and satisfactory “inode of ascertaining what are the powers incidentally granted to such companies, is to inquire what powers have been usually exercised under them, without question by the public or by the corporators. It may be safely assumed that the powers which have not heretofore been found necessary, and have not been claimed or exercised under such charters, are not to be considered generally as incidentally granted. Such charters have in former years been very common in this and other States, and they have not, so far as we are aware, been understood as authorizing the corporations to erect hotels, or to es- tablish stage or transportation lines, to purchase horses or carriages, or to employ drivers in transporting passengers or freight over their roads; and no such powers have any where been elaimed or exercised under them. We are, therefore, of opinion that the power to establish stage and transportation lines to and from the mountain, to purchase —carTiages ind horses for the purpose of carrying on such a, business, was not incidentally granted to the defendant corporation by their charter. State v. Commissioners, 3 Zab. 510. But it is contended that the power to make this contract is con- ferred by the act in amendment of the charter, passed July 12, 1856. By this act the corporation may ‘erect and maintain, lease snd dis- pose of any building or buildings which may be found convenient for the accommodation of their business, and of the horses and car- 1 See Stourbridge Canal v. Wheeley, 2 Barn. & Ad. 792. 2 See Whitaker v. Delaware Canal Co., 87 Pa. 34. 382 PEOPLE EX REL. TIFFANY & CO. J. CAMPBELL. [cHAP. I. riages and travelers passing over their said road.” By their business, which the buildings to be erected were designed to accommodate, it is said the legislature must have intended some permanent and continuing business beyond that of merely building and maintain- ing a road; and that it could be no other than that of erecting a hotel on the mountain, and establishing lines of carriages, for the purpose of carrying visitors up and down the mountain. But the foundation of this implication is very slight. The express grant is of an authority to erect, etc., buildings, not of all kinds, but such as may be found convenient for the accommodation of their business, and of travelers, etc. The business here referred to must be understood to be such as they are by their charter authorized to en- gage in. If nothing had been said of horses and travelers, there could hardly be any foundation for the idea that a hotel could have been contemplated by- the legislature. Buildings suitable for the accommodation of their toll-gatherers and workmen employed on~ their road, would probably be thought every thing the tegislature- —intended-to-authorize by this additional act. Connected as this au- thority now is with travelers, horses and carriages, there is scarce a pretence for argument, that this additional act goes any further than the original act, to authorize a stage and transportation ,com- pany. It is not unlikely that some of the projectors of this enterprise. intended to secure much more extensive rights than those of a turn- pike and hotel company, but it seems certain they have not exhibited this feature of their case to the legislature so distinctly as to secure i their sanction, and the charter and its amendment as yet justifies them in no such claim. [The court held that the defendant was.not liable on the contract for the omnibuses and baggage wagon.] Nore. — See, accord, Chewacha Lime Works v. Dismukes, 87 Ala. . 344 (a corporation whose objects are to mine lime rock and manu- facture the same has no implied or incidental power to carry on a | general mercantile. business); Cherokee Iron Co. v. Jones, 52 Ga. 276 (a corporation organized to manufacture pig iron has no power Y to erect a corn and flour mill); Bangor Boom Corporation v. Whiting, 29 Me. 123 (a corporation with power to boom lumber has no power to drive lumber). PEOPLE ex rel. TIFFANY & CO. v. CAMPBELL. 144 N.Y. 166, 1894. One question was whether the capital of Tiffany & Co. employed in the purchase and sale of goods "not-manufactured by 1t was sub= ject to taxation, or whether it was exempted from taxation under a —statute exempting manufacturing corporations from taxation. SECT. I.] PEOPLE EX REL. TIFFANY & CO. ¥. CAMPBELL. 383 Anprews, Cu.J. This appeal is from an order of the General ‘Term dismissing a writ of certiorari to review a decision of the state comptroller subjecting to taxation a portion of the relator’s capital employed in this state in the years 1889, 1890 and 1891. The relator is a manufacturing corporation in this state, organized under the general Jaw for the incorporation of manufacturing com- panies, for the manufacture and sale of gold and silverware and other articles of ornament and use. Its capital, stated in the certi- ficate, is $2,400,000, which by accretion now exceeds $3,000,000. It has a store for the sale of its products in the city of New York. It employs from six to eight hundred men in its manufacturing business in this state and about eighty per cent of its capital. All of this cap- ital, except a portion varying in different years from twelve to fif- teen per cent, is invested in its manufacturing business._The portion not employed in that way, amounting on the average to about $300,-_ ——000 a year, is employed in the purchase and sale of goods, principally of foreign manufacture, of the same general character as the goods manufactured by the relator, but of a cheaper description, which it cannot itself advantageously manufacture, but which are neces- sary in Order to make its stock complete, and to meet the wants of customers. eee SATE ETT TE Seale Tt is claimed that the purchase and sale of goods not manufac- tured by the relator, merely to complete its stock, and limited to articles which it could not advantageously manufacture itself, was incidental and subsidiary to the exercise of its corporate power as a manufacturing company, and; therefore, within the power granted. JIt_is well settled that a corporation possesses not only powers speci- fically granted in terms, but (as expressed in the Revised Statutes) _ such powers ‘‘as shall be necessary to the exercise of the powers so enumerated and given.” (1 Rev. St. 600, § 3.) The unexpressed and incidental powers possessed by a corporation are not limited to such as are absolutely or indispensably necessary to enable it to exercise the powers specifically granted. Whatever incidental powers are reasonably necessary to enable it to perform its corporate functions are implied from the powers affirmatively granted. (Comstock, J., Curtis v. Leavitt, 15 N.Y. 64.) But powers merely convenient or use- ful are not implied if they are not essential, having in view the na- ture and object of the inegs PO stOn. ~The poster-assumed_by_the relator in this case to othe ? _ not itse profitably w manufacture, was a convenient ta natal one, “and doubtless contributed to the success of its general business, but it —~vammot; we think, be said to be essential to its business as a manufac- turing corporation. The power to sell its products, even if it had not “asin this case been expressly included among the enumerated powers, would be necessarily implied in the charter of a manufacturing cor- poration. Without the power of sale the business of production could 384 U. 8. BREWING CO. v. DOLESE. [CHAP. I. not be carried on. The power to sell is an indispensable adjunct to a manufacturing business. But the same considerations do not apply where a manufacturing corporation is also engaged in the purchase Of goods manulac ies. S part of the Btor’s business was not, we think, within its chartered powers. [The court held that a tax was payable on the capital so employed.] Notz. — See also Nicollet Bank v. Frisk-Turner Co., 71 Minn. 413. U. 8. BREWING CO. v. DOLESE. 259 Ill. 274. 1913. Mr. Justice Farmer delivered the opinion of the court: Plaintiff in error (hereafter called plaintiff) brought this action of assumpsit in the municipal court of the city of Chicago against de- ~fendant in error (hereafter referred to as defendant) for the recovery of _of $10, 000 alleged to be due plaintiff from defendant. Plaintiff is a “corporation organized under the laws of Illinois “to manufacture and sell all kinds of beer, ale and porter, to buy and sell all kinds of brewer’s materials and supplies, and to carry on a general brewer’s “business in all its branches.” Defendant is a corporation organized to quarry stone, sand, clay, earth and gravel; to manufacture and deal in stone, brick, lime and cement, and deal also in sand, clay, earth, gravel, sewer and water pipe, stucco, lumber and building materials of all kinds, coal and ice, and to contract for, make and construct public and private improvements in which any such ma- terials are employed, including roads and bridges.” Defendant’s quarries were near the village of Gary (or Hodgkins), in a ownship, Cook county, about fifteen miles from €8S trict of the city of Chicago. The v illage is situated” is situated on the Atchis =n Topeka and Santa Fé railroad and is about three-quarters of a mile from the quarries. In 1905 there were but few houses in the neighbor- hood where employees of defendant could live and the transportation “facilities for conveying workmen to-and from the quarries werein- adequate and inconvenient. Defendantemployed between one hun- dred and two hundred workmen, and in 1905 it employed an archi- tect and caused plans to bé prepared for a building it proposed to —erect for a boarding house to accommodate its employees. Before any work was done by defendant on the building, negotiations were ~ entered into by it with plaintiff for the construction of the building y plaintiff. These negotiations resulted in an agreement being —Fesched by whieh plainiif as to erect the building, part of it to be used as a saloon. On November 5, 1905, defendant leased to plain- SECT. I.] U. S. BREWING CO. v. DOLESE. 385 tiff, for a term commencing January 1, 1906, and ending December 31, 1930, a tract of land described, one hundred feet wide by two hundred feet deep, upon which plaintiff agreed to erect at its own expense and maintain for the term of the lease, unless sooner termi- nated under the provisions thereof, ‘a certain building, and to use and operate the same continuously for the entire term aforesaid, as a saloon and boarding house, said building to cost the sum of $6700.” Plans and drawings for the building were made part of the agree- ment. Plaintiff erected an L-building twenty-four feet wide by one hundred and seventy-seven feet long, and an addition twenty feet by thirty feet. The portion of the building devoted to use for boarding- house purposes consisted of a kitchen, twenty-four feet by twenty- four feet; a dining room, twenty-four feet by eighty feet; forty-three double bed-rooms, and an apartment for the tenant. The part of the building devoted to saloon purposes was twenty-four feet by thirty feet. The lease contained provisions concerning its termina- tion by defendant upon notice, and for the appointment of appraisers to value the building and make an award for the payment therefor by defendant if it elected to terminate the lease before its expiration, but those provisions are not here involved. The lease provided that “should the district within which the premises herein demised are located become a prohibition or local option district, so that on ac- count thereof it shall be necessary to suspend the saloon business on said premises within three years from the date of this contract, then no such appraisement shall be made, but said first party [de- fendant] shall pay to the said second party [plaintiff] the cost price of the building and improvements on said premises such cost price not to exceed, however, the sum of $10,000.’ The lease authorized plaintiff to sublet the building, and after its completion plaintiff ~ leased it at a monthly rental of $200, with a provision that if the lessee or his assigns purchased from plaintiff all beer sold on the premises, a deduction or rebate would be allowed of $120 on each month’s rent. The building was conducted as a boarding house and saloon from the time of its completion. At the township election held April 7, 1908, the township of Lyons became prohibition or anti-saloon territory, and on April 9 plaintiff notified defendant, in writing, of that fact, demanded the payment of $10,000, and offered to surrender the building immediately upon payment. Defendant did not make the payment and appears to have ignored the demand. This suit was begun for the recovery of $10,000 on August 4, 1908. The declaration consisted of a special count on the contract and the common counts. Defendant pleaded the general issue and a special plea that the contract declared on in the special count was ultra vires. The cause was by agreement heard before the court without a jury. The court found the issues for the plaintiff, assessed its damages at $8490.12 and rendered judgment therefor. Defendant prosecuted an 386 U. 8. BREWING CO. v. DOLESE. [CHAP. I. appeal to the Appellate Court for the First District, and that court reversed the judgment of the municipal court. The Appellate Court was of opinion the contract was ultra vires the plaintiff corporation; that there could be no recovery upon the common counts, under the evidence, upon an implied contract, and the cause was therefore not remanded. A writ of certiorari was granted by this court. The view of the municipal court, as indicated by propositions of law held and refused, was that the contract was ultra vires but that plaintiff was entitled to recover the reasonable value of the building under an implied contract. While plaintiff -insists it is entitled to recover upon an implied contract if the written contract is ultra vires, it contends that said written contract was not wléra vires, and this appears to have been the principal theory upon which the case was tried in the municipal court. We agree with the municipal and Ap- pellate Courts that it was beyond the power of plaintiff to make the contract and that the contract is void. Plaintiff relies upon the rule announced in a number of cases that it is within the power of a corporation to adopt any proper and con- venient means tending directly to accomplish the purposes for which it was organized, not amounting to the transaction of a separate, un- authorized business. Among other similar cases, reliance is placed upon Heims Brewing Co. v. Flannery, 137 Il. 309, and Kraft v. West Side Brewery Co., 219 id. 205. In the Heims Brewing Co. case the corporation was organized with power “to acquire, own and use all necessary property and means to prosecute and conduct the business of brewing and disposing of beer, with all such powers as shall be essential and incident to the convenient and successful operation of a brewery.” It leased a building for a period of five years for saloon purposes. Before the term expired it abandoned the premises and refused to pay the rent. When suit was brought it defended on the ground that the contract was uléra vires. A part of the contract with the owner of the building was, that the owner would not engage in the saloon business during the period of the lease nor rent other property owned or controlled by him in the block for saloon pur- poses. The object of the contract and lease was to promote the business for which the brewery was organized by increasing the sale and consumption of beer manufactured by it, and it was held the contract was within the powers of the corporation and was valid and binding. In the Kraft case the brewery loaned Kraft money to erect a building for a saloon, living apartments for the owner, and for a hall in the upper story. The brewery was to be given a lease upon the premises and no other beer than that manufactured by it was to be sold thereon during the term of the lease. A mortgage was given the brewery to secure the payment of the loan, and when it instituted proceedings to foreclose the mortgage the defense of ultra vires was interposed. This court held that the loan was made SECT. 1.] U. 8S. BREWING CO. 0. DOLESE. 387 for a purpose not too remotely connected with the promotion of the business of the brewery and that it was within the implied powers of the corporation. We do not think the above cases, and others relied upon, sustain plaintiff’s contention. It is probably true that the boarding house would be of benefit to the saloon because of increased patronage at the bar, but because a corporation like plaintiff might do some things under its implied powers to promote its business, it does not follow that it may engage in any line of business or occupation not au- thorized by its charter powers because such business or occupation would promote the business for which the corporation was organized. It would be rather a far stretch of corporate powers to say that a corporation organized to manufacture and sell beer, ale and porter and carry on a general brewer’s business in all its branches, could establish and operate boarding houses for the purpose of increasing the sale of its beer. This court said in Fritze v. Equitable Building and Loan Society, 186 Ill. 183: ‘‘By an implied power is meant one that is directly and immediately appropriate to the execution of the specific power granted, and not one that has slight or remote relation 0 it.” In Best Brewing Co. v. Klassen, 185 Ill. 37, the court said: “Many acts can be suggested which, though beneficial to the busi- ness of a corporation, are too remote from its general purposes to be deemed reasonably within its implied powers. What is and what is not too remote must be determined according to the facts of each case. The rule has been stated to be: In exercising powers conferred by its charter, a corporation ‘may adopt any proper and convenient means tending directly to their accomplishment, and not amount- ing to the transaction of a separate, unauthorized business.’”’ Here, more than three-fourths of the building and of the investment for “its construction was for boarding-house purposes, which was a busi-_ “ness plainti had 10 power, either express oF implied, to engage in. Se ae ee ele could be fawn against its engaging in any business in connection with its manufacture and sale of beer that would promote that object. In View of the case no action could be sustained upon the contract. e portion of the opini ing to récovery on the common counts is omitted.] Nots. — See also Best Brewing Co. v. Klassen, 185 Ill. 37. Cf. Central Lumber Co. v. Kelter, 201 Tll. 508. Davis v. Old Colony R.R. Co., 181 Mass. 258. The directors of two corporations, one a railroad corporation, and one organized to manu- facture and sell musical instruments, undertook in the names of the corporations to pay part of the expenses of holding the World’s Peace Jubilee and International Music Festival in Boston. The directors in so doing acted “with the reasonable belief that the holding of the 388 MALONE 0. LANCASTER GAS LIGHT CO. _ [CHAP. I. festival proposed would be of great pecuniary benefit to the corpora- tion by increasing its proper business,” and that their so undertaking would promote the holding of the festival. The court held that no action could be maintained on such undertaking against either cor- poration. MALONE »v. LANCASTER GAS LIGHT CO. 182 Pa. 309. 1897. A STOCKHOLDER in the defendant sought to enjoin the issue by it Of additional stock and bonds on two grounds. One ground was th at the new debt was to be created for the purchase of certain patent appliances, not for the manufacture or distribution of gas, but for ~ its consumption, the dealing in which appliances was not within the company’s charter purposes.__ a 7 Mr. Justice Mircnety. The second branch of the case raises a mixed question of law and fact, namely, the authority of the Lan- caster Gas Company to purchase the right to use and deal in the steam heater, radiating mantel and gas consuming appliances cov- ered by the Backus patents. It is argued for plaintiff that the charter purpose of the Gas Company is limited by the words “manufactur- ing and supplying illuminating and heating gas,” and that nothing can be included which is not a necessary part or appliance for manu- facturing or supplying. This is too narrow and literal a construc- tion, and overlooks the fundamental object of the corporation, the manufacture and supply of gas to customers for profit. It would be See sears ape aie peti ence the company may fairly supply not only the gas itself, but incidentally such appliances and_conveniences_as will induce new Ts to use gas or old ones to use more. This is a legitirhate —mode of extending the company’s business, in direct furtherance of its charter object. In considering such questions, much weight must be allowed to the judgment of the parties most interested, the officers and stockholders of the corporation itself; and while they will not permitted, a e commonwealth or a dissenting stock- holder, to go outside of their legitimate corporate business, yet where the act questioned is of a nature to be fairly considered incidental or auxiliary to such business, it will not be unlawful, because not within ~~ the literal terms of the corporate grant. This is the general rule even where corporate privileges are most strictly construed. “Corporations may transact, in addition to their main undertaking, all such subordinate and connected matters as are, if not essential, at least very convenient to the due prosecution of the former:” Green’s Brice’s Ultra Vires (2d ed.), ch. 3, § 2, p.86. SECT. I.] MALONE v. LANCASTER GAS LIGHT CO. 389 The illustration given by Mr. Brice is that railway companies may erect refreshment rooms or book stalls, and “adopt other similar measures for both providing for the comfort of their customers and adding to their own receipts.”” The American illustrations in the same line, which have revolutionized modern travel, will occur to everyone. In Brown v. Winnisimmet Co., 11 Allen, 326, it was held that the contract of a ferry company to charter one of its boats for temporary use in another business was valid. Many illustrations are suggested in the opinion of BicrLow, C.J., who said, “‘We know of no rule or principle by which an act creating a corporation for cer- tain specific objects, or to carry on a particular trade or business, is to be strictly construed as prohibitory of all other dealings or trans- actions not coming within the exact scope of those designated. Un- doubtedly the main business of a corporation is to be confined to that class of operations which properly appertain to the general purposes for which its charter was granted. But it may also enter into con- tracts and engage in transactions which are incidental or auxiliary to its main business, or which may become necessary, expedient or profitable in the care and management of the property which it is authorized to hold.” See also Lyndeborough Glass Co. v. Mass. Glass Co., 111 Mass. 315. And in our own case of Watts’s Appeal, 78 Pa. 370, a land company’s charter purpose was to sell a large tract of land, but it was authorized inter alia ‘‘to aid in the development of the minerals and other materials,” and also “to promote the clear- ing and settlement of the country.” The directors, among other things, built sawmills and a hotel. It was held that their acts were not ultra vires, GORDON, J., saying (page 392): ‘“We know of no other material upon these lands more abundant or more obviously requiring development than the timber. Neither can we conceive of anything better calculated to develop this kind of materials than sawmills. So we regard a hotel of some kind in so large a territory of wild lands, as not only a convenience adding greatly to the settle- ment of the country, but a necessity.” In the present case the stockholders of the Gas Company by an almost unanimous vote, decided that the purchase of the Backus patents Tivantage of the company’s business as a manu- acturer and distributor of gas, and the court below has found as a matter of fact that they were right. We cannot say as matter of law that they were wrong. ‘Note. — See also Central Ohio Co: v. Capital City Co., 60 Ohio St. 96; Searight v. Payne, 6 Lea (Tenn.) 288. 390 PEOPLE v¥. PULLMAN CAR CO. [CHAP. I. PEOPLE v. PULLMAN CAR CO. 175 Ill. 125. 1898. Mr. Justice Boaes delivered the opinion of the court: This is an information in the nature of a quo warranto, filed by the Attorney General in the circuit court of Cook county, in the name and on behalf of the People of the State of Illinois, against Pullman’s Palace Car Company. Said company is a corporation, organized in 1867 by a special act of the legislature of Illinois, entitled “An act to incorporate Pullman’s Palace Car Company.” (2 Private Laws of 1867, p. 337.) Sections 4 and 6 of this act were as follows: “Sec. 4. Fhe said corporation shall have power to manufacture, construct and purchase railway cars, with all convenient append- ages, and supplies for persons traveling therein, and the same may sell or use, or permit to be used, in such manner and upon such terms as the said company may think fit and proper.” “Sec. 6. It may be lawful for the company hereby incorporated to purchase, acquire and hold such real estate as may be deemed necessary for the successful prosecution of their business, and may have power to sell and convey the same.” The information sets out the charter of the defendant, and then alleges certain acts which are alleged to be usurpations by the de- fendant of powers not conferred by its charter, and concludes with a prayer for the forfeiture of the charter of the corporation. The allégations contained in the information of the usurpations of power on the part of the defendant are, in substance, as follows: First — That it owns and controls a large ten-story business block, together with the ground on which it stands, worth two million dol- “Tars, in the business center of the city of Chicago; that it rents three- ~Ttourtns of said block to persons, firms and corporations, and derives @ large income therefrom; that this business block is located many ~—_Tniles from its works, or whatis called the “Town of Pullman,” and a small portion of it only is occupied by the company’s employees; that this business block was built as an investment, and not because tt had_any real necessity therefor. A corporation in our State has its existence by virtue of the enact- ment, general or special, of the law-making power. The appellee corporation was created by a special act of the General Assembly. The only difference between a corporation organized under a general law and one created by a special statute is, ‘‘that in the former we look to the certificate of the promoters, while in the latter we look to.the special statute to ascertain the scope of the powers of the cor- poration.” The rule for construing the instruments must neces- sarily be the same, viz., the powers specifically enumerated, and SECT. 1.] PEOPLE v. PULLMAN CAR CO. 391 such other powers as are incidental or necessary to carry those powers into effect, but none others may be exercised by the corporation. Rockhold v. Canton Masonic Benevolent Society, 129 Ill. 440. The enactment creating the appellee corporation is the full meas- ure of its power. In order to enable it to carry into execution the powers thus conferred it may exercise other powers, known to the law as incidental or implied powers. Implied powers exist only to enable a corporation to carry out the express powers granted, — that is, to accomplish the purpose of its existence, — and can in no case avail to enlarge the express powers, and thereby warrant, it to devote its efforts and capital to other purposes than such as its charter expressly authorizes, or to engage in collateral enterprises not directly but only remotely connected with its specific corporate purposes. A power which the law will regard as existing by implica- tion must_be one in a sense necessary, — that is, needful, suitable and proper to accomplish the object of the grant, and one thats irectly and immediately appropriate to the execution of the specific powers, and not one that has but a slight, indirect or remote relation to the specific purposes of the corporation. Illinois Conference emale College v. Cooper, 25 Ill. 133; Caldwell v. City of Alton, 33 id. ‘416; Chicago, Pekin and Southwestern Railroad Co. v. Town of Mar- seilles, 84 id. 643; Chicago Gas Light Co. v. People’s Gas Light Co., 121 id. 530; Mott v. Danville Seminary, 129 id. 403; People v. Chicago Gas Trust Co., 130 id. 268; North Side Railroad Co. v. Worthington (Tex.),305.W. Rep. 1055; Field on Corporations, §§ 53,54; 4 Thomp- son’s Law of Corp. § 5638; 2 Beach on Private Corp. § 385; Green’s Brice’s Ultra Vires, 88, 89. Keeping these definitions as to implied powers in view, we may proceed to determine whether the acts set forth in the pleas are within or beyond the measure of power possessed by the appellee company. The information charges that the defendant owns and controls within the city of Chicago a large ten-story business block, together with the ground on which said building stands, worth $2,000,000; that the defendant occupies a portion, only, of said building for purposes of its own corporation business, and that it leases about three-fourths of the building to other persons, firms or corporations, and receives a large consideration from the occupants thereof as rentals; that said block was built by the defendant as an investment, and charges that the said building was erected without warrant or authority of law. The defendant sets up by way of inducement in its plea, that it has had, ever since its organization, its general offices near the business center of the city of Chicago, and that it is neces- sary and proper to do so; that it became impossible to rent proper general offices, and that the rentals charged for poor offices were high and exorbitant; that thereupon, in 1880, it purchased a lot of land, 75 by 170 feet, at the corner of Michigan avenue and Adams 392 PEOPLE v. PULLMAN CAR CO. [CHAP. I: street, and erected thereon a building, in which it ever since has kept its general offices and some store rooms; that the said land was valuable, and could not, without great loss, be utilized for erecting a building other than a high building, and such as is in keeping with and equal to the surrounding buildings; that thereupon defendant erected thereon a nine-story building, of which 1t now uses nearly one-half, and that if its business continues to increase as it has in the past, it will soon also use it all for its general offices; that in the mean- ‘time it rents to different parties such offices as 1f 18 not at present ~ “using; that erecting such buildings is in keeping with the usual practice of other large corporations doing kindred business, and that it could not now rent such general offices as it requires, in the business center of Chicago, for a rental as low as five per centum per annum on the amount which said building and the land on which it stands cost defendant. The defendant is authorized by § 6 of its charter to purchase, acquire and hold such real estate as may be necessary for the success- ful prosecution of its business; but it is contended that the building in _ question is much larger and contains many moré rooms-anct offices than the business or wants of the corporation demand; that only a small portion of it is occupied by the company’s employees; that it was erected as an investment by the company, and therefore that the company owns and maintains the building without authority of law. We are concerned, however, with the averments of the plea the truth of which are admitted by the demurrer. The plea avers it was necessary and proper the general offices of the appellee should be maintained near the business center of the city of Chicago, and that such offices have always been maintained in that locality; that it became impossible to rent suitable general offices there, and even insufficient and undesirable offices could only be obtained at high and exorbitant rentals; that the business of the company was large and rapidly increasing, and that good business judgment dictated the company should provide its own offices, and that in view of the fact that desirable ground was very valuable, and that more office room would be needed in the future to accommodate the growing business of the company, it was determined to construct a larger building than was at the time actually needed and necessary and to rent such offices as were not at the present needed, and that, moved by such consideration, the building was erected; that if the business of the corporation continues to increase as it has in the past, the entire building will soon be devoted to the uses of the company. We think the plea presented a good defense to the charges pre- ferred in the information with reference to this building. The right of the appellee to construct an office building is indisputable “also, is thé right to select the most eligible and desirable site. It would be but a narrow and wholly unjustifiable view of this power SECT. I.] BROWN JU. WINNISIMMET CO. 393 to insist that in planning and constructing the building the corpora- tion should leave out of consideration its probable prospective re- quirements, and should erect a building containing only as many rooms and offices as its present business might demand. Thé Cor- poration had the right, as we think, to look to and prepare for the _future. It was but true economy to do so, and if it proceeded in good faith, as we are to assume from the conceded averments of the plea it did, no reason is perceived why it should be deemed bound by law to permit such parts of the building as are not for the present required for the accommodation of its business, to remain vacant, but, on the contrary, that it might lawfully obtain such income from the rents of such rooms as might be possible until the growth or in- crease of its business demanded the additional rooms or offices. A corporation could not be permitted, under mere color and pre- _tense of Turnishing accommodations for the transaction of its own affairs, to construct houses or rooms for the purpose of renting the same, and engage in renting such houses_or rooms as a business, if such pursuit was, as it here clearly is, beyond and distinct from that it was created to pursue and accomplish. But the averments of the “Tex donot imtity theimpatation that the acts of the company under consideration are but colorable, and in this investigation the aver- ments stand confessed by the State. Nore. — See, accord, Simpson v. Westminster Palace Hotel Co., 8 H.L. Cas. 712. Cf. First Methodist Church v. Dixon, 178 Il. 260. BROWN »v. WINNISIMMET CO. 11 All. (Mass.) 326. 1865. A VESSEL belonging to the defendant had, by authority of its directors, been chartered to the United States for use in the war. It had been sent to Fortress Munroe. The plaintiff claimed that certain commissions were due him for effecting this chartering by the United States. One ground of defence by the defendant was that it was ultra vires for it so to charter the vessel. BicEetow, C.J. The main defence to this action appears to have been that the contracts or agreements on which the plaintiffs rely in support of their claim against the defendants were such that the lat- ter had no power or authority to make them under the act of the legislature by which they were incorporated, and that they cannot for that reason be enforced in a court of law. The later English au- thorities seem to sanction the doctrine that such a , ground of defence, although it may be “ unbecoming and ungracious,’ ’ or, in the stronger language of Lord St. Leonards, “indecent,” is nevertheless legal and 394 BROWN J. WINNISIMMET CO. [CHAP. 1. valid, if it be made to appear, either by the express provisions of an - act of incorporation or by necessary and reasonable implication there- from, that a contract which is sought to be enforced in an action at law against a corporation is beyond the scope of the powers granted by its charter; or, in other words, that the legislature did not intend that the body created by them should enter into contracts of'a character like that which a plaintiff makes the foundation of a claim against it. South Yorkshire Railway, etc. v. Great Northern Railway, 9 Exch. 55, 85. Bateman v. Ashion-under-Lyne, 3 Hurlst. & Norm. 323. Norwich v. Norfolk Railway, 4 El. & Bl. 397, and cases cited. Hawkes v. Eastern Counties Railway, 1 DeG., Macn. & Gord. 737, 760. A similar doctrine has been recognized and applied by courts in this country. Pennsylvania, etc. Steam Navigation Co. v. Dand- ridge, 8 Gill & J. 248. Hood v. New York & New Haven Railroad, 22 Conn. 502. Pearce v. Madison, etc. Railroad, 21 How. 441. Angell & Ames on Corp. § 256, and cases cited. It is on the principle which seems to be adopted by these authorities that the defendants rely to defeat the present action. We have no occasion now to examine at length into the correct- ness of this doctrine, or to ascertain with precision its proper limita- tions or operation, because we are of opinion that the defendants do not bring the case at bar within any recognized application of the rule. Looking only at the words of the act by which the defendants were incorporated, Sé. 1833, c. 197, we are unable to say that the contracts on which the plaintiffs rely are so far-foreign to the object for which a charter was granted to the defendants as to re- quire us to declare them to have been ultra-vires and illegal, and that no action upon them can be maintained in a court of law. In the absence of all evidence of extraneous facts, and taking the case as it was presented at the trial, on a comparison of the contracts set up by the plaintiffs with the act incorporating the defendants, it ap- pears to us that the scrupulous care and anxiety to keep within the limit of their corporate powers, which the defendants now manifest will not avail them in defence of this action, although it may induce thém to exercise a greater caution in entering into contracts which they cannot fulfil without violating their charter _ They were incor- oston an the town of Chelsea, and were au- Mhorized to own, hold and possess vessels, steamboats and such other ars, as might be necessary and convenient for the beh manage- ment of such ferry and of t ation. There can “ee eee Spt nse at a ére incorporated was to carry on across Charles River between the points designated in the act. All SECT. 1.] BROWN Jv. WINNISIMMET CO. 895 else was to be subordinate and incidental to this main design. So far, the argument urged in behalf of the defendants is sound and irre- fragable. 7 But the next step is not so easily taken, nor does it lead to the point at which the defendants seek to arrive. It was not shown at the trial that the steamboat which was the subject of the contracts with the plaintiffs was not a necessary and proper vessel to be used by the defendants in the prosecution of the business of their.ferry, nor that by reason of its ownership they had exceeded the limit of per- sonal property which they were empowered by their charter to hold Nor could it be properly inferred that it was not reasonably required for the legitimate business of the corporation, because it was not in actual use by them on the ferry at the time the contract for letting it was entered into with the plaintiffs, and because it was chartered under that contract for the use of the government of the United States. Such an inference could be made only on the theory that the defendants were so restricted by their charter that they could not hold any greater number of vessels or steamboats than were ab- solutely required for present or immediate and constant use on their ferry, or, if they could be allowed to possess a larger number, that they could not use or employ them in any other business or for any other purpose whatever, but must suffer them to remain at their wharf to decay or deteriorate for the want of use, or, at least, ina condition in which they could be of no advantage to themselves or others. But we think such a narrow and restricted construction of the powers granted to the defendants is inconsistent with any reasonable view of the intention of the legislature in conferring on them a corporate franchise, and is not required by any considera- tions of justice or sound policy. On the contrary, we cannot doubt that under their charter they are authorized to hold any amount or kind of personal property, within the limit of value fixed by the act, which they may deem necessary or expedient for the proper conduct and management of the business of the ferry; that it is no excess of their corporate powers to own steamboats which are not required for immediate or constant use in the daily prosecution of their ordinary business, but which may be convenient or useful in case of sudden emergency or accident, or wlien those which are employed in the regular service of the ferry might be withdrawn for repairs; that it is not necessary that such extra or additional steamboats should be kept unemployed when not required for the business of the ferry, but that it is competent for the defendants to use them or to let them to others to be used in carrying on any legitimate business for which they are suitable, such as the towage of vessels and the transportation of passengers or merchandise, so long as such use is only temporary and incidental to the main purpose for which they are owned by the defendants. We know of no rule or principle by which an act creating a cor- 396 BROWN v. WINNISIMMET CO. [cHAP. I. poration for certain specific objects or-to carry on a particular trade or business is to be strictly construed, as prohibitory of all other dealings or transactions, not coming within the exact scope of those designated. Lmdoubtedly the main business of a corporation is to be confined to that class of operations which properly appertain to _ the general purposes for which its charter was granted. But it may So énter mto contracts and engage in tf ions which are in- cidental or auxiliary to its main business, or which may become nec- essary, expedient or profitable in the care and management of the property which it is authorized to hold under the act by which it was created. For example, it might perhaps be held that a corpora- tion established for the purpose of manufacturing cotton and woollen cloth could not properly invest all its capital in mill powers and privileges, and engage exclusively in the business of leasing them to others to be used for manufacturing purposes, or that it could not lawfully confine its operations to the making of steam-engines and machines for sale. But no one could doubt that it would be within the scope of its powers to allow another person or corporation, for a reasonable compensation, to draw surplus water from its mill-pond, or to employ that portion of its steam power which was not required for its own use. So a stage-coach company or a street railway cor- poration would exceed its corporate powers if it engaged extensively in the transportation of passengers and merchandise on land or sea by steam; but it would be acting strictly within the limits of its capacity if it should occasionally let a horse or a coach or car, not required for its own immediate purposes, to another person or cor- poration, or should enter into a contract for the employment of its horses in another occupation during a portion of the year when the business of the corporation did not require their use. We can see no substantial difference between transactions of this character and that which the defendants entered into when they made the con- tracts with the plaintiffs. These views of the extent of the authority granted to the defend- ants by the legislature are a decisive answer to the defence relied on by them at the trial. The steamboat, under the contract with the plaintiffs, was let to the United States in a season of great public exigency, for military purposes; the defendants did not part with her control for any definite period of time, but only from day to day, nor did they send her to a great distance, where she could not be speedily recalled. The defendants retained the right and power to resume the possession and use of her at any moment. In this state of facts, we are of opinion that the court below took a correct view of the law, and was right in refusing to rule, as requested by the defendants, that the contracts entered into with the plaintiffs were not authorized by the defendants’ charter, and were therefore void. Nore. — See, accord, Forrest v. Manchester Ry. Co., 30 Beav. 40. SECT. 1.] WILLIAMS v. JOHNSON. 397 WILLIAMS »v. JOHNSON. 208 Mass. 544. 1911. Know ton, C.J. This is an appeal from a decree of the Land Court granting a petition for the registration of the title to a tract of land in Boston, a part of which was formerly occupied as the station of the Boston and Providence Railroad Company, at Park Square. The diversion and extension of the railroad and the erection of the terminal passenger station in Boston under the St. 1896, chap. 516, rendered the property no longer available for railroad purposes, and it was conveyed by this corporation to the New York, New Haven, and Hartford Railroad Company in consideration of improvements made by the grantee upon the property of the grantor, in connection with the location and erection of the new station. The validity of this conveyance was confirmed in Little v. Old Colony Railroad, 202 Mass. 277. The petitioners claim title under,a deed from the New York, New Haven, and Hartford Railroad Company, bearing date September 15, 1909. The respondents, who are stockholders in the last mentioned corporation, deny the validity of the deed, on the ground that it was ultra vires of the corporation and that the directors had no authority to make it. The deed runs to the petitioners as trustees under a declaration of trust. The consideration expressed in it is $1 and other valuable considerations. The conveyance is “‘subject to and upon the terms, provisions and trusts mentioned and set forth in the aforesaid dec- laration of trust.” This declaration is of a peculiar kind. It pro- vides that the trustees shall forthwith issue to the grantor certifi- cates, in a form prescribed, for fifty-two thousand shares, of a nominal par value of $100 each, in payment for this real estate. The entire interest of the cestuis que trust, or shareholders in the property, was to be represented, immediately after the conveyance, by these shares. The trustées were authorized to issue not exceeding forty thousand additional shares of the same nominal par value, in ex- change for convertible notes or bonds that the trustees may issue to obtain money to be used in conducting the enterprise. The shares are transferable on the books of the trustees. The shareholders are not to have any legal title to the trust property itself, real or personal, and especially they are not to have a right to call for any partition. It is declared that they shall have no equitable estate in the lands and appurtenances constituting the trust property, but their in- terest shall consist only of an interest in the money to arise from the sale or other disposition thereof by the trustees, and, previously to such sale, in all the rights mentioned in the declaration, which are rights “of division of proceeds and profits and the other rights and matters concerning the trust property.” 398 WILLIAMS v. JOHNSON. [CHAP. I. The death of a shareholder is not to determine the trust, nor en- title his legal representatives to an accounting, but his rights are to pass to his executors, administrators or assigns, upon the sur- render of the certificate of the shares. The trustees may from time to time invite and receive subscriptions to additional shares, for the purpose of increasing the capital of the trust, giving preference, upon such terms and conditions as they shall deem best, to existing shareholders, and to the holders of convertible notes or bonds: The trustees have no power to bind the shareholders personally for any debt, nor are the trustees to be personally liable for claims or debts against the trust, but all persons extending credit to the trustees are to look only to the property of the trust for their payment. The trustees have no pecuniary interest in the property of the trust, or in the business carried on under the trust, except for the payment of prescribed commissions upon receipts and expenditures, as com- pensation for their services. The trustees are to have absolute control over and disposal of all real estate and other property held under the trust, including the power to improve it by building thereon or otherwise; to sell, for cash or credit, at public or private sale, any part of the property; ‘‘to lease or hire for improvement or otherwise, for a term beyond the possible termination of this trust, or for any less term, to let, to ex- change, to release and to partition.”” They have power to borrow money to carry out the purposes of the trust, to issue notes or bonds, and to secure the repayment of them by a pledge, mortgage or hy- pothecation of the property of the trust, or any part of it. The only limitation upon the power to borrow is that the total indebtedness at any one time shall not exceed $4,000,000. Notes or bonds issued for such indebtedness may be made convertible into shares of the trust. : The trustees may acquire, by purchase or otherwise, any real estate or any interest therein in the vicinity of that conveyed by the deed in question, ‘‘and any notes, bonds, shares or other securities of any corporation, association or real estate trust, organized or. adapted for the purpose of acquiring, holding, managing or im- proving real estate, or for the purpose of conducting a lighting, heat- ing, power or other business directly related to the management of real estate, if in their judgment such acquisition will in any manner tend to facilitate the laying out, development, management or im- provement of the real estate’? conveyed to them by the deed in question. They may lay out and construct or discontinue streets or ways, upon any property at any time held by them. They may dedi- cate to public use, or convey to the city of Boston, with or without compensation, any part of the property, with a view to the enhance- ment of the value of the remaining property. For a like purpose they may contribute money or other property to the cost of any SECT. 1.] WILLIAMS v. JOHNSON. > 399 public or quasi public undertaking. In all these matters the judg- ment and determination of the trustees is to be final and conclusive. They may from time to time determine what of their receipts and expenditures shall be treated as capital and what as income, and their determination shall be final. They may divide net income among the shareholders, under certain limitations, and may set aside a part of the net income as a reserve or contingent fund. Their determination of what is net income is to be conclusive. The trust is to continue until the expiration of twenty years from the death of the last survivor of nine persons named, some of whom, presumably, are quite young, unless three fourths in value of the shareholders shall appoint an earlier time for its termination, not earlier than the second day of July, in the year 1919, by an instrument in writing duly signed and acknowledged. After the termination of the trust by its own limitation, or by such an appointment of three fourths of the shareholders, the proceeds are to be divided among the shareholders. The trustees, when vacancies occur in their number, may appoint their own successors. By this conveyance and the accompanying declaration of trust, the New York, New Haven, and Hartford Railroad Company set on foot a scheme to put property, of an estimated value of more than $5,000,000, into the hands of trustees as managing agents, who were appointed irrevocably, to conduct a business for a term that might last nearly a century, with practically all the powers of an absolute owner, not only over the property conveyed, but for the acquisition of other real estate in the neighborhood, and of shares in corporations which have relation to the use, management and improvement of real estate. The scheme contemplates the borrowing of money to create an indebtedness not exceeding $4,000,000 at any one time. It contemplates an unlimited extension and enlargement of the enterprise, in the discretion of the trustees, by the issue of additional shares to persons who subscribe for them. It contemplates a real estate business, if not a speculation, that may continue a long time and become gigantic, of which the railroad corporation is now the sole owner. It needs no argument to show that, ordinarily, the pro- prietorship of such a business, by arailroad company as a beneficiary, is not within its corporate powers. As was said in Davis v. Old Colony Railroad, 131 Mass. 258, 259, “A corporation has power to do such business only as it is authorized by its act of incorporation to do, and no other. It is not held out by the government, nor by the stockholders, as authorized to make contracts which are beyond the purposes and scope of its charter. It is not vested with all the capacities of a natural person, or of an ordinary partnership, but with such only as its charter confers.” In Waldo v. Chicago, St. Paul & Fond du Lac Railroad, 14 Wis. 575, 581, we find this language: “When a corporation, created for 400 . WILLIAMS v. JOHNSON. (cHap. 1.' the purpose of building and operating a railroad, goes into the busi- ness of banking, or manufacturing and selling goods, or dealing and speculating in real estate, because its corporators or board of di- rectors think such adventures may be profitable, or if a bank should go to building and operating a railroad for like reason, it is easy to see that in each instance the corporation is attempting to transact business which, under its organic act, it has no right or power to do. And if the corporation might embark in a separate and distinct business, not contemplated by its charter, merely because it was supposed it would be profitable and increase its means and resources, there would be no safety to the public in granting any special charters, and none to individuals who might invest in the stock of the com- pany.” The following are a few among the many other cases that apply the same doctrine: Attorney General v. Great Northern Rail- way, 1 Dr. & Sm. 154; Case v. Kelly, 133 U.S. 21; Pacific Railroad v. Seely, 45 Mo. 212; State v. Southern Pacific Co., 52 La. Ann. 1822; Chicago v. Cameron, 120 Ill. 447; People v. Pullman’s Palace Car Co., 175 Il. 125; Slater Woolen Co. v. Lamb, 143 Mass. 420. If the railroad company had taken its money and purchased land, and had applied it to a use like that contemplated by this scheme, no one would contend that it was acting within the law. We are left with only the question whether its ownership of this real estate justifies its creation of such an enterprise. Its ownership of the land, which came to it legitimately, left it with the property on hand, to be sold or disposed of, so that its pro- ceeds could be properly used for the purposes for which the corpora- tion was created. It did not give it the right to hold the land per- manently, or for an unreasonably long time, as an investment for the production of income; much less did it give it the right to carry on, for a long term of years, the business of speculating in land, or de- veloping this and other land in the vicinity, and changing its general character, for the purpose of gain. If the corporation could not do this directly, it could not do it indirectly through the appointment of trustees or agents who should continue the business for its benefit. Attorney General v. New York, New Haven, & Hartford Railroad, 198 Mass. 413. . The objection to such a venture on the part of a corporation is twofold. On the part of the State it is that the corporation is usurp- ing powers which were never conferred upon it, and is engaging in a business which the Legislature has not authorized it to do, and to which there may be grave objections on grounds of public policy. The trustees are managing for this corporation, as the beneficiary, a large amount of valuable real estate in the heart of Boston, and are authorized, in the interest of the beneficiary, to make donations of land or other property for public purposes, or to convey it to the city of Boston with or without compensation, to lay out and con- SECT. 1.] WILLIAMS ¥. JOHNSON. 401 struct or to discontinue streets, and become the owners of corpora- tions engaged in other kinds of business relating to real estate, even in remote parts of the city. There may be grave reasons connected with the public interest why such powers should not be exercised in a city, and, incidentally, an influence possibly be exerted in behalf of a great railroad corporation. At all events, the Legislature has never seen fit to authorize their exercise. Corporations for the holding of real estate for purposes of profit have always been deemed ob- jectionable, and the general laws of this Commonwealth do not permit the organization of such corporations. The other objection is from the side of the stockholder in the cor- poration. He invests his money by subscribing for the shares of stock, with a knowledge of the purpose for which the corporation is organized, and with a view to the probable gain, and a thought of the possible loss, that may result from the transaction of the business of the corporation. He does not invest in any other kind of enter- prise than that which is within the authority conferred upon the corporation. His protection requires that the company be confined strictly to the business and functions for which it was organized. It would leave him without compass or rudder in making his invest- ment, if the managing officers, or a majority of the stockholders, could use the corporate property in a business foreign to that for which the company was established. In turning this real estate into money, the railroad company should not be held too strictly to sales to be made at once and with- out expenditure for changes and improvements that would increase its marketable qualities. A reasonable latitude in that respect is fairly incidental to ownership with a right to sell. Dupee v. Boston Water Power Co., 114 Mass. 37. But nothing more than what is fairly incidental to a reasonable disposition of the property for its fair market value, within a reasonable time, is permissible. The only debatable question in this case is whether such a scheme as has been devised is incidental to the right to sell, and reasonably necessary to enable the corporation to obtain the fair market value of the property. We are of opinion that it is not. The reasons relied on by the petitioners for adopting the scheme, as given in the statement of agreed facts, are that ‘earnest efforts during several years were made, without success, to sell the same and convert it into cash, but the risks and uncertainties attending the development and use of so large a tract of land, without streets or other facilities for its development, were such that no purchaser was in fact found, and no purchaser seemed likely to be found, will- ing and able to purchase said property, except at a price so low as to indemnify him against all such risks and uncertainties and much below the estimated real value of said land.” This is, in substance, that the directors have not been able to sell the land for its estimated 402 FRANKLIN NATIONAL BANK 0. WHITEHEAD. [CHAP. I. value, and that there are risks and uncertainties attending the development and use of the land, which a purchaser would take into account in determining what price he would pay for it. The directors decided to put these risks and uncertainties upon the stock-holders of the corporation, by providing for a business of developing and using this property for many years, in the belief, doubtless, that the business would be more profitable than a sale to others who would assume the risks of such a business. This is not very different from taking $5,000,000 in money of the corporation, if that amount hap- pened to be on hand, and if land could be bought for its fair market value, and investing the money in such an enterprise, in the expecta- tion that the assumption of these risks and uncertainties, in buying at a price diminished on account of them, would open a large field for profit in the business of developing and using the property. The conveyance to the trustees merely changed the form of the property. It did not bring a dollar to the treasury of the corporation. If the trust were sustained, it might or might not be possible, at some time, to sell shares at their estimated value instead of selling portions of the land. But, presumably, there will be no satisfactory market for any of these shares, unless it is demonstrated, after a considerable time, that the business is likely to prove profitable. Petition dismissed. FRANKLIN NATIONAL BANK ». WHITEHEAD. 149 Ind. 560. 1898. Monks, J. The first question to be determined is whether the Greenfield Iron and Nail Company was authorized to engage in the business of public warehouseman, and as such issue warehouse receipts. The special finding shows that said Greenfield Iron and Nail Company was organized under the laws for the incorporation of manufacturing and mining companies, and that its object, as stated in the articles of association, was to manufacture and sell nails and other products of steel and iron. A corporation possesses only such powers as are expressly given by law, and such implied powers as are necessary to enable them to exercise the power expressly given. State Board of Agriculture v. Citizens Street R.W. Co., 47 Ind. 407, 409; Clark on Corp., 120. The business of public warehouseman was not necessary or incidental to the business of said company in manu- facturing or selling nails or other products of steel or iron. It is evident that such company was not authorized, by the laws under which it was organized, to engage in the business of public ware- houseman or to issue warehouse receipts. SECT. 1.] NOTE. 403 It is insisted, however, by appellants, that as said company made a written application to the auditor of Hancock county and ob- tained a permit from him to carry on the business of public ware- houseman under the provisions of § 8704, Burns’ R.S. 1894 (6525, Horner’s R.S. 1897), it was fully authorized, by said section, to carry on that business and issue warehouse receipts. The section referred to is the first section of the public warehouse act of 1875, as amended in 1879, and the part relied upon by ap- pellants is as follows: ‘Any person or incorporated company desir- ing to keep any such public warehouse shall be entitled to do so upon receiving a permit therefor from the auditor of the county in which such warehouse shall be kept.” § 8704, Burns’ R.S. 1894. If appellants’ construction of said section is the correct one, then all the corporations in the State, whether educational, charitable, re- ligious, commercial, or otherwise, whatever may be the provisions of the law under which organized, are given the right of going into and carrying on the business of public warehousemen. While the language quoted from said section is very broad, it was certainly not the intention of the legislature to confer on all the corporations in the State, without regard to the law under which they were organized, and the purposes and objects of their organization, the privileges of public warehousemen. As well hold that persons without capac- ity to contract on account of infancy, insanity, or other disquali- fications were, by said statute, authorized to engage in the business of public warehousemen and execute valid warehouse receipts. A warehouseman is defined to be the owner of a warehouse; one who, as a business and for hire, keeps and stores the goods of others. (Black’s Law Dictionary.) A person who receives goods and mer- chandise to be stored in his warehouse for hire. (Bouvier’s Law Dictionary); 28 Am. and Eng. Ency. of Law, 636, 637; Edwards on Bailments, § 332; Hale on Bailments, 238. Only such corporations as are authorized by the law under which they are organized to carry on the business of warehouseman can avail themselves of the provisions of said act of 1875 (Acts 1875, p. 172), as amended by the act of 1879 (Acts 1879, p. 230), being §§ 8704, 8719, Burns’ R.S. 1894 (6525, 6540, Horner’s R.S. 1897). It follows that said nail company was not authorized to operate as a public warehouseman, or issue any warehouse receipts under the provision of said act of 1875, as amended by the act of 1879. NOTE. Section 4 of chap. 437 of the Acts of 1903 of Massachusetts (the Business Corporation Law) is set forth below. “‘Section 4. Every corporation which is subject to the provisions 404 NOTE. [CHAP. 1. of this act shall have the following powers and privileges and shall be subject to the following liabilities : — ‘“‘(a) To have perpetual succession in its corporate name, unless a period for its duration is limited by special law. “‘(6) To sue or be sued in its corporate name, and to prosecute or defend to final judgment an execution or decree in any court of law or equity. “(c) To have a capital stock to such an amount as may be fixed in its agreement of association or articles of organization or of amend- ment as hereinafter provided. “(d) To have a corporate seal, which it may alter at pleasure. “‘(e) To elect all necessary officers, fix their compensation and define their duties. “(f) To hold, purchase, convey, mortgage or lease within or with- out this commonwealth such real or personal property as the purposes of the corporation may require. ““(g) To make contracts, incur liabilities and borrow money on its credit and for its use. “‘(h) To make by-laws not inconsistent with the laws of this com- monwealth for regulating its government and for the administration of its affairs as hereinafter provided. ““(¢) To be dissolved or to have its affairs wound up in the man- ner hereinafter provided.” A corporation has power to take a fee in land, although its cor- porate existence is limited to a definite number of years. Nicoll v. New York & Erie R.R. Co., 12 N.Y. 121. Similarly of a franchise for a number of years longer than that limiting the corporate existence. Owensboro v. Cumberland Tel. Co., 230 U.S. 58. It may issue negotiable instruments for a proper consideration. Bradbury v. Boston Canoe Club, 153 Mass. 77. (In England, a more cautious statement would have to be made, as some corporations have no power to issue negotiable instruments.) But not for accom- modation. Owen & Co. v. Storms & Co., 78 N.J.L. 154. SECT. I1.] WHITTENTON MILLS v. UPTON. 405 SECTION 2. TO ENTER INTO A PARTNERSHIP. Ow WHITTENTON MILLS v. UPTON. 10 Gray (Mass.) 582. 1858. Petition by the Whittenton Mills, a manufacturing corporation, to set aside proceedings in insolvency, instituted against it and William Mason,-:as partners, upon Mason’s petition. The directors of the corporation, and Mason, had assumed to form a partnership between the corporation and Mason, and business had been con- ducted and liabilities occurred which were in form the liabilities of such partnership. Tuomas, J. Was this corporation capable of forming a partner- ship, of entering into the contract? This question presents itself in two forms. The more general one is: Has a corporation, as one of its usual inherent powers, the capacity to form a contract of copartner- ship? The narrower question, but for this. case the practical and pertinent one, is, Can a manufacturing corporation in this common- wealth, incorporated since February 1831, and subject to the provi- sions of the thirty-eighth and forty-fourth chapters of the revised statutes, enter into a contract or society of copartnership? This corporation was created in March 1836 as a manufacturing corporation, for the purpose of manufacturing cotton goods in the town of Taunton, and for that purpose was invested with all the powers and privileges and made subject to all the duties, restrictions and liabilities set forth in the thirty-eighth and forty-fourth chapters of the revised statutes, passed on the fourth of November preceding, but not to take effect till the first of May eighteen hundred and thirty- six. St. 1836, chap.19. This charter, with the provisions of the chapters referred to and made part of it, is the origin and source of the powers and functions of the corporation. What powers are granted expressly, or by implication, because necessary or usual for the purposes which this charter was given to effect, the corporation has, and no more. There is one obvious and important distinction between such a society as this charter creates and that of a partnership. An act of the corporation, done either by direct vote or by agents authorized for the purpose, is the manifestation of the collected will of the society. No member of the corporation, as such, can bind the so- ciety. In a partnership each member binds the society as a principal. 406 WHITTENTON MILLS ¥. UPTON. [cHAP. I. Tf then this corporation may enter into partnership with an indi- vidual, there would be two principals, the legal person and the nat- ural person, each having, within the scope of the society’s business, full authority to manage its concerns, including even the disposition of its property. The second section of chap. 38 of the Rev. Sts. provides that the business of every such manufacturing corporation shall be managed and conducted by the president and directors thereof and such other officers, agents and factors as the company shall think proper to au- thorize for that purpose. It is plain that the provisions of this section cannot be carried into effect where a partnership exists. The partner may manage and conduct the business of the corporation, and bind it by his acts. In so doing he does not act as an officer or agent of the corporation by authority received from it, but as a principal in a society in which all are equals, and each capable of binding the society by the act of its individual will. Indeed, in examining this chapter, it will be found that there is scarcely a provision for the conduct of the business of a manufac- turing corporation that is not inconsistent with the existence of a contract by which the power to manage the business of the company and to bind the corporation by his acts is vested in one not amember of the corporation nor its officer or agent. Such are the third, fourth and fifth sections, providing how the president and directors, and other officers, agents and factors of the corporation shall be chosen. Such too is the sixth section, which authorizes every such company to make by-laws for its own regulation and government. Such are the several provisions authorizing the stockholders to fix the amount of the capital stock, to increase the same within the limit fixed by law or to reduce it. §§ 9, 11, 19. And such is the provision requiring the president and directors to give annual notice of the amount of the debts of the corporation; the means of stating which’would not be in their power if another principal had the power of creating the debts. § 22. Of the same character is the twenty-fifth section, by which it is declared that the whole amount of the debts which the corporation shall at any time owe shall not exceed the amount of the capital stock actually paid in, and which renders the directors, under whose administration an excess shall occur, liable personally to the extent of such excess; a provision evidently based upon the ground that the exclusive power to contract debts is vested in such di- rectors, and that they cannot be divested of it, and which is wholly inconsistent with the existence of a power in the corporation to enter into a contract of partnership, by which another principal would be created, having equal power to contract debts and to bind the part- nership and the corporation in solido. Indeed the effect of all our statutes, the settled policy of our legis- lature, for the regulation of manufacturing corporations is that the SECT. 11.] BATES v¥. CORONADO BEACH CO. 407 corporation is to manage its affairs separately and exclusively; cer- tain powers to be exercised by the stockholders, and others by of- ficers who are the servants of the corporation and act in its name and behalf. And the formation of a contract, or the entering into a rela- tion, by which the corporation or the officers of its appointment should be divested of that power, or by which its franchises should be vested in a partner with equal power to direct and control its business, is entirely inconsistent with that policy. The power to form a partnership is not only not among the powers granted expressly or by reasonable implication, but is wholly incon- sistent with the scope and tenor of the powers expressly conferred, and the duties expressly imposed, upon a manufacturing corporation under the legislation of the commonwealth. [The prayer of the petition was granted.] Note. — See, accord, Gunn v. Central R.R., 74 Ga. 509; Bishop v. American Preservers’ Co., 157 Ill. 284; White Star Line v. Star Line, 141 Mich. 604; Burke v. Concord R.R., 61 N.H. 160; People v. North River Sugar Refining Co., 121 N.Y. 582, supra; Boyd v. American Carbon Black Co., 182 Pa. 206; Huguenot Mills v. Jempson, 68 8.C. 363; Mallory v. Hanaur Oil Works, 86 Tenn. 598; Pearce v. Madison R.R. Co., 21 How. (U-S.) 441. Cf. Allen v. Woonsocket Co., 11 R.I. 288. But such power may be given by the legislature. Butler v. Ameri- can Toy Co., 46 Conn. 136. om BATES v. CORONADO BEACH CO. 109 Cal. 160. 1895. Action for an accounting upon a partnership agreement. The plaintiff alleged that a contract had been made between the defendant and himself by which it was agreed that they should purchase certain lands and other property, sell the same, pay certain debts and encumbrances thereon, and divide the profits and losses arising therefrom equally between them. The plaintiff paid and conveyed to the defendant his contribution in money and land. The defendant used the money in discharging, obligations upon the land, and afterwards disposed of the land. Harrison, J. It was not ultra vires for the appellant to enter into the agreement with the plaintiff. The power of a corporation to enter into a general partnership with an individual, or with another corporation, is not here involved. The ground upon which this power is sometimes denied is that a partnership implies the power of each partner, under his authority as a general agent for all the purposes of 408 BATES Y. CORONADO BEACH CO. [CHAP. I. the partnership, to bind the others by his individual acts, whereas the statutes under which a corporation exists require its powers to be exercised by a board of directors, and preclude it from becoming bound by the act of the one who may be only its partner. There is, however, in the present case no question of agency in the manage- ment of the affairs of the corporation. The plaintiff paid the money to the appellant, and transferred to its appointee the title to the land, so that the entire management of the business contemplated by the contract was intrusted to the corporation itself. There is no rule of law that will preclude a corporation from entering into a contract with an individual, which will have the effect to carry out directly or indirectly the object of its incorporation, and to provide in that agreement that the gains or losses of the venture shall be borne equally by both parties. Section 354 of the Civil Code provides: “Every corporation, as such, has the power:...8. To enter into any obligations or contracts essential to the transaction of its ordi- nary affairs, or for the purposes of the corporation.” Nore. — Traffic agreements between railroad corporations to handle through business are not objectionable as making a partner- ship between the railroads. See Chicago & Alton R.R. Co. v. Mulford, 162 Ill. 522, 583; Najac v. Boston & Lowell R.R. Co., 7 All. (Mass.) 829. See also Hackett v. Multnomah Ry. Co., 12 Or. 124. SECT. 111.] DENNY HOTEL CO. v. SCHRAM. 409 SECTION 3. TO HOLD STOCK IN OTHER CORPORATIONS. DENNY HOTEL CO. v. SCHRAM. 6 Wash. 134. 1893. Dunzar, C.J. Can a corporation under the laws of this State » become an incorporator by subscribing for shares in another cor- poration? A corporation can only be formed in the manner provided by law and has only such powers as the law specifically confers upon it. We do not think that a corporation was within the contemplation of the legislature when they used the expression “two or more persons,” in § 1498, Gen. Stat. It is true that § 1709, Code Proc., provides that the term “person” may be construed to include the United States, this state, or any state or territory, or any public or private corporation, as well as an individual. But it does not follow, by any means, that the term “person” is always to be construed as a private corporation any more than it is always to be construed as the United States. oq ad omy Morawetz on Private Corporations, § 433, says: “A corporation cannot, in the absence of express statutory authority, become an “ificorporator by subscribing for shares in a new corporation; nor can it do this directly through persons acting as its agents or tools;”’ citing Central R-R. Co. v. Pennsylvama R.R. Co., 31 N.J. Eq. 475. The author, continuing, says: “The right of forming a corporation is - conferred by the incorporation laws only wu arsons acting in- dividually, and not up ations. = “This, 1 Seems to us, for maniiest and manifold reasons, is in ac- cordance with public policy; and we therefore decide that under the existing laws of this state one corporation cannot subscribe to the capital stock of another corporation. Nore. — See, accord, Knowles v. Sandercock, 107 Cal. 629, 642; Mechanics Association v. Meriden Agency Co., 24 Conn. 159; Franklin Co, v. Lewiston Institution for Savings, 68 Me. 43; Central R.R. Co. v. Pennsylvania R.R. Co., 31 N.J. Eq., 475, 494; Railway Co. v. Iron Co., 46 Ohio St. 44; McCampbell v. Fountain Head R.R. Co., 111 Tenn. 55, 67. 410 CENTRAL RAILROAD COMPANY ¥. COLLINS. [CHAP. I. CENTRAL RAILROAD COMPANY v. COLLINS. 40 Ga. 582. 1869. Tue Central Railroad and Banking Company was chartered to build and maintain a railroad oon Savannah to Macon, Its officers e Atlantic and Gulf Railroad Comal a company chartered to ~Duild a railroad from Savannah to Bainbridge, with intent to use the stock to affect the management of the Atlantic and Gulf Road. Cer- “tain stockholders of the Central Railroad and Banking Company _ «sought to restrain this, and alleged that such a purchase would be- ultra vires. The defense was that the Atlantic and Gulf Road was —so managing its affairs, in carrying freights at various rates from Bainbridge, as materially to injure the Central Railroad Company, and that the intent of the purchase was merely to enable the Central ~Railroad Company to protect itself; that it was, in truth, necessary for self-preservation, and that the power to make it was derivable from the expressly granted power to maintain its own road. —WsCay J. Butt is said that the power to purchase this stock is derivable from the power expressly given to “maintain the road;” that it is necessary for the self-preservation of the road, and arises by implication from the very purposes and objects for which the charter was granted. The basis of this argument is that it is neces- sary for the ‘maintaining’ of the Central Railroad, that it shall take a decided part in the ‘management and maintaining” of the Atlantic and Gulf Railroad, and as by the admitted rules of the com- mon law, a corporation may make all tontracts necessary, either directly or incidenmtaty,—to enable t+ creation, therefore it has the power to purchase enough of the stock ~ —of the Atlantic and Gulf Railroad to enable it to protect itself by controlling the unwise management of the Atlantic and Gulf Rail- road. The purposes of the charter of the Central Railroad are the “lay- ing, building and making” the road. The words of the charter do not in express terms include the “maintaining and sustaining” it, but we do not doubt they are included, since the “maintaining and sustaining ”’ are necessary to the very objects of the grant. But what does a grant to maintain and sustain a railroad include? Can it in any fair sense be construed to authorise the engaging in any enter- prise which will extend the business or lessen the rivalries of the company? If this be so, the whole doctrine so frequently and so emphatically stated in the books and decisions is a sham. The “maintaining and sustaining” of the road, has reference to keeping it in repairs, supplying it with machinery, and such like acts, and not to projects for extending its business, by schemes and enter- SECT. 111.] CENTRAL RAILROAD COMPANY 0. COLLINS. 411 prises not contemplated and expressed i in clear, unambiguous terms, by the charter itself. Every charter of a private corporation is a contract, first between the State and the corporation — to which each is solemnly bound — the State that 1t will not impair the obligation — the corporation —thattt-will perform the objects of its incorporation and keep within the powers granted to it: 4th Wheaton, 518; secondly, between the stockholders themselves. The stockholders are bound to consent to the management of the affairs of the corporation by the majority, and by the by-laws which that majority makes. And the whole, on ~the other hand, agreé with each other, that they will apply the funds ~of-the-companry—to-the-objects-und-purposes of the charter, and not _ otherwise: Young Vv. Harrison, 6 Ga. 130. Both as to the State and etween the corporators,.the law of this contract is the charter. The State has granted to it no rights, and the individual stockholders have clothed it with no rights, except such as are clearly and ex- pressly set down in the charter: 13 Penn. 133; 28 Penn. 352; 18 Howard, 341. Corporators are too apt to forget this fundamental law of their being. In the daily habit of transacting business, in the name of the company as though it were an individual, they are apt to slide into the notion that a corporation 7s an individual in all respects, so far as business matters are concerned. But a corporation is a mere creature of the law, and only exists at all, for the purposes declared in its charter, and has absolutely n powers but those which the law confers upon it. It is a creation of th law, and in the very nature of things is just what the law makes it, no more, no less; and by the word law here, I do not mean the gen- eral law which regulates the powers of persons, but the act of in- corporation, the charter, the constitution. There are certain general rulés which have, time out of mind, been adopted by the courts in their investigation of the powers of incorporations, that it may be well to notice. 1st. As a corporation is the mere creature of the act of incorporation, it has no other powers except such as are in said act expressly granted, or are necessary to effect the ends and objects of its existence. 2d. Charters being priv- ate acts, or rather contracts between the public and individuals, the charter is to be strictly construed, nothing is to be taken by intend- ment or inference. Being a creature of the law, it is made up of just such rights as its charter gives it; not that every power which it possesses must be granted in detail, but it is confined in its operations, to the objects and purposes expressly set forth in its charter, and it can undertake no other enterprise than is there expressly mentioned: Frederick et al. v. City Council of Augusta, 5 Ga. 561; Mayor, ete. v. Macon & W. BR.R. Co., 7 Ga. 221; 8 Ga. 23; 9 Ga. 213; Winter v. Mus. R.R., 11 Ga. 438. 412 CENTRAL RAILROAD COMPANY Jv. COLLINS. (CHAP. I. The books are full of decisions in illustration of these positions. In the case of the East Anglian Railroad Company v. Eastern Counties Railroad Company, 7 English Law and Equity Reports, 505, the charter was for the “ purpose of making and maintaining”’ a particu- lar railway. The company had leased another railway, and had covenanted to pay the costs of soliciting bills then pending in Parlia- ment, by which the other railway should have power to make exten- sions and branches, and the action was for a breach of the covenant to pay said costs. Jervis, Chief Justice, in deciding the case, says: “Tt is clear the defendants have a limited authority only, and are a corporation only for the purpose ‘of making and maintaining’ the railway sanctioned by the Act, and that their funds cannot be ap- plied for any other purpose than that directed by the act. Indeed, it is not contended that a company so constituted can engage in new trades not contemplated by their act, but it is said they may embark in other undertakings, however various, provided the object of the directors be to increase the profit of their own railway. This is in truth the same proposition in another form; if the company cannot carry on a new trade, because it is not contemplated by the act, they cannot embark in other undertakings not sanctioned by the act, merely because they hope the speculation may ultimately benefit the stockholders.” In Wood v. Greenville and Raleigh Plank Road Company, 3 Jones’ Equity (North Carolina Reports) 183, when a company was char- tered “to build a plank road from Greenville to Raleigh,” the court at the suit of a stockholder restrained the company from using the funds of the company to buy stages and horses, to establish a mail route over the road. In Coleman v. Eastern Counties Railway, 6 English Railroad Cases, 573, it was held that the directors of a company have no right to pledge the funds of the company in support of any project not pointed out by their charter, although such project may tend to increase the traffic upon the railway though a majority of the stock- holders may have consented and the object be not contrary to pub- lic policy. In the case of Solomons v. Lang, 14th Jurist for December, 1840, the company had power by its charter to “build and maintain” a railway. In a certain legal and legitimate. way, under the charter, the company became possessed of certain shares in another railway. Subsequently, it undertook to purchase other shares in the same com- pany. Lord Lanepauz, M.R., held that this was an unauthorized application of the funds of the company. This court in Mayor, etc. v. Macon and Western Railroad, 7 Ga. 221, held that it was not in the power of the Macon and Western Railroad, chartered to carry passengers, etc., from Macon to Atlanta, to undertake to transport produce through Macon, across the bridge, to the Central Railroad depot. SECT. 11.] CENTRAL RAILROAD COMPANY Jv. COLLINS. 413 In Merritt v. The Shrewsbury & Chester Railway, the company undertook to improve the navigation of the river Dee, upon which, by their charter, they had wharves and warehouses, and upon which also came much of the freight carried upon the road, but the court held such an undertaking ultra vires: 3 Eng. L. &. E.R. 149. In 16th English Law & Equity Reports, 180, it was held that a railroad company could not contract to pay the expenses of a managing com- mittee of a new railway company in application to Parliament for a charter. Seealso H.A.R.R. Co. v. The Eastern Counties Railway Co., 21 L. Rep. (N.8.) and the court say they are a corporation only for the purpose of making and maintaining the Eastern Counties Rail- way, and they cannot engage in a new trade. See, also, 10 Beavan, 1; 6 Railway Cases, 152; 43 N.H. 5115. These cases all proceed upon the well-established principle that a corporation has no~powers—except those expressly granted by its. _charter andsuch as are necessary to the declared objects of the grant, at_the charter is to be strictly construed, and that the capital ‘stock, credit and property of every kind, is to be used solely for the purposes and objects of the charter. So long as a company confines “itself within the “purposes and objects declared by the charter,” the courts will sustain it, but when it undertakes new and distinct enterprises not declared in the charter, under a pretence that they are in furtherance of the declared design, the courts will restrain them. The power to do acts and make contracts necessary to enable a cor- poration to answer the ends of its creation, like the express grants of power, is also to be strictly construed, and is limited by all the cases and by the general principles of all the books, with this qualification, that even for this purpose it cannot engage in any new and distinct enterprise, involving new risks to its stockholders, and not fairly within the terms of the original grant: 18th How. 341, 485; 2 Russ. & My. 480, 470; 4 Railway Cases, 492;7 Hare Chan. R. 114; 4 My. & Craig, 134; 1 Edwards, 84; 22 N.Y. 274; 13 Eng. Law and Equity, 513; 4 Russ. 562; 1 Black (U.S.) 449. The purchase of stock in an- other railroad company with intent to hold it, and especially, as is admitted by the answer in this case, with intent to use the power thus acquired to secure an interest in the management, either for good or evil, of the road, seems to come exactly within the principles which we have deduced from an unbroken series of decisions both in England and this country. If the Central Railroad Company may lawfully buy twelve thou- sand three hundred and eighty-three shares in this road, it may law- fully buy all the shares, become the owner of the road, and thus, without any grant from the State of Georgia, this company may have power to manage and maintain two railroads from Savannah to the interior of the State. Nay, the same principles precisely which would derive from its charter this power, would authorize it to be- 414 CENTRAL RAILROAD COMPANY v. COLLINS. [CHAP. I. come the owner of every railroad in the State, and of every other corporation and enterprise in the State, the management of which may in any way affect the interest of the Central Railroad Com- pany. We do not think the stockholders of the Central Railroad - Company, by their subscription, bound themselves to any-sueh in- detimite and unlimited enterprise. They contracted to give to the majority of the stockholders a control over their funds, for the pur- pose of making and keeping up and using a railroad from Savannah to-Wfacon, and the appropriations ot the-capital, or credit, or funds ofthe company in any other enterprise, against the consent of any of the stockholders, is a violation of the rights of those stockholders, and & Court of Equity will restrain the company from such an act. Note. — People v..Chicago Gas Trust Co., 130 Ill. 268. A cor- poration formed under a general law for the manufacture and sale of gas cannot clothe itself with:power to purchase and hold stock in similar corporations by naming this as one of its objects in the arti- cles filed with the Secretary of State. See also People v. Union Gas Co., 254 Ill. 395. Dunbar v. American Telephone Co., 224 Ill. 9. A domestic tele- phone company would not have had power to purchase a majority of the stock of a corporation, organized to manufacture and sell electric telephone and telegraph instruments, for the purpose of control; a foreign telephone company therefore has no power to make such a purchase in Illinois; and a purchase by trustees for the : foreign corporation is as objectionable as a purchase by the foreign corporation itself. See same case, 238 Ill. 456. Elkins v. Camden R.R. Co., 86 N.J. Eq. 5._It is ultra vires for a railroad to purchase a majority of the stock of a rival railroad. Pearson v. Concord Railroad, 62 N.H. 5387. It is ultra vires for a railroad to purchase stock in another railroad for the purpose of control. — Marble Co. v. Harvey, 92 Tenn. 115. A corporation engaged in the marble business has no power to puthase aod GF anther rmrhte _Sombany, for te-purpass of eontral._ ee also Louisville & Nashville R.R. Co. v. Kentucky, 161 U.S. 677, 698; De la Vergne Co. v. German Savings Institution, 175 U.S. 40, 51. In Attorney-General v. New York, New Haven, & Hartford R.R. Co., 198 Mass. 413, there was an express statutory provision that a railroad corporation should not (with specified exceptions) directly ue or indirectly subscribe for, take or hold the stock of any other cor- poration. SECT. u1.] CALIFORNIA BANK v. KENNEDY. 415 CALIFORNIA BANK v. KENNEDY. 167 U.S. 362. 1897. ONE question presented was whether a national bank has power | to own the stock of a savings bank. Mr- Justice Wuire. It is settled that the United States statutes relative to national banks constitute the measure of the authority of such corporations, and that they cannot rightfully exercise any powers except those expressly granted, or which are incidental to carrying on the business for which they are established. Logan County Bank v. Townsend, 139 U.S. 67, 73. No express power to acquire the stock of snother corporation is conferred upon a national — ank, but it has been held that, as incidental to the power to loan. money on personal security, a bank may in the usual course of doing: ‘such business accept stock of another corporation as collateral, and by the enforcement of itstights as pledgee it may become the owner “of the collateral and be subject to liability as other stockholders “National Bank -v-Case, 99 U.S. 628. So, also, a national bank may be conceded to possess the incidental power of accepting “stock of another corporation as security for a previous indebtedness. It is clear, however, that a national bank does not possess the power to deal in stocks. The prohibition is implied from the failure to grant the power. : : “Sr US- 1D, 128. On behalf of the plaintiff below it was admitted at the trial that the stock of the savings bank was not “taken as security or anything of the kind,” and it is not disputed in the argument at bar that the transaction by which this stock was placed in the name of the bank was one not in the course of the business of banking for which the bank was organized. Nors. — A national bank has to own the stock of an- other natisnal bank Comord Bank v. Hanbine 172 US. SCi. Or “of a mercantile corporation. Metropolitan Stock Exchange v. Lyn- donville Bank, 76 Vt. 303. __if a corporation has_powex to lend money, it hes power to take stock of other corporations as security. Calumet Paper Co. v. Stotts Investment Co., 96 Iowa, 147; Baldwin v. Canfield, 26 Minn. 43; West- minster Bank v. Electrical Works, 73 N.H. 465; In re Asiatic Bank- ing Corporation, L.R. 4 Ch. App. 252. Cf. Franklin Bank v. Com- mercial Bank, 36 Ohio, 350 (restrictive provision in act under which the banking corporation was organized). ' 0 416 JOINT STOCK DISCOUNT CO. v. BROWN. (CHAP. I. JOINT STOCK DISCOUNT CO. v. BROWN. L.R. 3 Eq. 139. 1866. THE memorandum relative to the incorporation of the Joint Stock Discount Company stated certain specific objects for which the com- pany was established, including the discounting of bills and notes; and then added: “and the doing of all such things as the directors shall consider incidental or conducive to the attainment of the above objects.” The directors invested funds of the company in the shares of a new banking company. Pace Woon, V.C. [After holding that such an investment did not come within the objects specifically stated in the memorandum]. Then as regards the second branch of the argument, which is this: that assuming this not to be within the clause for making advances and investing in securities, the directors are to do “all such things as they shall consider incidental or conducive to the attainment of the above objects’”’ — it appears to-me to be much too wide a con- struction of that clause to say, that if the transaction in question is not within the scope of the original terms there stated, it can be brought within the scope of doing that which is considered to be incidental to the attainment of the objects, the objects being to use money, by making it available in the shape of a return of interest, or of discount. How do they justify it in this resolution? They say, if we take all these shares in the bank, it will increase our connec- tions. What a prodigious extension I must give to those words in order to bring it within the power of the directors to do anything which they may consider conducive to the interests of the company by increasing its connections, however unconnected with the objects stated! I apprehend those powers must be exercised only for the purpose of doing something bond fide connected with the objects to de attained, and in the ordinary course of business adapted to their attainment. This was the only ground on which I proceeded in the case of Taunton v. Royal Insurance Company, 2H. & M. 135. There I found that the transaction impeached was in the ordinary course of business, and in the way in which other people conducted their busi- ness. In that case, if a large amount of advertisement, or of expendi- ture of money, had been found necessary, it would have been laid out properly; but to carry the principle on to any remote extension of the objects, on the ground that if shares were bought in this bank. there would be some control over the business of the discounting, would be, I apprehend, wholly unwarranted by the plainest rules of construction, which must limit the company’s powers to those trans- actions which are naturally conducive to the objects specified. If the principle were thus extended, it would apply to the buying shares in every sort of undertaking — a brewery, for instance, or any other SECT. u11.] PEOPLE v. PULLMAN CAR CO. 417 business where discounts might be of use. The company might be- come ship-builders, or might be engaged in any other business; they might buy a share in any general merchant’s business, because there would be bills in that business which would want discounting, and so they might get more business. Perhaps the case of Simpson v. Westminster Hotel Conan: 8 H.L.C. 712, which was taken to the House of Lords, may be con- sidered a strong application of the principle as to the extension of a company’s powers. But that case proceeded on this ground, that the company did bond fide intend to use the building as an hotel, but they said: ‘One of the greatest expenses of our hotel is the fur- nishing of it. With our capital we have not the means of furnishing the whole building, but we have the means of furnishing it in part, and of thus starting it directly. Our only alternative, consequently, is either to leave the building which we have erected wholly unpro- ductive, or to let it until we have got such a fund as will enable us to complete the furnishing.” Therefore it was let, and that the letting was not so very far from the objects of the company was shewn by this, that they inserted a stipulation for furnishing luncheons to the different clerks in the office. Everything tended to shew extreme bona fides in making use of that as a clear and definite means of get- ting at their object, and as the only means they had of making the hotel available, because it came to the alternative of leaving the property wholly unproductive, or of getting £5000 a-year for it, with the additional chance of supplying a certain amount of eating and drinking on the premises. In this case the proceeding is simply an embarking in a totally different business; it is not the buying shares for the purpose of sell- ing them again, or for investment, or anything of that kind, but it is buying shares for the purpose of enlarging the particular business which the company have to conduct. I think that it is clear that the bill must be answered, and the demurrer must be overruled, with costs. Norte. — See, accord, New Orleans Steamship Co. v. Ocean Dry Dock Co., 28 La. Ann. 173; Railway Co. v. Iron Co., 46 Ohio, 44; McCampbell v. Fountain Head R.R. Co., 111 Tenn. 55. PEOPLE v. PULLMAN CAR CO. 175 Ill. 125, 1898. Srctton 4 of the act in corporating the Pullman Car Co. was as follows: “The said corporation shall have power to manufacture, construct and purchase railway cars, with all convenient appendages, 418 STATE v. MISSOURI PACIFIC RY. CO. [cHAP. I. and supplies for persons travelling therein, and the same may sell or use, or permit to be used, in such manner and upon such terms as the said company may think fit and proper.” Mr. Justice Boaes. The pleas admit the appellee company has purchased and holds a majority of the shares of the capital stock of the Pullman Iron and Steel Company, and avers further that said Pullman Iron and Steel Company was never a competitor in business with defendant; that its products constitute a necessary part of the material required in the construction of the cars manufactured by defendant; that all its product is used and consumed by said defend- ant, and that the said corporation is, in effect, a mere department of defendant in its car manufacturing business, although existing nom- inally as an independent corporation. The right and power of a cor- poration to become a stockholder in another corporation was pre- sented to this court for determination in the case of People v. Chicago Gas Trust Co., 130 Ill. 268, and the conclusion arrived at was, that 2 corporation cannot become-a-stockholder in another corporation untess power to do so is specifically granted in its charter or neces- sarily implied from it. The conclusion there announced _is the pre- company had power to purchase the shares. The result of the judgment in the Court below is certainly somewhat startling. The creditors of the company which is being wound up, who have a right to look to the paid-up capital as the fund out of which their debts are to be dis- charged, find coming into competition with them persons who, in respect only of their having been, and having ceased to be, share- holders in the company, claim that the company shall pay to them a part of that capital. The memorandum of association, it is ad- mitted, does not authorize the purchase by the company of its own shares. It states, as the objects for which the company is established, the acquiring certain manufacturing businesses and the undertaking and carrying on the businesses so acquired, and any other business 440 TREVOR V. WHITWORTH. [CHAP. I. and transaction which the company consider to be in any way auxiliary thereto, or proper to be carried on in connection therewith. It cannot be questioned, since the case of Ashbury Railway Car- riage and Iron Company v. Riche, Law Rep. 7 H.L. 653, that a com- pany cannot employ its funds for the purpose of any transactions which do not come within the objects specified in the memorandum, and that a company cannot by its articles of association extend its power in this respect. These propositions are not apd could not be impeached in the judgments of the Court of Appeal, but it is said to be settled by authority, that although a company could not, under such a memorandum as the present, by articles authorize a trafficking in its own shares, it might authorize the board to buy its shares “whenever they thought it desirable for the purposes of the com- pany,” or “‘in cases where it was incidental to the legitimate objects of the company that it should do so.”” The former is Lord Justice Corton’s expression; the latter that of Lord Justice BowzEn. I will first consider the question apart from authority, and then examine the decisions relied on. The Companies Act 1862 requires (§ 8) that in the case of a com- pany where the liability of the shareholders is limited, the memoran- dum shall contain the amount of the capital with which the com- pany proposes to be registered, divided into shares of a certain fixed amount; and provides (§ 12) that such a company may increase its capital and divide it into shares of larger amount than the existing shares, or convert its paid-up shares into stock, but that “save as aforesaid, no alteration shall be made by any company in the con- ditions contained in its memorandum of association.” What is the meaning of the distinction thus drawn between a com- pany without limit on the liability of its members and a company where the liability is limited, but, in the latter case, to assure to those dealing with the company that the whole of the subscribed capital, unless diminished by expenditure upon the objects defined by the memorandum, shall remain available for the discharge of its lia- bilities? The capital may, no doubt, be diminished by expenditure upon and reasonably incidental to all the objects specified. A part of it may be lost in carrying on the business operations authorized. Of this all persons trusting the company are aware, and take the risk. But I think they have a right to rely, and were intended by the Legislature to have a right to rely, on the capital remaining undi- minished by any expenditure outside these limits, or by the return of any part of it to the shareholders. Experience appears to have shewn that circumstances might occur in which a reduction of the capital would be expedient. Accordingly, by the Act of 1867 provision was made enabling a company under strictly defined conditions to reduce its capital. Nothing can be stronger than these carefully-worded provisions to shew how incon- SECT. Iv.] TREVOR UV. WHITWORTH. .” 441 sistent with the very constitution of a joint-stock company, with limited liability, the right to reduce its capital was considered to be. Let me now invite your Lordships’ attention to the facts of the present case. The company had purchased, prior to the date of the liquidation, no less than 4142 of its own shares; that is to say, con- siderably more than a fourth of the paid-up capital of the company had been either paid, or contracted to be paid, to shareholders, in consideration only of their ceasing to be so. I am quite unable to see how this expenditure was incurred in respect_of or as incidental to any of the objects specified in the memorandum. And, if not, I have a difticulty in seeing how it can be justified. If the claim under consideration can be supported, the result would seem to be this, that the whole of the shareholders, with the exception of those hold- ing seven individual shares, might now be claiming payment of the sums paid upon their shares as against the creditors, who had aright ~ to look to the moneys subscribed as the source out of which the com- pan, J be met. And the stringent pre- _ cautions to prevent the reduction of the-capital of a_limited_com- -pany, without due notice and_judicial sanction, would be idle if the company might purchase its own shares wholesale, and so efféct the~- desired result. I do not think it was disputed that a company could — “not enter upon such a transaction for the purpose of reducing its capital, but it was suggested that it might do so if that were not the object, but it was considered for some other reason desirable in the interest of the company to do so. To the creditor, whose interests, I think, §§ 8 and 12 of the Companies Act were intended to protect, it makes no difference what the object of the purchase is. The result to him is the same. .The shareholders receive back th b- scribed, and there pase Toth pokcts wha Pelee esti the orm Of cash in the co i achin or stock available to meet the demands of the Greditors. What was the reason which induced the company in the present case to purchase its shares? If it was that they might sell them again, this would be a trafficking in the shares, and clearly unauthorized. If it was to retain them, this would be to my mind an indirect method of reducing the capital of the company. The only suggestion of another motive (and it seems to me to be a suggestion unsupported by proof) is that this was intended to be a family company, and that the directors wanted to keep the shares as much as possible in the hands of those who were partners, or who were interested in the old firm, or of those persons whom the directors thought they would like to be amongst this small number of shareholders. I cannot think that the employment of the company’s money in the purchase of shares for any such purpose was legitimate. The business of the com- pany was that of manufacturers of flannel. In what sense was the 442 COPPIN v. GREENLEES & RANSOM CO. (CHAP. I. expenditure of the company’s money in this way incidental to the carrying on of such a business, or how could it secure the end of enabling the business to be more profitably or satisfactorily carried on? I can quite understand that the directors of a company may sometimes desire that the shareholders should not be numerous, and ~ that they should be persons likely to leave them with a free hand to carry on their operations. But I think 1t would be mos gerdus to countenance the view that, for reasons such as these, they could legitimately expend the moneys of the company to any extent they "please in the purchase of its shares. No doubt if certain shareholders are disposed to hamper the proceedings of the company, and-are willing to sell their shares, they may be bought out; but this must be done by persons, existing shareholders or others, who can be induced to purchase-the shares, and not out of the funds of the company. enw COPPIN ». GREENLEES & RANSOM CO. 38 Ohio St. 275. 1882. TuHE original action was brought by William Coppin, plaintiff in error, against The Greenlees & Ransom Company, defendant in error, in the court of common pleas of Hamilton county, and the cause of action was thus stated in the petition: “The plaintiff states that the defendant is and for several years * past has been a corporation, duly incorporated under the laws of the state of Ohio, for manufacturing purposes. “That it has been the custom of said corporation that its officers and others, actively engaged in its service, should be holders of shares of its stock, and upon ceasing to be connected with said com- pany, such persons have been accustomed to sell, and said company to buy their said stock. “That the plaintiff was formerly in the employ of said company as a workman, and that while so engaged he became the holder of shares of the capital.stock of said company to the amount, at its par value, of $3300. “That having ceased to work for said company, he sought a pur- chaser for said stock, and offered to sell the same to the defendant for two lots of land, hereinafter described, valued respectively at $1100 and $700, and the balance of $1500 in manufactured work to be made by the defendant, at ten per cent. off their bill of prices, to which the defendant assented and agreed, and to carry the same into effect the plaintiff on May 28, 1875, caused to be prepared a written contract, which the defendant then duly executed and delivered to the plain- . tiff, of which the following is a copy: SECT. Iv.] OGPPIN v. GREENLEES & RANSOM CO. 443 ““CINCINNATI, May 28, 1875. ““For and in consideration of thirty-three shares of the capital stock in the Greenlees & Ransom Company, the receipt whereof is hereby acknowledged, said Greenlees & Ransom Company promise to pay, or cause to be paid, to William Coppin the sum of three thousand three hundred dollars, payable, viz: said Coppen to take a lot of ground, No. 46 on the plat of the Wyoming Land and Build- ing Co.’s subdivision of the Burn’s farm, Wyoming, Ohio, in part payment, amounting to $1100.00; also a lot of ground on the north side of Wyoming avenue owned by Caruthers, and next to Mr. Beeson’s house, fifty feet front by two hundred and forty-five feet deep, more or less, for the sum of $700.00; leaving a balance of $1500.00 to be paid in manufactured work, joist, scantling, etc., the manufactured werk at ten per cent. off their bill of prices; the other material at the usual rates; the work and material to be delivered from time to time to him as said Coppin may order it. ““GREENLEES & Ransom Company. ““By E. P. Ransom, President.’ “And the plaintiff says that afterwards, in the month of June, 1875, he tendered said shares of stock to the defendant, and offered to ieancter the same to it, and demanded performance of said con- tract; but the defendant refused to accept the same, and refused to convey said lots, or either of them, or to deliver said manufactured goods, although the plaintiff then demanded the same. “Wherefore he now brings said stock into court, and offers to transfer the same to the defendant, and prays that the defendant may be compelled to convey said lots by a perfect title, and to de- liver said goods, and for such other and further relief as in equity and good conscience he may prove to be entitled to.” * McIlvaine, J. Whether the defendant corporation was bound by its executory agreement with the plaintiff to purchase shares of its own stock, under the circumstances detailed in the petition, was, undoubtedly, the question upon which the case turned in the dis- trict court. The power of a trading corporation to traffic in its own stock, where no authority to do so is conferred upon it by the terms of its charter, has been a subject of much discussion in the courts; and the conclusions reached by different courts have been conflicting. Of course, cases, wherein the power is found to exist by express or im- plied grant in the charter, furnish no aid in the solution of the ques- tion before us; unless the claim of the plaintiff can be sustained, that such power was conferred on the defendant by § 63 of the Corpora- tion Act of 1852 (8. & C. 301), as amended, which confers on manu- facturing corporations the powers enumerated in § 3 of the act, and, among others, the power ‘‘to acquire and convey, at pleasure, all such real and personal estate as may be necessary or convenient to 444 COPPIN 0. GREENLEES & RANSOM CO. [CHAP. I. carry into effect the objects of the corporation.” We think, however, ‘that this claim cannot be maintained. The sole object of the de- fendant organization was “for manufacturing purposes;’’ and it cannot be said, in any just sense, that the power to acquire or con- vey its own stock was either necessary or convenient ‘“‘for manu- facturing purposes.” The doctrine that corporations, when not prohibited by their charters, may buy and sell their own stocks, is supported by a line of authorities; and, prominent among them, may be mentioned the cases of Dupee v. Boston Water Power Co., 114 Mass. 37, and C. P. and S. R.R. Co. v. Marsailles, 84 Ill. 145. But nevertheless, we think the decided weight of authority both in England and in the United States, is against the existence of the power unless conferred by ex- press grant or clear implication. The foundation principle, upon which these latter cases rest, is that a corporation possesses no powers except such as are conferred upon it by its charter, either by . express grant or necessary implication; and this principle has been frequently declared by the supreme court of this state; and by no court more emphatically than by this court. It is true, however, that in most jurisdictions, where the right of a corporation to traffic in its own stock has been denied, an exception to the rule has been admitted to exist, whereby a corporation has been allowed to take its own stock in satisfaction of a debt due to it. This exception is ‘supposed to rest on a necessity which arises in order to avoid loss; and was recognized in this state as early as Taylor v. Miami Export- ing Co. 6 Ohio, 176, and has been incidentally referred to as an exist- ing right since the adoption of our present constitution. State v. Building Association, 35 Ohio St. 258. But, however that may be, the right of a corporation to traffic in its own stock, at pleasure, appears to us to be inconsistent with the principle of the provisions of the present constitution, art. 18, § 3, which reads as follows: ‘Dues from corporations shall be secured by such individual liability of stockholders, and other means, as may be prescribed by law; but, in all cases, each stockholder shall be liable, over and above the stock by him or her owned, and any amount unpaid thereon, to a further sum, at least equal in amount to such stock.” Now, it is just as plain, that a business or trading cor- poration cannot exist without stock and stockholders, as it is that the creditors of such corporations are entitled to the security named in the constitution. State ex rel. Att’y-Gen. v. Sherman, 22 Ohio St. 411. The corporation itself cannot be a stockholder of its.own stock within the meaning of this provision of the constitution. Nobody will deny this proposition. And if a corporation can buy one share of its stock at pleasure, why may it not buy every share? If the right of a cor- poration to purchase its own stock at pleasure, exists and is un- limited, where is the provision intended for the benefit of creditors? SECT. Iv.] COPPIN v. GREENLEES & RANSOM CO. 445 This is not the security to which the constitution invites the credi- tors of corporations. I am aware, that the amount of stock required to be issued is not fixed by the constitution or by statute, and also that provision is made by statute for the reduction of the capital stock of corporations; but of these matters, creditors are bound to take notice. They have a right, however, to assume that stock once issued, and not called back in the manner provided by law, remains outstanding in the hands of stockholders liable to respond to creditors to the extent of the individual tability prescribed.“in this view it —matters riot whether the stock purchased by the corporation that issued it, becomes extinct, or is held subject to he re-issued. It is + enough to know that the corporation, as purchaser of its own stock, | does not afford to creditors the security mtended. And surely, if the “Taw Torbids the organization of a corporation without stock, because the required security is not furnished, it cannot be, that having brought the corporation into existence, it invests it with power to assume, at pleasure, the identical character or relation to the public, that was an insurmountable objection to the giving of corporate existence in the first place. Plaintiff in error lays much stress on the averments in the petition, that it had been the custom of the corporation that its officers and others, actively engaged in its service, should be holders of shares of its stock, and upon ceasing to be connected with the company, such persons had been accustomed to sell, and the company to buy such stock; and that the plaintiff had purchased the stock for the price of which suit was brought while in the employment of defendant. We cannot see why these averments should take the case out of the general rule. If it were averred that the plaintiff had purchased this stock from the defendant, or from others, under an agreement with the com- pany that it buy the same from him when he quit its employment, or if the contract of purchase by the defendant had been executed, very different questions would arise. It is not even averred, that the plaintiff relied upon such custom either in making the purchase, or the sale, of the stock; so that, in fact, he is unaffected by the alleged custom. But if such custom had been relied on by the plaintiff when he purchased the stock, it would not have made the executory contract of the defendant to buy the stock binding, which, without such custom, would be void. The usage of a corporation does not become the law of its existence, or the measure of its powers. The general law of the state, of which all per- sons are presumed to have knowledge, is the source and limit of all its powers and duties; and these cannot be varied either by usage or contract. The doctrine of estoppel has no application in the case. Nor is there any such equity in the case, as would have arisen be- tween the parties in case the contract had been executed. Judgment affirmed. 446 CLAPP Uv. PETERSON. [CHAP. I. Nore. — See also Vercoutere v. Golden State Co., 116 Cal. 410; Crandall v. Lincoln, 52 Conn. 73, 99; Abeles v. Cochran, 22 Kan, 405, 411 (cf. Salt Co. v. Barber, 58 Kan. 419); Schaun v. Brandt, 116 Md. 560; Herring v. Ruskin Co-op. Ass’n, 52 $-W, (Tenn.) 327. CLAPP »v. PETERSAN. 104 Ill. 26. 1882. Mr. Justice SHEetpon delivered the opinion of the court: By the will of her step-son, P. W. Bonner, who died in July, 1870, appellee, Georgie H. Peterson, a resident of the State of New York, became owfier of all personal property left by said Bonner, and in. September, 1870, on application made to her in New York, she sold " all said property to the Illinois Land and Loan Company. On No- vember 20, 1874,.she filed her bill against said company to set aside such sale, and for other relief in respect thereto, on the ground that she had been induced _to make the sale through the fraudulent mis- representations of the company, for an inadequate consideration, and onMay I, 1877, she obtained in the suit_a money decree against _jhe company, for Sa0h.23. An execution issued upon the decree aving been returned nulla bona, Mrs. Peterson, on September 18, 1879, filed her bill in chancery in the present_case, to subject prop- erty in the hands of : to the payment of this decree. A decree was entered in her favor granting the relief sought, which, on appeal to the Appellate Court for the First District, was affirmed, and the present appeal taken to this court. It appears that the Ilinois Land and Loan Company was char- tered by an act of the legislature in 1867, with a capital stock of ~ $100,000, with 1000 shares, of $100 each, all of which was paid: in. Caleb Clapp, a non-resident of the State, was a stockholder in the company, and in January, 1874, he surrendered to the company 555_ shares of stock, in consideration of which the company executed to “him 2 deed of-warranty of two lots in Chicago, one of the value of — $00,000, and the other of the value of $5500, that amount being the _ consideration stated in the deed. The stock was canceled, and was considered, at the time, of par value. Mr. till his death, and his estate still is, the owner of the lots. It is these “Tots which are sought to be subjected to the payment of said money decree against the company. The legal principle which appellants’ counsel lays down and in- sists upon as applying to the case, is, that corporations may pur- chase their own stock in exchange for money or other property, and hold, re-issue or retire the same, provided such act is had in entire good faith, is an exchange of equal value, and is free from all fraud, SECT. Iv.] CLAPP v. PETERSON. 447 actual or constructive, this implying that the corporation is neither insolvent nor in process of dissolution. We think there must be added to the proposition the further condition that the rights of creditors are not affected. corporation has the power to purchase its own stock, seems well enough settled, and was asserted by this court in Chicago, Pekin and outhwestern R.R. Co. v. Marseilles, 84 Ill. 643. Yet, in so holding there, the qualification was added, that, in equity, the transaction might be impeached if it operated to the injury of creditors. V We see see nothing to show that the transaction in the present case was not in good faith, that there was any element of fraud about it, or that there was anything 1 in the apparent condition of the company to interfere “with the making of the exchange that was had. It is only as injuri- ously affecting the interests of creditors, we think, that the trans- action can be questioned, and it is in that view that it must be con- sidered and passed upon. = © 870 > Be om Pitre] In Sanger v. Upton, 91 U.S. 60, it is laid down: “The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is a substitute for the. personal liability which subsists in private. co-partnerships. When debts are incurred a contract arises with the creditors that it shall not be withdrawn or applied, otherwise than upon their demands, until such demands are satisfied. The creditors have a lien upon it in equity. If diverted, they may follow it as far as it can be traced, and subject it to the payment of their claims, except as against holders who have taken it bona fide for a valuable consideration and without notice. It is publicly pledged to those who deal with the corporation for their security.” This doctrine is abundantly established by the authorities. 2 Story’s Equity Jur. § 1252; Wood v. Dummer, 3 Mason, 308; Spear v. Grant, 15 Mass. 505; Curran v. Arkansas, 15 How. 304; Bartlett v. Drew, 57 N.Y. 587. The shareholders of a corporation are conclusively charged with notice of the trust character. which attaches to its capital stock. As to it they can not occupy the status of innocent purchasers, but they are to all intents and purposes privies to the trust. When, therefore, they have in their _h any of this trust fund, they hold it cum’ onere, subject to all the equities which attach to it. Thompson’s Liability of Stockholders, § 13; Wood v. Dummer, 3 Mason, 312. It is objected, against the principles above stated, that the cases in which they were declared were where there was actual or con- structive fraud or unfairness, where the corporations were insolvent, or in process of being wound up. The question naturally would arise mostly in such circumstances, but the principles enunciated are general in scope, following from the nature of the capital stock of corporations, and the relation of a stockholder to the corporation, 448 CLAPP Jv. PETERSON. (CHAP. I. and we know of no limitation of their application as above suggested, or reason for denial of their full applicability to the present case. Indeed, we do not understand appellants’ counsel as asserting the validity of the purchase, or reduction by a corporation of its stock, where it should cirectly appear that it was an injury to its creditors. But it is denied that there was any such injury in this case. It is said, first, the company actually owed no one at the time, and even if it did, as the bill admits that the shares at the time of the exchange were valued at par, and worth full purported value, it follows from the stock being worth its par value, as a matter of course, that the company was then entirely solvent, and had assets sufficient to dis- charge all its debts, if it had any debts, and also to pay the stock in full, — that under no other circumstances could the admission of the bill be true. There was no proof as to the condition of the com- pany, or the value of the stock, save the testimony of the secretary of the company that at the time of the deed to Clapp the stock in the company was at par value technically, — that he did not know what the market value was, and did not know that it had any market value. The admission of the bill was the simple fact that the stock was at par. The complainant, of course, knew nothing as to what made the stock at par. But if the stock was at par, in so rating it this indebtedness to appellee could not have been taken into ac- count. It was supposed, of course, the purchase of personal property, which had been made of appellee, would stand, and that there was no liability on account of it the stock was just at par, not considering appellee’s claim with that claim recognized, the assets would have failed to pay the indebtedness of the company by the amount of her claim, to-wit, $5653.33, and to that amount the com- pany was insolvent. eee ee ——Tris insisted that this exchange of corporate property for stock was unassailable by any one, because it was an exchange of equal values — the lots being worth $55,500, and the shares of stock being worth $55,500, there was equal value received, and there could be harm to no one. This can not be so, as respects creditors. Suppose all the remaining property of the company had been one other lot worth $44,500, and the company had made a like exchange with another ‘stockholder of that lot for the remaining 445 shares of stock, and canceled the stock, what would there have been left to pay creditors? The partial exchange which was made affected the rights of credi- tors in a like way, only to a less extent. It is not as if there had been an exchange made with Clapp of these lots for other real property of equal value, or as if there had been a sale to him for $55,000 in oney. itute would have been furnished to the company to which creditors might have had-recourse for payment. of. their debts. But the exchange of corporate property for shares of ~stock, and canceling the stock, furnishes no equivalent for creditors. SECT. Iv.] DUPEE v. BOSTON WATER POWER CO. 449 Although the money decree in favor of appellee was not obtained until in 1877, some time after Clapp’s purchase, yet the cause of action of appellee against the company (the fraudulent purchase of the personal property from her) arose in September, 1870, which was before the purchase by Clapp, that being in January, 1874, so that at the time of Clapp’s purchase appellee must be regarded as being a creditor of the company. We can but regard the transaction in question, of the exchange of stock for the lots and the cancellation of the stock, as a withdrawal by the stockholder of his share of the capital stock, leaving appellee’s debt against the company unpaid; that the transaction was to the injury of appellee as a creditor; that the property taken by Clapp stood charged with a trust for the payment of appellee’s claim; that Clapp can not be held to be an innocent purchaser, and that the the property in his hands is affected with the trust, and appellee may pursue the property and subject it to the satisfaction of her debt. Norte. — See, accord, Hall v. Henderson, 126 Ala. 449, 481; Copper Belle Mining Co. v. Costello, 12 Ariz. 318; Oliver v. Rahway Ice Co., 64 N.J. Eq. 596. A fortiori, the purchase is improper if at the time the corporation is insolvent in the sense that it has not assets equal to its liabilities, excluding its capital stock as a liability; or if it was in grave danger of becoming insolvent in this sense. Tiger v. Rogers Cotton Cleaner Co., 96 Ark. 1; German Savings Bank v. Wulfekuhler, 19 Kan. 60; Pender v. Speight, 159 N.C. 612; Adams Co. v. Deyette, 8 S.D. 119. Where the property of a corporation is in the hands of a receiver, a claim against the corporation for the price of stock sold to it may be deferred to the claims of other creditors. Van Brocklin v. Queen City Printing Co., 19 Wash. 552. DUPEE v. BOSTON WATER POWER CO. 114 Mass. 37. 1873. _ Butt in equity by minority stockholders in defendant corpora- tion, to-restrain the corporation from selling Jand and receiving its own stock in payment. “Goor, 7 At an annial mecting of the defendant corporation it was voted that the directors be authorized, “if in their judgment the —interest of the company will be thereby promoted, to receive in-part payment for the land of the company hereafter to be sold, the stock —~of the company, af such price for the land and the sae f the company, at such price for the land and the as may be Seemed for the intsredt atthe stockholders Under this authority © directors advertised a number of lots belonging to the-corpere- 450 DUPEE ¥. BOSTON WATER POWER CO. [CHAP. I. tion to be sold at public auction, and paid for, at the option of the purchaser, one halfin cash, and one half in the.stock of the corpora- “tion at a price named. There is no other action of the corporation or its directors, past or contemplated, relied on to support the bill. The prayer is that the defendants be enjoined and restrained from selling the company’s lands by auction, or otherwise, in the mode proposed. . There is nothing in this vote of the corporation, or in the action of the directors, which amounts to a reduction of capital, or will amount to it, if the proposed sales take place. That must depend on future corporate action. The answer denies that the sale pro- posed would be an improper and illegal reduction of capital, and the allegation in the bill that the plaintiffs are otherwise advised, as well as the further statement in the answer, that it has always been the policy of the company to reduce its capital in proportion to its sales, becomes immaterial. It is unnecessary, therefore, to consider the question somewhat discussed, whether, under St. 1870, chap. 224, § 24, this corporation could reduce its capital at any meeting not specially called for that purpose. t The corporation was chartered by the St. of 1824, chap. 26, with power to purchase and hold any quantity of water power created by the establishment of the dams between Roxbury and Boston, to make canals and raceways, erect buildings and fixtures, and to hold real estate not exceeding $300,000 at the time of its purchase, and personal property not exceeding $100,000. There are no limitations upon the amount of its capital stock, but the corporation had the right to make unlimited expenditures in the construction of its works necessary for the appropriation and use of the water power required under its charter, and the power to determine the amount of capital stock required to meet these expenses is left to the corporation it- self. Additional acts, subsequently passed, authorize the company to hold_additional real estate, but the terms of the original incor- poration are not materially changed in other respects. a als | oe ts Somerton tim a sais of tha lands of She torporation in the Es € proposed would be a breach of trust. This depends upon the question whether a sale on such terms is by reasonable implication [em rt T powers of Such 4 corporation. It is not enough at the proposed action may be shown to be prejudicial to the gen= eral corporate interests, if it is not illegal, and if it equally affects all the corporators. Regard must be had to the peculiar situation of the property. The increase of population since the original act of incor- poration has given greatly increased value to the lands acquired by the company. The business of the company can no longer be pro- fitably confined to the development and use of its water privileges. It has, by contract with the Commonwealth, the city, and other owners of lands, extinguished its water power, and now owns in- * sEcr. Iv.] MARVIN 0. ANDERSON, 451 stead thereof extensive and valuable tracts of lands, over which it had originally only the right to flow. This change in its business has made it necessary to fill in and improve the tit might be made available as assets of the company, and this necessity has been recognized by a resolve of the legislature authorizing an increase of capital for that purpose. Res. 1856, chap. 76. There is nothing in the general laws of the Commonwealth, or in the company’s charter, which forbids the sale proposed. The power to purchase and hold implies the power to sell, and to sell upon such terms as to secure the highest price. The whole capital is now rep- resented by these lands, from the sale, and not from the income or use, of which the shareholders must derive their return. In the ab- _Sence of legislative provision to the contrary, a. corporation may hold_ and sell its own stock, an pledge or_in payment. _in the lawful exercise of its corporate powers. Leland v. Hayden, “02 Mass. 542. American Railway-Frog Co. v. Haven, 101 Mass. 398. Nesmith v. Washington Bank, 6 Pick. 324, 329. Coleman v. Columbia Oil Co., 51 Penn. State, 74. City Bank of Columbus v. Bruce, 17 N.Y. 507. Ex parte Holmes, 5 Cowen, 426. We cannot _see that the rights of any of the stockholders will be _illegally prejudiced by the proposed receipt yt of the shares in payment “Tor its land. Norte. — See also Republic Life Ins. Co. v. Swigert, 135 Ill. 150; West v. Averill Grocery Co., 109 Iowa, 488; Cole v. Cole Realty Co., 169 Mich. 347; Forrest v. Nebraska’ Hardware Co., 91 Neb. 735; Chapman v. Iron Clad Co., 62 N.J.L. 497; San Antonio Hardware Co. v. Sanger, 151 8.W. (Tex. Civ. App.) 1104; United States Mineral Co. v. Camden, 106 Va. 663; Shoemaker v. Washburn Lumber Co., 97 Wis. 585. Of course the purchase must not be made under such circumstances that it is unfair to olders, — as by undervaluing the assets of the corporation given in exchange. See Woodroof v. Howes, 88 Cal. 184; Price v. Pine Mountain Co., 32 8.W. (Ky.) 267. MARVIN »v. ANDERSON. wd 111 Wis. 387. 1901. Action by the trustee in bankruptcy of the property of the Badger Cycle Company to set aside a deed, given by the bankrupt some time before the commencement of the bankruptcy proceedings, upon the ground that it was fraudulent as to the creditors and stockholders of the corporation. The court decided as matters of fact as follows: On October 22, 1897, the day when the deed was given to de- 452 MARVIN v. ANDERSON. [CHAP. I. fendant Louis Anderson, he was and for some time prior thereto had been a stockholder of the corporation, possessed of five out of the fifty shares of its capital stock, each share being of the par value of $100, and was also a director of the corporation and the foreman of its business. At such time the corporation was indebted to its stock- holders in the sum of $1,573, $803 of which was due to Anderson for labor and services; was also indebted to outside parties in the sum of $5,444.32; and possessed property of the value of from nine to ten thousand dollars, being solvent and in every respect a going cor- poration. Anderson, upon the advice of his physician, decided to discontinue his work for the corporation, and thereupon requested it to pay him the amount due for his services. It being difficult for the corporation to comply with such request by paying Anderson in money, the parties agreed, without any formal action by the di- rectors as a board or by the stockholders, but upon their individual consideration and determination, that plaintiff should release his claim against the corporation and transfer to it his five shares of | capital stock, and receive therefor the real estate in question, which was of the value of $850 and was not used in the corporate busi- ness, four bicycles of the value of $20 each, and $225 in money, which agreement was fully consummated. All the stockholders and directors had knowledge of and fully acquiesced in the entire trans- action, and after it occurred treated it as valid till after the com- mencement of the proceedings in bankruptcy nearly two years sub- sequent to the making of the deed. Aside from claims of stockholders of the corporation who acquiesced in the transaction in question, the only claim proved in bankruptcy which existed at the time of such transaction was a small one in favor of one Comstock, which, prior to the commencement of this action, was fully paid. After the making of the deed and before its validity was in any way called in question, Anderson mortgaged the land to defendant John Gilbert to secure the payment of a loan of $200. Marsnatt, J. If the Badger Cycle Company was solvent at the time of the transaction in question, the main.contention by counsel for appellant, that the judgment appealed from is wrong, fails. The trial court decided that question in the affirmative because the prop- erty of the corporation, at a fair valuation, exceeded to a consider- able extent its debts. Appellant’s counsel say that was not the proper rule to be applied. The conclusive answer thereto is that the trial court followed the law as it has been laid down by this court. Hamii- ton v. Menominee Falls Q. Co., 106 Wis. 352; Shaw v. Gilbert, 111 Wis. 165. Counsel makes the common mistake of failing to distinguish between the meaning of the term “insolvent,” as the subject of in- solvency is dealt with by insolvent and bankrupt laws, and the gen- eral meaning thereof. The former is inability of a person to pay his debts as they mature in the ordinary course of business; the latter SECT. Iv.] MARVIN v. ANDERSON. 453 is a substantial excess of a person’s liabilities over the fair cash value of his property. The former does not militate against a debtor cor- poration dealing with its property as it sees fit; while the latter, in case of a corporation, if it is on the verge of collapse or has suspended payment — is in a condition, as the books say, to be rightfully con- sidered, so far as capacity to do business is concerned, civilly dead — is held to impress upon its property a trust for the benefit of its creditors. Hing v. Van Dusen, 95 Wis. 503; Shoemaker v. Washburn L. Co., 97 Wis. 585; Graham v. Railroad Co., 102 U.S. 148; Slack v. N.W. Nat. Bank, 103 Wis. 57; Hamilton v. Menominee Falls Q. Co., supra. The further question is. presented of whether the corporation was justified, as to its creditors or stockholders, in purchasing its own stock and parting with corporate property in payment therefor. There is no impediment in the way of a solvent corporation, having power to purchase and sell and convey property and not prohibited by its constitution or any statute, from buying in its own stock. ‘This court has several times passed upon that question. Shoemaker v. Washburn L. Co., supra; Calteaux v. Mueller, 102 Wis. 525. It was held in the last case cited that such rule could not be invoked to justify an officer of a corporation, without special authority, in buy- ing in its capital stock in its name, but that situation does not apply in this case, since all the stockholders of the cycle company knew of and individually considered and approved the transaction in question before it occurred, and thereafter, so long as the corporation existed as a business institution, a period of some two years, acquiesced in it. If under any circumstances the sale of land to respondent could be impeached on the ground of fraud or want of power in the cor- poration to make the sale, appellant has no standing in court to do so, since all the stockholders are estopped by their conduct from complaining, and the receiver, as the representative of the corpora- tion, has no better right in their behalf. Further, there is no indebt- edness to any nonstockholder of the corporation which existed at the time the transaction took place. Shoemaker v. Washburn L. Co., supra; Graham v. Railroad Co., supra. Here again counsel seem to have fallen into a common error, that of not keeping in mind that the rule under which, in any case, the property of a corporation is deemed a trust fund for creditors and stockholders, or either, is wholly a creation of courts of equity, and that only those have equit- able rights in a fund at the time of its depletion who have then a right to resort to such fund to satisfy their claims. Creditors of a corpora- tion are not presumed to have relied upon property of their debtor which it did not possess when the indebtedness accrued, and there- fore are not held to have any equitable claim thereon. ’ Norn. — See also Blalock v. Kernersville Mfg. Co., 110 N.C. 99; Joseph v. Raff, 82 N.Y. App. Div. 47; aff’d, 176 N.Y. 611. 454 RICHARDS v, WIENER CO. [cHAP. I. RICHARDS v. WIENER CO. 207 N.Y. 59. 1912. Hiacut, J. This action was brought to recover the sum of $3,000 __and interest thereon, claimed to be due from the defendant undera written contract, which is as follows: © bi TO NEW Yorx, October 24, 1908. “Mr. J. N. RicHarps, “New York City: “Dear Sir. — We beg to confirm our agreement with you as fol- lows: (1) You subscribe for 100 shares of our 6 per cent preferred stock of a par value of $100.00 at the price of $10,000 and you agree to pay not less than $3,000.00 immediately ($1,000.00 at the time of signing this contract, $2,000.00 on or before November 10th, 1908), not less than $5,000.00 within 6 months after date and the balance within 3 months thereafter, that is 9 months from date. (2) In consideration of this purchase of our stock, we agree to employ you in our business and you agree to devote to same your entire time exclusively and to use your very best efforts to further its interest directly or indirectly. We agree to allow you a salary of $50.00 per week and a commission on all the new business that you bring us, that is, on all orders from customers, whose first order has been obtained by you. This commission to be 10 per cent on the net profits of such orders. Such profits to result in deducting from the sales price all the expenses had with the order, as f.i., the cost price of the material figures in the regular way, discounts, freight and cart- age allowances, etc. Among the expenses on the order to be counted the interests from date of expenditure until date of payment by the customer, all special expenses such as telegrams, long distance tele- phone messages, traveling expenses if incurred especially, shares of profit to manufacturers if any, and outside commissions, but no general office expenses. “(3) As soon as you have paid the second installment of $5,000.00 on the above purchase of preferred stock, we will guarantee you the above commission in addition to the salary with $600.00 per year and we will sign a contract with you on this basis, to be good for not less than 2 years from the date of this letter. , “Tf, however, you should fail to pay the second installment, we will have the option to discontinue your employment, and if in this case you should not want to have the first installment paid by you considered as the purchase price in full for 30 shares of our pre- ferred stock, then we shall repurchase these 30 shares of stock from you at par within 6 months thereafter. If, however, at any time during the first 6 months or at the end of same you should discon- SECT. Iv.] RICHARDS v. WIENER CO. 455 tinue your services of your own account and fail to pay in the $5,000.00, then the first installment of $3,000.00 paid in by you shall be considered as the purchase price in full for 30 shares of our preferred stock without any obligation on our part to repurchase same. “In case this agreement should be terminated the commission will be paid on all orders coming under this agreement, such as have been received in our office, before the date of expiration of this contract whether accepted and executed before this date or thereafter. “Please acknowledge this agreement, and oblige, “Yours very truly, “ERNst WIENER CoMPANY, “Water J. Briaas, Sec’y.” It appears that the plaintiff thereupon paid to the defendant the sum of $3,000, being the first of the two sums mentioned in the con- tract, and then entered the employment of the defendant and ¢ con- tinued therein until the 14th day of August, 1909. He did not, how- ever, at the expiration of the six months pay the additional sum of “$5,000 upon the contract, but notified the defendant that he was unable to do so. Thereupon and on the 14th day of August, 1909, the defendant wrote the plaintiff as follows: ‘After a fair trial we have come to the conclusion that you are not competent to fill the position now occupied by you nor do the results warrant our keeping you, and we, therefore, beg to notify you that with the payment of this week’s salary your services will not be required after this date.” (Signed by the defendant company.) At the same time the defend- ant company drew a certificate for thirty shares of preferred capital stock of the corporation and delivered the same to the plaintiff. Thereupon the plaintiff wrote the defendant as follows: “Having received from you under date of the 14th notice that my services were no longer required by your Company, I beg to notify you that I shall require you to repurchase from me thirty (80) shares of your pre- ferred stock for which I have heretofore paid you the sum of Three Thousand ($3,000) Dollars, but which stock was never delivered to me, as I do not wish to have the money paid in by me under the con- tract between us bearing date October 24th, 1908, considered as the purchase price of said thirty (30) shares.”’ The chief defense inter- posed in the case is to the effect that the provision of the contract with reference to purchasing back the stock was void and contrary to the provisions of the Penal Law and is contrary to public policy and to the law. § 664 of the Penal Law, formerly § 594 of the Penal Code, provides as follows: —— director of a Stock corporation, who concurs in any vote or act of the directors of such corporation, or any of them, by which it is “jntended: . TET apply any portion of the funds of such corporation, ex- 456 MORGAN JU. LEWIS. [CHAP. I. cept surplus profits, directly or indirectly, to the purchase of shares of its own stock, is guilty of a misdemeanor.” ~~ e are much impressed with the contention that the contract in this case, properly construed, amounts merely to an option to pur- chase stock on the part of the plaintiff, and the advancement on such “option of $3,000 upon condition that he be given employment by the corporation at the price agreed upon, and that in case the company terminated such employment he had the right to demand the return of the money that he had advanced. But we have thought it wise in this case to follow the Appellate Division. Assuming, therefore, that under the contract the plaintiff had the title to the stock which he could resell but for the provision of the Penal Law, the defendant nevertheless was required to prove its invalidity, under the law re- ferred to. Upon the trial there was an attempt to show that the cor- poration had no surplus profits out of which the purchase of the stock could be made. But the evidence offered upon this subject was not proper and consequently was excluded by the trial court. We, therefore, have a case in which the corporation has failed to show that it did not possess surplus profits out of which the stock could be purchased. As was said by Scott, J., below: ‘‘The law will not pre- “sume, unless forced to do so, that a person intends to do an illegal —act. It will not, therefore, presume that the parties intended to make an illegal contract. The contract itself, therefore, was per- ~fectty legal subject to certain limitations upon its enforcibility. If when the time came defendant had a sufficient surplus the contract would be enforced. If it had not the contract could not be enforced. In defending against plaintiff’s attempt to enforce it the burden rested upon defendant to show that it would be illegal to do-so,-for there is no presumption one way or the other as to the existence of a surplus. The defendant assumed this burden but failed in sustain- ing it,...7” Bie eos fers The judgment appealed should be affirmed, with costs. 7 Judgment affirmed. CULLEN, Ch.J., VANN, WILLARD BaRTLETt, Hiscock and CHAsE, JJ., concur; Coin, J., absent. t Yow MORGAN ». LEWIS. 46 Ohio 1. 1888. THE action below was commenced by Lewis, one of the defendants in error, against the Alliance Rolling Mill Company and other de- fendants alleged to be stockholders in, or creditors of, the company, for the purpose of enforcing the statutory liability of the stockholders to contribute to the payment of the debts of the corporation, which SECT. Iv.] MORGAN v. LEWIS. 457 was alleged to be insolvent, and to have assigned its property and ceased to do business. The case was referred; there was a trial before the referee, and Morgan, the plaintiff in error, was held as a stockholder. He ex- cepted, and had a bill of exceptions signed by the referee. On hear- ing, the court of common pleas affirmed the referee’s report, Morgan excepting. He then presented a petition in error in the district court where the case was reserved for decision in this court. Upon the trial before the referee, Morgan offered to prove that prior to the time the Alliance Rolling Mill Company acquired title to the furnace property, the property was principally owned by the defendant, Morgan, and that for his interest in the furnace property the Alliance Rolling Mill Company issued to the defendant, Morgan, stock in the Rolling Mill Company, which stock was the same stock which was afterwards transferred by the defendant, Morgan, to the Alliance Rolling Mill Company in consideration of the re-transfer to him of the furnace property. And further offered to prove, that after the Alliance Rolling Mill Company acquired title to the furnace property, the furnace not proving as successful and profitable as had been expected, some of the stockholders were dissatisfied with the purchase from Morgan, and contentions arose among them, and the defendant, Morgan, was blamed by many of them for having gotten the company into the purchase and was requested to take the prop- erty off their hands and pay for it in stock of the company; and that Morgan, for the sake of settling such contentions and dissatisfac- tion, did purchase the furnace and pay for it in stock which had been issued to him as shown by the record. And thereupon the referee sustained the objection to the evidence so offered, and defendant, Morgan, excepted. It was testified to before the referee, and not contradicted, that Morgan transferred his stock to the company and the latter deeded to him the furnace property, of which he took immediate possession, and which he continued to hold and use as his own. No action has been taken looking to the subjection of this furnace property to the payment of the claims of any creditors, but all parties have treated it as if it were the property of Morgan since it was so deeded to him. In his report the referee finds that between February 5, 1867, and January 2, 1871, Morgan became the legal owner and holder of $116,583 worth (at par value) of stock in the company. That on the 17th of January, 1872, ‘‘by a resolution of the said board of di- rectors, the president of said corporation, by deed duly executed, deeded the furnace property mentioned in said proposition to said David Morgan, and on the same day said David Morgan signed powers of attorney in blank, transferring said stock, and delivered ‘up the certificates of the same to the secretary of the corporation, who 458 MORGAN. ¥. LEWIS. [cHaP. I. wrote the word ‘cancelled’ on the face of each certificate, and in- serted said certificates in the stock certificate book of the corpora- tion, as surrendered stock. “That at the time of said delivery of said certificates of stock to said corporation said David Morgan was the legal owner of said stock represented thereby. ‘That said stock so delivered and intended to be surrendered to said corporation, was never afterwards represented, and the same was completely merged in said corporation, and the capital stock of said corporation was treated by the directors as reduced by the amount of $116,588. “Said transaction was with the directors of said corporation alone, and without any submission of the same to, or vote on the same by, the general stockholders of said corporation; and without any knowledge or assent of the general stockholders, and that no certificate of decrease was filed with the Secretary of State as re- quired by statute, nor was any notice of the action of the directors ever. given. “That at the time of said attempted surrender said corporation was reported to be solvent. “That said David Morgan bought said property from, and in- tended to transfer said stock to, said corporation in good faith and without fraudulent intent. CONCLUSIONS OF LAW. “The transfer of this stock to the corporation had the effect of reducing the capital stock of the corporation; the directors of the corporation did not have the power to thus reduce the capital stock, and such transfer is void and of no effect, and left the title to said $116,583 of stock precisely where it had been, and the same as if no effort had been made to transfer the same. “Unless the power to buy its own stock is expressly conferred in its charter, a corporation can not deal in its own stock, and such transactions are void. “The fund arising from the individual liability of stockholders is a trust fund set apart under our constitution and statutes for the benefit of creditors, and the directors by no arrangement or dealing whatever can affect or impair this fund. “T find David Morgan liable on account of said stock, to con- tribute to the payment of the claims of the creditors of said corpora- tion, to the amount of $116,583.” The referee finds in another connection, that.the capital stock. of the company was increased from time to time, until in December, 1870, when it was increased to $450,000. The fact that Morgan took immediate possession of the furnace property upon its conveyance to him, is not found by the referee, SECT. IV.] MORGAN v. LEWIS. 459 and does not seem to have entered into the consideration of the case by him, or by the court of common pleas. It also appeared in the case that the claims of creditors all accrued after the transfer by Morgan of his stock to the company, and of the furnace property, by the latter, to him. Owen, C.J. The theory upon which the referee and the court of common pleas must have proceeded, was that the entire transaction by which Morgan acquired the furnace, and the company acquired his stock, was void; that it was beyond the power of the company tc engage in the transaction, and that consequently the company ac- quired no title to the stock, and Morgan acquired none to the furnace property. If this conclusion is sound, the inevitable consequence is, that the company still owns the furnace, and it is assets in the hands of the assignee for the payment of the company’s debts. It is an absurdity to assume that Morgan is still the owner of both the fur- nace and the stock. If he is still liable to creditors as a holder of this stock, the company, by the same reasoning, is owner of the furnace. It is conceded that the proceeding to subject the liability of stock- holders to the satisfaction of the claims of creditors, has throughout ignored this property. It does not appear but that this property alone would satisfy creditors, nor to what extent it would exonerate stockholders from the liability which it is now sought to subject to the satisfaction of creditors’ claims. If we were in accord with the referee and court of common pleas, upon the main proposition of the case, still it would be our duty to send the case back for proceedings to subject this property of the company to the satisfaction, pro tanto, of its debts. We are of opinion, however, that the referee erred in excluding the evidence which Morgan offered, to throw light upon the transaction ‘by which he assumed to acquire the furnace, and transfer his stock to the company. The contention of Morgan, in this respect, is not answered by the proposition that the only purpose of offering the rejected proof was to show that the transaction was in good faith, and that this already sufficiently appeared. We have no disposition to call in question the general and well recognized principle that a corporation cannot buy its own stock. It is conceded that this principle proceeds upon a want of power, rather than upon any express prohibition in its charter. With this general principle conceded, however, the right of a cor- poration to take its own stock in satisfaction of a debt due to it, has long been recognized in this state. This has been recognized as an exception supposed to rest upon the necessity of avoiding loss. Coppin v. Greenlees, 38 Ohio St. 279. It is, nevertheless, a relaxation of the general rule. It is, of course, because of the necessity of avoiding loss, and not because it is for the satisfac- tion of a debt, that the exception is recognized. If the same or a like 460 MORGAN ¥. LEWIS. [CHAP. I. necessity of avoiding loss should arise in any of the transactions of the company, it could not, with any show of reason, be contended that the application of this principle of necessity should be limited by any iron rule to the case of taking stock for an otherwise hopeless debt. The evidence which Morgan offered, and the referee rejected, tended to establish, in substance, that Morgan had traded to the company this furnace property for stock. That the furnace promised to prove a failure, or, at best, a disappointing and unsatisfactory ven- ture. Contentions arose over the transaction, between Morgan and some of the stockholders. Many of them blamed him for having induced the company to make the purchase. Thereupon they — “many stockholders” — simply proposed a rescission of the con- tract of purchase; that Morgan take back the furnace and restore to the company the stock he had received for it. The company was out of debt. Nobody could possibly be hurt by a rescission of this con- tract which had caused so much discontent and contention, and . which promised to be a losing venture for the company and Mor- gan’s fellow stockholders. This proof would have established some- thing beyond the mere good faith of the transaction. It would have tended to establish the fact that Morgan yielded to the importunities of many stockholders to rescind a bargain and set at rest an unfor- tunate controversy which was rapidly breeding discord among the stockhelders. The finding of the referee, that this transaction itself worked a reduction of the capital stock of the company, is not tenable. There was nothing in the way of the company re-issuing this stock or its equivalent to others who may have desired it. There was nothing in the fact that these certificates were marked “‘cancelled”’ on the face, by the secretary of the company, and by him treated as surrendered stock, to authorize the finding that the capital stock of the company was reduced. This was no part of the transaction with Morgan, and there was nothing in the fact of the re-exchange of the stock for the furnace which called upon the officers of the company to treat the stock as cancelled, or the capital pro tanto reduced. Green’s Brice’s Ultra Vires, 2d ed., 191, 192. This conclusion is not, in principle, qualified by the fact that the stock was not in fact thereafter rep- resented. Then, we should not lose sight of the fact that there was an executed transaction. The exchange—or the re-exchange, rather — had been made, posséssion of the furnace taken by Morgan, and retained by him for years before the transaction was questioned by any one. To this day it has remained free from direct attack. Certainly, the possession by Morgan of this property which had theretofore been in the possession of the company, was a circum- stance proper to be considered with other facts in the case. It at least helps us to distinguish it from the case of Coppin v. Greenlees, SECT. Iv.] MORGAN v. LEWIS. 461 38 Ohio St. 275, relied upon by defendants in error. In that case it was held that: ‘An executory agreement between a manufacturing corporation of this state and one of the stockholders, for the purchase of the stock of such corporation, by the former from the latter, can not be enforced, either by action for specific performance or for damages.” That this presents a very different case from one of an executed contract is emphasized by the following language of Mc- Iivarnu, J., by whom the opinion was prepared: ‘If it were averred that the plaintiff had purchased this stock from the defendant, or from others, under an agreement with the company that it buy the same from him when he quit its employment, or if the contract of purchase by the defendant had been executed, very different questions would arise.” In State v. Building Association, 35 Ohio St. 263, the general principle that a corporation may not traffic in its own stock is recognized. Yet in the same connection it is said: “‘ We do not deny that a corporation has power to receive shares of its stock as security for a debt or other similar purposes.” 26 Ga. 28; 84 Ill. 145; 17 N.Y. 507; 114 Mass. 37; 18 Vt. 131. It is apparent from the foregoing that no inflexible rule has been recognized by this court, that a corporation may not in any case, nor for any purpose, receive its own stock. On the,contrary, the way is left open for the application of exceptions to the general rule in proper cases. It is one of the established facts in the case that all the debts which are sought to be satisfied by this proceeding were contracted subsequently to the transaction which is assailed. The transfer of the furnace property from the possession ‘of the company to that of Morgan was a fact to which persons giving credit to the company could not safely close their eyes. The inquiry which it would naturally excite would have led to the information that the trade by which the company secured the furnace, and Mor- gan the stock, had simply been rescinded and the property — stock and furnace — re-exchanged. It being the law of our state that there are exceptions to the general rule, that corporations may not deal in their own stock, all persons dealing with this company must be held to have done so in the light of this state of the law. All persons are as much presumed to know of exceptions to a principle as of the principle itself. The slightest inquiry would have revealed the fact, that, as between himself and the company, Morgan did not sustain the relation of stockholder, at the time these debts were contracted. In the light of this state of adjudication in this court, we do not hesitate to say that the peculiar state of circumstances, which Mor- gan offered to prove before the referee, ought to have been received in evidence and considered in the light of other facts which did appear, in order that the referee and courts could have had an opportunity to say whether they did not bring the case within some of the well founded exceptions to the wise and well-established general rule. The facts alleged in the petition, concerning the insolvency, etc., 462 VENT v. DULUTH COFFEE CO. [cuap. 1. of the company, were sufficient to dispense with an averment of the recovery of a judgment against it as a prerequisite to the proceeding to subject the liability of the stockholders to the satisfaction of the corporate debts. Judgment reversed and cause remanded. Nor. — It was held that the corporation in question had power to take its own stock in payment of a previously existing debt in Draper v. Blackwell, 138 Ala. 182; Costello v. Portsmouth Brewing Co., 69 N.H. 405; City Bank v. Bruce, 17 N.Y. 507; Taylor v. Miami Co., 6 Ohio, 177; Barto v. Nix, 15 Wash. 563. So, of taking its own stock as collateral. Red Bud Realty Co. v. South, 96 Ark. 281. VENT ». DULUTH COFFEE CO. 64 Minn. 307. 1896. Canty, J. On April 23, 1894, plaintiffs and the defendant cor- poration (then called the Smith & Coulter Spice Company) entered “into the following agreement: ‘Parties of the first part_[plaintiffs] agree to take five thousand ($5,000) dollars” worth of capital stock of the Smith & Coulter Spice Co.’s stock at par value, to be paid™ ~-for on or before May ist, ’94, which is to represent one-fourth interest in all assets of the company at this date. Parties of the second part [defendant] agree that on April Ist, 1895, if said parties of the first part are dissatished with the said stock or interest_in said company, that the said Smith & Coulter Spice Co. will take stock from said parties of the first part, and pay them par value in cash for said “stock, or interest in said company; parties of the first part to give notice by April 15th, 1895, and parties of the second part to have 60 days from said notice to pay for said stock.’’ Pursuant to this agreement, defendant issued the $5,000 of its stock to plaintiffs, who paid for the same in full. The name of the defendant has since been changed to the Duluth Coffee & Spice Company. On April 11895, plaintiffs notified defendant that they were dissatisfied with the “stock, offered to return the same, and demanded that. they be paid “fhe price of the same. On April 14 the demand was renewed, and é stock again offered to defendant. Defendant has not accepted the stock, or paid for the same, and, after the 60 days mentioned ~ in the contract, this action was brought to recover the $5,000 so tiffs for the amount claimed. From an order denying its motion for a new trial, defendant appeals. We are of the opinion that the evidence conclusively establishes all of the foregoing facts, and the only point raised by appellant SECT. IVv.] VENT v. DULUTH COFFEE CO. 463 worthy of consideration is the contention that the part of the con- tract by which defendant agreed to purchase or accept a surrender of its own stock is ultra vires and void. ‘There is no express provision in its articles of incorporation authorizing defendant to buy_or deal in its own stock, and whether an original, independent contract, by which it agreed to purchase its own stock, would be wlira vires, we_ need not consider. This is not such a case. This provision of the “Contract constituted a material and substantial part of the considera- tion and inducement for the purchase of the stock by plaintiffs, and, if the provision is void, it seems to us that it vitiates the whole con- tract, and is a sufficient reason for the rescission of that contract and the return of the purchase price, which purchase price plaintiffs are demanding. But the better opinion, it seems to us, is that which holds the original contract to be a conditional sale, with the option to revoke or_rescind in the purchaser. In Browne v. St. Paul Plow Works, 62 Minn. 90, 64 N.W. 66, we held that a similar contract was not uléra vires. There is no question here as to the rights of creditors. a m Order affirmed. Nots. — See also Lowa Lumber Co. v. Foster, 49 Iowa, 25; Adam v. New England Investment Co., 33 R.I. 193; Rogers v. Building Ass’n, 30 Utah, 188; Yeaton v. Eagle Oil Co., 4 Wash. 183. Cf. Sarbach v. Fiscal Agency Co., 86 Kan. 734. In Mulford v. Torrey Co., 45 Colo. 81, the court said (p. 85): “ The statute upon which the defense is based, to the effect that the con- tracts in question are in violation of the statutes of the State, is as follows: ‘It shall not be lawful for such corporations to use any of their funds for the purchase of stock in their own company or cor- “poration, except such as may be forfeited for the non-payment of assessments thereon, except _as hereinafter provided.’ § 485, 1 Mills’ Ann. Stats. “This statute does not apply. The company desired to sell its treasury stock. It received the consideration agreed upon therefor. The plaintiff only purchased upon the condition that he should have the right to return the stock and have the consideration which he ave therefor returned to him. There was but one contract, namely, for the sale h_ object being a con- sideration for the other. The sale was, therefore, conditional. Such a transaction is not prohibited by the statute.” See also Sweeney v. Underwriters C'o., 29 5.D. 576. 464 NORTH MILWAUKEE TOWN SITE NO. 2 v. BISHOP. [CHAP. II. CHAPTER II. THE EXERCISE OF THE POWERS. SECTION 1. IN WHOM THE POWERS ARE VESTED. NORTH MILWAUKEE TOWN SITE NO. 2 v. BISHOP. 103 Wis. 492. Tue defendant was the owner of shares of stock in the plaintiff. The directors of the plaintiff resolved that the stock of the company, to the extent that it had not previously ly been. paid for, should be paid. “This action was brought to recover from the ‘defendant the amounts ‘unpaid on his shares. BaRvEEN, J. The judgment of nonsuit was justified upon either of to grounds: Boe o proof was made of giving notice of such call according to ig by-laws of the corporation. § 1754, Stats. 1898, provides that, “wu less otherwise expressly provided by law or the articles of ee tion, the directors of any corporation may call in the subscriptions to the capital stock by instalments, in such proportion and at such times as they shall think proper, by giving such notice thereof as the by-laws shall prescribe.” It was admitted on the trial that no by-law of the corporation in this regard had ever been adopted. The action of the board was attempted to be justified, however, by showing that the board, atter adopting the resolution for the call, adopted another resolution in- structing the secretary to notify each stockholder thereof by mailing to him a copy of said resolution. This latter action of the board is claimed to be equivalent to a regular by-law, and answers all the “purposes of the statute. The difficulty with this contention is that the board of directors have no power to enact by-laws unless so authorized by law, by the articl roper action of the stockholders. A by-law is a permanent and continuing rule “for the govermment of the corporation and its officers, The power to ~gnnot them resides primarily with the stockholders. ‘They have few ctions to perform, and this right to make by-laws is an essential and an important one. It is a power that the directors have no in- herent right to exercise. This is the rule laid down by the textwriters, SECT. I.] NORTH MILWAUKEE TOWN SITE NO. 2 v. BISHOP. 465 and finds ample support in the authorities cited in the following works: 2 Cook, Stock, § 700a; 1 Thomp. Corp. § 956; Ang. Corp. § 327. In the Germania Case cited, it is said: “‘We hold, therefore, that it was intended that the statutory method of making calls should supersede previous common-law methods, and to prescribe a uniform and reasonable rule easily complied with”; and it was accordingly held that a complaint which did not allege that a call was made by giving such notice as the by-laws prescribed fails to state a cause of action. For the same reason such an action cannot be sustained until proof is made in conformity to these requirements. It is argued, however, that because § 1776, R.S. 1878, provides that ‘‘the stock, property, affairs, and business” of every corporation shall be under the care of and be managed by a board of directors, the power to enact proper by-laws may be implied therefrom. As before inti- mated, the power to make by-laws is incident_to _ the corporation it- self, and results from the necessity of such a power to enable the body politic to answer to the purposes for which it was created. It being ~2 valuable and’ Moportant rent Tuable and’ important right, it ought not to be taken away by inference or implication. The power given to the directors to con- trol the stock and business of the corporation may exist, and be en- tirely consistent with the power of the stockholders to say upon what terms and conditions the stock of the corporation shall be paid for and issued. We therefore hold that, unless taken away by the charter or some law of the state, the power to enact suitable by-laws rests in the stockhotders of the corporation, and not in the board of directors. Our attention has been called to some expressions used in the opinion — in In re Klaus, 67 Wis. 401, to the effect that the directors, and not the stockholders, may make the by-laws. As we have seen, this statement of the law is contrary to all of the adjudicated cases, and cannot be sustained on principle, and was in fact not necessary to the question decided. In that regard it must be deemed to be over- ruled. By the Court. — The judgment of the superior court of Milwaukee County is affirmed. Note. —See, accord, Morton Gravel Road Co. v. Wysong, 51 Ind. 4. See also Trust & Savings Co. v. Home Lumber Co., 118 Mo. 447. Cf. Manufacturers’ Building Co. v. Landay, 219 Ill. 168, where the court held that by the statute in question the power of making by- laws had been vested i s. e power to elect directors is usually vested exclusively in the stockholders. See Durkee v. The People, 155 Ill. 354; State v. Mer- chant, 37 Ohio, 251. 466 CHICAGO CITY RAILWAY CO. ¥. ALLERTON. [CHAP. II. CHICAGO CITY RAILWAY CO. v. ALLERTON. 18 Wall. (U.S.) 233. 1873. . Tus charter of the Chicago City Railway Company contained the following provisions: eee oy e capital stock of said corporation shall be one hundred thousand dollars, and may be increased from time to time, at the pleasure of said corporation. ae § 4. All the corporate powers of said corporation shall be vested in and exercised by a board of directors, and such officers and agents as said board shall appoint. The directors, without consulting the stockholders, resolved to increase the capital stock. To this one Allerton, who wé was a stock- holder, objected, and filed a bill praying for an injunction to prevent _the increase. Mr. Justice Brapuey delivered the opinion of the court. We are satisfied that the decree must be affirmed on the broad ground that a change so organic and fundamental as that of increas- ing the capital stock of a corporation beyond the limit fixed by the charter cannot be made by the directors alone, unless expressly au- thorized thereto. The general power to perform all corporate acts refers to the ordinary business transactions of the corporation, and does not extend to 4 reconstruction of the body itself, or to an en- largement of its capital stock. A corporation, like a partnership, is an association of natural persons who contribute a joint capital for a common purpose, and although the shares may be assigned to new individuals in perpetual succession, yet the number of shares and amount of capital cannot be increased, except in the manner expressly authorized by the charter or articles of association. Authority to increase the capital stock of a corporation may un- doubtedly be conferred by a law passed subsequent to the charter; but such a law should regularly be accepted by the stockholders. Such assent might be inferred by subsequent acquiescence; but in some form or other it must be given to render the increase valid and binding on them. Changes in the purpose and object of an associa- tion, or in the extent of its constituency or membership, involving ~eharacter, and cannot, on general eae the —GEPISSE OF TmpOt COHEN Of The NieMbers: The résson is obvious. Te an a reapers the Durpose and object. This may | be said tc said to be the final cause of the association, for the sake of which it was ich it was brought into existenceTo change this without the consent of the associates, would be to commit them to an enterprise which they never embraced, and would be manifestly. unjust. Secondly, as it respects the constituency, or capital and member- SECT. 1.] CHICAGO CITY RAILWAY CO. v. ALLERTON. . 467 ship. This is the next most important and fundamental point in the constitution of a body corporate. To change it without the consent of the stockholders, would be to make them members of an associa- “tion in which they never consented to become such. It would change “the elative influence, control, and profit of each member. If the di- rectors alone could do it, they could always perpetuate their_ow1 _own power. Their agency does not extend to such an act unless so ex- pressed -in the charter, or subsequent enabling act; and such sub- sequent act, as before said, would not bind the stockholders without their acceptance of it, or assent to it in some form. Even when the diol slosh lo each stoekBolder ro rate it would often work injustice, because many of the stockholders might be unable to take their respective shares, and might it thus lose their rel- “ative interest and influence in the corporate Concerns. © = ———s—corporation must ‘stand _loss) ; Brinkerhoff Zinc Co. v. Boyd, 192 Mo. 597, 613; De- 490 BALDWIN 0. CANFIELD. [CHAP. II. marest v. Spiral Riveted Tube Co., 71 N.J.L. 14; Holcombe v. Tren- ton White City Co., 80 N.J. Eq. 122, 132; People’s Bank v. St. An- thony’s Church, 109 N.Y. 512; State v. People’ $ Association, 42 Ohio, 579; In re Haycraft Gold Mining Co., [1900] 2 Ch. 230." An express provision in the certificate of incorporation that “any resolution, in writing, signed by all the members of the board of directors . . . shall be and constitute action by such board... with the same force and effect as if the same had been duly passed by the same vote at a duly called meeting,” is invalid. Audenried v. Hast Coast Malling Cony 86-N- Bete 460. The court said (p. 468): e proposition that the stockholders, in assenting to this pro- vision in the articles of association, waived the advantage and protection they would enjoy under the common law and our Cor- poration act, does not meet the case. Stockholders may waive an advantage, but they cannot by waiver ordain a method of corporate —action which the Iaw does not recognize, nor dispense with the aid “of a board of directors as a means of corporate action. Such a course ~isnot sanctioned by our law and is inconsistent with the twelfth section of our act, which requires that ‘the business of every cor- —poration-shat-be-ma faged by its directors.’ But we ought not to confine the consideration of this question to the relationship exist- ing between the stockholders and the directors. The business of the state is to a large extent carried on by corporations, and their transactions directly and vitally affect the interests of all the people. In committing the transaction of business so generally to corpora- tions, the legislature may be presumed to have provided for and recognized deliberative meetings of directors as a safeguard to the public interest, which presumption ought not to be overthrown by a forced construction of the act. 'The fundamental idea of a busi- ness corporation involves an advantage coming from the aggregation ~Dpringing a large number of stockholders and directors into & common enterprise. It is their knowledge and wisdom combined, acting as a unit, that gives efficiency and safety to the corporate management.” A fortiort, corporate action is not to be predicated upon the assent, given separately, of enough of the directors to constitute a quorum. —Herington v. District Township, 47 Iowa, 11 (action to recover for services in teaching school. ‘‘ The question is here presented whether a corporation whose business is transacted by a board of directors can be bound by the assent of a majority of the directors to a contract, expressed otherwise than at a duly convened meeting. We are of opinion that it cannot. While it is true that a majority of the board will govern in the absence of a provision by statute, or in the articles of incorporation, requiring the concurrence of a greater number, yet their determination is valid only after the mi- —nority have had-ar-opportunity to be heard. A board must act as SECT. I1.] FINLEY SHOE & LEATHER CO. ¥. KURTZ. 491 a unit, and in the manner prescribed”); New Orleans Co. v. Lawson, a. 34; Hamlin v. Brass Co., 68 N.H. 292 (alleged discharge of superintendent not a corporate act); Bank v. Lumber Co., 116 N.C. 827; Doernbecher v. Columbia City Co., 21 Or. 573; Stoystown Co. v. Craver, 45 Pa. 386; Singer v. Salt Lake Co.,17 Utah, 143, 160; Limer v. Traders Co., 44 W.Va. 175, 180; Leonard v. Lent, 43 Wis. 83; D’Arcy v. The Tamar Co., L.R. 2 Exch. 158. But see, contra, Longmont Supply Ditch Co. v. Coffman, 11 Colo. 551; National Bank v. Sandford Fork Co.,157 Ind. 10, 17; Buck v. Troy Aqueduct Co., 76 Vt. 75. There may be encunstanees justifying t the holding of a meeting of the board of directors without notice to all the directors. See ‘prings Co. v. Middle River Co., 80 Conn. 37, 41. bw FINLEY SHOE & LEATHER CO. ». KURTZ. 34 Mich. 89. 1876. Cooury, Cu.J. The plaintiff in error is a manufacturing corpora- tion doing business in the city of Detroit. It was organized under the general law providing for the organization of such corporations, and by its articles its capital stock is thirty thousand dollars, which may be increased to one hundred and fifty thousand dollars. Kurtz was in the employ of the corporation and loaned money to it. For this he proposed to take stock, and also for a portion of what he earned by his services. The corporators were only three in number, and one of them informed Kurtz that he had conferred with the others and it was agreed that Kurtz should have stock for what was owing him. The sum was afterwards credited him on the corpo- ‘rate books as payment on stock, but without his direction. In the corporate reports subsequently made to the secretary of state, Kurtz was set down as a stockholder, but of this he had no knowledge. Afterwards Kurtz was discharged from the service of the corporation, and he then brought suit for what was credited to him, refusing to take stock therefor. It appears that the three original stockholders held the whole thirty thousand dollars of stock; that the corporation never took steps to increase the capital to any larger sum, and that no individual stockholder offered to assign to Kurtz any of his stock. The defense to Kurtz’s suit is, that what was due him has by his consent been applied on stock, and that he is entitled to stock therefor and nothing else. To make good this defense the corpora- tion must have shown, first, that it had stock to give Kurtz; and, second, that there was an agreement on their part that he should have it, and on his part that he would take it. That the corporation might have had the stock to give Kurtz is 492 HOISTING MACHINERY CO. ¥. GOELLER IRON WORKS. [CHAP. Il. undoubted. All that was necessary was that the corporation should increase its capital stock in the manner provided by law, that is to say, by vote of the stockholders at a meeting called for that pur- pose. Comp. L., § 2841. Probably by corporate action it might in advance agree to make such increase, and receive money for stock to be issued when the increase should be declared. But it is not very clear that the officers of the company could take action of that nature which would bind the corporators; for if they could, a meet- ing of the stockholders for the purpose would be a mere ceremony to do that which they could not refuse to do. It certainly could not be within the implied powers of any corporate officer to obligate the corporation to any such increase, and thus indirectly do what the law permits to be done only by the body of corporators specially convened for the purpose. Taking the case as it stands on the record, it is very manifest that the corporation was never placed under obligation to give Kurtz the stock. Assuming that all the stockholders had severally agreed to it, this agreement bound no one, and might have been repudiated at any corporate meeting. Where joint action is required by law, individual action is of no avail, and at most only puts the individuals under honorary obligations of which the law can take no notice. Suppose Kurtz had demanded the stock when he was discharged, it is clear that the corporation would have had none to give him. Suppose he had sued the. corporation for refusal to de- liver, where would he have discovered the elements of a contract to that effect? Certainly not in a report to which he was no party, and which was made without his consent or knowledge. Certainly not in the assurances of individual stockholders, when these, so far from binding the corporation, would not even bind themselves in- dividually. The conclusion is inevitable that Kurtz must have failed in such an action, and if so, the corporation must fail in, this defense. There can be no contract without mutuality, and a corpo- ration can only be bound by corporate action, and that we look for in vain in this record. The judgment must be affirmed, with costs. Nor. — See, accord, Duke v. Markham, 105 N.C. 131. HOISTING MACHINERY CO. v. GOELLER IRON WORKS. 84.N.J.L. 504. 1913. TRENCHARD, J. This suit was brought to recover a commission of five per cent. for the services of the plaintiff, a mechanical engi- neering company, in procuring for the defendant, who was engaged SECT. 11.] HOISTING MACHINERY CO. v. GOELLER IRON WORKS. 493 in the business of constructing and erecting iron work, a contract with the Harwood Electrical Company. The plaintiff’s action was based, primarily, upon the following letter purporting. to be from the defendant: — Newark, N.J., Aug. 23, 1909. Hoisting Machinery Co., New York City: Dear Sirs — We have to-day mailed estimates to the Harwood Mfg. Co. for structure for coal and ash conveyor of which we enclose copy. We hereby agree to give you 5 per cent. of the amount for your com- mission, same to be paid to you on receipt of payment for this work. Respectfully yours, THe GoELLER Iron Works, JoHN GOELLER, Sec’y. The case was tried before the judge without a jury, and he found the following matters of fact: ‘That (1) the plaintiff, in July, 1909, received an inquiry from a client concerning the erection of a piece of conveying machinery to be constructed of iron or steel; that (2) after preparing plans, the plaintiff sent the plans to the defendant for an estimate; that (3) as a result of the sending of the plans by the plaintiff to the defendant, an estimate was made by the de- fendant to the Harwood Electrical Company for the erection of the. machinery for which plans had been sent by the plaintiff to the defendant, and the defendant agreed to pay the plaintiff a com- mission of five per cent. of the amount of money which the defendant should receive if the estimate was accepted, to be paid to the plain- tiff on receipt of payment by the defendant for the work; that (4) after August 23d, 1909, the estimate was accepted and defendant entered into a contract with the Harwood Electrical Company, which included all the work called for in the estimate, and more besides; that (5) the defendant received $8,342.28 for work done by it under said contract.” Judgment was entered for the plaintiff for the sum of $462.98, being five per cent. of $8,342.28, with interest, and the defendant appealed... . It is next contended that the judge erred in refusing to nonsuit the plaintiff. Not so. The motion was based upon two grounds — first, that there was no corporate action by the defendant company, agreeing to pay commission to the plaintiff, and secondly, that no authority was shown in the secretary of the defendant company to make such contract. The rules as to nonsuits are the same, and have the same appli- cation, when the trial is by the court as when it is by a jury. Weston ‘Company v. Benecke, 53 Vroom, 445. 494 JOURDAN ¥. LONG ISLAND R.R. CO. [CHAP. II. And the rule is well settled that where, as in this case, the evidence tends to show that, in the general course of the business of an in- corporated business company, the directors or managers have per- mitted an officer to assume the direction and control of the business, and have held him out to the public as its general agent, his authority to act for the company in a particular transaction may be implied from the manner in which he has been permitted by the directors or managers to transact business. Fifth Ward Savings Bank v. First National Bank, 19 Vroom, 513. Nore. — See, accord, Winer v. Bank, 89 Ark. 4385, 446; York v. Mathis, 103 Me. 67, where the court said (p. 78): “A corporation must act and speak through its officers and authorized agents and it is entirely competent for a board of directors to establish a mutual understanding that one of their number shall be the active agent of the board in the management of the property and the conduct of the business affairs of the corporation. It is not necessary that such an understanding should be created by a formal vote passed at a formal meeting or proved by a formal record. It may be inferred from the situation and conduct of the parties. A director ‘may acquire the power to bind the corporation by the habit of acting with the assent and acquiescence of the board,’ and so his unauthorized acts ‘may be confirmed by the approbation and acquiescence of the board.’ It is true that in either case it is the board that acts or acquiesces and not the directors as individuals, but subsequent ratification as well as previous authority or acquiescence may be shown by circum- stances and conduct.” See also Pottsville Bank v. Water Co., 211 Pa. 566 (stockholders). JOURDAN ». LONG ISLAND R.R. CO. 115 N.Y. 380, 1889. DanrortuH, J. This action was begun in November, 1884, to re- cover damages from the Long Island Railroad Company for breach —ofa written contract purporting to have been made on the 31st day ~of May, 1879, between the “Brooklyn, Flatbush and Coney Island Railway Company,” of the first part, ‘Thomas R. Sharp, as re- ceiver,” of the property, etc., of the Long Island Railroad Company, of the second part, the ‘‘ Long Island Railroad Company,” of the third part, and the “Atlantic Avenue Railroad Company of Brooklyn,” of the fourth part. It was, by its terms, to continue for a period of five years from its date. The Brooklyn, Flatbush and Coney Island Railroad Company and the Long Island Railroad Company were severally the owners and operators of railways, and, SECT. II.] JOURDAN v. LONG ISLAND R.R. CO. 495 so far as is material to any question calling for our discussion, the terms of the contract were such that the first named company was required to extend and maintain its track at its own expense, but in a manner satisfactory to the other company, from its then ter- minus at Bedford station, so that it should connect with the tracks of the Long Island Railroad Company on Atlantic avenue, and thus form continuous lines of double track railroad between the depots of that company at Flatbush avenue and East New York, and the depot of the Brooklyn, Flatbush and Coney Island Railway Com- pany at Brighton Beach on Coney Island, and as it pleased, run trains over the line so made continuous between Flatbush avenue and Brighton Beach. The Long Island Railroad Company and Sharp, its receiver, agreed to furnish it with “all necessary depot facilities for its trains and passengers” at Flatbush avenue, and through its agents sell the tickets at that place; and the party of the first part agreed to pay to the Long Island Railroad Company, in compensa- tion “for the use of its tracks, the sale of its tickets and for depot facilities, twenty per cent of all moneys earned by it for the trans- portation of passengers between Flatbush avenue and any and all points on the line of the party of the first part, south of Bedford station.” Similar rights were secured to the Long Island Railroad over the continuous line, and a described portion of the plaintiff’s tracks and depot facilities secured to it at Brighton Beach, and for this use and these facilities the defendant agreed to pay thirty-three and one third per cent of all moneys earned by it for the transporta- tion of passengers between Long Island City and Brighton Beach, and thirty-five per cent of all moneys earned by it for the transporta- tion of passengers between Bushwick and Brighton Beach, and cer- tain other proportion for passengers between other stations. _ It was also provided that, the party of the first part (the B.F. & C. Co.) shall begin to run trains from Flatbush avenue to Brigh- ton Beach, and the party of the second part (the L.I. R.R. Co.) from Long Island City to Brighton Beach, on or before the fifteenth day of June in each year, and shall run every day thereafter, Sundays excepted, until the first day of October, at least twelve trains each way. Other payments were provided for, growing out of these arrangements for the use of each other’s track, and it was agreed that full statements of the business done under the agreement should be given to each party by the other at stated intervals, and that the books of the several companies should be open to the other’s inspec- tion. The receivership of the Long Island Railroad terminated in October, 1881, and the road was restored to the company. _The ques- tions at issue concern only the plaintiff, who represents the party of “the first part in the agreement, and the defendant, the Long Island Railroad Company. The alleged breach consisted, in substance, of the failure of the defendant's receiver, anditsown-subsequent refusal 496 JOURDAN v. LONG ISLAND R.R. CO. [CHAP. II. to run the trains of the Long Island Railroad Company over a certain _ portion of the plaintiff’s road, as provided by the contract, and their omission to furnish depot “facilities as also therein provided. Issue was taken upon these allegations and a trial had. At the close of the evidence the defendant’s counsel moved the trial judge to dismiss the complaint on the ground that the evidence was insufficient to show a contract between the plaintiff and defendant. The motion was denied and the case submitted to the jury upon both issues. Their verdict was for the plaintiff, and-it has been approved both by the trial judge, in denying the defendant’s motion for a new trial, and by the General Term in affirming the order and the judgment entered upon the verdict. The defendant’s contention is that the contract was not binding upon it. It was, aS is conceded, executed in the name of the Oration by its presiden y._ It was sealed ithri eal, afaxed by its proper officers. It was, there- fore, presumptively valid and was binding upon the corporation until evidence to the ¢ stiou If the seal was obtained fraudulently or the officers acted without authority either ir_official character, or in affixing “the vent, it tay. with the defendant to-establish those facts.—The evi uced for that purpose was from the secretary. He tes- “Ttifted thatthe contract was drafted in pursuance of negotiations —betweerthe two companies, and the draft-was_in“‘his office.” An emergency arose which called for its completion, and he, after con- “suiting -with Sharp, the president, with him, signed, sealed_and de- ~—tivered it-—“T expected,” he says, ‘‘to get a ratification. a -Both of these Officers were also directors, and d é court committed no error in refusing to eee the complaint or in refusing to charge the jury that the « contract was not binding “upon the company. Sharp, the president, was not examined upon that point, and whether the officers of the company did, in fact, exceed their authority, might have been, under the evidence, a question for the jury. No request was made to submit it. There was, however, abundant and conclusive evidence that the contract was adopted and ratified by the defendant in its corporate capacity. It was, as the secretary and counsel of the defendant testified, drafted in pursuance of negotiations had between the parties. It was acted upon by the defendant in a management of its business; or oO i its terms and received for —the-entire period the benefit of a faithful performance on the part of the other contracting pai It necessarily affected the running — or pietititer raata Gat The coahegernent of the business for which it was incorporated. As summarized by the learned. counsel for the appellant, “‘it gave rights to another cor tiff) “to use the tracks and depots of the Long Island Railroad SECT. 11.] JOURDAN ¥. LONG ISLAND R.R. CO. 497 Company, and provided for a division of earnings,” and it is impos- sible to suppose that these things were suffered or enjoyed without “Tull corporate knowledge of the contract obligations by which they were provided for. Moreover, the defendant received a pecuniary tenet under the contract, upon the assumption that the contract Was valid. ff they intended to disavow it, it was their duty to be active in so doing and not remain willfully passive, in order to profit by the omission or mistake on the part of their own officers, and which they might have prevented. The appellant argues that the objects of the parties might have been attained by two contracts as well as by one, and, therefore, that the defendant is at liberty to adopt so much as makes for its benefit and reject the rest. -It may be that two separate contracts could have been framed in such manner as to meet the views of the parties, and in that case one have been rejected at the party’s risk and the other performed, but only one was prepared, and that recites that ‘in consideration of the mutual covenants and agreements” therein “contained,” the parties have agreed and do agree as therein expressed. The pro- visions are reciprocal. One party cannot say “I have got all I bar- gained for,” and without liability repudiate the mutual obligation which enabled it to do so, and formed the consideration of the bar- gain. One promise was the consideration for the other, and together they constituted a binding agreement. _If, in fact, the formal execu- tion of the contract was unauthorized, Yt is plain the agreement was one the company had power to make, one which they intended to_ _ make, supposed they had made, and which, with knowledge, or full means of knowledge of its terms, they acquiesced in and ratified _by acting under it, so long as it was profitable, and refusing to do _ so only when it seemed otherwise, but receiving the benefit of it at all times. It is now argued that the question of ratification should have been passed upon by the jury. It is a sufficient answer that no request was made to have it submitted to them, but it may be further said that upon that point the evidence was all one way and conclusive in the highest degree. We find no legal merit in either of these points. The other questions raised by the appellant have been examined, and so far as they require particular observation the remarks of the General Term are sufficient. We find none which requires other discussion. Upon the assumption that the contract bound the defendant, the plaintiff’s way was clear and his right to a recovery certain. The reasonableness of the amount actually given to him is not for us to determine. Judgment affirmed. Nors. —See, accord, Blood v. La Serena Co., 184 Cal. 361, 366; Beach v. Miller, 130 Ill. 162, 174; Tryon v. White Co., 62 Conn. 161; Baker v. Harpster, 42 Kan. 511; Union Trust Co. v. Electric Park 498 SHERMAN 2. FITCH. [CHAP. II. Co., 163 Mich. 687; Presbyterian Board v. Gilbee, 212 Pa. 310; Bank of Middlebury v. Rutland R.R. Co., 30 Vt. 159; Murray v. Beal, 23 Utah, 548; King v. West Coast Grocery Co., 72 Wash. 132. Cf. People’s National Bank v. New England Home, 209 Mass. 48. SHERMAN »v. FITCH. 98 Mass. 59. 1867. Bit IN Equity by assignees of the Northampton Street Sugar Refinery, an insolvent corporation, praying for a decree that _a recorded mortgage of personal property, held forth by the respondent as having been made to him by the corporation, might be declared void. The mortgage (dated January I9, 1865) purported, by the ——tanguage of the grant, covenants, and condition, to be the mortgage of the corporation. It was signed “George R. Sampson, President of Northampton Street Sugar Refinery.’’ [Seal.] —aAfter-acdemurrer had been overruled, the respondent filed an answer putting in issue the validity of the mortgage as a mortgage of the corporation. The case was reserved for determination by the full court on agreed facts, which were, in part, as follows: — For some time prior to January 19, 1865, the respondent had been, and then was, selling agent of the corporation, which owed him about eighteen thousand dollars, to secure the payment of which by the corporation, George R. Sampson, who was president and a director, and was also manager of the manufacturing depart- Se een nd vee vee ieee ee oD At that date there were four directors (who were the principal _stock- holders): Sampson; his son; a nephew; and one Tappan, who was “in Hurope. That was the full number of the board required by the ~py-laws, which also provided that “the board of directors shall manage and control the business, property, and affairs of the corpo- ration.” The records of the corporation contained no express vote of either directors or stockholders authorizing the execution and delivery to the respondent of a mortgage on the corporate property; ~put the execution and delivery of the instrument was known to all “the directors except Tappan, at the time thereof, “and was approved “py them, provided their neglect to make any objection to the same ¢an_be construed _as an approval.” : We ts, J. The remaining consideration relates to the authority of Sampson to execute the mortgage in béhalf-of-the corporation. It is not necessary that the authority should be given by a formal vote. Such an act by the president and general manager of the usiness of the corporation, edge and concurrence of the directors, or with their subsequent and long-continued acqui- SECT. I1.] SHERMAN 0. FITCH. 499 escence, may properly be regarded as the act of the corporation. Authority in the agent of a corporation may be inferred from the conduct of its officers, or from their knowledge and neglect to make objection, as well as in the case of individuals. Emmons v. Provi- dence Hat Manufacturing Co., 12 Mass. 237; Melledge v. Boston Tron Co., 5 Cush. 158; Lester v. Webb, 1 Allen, 34. The absence of one of the directors in Europe could not deprive the corporation of the capacity to act and bind itself by the acts of the officers in actual charge of its affairs. If the validity of the mortgage were to depend entirely upon subsequent ratification, such ratification would be effective not- withstanding the recording of the mortgage. No new record would be necessary. The ratification relates back. Nore. — See, accord, Union Pacific Ry. Co. v. Chicago Ry. Co., 163 U.S. 564, 596. See also Morisette v. Howard, 62 Kan. 463 (knowledge and acqui- escence by stockholders). The student should consider whether it is consistent to hold that corporate authorization may not be predicated upon te amet oy she wee the directors, given severally, that an act shall be done in behalf of ~ the corporation; ond. Bay 2 oe ae eee eon ae predicated upon the fact that the directors severally knew that an act had been done in behalf of the corporation, and that they did nothing to express their disapproval. eS BOOK IV. LIABILITY FOR TORTS AND CRIMES. CHAPTER I. IN GENERAL! BLACKSTONE, COMMENTARIES. Book I, pp. 476, 477. THERE are also certain privileges and disabilities that attend an aggregate corporation. ... It can neither maintain, or be made de- ~ferdant to; an-action of battery or such like personal injuries: for a corporation can neither beat nor be beaten, in its body politic. A corporation cannot commit treason, or felony, or other crime, in its corporate capacity: though its members may in their distinct in acities. Neither is it capable of suffering a traitor’s ~—or a felon’s punishment, for it is not liable to corporal penalties, nor to attainder, forfeiture or corruption of blood. Xe cannot be arecutor or administrator, or perform any personal duties; for it cannot take an 0a e. It cannot be seised _ of lands to the use of another; for such kind of confidence is foreign _ to the end of its institution. Neither can 1t be committed to a for its existence being ideal, no man can apprehend or arrest : cither can a corporation be excommunicated; for it has no ne as is gravely observed by Sir Edward Coke. CHESTNUT HILL TURNPIKE CO. v. RUTTER. 48. &R. (Pa.) 6, 1818. THE question presented was whether a corporation, authorized to build a turnpike, was liable for damages done to pr plaintiff, by water thrown upon the plaintifi’s land by reason of structures erected in building the turnpike. A judgment for the plaintiff was affirmed. : 1 Torts committed in the course of ultra vires undertakings are considered in the Book on Unauthorized Corporate Action. CHAP. 1.] CHESTNUT HILL TURNPIKE CO. v. RUTTER. 501 TiLGHMaAN, C.J. A very refined argument is brought forward, to prove that a corporation cannot be guilty of a tort. A corporation, say the defendant’s counsel, is a mere creature of law, and can act only as authorized by its charter. But the charter does not authorize it to do wrong, and therefore it can do no wrong. The argument is fallacious in its principles, and mischievous in its consequences, as it tends to introduce actual wrongs and ideal remedies; for a turn- pike company may do great injury, by means of laborers who have no property to answer the damages recovered against them. It is much more reasonable to say, that when a corporation is authorized by law to make a road, if any injury is done in the course of making “that Tost by the persons employed under is authority. it shall be- responsible, in the same manner that an individual is responsible for the actions of his servants, touching his business. The a act of the agent is the act of the principal. Nots. — All corporate action must, in the nature of things, be vicarious. Ifa corporation appoints an agent to carry on an intra MAA Ade vires undertaking, it is submitted that the corporation n should be © ---~— --—— required to respond for the act of that agent in any case where the master, if a human being, would be required “ respond. The authorities, accord, are very numerous. © See Baltimore R.R. Co. v. Fifth Baptist Chih 108 U.S. 317 (maintaining a nuisance); Brokaw v. New Jersey R.R. Co., 32 N.J.L. 328 (assault and battery); Savannah Electric Co. v. Wheeler, 128 Ga. 550 (conductor of a street railway company caused the death of A by firing a pistol); Waterman Co. v. Modern Pen Co., 235 U.S. 88, 94 (unfair competition); Carr v. National Bank, 167 N.Y. 375 (false representations) ; Peebles v. Patapsco Co., 77 N.C. 233 (deceit) ; Baltimore Ry. Co. v. Ennalls, 108 Md. 75 (false imprisonment) ; Fetty v. Loan Co., 70 W.Va. 688 (malicious prosecution); Sun Life Assurance Co. v. Bailey, 101 Va. 443 (libel); Empire Cream Co. v. De Laval Dairy Co., 75 N.J.L. 207 (slander); Hypes v. Southern Ry. Co., 82 8.C. 315; Aberthau Construction Co. v. Cameron, 194 Mass. 208 (conspiracy). But as to slander, see Singer Mfg. Co. v. Taylor, 150 Ala. 574; Waters-Pierce Oil Co. v. Bridwell, 103 Ark. 345; Stewart Dry Goods Co. v. Heuchtker, 148 Ky. 228; Kane v. Boston Mutual Co., 200 Mass. 265; Redditt v. Mfg. Co., 124 N.C. 100. As to the exemption from liability of a charitable corporation see Hearns v. Waterbury Hospital, 66 Conn. 98. Cf. Hordern v. Sal- vation Army, 199 N.Y. 233. As to the exemption from_liability of a corporation which @ is a servant_of the crown, see Roper v. Public Works Commissioners, 1915] 1 K.B. 45. As to the limits, in the nature of things, to vicarious action, the 502 CHESTNUT HILL TURNPIKE CO. v. RUTTER. [CHAP. I. ee of Co-Operative Law Co., 198 N.Y. , With Willmott v. London Road Car Co., Ltd., [1910] 2 Ch. 525. In Matter of Co-Operative Law Co., the court held that a corpora- tion cannot practice law, saying (p. 483): ‘‘The practice of law is not a business open to all, but a personal right, limited to a few persons of good moral character, with special qualifications ascer- tained and certified after a long course of study, both general and professional, and a thorough examination by astate board appointed for the purpose. The right to practice law is in the nature of a franchise from the state conferred only for merit. It cannot be as- signed or inherited but must be earned by hard study and good conduct. It is attested by a certificate of the Supreme Court and is protected by registration. No one can practice law unless he has taken an oath of office and has become an officer of the court, sub- ~ject to its discipline, tiable to punishment for contempt in violating ~his duties as such, and to suspension or removal. It isnot a lawful ~ business except for members of the bar who have complied with “all the conditions required by statute and the rules of the courts.— ~-—~ “As these conditions cannot be performed by a corporation, it follows ‘that the practice of law is not a lawful business Tor a corporation to engage in.” But in Willmott v: London Road Car Co., Ltd., it was held that a limited company was capable of being ‘a respectable and respon- sible person.” A lessee covenanted to use the demised premises for the business of a jobmaster and livery stable keeper, and not to assign or underlet without the written consent of the lessor, which “corsent-was rot to be withheld in respect of a respectable and re- sponsible person. Cozens-Harpy, M.R., said (p. 581): “Suppose the words had simply been that consent should not be withheld in the case of a responsible person, I cannot bring myself to doubt that in that case a company which was admitted to be responsible in the sense of being able to discharge all obligations in respect. of rent. and covenants under the lease would be a responsible person within the Meaning of that covenant, and therefore a person with respect-to whom consent could not be refused. But then it is said, and this is the point which alone has given me difficulty in this case, ‘Can it be said that a corporation can be respectable? Does not the addi- tion of that word ‘‘respectable” compel you to say that in this case the word ‘‘ person” must be limited to an individual, a human per- sonality, a person who is capable of acts moral or immoral?’ In my opinion that is not so. I think the ordinary use of language justifies you in saying that a company is 4 respectable company. We all use that language habitually. We talk of a respectable in- surance company, or a respectable bank, and in that case we refer to the mode in which the company or the bank conducts its busi- “ness. But I think we are not without assistance from authority wo CHAP. 1.] UNITED STATES v. JOHN KELSO CO. 503 which is absolutely binding on us. A limited company or a com- pany whether limited or not can maintain an action of libel for an injury to its reputation without proving any special damage. A_ company can have a reputation which is not the reputation of the | individual directors, bu of the company, the repu- tation which the company itself and itself alone can protect_by means Of an action of libel.” a t UNITED STATES v. JOHN KELSO CO. 86 Fed. 304. 1898. De Havsn, District Judge. On October 9, 1897, there was filed in this court by the United States district attorney for this district, an information charging the defendant, a corporation, with the viola- tion of “An act relating to the limitation of the hours of daily service of laborers and mechanics employed upon the public works of the United States and of the District of Columbia,” approved August 1, 1892 (2 Supp. Rev. St. p. 62). Upon the filing of this information, e court, upon motion of the district attorney, directed that a sum- mons in prescribed by ol the Penal Code Of this State, be served upon said corporation, and accordingly on ead ade Suomen cies tae enn elore the judge of said court in the court room of the United ~States District Court for this district on the 2ist_ day of October, 1897, to answer the charge contained in the information. The Summons stated generally the nature of the charge, and for a more “complete stat the i jon_on e. On the day named in Bald summons for its are the cree oe poration appeared spe and upon rounds Henettittan eed. Up the aocnent of this mo- was claimed in behalf of the defendant: First, that the act of Congress above referr does not apply to ions, ecause the mtention is a necessary element of the crime therein ~tiefned, and a corporation as such 1s incapable of entertaining a Criminal mtention. ... It will be seen that the first objection goes directly to the sufficiency of the information, and presents precisely the same question as would a general demurrer, attacking the infor- mation on the ground of an alleged failure to charge the defendant with the commission of a public offense. This objection is one which would not ordinarily be considered upon a motion like that now before the court, when the party making the objection refuses to acknowledge the jurisdiction of the court, or to make any other than a special appearance for the purpose of attacking its jurisdiction; 504 UNITED STATES 0. JOHN KELSO CO. [CHAP. I. but, in view of the conclusion which I have reached upon the second point urged by the defendant, it becomes necessary for me to de- termine whether the act of Congress above referred to is applicable to a corporation, and whether a corporation can be guilty of the crime of violating the provisions of said act. § 1 of that act makes it unlawful for a contractor or subcontractor upon any of the pub- +c works of the United States, whose duty it shall be to employ, ~~ direct,_o trol the services of laborers or mechanics upon such public works, “to require or permit any such laborer or mechanic work more than eight hours in any calendar day except in cases of extraordinary emergency. And § 2 of the act provides | SIE an Contr whose duty it shall be to employ, direct, : | Or control any laborer or mechanic employed upon ‘any—public works of the United States .. . who shall intentionally violate any. provision of this act, shall be “deemed guilty of a misdemeanor, and ~ for each and every offense shall upon conviction be punished by a finé not to exceed _o dollars or by imprisonment for not —more-than six months, or by both such fine and imprisonment, in the discretion of the court having jurisdiction thereof.” It will be observed that by the express language of this statute there must be an intenttonat-vivistion of ts provisions, in order Ww constitute-the olfense which the statute defines. In view of this express declara- tion, It is claimed in behalf of defendant that the act is not applic- 4) able to corporations, because it is not possible for a corporation to 2! committhe crime déseribed in the statute. The argument advanced TO BUSTEMT this position is, in substance, this: That 8 orp is only an artificial creation, without animate body or mind, an therefore, from. its very aes meapavie or cutertaiing ne e spe- ff eee u osha rnade-an-essential e of the crime therein ae The case of State Vv. Great Works M. & M. Co., 20 Me. 41, supports the proposition that a corpora- . tion is not amenable to prosecution for a positive act of misfeasance, involving a specific intention to do an unlawful act, and it must be conceded there are to be found dicta in many other cases to the same effect. In a general sense, it may be said that no crime can be committed without a joint operation of act and intention. Tn many crimes, how intention require 0 do the prohibited act, — that is to say, the crime is errr _Wher The prohibited act has been imfentionally done; and the more recent and better considered cases ho at a corporation may be charged with an offense which only involves this kind of intention, JL and may bé properly convicted when, in its corporate capacity, and by direction of those controlling its corporate action, it does the prohibited act. _In such a case the intention of its directors ~ that the prohibited act should be done is imputed to the corporation itself. State v. Morris E. R. Co., 23 N.J. Law, 360; Reg. v. Great CHAP. 1.] UNITED STATES v. JOHN KELSO CO. 505 North of England Ry. Co., 58 E.C.L. 315; Com. v. Proprietors of New Bedford Bridge, 2 Gray, 339. See, also, State v. Baltimore & ‘O. R. Co., 15 W.Va. 380: That a corporation may be liable civilly for that class of torts in which a specific malicious intention is an essential element is not disputed at this day. Thus an action for malicious prosecution will lie against a banking corporation. . Reed v. Bank, 130 Mass. 434; Goodspeed v. Bank, 22 Conn. 530. An action will lie also against a corporation for a malicious libel. Railroad Co. v. Quigley, 21 How. 202; Maynard v. Insurance Co., 34 Cal. 48. The opinion in the latter case, delivered by Currey, C.J., is an able exposition of the law relating to the liability of corporations for malicious libel, and in the course of which that learned judge, in answer to the contention that corporations are mere legal entities existing only in abstract contemplation, utterly incapable of malev- olence, and without power to will good or evil, said: “‘The directors are the chosen representatives of the corporation, and constitute, as already observed, to all purposes of dealing with others, the cor- poration. What they do within the scope of the objects and pur- poses of the corporation, the corporation does. If they do any injury to another, even though it necessarily involves in its commission a ““Tralicious intent, the corporation must be deemed by imputation to “be guilty of the wrong, and answerable for it, as an individual would ‘bein such case.” e rules of evidence in relation to the manner of proving the fact of intention are necessarily the same in a criminal as in a civil case, and the same evidence which in a civil case would be sufficient to prove a specific or malicious intention upon the part of a corpora- tion defendant would be sufficient to show a like intention upon the part of a corporation charged criminally with the doing of an act prohibited by the law. Of course, there are certain crimes of which a corporation cannot be guilty; as, for instance, bigamy, perjury, rape, murder, and other offenses, which will readily suggest them- selves to the mind. Crimes like these just mentioned can only be committed by natural persons, and statutes in relation thereto are for this reason never construed as referring to corporations; but when a statute in general terms prohibits the doing of an act which ‘can be performed by a corporation, and does not expressly exempt. corporations from its provisions, there is no reason why such statute Ghoul be onatTied Se-not applying to them, when the punishment provided for its infraction is one than can be inflicted_upon a cor- poration, — as, for instance, a fine. In the act of Congress now - under consideration it is made an offense for any contractor or subcontractor whose duty it shall be to employ, direct, or: control any laborer employed upon any of the public works of the United States, to require or permit such laborer to work more than eight hours.in any calendar day. A corporation may be a contractor or 506 STATE v. EASTERN COAL CO. [CHAP. 1. subcontractor in carrying on public works of the United States, and as such it has the power or capacity to violate this provision of the law. Corporations are, therefore, within the letter, and, as it is as much against the policy of the law for a corporation to violate these provisions as for a natural person so to do, they are also within the spirit of this statute; and no reason is perceived why a corpora- tion which does the prohibited act should be exempt from the pun- ishment prescribed therefor. If the law should receive the con- struction contended for by the defendant, the result would be that @ corporation, in contracting for the doing of any public work, would be given a privilege denied to a natural person. Such an ~ intention should not be imputed to Congress, unless its language will admit of no other interpretation. Nors. — See, accord, Evans & Co., Lid., v. London County Council, [1914] 3 K.B. 315. The legislature may impose upon a railway corporation the duty of providing an adequate supply of pure drinking water for its passengers, and may provide that the corporation shall be indicted, prosecuted, and fined for a neglect of this duty (Southern Railway Co. v. State, 125 Ga. 287); a railroad corporation, constructing its railroad across a highway wi t_lawful authority 18 hable to in- dictment for a nuisance (Commonwealth v. Vermont R.R. Corporation, 4 Gray [Mass.] 22); a corporation. may be found guilty of having in its possession, with intent to ; Tm ommonwealih v. Graustein & Co., 209 Mass. 388); 80, of selling goods which were underweight (State v. Creamery Co., 83 Kan389); 86,_of mailing obscene matter (United States v. New York Herald Co., 159 Fed. 296) ;_so, of taking usury (State v. First National Bank, 2 8. D. 568); so, 0 Baltimore R.R. Co. v. United States, 220 U.S. 94); so, of keeping a disorderly house (State v. Passaic County Society, 54 N.J.L. 260); so, of a contempt of court oe Neéws- paper Co. v. Commonwealth, 172 Mass. 294; Rex v. J. G. Ham- mond & Co., Ltd., [1914] 2 K.B. 866). STATE v. EASTERN COAL CO. 29 R.I. 254. 1908. Dvusots, J. These are indictments charging the defendants with conspiracy. The cases were heard together, and came to this court upon certifications from the Superior Court for the counties of Providence and Bristol, under C.P.A., § 478. The material portions of the four counts in each of the indict- ments set out that the defendants “unlawfully and fraudulently did CHAP. I.] STATE Vv. EASTERN COAL CO. 507 combine, confederate and conspire together by divers unlawful and fraudulent devices, contrivances and acts, unlawfully to regulate and fix the price at which coal should be sold in the said City of Providence, to the prejudice of the public and of the consumers of said coal, which said coal was then and there an article of prime necessi ¢ and the consumers thereo!”; and that the defendants “wilfully devising and intending to regulate and fix the price_of @ prime necessity of life in said City of Providence, did unlawfully and maliciously conspire, combine, confederate and agree ogether to do an illegal act injurious to the public trade in reference “to a prime necessity of life, to wit, to then and there, in restraint of trade and to the injury of the public trade, unlawfully create, enter mto and become members of and parties to a trust, agreement, combination, confederation and understanding, with each other “wrongfully and unlawfully to regulate and fix the price at which co cé, which said coal was the i prime necessity to the public and con- “sumeérs thereof’’; and also that the defendants ‘unlawfully, fraud- ulently, maliciously, wrongfully and wickedly did conspire and agree together to do an illegal act injurious to the public trade, to wit, to then and there unlawfully regulate and fix the price at which anthracite coal should be sold in the City of Providence, which said anthracite coal was then and there an article of prime necessity to the public and the consumers .thereof, and that the defendants did unlawfully and fraudulently fix and regulate the price of anthracite coal in said City of Providence”; and finally, that the defendants “unlawfully, fraudulently, maliciously, wrongfully and wickedly did conspire and agree together to do an illegal act injurious to the public trade, to wit, to then and there unlawfully regulate and fix the price at which coal should be sold in said City of Providence, which said coal was then and there an article of prime necessity to the said public and consumers thereof:” The following are the questions certified for our determination. . . . The eighth question raises the inquiry: Has a corporation the ability to commit this kind of crime? Saag fe ea The defendants, in support of their contention that it has not, ’ argue as follows: ‘“‘We submit that, on principle and authority, a corporation has not, from its very nature, the capacity to commit this offense. It is too plain to require argument that this intangible entity cannot actually do any act requiring any mental, moral, or spiritual process, or any act, as it is more frequently put, requiring intent. In civil cases the intent of the officer or agent is sometimes imputed to the corporation, it is true, but this doctrine is admittedly a pure legal fiction, based on grounds of public policy. “In civil cases a party has been injured and is seeking compen- sation. Balancing the equities of the plaintiff and the stockholders 508 STATE v. EASTERN COAL Co. [cHAP. I. of the defendant corporation, it has seemed more just that the _person injured should be reimbursed than that an individual stock- holder should be absolved from liability forced upon him by an officer of the corporation. . But in criminal cases the theory is ade- quate punishment for an offense against the State. The punish- ment may be out of all proportion to the benefit gained by the commission of the crime, and never has any logical relation to it. Oftentimes no advantage is gained by the corporation, so that to punish an innocent stockholder for an offense really committed by an officer of the corporation can have no basis in justice. Further- more, all the benefit of the preventive objects of the punishment can be accomplished by punishing those who are in fact the wrong- doers.” The following argument in behalf of the affirmative of the ques- tion is presented by the attorney-general: “Conspiracy is a misdemeanor at common law, and not a felony. There is nothing peculiar connected with the element of intent in- volved in the crime of conspiracy which differs from the element of intent in other ordinary misdemeanors. If the contention of the defendants is held to be good it would seem to necessarily follow that a corporation could not be held guilty of any of the ordinary crimes where the question of intent was involved. In the early his- tory of corporations they were held to be without power of action except through their agents, and therefore they could not be guilty of a crime requiring a criminal intent. It is believed that this theory has long since been exploded both in England and America. At the present time there seems to be very little doubt that corporations may be guilty of most of the common crimes, and that criminal intent will be imputed to the corporation from acts done by its agents. It is still held in some jurisdictions that corporations can not be guilty of a felony, or crimes where personal violence is in- volved, but that is as far as any courts, it is believed, will now go in holding that they cannot be guilty of crime. The tendency of the present time is to hold corporations responsible, criminally as well as civilly, for all acts committed by their agents, having any relation to the business of the corporation. “Tt has been repeatedly held that a corporation may be guilty of © criminal libel, of maintaining the various kinds of nuisances, and of violations of the various obligations which it owes to the public. Some States even hold them capable of committing the crime of assault and battery and other similar crimes. “Tt is now universally held that corporations may be liable for all kinds of torts, including conspiracy. It is further generally held that a corporation is liable in exemplary or punitive damages, damages which from their very nature are only allowed as punish- ment for an actual wrong committed, which the law presupposes CHAP. 1.] STATE Y. EASTERN COAL CO. _ 509 that the defendant had the volition or initiatory powcr to commit. or not to commit. The intention of the officers and agents of the corporation is imputed to the corporation in these civil cases, but that is wuat is done in all other cases where a corporation is held criminally liable. Corporations are held amenable for acts of con- spiracy in the enforcement of contracts in civil law. Why should there be a distinction in the law with regard to conspiracy between that which is criminal and that which is civil?” In support of their argument, the defendants also quote 2 Mora- wetz on Corporations, 2d ed., § 732: “It is sometimes said that the act of an agent is, in law, the act of his principal; but it is well to bear in mind that this is a mere fiction. A principal is frequently liable for the acts of his agents, as if he had done the acts himself; the reason of the liability, however, is not always the same. Some- times the principal is chargeable by reason of his previous consent, sometimes by reason of his subsequent adoption of the act of the agent, and sometimes by reason of a rule of positive law established upon the grounds of public policy, which is the ultimate source of all law. It is for the latter reason that a principal may often be held civilly responsible for the torts of his agents, though in no manner at fault himself; and this is true, even where the tort in- volves a malicious intention on the part of the wrong-doer. “But public policy certainly does not demand that a person or association should be punished by the State, through criminal pro- ceedings, on account of a wrong committed by another. This would be contrary to the natural sense of justice. Hence it is held that where the commission of a crime involves the intention of the offender, this intention cannot be.imputed by means of a fiction; actual intention is required. “Tt follows, therefore, that a corporation cannot be charged criminally with a crime involving malice, or the intention of the offender. Even though the corporators themselves should unani- mously join, with malice aforethought, in committing a crime as a corporate act, yet the malice would be that of the several mem- bers of the company, and not actually one malicious intention of the whole company.” This doctrine, however, is contrary to that held in The Buffalo Lubricating Oil Company v. The Standard Oil Company of New York, 106 N.Y. 669 (1887) : “We entertain no doubt that the action against a corporation may be maintained to recover damages caused by conspiracy. Morton v. Metropolitan Life Ins. Co., 34 Hun...366; affirmed, 103 N.Y. 645; Reed v. Home Savings Bank, 130 Mass. 443; Krulevite v. Eastern R. R. Co., 140 Mass. 575; Western News Co. v. Wilmarth, 33 Kan. 510. If actions can be maintained against corpo- rations for malicious prosecution, libel, assault and battery and other torts, we can perceive no reason for holding that actions may not or 510 PEOPLE v. ROCHESTER RAILWAY & LIGHT co. [CHAP. I. be maintained against them for conspiracy. It is well settled by the authorities cited, that the malice and wicked intent needful to sustain such actions may be imputed to corporations.” If corporations have the capacity to engage in actionable con- spiracy they have the po iminally conspire. We are of the opinion that the better reasoning supports the contention that cor- porations can conspire, and therefore answer the eighth question in the affirmative. Se ee Note. — In Telegram Newspaper Co. v. Commonwealth, 172 Mass. 294, the court said (p. 296): ‘It is said that an intent cannot be imputed to a corporation in criminal proceedings. It has been de- eided in this Commonwealth that a corporation may be liable civilly for a libel or a malicious prosecution. We think that a corporation may be liable criminally for certain offenses of which a specific intent may be necessary. There is no more difficulty in imputing to a corporation a specific intent in criminal proceedings than in civil.” In State v. Passaic County Society, 54 N.J.L. 260, the court said (p. 264): ‘The very basis of the action for libel or for malicious prosecution is the evil intent, the malice of the party defendant. It is difficult, therefore, to see how a corporation may be amenable to civil suit for libel and malicious prosecution and private nuisance, and mulcted in exemplary damages, and at the same time not be indictable for like offenses, where the injury falls upon the public.” PEOPLE v. ROCHESTER RAILWAY & LIGHT CO. 195 N.Y. 102. 1909. Hiscock, J. The respondent has been indicted for the crime of manslaughter in the second degree because, as alleged, it installed certain apparatus in a residence in Rochester in such a grossly improper, unskillful and negligent manner that gases escaped and caused the death of an inmate. The demurrer to the indictment has presented the question whether a corporation may be thus indicted for manslaughter, under § 193 of the Penal Code. Before proceeding to the interpretation of this specific provision we shall consider very briefly the general question discussed by the parties whether a corporation is capable of committing in any form such a crime as that of manslaughter. Of the correctness of the proposition urged in behalf of the People ne it may do so, subject to various limitations, we entertain no oubt. Some of the earlier writers on the common law held that a corpo- CHAP. 1.] PEOPLE v. ROCHESTER RAILWAY & LIGHT CO. 511 ration could not commit a crime. Blackstone in his Commentaries, Book 1, page 476, stated: “A corporation cannot commit treason or felony, or other crime, in its corporate capacity: though its mem- bers may, in their distinct individual capacities.” And Lord Chief Justice Hott (Anonymous, 12 Modern, 559) is said to have held that “a corporation is not indictable, but the particular members of it are.” In modern times, however, the courts and text writers quite universally have reached an opposite conclusion. A corpora- tion may be indicted either for nonfeasance or misfeasance, the obvious and general limitations upon this liability being in the former case that it shall be capable of doing the act of non-perform- ance of which it is charged, and that in the second case the act for the performance of which it is charged shall not be one of which performance is clearly and totally. beyond its authorized powers. Bishop’s New Criminal Law, §§ 421, 422. The instances in which it has been held that a corporation might be liable criminally simply because it did or did not perform some act, and where no element of intent was supposed to be involved, are so familiar that any extended reference to them is entirely unnecesary. The latest authority in this state upholding such lia- bility is found in the case of People v. Woodbury Dermatological Institute, 192 N.Y. 455, where it was held that a corporation might be punished criminally for disobeying the statute providing that “any person not a registered physician who shall advertise to prac- tice medicine, shall be guilty of a misdemeanor.” There was in- volved no question of intent, but simply disobedience of a statutory prohibition against doing certain acts. At times courts have halted somewhat at the suggestion that a corporation could commit a crime whereof the element of intent was an essential ingredient. But this doctrine, again with certain limitations, may now be regarded as established, and there is nothing therein which is either unjust or illogical. Of course, it has been fully recognized that there are many crimes so involving personal, malicious intent and acts ultra vires that a cor- poration manifestly could not commit them. Wharton’s Criminal Law (9th ed.), 191; Morawetz on Private Corporations (2d e1.), § 732 et seg. But a corporation, generally speaking, is liable in civil proceedings for the conduct of the agents through whom it conducts its business so long as they act within the scope of their authority, real or apparent, and it is but a step further in the same direction to hold that in many instances it may be charged criminally with the unlawful purposes and motives of such agents while so acting in its behalf... . Within the principles thus and elsewhere declared, we have no doubt that a definition of certain forms of manslaughter might have been formulated which would be applicable to a corporation, and 512 PEOPLE v. ROCHESTER RAILWAY & LIGHT co. [CHAP. I. make it criminally liable for various acts of misfeasance and non- feasance when resulting in death, and amongst which very probably might be included conduct in its substance similar to that here charged against the respondent. But this being so, the question. still confronts us whether corporations have been so made liable for the crime of manslaughter as now expressly defined in the section alone relied on by the People, and this question we think must be decisively answered in the negative. § 179 of the Penal Code defines homicide as “the killing of one // human being by the act, procurement or omission of another.” We think that this final word “another” naturally and clearly means a second or additional member of the same kind or class alone re- ferred to by the preceding words, namely, another human being, and that we should not interpret it as appellant asks us to, as mean- ing another “person,” which might then include corporations. It seems to us that it would be a violent strain upon a criminal statute to construe this word as meaning an agency of some kind other than that already mentioned or referred to, and as bridging over a radical transition from human beings to corporations. Therefore we construe this definition of homicide as meaning the killing of one human being by another human being. § 180 says that ‘‘ Homicide is either: 1. Murder; 2. Manslaughter,” etc. § 193 says that: “Such homicide,” that is, “the killing of one human being... by another,” is manslaughter in the second de- gree when committed “without a design to effect death. .: . 3. By any act, procurement or culpable negligence of any person, which ... does not constitute the crime of murder in the first or second degree, nor manslaughter in the first degree.”” Thus we have the underlying and fundamental definition of homicide as the killing of one human being by another human being, and out of this basic act thus defined and according to the circumstances which accompany it are established crimes of varying degree including that of man- slaughter for which the respondent has been indicted. In the defi- nition of these crimes as contained in the sections under considera- ‘tion (§§ 183-193) we do not discover any evidence of an intent on the part of the legislature to abandon the limitiation of its enact- ments to human beings or to include a corporation as a criminal. Many of these sections could not by any possibility apply to a cor- poration and in our opinion subdivision 3 of § 193 relating to man- slaughter manifestly does not. It is true that the term “person” used therein may at times include corporations but that is not the case here. The surrounding and related sections are not calculated to induce the belief that it has any such meaning, and the classifi- cation of manslaughter as a form of homicide and the definition of homicide already quoted forbid it. CHAP. 1.] PEOPLE ¥. ROCHESTER RAILWAY & LIGHT CO. 513 The judgment should be affirmed. Cutten, Ch.J., Gray, Epwarp T. BarTurtt, WERNER, WILLARD Bartuert and Cuass, JJ., concur. Judgment affirmed. Note. — A railroad corporation may be indicted and fined in case of a loss of life by reason of the negligence of the members, or their servants. Boston R.R. v. State, 32 N.H. 215. For other cases, in addition to the principal case, where the court concluded that the legislature had not intended that corporations should come within the scope of a statute defining an offense, see United States v. Braun, 158 Fed. 456; Pharmaceutical Society v. London Ass’n, Ltd., L.R. 5 App. Cas. 857; Hauke v: Hulton & Co., Lid., [1909] 2 K.B. 93 (offender to be deemed ‘‘a rogue and vaga- bond”’). 514 OFFENSES UNDER THE SHERMAN ANTI-TRUST act. [CHAP. IL CHAPTER II. OFFENSES UNDER THE SHERMAN ANTI-TRUST ACT. 26 U.S. STAT. 209. JULY 2, 1890. An Act to protect trade and commerce against unlawful restraints and monopolies. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, — Sc. 1. Every contract, combination in the form of trust or other- wise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not ex- ceeding one year, or by both said punishments, in the discretion of the court. Sec. 2. Every person who shall monopolize, or attempt to monop- olize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misde- meanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court. Sec. 3. Every contract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce in ahy Territory of the United States or of the District of Columbia, or in restraint of trade or commerce between any such Territory and another, or be- tween any such Territory or Territories and any State or States or the District of Columbia, or with foreign nations, or between the District of Columbia and any State or States or foreign nations, is hereby declared illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by im- prisonment not exceeding one year, or by both said punishments, in the discretion of the court. 3 Sec. 4. The several circuit courts of the United States are hereby ‘nvested with jurisdiction to prevent and restrain violations of this CHAP. I1.] OFFENSES UNDER THE SHERMAN ANTI-TRUST act. 515 act; and it shall be the duty of the several district attorneys of the United States, in their respective districts, under the direction of the Attorney-General, to institute proceedings in equity to prevent and restrain such violations. Such proceedings may be by way of petition setting forth the case and praying that such violation shall be enjoined or otherwise prohibited. When the parties complained of shall have been duly notified of such petition the court shall pro- ceed, aS soon as may be, to the hearing and determination of the case; and pending such petition and before final decree, the court may at any time make such temporary restraining order or prohibition as shall be deemed just in the premises. Suc. 5. Whenever it shall appear to the court before which any proceedings under section four of this act may be pending, that the ends of justice require that other parties should be brought before the court, the court may cause them to be summoned, whether they reside in the district in which the court is held or not; and subpoenas to that end may be served in any district by the marshal thereof. Sec. 6. Any property owned under any contract or by any combi- nation, or pursuant to any conspiracy (and being the subject thereof) mentioned in section one of this act, and being in the course of trans- portation from one State to another, or to a foreign country, shall be forfeited to the United States, and may be seized and condemned by like proceedings as those provided by law for the forfeiture, seizure, and condemnation of property imported into the United States con- trary to law. Src. 7. Any person who shall be injured in his business or prop- erty by any other person or corporation by reason of anything for- bidden or declared to be unlawful by this act, may sue therefor in any circuit court of the United States in the district in which the de- fendant resides or is found, without respect to the amount in con- troversy, and shall recover threefold the damages by him sustained, and the costs of suit, including a reasonable attorney’s fee. Src. 8. That the word “person,” or “persons,’”’ wherever used in this act shall be deemed to include corporations and associations existing under or authorized by the laws of either the United States, the laws of any of the Territories, the laws of any State, or the laws of any foreign country. Nore. — See also the Clayton Anti-Trust Act, 38 U.S. Stat. 730 (Oct. 15, 1914). ‘ 516 UNITED STATES v. EB. C. KNIGHT CO. [CHAP. II. UNITED STATES »v. E. C. KNIGHT CO. 156 U.S. 1. 1894. Mr. Cuter Justice Futier delivered the opinion of the court. The material facts proved are that the American Sugar Refining Co., one of the defendants, is incorporated under the laws of New Jersey, and has authority to purchase, refine, and sell sugar; that the Franklin Sugar Refinery, the E. C. Knight Co., the Spreckels Sugar Refinery, and the Delaware Sugar House, were incorporated under the laws of Pennsylvania, and authorized to purchase, refine, and sell sugar; that the four latter Pennsylvania companies were located in Philadelphia, and prior to March, 1892, produced about thirty-three per cent of the total amount of sugar refined in the United States, and were in active competition with the American Sugar Refining Co., and with each other, selling their product wher- ever demand .was found for it throughout the United States; that prior to March, 1892, the American Sugar Refining Co. had ob- tained control of all refineries in the United States, excepting the four located in Philadelphia, and that of the Revere Co. in Boston, the latter producing about two per cent of the amount refined in this country; that in March, 1892, the American Sugar Refining Co. entered into contracts (on different dates) with the stockholders of each of the Philadelphia corporations named, whereby it pur- chased their stock, paying therefor by transfers of stock in its com- pany; that the American Sugar Refining Co. thus obtained possession of the Philadelphia refineries and their business; that each of the purchases was made subject to the American Sugar Refining Co. obtaining authority to increase its stock $25,000,000; that this assent was subsequently obtained and the increase made; that there was no understanding or concert action between the stockholders of the several Philadelphia companies respecting the sales, but that those of each company acted independently of those of the others, and in ignorance of what was being done by such others; that the stockholders of each company acted in concert with each other, understanding and intending that all the stock and property of the company should be sold; that the cortract of sale in each instance left the sellers free to establish other refineries and continue the business if they should see fit to do so, and contained no provision respecting trade or commerce in sugar, and that no arrangement or provision on this subject has been made since; that since the purchase the Delaware Sugar House Refinery has been operated in conjunction with the Spreckels Refinery, and the E. C. Knight Refinery in connection with the Franklin, this combination being made apparently for reasons of economy in conducting the business; that the amount of sugar refined in Philadelphia has been increased . CHAP. 1.] UNITED STATES v. E. C. KNIGHT CO. 517 since the purchases; that the price has been slightly advanced since that event, but is still lower than it had been for some years before, and up to within a few months of the sales; that about ten per cent of the sugar refined and sold in the United States is refined in other refineries than those controlled by the American Sugar Refining Co.; that some additional sugar is produced in Louisiana and some is brought from Europe, but the amount is not large in either in- stance. The object in purchasing the Philadelphia refineries was to obtain a greater influence or more perfect control over the business of re- fining and selling sugar in this country. The Circuit Court held that the facts did not show a contract, combination, or conspiracy to restrain or monopolize trade or com- merce “‘among the several States or with foreign nations,” and dis- missed the bill. 60 Fed. Rep. 306. The cause was taken to the Circuit Court of Appeals for the Third Circuit, and the decree affirmed. 60 Fed. Rep. 934. This appeal was then prosecuted. The fundamental question is, whether conceding that the existence of a monopoly in manufacture is established by the evidence, that monopoly can be directly suppressed under the act of Congress in the mode attempted by this bill. : The argument is that the power to control the manufacture of refined sugar is a monopoly over a necessary of life, to the enjoy- ment of which by a large part of.the population of the United States interstate commerce is indispensable, and that, therefore, the general government in the exercise of the power to regulate commerce may repress such monopoly directly and set aside the instruments which have created it. But this argument cannot be confined to necessaries of life merely, and must include all articles of general consumption. Doubtless the power to control -the manufacture of a given thing involves in a certain sense the control of its disposition, but this is a secondary and not the primary sense; and although the exercise of that power may result in bringing the operation of commerce into play, it does not control it, and affects it only incidentally and indi- rectly. Commerce succeeds to manufacture, and is not a part of it. The power to regulate commerce is the power to prescribe the rule by which commerce shall be governed, and is a power independent of the power to suppress monopoly. But it may operate in repres- sion of monopoly whenever that comes within the rules by which commerce is governed or whenever the transaction is itself a monop- oly of commerce. It will be perceived how far-reaching the proposition is that the power of dealing with a monopoly directly may be exercised by the general government whenever interstate or international commerce may be ultimately affected. The regulation of commerce applies to the subject of commerce and not to matters of internal police. 518 UNITED STATES v. E. C. KNIGHT CO. [CHAP. IL. Contracts to buy, sell, or exchange goods to be transported among the several States, the transportation and its instrumentalities, and articles bought, sold, or exchanged for the purposes of such transit among the States, or put in the way of transit, may be regulated, but this is because they form part of interstate trade or commerce. The fact that an article is manufactured for export to another State does not of itself make it an article of interstate commerce, and the intent of the manufacturer does not determine the time when the article or product passes from the control of the State and belongs to commerce. This was so ruled in Coe v. Errol, 116 U.S. 517, 525, in which the question before the court was whether certain logs cut at a place in New Hampshire and hauled to a river town for the purpose of transportation to the State of Maine were liable to be taxed like other property in the State of New Hampshire. Mr. Justice BrapLey, delivering the opinion of the court, said: “Does the owner’s state of mind in relation to the goods; that is, his intent to export them, and his partial preparation to do so, exempt them from ‘taxation? This is the precise question for solution. . .. There must be a point of time when they cease to be governed exclusively by the domestic law and begin to be governed and protected by the national law of commercial regulation, and that moment seems to us to be a legitimate one for this purpose, in which they commence their final movement from the State of their origin to that of their destination.” Contracts, combinations, or conspiracies to control domestic enter- prise in manufacture, agriculture, mining, production in all its forms, or to raise or lower prices or wages, might unquestionably tend to restrain external as well as domestic trade, but the restraint would be an indirect result, however inevitable and whatever its extent, and such result would not necessarily determine the object of the contract, combination, or conspiracy. Again, all the authorities agree that in order to vitiate a contract or combination it is not essential that its result should be a com- plete monopoly; it is sufficient if it really tends to that end and to deprive the public of the advantages which flow from free competi- tion. Slight reflection will show that if the national power extends to all contracts and combinations in manufacture, agriculture, min- ing, and other productive industries, whose ultimate result may effect external commerce, comparatively little of business operations and affairs would be left for state control. It was in the light of well-settled principles that the act of July 2, 1890, was framed. Congress did not attempt thereby to assert the power to deal with monopoly directly as such; or to limit and restrict the rights of corporations created by the States or the citizens of the States in the acquisition, control, or disposition of property; or to regulate or prescribe the price or prices at which such property or CHAP. I1.] UNITED STATES v. E. CG. KNIGHT CO. 519 the products thereof should be sold; or to make criminal the acts of persons in the acquisition and control of property which the States of their residence or creation sanctioned or permitted. Aside from the provisions applicable where Congress might exercise municipal power, what the law struck at was combinations, contracts, and con- spiracies to monopolize tradé and commerce among the several States or with foreign nations; but the contracts and acts of the defendants related exclusively to the acquisition of the Philadelphia refineries and the business of sugar refining in Pennsylvania, and bore no direct relation to commerce between the States or with foreign nations. The object was manifestly private gain in the man- ufacture of the commodity, but not through the control of interstate or foreign commerce. It is true that the bill alleged that the prod- ucts of these refineries were sold and distributed among the several States, and that all the companies were engaged in trade or com- merce with the several States and with foreign nations; but this was no more than to say that trade and commerce served manufac- ture to fulfill its function. Sugar was refined for sale, and sales were probably made at Philadelphia for consumption, and undoubtedly for resale by the first purchasers throughout Pennsylvania and other States, and refined sugar was also forwarded by the companies to other States for sale. Nevertheless it does not follow that an attempt to monopolize, or the actual monopoly of, the manufacture was an attempt, whether executory or consummated, to monopolize com- merce, even though, in order to dispose of the product, the instru- mentality of commerce was necessarily invoked. There was nothing in the proofs to indicate any intention to put a restraint upon trade or commerce, and the fact, as we have seen, that trade or com- merce might be indirectly affected was not enough to entitle com- plainants to a decree. The subject-matter of the sale was shares of manufacturing stock, and the relief sought was the surrender of property which had already passed and the suppression of the alleged monopoly in manufacture by the restoration of the status quo before the transfers; yet the act of Congress only authorized the Circuit Courts to proceed by way of preventing and restraining violations of the act in respect to contracts, combinations, or conspiracies in re- straint of interstate or international trade or commerce. The Circuit Court declined, upon the pleadings and proofs, to grant the relief prayed, and dismissed the bill, and we are of opinion that the Circuit Court of Appeals did not err in affirming that decree. Decree affirmed. Mr. Justice Harwan dissented. Nore. — For other cases in which the court held that the acts of the defendants did not offend against the Anti-Trust Act because 520 UNITED STATES v. FREIGHT ASSOCIATION. [CHAP. IL the effect, if any, of their acts upon interstate commerce was indirect and incidental see Hopkins v. United States, 171 U.S. 578; Anderson v. United States, 171 U.S. 604; Field v. Barber Asphalt Co., 194 U.S. 618; Cincinnati Co. v. Bay, 200 U.S. 179. See also Board of Trade v. Christie Grain & Stock Co., 198 U.S. 236, 252. American Banana Co. v. United Fruit Co., 2138 U.S. 347. The prohibitions of the Anti-Trust Act do not extend to acts done in foreign countries even though done by citizens of the United States and injuriously affecting other citizens of the United States. UNITED STATES v. FREIGHT ASSOCIATION. 166 U.S. 290. 1897. CERTAIN competing railroads entered into an agreement “‘for the purpose of mutual protection by establishing and maintaining reasonable rates, rules and regulations on all freight traffic, both through and local.” A committee was created to adopt rates, which were to be the governing rates for all the railroads. Charging a, rate not so adopted subjected the railroad making the charge to a pen- alty. The Government asked that, under the provisions of the Anti- Trust Act, the defendants be enjoined from continuing to act pur- suant to the terms of such agreement. Mr. Justice Peckuam. [The court held that the Anti-Trust Act applied to common carriers by railroad.] Second. The next question to be discussed is as to what is the true construction of the statute, assuming that it applies to common carriers by railroad. What is the meaning of the language as used in the statute, that ‘every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce among the several States or with foreign nations, is hereby declared to be illegal’’? Is it confined to a contract or combination which is only in unreasonable restraint of trade or commerce, or does it include what the language of the act plainly and in terms covers, all contracts of that nature? We are asked to regard the title of this act as indicative of its purpose to include only those contracts which were unlawful at common law, but which require the sanction of a Federal statute in order to be dealt with in a Federal court. It is said that when terms which are known to the common law are used in a Federal statute those terms are to be given the same meaning that they received at common law, and that when the language of the title is “to pro- tect trade and commerce against unlawful restraints and monopo- lies,” it means those restraints and monopolies which the common CHAP. IL] UNITED STATES ¥. FREIGHT ASSOCIATION. 521 law regarded as unlawful, and which were to be prohibited by the Federal statute. We are of opinion that the language used in the title refers to and includes and was intended to include those re- ‘straints and monopolies which are made unlawful in the body of the statute. It is to the statute itself that resort must be had to learn the meaning thereof, though a resort to the title here creates no doubt about the meaning of and does not alter the plain language contained in its text. It is now with much amplification of argument urged that the statute, in-declaring illegal every combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce, does not mean what the language used therein plainly imports, but that it/only means to declare illegal any such contract which is in un- reasonable restraint of trade, while leaving all others unaffected by the provisions of the act; that the common law meaning of the term “contract in restraint of trade’ includes only such contracts as are in unreasonable restraint of trade, and when that term is used in the Federal statute it is not intended to include all ‘contracts in restraint of trade, but only those which are in unreasonable restraint thereof. The term is not of such limited signification. Contracts in re- straint of trade have been known and spoken of for hundreds of ' years both in England and in this country, and the term includes all kinds of those contracts which in fact restrain or may restrain trade. Some of such contracts have been held void and unenforce- able in the courts by reason of their restraint being unreasonable, while others have been held valid because they were not of that nature. A contract may be in restraint of trade and still be valid at common law. Although valid, it is nevertheless a. contract in re- straint of trade, and would be so described either at common law or elsewhere. By the simple use of the term “contract in restraint of trade,” all contracts of that nature, whether valid or otherwise, would be included, and not alone that kind of contract which was invalid and unenforceable as being in unreasonable restraint of trade. When, therefore, the body of an act pronounces as illegal every contract or combination in restraint of trade or commerce among the several States, etc., the plain and ordinary meaning of such language is not limited to that kind of contract alone which is in unreasonable restraint of trade, but all contracts are included in such language, and no exception or limitation can be added without placing in the act that which has been omitted by Congress. Proceeding, however, upon the theory that the statute did not mean what its plain language imported, and that it intended in its prohibition to denounce as illegal only those contracts which were in unreasonable restraint of trade, the courts below have made an exhaustive investigation as to the general rules which guide courts in declaring contracts to be void as being in restraint of trade, and * §22 UNITED STATES ¥. FREIGHT ASSOCIATION. [CHAP. II. therefore against the public policy of the country. In the course of their discussion of that subject they have shown that there has been a gradual though great alteration in the extent of the liberty granted to the vendor of property in agreeing, as part consideration for his sale, not to enter into the same kind of business for a certain time or within a certain territory. So long as the sale was the bona fide consideration for the promise and was not made a mere excuse for an invasion of the rule itself, the later authorities, both in England and in this country, exhibit a strong tendency towards enabling the parties to make such a contract in relation to the sale of property, including an agreement not to enter into the same kind of business, as they may think proper, and this with the view to granting to a vendor the freest opportunity to obtain the largest consideration for the sale of that which is his own. A contract which is the mere ac- -companiment of the sale of property, and thus entered into for the purpose of enhancing the price at which the vendor sells it, which in effect is collateral to such sale, and where the main purpose of the whole contract is accomplished by such sale, might not be included within the letter or spirit of the statute in question. But we cannot see how the statute can be limited, as it has been by the courts below, without reading into its text an exception which alters the. natural meaning of the language used, and that, too, upon a most material point, and where no sufficient reason is shown for believing that such alteration would make the statute more in accord with the intent of the law-making body that enacted it. The great stress of the argument for the defendants on this branch of the case has been to show, if possible, some reason in the attendant circumstances, or some fact existing in the nature of railroad property and business upon which to found the claim, that although by the language of the statute agreements or combinations in restraint of trade or commerce are included, the statute really means to declare illegal only those contracts, etc., which are in unreasonable restraint of trade. In order to do this the defendants call attention to many facts which they have already referred to in their argument, upon the point that railroads were not included at all in the statute. They again draw attention to the fact of the peculiar nature of railroad property. When a railroad is once built, it is said, it must be kept in operation; it must transport property, -when necessary in order to keep its business, at the smallest price and for the narrowest profit, or even for no profit, provided running expenses can be paid, rather than not to do the work; that railroad property cannot be altered for use for any other purpose, at least without such loss as may fairly be called destructive; that compe- tition while, perhaps, right and proper in other business, simply leads in railroad business to financial ruin and insolvency, and to the operation of the road by receivers in the interest of its creditors CHAP. Il.] UNITED STATES v. FREIGHT ASSOCIATION. 523 instead of in that of its owners and the public; that a contest be- tween a receiver of an insolvent corporation and one which is still solvent tends to ruin the latter company, while being of no benefit to the former; that a receiver is only bound to pay operating ex- penses, so he can compete with the solvent company and oblige it to come down to prices incompatible with any profit for the work done, and until ruin overtakes it to the destruction of innocent stockholders and the impairment of the public interests. To the question why competition should necessarily be conducted to such an extent as to result in this relentless and continued war, to eventuate only in the financial ruin of one or all of the companies indulging in it, the answer is made that if competing railroad com- panies be left subject to the sway of free and unrestricted competi- tion the results above foreshadowed necessarily happen from the nature of the case; that competition being the rule, each company will seek business to the extent of its power, and will underbid its rival in order to get the business, and such underbidding will act and react upon each company until the prices are so reduced as to make it impossible to prosper or live under them; that it is too much yo ask of human nature for one company to insist upon charges sufficiently high to afford a reasonable compensation, and while doing so to see its patrons leave for rival roads who are obtaining its business by offering less rates for doing it than can be afforded and a fair profit obtained therefrom. Sooner than experience ruin from mere inanition, efforts will be made in the direction of meeting the underbidding of its rival until both shall end in ruin. The only refuge, it is said, from this wretched end lies in the power of com- peting roads agreeing among themselves to keep up prices for trans- portation to such sums as shall be reasonable in themselves, so that companies may be allowed to save themselves from themselves, and to agree not to attack each other, but to keep up reasonable and living rates for services performed. It is said that as railroads have a right to charge reasonable rates it must follow that a contract among themselves to keep up their charges to that extent is valid. Viewed in the light of all these facts it is broadly and confidently asserted that it is impossible to believe that Congress or any other intelligent and honest legislative body could ever have intended to include all contracts or combinations in restraint of trade, and as a consequence thereof to prohibit competing railways from agreeing among themselves to keep up prices for transportation to such a rate as should be fair and reasonable. These arguments it must be confessed bear with much force upon the policy of an act which should prevent a general agreement upon the question of rates among competing railroad companies to the extent simply of maintaining those rates which were reasonable and fair. 524 UNITED STATES. v. FREIGHT ASSOCIATION. [CHAP. II. There is another side to this question, however, and it may not be amiss to refer to one or two facts which tend to somewhat modify and alter the light in which the subject should be regarded. If only that kind of contract which is in unreasonable restraint of trade be within the meaning of the statute, and declared therein to be illegal, it is at once apparent that the subject of what is a reasonable rate is attended with great uncertainty. What is a proper standard by. which to judge the fact of reasonable rates? Must the rate be so high as to enable the return for the whole business done to amount to a sum sufficient to afford the shareholder a fair and reasonable profit upon his investment? If so, what is a fair and reasonable profit? That depends sometimes upon the risk incurred, and the rate itself differs in different localities: which is the one to which reference is to be made as the standard? Or is the reasonableness of the profit to be limited to a fair return upon the capital that would have been cufficient to build and equip the road, if honestly ex- pended? Or is still another standard to be created, and the reason- ableness of the charges tried by the cost of the carriage of the article and a reasonable profit allowed on that? And in such case would contribution to a sinking fund to make repairs upon the roadbed and renewal of cars, etc., be assumed as a proper item? Or is the reasonableness of the charge to be tested by reference to the charges for transportation of the same kind of property made by other roads similarly situated? If the latter, a combination among such roads as to rates would, of course, furnish no means of answering the ques- tion. It is quite apparent, therefore, that it is exceedingly difficult to formulate even the terms of the rule itself which should govern in the matter of determining what would be reasonable rates for transportation. While even after the standard should be determined there is such an infinite variety of facts entering into the question of what is a reasonable rate, no matter what standard is adopted, that any individual shipper would in most cases be apt to abandon the effort to show the unreasonable character of a charge, sooner than hazard the great expense in time and money necessary to prove the fact, and at the same time incur the ill-will of the road itself in all his future dealings with it. To say, therefore, that the act excludes agreements which are not in unreasonable restraint of trade, and which tend simply to keep up reasonable rates for trans- portation, is substantially to leave the question of reasonableness to the companies themselves. . It must also be remembered that railways are public corporations organized for public purposes, granted valuable franchises and priv- ileges, among which the right to take the private property of the citizen in invitum is not the least, Cherokee Nation v. Southern Kansas Railway Co., 135 U.S. 641, 657; that many of them are the donees of large tracts of public lands and of gifts of money by mu- CHAP, 11.) UNITED STATES v. FREIGHT ASSOCIATION. 525 nicipal corporations, and that they all primarily owe duties to the public of a higher nature even than that of earning large dividends for their shareholders. The business which the railroads do is of a public nature, closely affecting almost all classes in the com- munity — the farmer, the artisan, the manufacturer and the trader. It is of such a public nature that: it may well be doubted, to say the least, whether any contract which imposes any restraint upon its business would not be prejudicial to the public interest. We recognize the argument upon the part of the defendants that restraint upon the business of railroads will not be prejudicial to the public interests so long as such restraint provides for reasonable rates for transportation and prevents the deadly competition so liable to result in the ruin of the roads and to thereby impair their usefulness to the public, and in that way to prejudice the public interest. But it must be remembered that these results are by no means admitted with unanimity; on the contrary, they are earnestly and warmly denied on the part of the public and by those who assume to defend its interests both in and out of Congress. Compe- tition, they urge, is a necessity for the purpose of securing in the end just and proper rates. It was said in Gibbs v. Baltimore Gas Company, 130 U.S. 396, at page 408, by Mr. Chief Justice Futurr, as follows: “The supplying of illuminating gas is a business of a public nature to meet a public necessity. It is not a business like that of an ordinary corporation engaged in the manufacture of articles that may be furnished by individual effort. New Orleans Gas Co. v. Louisiana Light Co., 115 US. 650; Louisville Gas Co. v. Citizens’ Gas Co., 115 U.S. 683; Shepard v. Milwaukee Gas Co., 6 Wisconsin, 539; Chicago Gas Light & Coke Co. v. People’s Gas Light & Coke Co., 121 Hlinois, 530; St. Louis v. St. Louis Gas Light Co., 70 Missouri, 69. Hence, while it is justly urged that those rules which say that a given contract is against public policy, should not be arbitrarily extended so as to interfere with the freedom of contract, Printing, etc., Registering Co. v. Sampson, L.R. 19 Eq. 462, yet in the instance of business of such a character that it presumably cannot be restramed to any extent whatever without prejudice to the public interest, courts decline to enforce or sustain contracts imposing such restraint, however partial, ‘because in contravention of public policy. This subject is much considered, and the authorities cited in West Virginia Transporta- tion Co. *v. Ohio River Pipe Line Co., 22 West Va. 600; Chieago, etc., Gas Co. v. People’s Gas Co., 121 Hlinois, 5380; Western Union ‘Tele- graph Co. v. American Union Telegraph Co., 65 Georgia, 160.” It is true that in the Gibbs case there was a special statute which prohibited the company from entering into any consolidation, com- bination or contract with any other gas company whatever, and it was provided that any attempt to do so or to make such combina- 526 UNITED STATES Jv. FREIGHT ASSOCIATION. [CHAP. II. tion or contract should be utterly null and void. The above extract from the opinion of the court is made for the purpose of showing the difference which exists between a private and a public corporation — that kind of a public corporation which, while doing business for remuneration, is yet so connected in interest with the public as to give a public character to its business — and it is seen that while, in the absence of a statute prohibiting them, contracts of private individuals or corporations touching upon restraints in trade must be unreasonable in their nature to, be held void, different considera- tions obtain in the case of public corporations like those of railroads where it well may be that any restraint upon a business of that character as affecting its rates of transportation must thereby be prejudicial to the public interests. The plaintiffs are, however, under no obligation in order to main- tain this action to show that by the common law all agreements among competing railroad companies to keep up rates to such as are reasonable were void as in restraint of trade or commerce. There are many cases which look in that direction if they do not precisely decide that point. Some of them are referred to in the opinion in the Baltimore Gas Company case, above cited. The case of the Mogul Steamship Company v. McGregor, 21 Q.B.D. 544; 23 Q.B.D. 598; 1892, App. Cas. 25, has been cited by the courts below as holding in principle that contracts of this nature are valid at common law. The agreement held valid there was an agreement for lowering rates of transportation among the parties thereto, and it was entered into for the purpose of driving out of trade rival steamships in order that thereafter the rates might be advanced. The English courts held that the agreement was not a conspiracy, and that it was valid, although the result aimed at was to drive a rival out of the field, because so long as the injury to such rival was not the sole reason for the agreement, but self-interest the predominating motive, there was nothing wrong in law with an agreement of that kind. But assuming that agreements of this nature are not void at common law and that the various cases cited by the learned courts below show it, the answer to the statement of their validity now is to be found in the terms of the statute under consideration. The provisions of the Interstate Commerce Act relating to reasonable rates, discrim- inations, etc., do not authorize such an agreement as this, nor do they authorize any other agreements which would be inconsistent with the provisions of this act. The general reasons for holding agreements of this nature to be invalid even at common law, on the part of railroad companies are quite strong, if not entirely conclusive. Considering the public character of such corporations, the privi- leges and franchises which they have received from the public in order that they might transact business, and bearing in mind how CHAP. II.] UNITED STATES v. FREIGHT ASSOCIATION. 527 closely and immediately the question of rates for transportation affects the whole public, it may be urged that Congress had in mind all the difficulties which we have before suggested of proving the unreasonableness of the rate, and might, in consideration of all the circumstances, have deliberately decided to prohibit all agreements and combinations in restraint of trade or commerce, regardless of the question whether such agreements were reasonable or the reverse. It is true that, as to a majority of those living along its line, each railroad isa monopoly. Upon the subject now under consideration it is well said by Judge Ontvmr P. Sutras, United States District Judge, Northern District of Iowa, in his very able dissenting opinion in this case in the United States Circuit Court of Appeals, as follows: — “As to the majority of the community living along its line, each railway company has a monopoly of the business demanding trans- portation as one of its elements. By reason of this fact the action of this corporation in establishing the rates to be charged largely influences the net profit coming to the farmer, the manufacturer and the merchant, from the sale of the products of the farm, the work- shop and manufactory, and of the merchandise purchased and re- sold, and also largely influences the price to be paid by every one who consumes any of the property transported over the line of railway. There is no other line of business carried on in our midst which is so intimately connected with the public as that conducted by the railways of the country. ... A railway corporation engaged in the transportation of the persons and property of the commu- nity is always carrying on a public business which at all times directly affects the public welfare. All contracts or combinations entered into between railway corporations intended to regulate the rates to be charged the public for the service rendered, must of necessity affect the public interest. By reason of this marked dis- tinction existing between enterprises inherently public in their char- acter and those of a private nature, and further by reason of the difference between private persons and corporations engaged in private pursuits, who owe no direct or primary duty to the public, and public corporations created for the express purpose of carrying on public enterprises, and which, in consideration of the public powers exercised in their behalf, are under obligation to carry on the work entrusted to their management primarily in the interest and for the benefit of the community, it seems clear to me that the same test is not applicable to both classes of business and corporations in determining the validity of contracts and combinations entered into by those engaged therein. . . . In the opinion of the court are found citations from the reports of the Interstate Commerce Commission in which are depicted the evils that are occasioned to the railway companies and the public by warfares over rate charges, and the advantages that are gained in many directions by proper conference 528 UNITED STATES ¥. FREIGHT ASSOCIATION. [CHAP. II. and concert of action among the competing lines. It may be entirely true that as we proceed in the development of the policy of public control over railway traffic, methods will be devised and put in operation by legislative enactment whereby railway companies and the public may be protected against the evils arising from unre- stricted competition and from rate wars which unsettle the business of the community, but I fail to perceive the force of the argument that because railway companies through their own action cause evils to themselves and the public by sudden changes or reductions in tariff rates they must be permitted to deprive the community of the benefit of competition in securing reasonable rates for the trans- portation of the products of the country. Competition, free and unrestricted, is the general rule which governs all the ordinary business pursuits and transactions of life. Evils, as well as benefits, result therefrom. In the fierce heat of competition the stronger competitor may crush out the weaker; fluctuations in prices may be caused that result in wreck and disaster; yet, balancing the bene- fits as against the evils, the law of competition remains as a control- ling element in the business world. That free and unrestricted com- petition in the matter of railroad charges may be productive of evils does not militate against the fact that such is the law now governing the subject. No law can be enacted nor system be de- vised for the control of human affairs that in its enforcement does not produce some evil results, no matter how beneficial its general purpose may be. There are benefits and there are evils which result from the operation of the law of free competition between railway companies. The time may come when the companies will be relieved from the operation of this law, but they cannot, by combination and agreements among themselves, bring about this change. The fact that the provisions of the Interstate Commerce Act may have changed in many respects the conduct of the companies in the carrying on of the public business they are engaged in does not show that it was the intent of Congress, in the enactment of that statute, to clothe railway companies with the right to combine to- gether for the purpose of avoiding the effects of competition on the subject of rates.” : The whole opinion is a remarkably strong presentation of the views of the learned judge who wrote it. Still, again, it is answered that the effects of free competition among railroad companies, as described by the counsel for the com- panies themselves in the course of their argument, are greatly exag- gerated. According to that argument, the moment an agreement of this nature is prohibited the railroads commence to cut their rates, and they cease only with their utter financial ruin, leaving, perhaps, one to raise rates indefinitely when its rivals have been driven away. It is said that this is a most overdrawn statement, and that while CHAP. 11] UNITED STATES v. FREIGHT ASSOCIATION. 529 absolutely free competition may have in some instances and for a time resulted in injury to some of the railroads, it is not’ at all clear that the general result has been other than beneficial to the whole public, and not in the long run detrimental to the prosperity of the roads. It is matter of common knowledge that agreements as to rates have been continually made of late years, and that com- plaints of each company in regard to the violation of such agree- ments by its rivals have been frequent and persistent. Rate wars go on notwithstanding any agreement to the contrary, and the strug- gle for business among competing roads keeps on, and in the nature of things will keep on, any alleged agreement to the contrary not- withstanding, and it is only by the exercise of good sense and by the presence of a common interest that railroads, without entering into any affirmative agreement in regard thereto, will keep within the limit of exacting a fair and reasonable return for services ren- dered. These agreements have never been found really effectual for any extended period. The Interstate Commerce Commission, from whose reports quo- tations have been quite freely made by counsel for the purpose of proving the views of its learned members in regard to this subject, has never distinctly stated that agreements among competing rail- roads to maintain prices are to be commended, or that the general effect is to be regarded as beneficial. They have stated in their fourth annual -report that competition may degenerate into rate wars, and that such wars are as unsettling to the business of the country as they are mischievous to the carriers, and that the spirit of existing law is against them. They then add: ‘‘ Agreements be- tween railroad companies which from time to time they have entered into with a view to prevent such occurrences have never been found effectual, and for the very sufficient reason, that the mental reserva- tions in forming them have been quite as numerous and more influ- ential than the written stipulations.” It would seem true, therefore, that there is no guaranty of financial health to be found in entering into agreements for the maintenance of rates, nor is financial ruin or insolvency the necessary result of their absence. The claim that the company has the right to charge reasonable rates, and that, therefore, it has the right to enter into a combina- tion with competing roads to maintain such rates, cannot be ad- mitted. The conclusion does not follow from an admission of the premise. What one company may do in the way of charging rea- sonable rates is radically different from entering into an agreement with other and competing roads to keep up the rates to that point. If there be any competition the extent of the charge for the service will be seriously affected by that fact. Competition will itself bring charges down to what may be reasonable, while in the case of an agreement to keep prices up, competition is allowed no play; it is 530 UNITED STATES v. FREIGHT ASSOCIATION. [CHAP. II. shut out, and the rate is practically fixed by the companies them- selves by virtue of the agreement, so long as they abide by it. As a result of this review of the situation, we find two very widely divergent views of the effects which might be expected to result from declaring illegal all contracts in restraint of trade, ete.; one side predicting financial disaster and ruin to competing railroads, including thereby the ruin of shareholders, the destruction of im- mensely valuable properties, and the consequent prejudice to the public interest; while on the other side predictions equally earnest are made that no such mournful results will follow, and it is urged that there is a necessity, in order that the public interest may be fairly and justly protected, to allow free and open competition among railroads upon the subject of the rates for the transportation of persons and property. The arguments which have been addressed to us against the in- clusion of all contracts in restraint of trade, as provided for by the language of the act, have been based upon the alleged presumption that Congress, notwithstanding the language of the act, could not have intended to embrace all contracts, but only such contracts as were in unreasonable restraint of trade. Under these circumstances we are, therefore, asked to hold that the act of Congress excepts contracts which are not in unreasonable restraint of trade, and which only keep rates up to a reasonable price, notwithstanding the lan- guage of the act makes no such exception. In other words, we are asked to read into the act by way of judicial legislation an exception that is not placed there by the lawmaking branch of the Govern- ment, and this is to be done upon the theory that the impolicy of such legislation is so clear that it cannot be supposed Congress in- tended the natural import of the language it used. This we cannot and ought not to do. That impolicy is not so clear, nor are the reasons for the exception so potent as to permit us to interpolate an exception into the language of the act, and to thus materially alter its meaning and effect. It may be that the policy evidenced by the passage of the act itself will, if carried out, result in disaster to the roads and in a failure to secure the advantages sought from such leg- islation. Whether that will be the result or not we do not know and cannot predict. These considcrations are, however, not for us. If the act ought to read as contended for by defendants, Congress is the body to amend it and not this court, by a process of judicial legislation wholly unjustifiable. Large numbers do not agree that the view taken by defendants is sound or true in substance, and Congress may and very probably did share in that belief in passing the act. The public policy of the Government is to be found in its statutes, and when they have not directly spoken, then in the de- cisions of the courts and the constant practice of the government officials; but when the lawmaking power speaks upon a particular CHAP. Il.] UNITED STATES v. FREIGHT ASSOCIATION. 531 subject, over which it has constitutional power to legislate, public policy in such a ease is what the statute enacts. If the law prohibits any contract or combination in restramt of trade or commerce, a contract or combination made in violation of such law is void, whatever may have been theretofore decided by the courts to have been the public policy of the country on that subject. Mr. Chief Justice Futter, Mr. Justice Hartan, Mr. Justice Brewer, and Mr. Justice Brown concurred. Mr. Justice Frenp, Mr. Justice Gray, Mr. Justice Surras, and Mr. Justice Wurs dissented. Mr. Justice Wuire wrote the dis- senting opinion, in the course of which he said: — The theory upon which the contract is held to be illegal is that even though it be reasonable, and hence valid, under the general principles of law, it is yet void, because it conflicts with the act of Congress already referred to. Now, at the outset, it is necessary to understand the full import of this conclusion. As it is conceded that the contract does not unreasonably restrain trade, and that if it does not so unreasonably restrain, it is valid under the general law, the decision, substantially, is that the act of Congress is a departure from the general principles of law, and by its terms destroys the right of individuals or corporations to enter into very many reason- able contracts. But this proposition, I submit, is tantamount to an assertion that the act of Congress is itself unreasonable. The diffi- culty of meeting, by reasoning, a premise of this nature is frankly conceded, for, of course, where the fundamental proposition upon which the whole contention rests is that the act of Congress is un- reasonable, it would seem conducive to no useful purpose to invoke ~ reason as applicable to and as controlling the construction of a stat- ute which is admitted to be beyond the pale of reason. The question, then, is, is the act of Congress relied on to be so interpreted as to give it a reasonable meaning, or is it to be construed as being un- reasonable and as violative of the elementary principles of justice? Note. — The doctrine of this case was reaffirmed in United States v. Joint Traffic Association, 171 U.S. 505. Mr. Justice Peckuam again wrote the opinion, and the division of the court was the same as in the principal case, except that Mr. Justice Fretp was no longer a member of the court and his successor, Mr. Justice McKENnNa, took no part in the decision. In Shawnee Compress Co. v. Anderson, 209 U.S. 423, Mr. Justice McKenna said (p. 434): “It has been decided that not only un- reasonable but all direct restraints of trade are prohibited, the law being thereby distinguished from the common law.” See also, Addyston Pipe Co. v. United States, 175 U.S. 211; Mon- tague v. Lowry, 193 U.S. 38; Chattanooga Foundry v. Atlanta, 203 U.S. 390; Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20. §32 NORTHERN SECURITIES CO. v. UNITED STATES. [CHAP. II, NORTHERN SECURITIES CO. ». UNITED STATES. 193 U.S. 197. 1904. Tur Great Northern Railway Company, a Minnesota corpora- tion, owned and operated a line of railway extending from Superior, Duluth and St. Paul to Everett, Seattle and Portland, with a branch line to Helena. The Northern Pacific Railway Company, a Wisconsin corporation, owned and operated a line of railway ex- tending from Ashland, Duluth and St. Paul to Helena, Spokane, Seattle, Tacoma and Portland. The two were engaged in active competition for freight and passenger traffic. In 1901, James J. Hill, and associate stockholders in the Great Northern Railway Company, and J. Pierpont Morgan, and asso- ciate stockholders in the Northern Pacific Railway Company, entered into a combination to form, under the laws of New Jersey, a hold- ing corporation, to be called the Northern Securities Company, to which, in exchange for its own capital stock upon a certain basis, was to be turned over the capital stock, or a controlling interest in the capital stock, of the two railroad corporations, with power in the holding corporation to vote such stock and to act in all respects as the owner thereof. : It was alleged and found that their purpose was to make the stockholders of each system jointly interested in both systems, and practically to pool the earnings of both for the benefit of the former stockholders of each, and to vest the selection of the directors and officers of each system in a common body, to wit, the holding cor- poration, with not only the power but the duty to pursue a policy which would promote the interests, not of one system at the expense of the other, but of both at the expense of the public. All induce- ment for competition between the two systems was to be removed, a virtual consolidation effected, and a monopoly of the interstate and foreign commerce formerly carried on by the two systems as independent competitors established. The Northern Securities Company was organized. By its certifi- cate of incorporation, one of its objects was stated to be “‘to ac- quire by purchase, subscription or otherwise, and to hold as invest- ment, any bonds or other securities or evidences of indebtedness, or any shares of capital stock created or issued by any other cor- poration or corporations, association or ‘associations, of the State of New Jersey, or of any other State, Territory or country.” Through the issue of its stock it acquired more than nine-tenths of the stock of the Northern Pacific, and more than three-fourths of the stock of the Great Northern. _Hartan, J. The stockholders of these two competing companies disappeared, as such, for the moment, but immediately reappeared CHAP. I1.] NORTHERN SECURITIES CO. v. UNITED STATES. 533 as stockholders of the holding company which was thereafter to guard the interests of both sets of stockholders as a unit, and to manage, or cause to be managed, both lines of railroad as if held in one ownership. Necessarily by this combination or arrangement the holding company in the fullest sense dominates the situation in the interest of those who were stockholders of the constituent com- panies; as much so, for every practical purpose, as if it had been itself a railroad corporation which had built, owned, and operated both lines for the exclusive benefit of its stockholders. Necessarily, also, the constituent companies ceased, under such a combination, to be in active competition for trade and commerce along their respective lines, and have become, practically, one powerful con- solidated corporation, by the name of a holding corporation the principal, if not the sole, object for the formation of which was to carry out the purpose of the original combination under which competition between the constituent companies would cease. Those who were stockholders of the Great Northern and Northern Pacific and became stockholders in the holding company are now interested in preventing all competition between the two lines, and as owners of stock or of certificates of stock in the holding company, they will see to it that no competition is tolerated. They will take care that no persons are chosen directors of the holding company who will permit competition between the constituent companies. The result of the combination is that all the earnings of the constituent com- panies make a common fund in the hands of the Northern Securities Company, to be distributed, not upon the basis of the earnings of the respective constituent companies, each acting exclusively in its own interest, but upon the basis of the certificates of stock issued by the holding company. No scheme or device could more certainly come within the words of the act — “combination in the form of a trust or otherwise ... in restraint of commerce among the several States or with foreign nations,’ —or could more effectively and certainly suppress free competition between the constituent com- panies. This combination is, within the meaning of the act, a “trust”; but if not, it is a combination in restraint of interstate and international commerce; and that is enough to bring it under the condemnation of the act. The mere existence of such a combination and the power acquired by the holding company as its trustee, constitute a menace to, and a restraint upon, that freedom of com- merce which Congress intended to recognize and protect, and which the public is entitled to have protected. If such combination be not destroyed, all the advantages that would naturally come to the public under the operation of the general laws of competition, as between the Great Northern and Northern Pacific Railway com- panies, will be lost, and the entire commerce of the immense territory in the northern part of the United States between the Great Lakes 534 NORTHERN SECURITIES CO. v. UNITED STATES. [CHAP. II. and the Pacific at Puget Sound will be at the mercy of a single holding corporation, organized in a State distant from the people of that territory. Ts the act to be construed as forbidding every combination or conspiracy in restraint of trade or commerce among the States or with foreign nations? Or, does it embrace only such restraints as are unreasonable in their nature? Is the motive with which a for- bidden combination or conspiracy was formed at all material when it appears that the necessary tendency of the particular combina- tion or conspiracy in question is to restrict or suppress free compe- tition between competing railroads engaged in commerce among the States? ... [The court, after reviewing the decisions, stated, that, among the propositions established thereby, were the following:] That the act is not limited to restraints of interstate and interna- tional trade or commerce that are unreasonable in their nature, but embraces all direct restraints imposed by any combination, conspiracy or monopoly upon such trade or commerce; That Congress has the power to establish rules by which inter- state and international commerce shall be governed, and, by the Anti-Trust Act, has prescribed the rule of free competition among those engaged in such commerce; That every combination or conspiracy which would extinguish competition between otherwise competing railroads engaged in inter- state trade or commerce, and which would in that way restrain such trade or commerce, is made illegal by the act; That the natural effect of competition is to increase commerce, and an agreement whose direct effect is to prevent this play of com- petition restrains instead of promotes trade and commerce; That to vitiate a combination, such as the act of Congress con- demns, it need not be shown that the combination, in fact, results or will result in a total suppression of trade or in a complete mo- nopoly, but is only essential to show that by its necessary operation it tends to restrain interstate or international trade or commerce or tends to create a monopoly in such trade or commerce and to de- prive the public of the advantages that flow from free competition. Many suggestions were made in argument based upon the thought that the Anti-Trust Act would in the end prove to be mischievous in its consequences. Disaster to business and wide-spread financial ruin, it has been intimated, will follow the execution of its provisions. Such predictions were made in all the cases heretofore arising under that act. But they have not been verified. It is the history of monop- olies in this country and in England that predictions of ruin are habitually made by them when it is attempted, by legislation, to restrain their operations and to protect the public against their exactions. CHAP. 1] NORTHERN SECURITIES CO. ¥. UNITED STATES. 535 But even if the court shared the gloomy forebodings in which the defendants indulge, it could not refuse to respect the action of the legislative branch of the Government if what it has done is within the limits of its constitutional power: The suggestions of disaster to business have, we apprehend, their origin in the zeal of parties who are opposed to the policy underlying the act of Congress or are interested in the result of this particular case; at any rate, the sug- gestions imply that the court may and ought to refuse the enforce- ment of the provisions of the act if, in its judgment, Congress was not wise in prescribing as a rule by which the conduct of interstate and international commerce is to be governed, that every combina- tion, whatever its form, in restraint of such commerce and the monopolizing or attempting to monopolize such commerce shall be illegal. These, plainly, are questions as to the policy of legislation which belong to another department, and this court has no function to supervise such legislation from the standpoint of wisdom or policy. We need only say that Congress has authority to declare, and by the language of its act, as interpreted in prior cases, has in effect declared, that the freedom of interstate and international commerce shall not be obstructed or disturbed by any combination, conspiracy or monopoly that will restrain such commerce, by preventing the free operation of competition among interstate carriers engaged in the transportation of passengers and freight. This court cannot dis- regard that declaration unless Congress, in passing the statute in question, be held to have transgressed the limits prescribed for its action by the Constitution. It was said in argument that the circumstances under which the Northern Securities Company obtained the stock of the constituent companies imported simply an investment,in the stock of other corporations, a purchase of that stock; which investment or pur- chase, it is contended, was not forbidden by the charter of the com- pany and could not be made illegal by any act of Congress. This view is wholly fallacious, and does not comport with the actual transaction. There was no actual investment, in any substantial sense, by the Northern Securities Company in the stock of the two constituent companies. If it was, in form, such a transaction, it was not, in fact, one of that kind. However that company may have acquired for itself any stock in the Great Northern and Northern Pacific Railway companies, no matter how it obtained the means to do so, all the stock it held or acquired in the constituent companies was acquired and held to be used in suppressing competition be- tween those companies. It came into existence only for that pur- pose. If any one had full knowledge of what was designed to be accomplished, and as to what was actually accomplished, by the combination in question, it was the defendant Morgan. In his tes- timony he was asked, “‘Why put the stocks of both these [constituent 536 NORTHERN ‘SECURITIES CO. ¥. UNITED STATES. [CHAP, II. companies] into one holding company?” He frankly answered: ‘In the first place, this holding company was simply a question of cus- todian, because it had no other alliances.’”’ That disclosed the actual nature of the transaction, which was only to organize the Northern Securities Company as a holding company, in whose hands, not as a real purchaser or absolute owner, but simply as custodian, were to be placed the stocks of the constituent companies — such cus- todian to represent the combination formed between the share- holders of the constituent companies, the direct and necessary effect of such combination being, as already indicated, to restrain and monopolize interstate commerce by suppressing or (to use the words of this court in United States v. Joint Traffic Association) ‘“smother- ing” competition between the lines of two railway carriers. Mr. Justice Brown, Mr. Justice McKenna, and Mr. Justice Day concurred. Mr. Justice BrewEr, concurring in the result. I cannot assent to all that is said in the opinion just announced, and believe that the importance of the case and the questions in- volved justify a brief statement of my views. First, let me say that while I was with the majority of the court in the decision in United States v. Freight Association, 166 U.S. 290, followed by the cases of United States v. Joint Traffic Association, 171 U.S. 505, Addyston Pipe & Steel Company v. United States, 175 U.S. 211, and Montague & Co. v. Lowry, 193 U.S. 38, decided at the present term, and while a further examination (which has been induced by the able and exhaustive arguments of counsel in the present case) has not disturbed the conviction that those cases were rightly decided, I think that in some respects the reasons given for the judgments cannot be sustained. Instead of holding that the Anti-Trust Act included all contracts, reasonable or un- reasonable, in restraint of interstate trade, the ruling should have been that the contracts there presented were unreasonable restraints of interstate trade, and as such within the scope of the act. That act, as appears from its title, was leveled at only ‘‘ unlawful restraints and monopolies.” Congress did not intend to reach and destroy those minor contracts in partial restraint of trade which the long course of decisions at common law had affirmed were reasonable and ought to be upheld. The purpose rather was to place a statutory prohibition with prescribed penalties and remedies upon those con- tracts which were in direct restraint of trade, unreasonable and against public policy. Whenever a departure from common law rules and definitions is claimed, the purpose to make the departure should be clearly shown. Such a purpose does not appear and such a departure was not intended. Further, the general language of the act is also limited by the power. which each individual has to manage his own property and CHAP. IL] NORTHERN SECURITIES CO. v. UNITED STATES. 537 determine the place and manner of its investment. Freedom of ac- tion in these respects is among the inalienable rights of every citizen. If, applying this thought to the present case, it appeared that Mr. Hill was the owner of a majority of the stock in the Great Northern Railway Company he could not by any act of Congress be deprived of the right of investing his surplus means in the purchase of stock of the Northern Pacific Railway Company, although such purchase might tend to vest in him through that ownership a control over both companies. In other words, the right, which all other citizens had, of purchasing Northern Pacific stock could not be denied to him by Congress because of his ownership of stock in the Great Northern Company. Such was the ruling in Pearsall v. Great Northern Railway, 161 U.S. 646, in which this court said (p. 671), in reference to the right of the stockholders of the Great Northern Company to purchase the stock of the Northern Pacific Railway Company: ‘Doubtless these stockholders could lawfully acquire by individual purchases a majority, or even the whole of the stock of the reorganized company, and thus possibly obtain its ultimate control; but the companies would still remain separate corporations with no interests, as such, in common.” But no such investment by a single individual of his means is here presented. There was a combination by several individuals separately owning stock in two competing railroad companies to place the control of both in a single corporation. The purpose to combine and by combination destroy competition existed before the organization of the corporation, the Securities Company. That corporation, though nominally having a capital stock of $400,000,- 000, had no means of its own; $30,000 in cash was put into its treasury, but simply for the expenses of organization. The organ- izers might just as well have made the nominal stock a thousand millions as four hundred, and the corporation would have been no richer or poorer. A corporation, while by fiction of law recognized for some purposes as a person and for purposes of jurisdiction as a citizen, is not endowed with the inalienable rights of a natural person. It is an artificial person, created and existing only for the convenient transaction of business. In this case it was a mere instru- mentality by which separate railroad properties were combined under one control. That combination is as direct a restraint of trade by destroying competition as the appointment of a committee to regulate rates. The prohibition of such a combination is not at all inconsistent with the right of an individual to purchase stock. The transfer of stock to the Securities Company was a mere incident, the manner in which the combination to destroy competition and thus unlawfully restrain trade was carried out. If the parties interested in these two railroad companies can, through the instrumentality of a holding corporation, place both 538 NORTHERN SECURITIES CO. ¥. UNITED STATES. [cHAP. I. under one control, then in like manner, as was conceded on the argu- ment by one of the counsel for the appellants, could the control of all the railroad companies in the country be placed in a single cor- poration. Nor need this arrangement for control stop with what has already been done. The holders of $201,000,000 of stock in the Northern Securities Company might organize another corporation to hold their stock in that company, and the new corporation hold- ing the majority of the stock in the Northern Securities Company and acting in obedience to the wishes of a majority of its stock- holders would control the action of the Securities Company and through it the action of the two railroad companies, and this process might be extended until a single corporation whose stock was owned by three or four parties would be in practical control of both roads, or, having before us the possibilities of combination, the control of the whole transportation system of the country. I cannot believe that to be a reasonable or lawful restraint of trade. It’ must also-be remembered that under present -conditions a single railroad is, if not a legal, largely a practical, monopoly, and the arrangement by which the control of these two competing roads was merged in a single corporation broadens and extends such mo- nopoly. I cannot look upon it as other than an unreasonable com- bination in restraint of interstate commerce — one in conflict with state law and within the letter and spirit of the statute and the power of Congress. Therefore I concur in the judgment of affirm- ance. : I have felt. constrained to make these observations for fear that the broad and sweeping language of the opinion of the court might tend to unsettle legitimate business enterprises, stifle or retard wholesome business activities, encourage improper disregard of reasonable contracts and invite unnecessary litigation. The decree affirmed enjoined the Northern Securities Company from voting the stock which it held in the two railroad corporations; and enjoined the two railroad corporations from paying any divi- dends on such stock to the Northern Securities Company. But it permitted the Northern Securities Company to transfer such stock to the holders of its own stock which had been issued in exchange or payment for the railroad stocks. Mr. Justice Wurre dissented. He was of opinion that Congress had no constitutional power to regulate the ownership of stock in state corporations, even if such corporations may be in part en- gaged in interstate commerce. In the course of his opinion he said: “Tt has been decided by this court that, as the Anti-Trust Act forbids any restraint, it therefore embraces even reasonable con- tracts or agreements.” CHAP. IL] NORTHERN SECURITIES CO. v. UNITED STATES. 539 Chief Justice Futter, Mr. Justice Pecxuam, and Mr. Justice Homes concurred in this dissent. Mr. Justice Hotmss, dissenting. The question to be decided is whether, under the act of July 2, 1890, chap. 647, 26 Stat. 209, it is unlawful, at any stage of the process, if several men unite to form a corporation for the purpose of buying more than half the stock of each of two competing in- terstate railroad companies, if they form the corporation, and the corporation buys the stock. I will suppose further that every step is taken, from the beginning, with the single intent of ending com- petition between the companies. I make this addition not because it may not be and is not disputed but because, as I shall try to show, it is‘totally unimportant under any part of the statute with which we have to deal. The statute of which we have to find the meaning is a criminal statute. The two sections on which the Government relies both make certain acts crimes. That is their immediate purpose and that is what they say. It is vain to insist that this is not a criminal proceeding. The words cannot be read one way in a suit which is to end in fine and imprisonment and another way in one which seeks an injunction. The construction which is adopted in this case must be adopted in one of the other sort. I am no friend of artificial interpretations because a statute is of one kind rather than another, but all agree that before a statute is to be taken to punish that which always has been lawful it must express its intent in clear words. So I say we must read the words before us as if the question were whether two small exporting grocers should go to jail. Again the statute is of a very sweeping and general character. It hits “every” contract or combination of the prohibited sort, great or small, and “every” person who shall monopolize or at- tempt to monopolize, in the sense of the act, “any part” of the trade or commerce among the several States. There is a natural inclination to assume that it was directed against certain great combinations and to read it in that light. It does not say so. On the contrary, it says ‘‘every,” and ‘any part.” Still less was it directed specially against railroads. There even was a reasonable doubt whether it included railroads until the point was decided by this court. Finally, the statute must be construed in such a way as not merely to save its constitutionality but, so far as is consistent with a fair interpretation, not to raise grave doubts on that score. I assume, for the purposes of discussion, although it would be a great and serious step to take, that in some case that seemed to it to need heroic measures, Congress might regulate not only commerce, but instruments of commerce or contracts the bearing of which 540 NORTHERN SECURITIES CO. ¥. UNITED STATES. [cHAP. II. upon commerce would be only indirect. But it is clear that the mere fact of an indirect effect upon commerce not shown to be certain and very great, would not justify such a law. The point decided in United States v. E. C. Knight Co., 156 U.S. 1, 17, was that “the fact that trade or commerce might be indirectly affected was not enough to entitle complainants to a decree.” Commerce depends upon population, but Congress could not, on that ground, undertake to regulate marriage and divorce. If the act before us is to be carried out according to what seems to me the logic of the argument for the Government, which I do not believe that it will be, I can see no part of the conduct of life with which on similar principles Congress might not interfere. This act is construed by the Government to affect the purchasers of shares in two railroad companies because of the effect it may have, or, if you like, is certain to have, upon the competition of these roads. If such a remote result of the exercise of an ordinary incident of property and personal freedom is enough to make that exercise unlawful, there is hardly any transaction concerning com- merce between the States that may not be made a crime by the finding of a jury or a court. The personal ascendency of one man may be such that it would give to his advice the effect of a com- mand, if he owned but a single share in each road. The tendency of his presence in the stockholders’ meeting might be certain to prevent competition, and thus his adviee, if not his mere existence, become a crime. I state these general considerations as matters which I should have to take into account before I could agree to affirm the decree appealed from, but I do not need them for my own opinion, because when I read the act I cannot feel sufficient doubt as to the meaning of the words to need to fortify my conclusion by any generalities. Their meaning seems to me plain on their face. The first section makes ‘Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce among the several States, or with foreign nations,” a misdemeanor, punishable by fine, imprisonment or both. Much trouble is made by substituting other phrases assumed to be equiv- alent, which then are reasoned from as if they were in the act. The court below argued as if maintaining competition were the expressed object of the act. The act says nothing about competition. I stick to the exact words used. The words hit two classes of cases, and only two — Contracts in restraint of trade and combinations or conspiracies in restraint of trade, and we have to consider what these respectively are. Contracts in restraint of trade are dealt with and defined by the common law. They are contracts with a stranger to the contractor’s business (although in some cases carry- ing on asimilar one), which wholly or partially restrict the freedom . CHAP. I1.] NORTHERN SECURITIES CO. v. UNITED STATES. 541 of the contractor in carrying on that business as otherwise he would. The objection of the common law to them was primarily on the contractor’s own account. The notion of monopoly did not come in unless the contract covered the whole of England. Mitchel v. Reynolds, 1 P. Wms. 181. Of course this objection did not apply to partnerships or other forms, if there were any, of substituting a community of interest where there had been competition. There was no objection to such combinations merely as in restraint of trade, or otherwise unless they amounted to a monopoly. Contracts in restraint of trade, I repeat, were contracts with strangers to the con- tractor’s business, and the trade restrained was the contractor’s own. Combinations or conspiracies in restraint of trade, on the other hand, were combinations to keep strangers to the agreement out of the business. The objection to them was not an objection to their effect upon the parties making the contract, the members of the combination or firm, but an objection to their intended effect upon strangers to the firm and their supposed consequent effect upon the public at large. In other words, they were regarded as contrary to public policy because they monopolized or attempted to monopolize some portion of the trade or commerce of the realm. See United States v. EH. C. Knight Co., 156 U.S. 1. All that is added to the first section by § 2 is that like penalties are imposed upon every single person who, without combination, monopolizes or attempts to monopolize commerce among the States; and that the liability is extended to attempting to monopolize any part of such trade or commerce. It is more important as an aid to the construction of § 1 than it is on its own account. It shows that whatever is criminal when done by way of combination is equally criminal if done by a single man. That I am right in my interpretation of the words of § 1 is shown by the words ‘“‘in the form of trust or otherwise.” The prohibition was suggested by the trusts, the objection to which, as every one knows, was not the union of former competitors, but the sinister power exercised or supposed to be exercised by the combina- tion in keeping rivals out of the business and ruining those who already were in. It was the ferocious extreme of competition with others, not the cessation of competition among the partners, that was the evil feared. Further proof is to be found in § 7, giving an action to any person injured in his business or property by the for- bidden conduct. This cannot refer to the parties to the agreement and plainly means that outsiders who are injured in their attempt to compete with a trust or other similar combination may recover for it. Montague & Co. v. Lowry, 193 U.S. 38. How effective the section may be or how far-it goes, is not material to my point. My general summary of the two classes of cases which the act affects is confirmed by the title, which is “An Act to protect Trade and Commerce against unlawful Restraints and Monopolies.” 542 NORTHERN SECURITIES CO. ¥. UNITED STATES. [CHAP. IL. What I now ask is under which of the foregoing classes this case is supposed to come, and that question must be answered as defi- nitely and precisely as if we were dealing with the indictments which logically ought to follow this decision. The provision of the statute against contracts in restraint of trade has been held to apply to contracts between railroads, otherwise remaining independent, by which they restricted their respective freedom as to rates. This re- striction by contract with a stranger to the contractor’s business is the ground of the decision in United States v. Joint Traffic Associa- tion, 171 U.S. 505, following and affirming United States v. Trans- Missouri Freight Association, 166 U.S. 290. I accept those decisions absolutely, not only as binding upon me, but as decisions which I have no desire to criticize or abridge. But the provision has not been decided, and, it seems to me, could not be decided without per- version of plain language, to apply to an arrangement by which competition is ended through community of interest — an arrange- ment which leaves the parties without external restriction. That provision, taken alone, does not require that all existing competi- tions shall be maintained. It does not look primarily, if at all, to competition. It simply requires that a party’s freedom in trade be- tween the States shall not be cut down by contract with a stranger. So far as that phrase goes, it is lawful to abolish competition by any form of union. It would seem to me impossible to say that the words “every contract in restraint of trade is a crime punishable with imprisonment,’”’ would send the members of a partnership be- tween, or a consolidation of, two trading corporations to prison — still more impossible to say that it forbade one man or corporation to purchase as much stock as he liked in both. Yet those words would have that effect if this clause of § 1 applies to the defendants here. For it cannot be too carefully remembered that that clause applies to “every” contract of the forbidden kind — a consideration which was the turning point of the Trans-Missouri Freight Association’ s case. If the statute applies to this case it must be because the parties, or some of them, have formed, or because the Northern Securities Company is, a combination in restraint of trade among the States, or, what comes to the same thing in my opinion, because the de- fendants, or some or one of them, are monopolizing or attempting to monopolize some part of the commerce between the States. But the mere reading of those words shows that they are used in a limited and accurate sense. According to popular speech, every con- cern monopolizes whatever business it does, and if that business is trade between two States it monopolizes a part of the trade among the States. Of course the statute does not forbid that. It does not mean that all business must cease. A single railroad down a narrow valley or through a mountain gorge monopolizes all the railroad transportation through that valley or gorge. Indeed every railroad CHAP. II.] NORTHERN SECURITIES CO. v. UNITED STATES. 643 monopolizes, in a popular sense, the trade of some area. Yet I sup- pose no one would say that the statute forbids a combination of rae into a corporation to build and run such a railroad between the tates. I assume that the Minnesota charter of the Great Northern and the Wisconsin charter of the Northern Pacific both are valid. Sup- pose that, before either road was built, Minnesota, as part of a sys- tem of transportation between the States, had created a railroad company authorized singly to build all the lines in the States now actually built, owned or controlled by either of the two existing companies. I take it that that charter would have been just as good as the present one, even if the statutes which we are considering had been in force. In whatever sense it would have created a mo- nopoly the present charter does. It would have been a large one, but the act of Congress makes no discrimination according to size. Size has nothing to do with the matter. A monopoly of “any part” of commerce among the States is unlawful. The supposed company would have owned lines that might have been competing — prob- ably the present one does. But the act of Congress will not be con- strued to mean the universal disintegration of society into single men, each at war with all the rest, or even the prevention of all further combinations for a common end. a medi p ide There is a natural feeling that somehow or other the statute meant to strike at combinations great enough to cause just anxiety on the part of those who love their country more than money, while it viewed such little ones as I have supposed with just indifference. This notion, it may be said, somehow breathes from the pores of the act, although it seems to be contradicted in every way by the words in detail. And it has occurred to me that it might be that when a combination reached a certain size it might have attributed to it more of the character of a monopoly merely by virtue of its size than would be attributed to a smaller one. I am quite clear that it is only in connection with monopolies that size could play any part. But my answer has been indicated already. In the first place size in the case of railroads is an inevitable incident, and if it were an objection under the act, the Great Northern and the North~- ern Pacifie already were too great and encountered the law. In the next place in the case of railroads it is evident that the size of the combination is reached for other ends than those which would make them monopolies. The combinations are not formed for the purpose of excluding others from the field. Finally, even a small railroad will have the same tendency to exclude others from its narrow area that great ones have to exclude others from a greater one, and the statute attacks the small monopolies as well as the great. The very words of the act make such a distinction impossible in this case and it has not been attempted in express terms. 7 544 NORTHERN SECURITIES CO. ¥. UNITED STATES. [CHAP. II. If the charter which I have imagined above would have been good notwithstanding the monopoly, in a popular sense, which it created, one next is led to ask whether and why a combination or consolidation of existing roads, although in actual competition, into one company of exactly the same powers and extent, would be any more obnoxious to the law. Although it was decided in Louisville & Nashville Railroad Co. v. Kentucky, 161 U.S. 677, 701, that since the statute, as before, the States have the’ power to regulate the matter, it was said, in the argument, that such a consolidation would be unlawful, and it seems to me that the Attorney General was compelled to say so in order to maintain his case. But I think that logic would not let him stop there, or short of denying the power of a State at the present time to authorize one company to construct and own two parallel lines that might compete. The monopoly would be the same as if the roads were consolidated after they had begun to compete — and it is on the footing of monopoly that I now am supposing the objection made. But to meet the objection to the prevention of competition at the same time, I will suppose that three parties apply to a State for charters; one for each of two new and possibly competing lines respectively, and one for both of these lines, and that the charter is granted to the last. I think that charter would be good, and I think the whole argument to the con- trary rests on a popular instead of an accurate and legal conception of what the word ‘‘monopolize” in the statute means. I repeat, that in my opinion there is no attempt to.monopolize, and what, as I have said, in my judgment amounts to the same thing, that there is no combination in restraint of trade, until something is done with the intent to exclude strangers to the combination from competing with it ‘in some part of the business which it carries on. Unless I am entirely wrong in my understanding of what a “‘com- bination in restraint of trade” means, then the same monopoly,may be attempted and effected by an individual, and is made equally illegal in that case by § 2. But I do not expect to hear it maintained that Mr. Morgan could be sent to prison for buying as many shares as he liked of the Great Northern and the Northern Pacific, even if he bought them both at the same time and got more than half the stock of each road. There is much that was mentioned in argument which I pass by. But in view of the great importance attached by both sides to the supposed attempt to suppress competition, I must say a word more about that. I said at the outset that I should assume, and I do . assume, that one purpose of the purchase was to suppress competi- tion between the two roads. I appreciate the force of the argument that there are independent stockholders in each; that it cannot be presumed that the respective boards of directors will propose anv illegal act; that if they should they could be restrained, and that all CHAP. Il.] NORTHERN SECURITIES CO. 0. UNITED STATES. 545 that has been done as yet is too remote from the illegal result to be classed even as an attempt. Not every act done in furtherance of an unlawful end is an attempt or contrary to the law. There must be a certain nearness to the result. It is a question of proximity and degree. Commonwealth v. Peaslee, 177 Massachusetts, 267, 272. So, as I have said, is the amenability of acts in furtherance of inter- ference with commerce among the States to legislation by Congress. So, according to the intimation of this court, is the question of lia- bility under the present statute. Hopkins v. United States, 171 U.S. 578; Anderson v. United States, 171 U.S. 604. But I assume further, for the purposes of discussion, that what has been done is near enough to the result to fall under the law, if the law prohibits that result, although that assumption very nearly if not quite contra- dicts the decision in United States v. E. C. Knight Co., 156 U.S. 1. But I say that the law does not prohibit the result. If it does it must be because there is some further meaning than I have yet dis- covered in the words “combinations in restraint of trade.’”’ I think that I have exhausted the meaning of those words in what I have already said. But they certainly do not require all existing competi- tions to be kept on foot, and, on the principle of the Trans-Missourt Freight Association’s case, invalidate the continuance of old con- tracts by which former competitors united in the past. A partnership is not a contract or combination in restraint of trade between the partners unless the well known words are to be given a new meaning invented for the purposes of this act. It is true that the suppression of competition was referred to in United States v. Trans-Missouri Freight Association, 166 U.S. 290, but, as I have said, that was in connection with a contract with a stranger to the defend- ant’s business — a true contract in restraint of trade. To suppress competition in that way is one thing, to suppress it by fusion is an- other. The law, I repeat, says nothing about competition, and only prevents its suppression by contracts or combinations in restraint of trade, and such contracts or combinations derive their character as restraining trade from other features than the suppression of com- petition alone. To see whether I am wrong, the illustrations put in the argument are of use. If I am, then a partnership between two stage drivers who had been competitors in driving across a state line, or two merchants once engaged in rival commerce among the States whether made after.or before the act, if now continued, is a crime. For, again I repeat, if the restraint on the freedom of the members of a combination caused by their entering into partnership is a restraint of trade, every such combination, as well the small as the great, is within the act. In view of my interpretation of the statute I do not go further into the question of the power of Congress. That has been dealt with by my brother WuITE and I concur in the main with his views. 546 NORTHERN SECURITIES CO. ¥. UNITED STATES. [CHAP. II. I am happy to know that only a minority of my brethren adopt an interpretation of the law which in my opinion would make eternal the bellum omnium contra omnes and disintegrate society so far as it could into individual atoms. If that were its intent I should regard calling such a law a regulation of commerce as a mere pre- tense. It would be an attempt to reconstruct society. I am not concerned with the wisdom of such an attempt, but I believe that Congress was not entrusted by the Constitution with the power to make it and I am deeply persuaded that it has not tried. Chief Justice Futter, Mr. Justice Wurre, and Mr. Justice Peck- HaM concurred in this dissent. Nore. — In United States v. Union Pacific R.R. Co., 226 U.S. 61, the court held that the Anti-Trust Act was violated where the Union Pacific R.R. Co. acquired a dominating influence over the conduct of the business of the Southern Pacific Co., a competing railroad company, through the ownership, by a corporation controlled by the Union Pacific, of 46 per cent of the stock of the Southern Pacific. In the course of its opinion the court said (p. 88): — “Tt is urged that this competitive traffic was infinitesimal when compared with the gross amount of the business transacted by both roads, and so small as only to amount to that incidental restraint of trade which ought not to be held to be within the law; but we think the testimony amply shows that, while these roads did a great deal of business for. which they did not compete and that the com- petitive business was a comparatively small part of the sum total of all traffic, state and interstate, carried over them, nevertheless such competing traffic was large in volume, amounting to many millions of dollars. Before the transfer of the stock this traffic was the subject of active competition between these systems, but by reason of the power arising from such transfer it has since been placed under a common control. It was by no means a negligible part, but a large and valuable part, of interstate commerce which was thus directly affected.” ‘ In Umied States v. Union Pacific R.R. Co., 226 U.S. 470, the court held that a sale of the stock of the Southern Pacific to the share- holders of the Union Pacific, substantially in proportion to their respective holdings (or a distribution thereof, by way of a dividend) would not constitute a disposition of the shares in compliance with the opinion of the court reported in 226 U.S. 61. CHAP. II.] SWIFT & CO. ¥. UNITED STATES. 547 SWIFT & CO. v. UNITED STATES. 196 U.S. 375. 1905. Mr. Justice Houmess. This is an appeal from a decree of the Cir- cuit Court, on demurrer, granting an injunction against the appel- lants’ commission of alleged violations of the act of July 2, 1890, chap. 647, 26 Stat. 209, “to protect trade and commerce against un- lawful restraints and monopolies.”’ It will be necessary to consider- both the bill and the decree. The bill is brought against a number of corporations, firms and individuals of different States and makes the following allegations: 1. The defendants (appellants) are engaged in the business of buying live stock at the stock yards in Chicago, Omaha, St. Joseph, Kansas City, East St. Louis and St. Paul, and slaughtering such live stock at their respective plants in places named, in different States, and converting the live stock into fresh meat for human consumption. 2. The defendants ‘‘are also en- gaged in the business of selling such fresh meats, at the several places where they are so prepared, to dealers and consumers in divers States and Territories of the said United States other than those wherein the said meats are so prepared and sold as aforesaid, and in the District of Columbia, and in foreign countries, and shipping the same meats, when so sold from the said places of their prepara- tion, over the several lines of transportation of. the several railroad companies serving the same as common carriers, to such dealers and consumers, pursuant to such sales.” 3. The defendants also are engaged in the business of shipping such fresh meats to their respec- tive agents at the principal markets in other States, etc., for sale by those agents in those markets to dealers and consumers. 4. The defendants together control about six-tenths of the whole trade and commerce in fresh meats among the States, Territories and District of Columbia, and, 5, but for the acts charged would be in free com- petition with one another. 6. In order to restrain competition among themselves as to the purchase of live stock, defendants have engaged in, and intend to continue, a combination for requiring and do and will require their respective purchasing agents at the stock yards mentioned, where defendants buy their live stock (the same being stock produeed and owned principally in other States and shipped to the yards for sale), to refrain from bidding against each other, “except perfunctorily and without good faith,” and by this means compelling the owners of such stock to sell at less prices than they would receive if the bidding really was competitive. 7. For the same purposes the defendants combine to bid up, through their agents, the prices of live stock for a few days at a time, “so that the market reports will show prices much higher than the 548 SWIFT & CO. ¥. UNITED STATES. [CHAP. II. state of the trade will warrant,” thereby inducing stock owners in other States to make large shipments to the stock yards to their disadvantage. 8. For the same purposes, and to monopolize the commerce pro- tected by the statute, the defendants combine ‘“‘to arbitrarily, from time to time raise, lower, and fix prices, and to maintain uniform prices at which they will sell” to dealers throughout the States. This is effected by secret periodical meetings, where are fixed prices to be enforced until changed at a subsequent meeting. The prices are maintained directly, and by collusively restricting the meat shipped by the defendants, whenever conducive to the result, by imposing penalties for deviations, by establishing a uniform rule for the giving of credit to dealers, etc., and by notifying one another of the delinquencies of such dealers and keeping a black list of delin- quents, and refusing to sell meats to them. : 9. The defendants also combine to make uniform charges for cart- age for the delivery of meats sold to dealers and consumers in the markets throughout the States, etc., shipped to them by the defend- ants through the defendants’ agents at the markets, when no charges would have been made but for the combination. 10. Intending to monopolize the said commerce and to prevent competition therein, the defendants ‘‘have all and each engaged in and will continue” arrangements with the railroads- whereby the defendants received, by means of rebates and other devices, rates less than the lawful rates for transportation, and were exclusively to enjoy and share this unlawful advantage to the exclusion of competi- tion and the public. By force of the consequent inability of com- petitors to engage or continue in such commerce, the defendants are attempting to monopolize, have monopolized, and will monopolize the commerce in live stock and fresh meats among the States and Ter- ritories, and with foreign countries, and, 11, the defendants are, and have been in conspiracy with each other, with the railroad companies and others unknown, to obtain a monopoly of the supply and dis- tribution of fresh meats throughout the United States, etc. And to that end defendants artificially restrain the commerce and put arbi- trary regulations in force affecting the same from the shipment of the live stock from the plains to the final distribution of the meats to the consumers. To sum up the bill more shortly, it charges a combination of a dominant proportion of the dealers in fresh meat throughout the - United States not to bid against each other in the live stock markets of the different States, to bid up prices for a few days in order to induce the cattle men to send their stock to the stock yards, to fix prices at which they will sell, and to that end to restrict shipments of meat when necessary, to establish a uniform rule of credit to dealers and to keep a black list, to make uniform and improper charges for CHAP. 11.] SWIFT & CO. v. UNITED STATES. 549 cartage, and finally, to get less than lawful rates from the railroads to the exclusion of competitors. It is true that the last charge is not clearly stated to be a part of the combination. But as it is alleged that the defendants have each and all made arrangements with the railroads, that they were exclusively to enjoy the unlawful advan- tage, and that their intent in what they did was to monopolize the commerce and to prevent competition, and in view of the general allegation to which we shall refer, we think that we have stated cor- rectly the purport of the bill. It will be noticed further that the in- tent to monopolize is alleged for the first time in the eighth section of the bill as to raising, lowering ‘and fixing prices. In the earlier sections, the intent alleged is to restrain competition among them- selves. But after all the specific charges there is a general allegation that the defendants are conspiring with one another, the railroads and others, to monopolize the supply and distribution of fresh meats throughout the United States, etc., as has been stated above, and it seems to us that this general allegation of intent colors and applies to all the specific charges of the bill. Although the combination alleged embraces restraint and monop- oly of trade within a single State, its effect upon commerce among the States is not accidental, secondary, remote or merely probable. On the allegations of the bill the latter commerce no less, perhaps even more, than commerce within a single State is an object of at- tack. See Leloup v. Port of Mobile, 127 U.S. 640, 647; Crutcher v. Kentucky, 141 U.S. 47, 59; Allen v. Pullman Co., 191 U.S. 171, 179, 180. Moreover, it is a direct object, it is that for the sake of which the several specific acts and courses of conduct are done and adopted. Therefore the case is not like United States v. E. C. Knight Co., 156 U.S. 1, where the subject matter of the combination was manufac- ture and the direct object monopoly of manufacture within a State. However likely monopoly of commerce among the States in the article manufactured was to follow from the agreement it was not a necessary consequence nor a primary end. Here the subject matter is sales and the very point of the combination is to restrain and monopolize commerce among the States in respect of such sales. The two cases are near to each other, as sooner or later always must happen where lines are to be drawn, but the line between them is distinct. Montague & Co. v. Lowry, 193 U.S. 38. So, again, the line is distinct between this case and Hopkins v. United States, 171 U.S. 578. All that was decided there was that the local business of commission merchants was not commerce among the States, even if what the brokers were employed to sell was an object of such commerce. The brokers were not like the defendants before us, themselves the buyers and sellers. They only furnished certain facilities for the sales. Therefore, there again the effects of the combination of brokers upon the commerce was only indirect and 559 SWIFT & CO. v. UNITED STATES. (CHAP. II. not within the act. Whether the case would have been different if the combination had resulted in exorbitant charges, was left open. In Anderson v. United States, 171 U.S. 604, the defendants were buyers and sellers at the stock yards, but their agreement was merely not to employ brokers, or to recognize yard-traders, who were not members of their association. Any yard-trader could become a member of the association on complying with the conditions, and there was said to be no feature of monopoly in the case. It was held that the combination did not directly regulate commerce between the States, and, being formed with a different intent, was not within the act. The present case is more like Montague & Co. v. Lowry, 193 U.S. 38. For the foregoing reasons we are of opinion that the carrying out of the scheme alleged, by the means set forth, properly may be en- joined, and that the bill cannot be dismissed. So far it has not been necessary to consider whether the facts charged in any single paragraph constitute commerce among the States or show an interference with it. There can be no doubt, we apprehend, as to the collective effect of all the facts, if true, and if the défendants entertain the intent alleged. We pass now to the partic- ulars, and will consider the corresponding parts of the injunction at the same time. The first question arises on the sixth section. That charges a combination of independent dealers to restrict the com- petition of their agents when purchasing stock for them in the stock yards. The purchasers and their slaughtering establishments are largely in different States from those of the stock yards, and the sellers of the cattle, perhaps it is not too much to assume, largely in different States from either. The intent of the combination is not merely to restrict competition among the parties, but, as we have said, by force of the general allegation at the end of the bill, to aid in an attempt to monopolize commerce among the States. It is said that this charge is too vague and that it does not set forth a case of commerce among the States. Taking up the latter objection first, commerce among the States is not a technical legal conception, but a practical one, drawn from the course of business. When cattle are sent for sale from a place in one State, with the ex- pectation that they will end their transit, after purchase, in another, and when in effect they do so, with only the interruption necessary to find a purchaser at the stock yards, and when this is a typical, constantly recurring course, the current thus existing is a current of commerce among the States, and the purchase of the cattle is a part and incident of such commerce. What we say is true at least of such a purchase by residents in another State from that. of the seller and of the cattle. And we need not trouble ourselves at this time as to whether the statute could be escaped by any arrangement as to the place where the sale in point of law is consummated. See Nor- CHAP. 11.] SWIFT & CO. v. UNITED STATES. 551 folk & Western Ry. v. Sims, 191 U.S. 441. But the sixth section of the bill charges an interference with such sales, a restraint of the parties by mutual contract and a combination not to compete in order to monopolize. It is immaterial if the section also embraces domestic transactions. It should be added that the cattle in the stock yard are not at rest even to the extent that was held sufficient to warrant taxation in American Steel & Wire Co. v. Speed, 192 U.S. 500. But it may be that the question of taxation does not depend upon whether the article taxed may or may not be said to be in the course of commerce between the States, but depends upon whether the tax so far affects that commerce as to: amount to a regulation of it. The injunction against taking part in a combination, the effect of which will be a restraint of trade among the States by directing the defendants’ agents to refrain from bidding against one another at the sales of live stock, is justified so far as the subject matter is concerned. The injunction, however, refers not to trade among the States in cattle, concerning which there can be no question of original pack- ages, but to trade in fresh meats, as the trade forbidden to be re- strained, and it is objected that the trade in fresh meats described in the second and third sections of the bill is not commerce among the States, because the meat is sold at the slaughtering places, or when sold elsewhere may be sold in less than the original packages. But the allegations of the second section, even if they import a technical passing of title at the slaughtering places, also import that the sales are to persons in other States, and that the shipments to other States are part of the transaction — “pursuant to such sales” — and the third section imports that the same things which are sent to agents are sold by them, and sufficiently indicates that some at least of the sales are of the original packages. Moreover, the sales are by persons in one State to persons in another. But we do not mean to imply that the rule which marks the point at which state taxation or regulation becomes permissible necessarily is beyond the scope of interference by Congress in cases where such interference is deemed necessary for the protection of commerce among the States. Nor do we mean to intimate that the statute under consideration is limited to that point. Beyond what we have said above, we leave those questions as we find them. They were touched upon in the Northern Securities Company’s Case, 193 U.S. 197. 552 STANDARD OIL CO. ¥. UNITED STATES. [CHAP. II. STANDARD OIL CO. v. UNITED STATES. 221 U.S. 1. 1911. Tue Standard Oil Company of Ohio was formed in 1870, and acquired the assets of three separate partnerships theretofore engaged in the business of refining crude oil and shipping its products in interstate commerce. The former partners became its stockholders. Thereafter various properties were acquired either by the said corporation, or by trustees acting in behalf of the stockholders of said corporation, with the result that said corpora- tion and trustees came to control a great part — alleged by the Government to be 90 per cent —of the business in the United States of producing, shipping, refining and selling petroleum and its products. In 1882 the stock of the Standard Oil Company of Ohio, and the properties held by the said trustees, were transferred to certain trustees, who issued certificates of beneficial interest. The trustees thereafter acquired other properties having a value in the petroleum business. Quo warranto proceedings were commenced in Ohio against the Standard Oil Company of Ohio which resulted in the entry by the Supreme Court of Ohio, on March 2, 1892, of a decree adjudging the trust agreement to be void, not only because the Standard Oil Company of Ohio was a party to the same, but also because the agreement in and of itself was in restraint of trade and amounted to the creation of an unlawful monopoly. In 1897, the Attorney General of Ohio instituted contempt proceedings in the quo warranto case based upon the claim that the trust had not been dissolved as required by the decree in that case. In 1899 the stock of the Standard Oil Company of New Jersey. was increased from $10,000,000 to $110,000,000, and it eequited the properties formerly held by the said trustees. The government alleged that improper means had been used to ensure success in the conduct of the business of the Standard Oil Company of Ohio, the Standard Oil Trustees, and the Standard Oil Company of New Jersey. It enumerated: rebates, preferences and other discriminatory practises in favor of the combination by rail- road companies; restraint and monopolization by control of pipe lines, and unfair practises against competing pipe lines; contracts with competitors in restraint of trade; unfair methods of competi- tion, such as local price cutting at the points where necessary to suppress competition; espionage of the business of competitors, the operation of bogus independent companies, and payment of rebates on oil, with the like intent; the division of the United States into districts and the limiting of the operations of the various subsidiary corporations as to such districts so that competition in the. sale of CHAP. II.] STANDARD OIL CO. v. UNITED STATES. 553 petroleum products between such corporations had been entirely eliminated and destroyed. In its answer, the Standard Oil Company of New Jersey denied that a combination of independent or competing concerns or cor- porations was affected either by the formation of the Trust in 1882, or by its own acquisitions in 1899. The court below entered a decree which required the Standard Oil Company of New Jersey to transfer back, to the stockholders of the various subsidiary corporations, the stocks which had been turned over to it in exchange for its stock. Mr. Cuter Justice Wuirn. The debates [in Congress] show that doubt as to whether there was a common law of the United States which governed the subject in the absence of legislation was among the influences leading to the passage of the act. They conclusively show, however, that the main cause which led to the legislation was the thought that it was required by the economic condition of the times, that is, the vast accumulation of wealth in the hands of cor- porations and individuals, the enormous development of corporate organization, the facility for combination which such organizations afforded, the fact that the facility was being used, and that combina- tions known as trusts were being multiplied, and the widespread impression that their power had been and would be exerted to op- press individuals and injure the public generally. Although debates may.not be used as a means for interpreting a statute (United States v. Trans-Missourt Freight Association, 166 U.S. 318, and cases cited) that rule in the nature of things is not violated by resorting to de- bates as a means of ascertaining the environment at the time of the enactment of a particular law, that is, the history of the period when it was adopted. There can be no doubt that the sole subject with which the first section deals is restraint of trade as therein contemplated, and that the attempt to monopolize and monopolization is the subject with which the second section is concerned. It is certain that those terms, at least in their rudimentary meaning, took their origin in the com- mon law, and were also familiar in the law of this country prior to and at the time of the adoption of the act in question. We shall endeavor then, first to seek their meaning, not by in- dulging in an elaborate and learned analysis of the English law and of the law of this country, but by making a very brief reference to the elementary and indisputable conceptions of both the English and American law on the subject prior to the passage of the Anti-Trust Act. a. It is certain that at a very remote period the words ‘contract in restraint of trade” in England came to refer to some voluntary restraint put by contract by an individual on his right to carry on his trade or calling. Originally all such contracts were considered to { 554 STANDARD OIL CO. ¥. UNITED STATES. [CHAP. 11, be illegal, because it was deemed they were injurious to the public as well as to the individuals who made them. In the interest of the freedom of individuals to contract this doctrine was modified so that it was only when a restraint by contract was so general as to be coterminous with the kingdom that it was treated as void. That is to say, if the restraint was partial in its operation and was otherwise reasonable the contract was held to be valid. b. Monopolies were defined by Lord Cox as follows: — “\ monopoly is an institution, or allowance by the king by his grant, commission, or otherwise to any person or persons, bodies politic or corporate, of or for the sole buying, selling, making, work- ing, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade.’ (3 Inst. 181, chap. 85.)” Hawkins thus defined them: — “¢ A monopoly is an allowance by the king to a particular person or persons of the sole buying, selling, making, working, or using of anything whereby the subject in general is restrained from the free- dom of manufacturing or trading which he had before.’ (Hawk. P.C. bk. 1, chap. 29.)” The frequent granting of monopolies and the struggle which led to a denial of the power to create them, that is to say, to the estab- lishment that they were incompatible with the English constitution is known to all and need not be reviewed. The evils which led to the public outcry against monopolies and to the final denial of the power to make them may be thus summarily stated: 1. The power which the monopoly gave to the one who enjoyed it to fix the price and thereby injure the public; 2. The power which it engendered of enabling a limitation on production; and, 3. The danger of deterio- ration in quality of the monopolized article which it was deemed was the inevitable resultant of the monopolistic control over its produc- tion and sale. As monopoly as thus conceived embraced only a consequence arising from an exertion of sovereign power, no express restrictions or prohibitions obtained against the creation by an in- dividual of a monopoly as such. But as it was considered, at least so far as the necessaries of life were concerned, that individuals by the abuse of their right to contract might be able to usurp the power arbitrarily to enhance prices, one of the wrongs arising from monop- oly, it came to be that laws were passed relating to offenses such as forestalling, regrating and engrossing by which prohibitions were placed upon the power of individuals to deal under such circum- stances and conditions as, according to the conception of the times, created a presumption that the dealings were not simply the honest exertion of one’s right to contract for his own benefit unaccompanied by a wrongful motive to injure others, but were the consequence of a CHAP. I1,] STANDARD OIL CO. ¥. UNITED STATES. 558 contract or course of dealing of such a character as to give rise to the presumption of an intent to injure others through the means, for instance, of a monopolistic increase of prices. This is illustrated by the definition of engrossing found in the statute, 5 and 6 Edw. VI, chap. 14, as follows: — “‘Whatsoever person or persons .. . shall engross or get into his or their hands by buying, contracting, or promise-taking, other than by demise, grant, or lease of land, or tithe, any corn growing in the fields, or any other corn or grain, butter, cheese, fish, or other dead victual, whatsoever, within the realm of England, to the intent to sell the same again, shall be accepted, reputed, and taken an unlawful engrosser or engrossers.”’ As by the statutes providing against engrossing the quantity en- grossed was not required to be the whole or a proximate part of the whole of an article, it is clear that there was a wide difference be- tween monopoly and engrossing, etc. But as the principal wrong which it was deemed would result from monopoly, that is, an en- hancement of the price, was the same wrong to which it was thought the prohibited engrossment would give rise, it came to pass that monopoly and engrossing were regarded as virtually one and the same thing. In other words, the prohibited act of engrossing be- cause of its inevitable accomplishment of one of the evils deemed to be engendered by monopoly, came to be referred to as being a mo- nopoly or constituting an attempt to monopolize. Thus PoLLexreEn, in his argument in Fast India Company v. Sandys, Skin. 165, 169, said: — “By common law, he said that trade is free, and for that cited -3 Inst. 81; F.B. 65; 1 Roll. 4;-that the common law is as much against ‘monopoly’ as ‘engrossing’; and that they differ only, that a ‘monopoly’ is by patent from the king, the other is by the act of the subject between party and party; but that the mischiefs are the same from both, and there is the same law against both. Moore, 673; 11 Rep. 84. The sole trade of anything is ‘engrossing’ ex ret natura, for whosoever hath the sole trade of buying and selling hath ‘engrossed’ that trade; and whosoever hath the sole trade to any country, hath the sole trade of buying and selling the produce of that country, at his own price, which is an ‘engrossing.’”’ And by operation of the mental process which led to considering as a monopoly acts which although they did not constitute a mo- nopoly were thought to produce some of its baneful effects, so also because of the impediment or burden to the due course of trade which they produced, such acts came to be referred to as in restraint of trade. This is shown by my Lord Coxn’s definition of monopoly as being “an institution or allowance ... whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before or hindered in their law- 556 STANDARD OIL CO. v. UNITED STATES, [CHAP. II. ful trade.”? It is illustrated also by the definition which Hawkins gives of monopoly wherein it is said that the effect of monopoly is to restrain the citizen “from the freedom of manufacturing or trad- ing which he had before.” And see especially the opinion of ParKEr, C.J., in Mitchel v. Reynolds, (1711) 1 P. Williams, 181, where a classification is made of monopoly which brings it generically within the description of restraint of trade. Generalizing these considerations, the situation is this: 1. That by the common law monopolies were unlawful because of their re- striction upon individual freedom of contract and their injury to the public. 2. That as to necessaries of life the freedom of the individual to deal was restricted where the nature and character of the dealing was such as to engender the presumption of intent to bring about at least one of the injuries which it was deemed would result from mo- nopoly, that is, an undue enhancement of price. 3. That to protect the freedom of contract of the individual not only in his own interest, but principally in the interest of the common weal, a contract of an individual by which he put an unreasonable restraint upon himself as to carrying on his trade or business was void. And that at com- mon law the evils consequent upon engrossing, etc., caused those things to be treated as coming within monopoly and sometimes to be called monopoly and the same considerations caused monopoly, be- cause of its operation and effect, to be brought within and spoken of generally as impeding the due course of or being in restraint of trade. From the development of more accurate economic conceptions and the changes in conditions of society it came to be recognized that the acts prohibited by the engrossing, forestalling, etc., statutes did not have the harmful tendency which they were presumed to have when the legislation concerning them was enacted, and therefore did not justify the presumption which had previously been deduced from them, but, on the contrary, such acts tended to fructify and develop trade. See the statutes of 12th George III, chap. 71, en- acted in 1772, and statute of 7 and 8 Victoria, chap. 24, enacted in 1844, repealing the prohibitions against engrossing, forestalling, etc., upon the express ground that the prohibited acts had come to be considered as favorable to the development of and not in restraint of trade. It is remarkable that nowhere at common law can there be found a prohibition against the creation of monopoly by an indi- vidual. This would seem to manifest, either consciously, or intui- tively, a profound conception as to the inevitable operation of eco- nomic forces and the equipoise or balance in favor of the protection of the rights of individuals which resulted. That is to say, as it was deemed that monopoly in the concrete could only arise from an act of sovereign power, and, such sovereign power being restrained, pro- hibitions as to individuals were directed, not against the creation of monopoly, but were only applied to such acts in relation to particular CHAP. 11] STANDARD OIL CO. ¥. UNITED STATES, 557 subjects as to which it was deemed, if not restrained, some of the consequences of monopoly might result. After all, this was but an instinctive recognition of the truisms that the course of trade could not be made free by obstructing it, and that an individual’s right to trade could not be protected by destroying such right. From the review just made it clearly results that outside of the restrictions resulting from the want of power in an individual to voluntarily and unreasonably restrain his right to carry on his trade or business and outside of the want of right to restrain the free course of trade by contracts or acts which implied a wrongful purpose, free- dom to contract and to abstain from contracting and to exercise every reasonable right incident thereto became the rule in the Eng- lish law. The scope and effect of this freedom to trade and contract is clearly shown by the decision in Mogul Steamship Co. v. M. cGregor, (1892) A.C. 25. While it is true that the decision of the House of Lords in the case in question was announced shortly after the pas- sage of the Anti-Trust Act, it serves reflexly to show the exact state of the law in England at the time the Anti-Trust statute was enacted. In this country also the acts from which it was deemed there re- sulted a part if not all of the injurious consequences ascribed to monopoly, came to be referred to as a monopoly itself. In other words, here as had been the case in England, practical common sense caused attention to be concentrated not upon the theoretically correct name to be given to the condition or acts which gave rise to a harmful result, but to the result itself and to the remedying of the evils which it produced. The statement just made is illustrated by: an early statute of the Province of Massachusetts, that is, chap. 31 of the laws of 1778-1779, by which monopoly and forestalling were expressly treated as one and the same thing. It is also true that while the principles concerning contracts in restraint of trade, that is, voluntary restraint put by a person on his right to pursue his calling, hence only operating subjectively, came generally to be recognized in accordance with the English rule, it came moreover to pass that contracts or acts which it was considered had a monopolistic tendency, especially those which were thought to unduly diminish competition and hence to enhance prices — in other words, to monopolize — came also in a generic sense to be spoken of and treated as they had been in England, as restricting the due course of trade, and therefore as being in restraint of trade. The dread of monopoly as an emanation of governmental power, while it passed at an early date out of mind in this country, as a result of the structure of our Government, did not serve to assuage the fear as to the evil consequences which might arise from the acts of individuals producing or tending to produce the consequences of monopoly. It resulted that treating such acts as we shave said as amounting to monopoly, sometimes constitutional restrictions, again 558 STANDARD OIL CO. ¥. UNITED STATES. [CHAP. II, legislative enactments or judicial decisions, served to enforce and illustrate the purpose to prevent the occurrence of the evils recog- nized in the mother country as consequent upon monopoly, by pro- viding against contracts or acts of individuals or combinations of individuals or corporations deemed to be conducive to such results. It will be found that as modern conditions arose the trend of legis- lation and judicial decision came more and more to adapt the rec- ognized restrictions to new manifestations of conduct or of dealing which it was thought justified the inference of intent to do the wrongs which it had been the purpose to prevent from the beginning. The evolution is clearly pointed out in National Cotton Oil Co. v. Texas, 197 U.S. 115, and Shawnee Compress Co. v. Anderson, 209 U.S. 423; and, indeed, will be found to be illustrated in- various’ aspects by the decisions of this court which have been concerned with the enforcement of the act we are now considering. Without going into detail and but very briefly surveying the whole field, it may be with accuracy said that the dread of enhancement of prices and of other wrongs which it was thought would flow from the undue limitation on competitive conditions caused by contracts or other acts of individuals or corporations, led, as a matter of public policy, to the prohibition or treating as illegal all contracts or acts which were unreasonably restrictive of competitive conditions, either from the nature or character of the contract or act or where the surrounding circumstances were such as to justify the conclusion that they had not been entered into or performed with the legiti- mate purpose of reasonably forwarding personal interest and de- veloping trade, but on the contrary were of such a character as to give rise to the inference or presumption that they had been entered into or done with the intent to do wrong to the general public and to limit the right of individuals, thus restraining the free flow of commerce and tending to bring about the evils, such as enhance- ment of prices, which were considered to be against public policy. It is equally true to say that the survey of the legislation in this country on this subject from the beginning will show, depending as it did upon the economic conceptions which obtained at the time when the legislation was adopted or judicial decision was rendered, that contracts or acts were at one time deemed to be of such a char- acter as to justify the inference of wrongful intent which were at another period thought not to be of that character. But this again, as we have seen, simply followed the line of development of the law of England. Let us consider the language of the first and second sections, guided by the principle that where words are employed in a statute which had at the time a well-known meaning at common law or in the law of this country they are presumed to have been used in that sense unless the context compels to the contrary. Swearingen v. CHAP. II] STANDARD OIL CO: ¥. UNITED STATES. 559 United States, 161 U.S. 446; United States v. Wong Kim Ark, 169 U.S. 649; Keck v. United States, 172 U.S. 446; Kepner v. United States, 195 U.S. 100, 126. As to the first section, the words to be interpreted are: “ Fivery contract, combination in the form of trust or otherwise, or con- spiracy in restraint of trade or commerce . . . is hereby declared to be illegal.” As there is no room for dispute that the statute was in- tended to formulate a rule for the regulation of interstate and foreign commerce, the question is what was the rule which it adopted? In view of the common law and the law in this country as to re- straint of trade, which we have reviewed, and the illuminating effect which that history must have under the rule to which we have re- ferred, we think it results: a. That the context manifests that the statute was drawn in the light of the existing practical conception of the law of restraint of trade, because it groups as within that class, not only contracts which were in restraint of trade in the subjective sense, but all con- tracts or acts which theoretically were attempts to monopolize, yet which in practice had come to be considered as in restraint of trade in a broad sense. 6. That in view of the many new forms of contracts and com- binations which were being evolved from existing economic condi- tions, it was deemed essential by an all-embracing enumeration to make sure that no form of contract or combination by which an un- due restraint of interstate or foreign commerce was brought about could save such restraint from condemnation. The statute under this view evidenced the intent not to restrain the right to make and enforce contracts, whether resulting from combination or otherwise, which did not unduly restrain interstate or foreign commerce, but to protect that commerce from being restrained by methods, whether old or new, which would constitute an interference that is an undue restraint. c. And as the contracts or acts embraced in the provision were not expressly defined, since the enumeration addressed itself simply to classes of acts, those classes being broad enough to embrace every conceivable contract or combination which could be made concern- ing trade or commerce or the subjects of such commerce, and thus caused any act done by any of the enumerated methods anywhere in the whole field of human activity to be illegal if in restraint of trade, it inevitably follows that the provision necessarily called for the exercise of judgment which required that some standard should be resorted to for the purpose of determining whether the prohibi- tions contained in the statute had or had not in any given case been violated. Thus not specifying but indubitably contemplating and requiring a standard, it follows that it was intended that the stand- ard of reason which had been applied at the common law and in this 569 STANDARD OIL CO. ¥. UNITED STATES. (CHAP. II, country in dealing with subjects of the character embraced by the statute, was intended to be the measure used for the pur- pose of determining whether in a given case a particular act had or had not brought about the wrong against which the statute provided. And a consideration of the text of the second section serves to establish that it was intended to supplement the first and to make sure that by no possible guise could the public policy embodied in the first section be frustrated or evaded. The prohibitions of the second embrace ‘‘ Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, .. .”” By reference to the terms of §8 it is certain that the word person clearly implies a corporation as well as an individual. The commerce referred to by the words ‘‘any part” construed in the light of the manifest purpose of the statute has both a geo- graphical and a distributive significance, that is it includes any portion of the United States and any one of the classes of things forming a part of interstate or foreign commerce. Undoubtedly, the words ‘‘to monopolize” and “monopolize” as used in the section reach every act bringing about the prohibited results. The ambiguity, if any, is involved in determining what is intended by monopolize. But this ambiguity is readily dispelled in the light of the previous history of the law of restraint of trade to which we have referred and the indication which it gives of the practical evolution by which monopoly and the acts which produce the same result as monopoly, that is, an undue restraint of the course of trade, all came to be spoken of as, and to be indeed synonymous with, restraint of trade. In other words, having by the first section forbidden all means of monopolizing trade, that is, unduly restrain- ing it by means of every contract, combination, etc., the second sec- tion seeks, if possible, to make the prohibitions of the act all the more complete and perfect by embracing all attempts to reach the end prohibited by the first section, that is, restraints of trade, by any attempt to monopolize, or monopolization thereof, even although the acts by which such results are attempted to be brought about or are brought about be not embraced within the general enumeration of the first section. And, of course, when the second section is thus harmonized with and made as it was intended to be the complement of the first, it becomes obvious that the criteria to be resorted to in any given case for the purpose of ascertaining whether violations of the section have been committed, is the rule of reason guided by the established law and by the plain duty to enforce the prohibitions of the act and thus the public policy which its restrictions were obvi- ously enacted to subserve. And it is worthy of observation, as we CHAP. I11.] STANDARD OIL CO. ¥. UNITED STATES. 561 have previously remarked concerning the common law, that al- though the statute by the comprehensiveness of the enumerations embodied in both the first and second sections makes it certain that its purpose was to prevent undue restraints of every kind or nature, nevertheless by the omission of any direct prohibition against mo- nopoly in the concrete it indicates a consciousness that the freedom of the individual right to contract when not unduly or improperly exercised was the most efficient means for the prevention of mo- nopoly, since the operation of the centrifugal and centripetal forces resulting from the right to freely contract was the means by which monopoly would be inevitably prevented if no extraneous or sover- eign power imposed it and no right to make unlawful contracts hav- ing a monopolistic tendency were permitted. In other words that freedom to contract was the essence of freedom from undue restraint on the right to contract. In substance, the propositions urged by the Government are re- ducible to this: That the language of the statute embraces every contract, combination, etc., in restraint of trade, and hence its text leaves no room for the exercise of judgment, but simply imposes the plain duty of applying its prohibitions to every case within its literal language. The error involved lies in assuming the matter to be de- cided. This is true because as the acts which may come under the classes stated in the first section and the restraint of trade to which that section applies are not specifically enumerated or defined, it is ob- vious that judgment must in every case be called into play in order to determine whether a particular act is embraced within the statu- tory classes, and whether if the act is within such classes its nature or effect causes it to be a restraint of trade within the intendment of the act. To hold to the contrary would require the conclusion either that every contract, act or combination of any kind or nature, whether it operated a restraint on trade or not, was within thestatute, and thus the statute would be destructive of all right to contract or agree or combine in any respect whatever as to subjects embraced in interstate trade or commerce, or if this conclusion were not reached, then the contention would require it to be held that as the statute did not define the things to which it related and excluded resort to the only means by which the acts to which it relates could be ascer- tained — the light of reason — the enforcement of the statute was im- possible because of its uncertainty. The merely generic enumeration which the statute makes of the acts to which it refers and the absence of any definition of restraint of trade as used in the statute leaves room for but one conclusion, which is, that it was expressly designed not to unduly limit the application of the act by precise definition, but while clearly fixing a standard, that is, by defining the ulterior boundaries which could not be transgressed with impunity, to leave. it-to be determined by the light of reason, guided by the principles of i 562 STANDARD OIL CO. v. UNITED STATES. [CHAP. II, law and the duty to apply and enforce the public policy embodied in the statute, in every given case whether any particular act or contract was within the contemplation of the statute. But, it is said, persuasive as these views may be, they may not be here applied, because the previous decisions of this court have given to the statute a meaning which expressly excludes the construction which must result from the reasoning stated. The cases are United States v. Freight Association, 166 U.S. 290, and United States v. Joint Traffic Association, 171 U.S. 505. Both the cases involved the legality of combinations or associations of railroads engaged in interstate commerce for the purpose of controlling the conduct of the parties to the association or combination in many particulars. The asso- ciation or combination was assailed in each case as being in viola- tion of the statute. It was held that they were. It is undoubted that in the opinion in each case general language was made use of, which, when separated from its context, would justify the conclusion that it was decided that reason could not be resorted to for the purpose of determining whether the acts complained of were within the statute. It is, however, also true that the nature and character of the contract or agreement in each case was fully referred to and suggestions as to their unreasonableness pointed out in order to indicate that they were within the prohibitions of the statute. As the cases cannot by any possible conception be treated as authoritative without the certitude that reason was resorted to for the purpose of deciding them, it follows as a matter of course that it must have been held by the light of reason, since the conclusion could not have been other- wise reached, that the assailed contracts or agreements were within the general enumeration of the statute, and that their operation and effect brought about the restraint of trade which the statute pro- hibited. This being inevitable, the deduction can in reason only be this: That in the cases relied upon it having been found that the acts complained of were within the statute and operated to produce the injuries which the statute forbade, that resort to reason was not permissible in order’ to allow that to be done which the statute pro- hibited. This being true, the rulings in the cases relied upon when rightly appreciated were therefore this and nothing more: That as considering the contracts or agreements, their necessary effect and the character of the parties by whom they were made, they were clearly restraints of trade within the purview of the statute, they could not be taken out of that category by indulging in general rea- soning as to the expediency or non-expediency of having made the contracts or the wisdom or want of wisdom of the statute which prohibited their being made. That is to say, the cases but decided that the nature and character of the contracts, creating as they did a conclusive presumption which brought them within the statute, such result was not to be disregarded by the substitution of a judicial CHAP. I1.] STANDARD OIL CO. v. UNITED STATES. 563 appreciation of what-the law ought to be for the plain judicial duty of enforcing the law as it was made. But aside from reasoning it is true to say that the cases relied upon do not when rightly construed sustain the doctrine contended for as established by all of the numerous decisions of this court which have applied and enforced the Anti-Trust Act, since they all in the very nature of things rest upon the premise that reason was the guide by which the provisions of the act were in every case interpreted. In- deed intermediate the decision of the two cases, that is, after the decision in the Freight Association Case and before the decision in the Joint Traffic Case, the case of Hopkins v. United States, 171 U.S. 578, was decided, the opinion being delivered by Mr. Justice Pacx- HAM, who wrote the opinions in both the Freight Association and the Joint Traffic Cases. And, referring in the Hopkins Case to the broad claim made as to the rule of interpretation announced in the Freight Association Case, it was said (p. 592): ‘To treat as condemned by the act all agreements under which, as a result, the cost of conduct- ing an interstate commercial business may be increased would en- large the application of the act far beyond the fair meaning of the language used. There must be some direct and immediate effect upon interstate commerce in order to: come within the act.”’ And in the Joint Traffic Case this statement was expressly reiterated and’ approved and illustrated by example; like limitation on the general language used in Freight Association and Joint Traffic Cases is also the clear result of Bement v. National Harrow Co., 186 U.S. 70, 92, and especially of Cincinnati Packet Co. v. Bay, 200 U.S. 179. If the criterion by which it is to be determined in all cases whether every contract, combination, etc., is a restraint of trade within the intendment of the law, is the direct or indirect effect of the acts in- volved, then of course the rule of reason becomes the guide, and the construction which we have given the statute, instead of being re- futed by the cases relied upon, is by those cases demonstrated to be correct. This is true, because as the construction which we have de- duced from the history of the act and the analysis of its text is simply that in every case where it is claimed that an act or acts are in violation of the statute the rule of reason, in the light of the prin- ciples of law and the public policy which the act embodies, must be applied. From this it follows, since that rule and the result of the test as to direct or indirect, in their ultimate aspect, come to one and the same thing, that the difference between the two is therefore only that which obtains between things which do not differ at all. If it be true that there is this identity of result between the rule intended to be applied in the Freight Association Case, that is,.the rule of direct and indirect, and the rule of reason which under the statute as we construe it should be here applied, it may be asked how was it that in the opinion in the Freight Association Case much con- 564 STANDARD OIL CO. ¥. UNITED STATES. (CHAP. II. sideration was given to the subject of whether the agreement or com- bination which was involved in that case could be taken out of the prohibitions of the statute upon the theory of its reasonableness. The question is pertinent and must be fully and frankly met, for if it be now deemed that the Freight Association Case was mistakenly decided or too broadly stated, the doctrine which it announced should be either expressly overruled or limited. The confusion which gives rise to the question results from failing to distinguish between the want of power to take a case which by its terms or the circumstances which surrounded it, considering among such circumstances the character of the parties, is plainly within the statute, out of the operation of the statute by resort to reason in effect to establish that the contract ought not to be treated as within the statute, and the duty in every case where it becomes necessary from the nature and character of the parties to decide whether it was within the statute to pass upon that question by the light of reason. This distinction, we think, serves to point out what in its ultimate conception was the thought underlying the reference to the rule of reason made in the Freight Association Case, especially when such reference is interpreted by the context of the opinion and in the light of the subsequent opinion in the Hopkins Case and in Cincin- nati Packet Company v. Bay, 200 U.S. 179. And in order not in the slightest degree to be wanting in frankness, we say that in so far, however, as by separating the general language used in the opinions in the Freight Association and Joint Traffic Cases from the context and the subject and parties with which the cases were-concerned, it may be conceived that the language referred to conflicts with the construction which we give the statute, they are necessarily now limited and qualified. We see no possible escape from this conclusion if we are to adhere to the many cases decided in this court in which the Anti-Trust Law has been applied and en- forced and if the duty to apply and enforce that law in the futuré is to continue to exist. The first is true, because the construction which we now give the statute does not in the slightest degree conflict with a single previous case decided concerning the Anti-Trust Law aside from the contention as to the Freight Association and Joint Traffic Cases, and because every one of those cases applied the rule of reason for the purpose of determining whether the subject before the court was within the statute. The second is also true, since, as we have already pointed out, unaided by the light of reason it is impossible to understand how the statute may in the future be enforced and the public policy which it establishes be made efficacious. So far as the objections of the defendants are concerned they are all embraced under two headings: — a. That the act, even if the averments of the bill be true, cannot be constitutionally applied, because to do so would extend the power CHAP. II.] STANDARD CIL CO. ¥. UNITED STATES. 565 of Congress to subjects dehors the reach of its authority to regulate commerce, by enabling that body to deal with mere questions of production of commodities within the States. But all the structure upon which this argument proceeds is based upon the decision in United States v. E. C. Knight Co., 156 U.S. 1. The view, however, which the argument takes of that case and the arguments based upon that view have been so repeatedly pressed upon this court in connection with the interpretation and. enforcement of the Anti- Trust Act, and have been so necessarily and expressly decided to be unsound as to cause the contentions to be plainly foreclosed and to require no express notice. United States v. Northern Securities Co., 193 U.S. 197, 334; Loewe v. Lawlor, 208 U.S. 274; Swift & Co. v. United States, 196 U.S. 375; Montague v. Lowry, 193 U.S. 38; Shawnee Compress Co. v. Anderson, 209 U.S. 423. b. Many arguments are pressed in various forms of statement which in substance amount to contending that the statute cannot be applied under the facts of this case without impairing rights of property and destroying the freedom of contract or trade, which is essentially necessary to the well-being of society and which it is in- sisted is protected by the constitutional guaranty of due process of law. But the ultimate foundation of all these arguments is the as- sumption that reason may not be resorted to in interpreting and applying the statute, and therefore that the statute unreasonably restricts the right to contract and unreasonably operates upon the right to acquire and hold property. As the premise is demonstrated to be unsound: by the construction we have given the statute, of course the propositions which rest upon that premise need not be further noticed. E So far as the arguments proceed upon the conception that in view of the generality of the statute it is not susceptible of being enforced by the courts because it cannot be carried out without a judicial exertion of legislative power, they are clearly unsound. The statute certainly generically enumerates the character of acts which it pro- hibits and the wrong which it was intended to prevent. The prop- ositions therefore but insist that, consistently with the fundamental principles of due process of law, it never can be left to the judiciary to decide whether in a given case particular acts come within a gen- eric statutory provision. But to reduce the propositions, however, to this their final meaning makes it clear that in substance they deny the existence of essential legislative authority and challenge the right of the judiciary to perform duties which that department of the government has exerted from the beginning. This is so clear as to require no elaboration. Yet, let us demonstrate that which needs no demonstration, by a few obvious examples. Take for instance the familiar cases where the judiciary is called upon to determine whether a particular act or acts are within a given prohibition, depending 566 STANDARD OIL CO. v. UNITED STATES. [CHAP. II. upon wrongful intent. Take questions of fraud. Consider the power which must be exercised in every case where the courts are called upon to determine whether particular acts are invalid which are, abstractly speaking; in and of themselves valid, but which are as- serted to be invalid because of their direct effect upon interstate commerce. Beyond dispute the proofs establish substantially as alleged in the bill the following facts: 1. The creation of the Standard Oil Company of Ohio; 2. The organization of the Standard Oil Trust of 1882, and also a previous one of 1879, not referred to in the bill, and the proceedings in the Supreme Court of Ohio, culminating in a decree based upon the finding that the company was unlawfully a party to that trust; the transfer by the trustees of stocks in certain of the companies; the contempt proceedings; and, finally, the increase of the capital of the Standard Oil Company of New Jersey and the acquisition by that company of the shares of the stock of the other corporations in ex- change for its certificates. The vast amount of property and the possibilities of far-reaching control which resulted from the facts last stated are shown by the statement which we have previously annexed concerning the parties to the trust agreement of 1882, and the corporations whose stock was held by the trustees under the trust and which came therefore to be held by the New Jersey corporation. But these statements do not with accuracy convey an appreciation of the situation as it existed at the time of the entry of the decree below, since during the more than ten years which elapsed between the acquiring by the New Jersey corporation of the stock and other property which was formerly held by the trustees under the trust agreement, the situa- tion of course had somewhat changed, a change which when an- alyzed in the light of the proof, we think, establishes that the result of enlarging the capital stock of the New Jersey company and giving it the vast power to which we have referred produced its normal consequence, that is, it gave to the corporation, despite enormous dividends and despite the dropping out of certain corporations enumerated in the decree of the court below, an enlarged and more perfect sway and control over the trade and commerce in petroleum and its products. Giving to the facts just stated the weight which it was deemed they were entitled to, in the light afforded by the proof of other cognate facts and circumstances, the court below held that the acts and dealings established by the proof operated to destroy the “po- tentiality of competition” which otherwise would have existed to such an extent as to cause the transfers of stock which were made to the New Jersey corporation and the control which resulted over the many and various subsidiary corporations to be a combination or CHAP. 11.] STANDARD OIL CO. v. UNITED STATES. 567 conspiracy in restraint of trade in violation of the first section of the act, but also to be an attempt to monopolize and a monopolization bringing about a perennial violation of the second section. We see no cause to doubt the correctness of these conclusions, considering the subject from every aspect, that is, both in view of the facts established by the record and the necessary operation and effect of the law as we have construed it upon the inferences deduci- ble from the facts, for the following reasons: - a. Because the unification of power and control over petroleum and its products which was the inevitable result of the combining in the New Jersey corporation by the increase of its stock and the transfer to it of the stocks of so many other corporations, aggregating so vast a capital, gives rise, in and of itself, in the absence of coun- tervailing circumstances, to say the least, to the prima facie pre- sumption of intent and purpose to maintain the dominancy over the oil industry, not as a result of normal methods of industrial development, but by new means of combination which were resorted to in order that greater power might be added than would otherwise have arisen had normal methods been followed, the whole with the purpose of excluding others from the trade and thus centralizing in the combination a perpetual control of the movements of petrol- eum and its products in the channels of interstate commerce. b. Because the prima facie presumption of intent to restrain trade, to monopolize and to bring about monopolization resulting from the act of expanding the stock of the New Jersey corporation and vesting it with such vast control of the oil industry, is made conclusive by considering, 1, the conduct of the persons or corporations who were mainly instrumental in bringing about the extension of power in the New Jersey corporation before the consummation of that result and prior to the formation of the trust agreements of 1879 and 1882; 2, by considering the proof as to what was done under those agree- ments and the acts which immediately preceded the vesting of power in the New Jersey corporation as well as by weighing the modes in which the power vested in that corporation has been exerted and the results which have arisen from it. Recurring to the acts done by the individuals or corporations who were mainly instrumental in bringing about the expansion of the New Jersey corporation during the period prior to the formation of the trust agreements of 1879 and 1882, including those agreements, not for the purpose of weighing the substantial merit of the numerous charges of wrongdoing made during such period, but solely as an aid for discovering intent and purpose, we think no disinterested mind can survey the period in question without being irresistibly driven to the conclusion that the very genius for commercial development and organization which it would seem was manifested from the be- ginning soon begot an intent and purpose to exclude others which 568 STANDARD OIL CO. ¥. UNITED STATES. (CHAP. II. was frequently manifested by acts and dealings wholly inconsistent with the theory that they were made with the single conception of advancing the development of business power by usual methods, but which on the contrary necessarily involved the intent to drive others from the field and to exclude them from their right to trade and thus accomplish the mastery which was the end in view. And, considering the period from the date of the trust agreements of 1879 and 1882, up to the time of the expansion of the New Jersey corporation, the gradual extension of the power over the commerce in oil which ensued, the decision of the Supreme Court of Ohio, the tardiness or reluctance in conforming to the commands of that decision, the method first adopted and that which finally culminated in the plan of the New Jersey corporation, all additionally serve to make mani- fest the continued existence of the intent which we have previously . indicated and which among other things impelled the expansion of the New Jersey corporation. The exercise of the power which re- sulted from that organization fortifies.the foregoing conclusions, since the development which came, the acquisition here and there which ensued of every efficient means by which competition could have been asserted, the slow but resistless methods which followed by which means of transportation were absorbed and brought under control, the system of marketing which was adopted by which the country was divided into districts and the trade in each district in oil was turned over to a designated corporation within the combina- tion and all others were excluded, all lead the mind up to a conviction of a purpose and intent which we think is so certain as practically to cause the subject not to be within the domain of reasonable con- tention. The inference that no attempt to monopolize could have been intended, and that no monopolization resulted from the acts com- plained of, since it is established that a very small percentage of the crude oil produced was controlled by the combination, is unwar- ranted. As substantial power over the crude product was the inevi- table result of the absolute control which existed over the refined product, the monopolization of the one carried with it the power to control the other, and if the inferences which this situation sug- gests were developed, which we deem it unnecessary to do, they might well serve to add additional cogency to the presumption of intent to monopolize which we have found arises from the unques- tioned proof on other subjects. Mr. Justice Haruan concurred with the maj jody? in its conclusion that relief should be given to the United States, but dissented from re reasoning of Mr. Chief Justice Wu1rs. Extracts from his opinion follow. [After quoting from the opinion of the court in the Trans-Missouri Freight Case, 166 U.S. 290.] CHAP. I1.] ‘ STANDARD OIL CO. v. UNITED STATES. 569 It thus appears that fifteen years ago, when the purpose of Con- gress in passing the Anti-Trust Act was fresh in the minds of courts, lawyers, statesmen and the general public, this court expressly de- clined to indulge in judicial legislation, by inserting in the act the word “unreasonable” or any other word of like import. It-may be stated here that the country at large accepted this view of the act, and the Federal courts throughout the entire country enforced its provisions according to the interpretation given in the Freight As- sociation Case. What, then, was to be done by those who questioned the soundness of the interpretation placed on the act by this court in that case? As the court had decided that to insert the word “un- reasonable” in the act would be “judicial legislation” on its part, the only alternative left to those who opposed the decision in that case was to induce Congress to so amend the act as to recognize the right to restrain interstate commerce to a reasonable extent. The public press, magazines and law journals, the debates in Congress, speeches and addresses by public men and jurists, all contain abun- dant evidence of the general understanding that the meaning, extent and scope of the Anti-Trust Act had been judicially determined by this court, and that the only question remaining open for discussion was the wisdom of the policy declared by the act — a matter that was exclusively within the cognizance of Congress. But at every session of Congress since the decision of 1896, the lawmaking branch of the Government, with full knowledge of that decision, has re- fused to change the policy it had declared or to so amend the act of 1890 as to except from its operation contracts, combinations and trusts that reasonably restrain interstate commerce. But those who were in combinations that were illegal did not de- spair. They at once set up the baseless claim that the decision of 1896 disturbed the “business interests of the country,” and let it be known that they would never be content until the rule was established that would permit interstate commerce to be subjected to reasonable restraints. Finally, an opportunity came again to raise the same question which this court had, upon full consideration, determined in 1896. I now allude to the case of United States v. Joint Traffic As- sociation, 171 U.S. 505, decided in 1898. What was that case? It was a suit by the United States against more than thirty rail- road companies to have the court declare illegal, under the Anti- Trust Act, a certain agreement between these companies. The relief asked was denied in the subordinate Federal courts and the Govern- ment brought the case here. It is important to state the points urged in that case by the defend- ant companies charged with violating the Anti-Trust Act, and to show that the court promptly met them. To that end I make a copious extract from the opinion in the Joint Traffic Case. Among other things, the court said: “Upon comparing that agreement [the 570 STANDARD OIL CO. ¥. UNITED STATES. [CHAP. II. one in the Joint Traffic Case, then under consideration, 171 U.S. 505] with the one set forth in the case of United States v. Trans- Missouri Freight Association, 166 U.S. 290, the great similarity be- tween them suggests that a similar result should be reached in the two cases” (p. 558). Learned counsel in the Joint Traffic Case urged a reconsideration of the question decided in the Trans-Missourt Case contending that “the decision in that case [the Trans-Missouri Freight Case] is quite plainly erroneous, and the consequences of such error are far reaching and disastrous, and clearly at war with justice and sound policy, and the construction placed upon the Anti-Trust statute has been received by the public with surprise and alarm.” They suggested that the point made in the Joint Traffic Case as to the meaning and scope of the act might have been but was not made in the previous case. The court said (171 U.S. 559) that “the report of the Trans-Missouri Case clearly shows not only that the point now taken was there urged upon the attention of the court, but it was then intentionally and necessarily decided.” The question whether the court should again consider the point decided in the Trans-Missouri Case, 171 U.S. 573, was disposed of, in the most decisive language, as follows: ‘‘ Finally, we are asked to reconsider the question decided in the Trans-Missourt Case, and to retrace the steps taken therein; because of the plain error con- tained in that decision and the widespread alarm with which it was received and the serious consequences which have resulted, or may soon result, from the law as interpreted in that case. It is proper to remark that an application for a reconsideration of a question but lately decided by this court is usually based upon a statement that some of the arguments employed on the original hearing of the ques- tion have been overlooked or misunderstood, or that some controlling authority has been either misapplied by the court or passed over without discussion or notice. While this is not strictly an application for a rehearing in the same case, yet in substance it is the same thing. The court is asked to reconsider a question but just decided after a careful investigation of the matter involved. There have heretofore been in effect two arguments of precisely the same questions now before the court, and the same arguments were addressed to us on both those occasions. The report of the Trans-Missourt Case shows a dissenting opinion delivered in that case, and that the opinion was concurred in by three other members of the court. That opinion, it will be seen, gives with great force and ability the arguments against the decision which was finally arrived at by the court. It was after a full discussion of the questions involved and with the knowledge of the views entertained by the minority as expressed in the dissenting opinion, that the majority of the court came to the conclusion it did. Soon after the decision a petition for a rehearing of the case was made, supported by a printed argument in its favor, and pressed CHAP. 11.] STANDARD OIL CO. ¥. UNITED STATES. 571 with an earnestness and vigor and at a length which were certainly commensurate with the importance of the case. This court, with care and deliberation and also with a full appreciation of their im- portance, again considered the questions involved in its former de- cision. A majority of the court once more arrived at the conclusion it had first announced, and accordingly it denied the application. And now for the third time the same arguments are employed, and the court is again asked to recant its former opinion, and to decide the same question in direct opposition to the conclusion arrived at in the Trans-Missouri Case. The learned counsel while making the application frankly confess that the argument in opposition to the decision in the case above named has been so fully, so clearly and so forcibly presented in the dissenting opinion of Mr. Justice WuitTe [in the Freight Case] that it is hardly possible to add to it, nor is it necessary to repeat it. The fact that there was so close a division of opinion in this court when the matter was first under advisement, together with the different views taken by some of the judges of the lower courts, led us to the most careful and scrutinizing examination of the arguments advanced by both sides, and it was after such an examination that the majority of the court came to the conclusion it did. It is not now alleged that the court on the former occasion overlooked any argument for the respondents or misapplied any controlling authority. It is simply insisted that the court, notwith- standing the arguments for an opposite view, arrived at an erroneous result, which, for reasons already stated, ought to be reconsidered and reversed. As we have twice already deliberately and earnestly con- sidered the same arguments which are now for a third time pressed wpon our attention, it could hardly be expected that our opinion should now change from that already expressed.” These utterances, taken in connection with what was previously said in the Trans-Missouri Freight Case, show so clearly and affirm- atively as to admit of no doubt that this court, many years ago, upon the fullest consideration, interpreted the Anti-Trust Act as prohib- iting and making illegal not only every contract or combination, in whatever form, which was in restraint of interstate commerce, with- out regard to its reasonableness or unreasonableness, but all mo- nopolies or attempts to monopolize “any part” of such trade or commerce. In this connection it may be well to refer to the adverse report made in 1909, by Senator Nelson, on behalf of the Senate Judiciary Committee, in reference to a certain bill offered in the Senate and which proposed to amend the Anti-Trust Act in various particulars. That report contains a full, careful and able analysis of judicial decisions relating to combinations and monopolies in restraint of trade and commerce. Among other things said in it which bear on the questions involved in the present case are these: “The Anti- 572 STANDARD OIL CO. ¥. UNITED STATES. (CHAP. II. Trust Act makes it a criminal offense to violate the law, and provides a punishment both by fine and imprisonment. To inject into the act the question of whether an agreement or combination is reason- abie or unreasonable would render the act as a criminal or penal stat- ute indefinite and uncertain, and hence, to that extent, utterly nugatory and void, and would practically amount to a repeal of that part of the act....And while the same technical objection does not apply to civil prosecutions, the injection of the rule of reasonable- ness or unreasonableness would lead to the greatest variableness and uncertainty in the enforcement of the law. The defense of reasonable restraint would be made in every case and there would be as many dif- ferent rules of reasonableness as cases, courts, and juries. What one court or jury might deem unreasonable another court or jury might deem reasonable. A court or jury in Ohio might find a given agree- ment or combination reasonable, while a court and jury in Wisconsin might find the same agreement and combination unreasonable. In the case of People v. Sheldon, 139 N.Y. 264, Chief Justice ANDREWS remarks: ‘If agreements and combinations to prevent competition in prices are or may be hurtful to trade, the only sure remedy is to prohibit all agreements of that character. If the validity of such an agreement was made to depend upon actual proof of public prejudice or injury, it would be very difficult in any case to establish the in- validity, although the moral evidence might be very convincing.’ .:. To amend the Anti-Trust Act, as suggested by this bill, would be to entirely emasculate it, and for all practical purposes render it nugatory as a remedial statute. Criminal prosecutions would not lie and civil remedies would labor under the greatest doubt and un- certainty. The act as it exists is clear, comprehensive, certain and highly remedial. It practically covers the field of Federal jurisdic- tion, and is in every respect a model law. To destroy or undermine it at the present juncture, when combinations are on the increase, and appear to be as oblivious as ever of the rights of the public, would be a calamity.”’ The result was the indefinite postponement by the Senate of any further consideration of the proposed amendments of the Anti-Trust Act. After what has been adjudged, upon full consideration, as to the meaning and scope of the Anti-Trust Act, and in view of the usages of this court when attorneys for litigants have attempted to reopen questions that have been deliberately decided, I confess to no little surprise as to what has occurred in the present case. The court says that the previous cases, above cited, ‘‘cannot by any possible con- ception be treated as authoritative without the certitude that reason was resorted to for the purpose of deciding them.” And its opinion is full of intimations that this court proceeded in those cases, so far as the present question is concerned, without being guided by the “rule of reason,” or “the light of reason.” It is more than once CHAP. I1.] STANDARD OIL CO. v. UNITED STATES. 573 intimated, if not suggested, that if the Anti-Trust Act is to be con- strued as prohibiting every contract or combination, of whatever nature, which is in fact in restraint of commerce, regardless of the reasonableness or unreasonableness of such restraint, that fact would show that the court had not proceeded, in its decision, according to “the light of reason,” but had disregarded the “rule of reason.” If the court, in those cases, was wrong in its construction of the act, it is certain that it fully apprehended the views advanced by learned counsel in previous cases and pronounced them to be untenable. The published reports place this beyond all question. The opinion of the court was delivered by a Justice of wide experience as a judicial officer, and the court had before it the Attorney General of the United States and lawyers who were recognized, on all sides, as great leaders in their profession. The same eminent jurist who delivered the opinion in the Trans-Missouri Case delivered the opinion in the Joint Traffic Association Case, and the Association in that case was represented by lawyers whose ability was universally recognized. Is it to be supposed that any point escaped notice in those cases when we think of the sagacity of the Justice who expressed the views of the court, or of the ability of the profound, astute lawyers, who sought such an interpretation of the act as would compel the court to insert words in the statute which Congress had not put there, and the insertion of which words, would amount to “ judicial legislation’? Now this court is asked to do that which it has distinctly declared it could not and would not do, and has now done what it then said it could not constitutionally do. It has, by mere interpretation, modified the act of Congress, and deprived it of practical value as a defensive measure against the evils-to be remedied. On reading the opinion just delivered, the first inquiry will be, that as the court is unanimous in holding that the particular things done by the Stand- ard Oil Company and its subsidiary companies, in this case, were illegal under the Anti-Trust Act, whether those things were in rea- sonable or unreasonable restraint of interstate commerce, why was it necessary to make an elaborate argument, as is done in the opinion, to show that according to the “rule of reason”’ the act as passed by Congress should be interpreted as if it contained the word ‘“unrea- sonable” or the word “undue”? The only answer which, in frank- ness, can be given to this question is, that the court intends to decide that its deliberate judgment, fifteen years ago, to the effect that the act permitted no restraint whatever of interstate commerce, whether reasonable or unreasonable, was not in accordance with the ‘rule of reason.” In effect the court says, that it will now, for the first time, bring the discussion under the “light of reason” and apply the ‘rule of reason” to the questions to be decided. I have the authority of this court for saying that such a course of proceeding on its part would be “‘judicial legislation.” §74 UNITED STATES v. AMERICAN TOBACCO CO. [CHAP. II, UNITED STATES v. AMERICAN TOBACCO CO. 221 U.S. 106. 1911. Mr. Curer Justice Wurrs. We shall divide our investigation of the case into three subjects: First, the undisputed facts; second, the meaning of the Anti-Trust Act and its application as correctly con- strued to the ultimate conclusions of fact deducible from the proof; third, the remedies to be applied. First. Undisputed facts. The matters to be considered under this heading we think can best be made clear by stating the merest outline of the condition of the tobacco industry prior to what is asserted to have been the initial movement in the combination which the suit assails and in the light so afforded to briefly recite the history of the assailed acts and con- tracts. We shall divide the subject into two periods, (a) the one from the time of the organization of the first or old American To- bacco Company in 1890 to the organization of the Continental Tobacco Company, and (6) from the date of such organization to the filing of the bill in this case. Summarizing in the broadest way the conditions which obtained prior to 1890, as to the production, manufacture and distribution of tobacco, the following general facts are adequate to portray the situation. Tobacco was grown in many sections of the country having diver- sity of soil and climate and therefore was subject to various vicis- situdes resulting from the places of production and consequently varied in quality. The great diversity of use to which tobacco was applied in manufacturing caused it to be that there was a demand for all the various qualities. The demand for all qualities was not local, but widespread, extending as well to domestic as to for- eign trade, and, therefore, all the products were marketed under competitive conditions of a peculiarly advantageous nature. The manufacture of the product in this country in various forms was successfully carried on by many individuals or concerns scattered throughout the country, a larger number perhaps of the manufac- turers being in the vicinage of production and others being advanta- geously situated in or near the principal markets of distribution. Before January, 1890, five distinct concerns — Allen & Ginter, with factory at Richmond, Va.; W. Duke, Sons & Co., with factories at Durham, North Carolina, and New York City; Kinney Tobacco Company, with factory at New York City; W. 8S. Kimball & Com- pany, with factory at Rochester, New York; Goodwin & Company, with factory at Brooklyn, New York — manufactured, distributed and sold in the United States and abroad 95 per cent of all the do- mestic cigarette and less than 8 per cent of the smoking tobacco » CHAP. II.] UNITED STATES v. AMERICAN TOBACCO CO. 575 produced in the United States. There is no doubt that these fac- tories were competitors in the purchase of the raw product which they manufactured and in the distribution and sale of the manufactured products. Indeed it is shown that prior to 1890 not only had normal and ordinary competition existed between the factories in question, but that the competition had been fierce and abnormal. In J. anuary, 1890, having agreed upon a capital stock of $25,000,000, all to be divided amongst them, and who should be directors, the concerns referred to organized the American Tobacco Company in New Jersey, “for trading and manufacturing,” with broad powers, and conveyed to it the assets and businesses, including good will and right to use the names of the old concerns; and thereafter this corporation carried on the business of all. The $25,000,000 of stock of the Tobacco Com- pany was allotted to the charter members as follows: Allen & Ginter, $3,000,000 preferred, $4,500,000 common; W. Duke, Sons & Co., $3,000,000 preferred, $4,500,000 common; Kinney Tobacco Company, $2,000,000 preferred, $3,000,000 common; W. S. Kimball & Co., $1,000,000 preferred, $1,500,000 common; and Goodwin & Co., $1,000,000 preferred, $1,500,000 common. There is a charge that the valuation at which the respective prop- erties were capitalized in the new corporation was enormously in excess of their actual value. We, however, put that subject aside, since we propose only to deal with facts which are not in controversy. Shortly after the formation of the new corporation the Goodwin & Co. factory was closed, and the directors ordered “that the manu- facture of all tobacco cigarettes be concentrated at Richmond.” The new corporation in 1890, the first year of its operation, manufac- tured about two and one half billion cigarettes, that is, about 96 or 97 per cent of the total domestic output, and about five and one half million pounds of smoking tobacco out of a total domestic product of nearly seventy million pounds. In a little over a year after the organization of the company it increased its capital stock by ten million dollars. The purpose of this increase is inferable from the considerations which we now state. There was a firm known as Pfingst, Doerhoefer & Co., consisting of anumber of partners, who had been long and successfully carrying on the business of manufacturing plug tobacco in Louisville, Ken- tucky, and distributing it through the channels of interstate com- merce. In January, 1891, this firm was converted into a corporation known as the National Tobacco Works, having a capital stock of $400,000 all of which was issued to the partners. Almost immedi- ately thereafter, in the month of February, the American Tobacco Company became the purchaser of all the capital stock of the new corporation, paying $600,000 cash and $1,200,000 in stock of the American Tobacco Company. The members of the previously existing firm bound themselves by contract with the American 576 UNITED STATES v¥. AMERICAN TOBACCO CO. [CHAP. II. Tobacco Company to enter its service and manage the business and property sold, and each further agreed that for ten years he would not engage in carrying on, directly or indirectly, or permit or suffer the use of his name in connection with the carrying on of the tobacco business in any form. In April following, the American Tobacco Company bought out the business of Philip Whitlock, of Richmond, Virginia, who was engaged in the manufacture of cheroots and cigars, and with the exclusive right to use the name of Whitlock. The consideration for this purchase was $300,000, and Whitlock agreed to become an employé of the American Tobacco Company for a number of years and not to engage for twenty years in the tobacco business. In the month of April the American Tobacco Company also acquired the business of Marburg Brothers, a well-known firm located at Baltimore, Maryland, and engaged in the manufacture and dis- tribution of tobacco, principally smoking and snuff. The considera- tion was a cash payment of $164,637.65 and stock to the amount of $3,075,000. The members of the firm also conveyed the right to the use of the firm name and agreed not ta engage in the tobacco business for a lengthy period. Again, in the same month, the en es Tobacco Company bought out a tobacco firm of old standing, also located in Baltimore, known as G. W. Gail & Ax, engaged principally in manufacturing and selling smoking tobacco, buying with the business the exclusive right to use the name of the firm or the partners, and the members of the firm agreed not to engage in the tobacco business for a specified period. The consideration for this purchase was $77,582.66 in cash and stock to the amount of $1,760,000. The plant was abandoned soon after. Referring to the occurrences of the year 1891, as in all respects typical of the occurrences which took place in all the other years, of the first period, that is during the years 1892, 1893, 1894, 1895, 1896, 1897 and 1898 we content ourselves with saying that it is undis- puted that between February, 1891, and October, 1898, including the purchases which we have specifically referred to, the American Tobacco Company acquired fifteen going tobacco concerns doing business in the States of Kentucky, Louisiana, Maryland, Michigan, Missouri, New York, North Carolina and Virginia. For ten of the plants an all cash consideration of $6,410,235.26 was paid, while the payments for the remaining five aggregated in cash $1,115,100.95 and in stock $4,123,000. It is worth nothing that the last purchase, in October, 1898, was of the Drummond Tobacco Company, a Mis- souri corporation dealing principally in plug, for which a cash con- sideration was paid of $3,457,500. The corporations which were combined for the purpose of forming the American Tobacco Company produced a very small portion of CHAP. I1.] UNITED STATES ». AMERICAN TOBACCO CO. 577 plug tobacco. That an increase in this direction was contemplated is manifested by the almost immediate increase of the stock and its use for the purpose of acquiring, as we have indicated, in 1891 and 1892, the ownership and control of concerns manufacturing plug tobacco and the consequent increase in that branch of production. There is no dispute that as early as 1893 the president of the American To- bacco Company, by authority of the corporation, approached lead- ing manufacturers of plug tobacco and sought to bring about a com- bination of the plug tobacco interests, and upon the failure to accomplish this, ruinous competition, by lowering the price of plug below its cost, ensued. As a result of this warfare, which continued until 1898, the American Tobacco Company sustained severe losses aggregating more than four millions of dollars. The warfare pro- duced its natural result, not only because the company acquired during the last two years of the campaign, as we have stated, control of important plug tobacco concerns, but others engaged in that in- dustry came to terms. We say this because in 1898, in connection with several leading plug manufacturers, the American Tobacco Company organized a New Jersey corporation styled the Continental Tobacco Company, for ‘trading and manufacturing,”’ with a capital of $75,000,000, afterwards increased to $100,000,000. The new com- pany issued its stock and took transfers to the plants, assets and businesses of five large and successful competing plug manufacturers. The American Tobacco Company also conveyed to this corpora- tion, at large valuations, the assets, brands, real estate and good will pertaining to its plug tobacco business, including the National To- bacco Works, the James G. Butler Tobacco Co., Drummond To- bacco Company, and Brown Tobacco Co., receiving as considera- tion $30,274,200 of stock (one-half common and one-half preferred), $300,000 cash, and an additional sum for losses sustained in the plug business during 1898, $840,035. Mr. Duke, the president of the American Tobacco Company, also became president of the Conti- nental Company. Under the preliminary agreement which was made looking to the formation of the Continental Tobacco Company, that company acquired from the holders all the $3,000,000 of the common stock of the P. Lorillard Company in exchange for $6,000,000 of its stock, and $1,581,300 of the $2,000,000 preferred in exchange for notes aggregating a sum considerably larger. The Lorillard Company, however, although it thus passed practically under the control of the American Tobacco Company by virtue of its ownership of stock in the Continental Company, was not liquidated, but its business continued to be conducted as a distinct corporation, its goods being marked and put upon the market just as if they were the manufac- ture of an independent concern. Following the organization of the Continental Tobacco Company 578 UNITED STATES J. AMERICAN TOBACCO co. [CHAP. II. the American Tobacco. Company increased its capital stock from thirty-five millions of dollars to seventy millions of dollars, and de- clared a stock dividend of one hundred per cent on its common stock, that is, a stock dividend of $21,000,000. As the facts just stated bring us to the end of the first period which at the outset we stated it was our purpose to review, it is well briefly to point out the increase in the power and control of the American Tobacco Company and the extension of its activities to all forms of tobacco products which had been accomplished just prior to the organization of the Continental Tobacco Company. Nothing could show it more clearly than the following: At the end of the time the company was manufacturing eighty-six per cent or thereabouts of all the cigarettes produced in the United States, above twenty-six per cent of all the smoking tobacco, more than twenty-two per cent of all plug tobacco, fifty-one per cent of all little cigars, six per cent each of all snuff and fine cut tobacco, and over two per cent of all cigars and cheroots. so Ha . A brief reference to the occurrences of the second period, that is, from and after the organization of the Continental Tobacco Com- pany up to the time of the bringing of this suit, will serve to make evident that the transactions in their essence had all the characteris- tics of the occurrences of the first period. In the year 1899 and thereafter either the American or the Con- tinental company, for cash or stock, at an aggregate cost of fifty millions of dollars ($50,000,000), bought and closed up some thirty competing corporations and partnerships theretofore engaged in interstate and foreign commerce as manufacturers, sellers, and dis- tributors of tobacco and related commodities, the interested parties covenanting not to engage in the business. Likewise the two cor- porations acquired for cash, by issuing stock, and otherwise, control of many competing corporations, now going concerns, with plants in various States, Cuba and Porto Rico, which manufactured, bought, sold and distributed tobacco products or related articles throughout the United States and foreign countries, and took from the parties in interest covenants not to engage in the tobacco busi- ness. The plants thus acquired were operated until the merger in 1904, to which we shall hereafter refer, as a part of the general system of the American and Continental companies. The power resulting from and the purpose contemplated in making these acquisitions by the companies just referred to, however, may not be measured by con- sidering alone the business of the company directly acquired, since some of those companies were made the vehicles as representing the American or Continental company for acquiring and holding the stock of other and competing companies, thus amplifying the power resulting from the acquisitions directly made by the American or CHAP. IL] UNITED STATES ¥. AMERICAN TOBACCO CO. 579 Continental company, without ostensibly doing so. It is besides undisputed that in many instances the acquired corporations with the subsidiary companies over which they had control through stock ownership were carried on ostensibly as independent concerns dis- connected from either the American or the Continental company, although they were controlled and owned by one or the other of these companies. It is of the utmost importance to observe that the acquisitions made by the subsidiary corporations in some cases likewise show the remarkable fact stated above, that is, the disbursement of enormous amounts of money to acquire plants, which on being purchased were not utilized but were immediately closed. It is also to be remarked, that the facts stated in the memorandum in the margin show on their face a singular identity between the conceptions which governed the transactions of this latter period with those which evidently existed at the very birth of the original organization of the American To- bacco Company, as exemplified by the transactions in the first period. A. statement of particular transactions outside of those previously referred to as having occurred during the period in question will serve additionally to make the situation clear. And to accomplish this purpose we shall, as briefly as may be consistent with clarity, separately refer to the facts concerning the organization during the second period of the five corporations whigh were named as defend- ants in the bill, as heretofore stated and which for the purpose of designation we have hitherto classified as accessory defendants, such corporations being the American Snuff Company, American Cigar Company, American Stogie Company, MacAndrews & Forbes Com- pany (licorice), and Conley Foil Company. 1. The American Snuff Company. As we have seen, the American Tobacco Campany at the com- mencement of the first period produced a very small quantity of snuff. Its capacity, however, in that regard was augmented owing partic- ularly to the formation of the Continental Tobacco Company and the acquisition of the Lorillard Company, by which it came to be a serious factor as a snuff producer. There shortly ensued an ag- gressive competition in the snuff business between the American Tobacco Company, with the force acquired from the vantage ground resulting from the dominancy of its expanded organization, and others in the trade operating independently of that organization. The result was identical with that which had previously arisen from like conditions in the past. In March, 1900, there was organized in New J ersey a corporation known as the American Snuff Company, with a capital of $25,000,- 000, one-half: preferred and one-half common, which took over the snuff business of the P. Lorillard Company, Continental Tobacco Company and the American Tobacco Company, with that of a 580 UNITED STATES J. AMERICAN TOBACCO CO. [CHAP. IL large competitor, viz: the Atlantic Snuff Co. The stock of the new company was thus apportioned: Atlantic Snuff Company, preferred, $7,500,000, common, $25,000,000; P. Lorillard Company, preferred, $1,124,700, common, $3,459,400; the American Tobacco Company, preferred, $1,177,800, common, $3,227,500; Continental Tobacco Company, preferred, $197,500, common, $813,100. The stock issued to Continental Tobacco Company and the defendants, P. Lorillard ‘Company and the American Tobacco Company, is still held by the latter, and they have at all times had a controlling interest in the Snuff Company. All the companies, together with their officers and directors, covenanted that they would not thereafter engage as com- petitors in the tobacco business or the manufacture, sale, or distribu- tion of snuff. Among the assets transferred by the Atlantic Snuff Company to American Snuff Company were all the shares ($600,000) of W. E. Garrett & Sons, Inc., then and now one of the oldest and very largest producers of snuff, for a long time and still engaged at Yorkland, Del., in interstate and foreign commerce in tobacco and its products, and which controlled through stock ownership the Southern Snuff Company, Memphis, Tenn.; Dental Snuff Company, Lynchburg, Va., and Stewart-Ralph Snuff Company, Clarksville, Tenn. The separate existence of W. E. Garrett & Sons, Inc., has been preserved and its business conducted under the corporate name. In March, 1900, the American Snuff Company acquired all the shares of George W. Helme Company, one of the oldest and largest producers of snuff and actively engaged at Helmetta, N.J., in interstate and foreign commerce in competition with defendants, by issuing in exchange therefor $2,000,000 preferred stock and $1,000,000 common; and it thereafter took a conveyance of ali assets of the acquired company * and now operates the plant under its own name. As a result of the transactions just stated it came to pass that the American Tobacco Company, which had at the end of the first period only a very small percentage of the snuff manufacturing business, came virtually to have the dominant control as a manu- facturer of that product. ; 2. Conley Foil Company — manufacturers of tinfoil, an essential for packing tobacco products. In December, 1899, the American Tobacco Company secured control of the business of John Conley & Sons, a partnership of New York City. By agreement the Conley Foil Company was incor- porated in New York “for trading and manufacturing,” ete., with $250,000 capital, ultimately increased to $825,000. The corporation took over the business and assets of the firm, and the American To- bacco Company became owner of a majority of the shares of stock. The Conley Foil Company has acquired all the shares of stock of the Johnson Tinfoil & Metal Company, of St. Louis, a leading com- CHAP. I1.] UNITED STATES 9. AMERICAN TOBACCO CO. 581 petitor, and they supply under fixed contracts at remunerative prices the tinfoil used by the defendants, which constitutes the major part of the total production in the United States. 3. American Cigar Company. Prior to 1901 the American and Continental Tobacco companies manufactured, sold, and distributed cigars, stogies, and cheroots. In the year stated the companies determined to engage in the busi- ness upon a larger seale. Under agreement with Powell, Smith & Company; large manufacturers and dealers in cigars, they caused the incorporation in New Jersey of the American Cigar Company “for trading and manufacturing,” etc., to which all three conveyed their said business, and it has since carried on the same. The Ameri- can and Continental companies each acquired 463 per cent of the shares, and Powell, Smith & Company 7 per cent; the original cap- italization was $10,000,000 (afterwards $20,000,000), and more than three-fourths is owned by the former. The Cigar Company acquired many competitors (partnerships and corporations) engaged in interstate and foreign commerce, taking from the parties covenants against engaging in the tobacco business; and it has also procured the organization of controlled corporations which have acquired com- peting manufacturers, jobbers and distributors in the United States, Cuba and Porto Rico. It manufactures, sells and distributes a con- siderable percentage of domestic cigars; is the dominating factor in the tobacco business, foreign and domestic, in Cuba and Porte Rico, and is there engaged in tobacco planting. It also controls corporate jobbers in California, Alabama, Virginia, Pennsylvania, Georgia, Louisiana, New Jersey and Tennessee. 4. The MacAndrews & Forbes Company — manufacturers of licorice. There is no question that licorice paste is an essential ingredient in the manufacture of plug tobacco, and that one who is debarred from obtaining such paste would therefore be unable to engage in or carry on the manufacture of such product. The control over this article was thus secured: In May, 1902, the Continental Company secured control of MacAndrews & Forbes Co. of Newark, New Jersey, and organized “for trading and manufacturing” a corporation known as the MacAndrews & Forbes Co., with a capital of $7,000,000, $4,000,000 preferred and $3,000,000 common, which took over the business of MacAndrew & Forbes and another large competitor. The Continental Company acquired two-thirds of the common stock by agreeing to purchase its supply of paste from the new company. The American Tobacco Company, at the time of the filing the bill, was the owner of $2,112,900 of the common stock and $750,000 preferred. By various purchases and agreements the Mac- Andrews & Forbes Company acquired, substantially, the business of all competitors. Thus, in June, 1902, it purchased the business of 582 UNITED STATES ¥. AMERICAN TOBACCO CO. [CHAP. II. the Stamford Mfg. Co., of Stamford, Connecticut, and incorporated the National Licorice Company, which acquired the business of Young & Smylie and F. B. & V. P. Scudder, and the National Com- pany agreed with MacAndrews & Forbes not to produce licorice for tobacco manufacturers. In 1906 all the stock in the J.5. Young Company ($1,800,000), which had been organized to take over the business of the J.S. Young Co., of Baltimore, Md., was acquired by the MacAndrews & Forbes Co. The MacAndrews & Forbes Co. use in excess of ninety-five per cent of the licorice root consumed in the United States. 5. American Stogie Company. In May, 1903, the American Cigar Company and the American and Continental Tobacco Companies caused the American Stogie Company to be incorporated in New Jersey, with $11,979,000 capital, which immediately took over the stogie and tobie business of the companies named in exchange for $8,206,275 stock and then in the usual ways acquired the business of others in the manufacture, sale, and distribution of such products, with covenants not to compete. It acquired in exchange for $3,647,725 stock all shares of United States Cigar Company (which had previously acquired and owned the business of important competitors) and subsequently took the conveyance of the plant and assets. The majority shares always have been held by defendant, the American Cigar Company. As we think the legitimate inferences deducible from the undis- puted facts which we have thus stated will be sufficient to dispose of the controversy, we do not deem it necessary to expand this state- ment so as to cause it to embrace a recital of the undisputed facts concerning the entry of the American Tobacco Company into the retail tobacco trade through the acquisition of a controlling interest in the stock of what is known as the United Cigar Stores Company, as well as to some other subjects which for the sake of brevity we likewise pass over, in order to come at once to a statement concern- ing the foreign companies. The English Companies. In September, 1901, the American Tobacco Co. purchased for $5,347,000 a Liverpool (Eng.) corporation, known as Ogden’s Limited, there engaged in manufacturing and distributing tobacco products. A trade conflict which at once ensued caused many of the English manufacturers to combine into an incorporation known as the Imperial Tobacco Company of Great Britain and Ireland, capital 15,000,000, afterwards increased to 18,000,000, pounds sterling. The trade war was continued between this corporation and the American Tobacco Company, with a result substantially identical with that which had hitherto, as we have seen, arisen from such a situation. In September, 1902, the Imperial and the American companies CHAP. Il.] UNITED STATES v. AMERICAN TOBACCO CO. 583 entered into contracts (executed in England) stipulating that the former should limit its business to the United Kingdom, except pur- chasing leaf in the United States (it buys 54,000,000 pounds an- nually) ; that the American companies should limit their business to the United States, its dependencies and Cuba; and that the British- American Tobacco Company, with capital of 6,000,000 pounds sterl- ing apportioned between them, should be organized, take over the export business of both, and operate in other countries, etc. This arrangement was immediately put into effect, and has been ob- served. ‘ The Imperial Company holds one-third and the American Com- pany two-thirds of the capital stock of the British-American Tobacco Company, Limited. The latter company maintains a branch office in New York City and the vice-president of the American Tobacco Company is a principal officer. This company uses large quantities of domestic leaf, partly exported to various plants abroad and about half manufactured here and then exported. By agreement, all this is purchased through the American Tobacco Company. In addition to many plants abroad it has warehouses in various States and plants at Petersburg, Va., and Durham, N.C., where tobacco is manu- factured and then exported. The purchase of necessary leaf tobacco in the United States by the Imperial Company is now made through a resident general agent and is exported as a part of foreign commerce. Not to break the continuity of the narrative of facts we have omitted in the proper chronological order to state the facts relative to what was known as the Consolidated Tobacco Company. We now particularly refer to that subject. The Consolidated Tobacco Co. In June, 1901, parties largely interested in the American and Con- tinental companies caused the incorporation in New Jersey of the Consolidated Tobacco Company, capital $30,000,000 (afterwards $40,000,000), with broad powers and perpetual existence; to do busi- ness throughout the world, and to guarantee securities of other com- panies, etc. A majority of shares was taken by a few individuals connected with the old concerns: A. N. Brady, J. B. Duke, A. H. Payne, Thomas Ryan, W. C. Whitney, and P. A. B. Widener. J. B. Duke, president of both the old companies, became president of the Consolidated. Largely in exchange for bonds the new com- pany acquired substantially all the shares of common stock of the old ones. Its business, of holding and financing, was continued until 1904, when, with the American and Continental companies, it was merged into the present American Tobacco Company. By proceedings in New Jersey, October, 1904, the (old) American Tobacco Company, Continental Tobacco Company and Consoli- dated Tobacco Company were merged into one corporation, under 584 UNITED STATES v0. AMERICAN TOBACCO CO. [CHAP. II. the name of The American Tobacco Company, the principal de- fendant here. The merged company, with perpetual existence, was capitalized at $180,000,000 ($80,000,000 preferred, ordinarily with- out power to vote). Prior to the merger the Consolidated Tobacco Company, a ma- jority of whose $40,000,000 share capital was held by J. B. Duke, Thomas F. Ryan, William C. Whitney, Anthony N. Brady, Peter A. B. Widener and Oliver H. Payne, had acquired, as already stated, nearly all common shares of both old American and Continental companies, and thereby control. The preferred shares, however, were held by many individuals. Through the method of distribu- tion of the stock of the new company, in exchange for shares in the old American and in the Continental Company, it resulted that the same six men in control of the combination through the Consolidated Tobacco Company continued that control by ownership of stock in the merged or new American Tobacco Company. The assets, prop- erty, etc., of the old companies passed to the American Tobacco Company (merged), which has since carried on the business. The record indisputably discloses that after this merger the same methods which were used from the beginning continued to be em- ployed. Thus, it is beyond dispute: First, that since the organization of the new American Tobacco Company that company has acquired four large tobacco concerns, that restrictive covenants against en- gaging in the tobacco business were taken from the sellers, and that the plants were not continued in operation but were at once aban- doned. Second, that the new company has besides acquired control of eight additional concerns, the business of such concerns being now carried on by four separate corporations, all absolutely controlled by the American Tobacco Company, although the connection as to two of these companies with that corporation was long and persist- ently denied. Thus reaching the end of the second period and coming to the time of the bringing of the suit, brevity prevents us from stopping to portray the difference between the condition in 1890 when the (old) American Tobacco Company was organized by the consolida- tion of five competing cigarette concerns and that which existed at the commencement of the suit. That situation and the vast power which the principal and accessory corporate defendants and the small number of individuals who own a majority of the common stock of the new American Tobacco Company exert over the market- ing of tobacco as a raw product, its manufacture, its marketing when manufactured, and its consequent movement in the channels of interstate commerce, indeed relatively over foreign commerce, and the commerce of the whole world, in the raw and manufactured prod- ucts stand out in such bold relief from the undisputed facts which have been stated as to lead us to pass at once to the second funda- CHAP. Il.] UNITED STATES J. AMERICAN TOBACCO CO. 585 mental proposition which we are required to consider. That is, the construction of the Anti-Trust Act and the application of the act as rightly construed to the situation as proven in consequence of having determined the ultimate and final inferences properly deducible from the undisputed facts which we have stated. The construction and application of the Anti-Trust Act. If the Anti-Trust Act is applicable to the entire situation here presented and is adequate to afford complete relief for the evils which the United States insist that situation presents it can only be because that law will be given a more comprehensive application than has been affixed to it in any previous decision. This will be the case be- cause the undisputed facts as we have stated them involve questions as to the operation of the Anti-Trust Act not hitherto presented in any case. Thus, even if the ownership of stock by the American Tobacco Company in the accessory and subsidiary companies and the ownership of stock in any of those companies among themselves were held, as was decided in United States v. Standard Oil Co., to be a violation of the act and all relations resulting from such stock ownership were therefore set aside, the question would yet remain whether the principal defendant, the American Tobacco Company, and the five accessory defendants, even when divested of their stock ownership in other corporations, by virtue of the power which they would continue to possess, even although thus stripped, would amount to a violation of both the first and second sections of the act. Again, if it were held that the corporations, the existence whereof was due to a combination between such companies and other com- panies was a violation of the act, the question would remain whether - such of the companies as did not owe their existence and power to combinations but whose power alone arose from the exercise of the right to acquire and own property would be amenable to the prohi- bitions of the act. Yet further: Even if this proposition was held in the affirmative the question would remain whether the principal defendant, the American Tobacco Company, when stripped of its stock ownership, would be in and of itself within the prohibitions of the act although that company was organized and took being before the Anti-Trust Act was passed. Still further, the question would yet remain whether particular corporations which, when bereft of the power which they possessed as resulting from stock ownership, although they were not inherently possessed of a sufficient residuum of power to cause them to be in and of themselves either a restraint of trade or a monopolization or an attempt to monopolize, should nevertheless be restrained because of their intimate connection and association with other corporations found to be within the prohibi- tions of the act. The necessity of relief as to all these aspects, we think, seemed to the Government so essential, and the difficulty of giving to the act such a comprehensive and coherent construction as 586 UNITED STATES ¥. AMERICAN TOBACCO co. [CHAP. II. would be adequate to enable it to meet the entire situation, led to what appears to us to be in their essence a resort to methods of construction not compatible one with the other. And the same ap- parent conflict is presented by the views of the act taken by the defendants when their contentions are accurately tested. Thus the Government, for the purpose of fixing the illegal character of the original combination which organized the old American Tobacco Company, asserts that the illegal character of the combination is plainly shown because the combination was brought about to stay the progress of a flagrant and ruinous trade war. In other words, the contention is that as the act forbids every contract, and combina- tion, it hence prohibits a reasonable and just agreement made for the purpose of ending a trade war. But as thus construing the act by the rule of the letter which kills, would necessarily operate to take out of the reach of the act some one of the accessory and many subsidiary corporations, the existence of which depend not at all upon combination or agreement or contract, but upon mere pur- chases of property, it is insisted in many forms of argument that the rule of construction to be applied must be the spirit and intent of the act and therefore its prohibitions must be held to extend to acts even if not within the literal terms of the statute if they are within its spirit because done with an intent to bring about the harmful results which it was the purpose of the statute to prohibit. So as to the defendants. While it is argued on the one hand that the forms by which various properties were acquired in view of the letter of the act exclude many of the assailed transactions from condemnation, it is yet urged that giving to the act the broad construction which it should rightfully receive, whatever may be the form, no condemna- tion should follow, because, looking at the case as a whole, every act assailed is shown to have been but a legitimate and lawful result of the exertion of honest business methods brought into play for the purpose of advancing trade instead of with the object of obstructing and restraining the same. But the difficulties which arise, from the complexity of the particular dealings which are here involved and the situation which they produce, we think grows out of a plain mis- conception of both the letter and spirit of the Anti-Trust Act. We say of the letter, because while seeking by a narrow rule of the letter to include things which it is deemed would otherwise be excluded, the contention really destroys the great purpose of the act, since it renders it impossible to apply the law to a multitude of wrongful acts, which would come within the scope of its remedial purposes by resort to a reasonable construction, although they would not be within its reach by a too narrow and unreasonable adherence to the strict letter. This must be the case unless it be possible in reason to say that for the purpose of including one class of acts which would not otherwise be embraced a literal construction although in con- CHAP. I.] UNITED STATES ¥. AMERICAN TOBACCO CO. 587 flict with reason must be applied and for the purpose of including other acts which would not otherwise be embraced a reasonable construction must be resorted to. That is to say two conflicting rules of construction must at one and the same time be applied and adhered to. The obscurity and resulting uncertainty, however, is now but an abstraction because it has been removed by the consideration which we have given quite recently to the construction of the Anti-Trust Act in the Standard Oil Case. In that case it was held, without de- parting from any previous decision of the court, that as the statute had not defined the words restraint of trade, it became necessary to construe those words, a duty which could only be discharged by a resort to reason. We say the doctrine thus stated was in accord with all the previous decisions of this court, despite the fact that the contrary view was sometimes erroneously attributed to some of the expressions used in two prior decisions (the Trans-Missourt Freight Association and Joint Traffic Cases, 166 U.S. 290, and 171 U.S. 505). That such view was a mistaken one was fully pointed out in the Standard Oil Case and is additionally shown by a passage in the opinion in the Joint Traffic Case as follows (171 U.S. 568): “The act of Congress must have a reasonable construction, or else there would scarcely be an agreement or contract among business men that could not be said to have, indirectly or remotely, some bearing on inter- state commerce, and possibly to restrain it.” Applying the rule of reason to the construction of the statute, it was held in the Standard Oil Case that as the words ‘‘restraint of trade” at common law and in the law of this country at the time of the adoption of the Anti- Trust Act only embraced acts or contracts or agreements or com- ‘ binations which operated to the prejudice of the public interests by unduly restricting competition or unduly obstructing the due course of trade or which, either because of their inherent nature or effect or because of the evident purpose of the acts, etc., injuriously restrained trade, that the words as used in the statute were designed to have and did have but a like significance. It was therefore pointed out that the statute did not forbid or restrain the power to make normal and usual contracts to further trade by resorting to all normal methods, whether by agreement or otherwise, to accomplish such purpose. In other words, it was held, not that acts which the statute prohibited could be removed from the control of its prohibitions by a finding that they were reasonable, but that the duty to interpret which inevitably arose from the general character of the term ‘‘re- straint of trade” required that the words “restraint of trade” should be given a meaning which would not destroy the individual right to contract and render difficult if not impossible any movement of trade in the channels of interstate commerce — the free movement of which it was the purpose of the statute to protect. The soundness 588 UNITED STATES J. AMERICAN TOBACCO co. {[CHAP. IL of the rule that the statute should receive a reasonable construction, after further mature deliberation, we see no reason to doubt. In- deed, the necessity for not departing in this case from the standard of the rule of reason which is universal in its application is so plainly required in order to give effect to the remedial purposes which the act under consideration contemplates, and to prevent that act from destroying all liberty of contract and all substantial right to trade, and thus causing the act to be at war with itself by annihilating the fundamental right of freedom to trade which, on the very face of the act, it was enacted to preserve, is illustrated by the record before us. In truth, the plain demonstration which this record gives of the injury which would arise from and the promotion of the wrongs which the statute was intended to guard against which would result from giving to the statute a narrow, unreasoning and unheard of construction, as illustrated by the record before us, if possible serves to strengthen our conviction as to the correctness of the rule of construction, the rule of reason, which was applied in the Standard Oil Case, the application of which rule to the statute we now, in the most unequivocal terms, reéxpress and re-affirm. Coming then to apply to the case before us the act as interpreted in the Standard Oil and previous cases, all the difficulties suggested by the mere form in which the assailed transactions are clothed be- come of no moment. This follows because although it was held in the Standard Oil Case that, giving to the statute a reasonable con- struction, the words “restraint of trade” did not embrace all those normal and usual contracts essential to individual freedom and the right to make which were necessary in order that the course of trade might be free, yet, as a result of the reasonable construction which was affixed to the statute, it was pointed out that the generic designa- tion of the first and second sections of the law, when taken together, embraced every conceivable act which could possibly come within the spirit or purpose of the prohibitions of the law, without regard to the garb in which such acts were clothed. That is to say, it was held that in view of the general language of the statute and the public pol- icy which it manifested, there was no possibility of frustrating that policy by resorting to any disguise or subterfuge of form, since resort to reason rendered it impossible to escape by any indirection the prohibitions of the statute. Considering then the undisputed facts which we have previously stated, it remains only to determine whether they establish that the acts, contracts, agreements, combinations, etc., which were assailed were of such an unusual and wrongful character as to bring them within the prohibitions of the law. That they were, in our opinion, so overwhelmingly results from the undisputed facts that it seems only necessary to refer to the facts as we have stated them to demon- strate the correctness of this conclusion. Indeed, the history of the CHAP. I1.]| UNITED STATES v. AMERICAN TOBACCO CO. 589 combination is so replete with the doing of acts which it was the obvious purpose of the statute to forbid, so demonstrative of the existence from the beginning of a purpose to acquire dominion and control of the tobacco trade, not by the mere exertion of the ordi- nary right to contract and to trade, but by methods devised in order to monopolize the trade by driving competitors out of business, which were ruthlessly carried out upon the assumption that to work upon the fears or play upon the cupidity of competitors would make suc- cess possible. We say these conclusions are inevitable, not because of the vast amount of property aggregated by the combination, not because alone of the many corporations which the proof shows were united by resort to one device or another. Again, not alone because of the dominion and control over the tobacco trade which actually exists, but because we think the conclusion of wrongful purpose and illegal combination is overwhelmingly established by the following considerations: a. By the fact that the very first organization or combination was impelled by a previously existing fierce trade war, evidently inspired by one or more of the minds which brought about and became parties to that combination. 6. Because, immediately after that combination and the increase of capital which followed, the acts which ensued justify the inference that the intention existed to use the power of the combination as a vantage ground to further monopolize the trade in tobacco by means of trade conflicts de- signed to injure others, either by driving competitors out of the business or compelling them to become parties to a combination — @ purpose whose execution was illustrated by the plug war which ensued and its results, by the snuff war which followed and its results, and by the conflict which immediately followed the entry of the combination in England and the division of the world’s business by the two foreign contracts which ensued. c. By the ever-present manifestation which is exhibited of a conscious wrongdoing by the form in which the various transactions were embodied from the beginning, ever changing but ever in substance the same. Now the organization of anew company, now the control exerted by the taking of stock in one or another or in several, so as to obscure the result actually attained, nevertheless uniform, in their manifestations of the purpose to restrain others and to monopolize and retain power in the hands of the few who, it would seem, from the beginning con- templated the mastery of the trade which practically followed. d. By the gradual absorption of control over all the elements essen- tial to the successful manufacture of tobacco products, and placing such control in the hands of seemingly independent corporations serving as perpetual barriers to the entry of others into the tobacco trade. e. By persistent expenditure of millions upon millions of dollars in buying out plants, not for the purpose of utilizing them, but in order to close them up and render them useless for the pur- 590 UNITED STATES v. AMERICAN TOBACCO co. [CHAP. Ni. poses of trade. f. By the constantly recurring stipulations, whose legality, isolatedly viewed, we are not considering, by which num- bers of persons, whether manufacturers, stockholders or employés, were required to bind themselves, generally for long periods, not to compete in the future. Indeed, when the results of the undisputed proof which we have stated are fully apprehended, and the wrongful acts which they exhibit are considered, there comes inevitably to the mind the conviction that it was the danger which it was deemed would arise to individual liberty and the public well-being from acts like those which this record exhibits, which led the legislative mind to conceive and to enact the Anti-Trust Act, considerations which also serve to clearly demonstrate that the combination here assailed is within the law as to leave no doubt that it is our plain duty to apply its prohibitions. In stating summarily, as we have done, the conclusions which, in our opinion, are plainly deducible from the undisputed facts, we have not paused to give the reasons why we consider, after great consideration, that the elaborate arguments advanced to affix a different complexion to the case are wholly devoid of merit. We do not, for the sake of brevity, moreover, stop to examine and discuss the various propositions urged in the argument at bar for the pur- pose of demonstrating that the subject-matter of the combination which we find to exist and the combination itself are not within the scope of the Anti-Trust Act because when rightly considered they are merely matters of intrastate commerce and therefore subject alone to state control. We have done this because the want of merit in all the arguments advanced on such subjects is so completely established by the prior decisions of this court, as pointed out in the Standard Oil Case, as not to require restatement. Leading as this does to the conclusion that the assailed combina- tion in all its aspects — that is to say, whether it be looked at from the point of view of stock ownership or from the standpoint of the principal corporation and the accessory or subsidiary corporations viewed independently, including the foreign corporations in so far as by the contracts made by them they became codperators in the combination — comes within the prohibitions of the first and second sections of the Anti-Trust Act, it remains only finally to consider the remedy which it is our duty to apply to the situation thus found to exist. The remedy. Our conclusion being that the combination as a whole, involving all its coéperating or associated parts, in whatever form clothed, con- stitutes a restraint of trade within the first section, and an attempt to monopolize or a monopolization within the second section of the Anti-Trust Act, it follows that the relief which we are to afford must be wider than that awarded by the lower court, since that CHAP. II.] UNITED STATES v. AMERICAN TOBACCO CO. 591 court merely decided that certain of the corporate defendants con- stituted combinations in violation of the first section of the act, be- cause of the fact that they were formed by the union of previcusly competing concerns and that the other defendants not dismissed from the action were parties to such combinations or promoted their purposes. We hence, in determining the relief proper to be given, may not model our action upon that granted by the court below, but in order to enable us to award relief coterminous with the ultimate redress of the wrongs which we find to exist, we must approach the subject of relief from an original point of view. Such subject neces- sarily takes a two-fold aspect —the character of the permanent relief required and the nature of the temporary relief essential to be applied pending the working out of permanent relief in the event that it be found that it, is impossible under the situation as it now exists to at once rectify such existing wrongful condition. In con- sidering the subject from both of these aspects three dominant in- fluences must guide our action: 1. The duty of giving complete and efficacious effect to the prohibitions of the statute; 2, the accomplish- ing of this result with as little injury as possible to the interest of the general public; and, 3, a proper regard for the vast interests of private property which may have become vested in many persons as a result of the acquisition either by way of stock ownership or otherwise of interests in the stock or securities of the combination without any guilty knowledge or intent in any way to become actors or participants in the wrongs which we find to have inspired and dominated the combination from the beginning. Mindful of these considerations and to clear the way for their application we say at the outset without stopping to amplify the reasons which lead us to that conclusion, we think that the court below clearly erred in dis- missing the individual defendants, the United Cigar Stores Company, and the foreign corporations and their subsidiary corporations. Looking at the situation as we have hitherto pointed it out, it involves difficulties in the application of remedies greater than have been presented by any case involving the Anti-Trust Act which has been hitherto considered by this court: First. Because in this case it is obvious that a mere decree forbidding stock ownership by one part of the combination in another part or entity thereof, would afford no adequate measure of relief, since different ingredients of the combination would remain unaffected, and by the very nature and character of their organization would be able to continue the wrongful situation which it is our duty to destroy. Second. Because the methods of apparent ownership by which the wrongful intent was, in part, carried out and the subtle devices which, as we have seen, were resorted to for the purpose of accomplishing the wrong contemplated, by way of ownership or otherwise, are of such a char- acter that it is difficult if not impossible to formulate a remedy which 592 UNITED STATES 0. AMERICAN TOBACCO co. [CHAP. II. could restore in their entirety the prior lawful conditions. Third. Because the methods devised by which the various essential elements to the successful operation of the tobacco business from any partic- ular aspect have been so separated under various subordinate com- binations, yet so unified by way of the control worked out by the scheme here condemned, are so involved that any specific form of relief which we might now order in substance and effect might operate really to injure the public and, it may be, to perpetuate the wrong. Doubtless it was the presence of these difficulties which caused the United States, in its prayer for relief,to tentatively sug- gest rather than to specifically demand definite and precise remedies. We might at once resort to one or the other of two general remedies — a, the allowance of a permanent injunction restraining the com- bination as a universality and all the individuals and corporations which form a part of or coéperate in it in any manner or form from continuing to engage in interstate commerce until the illegal situa- tion be cured, a measure of relief which would accord in substantial effect with that awarded below to the extent that the court found illegal combinations to exist; or, b, to direct the appointment of a receiver to take charge of the assets and property in this country of the combination in all its ramifications for the purpose of prevent- ing a continued violation of the law, and thus working out by a sale of the property of the combination or otherwise, a condition of things which would not be repugnant to the prohibitions of the act. But, having regard to the principles which we have said must con- trol our action, we do not think we can now direct the immediate application of either of these remedies. We so consider as to the first because in view of the extent of the combination, the vast field which it covers, the all-embracing character of its activities concerning tobacco and its products, to at once stay the movement in interstate commerce of the products which the combination or its coéperating forces produce or control might inflict infinite injury upon the pub- lic by leading to a stoppage of supply and a great enhancement of prices. The second because the extensive power which would result from at once resorting to a receivership might not only do grievous injury to the public, but also cause widespread and perhaps irre- parable loss to many innocent people. Under these circumstances, taking into mind the complexity of the situation in all of its aspects and giving weight to the many-sided considerations which must control our judgment, we think, so far as the permanent relief to be awarded is concerned, we should decree as follows: Ist. That the ° combination in and of itself, as well as each and all of the elements composing it, whether corporate or individual, whether considered collectively or separately, be decreed to be in restraint of trade and an attempt to monopolize and a monopolization within the first and second sections of the Anti-Trust Act. 2d. That the court below, in CHAP. II.] UNITED STATES v. AMERICAN TOBACCO CO. 593 order to give effective force to our decree in this regard, be. directed to ‘hear the parties, by evidence or otherwise, as it may be deemed proper, for the purpose of ascertaining and determining upon some plan or method of dissolving the combination and of recreating, out of the elements now composing it, a new condition which shall be honestly in harmony with and not repugnant to the law. 3d. That for the accomplishment of these purposes, taking into view the difficulty of the situation, a period of six months is allowed from the receipt of our mandate, with leave, however, in the event, in the judgment of the court below, the necessities of the situation require, to extend such period to a further time not to exceed sixty days. 4th. That in the event, before the expiration of the period thus fixed, a condition of disintegration in harmony with the law is not brought about, either as the consequence of the action of the court in determining an issue on the subject or in accepting a plan agreed upon, it shall be the duty of the court, either by way of an injunction restraining the movement of the products of the combination in the channels of interstate or foreign commerce or by the appointment of a receiver, to give effect to the requirements of the statute. Pending the bringing about of the result just stated, each and all of the defendants, individuals as well as corporations, should be restrained from doing any act which might further extend or enlarge the power of the combination, by any means or device whatsoever. In view of the considerations we have stated we leave the matter to the court below to work out a compliance with the law without unnecessary injury to the public or the rights of private property. While in many substantial respects our conclusion is in accord with that reached by the court below, and while also the relief which we think should be awarded in some respects is coincident with that which the court granted, in order to prevent any complication and to clearly define the situation we think instead of affirming and modifying, our decree, in view of the broad nature of our conclusions, should be one of reversal and remanding with directions to the court below to enter a decree in conformity with this opinion and to take such further steps as may be necessary to fully carry out the direc- tions which we have given. And it is so ordered. Mr. Justice Haruan concurred in holding that relief ought to be granted the United States, but dissented from that part of the opin- ion stating the form of relief to be granted, and also dissented from that part of the opinion in which the court reaffirms the doctrine of the “rule of reason” announced in the Standard Oil Case, supra. Nore. — For later suits, instituted by the United States, in which the court held acts to be in violation of the Anti-Trust Act, see 594 UNITED STATES v. AMERICAN TOBACCO CO. [CHAP. II. United States v. St. Louis Terminal, 224 U.S. 383; United States v. Reading Co., 226 U.S. 324; United States v. Patten, 226 US. 525; Eastern States Lumber Ass’n v. United States, 234 U.S. 600; Lawlor v. Loewe, 235 U.S. 522 (see also 208 U.S. 274). ; In Nash v. United States., 229 U.S. 373, Mr. Justice Hotmzs said (p. 376): “The objection to the criminal operation of the statute is thought to be warranted by The Standard Oil Co. v. United States, 221 U.S. 1, and Untied States v. American Tobacco Co., 221 U.S. 106. Those cases may be taken to have established that only such con- tracts and combinations are within the act as, by reason of intent or the inherent nature of the contemplated acts, prejudice the public interests by unduly restricting competition or unduly obstructing the course of trade. 221 U.S. 179. And thereupon it is said that the crime thus defined by the statute contains in its definition an element of degree as to which estimates may differ, with the result that a man might find himself in prison because his honest judgment did not anticipate that of a jury of less competent men. The kindred proposition that ‘the criminality of an act cannot depend upon whether a jury may think it reasonable or unreasonable. There must be some definiteness and certainty,’ is cited from the late Mr. Justice Brewer sitting in the Circuit Court. Tozer v. United States, 52 Fed. Rep. 917, 919. “ But apart from the common law as to restraint of trade thus taken up by the statute the law is full of instances where a man’s fate de- pends on his estimating rightly, that is, as the jury subsequently estimates it, some matter of degree. If his judgment is wrong, not only may he incur a fine or a short imprisonment, as here; he may incur the penalty of death. ‘An act causing death may be murder, manslaughter, or misadventure according to the degree of danger attending it’ by common experience in the circumstances known to the actor. ‘The very meaning of the fiction of implied malice in such cases at common law was, that a man might have to answer with his life for consequences which he neither intended nor foresaw.’ Commonwealth v. Pierce, 138 Massachusetts, 165, 178. Common- wealth v. Chance, 174 Massachusetts, 245, 252. ‘The criterion in such cases is to examine whether common social duty would, under the circumstances, have suggested a more circumspect conduct.’ 1 East P.C. 262. If a man should kill another by driving an auto- mobile furiously into a crowd he might be convicted of murder how- ever little he expected the result. See Reg. v. Desmond, and other illustrations in Stephen, Dig. Crim. Law, art. 223, 1st ed., p. 146. If he did no more than drive negligently through a street he might get off with manslaughter or less. Reg. v. Swindall, 2 C. & K. 230; Rex v. Burton, 1 Strange, 481. And in the last case he might be held although he himself thought that he was acting as a prudent man should. See The Germanic, 196 U.S. 589, 596. But without further cHapP. u1.] UNITED STATES v0. WINSLOW. 595 argument, the case is very nearly disposed of by Waters-Pierce Oil Co. v. Texas (No. 1), 212 U.S. 86, 109, where Mr. Justice BREwsr’s decision and other similar ones were cited in vain. We are of opinion that there is no constitutional difficulty in the way of enforcing the criminal part of the act.” Cf. International Harvester Co. v. Ken- tucky, 234 U.S. 216. UNITED STATES ». WINSLOW. 227 U.S. 202. 1912. Mr. Justice Hotmss. This is a writ of error to determine whether two counts in an indictment as construed by the District Court charge offences under the Sherman Act of July 2, 1890, chap. 647. 26 Stat. 209. They were held bad, on demurrer, by the District Court. 195 Fed. Rep. 578. The two counts allege substantially the same facts; the first laying them as a combination in restraint of the trade of the defendants themselves, the second as a conspiracy in restraint of the trade of others, shoe manufacturers. The facts alleged are as follows: For the last twenty-five years practically all the shoes worn in the United States have been made by the help of machines, grouped as lasting machines, welt-sewing machines and outsole-stitching machines, heeling machines and metallic fastening machines, there being a large variety of machmes in each group. (These machines of course are not alleged to do all the work of making finished shoes.) There is a great number of shoe factories, and because the machines are expensive and the best of them patented, the manufacturers have had to get them principally from the defendants. Before and up to February 7, 1899, the de- fendants Winslow, Hurd and Brown, through the Consolidated and McKay Lasting Machine Company, under letters patent, made sixty per cent. of all the lasting machines made in the United States; the defendants Barbour and Howe, through the Goodyear Shoe Ma- chinery Company, in like manner made eighty per cent. of all the welt-sewing machines and outsole-stitching machines, and ten per cent. of all the lasting machines; and the defendant Storrow, (against whom the indictment has been dismissed), through the McKay Shoe Manufacturing Company, made seventy per cent. of all the heeling machines and eighty per cent. of all the metallic fastening machines made in the United States. The defendants all were carrying on commerce among the States with such of the shoe manufacturers as are outside Massachusetts, the State where the defendants made their machines. On February 7, 1899, the three groups of defendants above named, up to that time separate, organized the United Shoe Machinery 596 UNITED STATES ¥. WINSLOW. [CHAP. II. Company and turned over to that company the stocks and business of the several corporations that they respectively controlled. The new company now makes all the machines that had been made in different places, at a single new factory at Beverly, Massachusetts, and directly, or through subsidiary companies, carries on all the commerce among the States that had been carried on independently by the constituent companies before. The defendants have ceased to sell shoe machinery to the shoe manufacturers. Instead, they only let machines, and on the condition that unless the shoe manufac- turers use only machines of the kinds mentioned furnished by the defendants, or if they use any such machines furnished by other machinery makers, then all machines let by the defendants shall be taken away. This condition they constantly have enforced. The defendants are alleged to have done the acts recited with intent unreasonably to extend their monopolies, rights and control over commerce among. the States; to enhance the value of the same at the expense of the public, and to discourage others from inventing and manufacturing machines for the work done by those of the defend- ants. The organization of the new company and the turning over of the stocks and business to it are alleged to constitute a breach of the Sherman Act. It is to be observed that the conditions now inserted in the leases are not alleged to have been contemporaneous with the combination, or to have been contemplated when it was made. The District Court construed the indictment as confined to the combination of February 7, that is, simply to the merger of the companies without regard to the leases subsequently made, 195 Fed. Rep. 592, 594; and we have no jurisdiction to review this interpretation of the indictment. United States v. Patten, 226 U.S. 525. Hence the only question before us is whether that combination taken by itself was within the penalties of the Sherman Act. The validity of the leases or of a combination contemplating them cannot be passed upon in this case. Thus limited the question does not require lengthy discussion, and a large part of the argument addressed to us concerned matters not open here. On the face of it the combination was simply an effort after greater efficiency. The business of the several groups that com- bined, as it existed before the combination, is assumed to have been legal. The machines are patented, making them is a monopoly in any case, the exclusion of competitors from the use of them is of the very essence of the right conferred by the patents, Paper Bag Patent Case, 210 U.S. 405, 429, and it may be assumed that the success of the several groups was due to their patents having been the best. As, by the interpretation of the indictment below, 195 Fed. Rep. 591, and by the admission in argument before us, they did not com- pete with one another, it is hard to see why the collective business should be any worse than its component parts. It is said that from CHAP. IL] UNITED STATES ». WINSLOW. 597 seventy to eighty per cent. of all the shoe machinery business was put into a single hand. This is inaccurate, since the machines in question are not alleged to be types of all the machines used in making shoes, and since the defendants’ share in commerce among the States does not appear. But taking it as true we can see no greater objection to one corporation manufacturing seventy per cent. of three non-competing groups of patented machines collectively used for making a single product than to three corporations making the same proportion of one group each. The disintegration aimed at by the statute does not extend to reducing all manufacture to isolated units of the lowest degree. It is as lawful for one corporation to make every part of a steam engine and to put the machine together as it would be for one to make the boilers and another to make the wheels. Until the one intent is nearer accomplishment than it is by such # juxtaposition alone, no intent could raise the conduct to the dignity of an attempt. Nore. — On the rights of owners of patented articles see Bement v. National Harrow Co., 186 U.S. 70; Henry v. Dick Co., 224 US. 1, 30; Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20; United States v. Pacific & Arctic Co., 228 U.S. 87; Bauer & Cie v. O’ Donnell, 229 U.S. 1. On the rights of owners of copyrighted articles see Bobbs-Merrill Co. v. Straus, 210 U.S. 339; Straus v. American Publishers’ Associa- tion, 231 U.S. 222. On the rights of owners of proprietary medicines see Dr. Miles Medical Co. v. Park & Sons Co., 220 U.S. 373. BOOK V. UNAUTHORIZED CORPORATE ACTION. CHAPTER I. COLLATERAL ATTACK UPON THE FORMATION OF A CORPORATION. HEREIN OF THE EXPRESSION “DE FACTO CORPORATION.” SECTION 1. WHERE THERE HAVE BEEN DEALINGS BETWEEN THE PARTIES ON A CORPORATE BASIS. CALLENDER v. PAINESVILLE R.R. CO. 11 Ohio State, 516. 1860. Tue plaintiffs sought to recover for a breach of a written contract by the defendant, as an incorporated company, executed in its be- half by Van R. Humphrey, as its president. “A summons was served by leaving a true and certified copy at the principal business office of the defendant at Painesville. Thereafter one George W. Steele filed a motion, stating that he was a member, and the secretary of the company, and asking that the petition be dismissed on several grounds, one being that said railroad company “is not an incorporated company.” This motion was granted in the lower court. It appeared that there was a law under which such a railroad cor- poration could be formed, and that a certificate purporting to comply with the requirements of that law had been filed in the proper public office, and that the associates had done business, as though they were incorporated. It was argued that the certificate did not comply with the require- ments of law because the line of railroad was not defined with suffi- cient certainty. Suturrr, J. [After intimating that the objection to the certificate was untenable. ] But in this case the original petition alleged that the defendant was a corporation. The contract upon which the action was brought, SECT. 1.] CALLENDER ¥. PAINESVILLE R.R. CO. 599 a copy of which was appended to the petition, purported to be exe- cuted by the defendant, as a corporation; and the motion and the affidavit of the mover, disclosed, at most, only a defect in the act of incorporation. But the affidavit admits that the company had at- tempted in all respects to comply with the requisitions of the statute, and in fact obtained, by a supposed compliance on their part, the acceptance and record of their certificate by the secretary of state, a copy of which was to them a valid charter, as they supposed. And the affiant further states that he had acted as their secretary for some three years, and that the president of the company was then residing at Painesville, where the company then kept its office. It thus appears that the members of the company obtained their charter, supposed themselves a legally incorporated company, and had continued to hold themselves out, and to act as such, to and with the public, and are still so acting. Nor is there any denial, either in the motion or affidavit of Steele, that their president, Humphrey, was not authorized by himself and others of the associa- tion, to execute said contract on behalf of the association, as an incorporated company. Under such circumstances, the members of the company, and especially the officers of the company, are estopped to deny its existence as a corporation. However mistaken in fact, no person, whether artificial or natural, is permitted to so conduct and repre- sent himself as to induce reasonable men, at his instance, to act upon the truth of such representations in their contracts and dealings with him, and to then deny the truth of such representations, to the prejudice of the party so having relied upon them. In order for the company, or any member thereof, to so repudiate its conduct, and disprove the truth of its own representation, it is necessary for it, not only to show an honest mistake, but that such mistaken representation had not induced the adversary party, in the exercise of reasonable prudence on his part, to give the credit, make the contract, and act under it in confidence of the truth of such conduct and representations. But in this case, not only has the association obtained a copy of the certificate, its charter of incorporation, and represented itself to the other party to be a corporation, by making the contract in that capacity, but it has continued to act in a corporate capacity down to the time of filing the motion; and the member so filing the motion states that he is still the officer of the corporation. It thus appears that, instead of contradicting the misrepresentation, before the con- tract was made, the company had not, even after making the con- tract, either in conduct or representation, ever denied their corporate character. Under such circumstances, to suffer the defendants to repudiate their first conduct, and deny the truth of their representations, by 600 BOYCE v¥. TOWSONTOWN STATION. [CHAP. I. which the plaintiffs had been induced to contract with them, and upon which both parties had acted, would be in contravention of those principles of equity upon which the doctrine of estoppel rests, and its operative effect to prevent fraud depends. We are, therefore, clearly of opinion that, at the time of the hear- ing of the motion, the company and its members who had so held themselves out to be a corporation, were estopped to deny that fact, for any defect whatsoever, if the same had in fact existed in their charter. : The judgment of the court of common pleas must, therefore, be reversed, and the cause remanded. Judgment accordingly. BOYCE »v. TOWSONTOWN STATION. 46 Md. 359. 1877. ASSUMPSIT against an alleged religious corporation. Defendants appeared by counsel, and pleaded, Ist, that the defendants are not and never were a body corporate, as alleged. Plaintiff offered in evi- “dence an agreement or certificate of incorporation under a general —statute. The statute required this document to be acknowledged “pefore two justices of the peace, or a judge of the Circuit Court or Se “Tt-was acknowledged before a Single justice of the peace. Plaintiff, to show user of the corporate Tame and franchise, offered in evidence a deed of land to said trustees; and a mortgage from said trustees to Crook and Hiss, trustees. ATI the above evidence was rejected, and plaintiff excepted, Ver- dict and {adement for defendants. Plaintiff appealed Stewart, J.... But the appellant has undertaken to offer evi- dence of certain acts and proceedings of the appellee, referred to in the exceptions, to show that it held itself out as a corporation, and treated with the appellant as such, and is estopped from denying its liability as a corporation. We think it would be extending the doctrine of estoppel to an extent, not justified by the principles of public policy, to allow it to operate through the conduct of the parties concerned, to create sub- stantially a de facto corporation, with just such powers as the parties may by their acts give to it. This would be substituting the dealings of the parties, for compli- ance with the requirements of the law, and giving to them the same effect through the aid of the Courts. Thus, virtually, through the Courts, recognizing the existence of the corporation, in manifest dis- regard of the written law. It has been determined by this Court, that a corporation cannot SECT. 1.] BOYCE ¥. TOWSONTOWN STATION. 601 bind itself in excess of its powers. Penna. Steam Navigation Co. v. Dandridge, 8 G. & J. 319. Whilst denying its capacity upon any principle of estoppel, to make contracts ultra vires, to bind itself; it would not be consistent with that theory to recognize its existence ad libitum, according to the conduct of the parties concerned. Such a principle would seem to affix no other limit to the exist- ence of the corporation de facto, or the extent of its power than the dealings of the parties, through the recognition of the Courts, might, upon the doctrine of estoppel, prescribe. It would be more reasonable to hold corporations to their con- tracts, though ultra vires, of which they have received the benefit, or to prevent parties who have contracted with them, and received the benefit therefrom, from defeating their liability, on the ground of want of power in the corporation, as is held in quarters of high authority (see note and references in 2 Kent, 351), than to hold that corporations should be deemed to have existence, because they had so held themselves out. The statute law of the State expressly requiring certain _pre- scribed acts to be done to consti i i i indirectly, or upon the principle of estoppel, virtually to create a cor- poration for any purpose, or to have acts so construed, would be in manifest opposition to the statute law, and clearly against its policy, and justified upon no sound principle in the administration of justice. Judgment affirmed. tec Pee alg pee eee | Nots. — Suppose a legislature has passed some law authorizing the formation of a corporation upon the performance of certain acts; that associates assume to comply with the law and, therefore, to be incorporated; and that it is claimed that they have not complied with the law. The court may hold (1) that what has been done amounts to a substantial compliance with the law; or (2) that the. provision of law not complied with was a mere directory provision; or (8) that non-compliance with the provision of law in question was intended by the legislature to be only a cause for the forfeiture of the corporate existence. The doctrine of de facto corporations is reached only when the court feels bound to hold that the defect in organization amounts to a failure substantially to perform a mandatory provision, the per- formance of which the legislature intended should be a condition precedent to incorporation. (See note on p. 30, supra.) Whenever associates, who are not incorporated, assume to be in- corporated, there is, in the nature of things, a composite unit, — the conception of a composite unit was not originated by the law. But the question remains whether this composite unit is to be treated by the court as a legal unit. It is for the legislature, not the court, to 692 BOYCE ¥. TOWSONTOWN STATION. -[CHAP. 1, create corporations; and, by our supposition, the associates have failed to perform a condition precedent to incorporation. It is clear that if the State itself, in guo warranto (or similar pro- ceeding), questions the incorporation of the associates, the court will declare them not to be a legal unit. But if there is no such direct attack upon the incorporation of the associates, the question remains whether the court will permit col- lateral attack upon their incorporation, — whether, for example; the court will permit a private individual to show that the associates are not incorporated. It is to be frankly recognized that, in any case in which the court denies collateral attack, it predicates the same con- sequences upon unauthorized corporate action as it wonld have pred- icated upon authorized corporate action. Tn every case in which associates who are not ner assume to be incorporated, the composite unit thus formed might, with some propriety, be termed a corporation de facto (or a corporation by as- -] sumption). But the courts usually (although not always) use the term corporation de facto in a restricted sense. They incline to use the term only under the following circumstances: (1) when at the time of the alleged incorporation there was a law authorizing the formation of such a corporation as the associates attempted to form; (2) when the attempt to incorporate has been carried so far as to result in a colorable corporate organization; (8) when there has been user by the associ- ates in the name of the alleged corporation of some of the powers which such a corporation would possess; and (4) when the person or per- sons asking that collateral attack be denied have acted in good faith. Where i have caused a co t, i ame of the alleged corporation, to be made with an outsider, and the outsider Sues the alleged corporation for breach thereof, and the circumstances are such tha corpora fo, in the restricted sense ~of the term explaine: ities j der aimesville R.R. Co., supra, are very numerous. See 20 H.L.R. 476; note 33— The rule laid down in Boyce v. Towsontown Church_has_ heen changed by statute. Section 6 of chap. 240 of the Laws of Mary- —tand;1908, provides: “Where an effort has been. made in good faith to form, under the laws OFTHIS State m-corporation formable there- uncer, neither party to any transaction with it shall deny the legality of tts corporation or organization in any suit or proceeding grow- 1 S$ a logical extension of the principle of Callender v. Painesville R.R. Co. that the outsider may hold any stockholder, director or offi- cer of thé altegec-eoxperation-te-suehrtiability as would have-attached to him if the associates had betr-imeerperated-when—the_contraet— ae oeisieet was made.—S th the outsider was made, Slocum v. Warren, 10 RI. 116. For further authorities see 20 H.L.R. 476, note 33. SECT. 1] BUSHNELL ¥. CONSOLIDATED ICE MACHINE CO. 603 If associates are incorporated, de facto, a sale by a receiver of the alleged corporation of its assets will pass whatever rights the asso- ciates have treated as rights of the corporation. Matter of New York, Westchester & Boston Ry. Co., 193 N.Y. 72, 90. BUSHNELL ». CONSOLIDATED ICE MACHINE Co. 138 Ill. 67, 1891. Suit in chancery to have the Consolidated Ice Machine Company declared_a copartnership, and its affairs settled between the com- vlainant and defendants accordingly. In the court below, the de- “murrer was sustained and the bill dismissed. The following facts appear from the bill: In 1884 the complainant and the individual defendants entered into a written agreement to form a& corporation, with the above title, under the laws of the State; all the required steps were taken, up to and including the issu- ing of a certificate of the complete organization of such corporation by the Secretary of State; complainant was a director; and for several months secretary and soliciting agent, actively engaged in its busi- ness. In 1885 complamant became afflicted with melancholia and remained incapacitated for the transaction of business for about three —years. During his sickness, the other directors sold some of his shares for non-payment of installments, the sale being without no- tice. Since the sale he has been excluded from all participation in the management of the business. After being restored to health, and before filing his bill, he made frequent demands to be restored to his rights in said corporation, but without avait: Witkin, J. The only allegation of the bill which is seriously in- sisted upon as furnishing a ground for the relief prayed is, ‘“‘that the certificate of complete organization was never recorded in the office of the recorder of deeds for Cook County, where its principal office is located,” the argument being, that in order to constitute the defendant company a corporation under the laws of this State that certificate must have been so recorded, and failing to become incor- orated, its members are to be treated as partners. The section of the statute upon which the first proposition is based is as follows: “The Secretary of State shall thereupon issue a certificate of the complete organization of the corporation, making part thereof a copy of all papers filed in his office in and about the organization of the corpora- tion, and duly authenticated under his hand and seal of State, and the same shall be recorded in a book for that purpose in the office of the recorder of deeds of the county where the principal office of such company is located. Upon the recording of said copy the corporation shall be deemed fully organized, and may proceed to business. Unless 604 BUSHNELL ¥. CONSOLIDATED ICE MACHINE CO. [CHAP. I. such company shall be organized, and shall proceed to business, as provided in this act, within two years after the date of such license, then such license shall be deemed revoked and all proceedings there- under void.” The language of this section is not clear. While it says the certificate shall be recorded, it does not say who shall cause it to be done. It does not say the recording of the certificate shall be neces- sary to the complete organization of a corporation, but “upon the recording of the said copy the corporation shall be deemed fully organized, and may proceed to business.”” Conceding, however, by the word “copy” is meant “certificate,” incorporators would have done all that is required of them when they had filed it with the proper officer for record. There is no allegation in this bill that it was not so filed. The averment is simply that it has “never been re- corded,” etc. But assuming that a corporate existence de jure depends upon the filing of the certificate of complete organization in the office of the recorder of deeds of the county in which its principal office is located, and that the bill properly avers that it was not done in the case of the corporation in question, it by no-means follows that it did not become a corporation de facto as. between the complainant and de- fendants. From the facts set up in the bittit-clearly-appears that —there was an honest attempt by the incorporators to organize a Cor- poration authorized by the laws of this State. The necessary steps to perfect that organization were all taken as required by the statute, except that the final certificate was not recorded. It is shown by the | bill that upon the issuing of that certificate its directors elected the Proper officers and proceeded io the transaction of business 8_a corporation, and continued to act as such until the filing of this bill, a period of more than five years. That these facts establish a cor- poration dé facto is settled by numerous decisions of this court. Presi- “dent and-Frustees, fc., v. Thompson, 20 Til. 198; Rice v. R.T. and A. R.R. Co., 21 id. 93; Baker et al. v. Administrator, 32 id. 79; Ramsey v. Marine and Fire Ins. Co., 55 id. 311; Cincinnati, Lafayette and Chicago Railroad Co. v. Danville and Vincennes Ry. Co., 75 id. 113; Louisville, New Albany and Chicago Ry. Co. v. Shires, 108 id. 617; Hudson v. Green Hill Seminary Corporation, 113 id. 618. That plaintiff in error, if he had been sued by the Consolidated Ice Machine Company on his subscription to its capital stock, could not have questioned its corporate existence on the grounds alleged in his bill, is directly settled by several of the above cited decisions. It is equally clear that if, during the time he was a mem- ber of said corporation, it had been sued as such, neither he nor any other of its members could have been heard to say that no such corporation existed. ee ee cor- poration as existing de facto, ts éstop fo deny, a rest it, that tt has been legally organized. It ts the settled-rutein this State that _the SECT. 1.] MINNESOTA GAS-LIGHT CO. ¥. DENSLOW. 605 legal existence of a corporation de facto cannot be questioned collaterally. See cases supra, and Renwick et al. v. Hall et al., 84 Ill. 162; The Peo- ple ex rel. v. Trustees of Schools, 111 id. 171 ; Keigwin et al. v. Drain- age Comrs., 115 id. 347. It seems impossible to find a reason for placing the complainant in this bill in a more favorable position to deny the existence of the corpo- ration in question than a mere subscriber to its capital stock, or one who, as a third party, had dealt with it as a corporation, and we are of the opinion that he could not do so in this collateral proceeding. Nore. — See, accord, Lincoln Park Chapter v. Swatek, 204 Ill. 228; Doty v. Patterson, 155 Ind. 60; Troutman v. Council Bluffs Co., 142 Towa, 140; Cannon v. Brush Electric Co., 96 Md. 446 ; Allegheny Bank v. Bailey, 147 Pa. 111; Marsh v. Mathias, 19 Utah, 350. MINNESOTA GAS-LIGHT CO. ». DENSLOW. 46 Minn. 171. 1891. VANDERBURGH, J. This action is brought upon a promissory note made by the defendant to the plaintiff for the sum of $1,000, dated February 15, 1888, and due in four months. ~ Itis found by the trial court that the plaintiff at and since the date of the note has been an acting corporation, created and organized under the laws of the state of West Virginia and doing business as such in the state of Minnesota. But the defendant denies that the evidence warrants any such conclusion, and denies that the plaintiff has any legal capacity to sue in the courts of this state as a corpora- tion de jure or de facto. It is clear, however, that a number of persons “have associated themselves-together claiming to be a corporation, and under the corporate name stated have filed articles, and have received the usual certificate of incorporation under the seal of the “state —ami have_b rate name. Nor is it disputed that corporations with the powers claimed to have been granted the plaintiff are authorized to be created under the laws of the state granting the charter. The defendant has con- tracted with the plaintiff by its corporate name. He is not in a posi- tion, therefore, to question i orate character. Nor is it ma- Sr TS Rae aE his aod Othe stat legal relations of the associates may be as between themselves, whether corporators, partners, or otherwise jointly interested together and acting under the common corporate name. Notr.— The authorities, accord, are very numerous. See 20 H.L.R. 476, note 33. 606 SNIDER’S SONS’ CO. v. TROY. [CHAP. 1. SNIDER’S SONS’ CO. v. TROY. 91 Ala. 224. 1890. Action for goods sold by plaintiffs, in 1888, to, or on the order of, ispatch Publishing Co. The co i CEE id-Com- “pany was at the time a partnership, and that defendant was one of the partners; that the Company claimed to be a corporation, but was never in fact mcorporated. Plea, setting out certain steps taken, in efendant an i orporation by the above name; also alleging that the debt now sued for was con- tracted by said Company as such corporation, and not otherwise; ~andthat-ptamtift dealt with it as a corporation, and not as a part- ~—nership-or-association of individuals. A demurrer to the plea was ~overruted. ane —-€ropTon, J. A corporation de facto exists, when from irregularity or defect in the organization or constitution, or from some omission to comply with the conditions precedent, a corporation de jure is not created, but there has been a colorable compliance with the require- ments of some law under which an association might be lawfully in- corporated for the purposes and powers assumed, and a user of the rights claimed to be conferred by the law — when there is an organ- ization with color of law, and the exercise of corporate franchises. Meth. EH. Un. Church v. Pickett, 48 N.J.L. 599. The enabling law, under which a corporation for the purposes and i objects of the Dispatch Publishing Company, and with the powers assumed, might have been lawfully created at that time, is contained in §§ 1803-1812 of the Code of 1876, and the amendatory acts, which authorize and provide for the incorporation of two or more persons desirous of forming a private corporation for the purpose of carrying on any industrial or other lawful business not otherwise specially provided for by law. Acts 1882-3, p. 40. The plea avers that«de- fendant and two other named persons filed, September 2, 1885, with the judge of probate of Montgomery county a written declaration, signed by themselves, setting forth substantially the matters re- quired by the statute, except the residences of the persons; that they organized by the election of three directors, and commenced and continued to do business in a corporate capacity, and were so doing business when the debt sued for was contracted. If the averments of the plea be true, the truth of which is admitted by the demurrer, the Dispatch Publishing Company was an association having capital stock divided into shares, organized by the election of officers, trans- acting business, and exercising franchises, functions and powers, after an attempted incorporation, as if it were a corporation de jure a — a colorable compliance with the requirements of an existing and enabling law, and user of the rights claimed to be conferred thereby SEcT. 1.] SNIDER’S SONS’ CO. . TROY. 607 — the essential elements of a corporation de facto, Cen. Agr. & Mech. Asso. v. Ala. Gold Life Ins. Co., 70 Ala. 120. Appellant seeks by the action to hold defendant, who was a mem- ber, liable as a partner for paper and other supplies sold to the Dis- patch Publishing Company. Whether the shareholders in a corpora- tion de facto are individually liable for the corporate debts, in the absence of fraud or a statute, is a question as to which the authorities are in direct antagonism. In Cook on Stock and Stockholders, § 233, the doctrine asserted is: “‘ A corporate creditor, seeking to enforce the payment of his debt, may ignore the existence of the corporation, and may proceed against the supposed stockholders as partners, by proving that the prescribed method of becoming incorporated was not complied with by the company in question.” The leadimg cases Supporting this doctrine are Bigelow v. Gregory, 73 Ill. 197; Abbott v. Omaha Smelt. Co., 4 Neb. 416; Garrett v. Richardson, 35 Ark. 144; Ferris v. Thaw, 72 Mo. 446; Richardson v. Mayo, 40 Ohio St. 9; Cole- man v. Coleman, 78 Ind. 344. We have omitted reference to a few cases sometimes cited, for the reason, that either the question of liability as partners was not before the court, as in Blanchard v. Kaull, 44 Cal. 440; or the debt was contracted before any steps were taken, other than the mere filing of a certificate, toward organization, as in Porpoise Fish Co. v. Bergen, 13 Amer. & Eng. Cor. Cas.1; orit was contracted after the expiration of the charter by its own limitation, without reorganization, as in Nat. Bank v. Landon, 45 N.Y. 410. In the case last cited, the shareholders entered into a special agreement, which by its terms created a partnership as to third persons. In 2 Mor. on Corp. § 748, the doctrine is stated as follows:_‘‘If an association assumes to enter into a contract in a corporate capac- ‘ity; and the party dealing with the association contracts with it_as if it were a corporation, the individual members can not be charged as parties to the contract, either severally or jointly, or as partners.” The following cases maintain the doctrine, that thé members of a corporation de jacto can not be held liable as partners for the cor- Ss: Fay v. Noble, ush, ; First Nat. Bank v. Avery, 117 Mass. 476; Stout v. Zulick, 48 N.J.L. 599; Plan. Bank v. Padgett, 69 Ga. 164; Mer. & Man. Bank-v—Stone, 38 Mich. 779; Humphrey v. Mooney, 5 Cal. 282; Cen. City Sav. Bank v. Walker, 66 N.Y. 424; Gartside Coal Co. v. Maxwell, 22 Fed. Rep. 197 ;+inting-v--Wyman, 101 U.S, 392. The plea and demurrer do not raise the question of the liability of the supposed stockholders as partners, where there has been no in- tention or attempt to incorporate; where they are acting as a body corporate, without even color of legislative authority — sheer usurp- ation. The plea avers that the debt sued for was contracted by the Dispatch Publishing Company, which is alleged to have been a de facto corporation, and that plaintiff sold the goods to, and contracted 608 SNIDER’S SONS’ CO. v. TROY. [CHAP. 1. with the company as a corporation, knowing that it was doing busi- ness as such. The question before us, and the only question we pro- pose to decide, is whether, there being no fraud alleged, nor statute making the stockholders individually liable, a creditor who has dealt with a de facto corporation as a corporation, who has entered into contractual relations with it in its corporate name and capacity, can disregard the existence of the corporation, and, electing to treat it as a partnership, enforce the collection of his debt from the stock- holders individually? The conflicting authorities afford aid in the solution of this question, only so far as their opinions may be in ac- cord with settled principles and sustained by reason. Though it is an undecided question in this State, principles have been well settled, which materially bear upon the inquiry, and mark the way to a cor- rect conclusion. Corporations may exist either de jure, or de facto. If of the latter class, they are under the protection of the same law, and governed by the same legal principles as those of the former, so long as the State acquiesces in their existence and exercise of corporate functions. A private citizen, whose rights are not invaded, who has no cause of complaint, has no right to inquire collaterally into the legality of its existence. This can only be done in a direct proceeding.on the part “Ot the State, from whom is derived the right to exist as a corporation, and whose authority is usurped. This principle was clearly and em- phatically declared in Lehman v. Warner, 61 Ala. 455, in the follow- ing language: ‘‘The corporation must, of necessity, be presumed to be rightfully in possession of the franchise-and rightta lly to exercise ~¢he-power,-whtehr the Tepistative-grant-confers:—Endividual right is not invaded, if the negative is true in fact, and there is usurpation. Tt_is the State — the sovereign — whose rights are invaded, and whose rights are usurped. The individual could not create the cor- “poration — could not grant, define, tnmitits-powers; and no grant “of these by the sovereign can lessen his rights. There can corse- —quentty be mo cause of complaint by the citizen, and no right to inquire whether the corporate existence is rightful — de jure — or merely colorable.” Taylor on Corp. § 145; 4 Amer. & Eng. Encyc. of Law, 198. The creditor can not proceed against the stockholders as partners, without proving non-compliance with prescribed con- ditions precedent, thus inquiring collaterally, not into the fact, but the legality of its existence. It is also an established rule of general application, that a party who contracts with a corporation, exercising corporate powers, and performing corporate functions — existing as a de facto co rporation : —in its corporate name and capacity, will not be permitted, in a — orr thre sla to deny and disprove the rightfulness of its ve. aw, 198. In Smartwood v. Michi yan Sor Line R. R. Co., 34 Mich. 390, Cootzy, J., declares the rule as SECT. 1.] SNIDER’S SONS’ CO. v. TROY. 609 follows: “Where there is thus a corporation de facto, with no want of legislative power to its due and legal existence, when it is proceeding in the performance of corporate functions, and the public are dealing with it on the supposition that it is what it professes to be, and the questions are only whether there has been exact regularity and strict compliance with the provisions of the law relating to corporations; it is plainly a dictate alike of justice and public policy, that in con- troversies between the de facto corporation and those who have entered into contract relations with it, as corporators or otherwise, that such questions should not be suffered to be raised.” i The general rule is thus stated by BrickELn, C.J.: “Whoever contracts with a corporation in the use of corporate powers and fran- chises, and within ope of such powers, is estopped from denying the existence of the corporation, or inquiring into the regularity of the corporate organization, when an enforcement of the contract, or ol Tignts arising under it, is sought.” Cahall v. Citizens’ M.B. Asso., 6T Ala.-232; Central Agr. & Mech. Asso. v. Ala. Gold Life Ins. Co., 70 Ala. 120; Schloss v. Montg. Trade Co., 87 Ala. 411. It is conceded that the rule has been invoked and applied most frequently in suits against the stockholders or corporation, or per- sons who have contracted with it, where the stockholder, corporation or person is seeking to avoid a liability by denying the legality of the corporate organization. But why should it not be applicable in other cases? Why should a stockholder be estopped, in a suit by a ereditor of an insolvent corporation, to require payment of his unpaid sub- scription, and the creditor allowed to ignore the existence of the cor- poration, and proceed against the stockholder as a partner? Why should not the estoppel be mutual? Taylor, in his work on Corpora- tions, § 148, having stated the general rule, that a corporation when sued on its contract, and the person who contracted with it, when sued on his contract, is each estopped to deny its legal incorporation, adds: ‘Furthermore, persons who have contracted with a corpora- tion as such, and have acquired claims against it, are estopped from denying its corporate existence for the purpose of holding its share- holders liable as partners.’”’ And the same rule was applied in several of the cases cited above, in which a corporate creditor was seeking to hold the stockholder liable as a partner for a corporate debt. The abrogation of the foregoing well established rule is the logical] se- quence of maintaining a suit by a creditor of a de facto corporation, charging the stockholders as partners. © Another consideration. § 8 of Article XIV of the Constitution declares: “In no case shall any stockholder be individually liable, otherwise than for the unpaid stock owned by him or her.”’ Exemp- tion from liability, other than for unpaid stock, is the declared policy of the State. It can not be imposed by legislation, or by the judg- ment of a court. In view of the constitutional provision, it is mani- 610 SNIDER’S SONS’ CO. v. TROY. (CHAP. I. fest that the share-holders of the Dispatch Publishing Company in- tended, by the attempt to incorporate, to avoid individual liability for the debts contracted by the corporation. When a party deals and contracts with a corporation as corporators, exemption from individ- ual Hability enters as an element of the contract. Itis true that the liability of persons associated in an enterprise or adventure is not determimable by the name they assume, but by the legal consequence of their acts. A partnership may arise as to third persons, by mere operation of law, and contrary to the intention of the parties; but, to have this effect, the elements essential to constitute a partnership as to third persons must exist. A corporation de facto has an in- dependent status, recognized by the law as distinct from that of its members. A partnership is not the necessary legal consequence of an abortive attempt at incorporation. As said in Fay v. Noble, supra, “Surely, it can not be, in the absence of all fraudulent intent, that such a legal result follows as to fasten on parties involuntarily, for such a cause, the enlarged liability of co-partners, a liability neither contemplated nor assented to by them. The statement of the prop- osition carries with it a sufficient refutation.” Maintenance of such suit involves judicial nullification of fran- chises and powers enjoyed and exercised by a de facto corporation, as a distinct entity recognized by the law, acquiesced in by the State; defeats the corporate character of the contract, changes the relation from that of stockholders to that of partners; substitutes other and new parties to the contract, and effects the imposition of an en- larged liability, which they did not assume, but intended to avoid; so understood by the creditor, when he contracted the debt with the corporation as such. The contract is valid and binding on the cor- poration, which the creditor trusted. No injustice is done him, for -althis rights and remedies are preserved by the principle that the corporation and the share-holder are estopped from denying its Tegal existence, as against him. It will not answer to say that he is not repudiating, but enforcing the contract. He repudiates the party — the corporation — with which he made the contract, and seeks its enforcement against parties who never entered into con- tractual relations with him. The doctrine that a creditor who has dealt with a de facto corpora- __ tion, in its corporate capacity, can not chargethe stockholders as partners with the corporate debt, there being no fraudulent intent —alteged and proved, seems to us to be sustained by the weight of authority, maintained by stronger reasoning, consistent with well settled principles, and in harmony with the policy of the State. Affirmed. Notes. — See, accord, Humphreys v. Mooney, 5 Colo. 282; Stafford Bank v. Palmer, 47 Conn. 443; Planters’ Bank v. Padgett, 69 Ga. SECT. 1.] RICHARDSON FUELING CO. v. SEYMOUR. 611 164; Tulane Improvement Co. v. Chapman, 129 La. 562; Jennings v. Dark, 175 Ind. 332; Trowbridge v. Scudder, 11 Cush. (Mass.) 83; Merchants Bank v. Stone, 38 Mich. 779; Finnegan v. Noerenberg, 52 Minn. 239; Hogue v. Capital National Bank, 47 Neb. 929; Larned \ | v. Beal, 65 N.H. 184; Stout v. Zulick, 48 N.J.L. 599; Whitford v. Laidler, 94 N.Y. 145, 151 (see also Central Bank v. Walker, 66 N.Y. 424; but ef. Fuller v. Rowe, 57 N.Y. 23); Rowland v. Meader Co., 38 Ohio, 269; Mason v. Stevens, 168.D. 320; Shields v. Clifton Co., 94 Tenn. 123; American Co. v. Heidenheimer, 80 Tex. 344; Mitchell v. Jensen, 29 Utah, 346; Clausen v. Head, 110 Wis. 405 (but cf. Ber- geron v. Hobbs, 96 Wis. 641). RICHARDSON FUELING CO. ». SEYMOUR. c 235 Ill. 319. 1908. _ Action of assumpsit against John Seymour, and others, to recover for coal sold. Mr. Justiczk Dunn delivered the opinion of the court. The account sued on was for coal furnished to the steamer Puritan. There was evidence tending to show that the steamer was operated, at the time the account accrued, by the Seymour Transportation Company, purporting to be a corporation organized under the laws of this State. The certificate of incorporation of the company, how- ever, had never been filed for record in the county where its principal office was located, and the ground of the alleged liability of the ap- pellants is their assumption and exercise of corporate powers and use of the corporate name without complying with the provision of § 4 of the Incorporation Act, in regard to the recording of the cer- tificate of complete organization of the corporation. The appellants were original subscribers to the capital stock of the supposed cor- poration, and were stockholders, directors and officers thereof until after the transactions here in controversy. The evidence tends to show that the appellants lived in Manistee, Michigan, and that E. W. Seymour, another original subscriber, stockholder, director and officer of the company, was its manager, who had actual charge of the business of the steamer in Chicago, where the coal was fur- nished. It is argued that the debt to the appellee was made by the latter alone, and that appellants did not participate therein in any way and had no connection therewith. In the case of Bigelow v. Gregory, 73 Ill. 197, the effect upon the liability of incorporators of a failure to comply with the provisions of the statute of Wisconsin in regard to the filing of their certificate and publication of articles of association was under consideration, and it was there held that the incorporators, under such circumstances, were liable as partners. 612 RICHARDSON FUELING CO. v. SEYMOUR. [CHAP. I. “And in Loverin v. McLaughlin, 161 Ill. 417, it was held that a com- pany which is not a corporate body is a partnership, composed not merely of the directors, but of all the subscribers to the articles of association who had not withdrawn. So in Gunderson v. Illinois Trust and Savings Bank, 199 Ill. 422, it is said that if the association there concerned was not a corporate body it was a partnership of individuals, who would be liable as partners for its debts. Proof of a corporation de facto does not relieve directors and officers of the cor- poration from the liability imposed by the statute. A corporation de jure must be shown, to escape that liability. Butler Paper Co. v. Cleveland, 220 Ill. 128. Independent of any liability under § 18 of the Incorporation Act, the appellants were liable as partners if the proof showed the delivery of the coal. There was evidence tending to show its delivery, and with the weight of the evidence we have noth- ing to do. Notes. — Section 18 of the Incorporation Act, to which reference is made in the opinion, is as follows: ‘If any person or persons being, or pretending to be, an officer or agent, or board of directors, of any stock corporation, or pretended stock corporation, shall assume to exercise corporate powers, or use the name of any such corpora- tion, or pretended corporation, without complying with the pro- visions of this Act . . . then they shall be jointly and severally liable for all debts and liabilities made by them, and contracted in the name of such corporation, or pretended corporation.” In Bigelow v. Gregory, 73 Ill. 197, the court said (pp. 200, 201): “The defendants are seeking escape from individual liability; let them show that they have complied with the statute which enables them to do so, at least substantially.:. .. There would seem to be a distinction between the case where, in a suit between a corporation and a stockholder or other individual, the plea of nul tiel corporation is set up to defeat a liability which the one may have contracted with the other, and the case of a suit against individuals who claim exemp- tion from individual liability, on the ground of their having become a corporation formed under the provisions of a general statute. In the latter case, a stricter measure of compliance-with statutory re- quirements will be required, than in the former.” See, in accord with the principal case, Garnett v. Richardson, 35 Ark. 144. See also Vanhorn v. Corcoran, 127 Pa. 255. As to the law of Missouri ¢f. Martin v. Fewell, 79 Mo. 401, 410, with Bank v. Rockefeller, 195 Mo. 15. A liability may be expressly imposed in such case by statute. See Humphreys v. Drew, 59 Fla. 295; Berkson v. Anderson, 115 Iowa, 674; Ragland v. Doolitile, 100 Miss. 498. SECT. 1.] UNITED STATES EXPRESS CO. v. BEDBURY. 613 UNITED STATES EXPRESS CO. ». BEDBURY. O 34 Til. 459. 1864. THIS was a proceeding by garnishment, commenced by Bedbury against the United States Express Company. Mr. Cuter Justice Waker. It is insisted, as a ground of re- versal, that there is nothing in the record to show that plaintiff in error was 4 corporation... . It is insisted that the service of the garnishee process upon the company was insufficient to sustain the judgment. By the amended return it appears, that if plaintiff in error is a corporation the service was sufficient, and in strict compliance with the statute. It states, that the president of the company not residing in the county in which the suit was pending, that the writ was served upon the company as garnishee, by reading and delivering a copy thereof to Henry Colvin and James C. Fargo, agents of the company, and on D. B. Cooke, their clerk. This, then, presents the question whether this is a corporation. Plaintiff in error appeared to the suit by the name of the “ United States Express Company,” and this is a sufficient admission that such is their name. In the case of Henriques v. Dutch West India Company, 28 Raym. 1535, it was held, that the name of the com- pany imported a corporation. And the same rule has been announced or recognized in the courts of New York in the case of Stoddard v. Onondaga Conference, 12 Barb. 570; Kennedy v. Cotton, 28 id. 62. These cases show that such a name imports a corporation. It seems to comport with reason, that when an association of persons assume a name, which implies a corporate body, and exercise cor- porate powers, [they] should not be heard to deny that they are a corporation. When they do act and contract they are estopped from denying their corporate liability. Judgment affirmed. Note. — See, accord, Perine v. Grand Lodge, 48 Minn. 82; Corey v. Morrill, 61 Vt. 598. So, where the associates have assumed to be still incorporated after the expiration of thé period of incorporation. Miller v. Coal Co., 3l W.Va-836- So, where the associates have assumed to be incorporated although _ there was no law under which such a corporation, as they assumed_ to have forme ave-been-formed_ McDonnell v. Alabama Insurance Co., 85 Ala. 401; McCarthy v. Lavasche, 89 Ill. 270; Shad- ford v. Detroit Ry., 130 Mich. 300; Gardner v. Minneapolis Co., 73 Minn. 517. S 614 SEATON v. GRIMM. [CHAP. I. SEATON »v. GRIMM. 110 Iowa, 145. 1899. Tue defendants are stockholders in a corporation known as the ‘Farmers’ Co-Operative Creamery Association of Millersburg, Towa.” Plaintiffs hold a judgment against the corporation, and bring this action against the stockholders to recover the balance due on their judgment, after exhausting all property of the corporation, — alleging that while the corporation was organized on the twenty- sixth of April, 1893, it did not publish notice of incorporation until November 8, 1898. By way of estoppel, defendants pleaded that plaintiffs and defendants were and are the identical persons who signed, acknowledged, and filed for record the original articles of incorporation, and that, by reason of being such incorporators and stockholders, plaintiffs are estopped from denying the legality of the corporation. Plaintiffs demurred to the whole answer. Dremer, J. The estoppel pleaded by defendants is said to be in- sufficient; because there is no allegation or claim of injury. That it is injury defendants seek to avoid in their plea of estoppel is appar- ent. Granting, for the purpose of argument, that, technically speak- ing, no estoppel is pleaded, the broader question remains, may plain- tiffs, who are and were, with defendants, the original stockholders in the corporation, and who dealt with the corporation as a legal entity, plead failure to comply with the statutes with reference to publicity, and thus take advantage of their own wrong? The principle that no one may take advantage of his own wrong is firmly imbedded in our ‘ jurisprudence, and has been applied to an almost infinite number and character of cases. That doctrine is peculiarly applicable to the case at bar. Here plaintiffs dealt with a de facto corporation and ac- cepted notes and mortgages signed by the corporation as such. They were among the original incorporators, and, if notice was not given as required by statute, the fault is theirs; at least, they are as blam- able as the defendants. Surely, they cannot be heard to say that, by reason of not having complied with the law, they are entitled to hold defendants liable for failure to do the very things that they were as much bound to do as the defendants. Such a rule would allow them to profit from their own wrong. Bushnell v. Ice Machine Co., 138 Ill. Sup. 67 (27 N.E. Rep. 596); Heald v. Owen, 79 Iowa, 23. Note. — So, even if the law under which the alleged corporation was formed is unconstitutional, this is no defense in an action to recover on a subscription to its stock, made after the alleged incor- poration. Evansville Co. v. Evansville, 15 Ind. 395, 416; Hast Pasca- goula Co. v. West, 138 La. Ann. 545; Weinman v. Wilkinsburg Co., 118 Pa. 192. SECT. 1.] WINGET ¥. QUINCY BUILDING ASS’N. 615 WINGET ». QUINCY BUILDING ASS’N. 128 Ill. 67, 1889. A_BILL in chancery, brought by complainants to enjoin the sale of certain premises under the powers of sale contained in two deeds-of ~_trust_executed by the complainants to the Quincy Building and Homestead Association to secure the repayment of money loaned. Mr. Justice Baiiey delivered the opinion of the court: — One of the grounds upon which the complainants seek to be re- lieved from the legal consequences of Winget’s membership in the Quincy Building and Homestead Association, and from the obliga- tions created by the notes and deeds of trust executed by them to said association is, that the association has no valid legal existence. In support of this contention they insist that the act of 1872 under which said association was organized is unconstitutional and void, because the entire scope of the act, as is claimed, is not sufficiently expressed in the title. On this point it is sufficient to say that what- ever may be the fact in relation to the valid legal existence of said association as a corporation, the complainants are not in a position in which they can be permitted to challenge its validity. A party who has contracted with a corporation de facto as such, cannot be— permitted, after having received the benefits of his contract, to allége any defect in the organization of such corporation, as affeét- “ing its capacity to enforce such contract, but all such objections, if valid, are available only on behalf of the sovereign power of the State. 2 Morawetz on Corporations, § 750, and authorities cited in “note. And this rule applies even where the corporation is organized under a law alleged to be unconstitutional. Friedland v. Pennsyl- —~~--—° vania Central Ins. Co., 94 Pa. St. 504; McCarthy v. Lavasche, 89 Il. 270; Dows v. Naper, 91 Id. 44; Morawetz on Corporations, §§ 759, 760. Note. — See, accord, Platte Bank v. Harding, 1 Neb. 461; Core v. State, 144 N.Y. 396; Freeland v. Penn. Co., 94 Pa. 504; Building Ass’n v. Chamberlain, 4 8.D. 271; Black River Co. v. Holway, 85 Wis. 344. See, contra, Green v. Graves, 1 Doug. (Mich.) 351; Owen v. Bank of Sandstone, 2 Doug. 134, note; Skinner v. Wilhelm. 63 Mich. 568 (but cf. Burton v. Schildbach, 45 Mich. 504). 616 STOUTIMORE v. CLARK. [CHAP. I, STOUTIMORE v. CLARK. 70 Mo. 471. 1879. -APPEAL from Clay Circuit Court. The action, Stoutimore v. Clark, was brought to establish a certain charge as a lien upon the Jand formerly the property of Joseph Y. Ctark, now deceased; and to obtain a decree for the sale of the land to satisfy the charge. By order of court, the Missouri City Savings ank, and John Chrisman, were made defeidantet in said suit. The Bank filed an answer alleging a lien under a judgment against Clark, rendered March 27, [874. This judgment was founded on a note of “guid Clark payable to the order of the Missouri City Savings Bank, at the office of said bank.—Chrisman filed an answer alleging a Tien _on part of the land under a trust deed, executed by Clark September “TS, 1874, to secure a loan. Chrisman also filed a cross answer to the answer of the Missouri City Savings Bank, alleging that said bank —was not 4 corporation. Upon the trial, to prove the corporate organ- {zation and existence of the bank, a certificate signed by the alleged president and secretary was offered in evidence ‘T’o the admission of this certificate Chrisman objected, on the ground that it did not comply with the statutory requirements. This objection was Sus- tained, and the evidence was excluded. The Circuit Court ordered tha wale of the land: and directed th ;and directed that the judgment of the bank should be paid out of the proceeds before the claim of Chrisman. Chrisman appealed from an order denying his motion for a new trial. Norton, J. It is insisted by counsel that, inasmuch as, on the trial of the cause, the Missouri City Savings Bank failed to introduce evidence establishing the fact that it was a corporation, the said judgment rendered in its favor was a nullity and did not create a Tien upon thie real estate of-Ctark. @ think the view thus taken is unsound. The note upon which” said judgment was rendered is as follows: — “$4,000. Missourt Crry, July 1st, 1870. “Four months after date we promise to pay to the order of the Missouri City Savings Bank, Four Thousand Dollars, negotiable and payable at the office of the Missouri City Savings "Banik Mis- Ssouri with interest at ten per cent per annum from maturity until paid. “GILMER, CLARK & Co. “J. Y. CLARK. “R. G. Grumer, Security.” We think it clear that in the suit instituted by the bank on this note Clark would not have been allowed to deny the corporate exist- ence of the bank for the reason that by executing the note he ad- mitted the fact that it was a corporation, which estopped him from SECT. 1.] STOUTIMORE 0. CLARK. 617 disputin, it. This principle was distinctly enunciated in the case of National Insurance Co. v. Bowman, 60 Mo. 252, following the case of Farmers and Merchants Insurance Co. v. Needles, 52 Mo. 17, and the case of O. & M. R.R. Co. v. McPherson, 35 Mo. 13. In the case of City of St. Louis v. Shields et al., 62 Mo. 247, it was expressly held that the obligors on a bond given to a corporation by making and signing the instrument admit the corporate capacity of the obligee, and in a suit on such bond cannot plead nul tiel corporation. The cases cited indisputably establish that Clark, the obligor in the note upon which the judgment rests, could not have set up as a defense that the bank was not a corporation, and it therefore follows that the judgment, so far from being a nullity as counsel contend, was right- ful and proper, and from the time of its rendition became a lien on the real estate of Clark in Clay County, and was conclusive and binding not only on him but upon all claiming through or under him. “Nott. — If A contracts with the associates as a corporation, does this, without more, give them a right to sue A as a corporation? Some courts have been careful not to commit themselves to any larger doctrine than that the contract is sufficient to make a prima facie case of incorporation. See Montgomery R.R. v. Hurst, 9 Ala. 513; Gaines v. Bank of Mississippi, 12 Ark. 769; Brown v. Morigage Co., 110 Ill. 235, 241; Williams v. Cheney, 3 Gray (Mass.) 215, 220; Topping v. Bickford, 4 Allen (Mass.) 120, 121; Williamsburg Co. v. Frothingham, 122 Mass. 391; French v. Donohue, 29 Minn. 111, 113; Johnston Co. v. Clark, 30 Minn. 308; Den v. Van Houten, 5 Halst. (N.J.) 270; Ryan v. Martin, 91 N.C. 464. Some courts have gone further, and have said that where the assumption is naked the asso- ciates may Not sue as a Corporation. See Schuetzen Bund v. Agita- “tions Verein, 44 Mich. 313; Methodist Church v. Pickett, 19 N.Y. 482. On the other hand, there is a cloud of dicta to the effect that if A contracts with the associates as a corporation, he is estopped to show that they were not authorized to act as a corporation. Such a dictum seems first to have been made in Dutchess Manufactory v. Davis, 14 Johns. (N.Y.) 238 (1817), in which the court relied on Henriques v. Dutch West India Co., 2 Ld. Raym. 1532. See the explanation of this latter case by NeLson, J., in Welland Canal Co. v. Hathaway, 8 Wend. (N.Y.) 480,.481. While the language of these dicta is unrestrained, and, taken at its face value, covers the case of naked assumption, itis clear that in nearly all of the cases no question as to naked assumption was present to the minds of the judges. Such dicta will be tound in McCullough v. Talladega Co., 46 Ala. 376; Lehman v. Warner, 61 Ala. 455, 466; Greenville v. Greenville Co., 125 Ala. 625, 642; Searcy v. Yarnell, 47 Ark. 269, 281; Plummer v. Struby-Esta- brooke Co., 23 Colo. 190, 193; School District v. Alderson, 6 Dak. 145, 149; Booske v. Gulf Ice Co., 24 Fla. 550, 559; Petty v. Brunswick Ry. Co., 109 Ga. 666, 674; Lombard v. Chicago Congregation, 64 Iil. 477, we 618 IMPERIAL BUILDING CO. ¥. BOARD OF TRADE. [CHAP. 1. 487; John v. Farmers’ Bank, 2 Blackf. (Ind.) 367, 369; Ensey v. Cleveland Co., 10 Ind. 178; Beaver v. Hartsville University, 34 Ind. 245; Jones v. Kokomo Ass’n, 77 Ind. 340; Cravens v. Eagle Co., 120 Ind. 6; Depew v. Bank of Limestone, 1 J. J. Marsh. (Ky.) 378, 380; Blanc v. Germania Bank, 114 La. 739; Meadow Dam Co. v. Gray, 30 Me. 547, 549; Worcester Institution v. Harding, 11 Cush. (Mass.) 285; Mason v. Crowder, 98 Mo. 352; Congregational Soc. v. Perry, 6 N.H. 164; Nashua Co. v. Moore, 55 N.H. 48, 53; Dutchess Mfy. v. Davis, 14 Johns. (N.Y.) 238; Williams v. Bank of Michigan, 7 Wend. (N.Y.) 539, 542; Commercial Bank v. Pfeiffer, 108 N.Y. 242, 254; All Saints’ Church v. Lovett, 1 Hall (N.Y.) 191, 198; Newburg Co. v. Weare, 27 Ohio St. 348, 354; Grant v. Clay Co., 80 Pa. St. 208, 218; Myers v. Croft, 13 Wall. (U.S.) 291, 295; Casey v. Galli, 94 U.S. 678, 680; Close'v. Glenwood Cemetery, 107 U.S. 466, 477; Andes v. Ely, 158 U.S. 312, 322; Wallace v. Hood, 89 Fed. 11, 20; Wells Co. v. Avon Mills, 118 Fed. 190, 194. Of these dicta, those entitled to most weight are in Williams v. Bank of Michigan, 7 Wend. (N.Y.) 5389, 542, and Commercial Bank v. Pfeiffer, 108 N.Y. 242. See also Calkins v. Bump, 120 Mich. 335, 342; Rafferty v. Bank of Jersey City, 33 N.J.L. 368. And there are a fow decisions, in accord with the prin-_ cipal case, the result of which logically volves the proposition that one who has contracted with the associates a8 & corporation is, with- ut more, estopped to defend on the ground that the associates were not authorized to act as a porpera tian, Blake v. Holley, 14 Ind. 383; eikel V. German S0c., n asselman v. U.S. Mortgage Co., 97 Ind. 365; Liverpool Co. v. Hunt, 11 La. Ann. 623; Franz v. Teu- tonia Ass’n, 24 Md. 259 (but see Banas v. Church, supra) Farmers’ Co. v. Needles, 52 Mo. 17; Nat'l Ins. Co. v. Bowman, 60 Mo. 252; Studebaker Co. v. Montgomery, 74 Mo. 101. Where the period of incorporation has expired, and A thereafter contracts with the associates as a corporation, they may sue, as a corporation, for breach of A’s contract. West Missouri Co. v. Kansas City Co., 161 Mo. 595; Miller v. Coal Co., 31 W.Va. 836, 841; Citi- zens’ Bank v. Jones, 117 Wis. 446. Contra, White v. Campbell, 5 Humph. (Tenn.) 38. IMPERIAL BUILDING CO. v. CHICAGO OPEN B . BOARD OF TRADE. 238 Ill. 100. 1909. APPELLANT sought to recover from appellee upon a warrant of attorney contained in a lease in which appellant was lessor and appellee lessee. Appellant was organized under the general Incorporation Act for the purpose of leasing certain land in Chicago, erecting a building SECT. I.] IMPERIAL BUILDING CO. v. BOARD OF TRADE. 619 thereon for the accommodation of tenants, making leases, collect- ing rents and doing all things incident to the management of said property. Mr. Justice Farmer delivered the opinion of the court: It is not controverted that corporations cannot be organized in this State for the purpose of acquiring and holding real estate. The first section of our general Incorporation Act (Hurd’s Stat. 1905, chap. 32) reads: ‘That corporations may be formed in the manner provided by this act for any lawful purpose except banking, insur- ance, real estate brokerage, the operation of railroads and the busi- ness of loaning money: Provided, that horse and dummy railroads, and organizations for the purchase and sale of real estate for burial purposes only, may be organized and conducted under the provisions of this act: And provided further, that corporations formed for the purpose of constructing railroad bridges shall not be held to be rail- road corporations.” § 5 provides that corporations formed under the act “may own, possess and enjoy so much real and personal estate as shall be necessary for the transaction of their business, and may sell and dispose of the same when not required for the uses of the corporation.”’ It is further provided in said § 5 that real estate ac- quired by the corporation in satisfaction of an indebtedness or lia- bility to it, unless necessary and suitable for the business of the cor- poration, must be offered at public auction for sale once every year until sold, and that if any such corporation shall not within five years sell land so acquired at public or private sale, the State’s at- torney is required to proceed by information against the corporation in the circuit court, which court shall have jurisdiction to order the sale of such land or real estate. The last clause of § 26 of the act reads: ‘‘ And no foreign or domestic corporation established or main- tained in any way for the pecuniary profit of its stockholders or members, shall purchase or hold real estate in this State, except as provided for in this act.” It is not, and could not reasonably be, contended that under said general Incorporation Act a corporation can be organized for the purpose of purchasing and holding real estate. This act has often been before this court, and it has uniformly been held that acquiring and holding real estate are not purposes for which a corporation may be organized but that the organization of corporations for such pur- poses is forbidden by the statute. Bizler v. Summerfield, 195 IM: 147; People v. Pullman Palace Car Co., 175 id. 125; Carroll v. City of East St. Louis, 67 id. 568; First M. E. Church v. Dixon, 178 id. 260. Authority is given corporations organized for legitimate pur- poses, not prohibited by law, to acquire and hold such real estate as may be necessary for the transaction of the business of the corpora- tion, but beyond this, corporations, no matter for what purpose organized, are forbidden to hold real estate, but are required by the 620 IMPERIAL BUILDING CO. ¥. BOARD OF TRADE. [CHAP. I. statute referred to, to sell the same within five years or be proceeded against by the State’s attorney by information. That it has always been contrary to the public policy of this State to permit corporations to acquire and hold real estate was declared in Carroll v. City of East St. Louts, swpra, where in an elaborate opinion the legislation, and the reasons for it, were pointed out. It is next contended that if appellant’s charter be held void it is not subject to be attacked collaterally, and that appellee having entered into a contract with appellant for the leasing of the premises is now estopped to deny its corporate existence. The general rule is, that where there is an attempt in good faith to organize under a law authorizing the incorporation, and corporate functions are exercised, this makes the organization a corporation de facto, and its legality cannot be questioned collaterally or by one who deals with it as a corporation. In such cases the introduction in evidence of the charter and proof of user, and that the party seeking to deny the legality of the corporation dealt with it as a corporation, sufficiently proves it a corporation de facto, and whether there may have been some irregu- larities in perfecting the incorporation will not be inquired into. The legality of such incorporation can only be attacked by the State in a direct proceeding. Ramsey v. Peoria Marine and Fire Ins. Co., 55 Il. 311; Smith v. Mayfield, 163 id. 447; Mitchell v. Deeds, 49 id. 416. The appellee concedes that this is the rule as to de facto cor- porations but contends that there can only be a de facto corporation where there is a law under which the corporation might legally be or- ganized, but that if there is no law authorizing the organization of such corporation its non-existence or invalidity may be set up col- laterally. Cook on Corporations (§ 234) thus defines a corporation de facto: “The corporation is a de facto corporation where there is a law authorizing such a corporation and where the company has made an effort to organize under the law and is transacting business in a corporate name.” In American Trust Co. v. Minnesota and North- western Railroad Co., 157 Ill. 641, it was contended on behalf of cer- tain corporations that had attempted a consolidation without any law authorizing such consolidation, that the validity of the consolida- tion, when not questioned by the State, must be sustained as against third persons and wrongdoers. The court held the rule of law was not as broad as contended for, and said (p. 652): “Where there is a de facto corporation, its corporate existence, except in a few excep- tional cases, cannot be questioned collaterally, and can only be in- quired into by the State and in a direct proceeding. Hudson v. Green Hill Seminary, 118 Ill. 618. But in order that there should be a de facto corporation two things are essential: First, there must be a law under which the corporation might lawfully be created; and second, user. Where the law authorizes a corporation, and there is an at- tempt, in good faith, to organize, and corporate functions are there- SECT. I.] IMPERIAL BUILDING CO. v. BOARD OF TRADE. 621 upon exercised, there is a corporation de facto, the legal existence of which cannot ordinarily be questioned collaterally. This is not only the doctrine of Judson v. Green Hill Seminary, supra, but of numer- ous other decisions in this court. And in said Hudson case this court quoted with approval the language of the Supreme Court of In- diana in Williamson v. Kokomo Building and Loan Ass., 89 Ind. 389, as follows: ‘The rule stated does not go to the extent of precluding strangers from showing that there was no law authorizing a cor- poration.’ In Heaston v. Cincinnati, etc., Railroad Co., 16 Ind. 275, it is held that there must be a corporation de facto under an authority sanctioning such a corporation de jure. In Eaton v. Walker, 76 Mich. 579, it is said: ‘But the two things necessary to show a corporation, even de facto, do not exist. There is no law under which the power they assume might lawfully be created, and the mere fact that they assumed to act as such, even in the full belief that they were legally incorporated, would not constitute them a corporation de facto.’ See, also, Swartwout v. Michigan Air Line Railroad Co., 24 Mich. 389; Detroit Schuetzen Bund v. Detroit Agitations Verein, 44 id. 318. In Evenson v. Ellingson, 67 Wis. 634, it is held that a body which cannot become a corporation de jure cannot become a corporation de facto. In City of St. Louis v. Shields, 62 Mo. 247, it is held that if a corporation be acting under legislative sanction and color of law its corporate character cannot be questioned collaterally. In Pape v. Capitol Bank, 20 Kan. 440, in discussing the matter of a de facto corporation, it is said by Brewmr, J., that the charter of a corpora- tion, with acts of user, is sufficient as against collateral inquiry; that the same principle obtains in respect to incorporations organized under a general law, but that there must in such cases be a law under which the incorporation can be had. And see, also, Cooley’s Const. Lim. (6th ed.) p. 310.” That to create a corporation de facto it is necessary that there be a law authorizing its incorporation, an at- tempt in good faith to comply with the law, and user, was decided in Hudson v. Green Hill Seminary Co., swpra, Marshall v. Keach, 227 Ill. 35, and Gillette v. Aurora Railways Co., 228 id. 261. Appellant contends that the question of estoppel arising between parties by reason of a contract was not involved in American Trust Co. v. Minnesota and Northwestern Railroad Co., supra, and that it is not authority for the proposition that one dealing with a party as a corporation is estopped to deny its legal existence even though there is no law authorizing such incorporation. We do not under- stand the opinion to be capable of such distinction. In Eaton v. Walker, cited in the opinion, the Supreme Court of Michigan held that the pretended corporation itself might deny its legal existence, where there was no law authorizing its organization, when sued by a creditor with whom it had had dealings and to whom it had become indebted. 622 WILDER MFG. CO. ¥. CORN PRODUCTS CO. [CHAP. I. The rule that one dealing with a corporation is not estopped to deny its legal existence on the ground that there was no law au- thorizing it is based on the principle that the law will not recognize nor lend its aid to the organization as a de facto corporation where the law does not authorize or where it forbids such corporetion. It is analogous to ultra vires acts and contracts of the corporation wholly beyond and outside the general scope of its corporate powers and entirely foreign to the objects and purposes of its creation. We are not to be understood as holding appellee is not liable in any event for use and occupation of appellant’s premises, for we are of the opinion if it occupied them under an agreement to pay rent, a liability was created which may be enforced in some appropriate proceeding, but it cannot be enforced in this suit. We are of opinion the judgment of the circuit court was correct, and it is therefore affirmed. Judgment affirmed. Note. — See also Clark v. American Co., 165 Ind. 213; Raccoon River Co. v. Eagle, 29 Ohio St. 238. Cf. Homestead Co. v. Linigan, 46 La. Ann. 1118. WILDER MFG. CO. ». CORN PRODUCTS CoO. 236 U.S. 165. 1915. Mr. Curer JusticE WHITE delivered the opinion of the-court. We refer to the parties, the one as the Manufacturing, and the other as the Refining Company. Sued by the Refining Company in April, 1909, to recover the amount of the price of two lots of glucose or corn syrup which it had bought in January, 1909, and which it had consumed and not paid for, the Manufacturing Company asserted its non-liability on the following grounds which we summarize: (a) Because the Refining Company had no legal existence as it was a combination composed of all the manufacturers of glucose or corn syrup in the United States, illegally organized with the object of monopolizing all dealings in such products in violation of the Anti- Trust Act of Congress. That having illegally brought into one or- ganization all the manufacturers of glucose or corn syrup, the cor- poration had unreasonably advanced the price of the products of its manufacture to the injury of the public. (6) That this end being accomplished, the corporation sought to perpetuate its monopoly by rendering it difficult or impossible for competitors to go into the business of producing glucose or corn syrup by devising a so-called profit-sharing scheme, by which it was proposed to give to all those who purchased from the combination a stipulated percentage upon the amount of the purchases made in one year to be paid at the end SECT. 1.] WILDER MFG. CO. v. CORN PRODUCTS CO. 623 of the following year provided that during such time they dealt with no one else but the combination. While the sum of the percentage thus offered, it was alleged, varied from year to year, nevertheless it was charged that in substance the contract or offer remained the same. The tender to the Manufacturing Company of a right to ' participate in the scheme, it was alleged, was first made in 1907 rela- tive to the business done in 1906 in the form of a letter which is in the margin and this offer or asserted contract. was continued from year to year. It was further alleged that the scheme proved success- ful in accomplishing its wrongful purpose since, although subse- quently independent concerns engaged in the business of manufac- turing glucose or corn syrup and offered to sell their products at prices less than those charged by the combination, such concerns were virtually driven out of business because those who desired to purchase the products were deterred from buying from them for fear of losing the pereentage which they would receive from the combina- tion if all their purchases continued to be made from it alone, and moreover because of the dread felt by purchasers that the independ- ents would not be able to resist the overweening and controlling power of the combination. It was moreover alleged that all purchases made by the manufacturing company “contained the following clause in the contract of purchase: ‘The goods herein sold are for your own consumption and not for resale.’”’ Charging that the condition which made the payment of the proposed profit-sharing percentage depend upon dealing alone with the combination was void and should be disregarded, the answer asked not only that the prayer for judgment for the purchase price be rejected but that treating the failure of the Manufacturing Com- pany to comply with the condition on which the offer of profit shar- ing was made as immaterial, there should be a judgment for that com- pany for the percentage of profits on the business for the year 1908. On motion the answer was stricken out as stating no defense. There was a judgment in the absence of further pleading against the Manufacturing Company for the price of the goods, as sued for, and rejecting its claim for the percentage of profits. This judgment was affirmed by the court below (11 Ga. App. 588) and because of an assumed failure to give effect to the Anti-Trust Act of Congress this writ of error was prosecuted. As the context of the answer clearly justified the inference that the sale of the glucose was an interstate transaction, the court be- low was right in assuming that to be the case and therefore we put out of view as devoid of merit the contrary suggestion made by the Refining Company. ees Having dealt with the Refining Company as an existing concern possessing the capacity to sell, speaking generally the assertion that it had no legal existence because it was an unlawful combination in ' 624 WILDER MFG. CO. ¥. CORN PRODUCTS CO. [CHAP. I. violation of the Anti-Trust Act was irrelevant to the question of the liability of the Manufacturing Company to pay for the goods since such defense was a mere collateral attack on the organization of the corporation which could not be lawfully made. Besides, considered from the point of view of the alleged illegality of the corporation, the attack on its existence was absolutely immaterial because the right to enforce the sale did not involve the question of combination, since conceding the illegal existence of the corporation making the sale, the obligation to pay the price was indubitable, and the duty to enforce it not disputable. This is true because the sale and the ob- ligations which arose from it depended upon a distinct contract with reciprocal considerations moving between the parties, — the receipt of the goods on the one hand and the payment of the price on the other. And this is but a form of stating the elementary proposition that courts may not refuse to enforce an otherwise legal contract because of some indirect benefit to a wrongdoer which would be afforded from doing so or some remote aid to the accomplishment of a wrong which might possibly result — doctrines of such universal acceptance that no citation of authority is needed to demonstrate their existence, especially in view of the express ruling in Connolly v. Union Sewer Pipe Co., 184 U.S. 540, applying them to the identi- cal general question here involved. The case therefore reduces itself to the question whether the con- tract of sale was inherently illegal so as to bring it within the also elementary rule that courts will not exert their powers to enforce illegal contracts or to compel wrongdoing. The only suggestion as to the intrinsic illegality of the sale results from the averments of the answer as to the offer of a percentage of profits upon the condition of dealing exclusively with the Refining Company for the following year and the clause to the effect that the goods were bought by the Manufacturing Company for its'‘own use and not for resale. But we can see no ground whatever for holding that the contract of sale was illegal bécause of these conditions. In fact it is not so contended in argument since substantially the proposition which is relied upon is that although such stipulations were intrinsically legal, they be- come illegal as the result of the duty to consider them from the point of view that one of the parties was an illegal combination interested in inserting such conditions as an efficient means of sustaining its continued wrongdoing and therefore giving power to accomplish the baneful and prohibited results of its illegal organization, — a duty which, it is urged, results from reason, is commanded by the Anti-Trust.Act and the obligation to enforce its provisions and is required because of a previous decision of this court enforcing that act (Continental Wall Paper Co. v. Voight, 212 U.S. 227) unless that decision is to be now qualified or overruled. In the first place, the contention cannot be sustained consistently SECT. 1.] WILDER MFG. CO. ¥. CORN PRODUCTS CO. 625 with reason. It overthrows the general law. It admits the want of power to assail the existence of a corporate combination as a means of avoiding the duty to pay for goods bought from it and concedes at the same time the legality of the condition in the sale and yet pro- poses by bringing the two together to produce a new and strange result unsupported in any degree by the elements which are brought together to produce it and conflicting with both. In the second place, the proposition is repugnant to the Anti- Trust Act. Beyond question reéxpressing what was ancient or exist- ing and embodying that which it was deemed wise to newly enact, the Anti-Trust Act was intended in the most comprehensive way to provide against combinations or conspiracies in restraint of trade or commerce, the monopolization of trade or commerce or attempts to monopolize the same. Standard Oil Co. v. United States, 221 U.S. 1; United States v. American Tobacco Co., 221 U.S. 106. In other words, founded upon broad conceptions of public policy, the prohibitions of the statute were enacted to prevent not the mere injury to an indi- vidual which would arise from the doing of the prohibited acts, but the harm to the general public which would be occasioned by the evils which it was contemplated would be prevented, and hence not only the prohibitions of the statute but the remedies which it pro- vided were coextensive with such conceptions. Thus the statute expressly cast upon the Attorney-General of the United States the responsibility of enforcing its provisions, making it the duty of the district attorneys of the United States in their respective districts under his authority and direction to act concerning any violations of the law. And in addition, evidently contemplating that the official unity of initiative which was thus created to give effect to the statute required a like unity of judicial authority, the statute in express terms vested the Circuit Court of the United States with ‘jurisdic- tion to prevent and restrain violations of this act,” and besides ex- pressly conferred the amplest discretion in such courts to join such parties as might be deemed necessary and to exert such remedies as would fully accomplish the purposes intended. Act of July 2, 1890, chap. 647, 26 Stat. 209. It is true that there are no words of express exclusion of the right of individuals to act in the enforcement of the statute or of courts gen- erally to entertain complaints on that subject. But it is evident that such exclusion must be implied for a twofold reason: First, because of the familiar doctrine that “where a statute creates a new offense and denounces the penalty, or gives a new right and declares the remedy, the punishment or the remedy can be only that which the statute prescribes.” Farmers’ & Mechanics’ National Bank v. Dear- ing, 91 U.S. 29, 35; Barnet v. National Bank, 98 U.S. 555; Oates v. National Bank, 100 U.S. 239; Stephens v. Monongahela Bank, 111 U.S. 197; Tenn. Coal Co. v. George, 233 U.S. 354, 359; Second, be- 626 WILDER MFG. CO. ¥. CORN PRODUCTS CO. = [CHAP. I. cause of the destruction of the powers conferred by the statute and the frustration of the remedies which it creates which would obvi- ously result from admitting the right of an individual as a means of defense to a suit brought against him on his individual and otherwise inherently legal contract to assert that the corporation or combina- tion suing, had no legal existence in contemplation of the Anti-Trust Act. This is apparent since the power given by the statute to the Attorney-General is inconsistent with the existence of the right of an individual to independently act since the purpose of the statute was where a combination or organization was found to be illegally existing to put an end to such illegal existence for all purposes and thus protect the whole public, — an object incompatible with the thought that such a corporation should be treated as legally existing for the purpose of parting with its property by means of a contract of sale and yet be held to be civilly dead for the purpose of recovering the price of such sale and then by a failure to provide against its future exertion of power be recognized as virtually resurrected and in possession of authority to violate the law. And in a twofold sense these considerations so clearly demonstrate the conflict between the statute and the right now asserted under it as to render it unneces- sary to pursue that subject further. In the first place because they show in addition how completely the right claimed would defeat the jurisdiction conferred by the statute on the courts of the United States, — a jurisdiction evidently given, as we have seen, for the pur- pose of making the relief to be afforded by a finding of illegal exist- ence as broad as would be the necessities resulting from such finding. In the second place because the possibility of the wrong to be brought about by allowing the property to be obtained under a contract of sale without enforcing the duty to pay for it, not upon the ground of the illegality of the contract of sale but of the illegal organization of the seller, additionally points to the causes which may have operated to confine the right to question the legal existence of a corporation or combination to public authority sanctioned by the sense of public responsibility and not to leave it to individual action prompted it may be by purely selfish motives. As from these considerations it results not only that there is no support afforded to the proposition that the Anti-Trust Act au- thorizes the direct or indirect suggestion of the illegal existence of a corporation as a means of defense to a suit brought by such corpora- tion on an otherwise inherently legal and enforceable contract, but on the contrary that the provisions of the act add cogency to the principles of general law on the subject and therefore make more imperative the duty not directly or indirectly to permit such a de- fense to a suit to enforce such a contract, we put that subject out of view and come to the only remaining inquiry, the alleged effect of the previous ruling in the Continental Wall Paper Case, supra. SECT. 1.] WILDER MFG. CO. v. CORN PRODUCTS CO. 627 It is to be observed in considering that contention that the general rule of law which we have stated is not apparently questioned in the argument and the controlling influence of the ruling in the Connolly Case, supra, if here applicable is not denied, but the contention is that the general law is not applicable and the Connolly Case is inapposite because of an exception which was engrafted upon the general law by the ruling in the Continental Wall Paper Case under which it is said this case comes. While it clearly appears that this is the contention, it is difficult to precisely fix the ground upon which it is rested. But as the rule of general law which under ordinary circumstances does not permit the existence of a corporation to be indirectly attacked is not assailed, and as it is not asserted that irrespective of the illegal organization of the corporation, the contract of sale was inherently unlawful, it follows that the proposition is the one which we have already in another aspect disposed of, that is, that the sale and its conditions although inherently legal become illegal by considering the illegal corporation and the aid to be afforded to its wrongful pur- poses by the conditions which formed a part of the sale. But in sub- stance this only assumes that it was held in the Continental Wall Paper Case that that which was inherently legal can be rendered illegal by considering in connection with it something which there is no right to consider at all. But it is apparent on the face of the opin- ion in the Continental Wall Paper Case that it affords no ground for the extreme and contradictory conclusion thus deduced from it since the ruling in that case was based not upon any supposed right to import into a legal and valid contract elements of wrong which there was no right to consider, but was rested exclusively upon elements of illegality inhering in the particular contract of sale in that case which elements of illegality may be thus summarized: (a) the relations of the contracting parties to the goods sold, (b) the want of real owner- slip in the seller, (c) the peculiar obligations which were imposed upon the buyer, and (d) the fact that to allow the nominal seller to enforce the payment of the price would have been in and of itself directly to sanction and give effect to a violation of the Anti-Trust Act inhering in the sale. It is not necessary to analyze the facts and issues in the case for the purpose of pointing out how completely they are covered by the statement just made because the opinion of the court and the reasons stated by the members of the court who dissented without more make that fact perfectly clear. Indeed not only does this statement make clear the fact that there is no conflict between the Connolly Case and the Continental Wall Paper Case, but it also establishes that both cases, the first directly, and the other by a negative pregnant, demonstrate the want of merit in the conten- tions here insisted upon. It only remains to say that we think it requires nothing but state- ment to demonstrate that in view of the facts which we have recited 628 DAVIS Uv. STEVENS. [CHAP. 1. and the legal principles which we have applied to them, no error was committed by the court below in refusing to give to the defendant a judgment for its alleged share of the profits for the year 1908 when it was expressly admitted that the conditions upon which the offer of a right to a participation in the profits was rested, or the contract (if there was a contract to that effect) was based, had not been com- plied with. Affirmed. Notre. — Where incorporation failed because of a lack of good faith on the part of the associates, but this lack in no wise injured A, there may be a recovery in the name of the alleged corporation for breach of A’s contract. See Southern Bank v. Williams, 25 Ga. 534; Smith v. Mississippi Co., 14 Miss. 179; United States Co. v. Schlegel, 143 N.Y. 537; Wallace v. Loomis, 97 U.S. 146, 154. DAVIS »v. STEVENS. 104 Fed. 235. 1900. In the U.S. District Court for the District of South Dakota. On March 21, 1900, creditors of the Bank of Plankinton filed a peti- tion, praying that the Bank of Plankinton be adjudged bankrupt, as “a private banking institution, and a co-partnership consisting of the above-named defendants. In their answer defendants deny generally the allegations of the petition, and, further answering, allege that the ~Bank of Plankinton was during the times alleged in the petition, and now is, a corporation duly organized under the laws of the territory of Dakota tt rs from the testi- mony and admission of the parties to this proceeding that on the 27th day of November, 1885, articles of incorporation, duly signed.and ac- knowledged by Edwin 8. Rowley, Fred L. Stevens, Charles A. John- son, Joseph D. McCormick, and William M. Smith, were duly filed in the office of the secretary of the territory of Dakota, wherein it was stated that the business of the proposed corporation, which was to be called the Bank of Plankinton, should be a general banking, real estate, and loan business. Upon the filing of said articles there was issued by the secretary of the territory of Dakota a certificate of cor- porate existence to the parties above named, wherein it was certified that said parties, their associates and successors, had become a body politic and corporate under the corporate name of Bank of Plankin- ton. It further appears that the Bank of Plankinton did business as a banking corporation from the time of its alleged incorporation until about Jan. 10, 1900, when it closed its doors and ceased to do business. Car anp, District Judge. [After stating the case.] It is claimed SECT. 1.] DAVIS ¥. STEVENS. 629 by tie petitioners that, as there was no law of the territory of Dakota which authorized the incorporation of individuals to do a banking “business, the defendants in this proceeding, who are alleged to have owned. stock in this corporation, were simply partners, and as such _were doing business as a private bank, and thus subject to be ad- judicated a bankrupt as a private bank. It is contended by the de- fendants that whether or not the Bank of Plankinton was a corpora- tion cannot ke inquired into collaterally, and that the state of South Dakota is the only power which could, by proceedings in the nature of a quo warranto, inquire into the legal organization of this corpora- tion. If the Bank of Plankinton was a de facto corporation, this posi- tion would be unassailable. But, in order that there may be a de facto corporation, it must have been possible for the territory of Dakota to have chartered a de jure corporation, and as there was no law of the territory of Dakota permitting the incorporation of banking corporations at the time the Bank of Plankinton received its “certificate of corporate existence, it results that there cannot be a _de facto corporation. The limitation of the doctrine that the validity of corporate existence cannot be litigated collaterally is that, where there 18 no law_under which a corporation might exist, then the validity of corporate existence may be attacked collaterally. Heaston v. Ratlroad Co., 16 Ind. 275; Krutz v. Town Co., 20 Kan. 397; Eaton v. Walker, 76 Mich. 579, 43 N.W. 638, 6 L.R.A. 102; 1 Thomp. Corp. § 505. As is said in § 502, 1 Thomp. Corp.: — “We must not get too far away from the primal proposition that the legislature alone can create a corporation, and that a collection 6f individuals cannot make themselves a corporation by merely resolving to be such, or calling themselves such. The three tailors of Tooley street did not make themselves the people of England by passing a resolution in which they styled themselves such. There must be some basis for the operation of the rule, and accordingly we find a better statement of it in the proposition that where a corpora- tion exists de facto, and in fact exercises corporate powers, the ques- tion whether it exercises such powers lawfully cannot be litigated in a collateral proceeding between private parties, or between a private party and the corporation. The question ‘can only be litigated be- tween the corporation and the state.” Defendants invoke § 2892 of the Compiled Laws of Dakota, which is in the following language: — “The due incorporation of any company claiming in good faith to be a corporation under this chapter and doing business as such, or its right to exercise corporate powers, shall not be inquired into col- laterally in any private suit to which such de facto corporation may be a party, but such inquiry may be had and action brought at the suit of the territory in the manner prescribed in the Code of Civil Procedure.” 630 DAVIS v. STEVENS. [cHAP. 1. This section, as I understand it, simply declares the law in the same manner that the courts declare it. It presupposes that there is a de facto corporation, which cannot exist if there could have existed no de jure corporation. In the case of Oroville & V. R. Co. v. Super- visors of Plumas Co., 37 Cal. 354, it was held by the Supreme Court of California that a similar provision in the laws of that State did not go to the extent of precluding private persons from denying the existence de jure or de facto of the alleged corporation. ... arise Trom simply depositing money with the Bank of Plankinton, ere is no such relation between the bank and the creditors as would ‘allow the principle of estoppel to be urged. I, therefore, am of the opinion that the parties interested in the Bank of Plankinton were cO-partners. {Petition dismissed for other reasons.] Nore. — To the same effect are Booth v. Wonderly, 36 N.J.L. 250 (a charter authorizing a business to _be carried-om in Trenton was used in conducting a business at Jersey City; apparently no stock was subscribed; the persons who assumed to act as directors were held to full liability); Ridenour v. Mayo, 40 Ohio St. 9 (trustees of a savings bank used name of bank in carrying on a general banking business). See also Vredenburg v. Behan, 33 La. Ann. 627; Hill v. Beach, 1 Beasl. (N.J.) 31,236 (one ground of the decision was that the laws of New York did not authorize a corporation to be formed by the residents of another state to do business only in that other State). In Merchants’ Bank v. Stone, 38 Mich. 779, Marston, J., dissent- ing, held, that a statute authorizing manitierurng corporations did not authorize lumbering companies, and that the associates were exposed to full liability. The grounds on which the majority og ceeded, in protecting the associates, are not clear. if the law under which the associates organized is cieaueetunional the court, in Michi 2 t the associates would be exposed to full liability. ‘When the law under which such exemption is claimed is unconstitutional, the exemption itself ceases to exist.” There is a dictum to the same effect in Burton v. Schild- bach, 45 Mich. 504, 511, and a decision in Eaton v. Walker, 76 Mich. 579, 590. ‘‘Obligors are bound, not by the style which they give to themselves, but by Ths COMequeHcGs WHOI-THEy INGuT by FeRson of “‘theiracts.”” The court_would apparently have held the associates even if the plaintiff had admitted that he dealt with them as a cor-_ poration. See also Clark v. American Co., 165 Ind. 213, 216; Che- nango Bridge Co. v. Paige, 83 N.Y. 178, 190. In Planters’ Bank v. Padgett, 69 Ga. 159, a court assumed, by a judgment, to incorporate associates. The judgment was held to be SECT. 1.] PROVIDENT BANK & TRUST CO. v. SAXON. 631 void, but the associates were shielded from full liability on the au- thority of Morawetz, § 748. In Richards v. Minnesota Bank, 75 Minn. 196, the name of a cor- poration de jure was changed, Held, that, even if the act making the tion in such new name could not hold the stockholders to full liability. PROVIDENT BANK & TRUST CO. v. SAXON. 6. 116 La. 408. 1906. Lanp, J. Plaintiff’s suit was dismissed on an exception of no cause of action, which necessarily admits all the facts alleged in the petition. The defendants were sued as members of a commercial partner- ship, formerly doing business in the city of New Orleans under the name of the “Vossburg Mineral Springs Co., Ltd.” It is alleged that the business of the concern was the selling of spring water in bottles, packages, or otherwise, and that the com- pany became indebted to plaintiff on deposit account in the sum of $6,899.73, or in the alternative in the same sum on a note and a num- ber of drafts filed and made part of the petition. The deposit account was kept in the name of the “ Vossburg Mineral Springs Co., Ltd.” The note is signed in the same name by “Henry Mordecai, President,” and the drafts were drawn by him officially to the order of, and indorsed by, the ‘‘ Vossburg Mineral Springs Co., Ltd.” In eight instances shares of stock of said company were attached to drafts as collateral. The note and all of the drafts were discounted by the plaintiff bank, and the net proceeds placed at credit of the company. The petition alleges that the defendant and others, constituting the company, so called, falsely claimed to be and have been a, cor- poration established under the laws of this state, whereas it was in truth and to the knowledge of defendants a commercial partnership only. The petition charges that the pretense that the Vossburg Mineral Spring Co., Ltd., was a corporation was nugatory for the reason, among others, “that no original or other subscriptions made for the purpose of organizing the said company or any list of subscriptions was recorded in the office of the recorder of mortgages for this par- ish,” as is required by § 686 of the Revised Statutes of 1870; that the charter was not published in a newspaper or daily journal as enjoined by the same section, but in a weekly religious journal with a limited circulation confined to the members of a certain church 632 PROVIDENT BANK & TRUST CO. v. SAXON. [CHAP. 1. organization; that the company never had a true capital subscribed of $5,000, as required by law; that the pretended charter does not affix any manner or terms of payment of its alleged stock as en- joined by Rev. St. 1870, § 685; that there never was any real sub- scription to stock of the said corporation, or any intention by the parties forming the same to so subscribe; that there were never any payments for such stock either made or intended by the parties concerned. The charter was not annexed to the petition, and its contents can be ascertained only by reference to the allegations of the pleader. Several defects “‘among others” are pointed out, but there is no presumption that the charter was perfect in all other respects, or that all other formalities required by law were observed. The pleader, after alleging facts sufficient to charge defendants as commercial partners, seems to have anticipated the probable defense that defendants were not members of a commercial part- nership, but were stockholders in a de jure or de facto corporation, and therefore not liable personally for the claims sued on. It is not alleged in the petition that the charter was recorded in the office of the recorder of mortgages. The whole argument for the defense is based on the proposition that defendants undertook to form a corporation under the existing laws of this State; that they had executed, recorded in the mortgage office, and published their charter; that the corporation so formed had subsequently done busi- ness as a corporation; and that it had been recognized as a valid cor- poration, and all of its acts and contracts ratified by Act No. 120, p. 281, of 1904.1 We assume that the act was passed for the benefit of persons who had actually and in good faith attempted to organize corporations for business purposes, but, in so doing, had committed errors and mistakes in the proceedings or in the instruments of incorporation. The petition charges that the so-called corporation was a com- mercial partnership doing business in the name of a limited liability company, and that defendant falsely and knowingly pretended that the partnership was a corporation established under the laws of the State. It is charged that there was never any real subscription to the capital stock or any intention by the parties forming the company to so subscribe, and that there never were payments for such stock either made or intended to be made by the parties concerned. 1 This act provided ‘‘that whenever persons have undertaken to form a corporation under any of the existing laws of this State, and have executed, recorded in the mort- gage office, and published their charters, the corporations so formed and subsequently doing business as corporations, are hereby recognized and declared to be now and hereafter, for the term stated in their charters, valid corporations, notwithstanding that the charters may have authorized the carrying on by one corporation of several branches of business, the carrying on of which by corporations is authorized by dif- ferent statutes of this State, and notwithstanding irregularitics in the proceedings and instruments of the incorporation.” SECT. I.] PROVIDENT BANK & TRUST CO. v. SAXON. 633 Admitting all the allegations of the petition to be true, it follows that the corporation, so called, was but a name, under which the defendants conducted a commercial business. The allegations of the petition are sufficient to show a cause of action against the defendants as commercial partners, and do not disclose that the ‘‘ Vossburg Springs Company, Ltd.,’’ was a corpora- tion de jure cr de facto under the laws of this State. The pleader might have well rested on his allegation that the defendants were commercial partners, without anticipating the defense. The questions of law raised are of the utmost importance, but find no application to such a corporation as that described in the petition, consisting of a name and nothing more. This court has decided in a number of cases that the fact that a creditor has contracted with a company holding itself out as a cor- poration does not necessarily work an estoppel to deny its legal corporate existence. Spencer Field & Co. v. Cooks et al., 16 La. Ann. 153; Chaffe v. Ludeling et al., 27 La. Ann. 611; Williams v. Hewitt, 47 La. Ann. 1076, 17 South. 196, 49 Am. St. Rep. 394; Lehman v. Knapp e¢ al., 48 La. Ann. 1154, 20 South. 674. It is therefore ordered and decreed that the judgment appealed from be reversed, and it is now ordered and decreed that the excep- tions of no cause of action be overruled, and that this cause be re- manded for further proceedings according to law; costs of appeal to be paid by appellees. Nots. — Where the associates have not, in assuming to incor- porate, acted in good faith, a preliminary question arises. It seems always to have been the law in this country that a charter obtained by fraud was voidable, and not void (as to the English law, see Morgan v. Seaward, 2 M. &. W. 544, 561; Macbride v. Lindsay, 9 Hare, 574, 583; Robinson v. London Hospital, 22 L.J. Ch. 754, 757). Thus, if the legislature is induced by fraud to pass a special act of incorporation, the corporation comes into being, and the fraud is only a cause of forfeiture by the state. Charles River Bridge v. Warren Bridge, 7 Pick. (Mass.) 344, 370. Similarly, if the legislature has by a special or general law authorized a designated official or body to issue a charter or a certificate (which is made conclusive evidence of incorporation) upon the performance of conditions precedent, and the official or body is induced by fraud to issue such charter or certi- ficate. Rice v. Bank of Commonwealth, 126 Mass. 300 (Mass. Laws of 1903, chap. 437, § 12, provides that the certificate of the Secretary of State “shall have the force and effect of a special charter’); Nat’l Bank v. Rockefeller, 195 Mo. 15, 42 (the statute provides that the certificate of the Secretary of State “shall be taken by all courts of this State as evidence of the corporate existence of such corpora- tion”; the court held that the certificate was equivalent to a special 634 PROVIDENT BANK & TRUST CO. v. SAXON. (CHAP. I, act of the legislature; whether this was a sound construction of the statute, quaere); Centre Co. v. M’Conaby, 16 Serg. & R. (Pa.) 140, 1 Pen. & W. (Pa.) 426, 431; Travaglint v. Societa Italiane, 5 Pa. Dist. 441; German Ins. Co. v. Strahl, 13 Phila. (Pa.) 512. See also Pat- tison v. Albany Ass’n, 63 Ga. 373; Laflin Co. v. Sinsheimer, 46 Md. 315; U.S. Vinegar Co. v. Schlegel, 143 N.Y. 537; Cochran v. Arnold, 58 Pa. St. 399; Wells Co. v. Gastonia Co., 198 U.S. 177, 185. Simi- larly, if the designated official or body is induced by fraud to do an act the performance of which is one of the conditions precedent to incorporation. Duke v. Cahawba Co., 16 Ala. 372; Litchfield Bank v. Church, 29 Conn. 137, 148; Jones v. Dana, 24 Barb. (N.Y.) 395; Tar River Co. v. Neal, 3 Hawks (N.C.) 520. Wherever the legislature has authorized the formation of a cor- poration upon the performance of certain conditions precedent, the courts must necessarily determine whether the legislature intended to require a certain mental state in the corporators as one of these conditions. Considering the difficulty of proof on such a point, the courts may incline against such a construction of the law. See Im- porting Co. v. Locke, 50 Ala. 332, 334; Niemeyer v. Little Rock Ry., 43 Ark. 111, 120; Aurora Co. v. Lawrenceburgh, 56 Ind. 80, 87; Lin- coln Ass’n v. Graham, 7 Neb. 173; Atty.-Gen. v. Stevens, Saxt. Ch. (N.J.) 869, 378; Nat’l Docks Co. v. Central R.R., 32 N.J. Eq. 755; Terhune v. Midland Co., 88 N.J. Eq. 423; Atty.-Gen. v. Am. Tobacco Co.; 55 N.J. Eq. 352, 369, aff'd, 56 N.J. Eq. 847; Buffalo Co. v. Hatch, 20 N.Y. 157, 159; Wellington Co. v. Cashie Co., 114 N.C. 690; Coch- ran Vv. Arnold, 58 Pa. St. 399, 405; Windsor Co. v. Carnegie Co., 204 Pa. St. 459, and cases cited. Cf. Christian Co. v. Fruitdale Co., 121 Ala. 340, 345; Montgomery v. Forbes, 148 Mass. 249; Augir v. Ryan, 63 Minn. 373; Hill v. Beach, 1 Beasl. (N.J.) 31, 36; Jersey City Co. v. Dwight, 29 N.J. Eq. 242 (the learned vice-chancellor who decided this case assumed, 46 N.J. Eq. 130, that it could not stand with 32 N.J. Eq. 755. But see 49 N.J. Eq. 329, 335); Elizabeth Co. v. Green, 49 N.J. Eq. 329 (by five dissenting judges. Whether the majority was opposed on this point does not appear. The decision is explained in 52 N.J. Eq. 111, 144, on a ground consistent with this opinion by the dissenting judges); Farnham v. Benedict, 107 N.Y. 159, 169; Brun- dred v. Rice, 49 Ohio St. 640; McGrew v. City Produce Exchange, 85 Tenn. 572; Le Warne v. Meyer, 38 Fed. 191. See also Carey v. Cin- cinnati Co., 5 Ia. 357; Chicora Co. v. Crews, 6 S.C. 248, 275. In New Orleans Co. v. Louisiana, 180 U.S. 320, 330, Pecxuam, J., said: “If not created for a lawful purpose, the company was not created at all.” There is a dictum to the same effect by Lord HerscHELt in Salomon v. Broderip, [1897] A.C. 22, 48. The legislature may, however, require a certain mental state as a condition precedent to incorporation. Thus it may require that cer- tain subscriptions or payments be made in. good faith. And, it is SECT. 1.] PROVIDENT BANK & TRUST CO. v. SAXON. 635 submitted, where the legislature requires that certain statements be made and filed or recorded in a public office, the courts should hold that the legislature intended to require that such statements be made in good faith. Assume that such requirement is made. For example, the legisla- ture requires the associates to state the amount of capital stock sub- scribed and paid in. The associates make statements which are false, and which are known to be false. If incorporation fails because such statements are not made in good faith, it would seem to be clear that the associates should be held to full liability on their contracts. To say that A, the other contracting party, is estopped to show that the associates are not incorporated when the incorporation has failed because the associates made a representation which they knew was not true, and A has acted on it to his hurt, would be contrary to the principles underlying the law of estoppel. There is no equity in estopping A under these circumstances; the equity is all the other way. Here then is a case where justice between the parties and public policy both require that the associates be held to full liability. One may be permitted to be astonished at a doctrine which protects the associates, — it is contrary to the manner in which the courts deal with fraud in every other branch of the law. In Gow v. Collin Co., 109 Mich. 45, the plaintiff alleged that the statements of the associates in their certificate of incorporation re- specting their capital were false, and that he contracted with them relying on these statements; he sought to hold them to full liability. A demurrer to the bill was sustained. “The company, in form, was duly incorporated, was recognized by the public authorities, and filed its annual reports, and did business as a corporation. The complain- ants dealt with it as a corporation.” In substance, this was all the consideration which the court gave to the point. The decision is the more remarkable when compared with Doyle v. Mizner, 42 Mich. 332. In Cochran v. Arnold, 58 Pa.St. 399, the reasoning of the court goes as far as the decision in Gow v. Collin Co. But the statements, al- though technically untrue, do not seem to have been made in bad faith, and, in any event, the other contracting party knew all the facts. Laflin Co. v. Sinsheimer, 46 Md. 315. From portions of the opin- ion it would appear that the court dealt with the case as one of in- corporation secured by fraud. But elsewhere (p. 320) it says that the validity of the incorporation cannot be collaterally attacked ‘by proving aliuwnde the certificate of its incorporation that certain pre- requisites of the law had not been in good faith complied with.” In Webb v. Rockefeller, 195 Mo. 57, the court held that A, who had contracted with the associates as a corporation, could not recover in tort from them because he was not of the class intended to be influ- enced by the representations as to their capital. 636 COTTENTIN v. MEYER. [CHAP. I. On the other hand, there are the following authorities in support of the principal case. In Montgomery v. Forbes, 148 Mass. 249, the de- fendant falsely stated that the business of the corporation was to be carried on in a certain State; he thereafter purchased goods in the name of the corporation, and was held to full liability. There is a dictum to the same effect in Gartside Co. v. Maxwell, 22 Fed. 197. See also Cleaton v. Emery, 49 Mo. App. 345; Davidson v. Hobson, 59 Mo. App. 130; Hill v. Beach, 1 Beasl. (N.J.) 31, 36; Booth v. Wonderly, 36 N.J.L. 250. : In Brundred v. Rice, 49 Ohio St. 640, 650, where a corporation was not organized in good faith, but for the purpose of consummating an illegal agreement, the associates were held accountable for moneys nominally paid to the corporation. ‘The act of incorporating can be of no avail to them as a defense.” To the same effect is McGrew v. City Produce Exchange, 85 Tenn. 572. If the attempt at incorporation is not made in good faith, but per- sons purchase the stock in good faith, they should not be exposed to full liability to those who have contracted with the corporation. American Co. v. Heidenheimer, 80 Tex. 344. See also Minor v. Mechanics Bank, 1 Pet. (U.S.) 46, 66. COTTENTIN v. MEYER. 80 N.J.L. 52. 1910. Tue plaintiff sought torecover against certain individuals for breach of 2 contract in which the named obligor was the Cottentin Hotel Co. ~—Swayzs, J. We think the evidence justiffed the submission to the jury of the question whether the Cottentin Hotel Company was organized as a corporation at the time the plaintiff made the con- tract upon which his suit was brought. If, in fact, the certificate was not signed until August, there was no de facto corporation in the preceding April and the case is not controlled by the rule of Hacken- sack Water Co. v. De Kay, 9 Stew. Eq. 548, 559; Stout v. Zulick, 19 Vroom, 599, and Vanneman v. Young, 23 Id. 403. Nor does it come within the rule of Den v. Van Houten, 5 Halst. 270, and the numerous cases in other jurisdictions where a similar situation was presented. Those cases rest upon the doctrine of estoppel. In Den. v. Van Houten the mortgagor, by giving a mortgage in form to a corpora- tion, represented in effect to the assignee of the mortgage that the original mortgagee was in fact a corporation. In Close v. Glenwood Cemetery, 107 U.S: 466, Close, by making deeds in the name of the corporation for cemetery plots, represented that there was an actual corporation capable of owning and convey- ing the lots. There are cases which go further and hold that one who SECT. 1.] NOTE. 637 deals as with a corporation and thereby obtains a benefit, cannot afterwards, when sued in the corporate name, deny the actual exist- ence o1 the corporation. It is as Mr. Machen, in his recent book on Corporations, points out (§ 282), difficult to see how the principle _ot estoppel is applicable to such a case, since it can hardly be sup- posed that those who act as a corporation without even a colorable organization, can be misled into a belief that they are actually in- corporated by the representation of an outsider who is without their “means of knowledge. Even those cases, however, fall short of the “present. If, in fact, Meyer and McKenna were merely using the cor- porate name in which to make their own contracts, they were in no way misled by the act of Cottentin in entering into a written contract which expressly described the Cottentin Hotel Company as a New _Jersey corporation. On the contrary it was they who in that event mis- ed Cottentin by purporting to contract as a corporation and they can- not escape liability if, in fact, Cottentin Hotel Company was merely their trade name. This, under the evidence, was a jury question. Nore. — The assumption of the corporate privilege may, it is submitted, be called naked-wherever the associates have not fited or recorded or published their certificate of incorporation (or similar < paper) in-at least one of the ways provided by law. Where the assumption of the corporate privilege was naked, the associates have uniformly been held to full liability to the other con- —tracting party. Fortes v. Whittemore, 62 Ark. 229; Pettis v. Atkins, “CO TI 454; Chaffe v. Ludeling, 27 La. Ann. 607, 611; Johnson v. Corser, 34 Minn. 355 (see the explanation of this case in 52 Minn. 239, 244); Furniture Co. v. Crawford, 127 Mo. 356, 364; Abbott v. Omaha Smelting Co., 4 Neb. 416; McVicker v. Cone, 21 Or. 353; Haslett v. Wotherspoon, 2 Rich. Eq. (S.C.) 395. See also Brooke v. Day, 129 Ga. 694 (no colorable requirements with terms of charter); Bank v. Sheldon, 86 Kan. 460. In Bank of Watertown v. Landon, 45 N.Y. 410, the associates, after the expiration of their charter, a é business, and € business was continued ostensibly by a corporation. The plaintiff “Became the owner of a note signed in the name of the corporation, and “which he believed was made by a corporation de jure. The associates were held to full hability. Cf. the dictum in Miller v. Coal Co., 31 ‘W.Va. 836, 340-0—S—~—~— NOTE. On the liability of the agent of a corporation, by assumption, to the other contracting party see Coleman v. Coleman, 78 Ind. 344, 346; Hurt v. Salisbury, 55 Mo. 310; Lagrone v. Timmerman, 46 8. C. 372. 638 SOCIETY PERUN v. CLEVELAND. [cHAP. I. SECTION 2. WHERE THERE HAVE BEEN NO DEALINGS BETWEEN THE PARTIES ON A CORPORATE BASIS. SOCIETY PERUN v. CLEVELAND. 43 Ohio 481. 1885. Action by city of Cleveland to foreclose a mortgage, as against certain subsequent grantees, mortgagees, and purchasers. Perun, a corporation, January 29, 1874, executed and delivered a mortgage to “the city. This mortgage was not filed for record until October 21, 1879. In February, 1874, certain persons attempted to organize, a a_corporation by the name of Society Perun. n May, 1874, Perun delivered to Society Perun its deed, purporting “to convey to the latter the premises theretofore mortgaged to the city. Between that date and October 21, 1879, Society Perun, acting in its supposed corporate capacity, executed and delivered deeds and — mortgages, purporting to convey and incumber parcels of these mort-— gaged premises tO various parties, who are made defendants in the present suit. During the pendency of the present foreclosure suit, it was adjudged, in a quo warranto proceeding, instituted by the Attorney-General, that the persons who attempted to incorporate _under the name of Society Perun had not been legally incorporated, and that their attempted organization as a corporation was wholly void; and a decree of ouster was rendered. Upon the trial of the ~present foreclosure suit in the District Court, the plaintiff gave in evidence, against the objection of the defendants, the record of the quo warranto proceedings. Defendants offered evidence tending to prove an attempt in good faith to incorporate Society Perun. This evidence was excluded, and defendants excepted. ‘The District Court found, among other things, that, as to the city of Cleveland, Society Perun was not @ corporation either in law or in fact; thatthe conveyance to it by Perun was void as against the city; and that the claims of all the defendants (except certain claims for taxes and improvements) were subsequent and inferior to the lien of the city. “To reverse the judgment rendered upon these findings, error was brought. Owen, J. The defendants below, conceding that Society Perun had never been a corporation de jure, maintain that the court below should have permitted them to prove that such society was a de facto corporation; that it attempted, in good faith, to become a body SECT. 11.] SOCIETY PERUN 0. CLEVELAND. 639 corporate; proceeded to act and transact business in good faith under the supposed authority of incorporation, and that its acts ought not . ao been declared to be wholly void as against the city of Cleve- and. The judgment of ouster was an adjudication between the State and the society upon the right of the latter to exercise corporate franchises. For the purposes of such adjudication it was competent for this court to consider and determine what had been its status from its first attempt to incorporate. But it had no power to pass upon or determine the rights of parties not before it. It was not competent for this court to determine in that proceed- ing that Society Perun had never been a corporation de facto, or that its acts and business transactions, under the color of its supposed charter powers, were void. The authority of the court in that behalf was derived from § 6774 (Rev. Stats.), which provides: “When a defendant is found guilty of usurping, intruding into, or unlawfully holding or exercising an office; franchise, or privilege, judgment shall be rendered that such defendant be ousted and altogether excluded therefrom, and that the relator recover his costs.” When the court had excluded the society from its franchises to be a corporation, it exhausted its jurisdiction over the subject-matter. —ithad no power to speak concerning whatever rights may have been acquired by the society as a corporation de facto, or by third parties —hrtheir transactions with it as an acting corporation. =| ee ered by the city that parties who had recognized the existence of the society by their transactions with it as a supposed corporation are estopped to deny its corporate existence. But it is maintained that the city, having engaged in no transactions with it, is free to challenge its existence as a corporation de facto as well as de jure. The argument is that: “‘No case can be found where it is held that there is a corporation de facto against persons who have in no way recognized its existence as a corporation,” and that: ‘‘The notion of a de facto corporation is based on the doctrine of estoppel; when estoppel can not be invoked there can be no de facto corpora- tion.” The theory that a de facto corporation has no real existence, that it is a mere phantom, to be invoked only by that rule of estoppel which forbids a party who has dealt with a pretended corporation to deny its corporate existence, has no foundation, either in reason or authority. A de facto corporation is a reality. It has an actual and substantial legal existence. It is, as the term implies, a corporation. “It is a self-evident proposition that a contract can not be made with a corporation unless the corporation be in existence at the time. A real contract with an imaginary corporation is as impossible, in the nature of things, as a real contract with an imaginary person. It is essential, therefore, in order to establish the existence of a contract 640 SOCIETY PERUN v. CLEVELAND. [cHaAp. 1. with a corporation, to show that the corporation was in existence, at least de facto, at the time the contract was made.” Morawetz Private Corporations, § 137. It is bound by all such acts as it might rightfully perform as a corporation de jure/ Where it has attempted in good faith to as- sume corporate powers; where its proceedings in that behalf are colorable, and are approved by those officers of the state who are authorized to act in that regard; where it has honestly proceeded for a number of years, without interference from the State, to transact business as a corporation; has been reputed and dealt with as a duly incorporated body, and valuable rights and interests have been acquired and transferred by it, no substantial reason is suggested why its corporate existence, in a suit involving such transactions, , should be subject to attack by any other party than the State, and then only when it is called upon in a direct proceeding for that pur- pose, to show by what authority it assumes to be a oa Proof was offered upon the trial below to show, (1) that the persons seeking to incorporate first filed with the Secretary of State a certi- ficate which fully complied with the requirements of the statutes, and free from the defect which finally proved fatal to its existence, but which was disapproved by the Attorney-General; (2) that the certificate of incorporation which was finally filed with the Secretary of State recited that, “said association has been formed and or- ganized for the mutual protection and relief of its members, and for the payment of stipulated sums of money to the families or heirs of the deceased members of said association; that the officers of said association have been duly chosen; that for the purpose of becoming a body corporate under an act passed by the general assembly of the State of Ohio, entitled, an act supplementary to an act, entitled an act to provide for the creation and regulation of incorporated com- panies in the State of Ohio, passed May 1, 1852, passed April 20, 1872”; (8) that this certificate was approved by the Secretary of State, and also by the Attorney-General, as provided by the statutes (69 Ohio L. 150); (4) that it proceeded in good faith to transact busi- ness peculiar to corporations provided for by the act under which it attempted to incorporate. All this was excluded, and the decision of the. court below practi- cally rested on the proof offered by the city, that Society Perun had been ousted of its franchises, which was evidently construed as de- termining that such society had from the first no corporate existence, either de jure or de facto, and consequently no capacity to receive or impart any interest in or title to real estate except as against such parties as were by reason of their recognition of or dealings with it, estopped to deny its incorporate existence. Did the court err? This fairly presents the controlling and very important question: Was it competent to show, as against a party SECT. 11.] SOCIETY PERUN Jv. CLEVELAND. 641 who was not estopped to deny its corporate existence, that Society Perun was, at the time of the transactions involved in controversy, a corporation de facto? In Attorney-General ex rel. Pettee v. Stevens, Saxton (N.J. Eq.) 369, the relator sought to enjoin the Camden and Amboy Railroad and Transportation Company and others acting under its authority from erecting a bridge over a navigable stream. The claim was that the act authorizing the corporation had been perverted and disregarded, and that there was no legal incorporation. The relators were in no manner estopped to attack the corporate existence of the respondent. ‘rhe court held: — ‘Where a set of men claiming to be a legally incorporated com- pany under an act of the legislature, have done everything necessary to constitute them a corporation, colorably at least, if not legally, and are exercising all the powers and functions of a corporation; they are a corporation, de facto, if not de jure; and this court will not interfere, in an incidental way, to declare all their proceedings void, and treat them as a body having no rights of powers.” The chancellor, speaking for the court, said: — “Here, then, is a set of men claiming to be a legally incorporated company under the act of the legislature, exercising all the powers and functions of a corporation. They are a corporation de facto, if not de jure. Every thing necessary to constitute them a corporation has been done, colorably at least, if not legally; and I do not feel at lib- erty, in this incidental way, to declare all their proceedings void, and treat them as a body having no rights or powers. It has been seen that the court will not do this where a corporation properly organized has plainly forfeited its privileges; and there is but little difference in principle between the two cases. In both the corporation is actu- ally in existence, but whether legally and rightfully so is the question. And it appears to me that if the court can take cognizance of the matter in this case, it must in all others where it can be brought up, not only directly, but incidentally.” This case is approved and followed in National Docks R. Co. v. Central R.R. Co., 32 N.J. Eq. 755, which held: ‘“When a corporation exists de facto, the court of chancery can not, at the instance of priv- ate parties, restrain its operations upon the ground that its organiza- “tion 1s not dé i uo warranto, or_information in the nature thereof, instituted by the Attorney- “General” The rule of estoppel found no place in this case: —Th S.-& LOGR. Co. v. 8. & C. R.R-Co., 45 Cal. 680, it was held that: “if a corporation de facto is in the actual possession of a public highway, under a grant of a franchise to improve and collect tolls on the same, a mere trespasser can not justify his entry thereon on the ground that it was only a corporation de facto, and was not de jure entitled to the franchise.” 642 SOCIETY PERUN v. CLEVELAND. [CHAP. I. In Williams v. Kokomo B. & L. Ass’n., 89 Ind. 339, one Leach gave to an acting corporation his mortgage on real estate. Sub- sequent to the execution and recording of it, he executed another mortgage on the same land to Williamson. In a proceeding to fore- close the junior mortgage, Williamson maintained that the pretended corporation had no legal existence, by reason of defects and omis- sions in the proceedings to incorporate, and that the senior mortgage was void. He was in no manner estopped, by dealings with, or rec- ognition of, the first mortgagee to deny its corporate existence. The court held that: ‘(A junior mortgagee can not defeat a senior mort- gage by showing that the corporation to which the senior mortgage was executed was defectively organized, if it be a corporation de facto.” Exxtot, J., said: “Where persons assume to incorporate under the laws of the State, and in part comply with their requirements, assume corporate functions and transact business as & corporation, private persons can not collaterally question the right of such an association tO 4 corporate existence, although there has not been a full compliance with the provisions of the statute. Baker-v-—Wef,, 73 Ind. 68. This rules not limited to cases where one by contract admits corporate existence, but is arule of general application.” It is not easy “to distinguish the principle of this casé from that. of the case at bar. In Pape v. Capital Bank, 20 Kan. 440, Pape and wife gave their notes to ‘‘James M. Spencer or bearer,” and their mortgage on real estate to secure them. Spencer transferred the notes to the Capital Bank of Topeka, an acting corporation, with this indorsement: “‘ Pay the bearer, without recourse on me; James M. Spencer.” The mort- gage was also transferred to the bank, which proceeded by suit to coilect the notes and foreclose the mortgage. Pape and wife inter- posed the defense that the bank was not, and néver had been, a body corporate, by reason, among others, of a defective organization. The bank had assumed corporate functions after an attempt, in good faith, to incorporate, and for a number of years was in the actual and notorious exercise of corporate franchises. Pape had transacted banking business with the plaintiff prior to the purchase of the notes and mortgage, but such business was wholly unconnected with the notes and mortgage in suit. His wife, however, had not in any man- ner recognized the existence of the bank as a corporate body, and the doctrine of estoppel was not invoked to aid the court in sustaining a judgment of foreclosure against Pape and wife. Brrewemr, J., says: “The corporation is one de facto; and only the State can inquire, and that, in a direct proceeding, whether it be one de jure... . ‘There must, in such cases, be a law under which the incorporation can be had; there must, also, be an attempt, in good faith, on the part of the corporators, to incorporate under such law; and when, after this, there has been for a series of years an actual, open, and notorious exercise, unchallenged by the State, of the powers of a corporation, SECT. 11.] SOCIETY PERUN v. CLEVELAND. 643 one who is sued on a note held by such corporation will not be per- mitted to question the validity of the incorporation as a defense to the action. No mere matters of technical omission in the incorpora- tion, no acts of forfeiture from misuser after the incorporation, are subjects of inquiry in such an action. This is not upon the ground of equitable estoppel but upon grounds of public policy. If the State, which alone can grant the authority to incorporate, remains silent during the open and notorious assertion and exercise of corporate powers, an individual will not, unless there be some powerful equity on his side, be permitted to raise the inquiry.” .. . In the case at bar, the certificate which was last filed by the so- ciety embraced a full statement of the objects of incorporation and indicated what the nature of its business must necessarily be, and was strongly suggestive of the manner in which it must necessarily be transacted; and while it is not our purpose to call in question the action of this court in the quo warranto proceedings, we have no hesitation in saying that if we were now called upon to determine whether the corporate life of Society Perun should be taken, the question, upon the facts offered in proof at the trial below, would not be free from doubt and difficulty. It is very clear that the proceed- ings to incorporate were colorable; and so far as this fact is a test of the existence of a corporation de facto, it is most amply established. That there was proof of user is manifest from the evidence which was received without objection. That the judgment of ouster did not and could not have a retro- active effect upon the rights of the society, and of parties who had “dealt with it during its de facto existence, is suggested by the opin- ion of Wricut, J., in Gaff v. Flesher, 33 Ohio St. 115. The evidence which was offered and excluded would, if credited, have shown Society Perun capable of holding and transferring the legal title to the Jands in controversy. Walsh v. Barton, 24 Ohio St. 43; Darst v. Gale, 83 Ill. 136; Shewalter v. Pirner, 55 Mo. 218; Nat. Bank v. Matthews, 98 U.S. 628; Goundie v. Northampton Water Co., 7 Penn. St. 233; Barrow v. Nashville Turn. Co., 9 Humph. 304; Kelly v. People’s Trans. Co., 3 Ore. 189; Bogardus v. Trinity Church, 4 Sandf. Ch. 758. The public and all persons dealing with this society were justified in assuming that the certificate filed with the Secretary of State, and by him admitted to record in his office, had been approved by him, and also by the Attorney-General, as required by statute (69 Ohio L. 150), and that it so far conformed to all legal requirements that, as provided in § 2 of the act of incorporation (69 Ohio L. 83), “a copy, duly certified by the Secretary of State, under the great seal of the State of Ohio, shall be evidence of the existence of such association.” It would_se rtific ol- lowed by uninterrupted and unchallenged user for nearly six years, ~~ 644 SOCIETY PERUN v. CLEVELAND. [cHap. 1. of all of which proof was tendered, would constitute a corporation “de facto, if such a body is, under any circumstances, entitled to legal recognition. -—The highest considerations of public policy and fair dealing protest against treating such an organization as a nullity, and all of its trans- actions void. The principle of the above cases is to be distinguished from a case where a mere corporation de facto attempts to assert the power of eminent domain by the appropriation of private property to public use. It has been held that the exercise of this right (which is but a delegation of the sovereign power of the State), depends upon the sufficiency and legal validity of the certificate of incorporation and public record of its organization. R.R. Co. v. Sullivant, 5 Ohio St. 276; Atkinson v. R.R. Co., 15 Ohio St. 21. The case of Raccoon River Nav. Co. v. Eagle, 29 Ohio St. 288, is relied upon by the defendant in error. It was an action to recover upon a stock subscription. A plea of nul tiel corporation was inter- posed. The plaintiff claimed to be organized under an act to au- thorize the incorporation of companies ‘‘for the purpose of improv- ing any stream of water... declared navigable by any law of the State of Ohio.” On the trial the plaintiff offered in evidence a certi- ficate by which it appeared that the company was formed for the purpose of improving, etc., Big Raccoon River. Unfortunately there was no navigable stream in Ohio by that name. No other testimony was offered. There was no proof of user. There was no defect in the form of the proceedings to incorporate, but an attempt to organize and incorporate for a purpose impossible of accomplishment. There was neither a de jure nor de facto corporation. Judgment was properly rendered for defendant. In excluding proof of what was actually done looking to the incor- poration of Society Perun, and of the subsequent acts of user, which was offered in evidence, there was error. Judgment reversed. —_-_ Norte. — See, accord, Denver v. Mullen, 7 Colo. 345, 358 (lessees of a de facto corporation protected); Duggan v. Colorado Co., 11 Colo. 113 (mortgagee protected); Georgia Co. v. Mercantile Co., 94 Ga. 306 (mortgagee protected); Finch v. Ullman, 105 Mo. 255 (grantee maintained ejectment); Crenshaw v. Ullman, 113 Mo. 633; Lusk v. Riggs, 102 N.W. Rep. 88 (Neb.); Saunders v. Farmer, 62 N. H. 572 (grantee maintained a writ of entry); Hackensack Co. v. DeKay, 36 N.J. Eq. 548, 559 (mortgagee protected). See also the reasoning of the court in Quinn v. Shields, 62 la. 129, 139; Keene v. Van Reuth, 48 Md. 184, 193; Elizabethtown Co. v. Green, 49 N.J. Eq. 329, 337; American Co. v. Heidenheimer, 80 Tex. 344, 348; Ricketson v. Galligan, 89 Wis. 394. In Fay v. Noble, SECT. 11.] BREWER v. THE STATH 645 7 Cush. (Mass.) 188, the plaintiff did not ask for relief on this ground. It is submitted that the courts should go far in denying collat- eral attack for the benefit of innocent third persons where the only question 1s whether the corporation by assumption may be a conduit of title.” But in American Trust Co. v. Minnesota Co., 157 Ill. 641 (no law), and Bradley v. Reppell, 133 Mo. 545 (expiration of charter), collateral attack was permitted. See, however; Sherwood v. Alvis, 83 Ala. 115, 118; Brickley v. Edwards, 131 Ind. 3, 7; Reynolds v. Myers, 51 Vt. 444, 445; Smith v. Sheeley, 12 Wall. (U.S.) 358; County of Leavenworth v. Barnes, 94 U.S. 70. BREWER v. THE STATE. oO 7 Lea (Tenn.) 682. 1881. Turney, J., delivered the opinion of the court. Brewer was indicted and convicted in the circuit court of Han- cock county, for selling intoxicating liquors within four miles of “McKinney High School,” an incorporated institution of learning. The proof shows the sale to have been in the town of Sneedville, aes four hundred yards of the building in which the school was taught. ; The act of 1875, chap. 142, entitled “An act to provide for the organization of corporations,’ makes provision for the organization of such corporations as the “‘McKinney High School.” The charter of said institution was passed in the form required by law, and was acknowledged and registered and transmitted to the Secretary of State, but his certificate and the fac simile of the seal of the State had not been registered in the county at the time of the alleged offense. By § 3 of the act it is provided: “The said instrument registered as aforesaid, shall be transmitted to the Secretary of State, who shall copy the same in a book to be kept for that purpose, with the probates, acknowledgments, certificates of clerk, register, etc. The Secretary of State shall then certify in the original instrument, that the same has been registered in his office, to which certificate shall be affixed the great seal of the State, and upon the affixing of the great seal of the State to said certificate or said original instrument, and the registration of said Secretary’s certificate and the fac simile of said seal in the register’s office where said instrument was originally reg- istered, the formation of the association as a body politic and cor- porate is hereby declared complete, and the validity of the same shall not be in any legal proceeding collaterally attacked.” As we have seen, these things were not done when the offense is alleged to have been committed; hence the “McKinney High 646 EAST NORWAY LAKE CHURCH ¥. FROISLIE. [CHAP. I. School” was not then an incorporated institution in the sense of the statute, the defendant is therefore not guilty of the offense charged. It is urged on the part of the State that § 20 of the act enacts “that the Secretary of State shall have published and bound with the acts of each general assembly a certified list of all corporations organized under this or any subsequent act of the Legislature, since the last publication, giving the name and date of organization of each corporation, and such publication shall be legal evidence of the exist- ence of such corporations.” That this section having been complied with, the offense was complete. The object of this section was convenience simply. The legal evidence created by it is only prima facie, and may be, as it was in this case, rebutted. Reversed. EAST NORWAY LAKE CHURCH ». FROISLIE. Loh ae 37 Minn. 447, 1887. ae ‘Tur plaintiffs in this action are “The Trustees of the East Nor- way Lake Norwegian Evangelical Lutheran Church of Kandiyohi County, Minnesota,” and “The Trustees of the West Norway Lake Norwegian Evangelical Lutheran Church of Kandiyohi County, Minnesota,” and they brought the action in the District Court for ‘Kandiyohi County, to recover the possession of certain real property detained by the defendant, and of which the plaintiffs allege that they are the joint owners. The answer denies plaintiffs’ incorpora- tion and ownership. Mitcueti, J.... Defendants, however, attack plaintiffs’ title. They claim that they Were never legally organized, and hence were incapable of taking or holding property. The points made in support of this contention are that the meetings at which the organizations were attempted to be made were not held after sufficient notice; that the certificates of incorporation were not properly executed, ac- knowledged, or recorded, etc.; and that Sp. Laws 1878, chap. 193, purporting to legalize the organizations, is unconstitutional. Under the view we take of the case it is wholly unnecessary to consider any of these questions. The plaintiffs are at least corporations de facto. Such a corporation, af Teast where there is a aw under which a cor- —poration-might have been legally f ormed with such power, is capable of talking anc holding property as grantee corporation jure, and conveyances to it are valid as to all the world, except the state in proceedings in quo warranto, or other direct proceedings to “jnquiré into its right to exercise corporate franchises. And in an action by it to recover such property, no private person will be al- Towed to inquire collaterally into the regularity of its organization. SECT. 11.] EAST NORWAY LAKE CHURCH 2. FROISLIE. 647 This rule is not founded upon any principle of estoppel, as is some- times assumed, but upon the broader principles of common justice and public policy. It would be unjust and intolerable if, under such circumstances, every interloper and intruder were allowed thus to take advantage of every informality or irregularity of organization. Judgment affirmed: Nort. — There is authority that if a conveyance purports to run to a corporation, and there is no corporation de jure, the deed is void, and the grantor may successfully assert title to the land or chattels against the associates. Harriman v. Southam, 16 Ind. 190 (overruled in Snyder v. Studebaker, 19 Ind. 462); Whiting v. Barton, 204 Mass 169; Douthitt v. Stinson, 63 Mo. 268 (distinguished in Reinhard v. Virginia Co., 107 Mo. 616, and White Oak Society v. Murray, 145 Mo. 622); White v. Campbell, 5 Humph. (Tenn.) 38; Russell v. Topping, 5 McLean (U.S.) 194, 202 (but this cannot stand after Smith v. Sheeley, 12 Wall. (U.S.) 358). But by the weight of authority it is held that (at least if there is a de facto corporation in the restricted sense stated in the note to Boyce v. Towsontown Station, supra) the transferor and those in privity with him are estopped to assert title. Cahall v. Citizens Ass’n, 61 Ala. 232; Bates v. Wilson, 14 Colo. 140; Thompson v. Candor, 60 Ill. 244; Baker v. Neff, 73 Ind. 68; Williamson v. Kokomo Ass’n, 89 Ind. 389 (junior mortgagee cannot defeat prior mortgage to de facto corporation) ; Sword v. Wickersham, 29 Kan. 746; Reinhard v. Virginia Co., 107 Mo. 616; Frost v. Frostburg Co., 24 How. (U.S.) 278. And in Otol Ass’n v. Doman, 95 N.W. (Neb.) 327, a de facto corporation main- tained a proceeding against its grantor for reformation of the deed. Where the associates have expended money for the transfer or on the property transfer: rotected in equity. See Walker v. Taylor, 252 Til. 424, 430; Johnson v. Northern Trust Co., 265 Ill. 263; Whipple v. Parker, 29 Mich. 369, 381. _It is submitted that the courts should go further. The circum- _ stances frequently are such that to vest the title in the associates would more nearly accord with the intent of the parties than to declare the title to be still in the transferor. Under such circum- stances, if the transfer fails, as a transfer to a corporation, it ought to be held to avail, as a transfer to the.associates. In Maugham v. Sharpe, 17 C.B. (n.s.) 443, chattels were mortgaged to “The City Investment and Advance Company.” The mortgagor believed he was conveying to a corporation (per Erg, C.J., at p. 462); but there was no such corporation authorized by the State. The court held that the title passed to the individuals doing business under that name. Wuti1aMs, J., said (p. 463): “I apprehend, the meaning of the grant is plain: the deed purports and intends to con- vey the goods to those persons who use the style and firm of the City 648 EAST NORWAY LAKE CHURCH v. FROISLIE. [CHAP. I. Investment and Advance Company. They may or may not be a corporation; but when it is ascertained that those who carry on busi- _ Sees ni ta arn are conta te Mie et anerats ta cor vey the property to them.” Jones v. Aspen Co., 21 Colo. 263, 271; ew Haven Wire Co. Cases, 57 Conn. 352, 394; accord. See also Farnsworth v. Drake, 11 Ind. 101; Fay v. Noble, 7 Cush. (Mass.) 188, 194; American Silk Works v. Salomon, 6 T. & C. (N.Y.) 352. The English courts would follow Maugham v. Sharpe, if the sub- ject of the conveyance was realty. Wray v. Wray, [1905] 2 Ch. 349. In Byam v. Bickford, 140 Mass. 31, Devens, J., said (p. 32): “But the South Chelmsford Hall Association was a body well known, all ~the members of which could be ascertained; and, as it could not take as a corporation, the deed may properly be construed as a grant of ~ the estate to those who were properly described by this title. .~ . The persons associated in the society were thus tenants in common of the Iand conveyed.” See also Hart v. Seymour, 147 Ill. 598, 610; Clifton Heights Co. v. Randell, 82 Ia. 89. Where a transfer of property has been made, in form, to a cor- poration, and the title is in the associates, as many, if not in them as a corporation, the court should not, it is submitted, permit collateral attack upon the due incorporation of the associates by a person who has illegally interfered with that property. If there is a transfer to a de facto corporation (in the restricted sense stated above), the authorities permit a suit by the de facto Tporation against any person who illegally interferes with that property. In accord with the principal case, see Chiniquy v. Bishop —@ Chicago, 41 Ill. 148; Cincinnati Co. v. Danville Co., 75 Ill. 113 (in- junction to restrain irreparable i injury to property); Williams v. Citi- zens Co., 1380 Ind. 71 (same); Buffalo Co. v. Cary, 26 N.Y. 75, 77-78; Remington Co. v. O’Dougherty, 65 N.Y. 570 (conversion); Persse Works v. Willett, 1 Rob. N.Y. 131 (trespass upon personality) ; A mer- ican Silk Works v. Salomon, 6 T. & C. (N.Y.) 352 (conversion); ‘Elizabeth Academy v. Lindsey, 6 Ired. (N.C.) 476 (conversion); Searsburgh Co. v. Cutler, 6 Vt. 315, 323 (“For the purpose... of protecting the property . . . from tert-feasors, it is enough to show a corporation de facto”); Baltimore Co. v. Baptist Church, 187 U.S. 568, 572 (nuisance. A de facto corporation may maintain an action “against any one... who has done it a wrong.”); American Co. v. New York, 68 Fed. 227. But cf. Proprietors of Southold v. Horton, 6 Hill (N.Y.) 501; Augusta Co. v. Vertrees, 4 Lea (Tenn.) 75; Slo- cum v. Providence Co., 10 R.I. 112, 114. Similarly, an association de facto may recover for use and occupa- tion of land. Philippine Sugar Co. v. United States, 39 Ct. Cl. 225. Similarly, a de facto corporation may maintain proceedings to remove a ¢ an it. Keyes v. Smith, 2 SECT. I1.] INDIANAPOLIS FURNACE CO. 0. HERKIMER. 649 Similarly, if the holder of a note indorses it to a de facto corpora- tion, such corporation may enforce the note against the parties thereto. Cozzens v. Chicago Co., 166 Ill. 213; Wilcox v. Toledo Co., 43 Mich. 584, 590; Haas v. Bank of Commerce, 41 Neb. 754. ; It is submitted that collateral attack may properly under some circumstances be denied to a wrongdoer, even if there was not a de jacto corporation (in the restricted sense stated above). Cf. inget v. Quincy Building Ass’n, 128 Ill. 67, supra; Stoutimore v. Clark, 70 Mo. 471, supra; Wilder Mfg. Co. v. Corn Products Refining Co., 236 U.S. 165, supra. But in American Trust Co. v. Minnesota Co., 157 Ill. 641, the courts announce the doctrine that no suit against a wrongdoer witt be permitted in the name of the corporation, if there was no law under which such a corporation could have been legally formed. See also Johnson v. Northern Trust Co., 265 Ill. 263. INDIANAPOLIS FURNACE CO. ». HERKIMER. 46 Ind. 142. 1874. ComptaintT by the appellant against the appellee on the following paper subscribed by the defendant: — “Articles of association of the Indianapolis Furnace and Mining Company, organized for the purpose of operating in the counties of Marion and Clay, in the State of Indiana. “ Article First. The name of said company shall be the Indianapolis Furnace and Mining Company. “ Article Second. The capital stock of said company shall be one hundred thousand dollars, and be divided into shares of fifty dollars each, to be paid for in such amounts and at such times as may be ordered by the board of directors. “ Article Third. The stockholders shall elect directors, who shall from their number elect a president, secretary, and treasurer, who shall hold their office for one year and until their successors are elected and qualified. “ Article Fourth. The board of directors shall have the control and management of the business of the company, except as they may appoint some one or more persons to take charge of the same, in which case the record of the action of the board in appointing them shall be evidence of their authority to act for said company. “ Article Fifth. The board of directors shall have power to make assessments on stock, collect the same, issue certificates therefor, and declare and pay dividends, which shall be at least twice a year. “ Article Sixth. All the expense incurred by the company shall be paid, and all the indebtedness of the same shall likewise be discharged 650 INDIANAPOLIS FURNACE CO. v. HERKIMER. [cHaP. I. ‘before any dividends shall be paid to the stockholders, unless the directors shall direct otherwise. “ Article Seventh. We, the undersigned, hereby subscribe to all the foregoing articles, provisions, conditions, and stipulations, and agree to the organization of a company as therein stated, binding ourselves to take and pay for the number of shares of stock set oppo- site our names respectively, and pay for the same at such times and in such amounts as the board of directors may order the same to be paid for, without relief from valuation or appraisement laws. ‘Subscribers’ Names. No. of Shares. “J. D. Herkimer, by D. Root, 100.” Worpen, J. The articles of association signed by the defendant, including his subscription for stock, were very clearly mere prelimi- “Gary aitisles, contemplating a Tutte perfection of the organization as a corporation. The defendant’s contract did not purport to be —with-an existing corporation, but with one to be brought into exist- ence in the future. The averment in the complaint that the plaintiff was, at the time the subscription was made, an existing corporation, cannot change the nature and legal effect of the defendant’s con- tract. That contract was, in legal effect, that the defendant would take and pay for the stock subscribed for, in case the organization should be perfected and the corporation brought into legal existence, and not otherwise. Such preliminary subscriptions seem to enure to the benefit of the corporation when formed. Heaston v. The Cin- cinnatt, etc., Railroad Co., supra. But unless the subsequent steps, necessary to bring into existence the corporation, were taken, there was no corporation to whose beneht the contract could enure, and the defendant could not be “Table; and it should have been averred in the complaint that such steps had been taken. Wert v. The Crawfordsville and Alamo Turn- pike Co., 19 Ind. 242; Williams v. The Franklin Township Academical, Association, 26 Ind. 310. In such case, the estoppel growing out of a contract with a party as an existing corporation does not apply. In the case last cited the court say: “This rule of estoppel does not apply to a suit brought on a sub- scription made wi ew to the organization of a corporation, and as preliminary thereto, where other acts are required by the law as @ condition precedent to the exercise of corporate powers.” [The court held that the conditions precedent to the formation of a corporation had not been performed, and that therefore the defend- ant could not be required to pay for the stock .subscribed.] Not. — See, accord, Schloss v. Montgomery Co., 87 Ala. 411; Nelson v. Blakey, 47 Ind. 38; Reed v. Richmond Co., 50 Ind. 342, 83 Ind. 9, Rikhoff v. Brown’s Co., 68 Ind. 388; Coppage v. Hutton, 124 SECT. Il.] NEW YORK CABLE CO. ¥. MAYOR OF NEW YORK. 651 Ind. 401; Allman v. Havana Co., 88 Ill. 521; Richmond Ass'n v. Clarke, 61 Me. 351; Taggart v. Western Co., 24 Md. 563; Katama Land Co. v. Holley, 129 Mass. 540; Columbia Co. v. Dixon, 46 Minn. 463, 465; Capps v. Hastings Co., 40 Neb. 470; Dorris v. Sweeney, 60 N.Y. 463; Greenbrier Exposition v. Rodes, 37 W.Va. 738. See also McIntire v. McLain Ass’n, 40 Ind. 104; Stowe v. Flagg, 72 Ill. 397; Mansfield Co. v. Drinker, 30 Mich. 124; Crocker v. Crane, 21 Wend. (N.Y.) 211; Wilmington. Co. v. Wright, 5 Jones (N.C.) 304. But of. Willard v. Church of Rockville Centre, 66 Ill. 55. NEW YORK CABLE CO. ». MAYOR, eErc., OF NEW YORK. 104. N.Y. 1. 1887. Appeat from order of the General Term of the Supreme Court in the-first-judicial department, made December 1, 1884, denying a motion on the part of the petitioner, the New York Cable Railway Uompany, to confirm the report of corimissioners appointed by the ‘Bupreme Court to determine whether the railways described in the = aahion Bk aid coupe ee te constructed and operated. ihe report of the commissioners was in favor of the petitioner. The refusal to confirm their report was upon the ground thatthe —petitioner had no legal right to construct or operate a railway. ——~RaPatto, J... . Third. It is claimed that this court-overlooked the authorities cited on the appellants’ points, to the effect that a defect in articles of association or in the affidavits annexed thereto, is not fatal to the existence of a corporation or its faculty to acquire franchises, but that the State alone can interpose and take advantage of such defects. This court did not deem it necessary to comment in its opinion upon those authorities, for the simple reason that we did not deem them applicable to the case at.bar. In order to sustain proceedings by which a body claims to be a corporation, and as such empowered to exercise the right of eminent domain, and-under that right to take ‘the property of a citizen, it is not sufficient that it be a corporation de facto. It must be a corporation de jure. Where it is sought to take —the property of an individual under powers granted by an act of the legislature to a corporation to be formed in a particular manner the constitutional protection of the rights of private property re- quires that the powers granted by the legislature be strictly pursued, and all the prescribed conditions be performed. Where the power is conferred upon a corporation, duly formed, it will not-be defeated ¥ because the corporati atk ich may be se_of forfeiture of its rights and franchises, for it rests with the State to determine whether such forfeiture will be enforced. 652 NEW YORK CABLE CO. v. MAYOR OF NEW YORK. (CHAP. I, Judicial proceedings are necessary to enforce such a forfeiture, and it may be waived. That was the point to which the opinion in the matter of the Brooklyn, etc., Railroad Company (72 N.Y. 245), cited by the appellant was directed. It was assumed that this distinction was well understood, and a considerable portion of the opinion of this court in the present case was devoted to showing that the omissions and_def the company were failures to _ comply with the conditions precedent to the existence of the peti- “fioner as a corporation, and the exercise by it of the right of eminent domain, mnstead of being mere causes of forfeiture of rights acquired. Note. — See, accord, Piper v. Rhodes, 30 Ind. 309 (assessment by de facto turnpike company); McIntire v. McLain Ass’n, 40 Ind. 104 (assessment by de facto drainage company) ; Newton Co. v. Nofsinger, 43 Ind. 566 (same); Knight v. Flatrock Co., 45 Ind. 134 (assessment of tax in aid of de facto turnpike company); Williamson v. Kokomo Ass’n, 89 Ind. 389, 392 (condemnation) ; Hopkins v. Kansas City Co., 79 Mo. 98 (condemnation); St. Joseph Co. v. Shambaugh, 106 Mo. 557, 566 (condemnation); Hampton v. Clinton Co., 65 N.J.L. 158, 160 (“There is no doubt that,non-compliarice with conditions precedent to incorporation will defeat a condemnation”’); Matter of Union Co., 112 N.Y. 61 (condemnation) ; Matter of New York Co., 35 Hun (N.Y.) 220 (same. On appeal, 99 N.Y. 12); Matter of Broadway Co., 73 Hun (N.Y.) 7, 13 (same); Kinston Co. v. Stroud, 182 N.C. 413 (same. Cf. Wellington Co. v. Cashie Co., 114 N.C. 690); Adlantic Co. v. Sullivant, 5 Ohio St. 276 (same); Atkinson v. Marietta Co., 15 Ohio St. 21 (same); Powers v. Hazelton Co., 33 Ohio St. 429 (same); Tulare District v. Shepard, 185 U.S. 1, 17 (same). See also Niemeyer v. Little Rock Ry., 48-Ark. 111; Fales v. Whiting, 7 Pick. (Mass.) 225; Trenton Co. v. United Co., 60 N.J. Eq. 500; Farnham v. Benedict, 107 N.Y. 159; New Orleans Co. v. Louisiana Co., 11 Fed. 277. In Sisters of Charity v. Morris Railroad Co., 84 N.J.L. 310, it was held that when in proceedings to condemn land by a corporation, the facts as to due incorporation are questioned or the inferences are disputable, the proceedings should be held until the legality of the corporation can be settled once for all upon an information by the Attorney-General. There is considerable authority contra to the principal case. Central of Georgia Co. v. Union Springs Co., 144 Ala. 689; McAuley v. Columbus Co., 83 Ill. 348; Peoria Co. v. Peoria Co., 105 Ill. 110; Chicago Co. v. Chicago Co., 112 Ill. 589; Morrison v. Forman, 177 Il. 427;. Eddleman v. Union Co., 217 Ill. 409, 414; Detroit Co. v. Camp- bell, 140 Mich. 384, 394 (relying on 44 Mich. 387, and 81 Mich. 378, which only decided that the question could not be litigated in certiorart proceedings); Postal Co. v. Oregon Co., 23 Utah, 474, 482. See also Osborn v. People, 103 Ill. 224; Ward v. Minnesota Co., 119 SECT. 11.] GUCKERT v, HACKE. 653 Ill. 287; Reisner v. Strong, 24 Kan. 410, 417; Portland Co. v. Bobb, 88 Ky. 226; Farnham v. Delaware Co., 61 Pa. St. 265. But note the explanation of the Illinois doctrine made in Henry v. Centralia Co., 121 Ill. 264, 267. (Smt GUCKERT v. HACKE. 159 Pa. 303. 1893. At the trial before Porrsr, J., it appeared that plaintiff entered into a contract to make some alterations and repairs in a building occupied by the Hughes & Gawthrop Co. In October, 1890, a certi- ficate of incorporation in proper form was presented by the Hughes & Gawthrop Co. to the governor, asking for a charter. The certifi- cate was approved and letters patent were duly issued. All of the details required by the act of April 29, 1874, P.L. 77, were complied with, excepting only the recording of the certificate in the recorder’s office of Allegheny County. The certificate was not recorded until June, 1891. In the mean time, plaintiff, without knowledge of the incorporation, made the contract with Gawthrop, upon which he sued. Subsequently he accepted a note for the debt, signed with the corporate name. Mr. Cuier Justice Starrett. It is essential to the creation of a corporation under an enabling statute that all material provisions should be substantially followed; and, exemption from personal lia- bility being one of the chief characteristics distinguishing corpora- tions from partnerships and unincorporated joint-stock companies, it follows that those who transact business upon the strength of an organization which is materially defective are individually liable, as partners, to those with whom they have dealt. What provisions are material must be gathered from the relation of each to the purpose and scope of the act; and when, therefore, successive steps are pre- scribed for the creation of corporations, these must obviously be re- garded as imperative. Enabling statutes, on the principle of expressio unius est exclusio alterius, impliedly prohibit any other mode of doing the act which they authorize; they must be strictly construed: Suth- erland on Stat. Construction, § 454. Hence it has been uniformly held that requirements in respect of filing charters are imperative: Childs v. Smith, 55 Barb. 45; Smith v. Warden, 86 Mo. 382; Abbott v. Smelting Co., 4 Neb. 416; Beach on Corporations, § 162. . It is plain even from a cursory reading of the Act of April 29, 1874, P.L. 77, that recording of the certificate “in the office for the record- ing of deeds, in and for the county where the chief operations are to be carried on,” was intended to be made one of the conditions prec- edent to corporate existence. That was the last of successive steps required to be taken, and the right to begin the transaction of cor- 654 GUCKERT v. HACKE. [CHAP. I. porate business was made to depend upon the taking of that step. “From thenceforth,” the act expressly declares, the subscribers and their associates and successors “shall be a corporation for the pur- poses and upon the terms named in the said charter.” One of the purposes of the act being exemption from personal liability in the transaction of business, it is obviously material that the public should have notice, and notice by record was accordingly prescribed. Failure to record was failure to comply with one of the express conditions of incorporation, and consequently of exemption from liability. It may be conceded that had plaintiff dealt with defendants as a corporation he would have been estopped from claiming against them in any other capacity, even though they failed to record their charter: Spahr v. Bank, 94 Pa. 429. But it is not pretended that he had any knowledge of the existence of the charter; and there was certainly nothing, either in the name under which they did business or in their conduct, which should have put him upon inquiry. In these circum- stances he was amply justified in dealing with them as partners. It was through their default — not his — that they were so treated; and it would be manifest injustice that he should lose his admittedly honest claim. In the absence of an express agreement the acceptance of a note from the defendants, as a corporation, after plaintiff had performed his part of the contract, cannot operate by way of election or estop- pel. The relation of the parties was fixed by their status when the original contract was made, and cannot be changed by gratuitous inference. The members of the alleged corporation were the defend- ants, and were not injured by the acceptance of the note. The prin- ciple which treats the acceptance of a note as additional security to and not as satisfaction of a mechanic’s lien (Jones v. Shawhan, 4 W. & §. 257) is, with even more justice, applicable here. It follows from what has been said that the instructions com- plained of are erroneous. Judgment-reversed and a venire facias de novo awarded. Notes. — See, accord, Christian Co. v. Lumber Co., 121 Ala. 340; Field v. Cooks, 16 La. Ann. 153; N.Y. Bank v. Crowell, 177 Pa. St. 313; Slocum v. Head, 105 Wis: 431; Clausen v. Head, 110 Wis. 405. See also Williams v. Hewitt, 47 La. Ann. 1076, 1082; Johnson v. Oker- strom, 70 Minn. 303, 311; Queen City Co. v. Crawford, 127 Mo. 356, 363; Vanhorn v. Corcoran, 127 Pa. St. 255, 268 (cf. Allegheny Bank v. Bailey, 147 Pa. St. 111); Mitchell v. Jensen, 29 Utah, 346, 360. As to the liability of the associates for a tort committed by an agent, see the article in 20 H.L.R. 456, and particularly note 30 on p. 474. SECT. 1.] BRITISH SOUTH AFRICA CO. v. DE BEERS. 655 CHAPTER II. COLLATERAL ATTACK UPON THE POWERS OF A CORPORATION. HEREIN OF THE EXPRESSION “ULTRA VIRES.” SECTION 1. THE ENGLISH AUTHORITIES. BRITISH SOUTH AFRICA CO. v. DE BEERS CONSOLIDATED MINES, LTD. [1910] 1 Ch. 354. Tue plaintiff was incorporated by Royal charter dated October 29, 1889, for the purpose of carrying on certain operations in South Africa. The powers granted it were extensive, but the charter con- tained the following: ‘‘Nothing in this our charter shall be deemed to authorize the company to set up or grant any monopoly of trade.” The plaintiff asked the court to declare that a certain exclusive license granted (in form) by it to the defendant was void as being a monopoly, and therefore ultra vires the plaintiff. The court was of opinion that the exclusive license did not amount to a monopoly, but gave the following opinion as to the effect of an ultra vires act by the plaintiff. Swinren Eapy, J. It must not be assumed that, if a chartered company does some act which it is forbidden to do by its charter, that act is necessarily void as ultra vires. In Riche v. Ashbury Railway Carriage and Iron Co., L.R. 9 Ex. 224, all the judges in the Exchequer Chamber agreed that a corporation at common law has as an incident given by law the same power to contract and subject to the same restrictions that a natural per- son has, although the court was equally divided upon the question whether the acts which were ultra vires a statutory corporation were capable of ratification. BLACKBURN, J., in delivering the judgment of himself, Brerr and Grove, JJ:, which so far as regards a statutory corporation was overruled by the House of Lords, referred to Sutton’s Hospital Case, 10 Rep. 1a, 30b, and said (L.R. 9 Ex. 263): “This seems to me an ex- press authority that at common law it is an incident to a corporation 656 BRITISH SOUTH AFRICA CO. ¥. DE BEERS. [CHAP. II. to use its common seal for the purpose of binding itself to anything to which a natural person could bind himself, and to deal with its prop- erty as a natural person might deal with his own. And further, that an attempt to forbid this on the part of the King, even by express neg- ative words, does not bind at law. Nor am I aware of any authority in conflict with this case. Jf there are conditions contained in the charter that the corporation shall not do particular things, and these things are nevertheless done, it gives ground for a proceeding by set. fa.in the name of the Crown to repeal the letters patent creating the corporation: see Hastern Archipelago Co. v. Reg., (1853) 2 E. & B. 856. But if the Crown take no such steps, it does not, as I conceive, lie in the mouth either of the corporation, or of the person who has contracted with it, to say that the contract into which they have entered was void as beyond the capacity of the corporation. I am aware of no decision by which a corporation at common law has been permitted to do so. I take it that the true rule of law is, that a corporation at common law has, as an incident given by law, the same power to contract, and subject to the same restrictions, that a natural person has.” ARCHIBALD, J., in delivering the judgment of himself, Kratine and Quain, JJ., whose opinion as regards a statutory corporation ultimately prevailed in the House of Lords, said (L.R. 9 Ex. 292): “T admit that at common law (as was resolved in the case of Sutton’s Hospital, 10 Rep. la, 30b), when a corporation is duly created all other incidents are tacite annexed, such as ability to purchase and alien, to sue and be sued, and to use what seal they will; and that even a clause in their charter restraining them from aliening or demising but in a certain form, though an ordinance testifying the desire of-the Crown, is to be deemed but a precept and not binding in law, so that a corporation thus constituted acquires rights of contracting as extensive as those of a natural person.” In Baroness Wenlock v. River Dee Co., 36 Ch.D. 675, n., 685, n.,° Bowen, L.J. says: “At common law a corporation created by the King’s charter has, prima facie, and has been known to have ever since Sutton’s Hospital Case, 10 Rep. 1a, 30b, the power to do with its property all such acts as an ordinary person can do, and to bind itself to such contracts as an ordinary person can bind himself to; and even if by the charter creating the corporation the King imposes some direction which would have the effect of limiting the natural capacity of the body of which he is speaking, the common law has always held that the direction of the King might be enforced through the Attorney-General; but although it might contain an essential part of the so-called bargain between the Crown and the corpora- tion, that did not at law destroy the legal power of the body which the King had created.” At p. 11 of the 9th edition of his work on the Companies Acts SECT. I.] ASHBURY RY. CARRIAGE AND IRON CO. J. RICHE. 657 Bucktpy, L.J., states the law thus: “At common law a corporation created by charter can by its common seal bind itself to anything to which a natural person could bind himself, and can deal with its property as a natural person might deal with his own. So that not only can the chartered company bind itself by acts as to which no power is affirmatively given by the charter, but even if the charter by express negative words forbid any particular act, the corporation can nevertheless at common law do the act, and if it does it, is bound thereby, and the result is only that ground is given for a proceeding by scire facias in the name of the Crown, repealing the charter.” If it were necessary to determine the question, I should decide that the objection raised by the plaintiff company that the agree- ments are not binding because they are wlira vires wholly fails. ASHBURY RAILWAY CARRIAGE AND IRON CO. »v. RICHE. L.R. 7 H.L. 653. 1875. A company called ‘‘the Ashbury Railway Carriage and Iron Co.” was incorporated under the Companies Act, 1862. (25 & 26 Vict. chap. 89.) The memorandum of association of the said company contained the following: ‘‘The objects for which the company is established are to make and sell, or lend on hire, railway-carriages and waggons, and all: kinds of railway plant, fittings, machinery, and rolling-stock; to carry on the business of mechanical engineers and general con- tractors; to purchase and sell, as merchants, timber, coal, metals, or other materials; and to buy and sell any such materials on commis- sion, or as agents.” — The directors of the Ashbury Company entered into an arrange- ment, in behalf of the company, under which the Messrs. Riche were to construct a railway in Belgium, and the Ashbury Company was to supply the funds for the payment of this construction work. The plaintiffs claimed that this contract had been ratified by the stockholders of the Ashbury Company. Later, the Ashbur iated this contract as being ultravires. Messrs. Riche brought this action for damages for breach _ Onp Catans, Lord Chancellor. [After holding that the contract in question was ultra vires of the Ashbury Company.] Those being the results of the documents to which I have referred, I will ask your Lordships now to consider the effect of the act of Parliament — the Joint Stock Companies Act of 1862 —on this du 658 ASHBURY RY. CARRIAGE AND IRON CO. v. RICHE. [CHAP. II state of things. And here, my Lords, I cannot but regret that by the two judges in the Court of Exchequer the accurate and precise bearing of that act of Parliament upon the present case appears to me to have been entirely overlooked or misapprehended; and that in the Court of Exchequer Chamber, speaking of the opinion of those learned judges who thought that the decision of the Court of Ex- chequer should be maintained, the weight which was given to the provisions of this act of Parliament appears to me to have entirely fallen short of that which ought to have been given to it. Your Lordships are well aware that this is the act which put upon its present permanent footing the regulation of joint-stock companies, and more especially of those joint-stock companies which were to be authorized to trade with a limit to their liability. The provisions under which that system of limiting liability was inaugurated, were provisions not merely, perhaps I might say not mainly, for the benefit of the shareholders for the time being in the company, but were enactments intended also to provide for the interests of two other very important bodies; in the first place, those who might become shareholders in succession to the persons who were shareholders for the time being; and secondly, the out- side public, and more particularly those who might be creditors of companies of this kind. And I will ask your Lordships to observe, as I refer to some of the clauses, the marked and entire difference there is between the two documents which form the title deeds of companies of this description — I mean the Memorandum of Asso- ciation on the one hand, and the Articles of Association on the other hand. With regard to the memorandum of association, -your Lord- ships will find, as has often already been pointed out, although it appears somewhat to have been overlooked in the present case, that that is, as it were, the charter, and defines the limitation of the powers of a company to be established under the act. With regard to the articles of association, those articles play a part subsidiary to the memorandum of association. They accept the memorandum of association as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, the rights and the powers of the governing body as between themselves and the company at large, and the mode and form in which the business of the company is to be carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made. With regard, therefore, to the memorandum of association, if you find anything which goes beyond that memoran- dum, or is not warranted by it, the question will arise whether that which is so done is ultra vires, not only of the directors of the com- pany but of the company itself. With regard to the articles of asso- ciation, if you find anything which, still keeping within the memo- randum of association, is a violation of the articles of association, or SECT. I.] ASHBURY RY. CARRIAGE AND IRON CO. Jv. RICHE. 659 in excess of them, the question will arise whether that is anything more than an act eztra vires the directors, but intra vires the com- pany. The clauses of the statute to which it is necessary to refer are four: in the first place, the sixth clause. That provides that “ Any seven or more persons associated for any lawful purpose may, by subscribing their names to a memorandum of association, and other- wise complying with the requisitions of this Act in respect of regis- tration, form an incorporated company, with or without limited liability.” My Lords, this is the first section which speaks of the incorporation of the company; but your Lordships will observe that it does not speak of that incorporation as the creation of a corpora- tion with inherent common law rights, such rights as are by common law possessed by every corporation, and without any other limit than would by common law be assigned to them, but it speaks of the company being incorporated with reference to a memorandum of association; and you are referred thereby to the provisions which subsequently are to be found upon the subject of that memorandum of association. The next clause which is material is the eighth: “Where a com- pany is formed on the principle of having the liability of its members limited to the amount unpaid on their shares, hereinafter referred to as a company limited by shares, the Memorandum of Association shall contain the following things” (I pass over the first and second, and I come to the third item which is to be specified): ‘The objects for which the proposed company is to be established.” That is, therefore, the memorandum which the persons are to sign as a pre- liminary to the incorporation of the company. They are to state “the objects for which the proposed company is to be established”’; and the existence, the coming into existence, of the company is to be an existence, and to be a coming into existence for those objects and for those objects alone. Then, my Lords, the eleventh section provides: ‘“‘The memoran- dum of association shall bear the same stamp as if it were a deed, and shall be signed by each subscriber in the presence of, and be attested by, one witness at the least, and that attestation shall be a sufficient attestation in Scotland, as well as in England and Ireland. It shall, when registered, bind the company and the members thereof to the same extent as if each member had subscribed his name and affixed his seal thereto, and there were in the memoran- dum contained, on the part of himself, his heirs, executors, and administrators, 2 covenant to observe all the conditions of such memorandum, subject to the provisions of this act.”” Your Lord- ships will observe, therefore, that it is to be a covenant in which every member of the company is to covenant that he will observe the conditions of the memorandum, one of which is that the objects 669 ASHBURY RY. CARRIAGE AND IRON CO. v. RICHE. [CHAP. IL. -for which the company is established are the objects mentioned in the memorandum, and that he not only will observe that, but will observe it subject to the provisions of this act. Well, but the very next provision of the act contained in the twelfth section is this: “ Any company limited by shares may so far modify the conditions contained in its memorandum of association, if authorized to do so by its regulations as originally framed, or as altered by special resolu- tion in manner hereinafter mentioned, as to increase its capital by the issue of new shares of such amount as it thinks expedient, or to consolidate and divide its capital into shares of larger amount than its existing shares, or to convert its paid-up shares into stock, but, save as aforesaid, and save as is hereinafter provided in the case of a change of name, no alteration shall be made by any company in the conditions contained in its memorandum of association.’ The covenant, therefore, is not merely that every member will observe the conditions upon which the company is established, but that no change shall be made in those conditions; and if there is a covenant that no change shall be made in the objects for which the company is established, I apprehend that that includes within it the engage- ment that no object shall be pursued by the company, or attempted to be attained by the company in practice, except an object which is mentioned in the memorandum of association. Now, my Lords, if that is so—if that is the condition upon which the corporation is established —if that is the purpose for which the corporation is established — it is a mode of incorporation which contains in it both that which is affirmative and that which is negative. It states affirmatively the ambit and extent of vitality and power which by law are given to the corporation, and it states, if it is necessary so to state, negatively, that nothing shall be done beyond that ambit, and that no attempt shall be made to use the corporate life for any other purpose than that which is so specified. Now, my Lords, with regard to the articles of association, observe how completely different the character of the legislation is. The fourteenth section deals with those articles: ‘The memorandum of association may, in the case of a:company limited by shares, and shall, in the case of a company limited by guarantie, or unlimited, be accompanied, when registered, by articles of association, signed by the subscribers to the memorandum of association, and prescribing such regulations for the company as the subscribers to the memorandum of association deem expedient.” They are to be the masters of the regulations which (always keeping within the limit allowed by law) they may deem expedient for the internal regulation of the company. “The articles shall be expressed in separate paragraphs, numbered arithmetically. They may adopt also any of the provisions contained in the table marked A. in the first schedule hereto.” I need not read the remainder of that section. SECT. I.] ASHBURY RY. CARRIAGE AND IRON CO. v. RICHE. 661 But your Lordships must take, in connection with that, the fiftieth section of the act. That provides that “subject to the pro- visions of this act, and to the conditions contained in the memoran- dum of association, any company formed under this act may, in general meeting, from time to time, by passing a special resolution in manner hereinafter mentioned, alter all or any of the regulations of the company contained in the articles of association, or in the table marked A. in the first schedule, where such table is applicable to the company, or make new regulations to the exclusion of, or in addition to, all or any of the regulations of the company.” Of the internal regulations of the company the members of it are absolute masters, and, provided they pursue the course marked out in the act, that is to say, holding a general meeting and obtaining the con- sent of the shareholders, they may alter those regulations from time to time; but all must be done in the way of alteration subject to the conditions contained in the memorandum of association. That is to override and overrule any provisions of the articles which may be at variance with it. The memorandum of association is, as it were, the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulations for their own government as they think fit. My Lords, that reference to the act will enable me to dispose of a provision in the articles of association in the present case which was hardly dwelt upon in argument, but which I refer to in order that it may not be supposed to have been overlooked. It appears that there has come into the articles of association of this company one which is in these words: ‘‘An extension of the company’s busi- ness beyond or for other than the objects or purposes expressed or implied in the memorandum of association shall take place only in pursuance of a special resolution.” In point of fact, no resolution for the extension of the business of the company was in this case come to; but even if it had been come to, it would have been entirely inept and inefficacious. There was, in this fourth article, an attempt to do the very thing which, by the act of Parliament, was prohibited to be done — to claim and arrogate to the company a power under the guise of internal regulation to go beyond the objects or purposes expressed or implied in the memorandum. Now, my Lords, bearing in mind the difference which I have just taken the liberty of pointing out to your Lordships between the memorandum and the articles, we arrive at once at all which appears to me to be necessary for the purpose of deciding this case. I have used the expressions eztra vires and intra vires. I prefer either ex- pression very much to one which occasionally has been used in the judgments in the present case, and has also been used in other cases, the expression “illegality.” In a case such as that which your Lordships have now to deal 662 ASHBURY RY. CARRIAGE AND IRON CO. v. RICHE. [CHAP. IL, with, it is not a question whether the contract sued upon involves that which is malum prohibitum or malum in se, or is a contract con- trary to public policy, and illegal in itself. I assume the contract in itself to be perfectly legal, to have nothing in it obnoxious to the doctrine involved in the expressions which I have used. The ques- tion is not as to the legality of the contract; the question is as to the competency and power of the company to make the contract. Now, I am clearly: of opinion that this contract was entirely, as I have said, beyond the objects in the memorandum of association. If so, it was thereby placed beyond the powers of the company to make the contract. If so, my Lords, it is not a question whether the contract ever was ratified or was not ratified. If it was a contract void at its beginning, it was void because the company could not make the contract. If every shareholder of the company had been in the room, and every shareholder of the company had said, ‘‘ That is a contract which we desire to make, which we authorize the directors to make, to which we sanction the placing the seal of the company,”’ the case would not have stood in any different position from that in which it stands now. The shareholders would thereby, by unanimous con- sent, have been attempting to do the very thing which, by the act of Parliament, they were prohibited from doing. But, my Lords, if the shareholders of this company could not ab ante have authorized a contract of this kind to be made, how could they subsequently sanction the contract after it had, in point of fact, been made. I endeavoured to follow as accurately as I could the very able argument of Mr. Benjamin at your Lordships’ Bar on this point; but it appeared to me that this was a difficulty with which he was entirely unable to grapple. He endeavoured to con- tend that when the shareholders had found that something had been done by the directors which ought not to have been done, they might be authorized to make the best they could of a difficulty into which they had thus been thrown, and therefrom might be deemed to possess power to sanction the contract being proceeded with. My Lords, I am unable to adopt that suggestion. It appears to me that it would be perfectly fatal to the whole scheme of legislation to which I have referred, if you were to hold that, in the first place, directors might do that which even the whole company could not do, and that then, the shareholders finding out what had been done, could sanction, subsequently, what they could not antecedently have authorized. My Lords, if this be the proper view of the act of Parliament, it reconciles, as it appears to me, the opinion of all the judges of the Court of Exchequer Chamber; because I find Mr. Justice Buack- BURN, whose judgment was concurred in by two other judges who took the same view, expressing himself thus (Law Rep. 9 Ex. 262): “T do not entertain any doubt that if, on the true construction of a statute creating a corporation it appears to be the intention of the SECT. I.] ASHBURY RY. CARRIAGE AND IRON CO. ¥. RICHE. 663 legislature, expressed or implied, that the corporation shall not enter into a particular contract, every court, whether of law or equity, is bound to treat a contract entered into contrary to the enactment as illegal, and therefore wholly void, and to hold that a contract wholly void cannot be ratified.”” My Lords, that sums up and ex- hausts the whole case. In my opinion, beyond all doubt, on the true construction of the statute of 1862, creating this corporation, it appears that it was the intention of the legislature, not implied, but actually expressed, that the corporation should not enter, having. regard to its memorandum of association, into a contract of this description. If so, according to the words of Mr. Justice BLackBurn, every court, whether of law or of equity, is bound to treat that con- tract, entered into contrary to the enactment, I will not say as illegal, but as extra vires, and wholly null and void, and to hold also that a contract wholly void cannot be ratified. ser wrt gy J My Lords, that relieves me, and, if your Lordships agree with me, relieves your Lordships from any question with regard to ratifica- tion. I am bound to say that if ratification had to be considered I have found in this case no evidence which to my mind is at all suffi- cient to prove ratification; but I desire to say that I do not wish to found my opinion on any question of ratification. This contract, in my judgment, could not have been ratified by the unanimous assent of the whole corporation. Norte. — In earlier cases there are opinions which do not treat an ulira vires contract, even of a statutory corporation, as being beyond the legal capacity of the corporation. Thus Lord St. Lzon- apps in Eastern Counties Ry. Co. v. Hawkes, 5 H.L. Cas. 331 (1855), said (p. 373) he was disposed “‘to restrain the doctrine of ultra vires to clear cases of excess of power, with the knowledge of the other party, express, or implied from the nature of the corporation and of the contract entered into.” But the reasoning of Lord Carrns in the principal case has been accepted as settling the English law. The authorities in accord are very numerous. Nor can the corporation be held: on any theory of estoppel. Great North-West Ry. Co. v. Charlesbois, [1899] A.C. 114. If the corporation has not legal capacity to make the contract, it fottows thatthe corporation can neither be suéd, nor Sue;-tpon it. —Forts. Suppose all the shareholders of @ company authorize the directors to carry on a business in the name, with the funds and for the benefit of the corporation, and that a person employed by the directors for this purpose, while acting within the scope of his employment, commits a tort upon the plaintiff. Assuming the busi- ness is ultra vires of the company, can the plaintiff recover from the company? Note Lord Carrns’s language: “It states affirmatively the ambit and extent of vitality and power which by law are given 664 AYERS ¥. SOUTH AUSTRALIAN BANKING CO. [CHAP. II. to the corporation, and it states, if it is necessary so to state, nega- tively, that nothing shall be done beyond that ambit, and that no attempt shall be made to use the corporate life for any other purpose than that which is so specified.”’ Lindley on Companies (6th ed.), pp. 213, 257: “Agents cannot have a more extensive authority than their principals can legally confer upon them; an principle at_ once limits the authority of all agents of incorporated companies. of such companies is itse f limited, and they cannot be ally bound by any acts of their Ors or officers in which the _ “Companies themselves are legally incompetent to engage... . All —thaTis necessary to charge the company [in tort] is that the act com- plained of should be intra vires and not ultra vires, etc.” Clerk & Lindsell on Torts (6th ed.), p. 62, note (d): “To fix a corporation with liability for the acts of its agents, two conditions must be ful- filled; Ist, the act must have been within the scope of the agent’s employment; 2nd, that em n within the _ scope of the corporat .”’ But Salmond, although formerly of this opinion (see Salmond on Torts, 2d ed., p. 56), says in his Sum- mary of the Law of Torts, p. 43: “The rule that a corporation is nct bound by contracts which are ultra vires is commonly said to app'y “also-to torts which are ulira vires, in the sense that they are committed ott rse_of some activity which is be e limits of the cor- _ ver, no sufficient authority for | any such exemption of corporations from the consequences of their dis-_ Tepard of the limits of their powers.” The student should consider. whether (assuming that Salmond accepts the reasoning of Lord Carens in the principal case as sound) he has not begged the ques- tion by speaking of “their” disregard. The fundamental question in any corporate problem is: To what acts of human beings shall cor- porate significance be given? AYERS v. THE SOUTH AUSTRALIAN BANKING CO. L.R. 3 P.C. 548. 1871. Tue South Australian Banking Company was incorporated by charter, which contained a clause declaring that it should not be lawful for the company to advance money on the security of mer- chandise. Its officers advanced its money on the security of mer- chandise, the lien being, in form, in favor of the corporation. Ayers, and others, withheld this merchandise from the corporation, and it brought trover. Tue Lorp Justices Metisse. Another objection was taken by Mr. Manisty on the terms of the charter — the clause in the charter which says, it shall not be lawful for the bank to make advances SECT. 1.] AYERS v. SOUTH AUSTRALIAN BANKING CO. 665 on merchandise. Now, unquestionably, a great many questions might be raised on the effect of that clause in the charter which may be of very great importance, but which also being of great diffi- culty, their Lordships do not think it necessary to give any opinion upon. There may be a question as to what are the transactions which come really within the clause, and whether this particular case does come within it. There may be also question whether, under any circumstances, the effect of violating such a provision is more than this, that the Crown may take advantage of it as a forfeiture of the charter, but the only point which it appears to their Lordships is necessary to be determined in the present case is this, that whatever effect such a clause may have, it does not prevent property passing, either in godds or in lands, under a conveyance or instrument which, under the ordinary circumstances of law, would pass it. The only defence which can be set up here (there is no plea of illegality) is under the plea of not possessed, that the right of property and the right of possession never passed to the plaintiffs. Their Lordships are of opinion, that whatever other effect it has, it cannot have the effect of preventing the property passing. If that were otherwise, the consequences might be most lamentable, because if the property never passed to them, they could not themselves convey any property to third persons. Transactions of the most honest description might be set aside. They might do what is a very common thing, make advances and take bills of exchange with the bills of lading attached. If it is to be said that the property in the goods mentioned in the bill of lading does not pass to them, then any purchaser to whom they might sell the goods under the bill of lading would get no title, and the original owner who had received the full proceeds of the goods, or a large advance upon them, might say, ‘Oh, the property never passed to the South Australian Bank, and, therefore, it never passed to you.” Mr. Manisty admitted that he could find no authority for the proposi- tion, that any violation of such a condition of a charter would prevent the property in goods passing to the person to whom an instrument otherwise valid professed to pass it, and their Lordships are of opinion, that whatever other effect the violation of such a condition may have, it has not the effect of preventing the property in the goods passing, or of preventing an action of trover being main- tained if there is a wrongful conversion. Nore. — Lindley on Companies (6th ed.), p. 215, relying on this case, says: “An act or a contract which is ultra vires and therefore invalid is not necessarily devoid of all legal effect.” The context indicates that by “legal effect” is meant ‘‘legal corporate effect.” And Buckley on Companies (8th ed.), p. 17, says: “It would seem that a proprietary right belonging to a company may be enforced : 666 IN RE DAVID PAYNE & CO., LTD. [CHAP. II. and protected, even if acquired by an wiltra vires expenditure of capital.” But the South Australian Banking Company was a chartered corporation. The student should consider whether (assuming the reasoning of Lord Catrns in Ashbury Co. v. Riche, supra, is sound) a similar result can be reached with respect to a statutory corporation. See Davis’ Case, L.R. 12 Eq. 516; Great Eastern Ry. Co. v. Turner, L.R. 8 Ch. 149; In re Dronfield Coal Co., L.R. 17 Ch.D. 76, 97; National Telephone Co., Ltd. v. Constables of St. Peter Port, [1900] A.C. 317, 321. Inre DAVID PAYNE & CO., LTD: [1904] 2 Ch. 608. Tus directors of David Payne & Co., Limited, borrowed money by issuing a debenture in the name of the company. They intended to apply, and did apply, this money in the name of the company to accomplish an object outside the objects of the company as stated in the memorandum of association. The liquidator in the winding-up of the company applied for a declaration that the debenture was ultra vires and void, and did not constitute a charge on the under- taking or assets of the company. Bucktiey, J. [After holding that the lender, the Exploring Land and Minerals Company, had no notice of the intended misapplica- tion.] That leaves only this matter to be considered. If an act ultra vires the corporation be done, it may be immaterial whether the other party to that act had knowledge or had not knowledge that the corporation could not do it, and in that state of things the investi- gation of knowledge which I have made would become irrelevant. Was the borrowing by David Payne & Co. for the purposes of pay- ing 20001. to Johnston and 40002. to the Johnston companies ultra’ vires, so that, notwithstanding the absence of knowledge, the thing which they in fact sealed does not bind them? That arises upon a clause in the memorandum of association and one of the articles. The clause in the memorandum is a power to borrow and raise money for the purposes of the company’s business, and art. 114 (D) gives power to the directors to borrow or raise or secure any sum or sums of money on the security of the property of the company by the issue of debentures, and so on. What is the effect of clauses of that kind? Suppose under a memoraridum such as this a board, . after passing proper resolutions, go to their bankers, or to anybody else, and say, “Lend us 10,000!.”’ Is it the duty of the lending com- pany then to say, “I look at your memorandum” — which cer- tainly they are bound to look at — “and I find that you can only raise money for the purposes of your business; I cannot safely lend SECT. 1.] IN RE DAVID PAYNE & CO., LTD. 667 to you until you show me you are borrowing for the purposes of your business”? In other words, is it a condition attached to the exercise of the power that the money should be borrowed for the purposes of the business, or is that a matter to be determined as between the shareholders and the directors? In my view, the introduction into any memorandum of association of a power to borrow is, generally speaking, unnecessary. Every trading company has power to borrow for the purposes of its business, and the introduction of this clause is only to express in words what would otherwise be the law. A limitation of the borrowing to borrowing for the purposes of the company’s business is necessary, of course. A corporation cannot do anything except for the purposes of its business, borrowing or any- thing else; everything else is beyond its power, and is ultra vires. So that the words “for the purposes of thé company’s business” are a mere expression of that which would be involved if there were no such words. If you found a power to borrow which would arise only on the happening of a particular event, then I think’ it would lie upon the lender to say, “I cannot lend to you until you can satisfy me that the condition has been complied with’’; but where the power is merely a general power to borrow, limited only, as it must be, for the purposes of the company’s business, I think the matter is to be treated in this way — that the lender cannot investigate what the borrower is going to do with the money; he cannot look into the affairs of the company and say, ‘Your purposes do not require it now; this borrowing is unnecessary; you must show me exactly why you want it,”’ and so on. That is all matter lying between the share- holders and the directors. If this borrowing was made, as it appears to me at present it was made, for a purpose illegitimate so far as the borrowing company was concerned, that may very well be a matter on which rights may arise as between the shareholders and directors of that company. It may have been a wrongful act on the part of the directors. But I do not think that a person who lends to the company is by any words such as these required to investigate whether the money borrowed is borrowed for a proper purpose or an improper purpose. The borrowing being effected, and the money passing to the company, the subsequent application of the money is a matter in which the directors may have acted wrongly; but that does not affect the principal act, which is the borrowing of the money. On general principles, I may point out, it would be perfectly impos- sible to work such a clause as this in any other way. A corporation, every time it wants to borrow, cannot be called upon by the lender to expose all its affairs, so that the lender can say, ‘Before I lend you anything I must investigate how you carry on your business, and I must know why you want the money, and how you apply it, and when you do have it I must see you apply it in the right way.” It is perfectly impossible to work out such a principle. I think here the 668 BARONESS WENLOCK ¥. RIVER DEE CO. (CHAP. II. power to borrow was a power resting in the directors. It did not lie on the Exploring Land and Minerals Company to say, “‘ We cannot lend anything to you until you say exactly what you are going to do with it when you have got it.” For these reasons it seems to me the Exploring Land and Minerals Company, who have paid this money and taken this debenture without notice that the money was going to be applied as it was, are not affected by anything arising in regard to that. I therefore think that they are entitled to hold the debenture. Norse. —In Norwich v. Norfolk Ry. Co., 4 E. & B. 397, Lord CAMPBELL, C.J., said (p. 443): ““‘The mere circumstance of a cove- nant by directors in the name of the company being ultra vires, as between them and the shareholders, does not necessarily disentitle the covenantee to sue upon it. For example, if the directors of a railway company were to enter into a contract under the seal of the company for the purchase of a large quantity of iron rails and to pay for them at a fixed price, as the vendor had reasonable ground for supposing that the rails were wanted for the purpose of the railroad, it would be no defence to an action for the price, or for not accepting them, that the rails were illegally purchased on speculation, to be resold by the directors for their own profit. But suppose that the directors of a railway company should purchase a thousand gross of green spectacles, as a speculation, and should put the seal of the company to a deed covenanting to pay for these goods, here would be a clear excess of authority on the part of the directors; this excess of authority would necessarily be known to the covenantee; and, he be- ing in part delicto, I conceive that the maxim would apply potior est conditio possidentis. This would be an illegal contract to misapply the funds of the company; and the illegality might beset up as a defence.” But cf. Firbank’s Executors v. Humphreys, L.R. 18 Q.B.D. 54. BARONESS WENLOCK v. RIVER DEE CO. - L.R. 36 Ch.D. 674. 1887. Tus River Dee Company, a corporation, was empowered to bor- row any sum not exceeding £25,000. A loan of a much larger sum was, in form, made by Lord Wenlock to the corporation. In an action by the executors of the lender, the company sought to defend on the ground that the loan was ultra vires. Lorp Esuer, M.R. In this case Lord Wenlock’s executors have brought an action against the River Dee Company in order to recover a very large sum with interest upon a covenant contained in a mort- ‘gage deed, and it is undoubted that Lord Wenlock did advance a SECT. I.] BARONESS WENLOCK 0. RIVER DEE CO. 669 very large sum upon a mortgage which was given to him under the seal of the company and upon a contract which those who in fact made it with him represented to be a contract with the company. The defence is, that although the money was in fact advanced upon such representation, namely, that it was money to be advanced to the company, and although the mortgage and the covenant are a mortgage and a covenant under the seal of the company, yet that the company is not liable to this action substantially in covenant, because it is alleged by the company that those who made that covenant and who made that mortgage had no authority to bind the company by the use of the seal for that purpose. If that defence be a valid one there can be no doubt about the hardship thereby in- flicted upon Lord Wenlock, and in this case a hardship much greater than usual, because this is not simply the case of directors either wilfully or inadvertently doing that which, if it were upheld, would bind a number of shareholders who are not directors, but actually in this case if this covenant and this mortgage cannot be upheld it is a covenant and a mortgage made by people who are said to be the agents of the company, but who in truth and in fact are the only persons interested in the company. It is as if all the shareholders of the company were to make this representation and obtain money and then put forward the defence when an action is brought against the company, that although they, the shareholders, had misled the person into advancing his money, nevertheless the company is not liable. If this action were really the defence of those who induced Lord Wenlock to advance his money upon the representation made by them — if this action is defended in the name of the company by them — I hesitate to express the feeling which I have as to such con-’ duct; but if this action is really defended, although in the name of the company, on behalf of the Crédit Foncier, I can pass no opinion upon whether it is a just or righteous defence or not, because I know nothing of the circumstances under which they became the persons having the command of this defence. [After holding that the company had power to borrow £25,000 but no more.] Therefore to the extent of £25,000, but to that extent only, those who were acting for this company had power to borrow on mortgage containing a covenant, and that being so, they having borrowed money from Lord Wenlock, although they exceeded their authority when they borrowed more than £25,000, to the extent of £25,000 they did not exceed their authority, and the company is bound. Therefore Lord Wenlock, taking this to be an action on covenant, is entitled upon that covenant, and in respect of that covenant, to recover to the extent of £25,000, and the proper interest calculated in the ordinary way. But when we have to deal with the money which was obtained from Lord Wenlock on this covenant given in the name of the company and under the seal of the com- 670 FURNIVALL v. COOMBES. [CHAP. If. pany, but beyond the authority of those who so borrowed the money in the name of the company, it is clear that.the plaintiffs, as to that, cannot recover by action on the covenant, because the covenant is an unauthorized covenant beyond the extent of £25,000. The plain- tiffs may recover in respect of some other right, but there is no right which can bind the company at law according to the common law of England, therefore their right, if any, is an equitable right. I shall not pretend to go further with regard to the equitable right than to say that if any of the money borrowed in this way from Lord Wen- lock has been expended in paying proper debts of the company then, although those who received the money from Lord Wenlock were not authorized to bind the company, yet Lord Wenlock’s representa- tives may in equity recover from the company so much of that money as was expended in paying debts of the company. Note. — Affirmed in the House of Lords, L.R. 10 A.C. 354. Lord Buacksurn said that, although he still thought his opinion in the case of Ashbury Co. v. Riche (see L.R. 9 Ex. 249) was “better than that of noble and learned lords who decided against it,”’ he was of opinion that the law there laid down applied not only to com- panies formed under the Companies Act, but “to all companies created by any statute for a particular purpose.” For earlier cases, see Troup’s Case, 29 Beav. 353; Blackburn Society v. Cunliffe, L.R. 22 Ch.D. 61; In re Cork & Youghal Ry. Co., L.R. 4 Ch. 748. The right to recover to the limited extent allowed in the principal case would seem not to depend on the absence of knowledge by the ‘lender that the loan was ultra vires. See Reversion Fund Co., Ltd. v. Maison Cosway, Ltd., [1913] 1 K.B. 364. In Ernest v. Croysdill, 8 W.R. 736, the directors of one railway company made an unauthorized advance to a second railway com- pany, some of the proceeds of which came into the hands o: the defendant, the official manager of the second railway company. The plaintiff, who represented the first railway company, was allowed to recover the amount of such proceeds from the defendant, with interest at four per cent. from the time the defendant received them. FURNIVALL ». COOMBES. 5M. &G. 736. 1843. A COVENANTED with C, D, E, and F, to do certain repairs to the parish church of Z; and in consideration of covenants on A’s part, C, D, E, and F, “churchwardens, and overseers of the poor of the parish of Z, for themselves and for their successors, churchwardens, SECT. 1.] FURNIVALL v. COOMBES. 671 and overseers of the said parish, and their assigns, did thereby cove- nant with A, his executors and administrators, that they, the said churchwardens and overseers of the poor, their successors or assigns, should and would well and truly pay, or cause to be paid, unto A” the sum specified, by certain instalments. After this covenant the deed proceeded as follows: “Provided always that nothing in these presents contained, shall extend, or be deemed, adjudged, construed, or taken to extend, to any personal covenant of, or obligation upon, the said several persons parties thereto, of the third part, or in any- wise personally affect them, any or either of them, their, or any or either of their executors, administrators, goods, effects, or estates in their private capacity, but shall be, and is intended to be, binding and obligatory upon churchwardens and overseers of the poor of the parish of, etc., and their successors for the time being, as such church- wardens and overseers of the poor, but not further or otherwise.”’ Tinpau, C.J. The first question is, whether this is a personal covenant, or is it a covenant by the defendants as a corporate body. It must fall within the one class or the other. Churchwardens and overseers, though they are by statute a corporate body for some purposes, cannot enter such a covenant as this in a corporate char- acter; and if not, then the contract must be a personal covenant. If it be, the next question is, what does it bind the defendants to do? At all events, it binds them, while they remain in office, to pay. Looking at the proviso, however, it is utterly inconsistent with the covenant. [Here, his lordship read the proviso.] Therefore, if the defendants have entered into a covenant which, to any extent, binds them personally, this proviso is at variance with such covenant, and consequently must be rejected as repugnant according to the authori- ties cited... . It would have been a different thing if the defendants had so shaped their covenant as to make the payment come only out of the parish fund. Note. —In East Anglian Rys. Co. v. Eastern Counties Ry. Co., 11 C.B. 775, Jervis, C.J., said (p. 813): “Tf the contract is illegal, as being contrary to the act of Parliament, it is unnecessary to con- sider the effect of dissentient shareholders; for, if the company is a corporation only for a limited purpose, and a contract like that under discussion is not within their authority, the assent of all the share- holders to such a contract, though it may make them all personally liable to perform: such contract, would not bind them in their cor- porate capacity, or render liable their corporate funds.” 672 MAcGREGOR J. DOVER & DEAL RY. CO. [CHAP. II. MacGREGOR v. DOVER & DEAL RY. CO. 18 Q.B. 618. 1852. Tue South Eastern Railway Company was incorporated for the purpose of making and maintaining that railway, with power to raise moneys for the purposes of the act. The projectors of an in- tended Dover & Deal, etc., Railway had contemplated bringing a bill before Parliament for the establishment of such railway, but were in doubt as to proceeding. M, a person interested, and having influence, in the South Eastern Company, undertook that, if the pro- jectors of the Dover, etc., Railway would proceed in endeavouring to obtain their act, and, if successful, would hand over their scheme to the South Eastern Company, that company, if the bill were re- jected, would insure them against loss by such rejection, and would pay their Parliamentary expenses. No clause in the company’s act empowered them so to apply their funds. The bill was proceeded with, and rejected by Parliament. This action was brought against M for breach of this contrast. Autprerson, B. The Solicitor General argued that this promise of the defendant was in truth a promise that the South Eastern Railway Company should do an illegal thing, and that the prom- ise was therefore void: and we are of that opinion. This is not like the promise of a party that an act impossible to be done shall be done by the defendant or by some third person; but it is a promise that an act shall be done contrary to the public law of the country, of which both parties are bound to take notice. The act is therefore illegal; and the promise that it shall be done is a void promise. The question is, we think, determined by the decision of the Court of Common Pleas in East Anglian Railways Company v. Eastern Counties Railway Company, 11 Com. B. 775. It is there laid down that a railway company incorporated by act of Parliament is bound to apply all the funds of the company for the purposes directed and provided for by the act, and for no other purpose whatsoever; and then, the defendants having, inter alia, covenanted to pay the costs of soliciting bills then pending in Parliament, it was held that the act incorporating the defendants, being a public act, must be presumed to be known to the plaintiffs, and that they could not recover, inasmuch as the covenant entered into by the defendants was beyond the scope of their authority as a corporation, and was therefore illegal and void. The court there say that such a contract is illegal, because it is contrary to the act of Parliament which was passed to give them certain powers as a corporation for public pur- poses of advantage to the country at large as well as for the private profit of the individual members of the corporation; and they add SECT. 1.] RICHARDSON ¥. WILLIAMSON. 673 that the actual assent of the whole body of shareholders would make no real difference in the matter. If this be so, both plaintiffs and defendant here must be taken, with full knowledge of the powers conferred on the South Eastern Railway Company, to have made a contract by which the defendant is to bind the company to do an illegal act; not merely an act which they have no power to do, but an act contrary to public policy and the provisions of a public act of Parliament. This, we think, is a void contract, and one, therefore, which cannot form the proper ground for a suit in a court of law. RICHARDSON »v. WILLIAMSON. L.R. 6 Q.B. 276. 1871. DEcLARATION on the common money counts. Plea: never indebted. Issue joined. At the trial before HannEN, J., at the London sittings after Easter term, 1870, it appeared that the action was brought to recover 501., the balance of 701., which the plaintiff had lent to The Imperial Per- manent Benefit Building Society, on the deposit of which she received the following document, stamped as a receipt, signed by the two defendants, who were directors of the society: — “Imperial Permanent Benefit Building Society, “London, 17th June, 1867. “This is to certify that Mrs. A. E. Richardson, of, etc., has this day deposited the sum of 701. with the Imperial Permanent Benefit Building Society for a period of three months certain, upon which interest at the rate of 51. per cent. per annum will be allowed. bb a ba 7" ae \ Directors. ““Wm. Richardson, Secretary. “Memorandum. — The above deposit may be withdrawn at any time subsequent to 17th Sept., 1867, upon receipt of fourteen days previous notice of such intended withdrawal.” The plaintiff withdrew 201. on the 7th of May, 1868, and after giving notice to withdraw the rest, she was unable to obtain it; and a correspondence ensued, in which the defendants said there were plenty of funds, but not immediately available. Being unable to get her money, the plaintiff took legal advice, and was advised that she had no remedy against the society, which was established under the Benefit Building Societies Act (6 & 7 Wm. 4, chap. 32), and the rules of the society containing no power to borrow money; she accordingly brought the present action, seeking to make the defendants personally liable. 674 RICHARDSON 0. WILLIAMSON. [cHap. 11. Cocxzsurn, C.J. The defendants as directors appear to have pro- ceeded to borrow money on behalf of the society without ascertaining whether they had power to do so, and they apply to the public to advance money on the faith of the solvency and liability of the soci- ety. It turns out that they had no authority to do this, the society having no power to borrow money. It cannot be supposed that the plaintiff on lending money to the society did so with the knowledge that the society was not authorized to borrow; and it was-not till she wanted her money back that she ascertained the real position of affairs, and is met by the defence that the society is not liable. For- tunately, there is a mode by which persons acting as the defendants have done can be reached, and the loss thrown on the right parties. By the law of England, persons who induce others to act on the sup- position that they have authority to enter inte a binding contract on behalf of third persons, on it turning out that they have no such authority, may be sued for damages for the breach of an implied warranty of authority. This was decided in Collen v. Wright, 7 E. & B. 301 (E. C. L. R. vol. 90), 26 L.J. (Q.B.) 147, 8 E. & B. 647 (E. C. L. R. vol. 92), 27 L.J. (Q.B.) 215, and other cases; and the necessary amendment may be made in the present case. Then I think upon the facts the inference is, that the defendants do repre- sent upon this instrument that they are authorized on behalf of the society to borrow money, and that the society will be liable on this contract of loan. It is quite true, as the defendants’ counsel con- tended, that the plaintiff intended to deal with the society; and the ground of the amended cause of action is that the defendants induced her to deal with the society by representing they had authority when they had not. BLacKBuURN, J. I am of the same opinion. It appears that the plaintiff on advancing her money received a certificate, signed by two directors, that she had deposited the money with the society for three months, and that after that it would be repaid with interest after fourteen days notice. I think it clear that the defendants, the two directors who signed this certificate, did by that represent that they had authority to borrow the money on behalf of the society, and that the society would be bound to repay it on proper demand. As they had no such authority, it follows, on the principle of the decision in Collen v. Wright, that the plaintiff is entitled to re- cover from the defendants the damages she has suffered from not being able to sue the society, on showing that the defendants professed to be able to bind the society. But as the declaration only contains the common money counts, it will be necessary that an amendment should be made. Had the society been insol- vent, the damages would have been possibly nil. The correspond- ence shows that the society has ample funds, and, therefore, the damages will be the same as what she would have recovered from SECT. 1.] RICHARDSON J. WILLIAMSON. 675 the society: had it been liable, that is, the amount of her loan and interest. Norts. — The Imperial Permanent Benefit Building Society was an unincorporated society. See 6 & 7 Wm. 4, c. 32, and 10 Geo. 4, ¢. 56. Under 10 Geo. 4, c. 56, the members of such a society were to adopt Rules setting forth, among other things the “Purposes for which such society is intended to be established” (section m1), and a tran- script of these Rules was to be filed in a specified public office. (sec- tion Iv). In Beattie v. Lord Ebury, L.R. 7 Ch. 777, Meuuisu, L.J., said (p. 800): “I have no doubt myself that it would be held that if there is no misrepresentation in point of fact, but merely a mistake or mis< representation in point of law, that is to say, if the person who deals with the agent is fully aware in point of fact what the extent of the authority of the agent is to bind his principal, but makes a mistake as to whether that authority is sufficient in point of law or not, under those circumstances I have no doubt that the agent would not be liable. For instance, supposing when an agent comes and professes to make a contract on behalf of his principal, instead of trusting his representation that he has power to bind his principal the person dealing with the agent were to ask to see his authority, and a power of attorney executed by the principal was shewn to him, and he took the opinion of his lawyer as to whether the power of attorney was sufficient to bind the principal, and was advised that it was sufficient to bind the principal, and then after that a contract was made, and it turned out when the point was raised in a Court of Law that the power of attorney was insufficient — under such circumstances I am clearly of opinion that there would be no warranty on the part of the agent that the power of attorney was good in point of law. The first case mentioned on the subject was Collen v. Wright, 8 BE. & B. 647. That was a simple case, where the steward of a gentleman executed an agreement for a lease in his name, and when a suit was brought for specific performance it turned out that the gentleman had never given any authority to the steward to make an agreement for a lease in his name. Specific performance was therefore refused. The plaintiff then brought an action against the steward to recover damages, and was held entitled to recover. There it is perfectly plain that the defendant had made a misrepresentation in point of fact. “The next case was the case of Richardson v. Williamson, Law Rep. 6 Q.B. 276. There the plaintiff lent £70 to a benefit building society, and received a receipt signed by the defendants, as two of the direc- tors, certifying that the money had been lent, and then it turned out that in point of law they had no power to borrow money. But, then, their power to borrow money depended upon whether they 676 RICHARDSON v. WILLIAMSON. (CHAP. II. had made a rule to borrow money, because a benefit building society may receivé money, at any rate to a certain amount, on deposit, if it has a rule enabling it so to receive money. Therefore that was taken as a representation by the directors that they had such a rule, and that the borrowing was within the rule when, in point of fact, there was no such rule at all.” See also Rashdall v. Ford, L.R. 2 Eq. 750. In Riche v. Ashbury Co., L.R. 9 Exch. 224, Martin, B., said (p. 249): “That the directors would be liable upon the contracts sued on there can be no doubt.” For cases in which the plaintiff had no means of knowing that the corporation had no power to make the contract, and in which the court was of opinion that the corporation was not liable, and that the directors were liable see Firbank v. Humphreys, L.R. 18 Q.B. 54; Weeks v. Propert, L.R. 8 C.P. 427. See also Higgins v. Livingstone, 4 Dow, 341, 355. SECT. I1.] NIMS ¥. MOUNT HERMON BOYS’ SCHOOL. 677 SECTION 2. UNITED STATES AUTHORITIES. A. Forts. NIMS v. MOUNT HERMON BOYS’ SCHOOL. 160 Mass. 177. 1893. Knowtton, J. The defendant is an educational corporation. The plaintiff seeks to recover damages for an injury received through the negligence of a Terryman in managing-a—boat-on-which-he-was a passenger, and which, as he alleges, the defendant was using at a public ferry in the business of carrying passengers for hire. At the request of the defendant, the presiding justice ruled that there was no evidence to warrant a finding for the plaintiff, and directed a_ —vardiet forthe defendant. ~The defendant contends that the ruling should be sustamed on one or both of two grounds. It says in the first place, that, i it maimtained the ferry and hired and paid the __ ferryman, the business was ultra vires, and therefore it is not lable ” for negligence in the management of the boat. Secondly, it contends —thm there Was no evidence to ¢ connect the corporation with the busi- ness of running the ferry-boat, or to show that the ferryman was its servant. —Tt is a general rule that corporations are liable for their torts as natural persons are. It is no defence to an action for a tort to show that the corporation is not authorized by its charter to do wrong. Recovery may be had against corporations for assault and battery, for libel and for malicious prosecution, as well as for torts resulting from negligent management of the corporate business. Moere v. Fitchburg Railroad, 4 Gray, 465; Reed v. Home Savings Bank, 130 Mass. 443; Fogg v. Boston & Lowell Railroad, 148 Mass. 513; Philadelphia, Wilmington, & Baltimore Ratlroad v. Quigley, 21 How. 202, 209; Merchants’ Bank v. State Bank, 10 Wall. 604; National Bank v. Graham, 100 U.S. 699; Gruber v. Washington & Jamesville Railroad, 92 N.C. 1; Hussey v. Norfolk Southern Railroad, 98 N.C. 34. If a corporation by its officers or agents unlawfully injures a person, whether intentionally or negligently, it would be most unjust to allow it to escape responsibility on the ground that its act is ultra vires. The only plausible ground on which the defendant in the pres- ent cade can contend that it should be exempt from hability for the neg igence 0 its serva erry-b0a e 678 NIMS J. MOUNT HERMON BOYS’ SCHOOL. [CHAP. It. contract to carry the plaintiff was ultra vires, and therefore invalid, _Sint that the. daty Tor neglect of which the plain suet armrent-of- e contract, and disappears with it when the contract appears to be “void. The defendant may argue that the plaintiff cannot maintain an action for a breach of the contract to use proper care to carry him safely, and that he stands no better when he sues in tort for failure to do the duty which grew out of the contract. In Bissell v. Michigan Southern & Northern Indiana Ratlroad, 22 N.Y. 258, the plaintiff founded his action on the negligence of the two defendants while jointly running cars on a railroad in a State to which the charter of neither of them extended, and it was conceded that the defendants were acting wléra vires. The plaintiff recovered, Comstock, C.J., holding in an elaborate opinion that the corporations were liable under their contract, notwithstanding that the contract was ultra vires, and that if they could not be held under their contract they could not be held at all, inasmuch as the only negligence alleged was a failure to use the care which the contract called for. SELDEN, J., in an equally full and elaborate opinion, held that the contract for carriage was invalid, and that there could be no recovery under it, nor for negligence founded upon it; but it was his opinion that, if the contract were set aside, the defendants owed the plaintiff a duty founded on his relation to them as an occupant, with their permission, of a place in their car, and that the improper management of the car was a neglect of that duty for which the plaintiff could recover. CLERKE, J., agreed with this view, and all but one of the other judges concurred in a decision for the plaintiff, without stating the ground on which they thought the decision should be placed. This case was followed in Buffett v. Troy & Boston Rail- road, 40 N.Y. 168, in which it was held that a railroad corporation was liable for negligence of the driver of a stage-coach which it was running without a legal right to do a business of that kind; but the opinion does not show whether the decision is founded on the opinion of Comstock, C.J., given in the former case, or on that of SELDEN, J. Like decisions have been made under similar facts in Central Railroad & Banking Co. v. Smith, 76 Ala. 572; New York, Lake Erie, & Western Railway v. Haring, 18 Vroom, 137; and Hutchinson v. Western & Atlantic Ratlroad, 6 Heisk, 634. In the present case we think it makes no difference that the de- fendant was not a manufacturing or trading corporation, but was chartered for educational purposes only. It could acquire and hold property, make contracts, and do anything else incidental to the maintenance of the school. Doubtless some of its officers or agents thought it would be an advantage to its students and managers to have a public ferry at the place where the plaintiff was injured. Its maintenance of such a ferry was ultra vires, but its acts in that respect were not different in kind from the ordinary acts of corpora- SECT. II.] NIMS ¥. MOUNT HERMON Boys’ SCHOOL. 679 tions in excess of the powers given them by their charter. We are of opinion, therefore, that if the defendant while running the ferry- boat accepted the plaintiff as a passenger to be transported for hire, and undertook to carry him across the river, he was in the boat as” a licensee, it owed him the duty to use proper care to carry him safely, and, whether an action could be maintained for a breach of the contract or not, it is lable to the plaintiff in an action of tort for nhegiéct Or that duty. e other question in the case is whether there was evidence that the corporation operated the ferry. Under its by-laws the manage- ment of the corporation is vested in a board of trustees. It does not appear that any vote was ever taken in regard to the ferry, and it was not shown that any officer of the corporation took out the license which was granted to the defendant by the county commissioners, under Pub. Sts. chap. 55, § 1, to keep the ferry, but the records of the county commissioners show that such a license was granted, and that a bond with sureties was given to the county of Franklin, with the condition properly to perform the duty of a ferryman, executed in behalf of the defendant by one who was designated as superintend- ent, and witnessed by the defendant’s cashier and paymaster. It further appeared that the title to the property used at the ferry was taken by Ambert G. Moody, one of the trustees of the defendant, who was then a student in Amherst College, and that he paid for it only a nominal sum above the mortgage existing upon it, and that he and the defendant’s superintendent, who had charge of its farm, employed one Deane to operate the ferry, who was paid by the month, and who turned over the balance of the receipts of the ferry above his wages to the defendant’s cashier and paymaster. For the month of April Deane was paid for his services by the defendant’s paymaster out of the defendant’s funds. In June, 1890, a new ferry- boat was constructed under an arrangement with Ambert G. Moody and Dwight L. Moody, both of whom were trustees of the corpora- tion, and was paid for by the paymaster out of the funds of the corporation. For six months, and until there was a change in the management of the ferry, the defendant’s cashier and paymaster sent to the treasurer, who lived in New York, monthly accounts, showing monthly receipts and expenses on account of the ferry. Accompanying the first of these accounts was a statement that the school was running the ferry and paying the bills. The treasurer was himself a trustee of the corporation. He subsequently rendered his official report to the corporation, which was audited by another of the trustees, who did not examine the items in person, but caused the examination to be made by a man in his employment. This report was accepted by the trustees and placed on file. The items of receipts and expenditures were entered on the books of the treasurer in an account under the title “ferry.” The treasurer’s 680 NIMS ¥. MOUNT HERMON BOYS’ SCHOOL. (CHAP. II. report was not put in evidence, and was not produced, although the defendant was notified to produce it. There is no evidence of original authority from the defendant to anybody to operate the ferry on its account, but the evidence is plenary that persons connected with the management of its business assumed so to operate it. The important question is whether there was evidence that the corporation ratified the acts of these persons. We are of opinion that there was evidence from which the jury might have found such ratification. It is not necessary that the ratification should be by a formal vote. It is enough if the corpora- tion, acting through its managing officers, knowing that the business had been done by those who assumed to act as its agents in doing it, and that the income of the business had been received and the expenses of it paid by its treasurer in his official capacity, and that the balance of the receipts above the expenditures was in its treas- ury, adopted the action of its treasurer, and elected to keep the money. It was a fair inference of fact, especially when the corpora- tion failed to produce the treasurer’s report after notice to produce it, that the report contained a true statement of the accounts which related to the ferry, and that it was accepted with full knowledge on the part of the trustees of what it contained. Whether there was a ratification by the corporation was a question of fact for the Jur ~on all the evidence- there was such a ratification, it carried with it the consequences which would have followed an original authority. In Dempsey v. Chambers, 154 Mass. 330, it was held, after much consideration, that ratification of an unauthorized act_would make the principal liable “in an action of tort for_an injury resulti negligence of the agent in doing the act. e are of opinion that the case should have been submitted to the jury. Exceptions sustained. Nore. — A corporation may be liable for tort committed in the course of an wlira vires undertaking, South & North Alabama R.R. Cra Chappalt-6IBe 537; First National Bank v. Henry, 159 Ala. 867; First National Bank v. Strang, 138 Ill. 347, 356; Feital v. Middlesex R.R. Co., 109 Mass. 398; Alexander v. Relfe, 74 Mo. 495, 517; New York, Lake Erie & Western Ry. Co. v. Haring, 47 N.J.L. 137; Bissell v. Michigan Southern, 22 N.Y. 258; Buffett v. Troy & Boston R.R. Co., 40 N.Y. 168; Hannon v. Siegel-Cooper Co., 167 N.Y. 244 (a corporation, proprietor of a department store, held liable for malpractice in the business of dentistry. “Though it was beyond the corporate powers of the defendant to engage in the business this does not relieve it from the torts of its servants committed therein’); Gruber v. Railroad Co., 92 N.C. 1; Searle v. First National Bank, 2 SECT. 11.] NIMS ¥. MOUNT HERMON BOYS’ SCHOOL. 681 Walker (Pa.) 395; Hutchinson v. Western R.R. Co., 6 Heisk. (Tenn.) 634; Zine Carbonate Co. v. First National Bank, 103 Wis. 125; National Bank v. Graham, 100 U.S. 699 (‘corporations are liable for every wrong they commit, and in such cases the doctrine of ultra vires has no application”’). But see, contra, Gunn v. Central R.R., 74 Ga. 509; Bathe v. Decatur Agricultural Society, 73 Iowa, 11; Weckler v. First National Bank, 42 Md. 581, 595. Salt Lake City v. Hollister, 118 U.S. 256. The question was whether a municipal corporation was subject to internal revenue taxation under the laws of the United States for engaging in the business of distilling spirits: The defense was that it was ultra vires for the cor- poration to engage in such a business. The court held that the cor- poration was liable. Mr. Justice MrtuEr said (p. 259): “It would bea fine thing, if this argument is good, for all distillers to organize into milling corporations to make flour, and proceed to the more profit- able business of distilling spirits, which would be unauthorized by their charters or articles of incorporation; for they would thus escape taxation and ruin all competitors. It is said that the acts done are not the acts of the city, but of its officers or agents who undertook to do them in its name. This would be a pleasant farce to be enacted by irresponsible parties, who give no bond, who have no property to respond to civil or criminal suits, who make no profit out of it, while the city grows rich in the performance. It is to be taken as a fair inference on this demurrer that all that the city might have done was done in establishing this business. The officers who, it is said, did this thing, must be supposed to have been properly appointed or elected. Resolutions or ordinances of the governing body of the city directing the establishment of the distillery and fur- nishing money to buy the plant, must be supposed to have been passed in the usual mode. Everything must have been done under the same rules and by the same men as if it were a hospital or a town hall. If the demurrer had not admitted this, it could no doubt have been proved on an issue denying it. But the argument is unsound that whatever is done by a corporation in excess of the corporate ‘powers, as defined by its charter, is as though it was not done at all. “KX railroad tompany authorized to acquire a right of way by such exercise of the right of eminent domain as the law prescribes, which undertakes to and does seize upon and invade, by its officers and servants, the land of a citizen, makes no compensation, and takes no steps for the appropriation of it, is a naked trespasser, and can be made responsible for the tort. It had no authority to take the man’s land or to invade his premises. But if the governing board had directed the act, the corporation could be sued for the tort, in an action of ejectment, or in trespass, or on an implied assumpsit for the value of the land. A plea of ultra vires, in this case, would be no defence. The truth is, that, with the great increase in corpora- 682 CENTRAL R.R. CO. v. SMITH. [CHAP. 11. tions in very recent times, and in their extension to nearly all the business transactions of life, it has been found necessary to hold them responsible for acts not strictly within their corporate powers, ay but done in their corporate name, and by corporation officers who : —were cormipetent to exercise all the corporate powers. When such “acts are not founded on contract, but are arbitrary exercises of power in the nature of torts, or are quasi-criminal, the cor lon may b eld to a pecuniary responsibility for them to the party injured.” CENTRAL R.R. CO. v. SMITH. 76 Ala. 572. 1884. Apprat from Circuit Court. Action by Smith against the appellant, described as ‘‘a corporation created by the laws of Georgia, and doing business in Alabama by agents.” Plaintiff seeks to recover damages for injuries sustained by. Seine of The Stee Lek Gorge Walle tie ee attahoochee River; the plaintiff having been a passenger at the time. —The complaint alleged that the defendant corporation was a com- mon carrier, and was, in connection with one Whitesides (who was not sued), the owner and proprietor of said steamboat, and engaged in running and operating it for the transportation of passengers and freight for a reward; and that the accident and injury were caused by the negligence of the officers and persons in charge of the boat, and its unsound and rotten condition. The defendant pleaded not guilty, and a special plea which averred, im substance;that-it-had no | authority under its charter to engage in running a steamboat on the Chattahoochee River, and that the persons who were engaged i in running said steamboat, at the time of the alleged loss and injury, —were hot the agents or servants of said defendant. Issue \ was joined \ on both of these pleas. The court, at defendant’s request, instructed the jury that the defendant had no power under its charter to own or operate the Stea: : ever—at—plaintif’s_ request, added—to this instruction: “But this will not excuse defendants, if the evidence shows they did operate it.” To this addition, defendant excepted. Sea ees —TCrorTon, J. [The court held, on other grounds, that there must be a new trial. It further held that the corporation had no power, under its charter, to own and operate the steamboat ih association with a natural person.) The question is, what is the liability of a corporation for a tort, committed while transacting a business without and be- yond the purview of the corporate powers and purposes? This is 4 SECT. II.] CENTRAL R.R. CO. ¥. SMITH. 683 . followed by another question; by what authority, and in what man- ner, can a corporation be subjected to such liability? . . . Before the duties and responsibilities attach, the corporation must undertake and engage in the business, and thereby assume its bur- dens. Of this there can be no implication, from the isolated fact, that some officer or agent has engaged, in the name of the company, in running and operating the boats; in other words, there can be no implication that a corporation has made a contract, or engaged in business transcending its powers. Green’s Brice’s Ultra Vires, 364. It may be inferred from proved circumstances, as other facts, but is not the subject of implication. Corporations are responsible for the wrongs committed by their officers, agents, or servants, while in the course of their employment; but, if the officer, agent, or servant, “go beyond the range of his employment or duties, and of his own will do an unlawTul act injurious to another, the agent is liable, but ~ the master or employer is not.” Gilliam v. S. & N.R.R. Co., 70 Ala. 268. The limitation is, the scope of the employment, or delegated authority. If an officer or agent can not directly subject the corpora- tion to liability for his tortious act beyond the range and course of his employment, though doné while engaged in its performance, for what reason, or on what principle is it, that an officer or agent can, by making an unlawful transaction, and engaging in an un- authorized and unlawful business, in the name of the company, without the authority of the corporation, indirectly subject it to liability for the negligent or intentional wrongs of the agents or servants employed by him in the performance of such contract, or in carrying on such business? While corporations should be held to a strict responsibility for the wrongful acts of their employees, when done in the course of their employment, and connected with the execution of the business for which incorporated, they should be protected against the consequences of unauthorized acts of their officers or agents, committed in excess of its powers, and uncon- nected with the business or purposes of their incorporation and organization, especially when dealing with persons charged with notice of their powers, and the nature and extent of the employment and authority of the officer or agent. In Brakan v. N.J.R. & T. Co., 32 N.J. Law, 328, it is said: “In considering the question whether the agent has the authority of the corporation, so as to make it answerable for his act, the purposes for which the company was incorporated must not be overlooked. An authority given even by the board of directors, in express terms, will not, in all cases, be the authority of the corporation. The directors are only agents themselves, and their powers are neces- sarily limited within the scope of the purposes for which the corpora- tion was created, beyond which they are not authorized to bind the corporation. To fix the liability of a corporation for the tortious 684 CENTRAL R.R. CO. v. SMITH. [c#ap. 11. acts of one of its employees done in obedience to the commands of its officers, the act must be connected with the transaction of the ‘business for which the company was incorporated. If the directors “should order an agent to take a person out of his house and beat him; or if the directors of a banking company should purchase a steamboat, and engage in transporting passengers, the corporation would not be liable for the misfeasance or nonfeasance of agents employed in that business.” It is true that the board of directors may be invested by the charter, or general law, with such manage- ment and authority as practically to constitute it the corporation; but, by the provisions of the charter of the defendants, the directors are agents and representatives, with authority limited by the scope of the powers, business, and purposes of the corporation. It will be observed that the business was not carried on in the name of the corporation. As there is no implied authority of any officer or agent to make an ultra vires contract, oF transaction, and on that ground —mrerety-bimd the corporation, it follows, that ifthe bosts-were-pur- éd, in connection wi itesidés, i i of transporting persons and freight on the Chattahoochee River, by the president, superintendent, or even the directors, the cor- poration is not bound thereby, and is not liable for the negligent “or wrongful acts of the persons employed in such business, unless ~~ the transaction was previously authorized, or subsequently ratrtted ‘by the corporation. Without such authority or ratification, the persons thus employed are not the agents or employees of the cor- poration. As the immediate or direct act of the officer or agent, in such case, can not bind the corporation, his mere knowledge of, and acquiescence in the prosecution of such business, are not tantamount to a ratification by the corporation. Considering the difference be- tween the principles which govern the liability of the company for the tortious acts of its agents committed in the course of their authorized employment, and its liability for the tortious acts of persons employed in the conduct and prosecution of a business undertaken on behalf of the corporation by its agents, beyond the range of their employment, and prohibited by the laws of its creation, the previous authority or subsequent ratification, in order to bind the corporation, must be in corporate capacity. A corporation is an artificial body, a distinct person, in legal contemplation, from the stockholders, in which the corporate property is vested. Its will is usually or ordinarily expressed at a meeting of the corporators. Its officers are its agents, and not the agents of the stockholders. In this sense, previous authority, to bind the corporation by the act of an officer or agent transcending its powers and unconnected with its authorized business and pur- poses, must be the result of corporate action, as contradistinguished from the individual action of the stockholders or officers. Subse- SECT. I1.] CENTRAL R.R. CO. v. SMITH. 685 quent ratification results, when a knowledge of the business being thus conducted, and of the reception and retention of its fruits and benefits, is brought home to the corporators, at a time, and under circumstances which require them to elect to repudiate or be bound, and they fail to disavow the act; in other words, any facts, which would be a ratification of the unauthorized acts of an agent by a poner who is a natural person. Nore, — The Mount Hermon Boys’ School was an educational corporation, and it does not appear that there were any stockholders. In the case of a corporation having stockholders, will the act of the directors (or other similar managing officers) in engaging, in the name of the corporation, in a business, lawful in itself but ultra vires of the corporation, be given corporate significance, without more ¢ ? “This 1s not as yet plain under the authorities. : Tn most of the cases cited in the note to Nims v. Mount Hermon Boys’ School, supra, no consideration was given to this question. In the Bissell case, SELDEN, J., said (22 N.Y. 258, 306): “There is no doubt that all that was done under the arrangement between the defendants, unauthorized and contrary to law, is nevertheless to be treated as done by the corporations themselves. The business was carried on under the direction of their managing officers, with their “property and for their benefit; and they cannot now be heard at it was do : is to be noted, however, that the busi- ére in question had been carried on openly in the name of the corporation over a considerable period of time. 686 NATIONAL BANK Jv. MATTHEWS. [CHAP. II. B. Transfers of Property Rights. NATIONAL BANK v. MATTHEWS. 98 U.S. 621. 1878. Error to the Supreme Court of the State of Missouri. On the Ist of March, 1871, Hugh B. Logan and Elizabeth A. Matthews executed and delivered to Sterling Price & Co. their _{oint_ and several promissory note for the sum of $15,000, payable to the order of that firm two years from date, with interest at the Tate of ten per cent per annum. The payment of the note was secured by a deed of trust, executed by her, of certain real estate ‘therein described, situate in the State of Missouri. © —On the [3th of the same month, the note and deed of trust were assigned to the Union National Bank of St. Louis. Price & Co. failed to pay the loan at maturity. The bank directed the trustee hamed in the deed of trust to sell. Said Elizabeth thereupon filed this bill in the proper State court to enjoin the sale. The bank in its answer avers that it “accepted the said note and deed of trust as security for the sum of $15,000, then and there advanced and loaned to said Sterling Price & Co... . on the security of said note and deed of trust.” A perpetual injunction was decreed, upon the ground that the loan by the bank to Price & Co. was made upon real- estate security; that it was Torbidden by law; and that the deed _of trust was, therefore, void. The decree was made upon the pleadings. “No testimony was introduced upon either side. The bank removed the case to the Supreme Court of the State, where the decree was affirmed. The bank then sued out this writ of error. Mr. Justice Swayne, after stating the facts, delivered the opinion of the court. This case involves a question arising under the national banking law, which has not heretofore been passed upon by this court. We have considered it with the care due to its importance. Our attention has been called to but a single point which requires consideration, and that is, whether the deed of trust can be enforced for the benefit of the bank. The statutory provisions which bear upon the subject are as follows: — “Secor. 5186.” Every national banking association is authorized ‘to exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be neces- sary to carry on the business of banking by discounting and negoti- ating promissory notes, drafts, bills of exchange, and other evidences SECT. 11.] NATIONAL BANK 0. MATTHEWS. 687 of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtain- ing, issuing, and circulating notes according to the provisions of this title. “Sect. 5137. A national banking association may purchase, hold, and convey real estate for the following purposes, and for no others: First, such as may be necessary for its immediate accom- modation in the transaction of its business. Second, such as shall be mortgaged to it in good faith by way of security for debts previ- ously contracted. Third, such as shall be conveyed to it in satisfac- tion of debts previously contracted in the course of its dealings. Fourth, such as it shall purchase at sales under judgments, decrees, or mortgages held by the association, or shall purchase to secure debts to it. But no such association shall hold the possession of any real estate under mortgage, or the title and possession of any real estate purchased to secure any debts due to it for a longer period than five years.” Rev. Stat. 1999; 13 Stat. 99. Here the bank never had any title, legal or equitable, to the real estate in question. It may acquire a title by purchasing at a sale under the deed of trust; but that has not yet occurred, and never may. Section 5137 has, therefore, no direct application to the case. It is only material as throwing light upon the point to be consid- ered in the preceding section. Except for that purpose it may be laid out of view. Section 5136 does not, in terms, prohibit a loan on real estate, but the implitation to that effect is clear. What is so implied is as effectual as if it were expressed. As the transaction is disclosed in the record, the loan was made upon the note as well as the deed of trust. Non constat, that the maker who executed the deed would not have been deemed abundantly sufficient without the further secu- rity. The deed, as a mortgage would have been, was an incident to the note and a right to the benefit of the deed, whether mentioned or delivered or not, when the note was assigned, would have passed with the note to the transferee of the latter. The object of the restrictions was obviously threefold. It was to keep the capital of the banks flowing in the daily channels of com- merce; to deter them from embarking in hazardous real-estate specu- lations; and to prevent the accumulation of large masses of such property in their hands, to be held, as it were, in mortmain. The intent, not the letter, of the statute constitutes the law. A court of equity is always reluctant in the last degree to make a decree which will effect a forfeiture. The bank parted with its money in good faith. Its garments are unspotted. Under these circumstances, the defence of wléra vires, if it can be made, does not address itself favor- ably to the mind of the Chancellor. We find nothing in the record 688 NATIONAL BANK ¥. MATTHEWS. (CHAP. 11. touching the deed of trust which, in our judgment, brings it within the letter or the meaning of the prohibitions relied upon by the counsel for the defendant in error. Where a corporation is incompetent by its charter to take a title to real estate, a conveyance to it is not void, but only voidable, and the sovereign alone can object. It is valid until assailed in a direct proceeding instituted for that purpose. Leazure v. Hillegas, 7 Serg. & R. (Pa.) 318; Goundie v. Northampton Water Co., 7 Pa. St. 233; Runyon v. Coster, 14 Pet. 122; The Banks v. Poitiaux, 3 Rand. (Va.) 186; McIndoe v. The City of St. Louis, 10 Mo. 577. See also Gold Mining Company v. National Bank, 96 U.S. 640. The authority first cited is elaborate and exhaustive upon the subject. So an alien, forbidden by the local law to acquire real estate, may take and hold title until office found. Fairfax’s Devisee v. Hunter’s Lessee, 7 Cranch, 604. In Silver Lake Bank v. North, 4 Johns. (N.Y.) Ch. 370, the bank was a Pennsylvania corporation, and had taken a mortgage upon real estate in New York. A bill of foreclosure was filed in the latter State. The answer set up as a defence “that by the act of incorpora- tion the plaintiffs were not authorized to take a mortgage except to secure a debt previously contracted in the course of its dealings; and here the money was lent after the bond and mortgage were exe- cuted.” The analogy of this defence to the one we are considering is too obvious to need remark. Both present exactly the same question. Chancellor Kent said: ‘Perhaps it would be sufficient for this case that the plaintiffs are a duly incorporated body, with authority to contract and take mortgages and judgments; and if they should pass the exact line of their power, it would rather belong to the government of Pennsylvania to exact a forfeiture of their charter, than for this court in this collateral way to decide a question of misuser, by setting aside a just and bona fide contract. . . . If the loan and mortgage were concurrent acts, and intended so to be, it was not a case within the reason and spirit of the restraining clause of the statute, which only meant to prohibit the banking company from vesting their capital in real property, and engaging in land speculations. A mortgage taken to secure a loan advanced bona fide as a loan, in the course and according to the usage of banking opera- tions, is not surely within the prohibition.” Tt is not denied that the loan here in question was within this category. This authority, if recognized as sound, is conclusive. See also Baird v. The Bank of Washington, 11 Serg. & R. (Pa.) 411. Sedgwick (Stat. and Const. Constr. 73) says: ‘ Where it is a simple question of authority to contract, arising either on a question of reg- ularity of organization or of power conferred by the charter, a party who has had the benefit of the agreement cannot be permitted in an action founded upon it to question its validity. It would be in the SECT. 11.] KERFOOT ¥. FARMERS’ BANK. 689 highest degree.inequitable and unjust to permit a defendant to re- pudiate a contract, the benefit of which he retains.” What is said in the text is fully sustained by the authorities cited. We cannot believe it was meant that stockholders, and perhaps depositors and other creditors, should be punished and the borrower rewarded, by giving success to this defence whenever the offensive fact shall occur. The impending danger of a judgment of ouster and dissolution was, we think, the check, and none other contemplated by Congress. That has been always the punishment prescribed for the wanton violation of a charter, and it may be made to follow whenever the proper public authority shall see fit to invoke its application. A private person cannot, directly or indirectly, usurp this function of the government. The decree of the Supreme Court of Missouri will be reversed, and the cause remanded with directions to dismiss the bill; and it is So ordered. Mr. Justice MILLer dissenting. I am of opinion that the National Banking Act makes void every mortgage or other conveyance of land as a security for money loaned by the bank at the time of the transaction to whomsoever the con- veyance may be made; that the bank is forbidden to accept such security, and it is void in its hands. The contract to pay the money, and the collateral conveyance for security, are separable contracts, and so far independent that one may stand and the other fall. In the present case, the money was loaned on the faith of the deed of trust, and that instrument is void in the hands of the bank, but the note, as evidence of the loan of money, is valid against Mrs. Matthews personally. With this latter contract the State court did not interfere. It enjoined proceedings under the deed of trust against the land, and did no more. Its judgment in that matter ought, in my opinion, to be affirmed. KERFOOT v. FARMERS’ BANK. 218 U.S. 281. 1910. Mr. Justice Hucuss delivered the opinion of the court. This action was brought in 1894, in the Circuit Court of Grundy County, State of Missouri, to set aside a deed of real property made ry James FT: Irs nal-Bank-of Frenton,Mis- sourl, and also a deed by which that bank purported to convey the 690 KERFOOT ¥. FARMERS’ BANK. [CHAP. II. same property to the defendants Hervey Kerfoot, Alwilda Kerfoot ‘and Lester R. Kerfoot, and for the recovery ry Of B possession. The— plaintiffs in the action, which was brought shortly after-the-death of James H. Kertoot, were Homer Hall, administrator of his esta estate, and Robert Marl Kerfoot, his infant grandson, who claimed to be his only heir at law and sued by Homer Halt as next friend. The peti- “tion contained two counts, one in equity, the other in ejectment. Upon the trial the Circuit Court found the issues for defendants and the judgment in their favor was affirmed by the Supreme Court of Missouri. 145 Missouri, 418. On his coming of age Robert Earl Kerfoot sued out this writ of error. The plaintiff in error challenges the conveyance made by James H. Kerfoot to the bank, upon the ground that under § 5137 of the ~Revised Statutes of the United States relating to national-banks, ~the bank was without power to take property, amc-hence that no-title passed by the deed, but that it remained in the grantor and descended to the plaintiff in error as his heir at law. It appears that the deed, which was absolute in form, with warranty and expressing a sub- stantial consideration, was executed in pursuance of an arrangement by which the title to the property was to be held in trust to be con- veyed upon the direction of the grantor; and the Supreme Court of Missouri decided that a trust was in fact declared by the grantor in favor of Hervey, Alwilda and Lester R. Kerfoot, to whom ran a quitclaim deed, which he prepared and forwarded to the bank to be signed and acknowledged by it and then returned to him. But while the purpose of this transaction was not one of those described in the statute for which a national bank may purchase and hold real estate, it does not follow that the deed was a nullity and that it failed to convey title to the property. In the absence of a clear expression of legislative intention to the contrary, a conveyance of real estate to a corporation for a purpose not authorized by its charter, is not void, but voidable, and the sovereign alone can object. Neither the grantor nor his heirs nor third persons can impugn it upon the ground that the grantee bas exceeded its powers. Smith v. Sheeley, 12 Wall. 358; National Bank v. Matthews, 98 U.S. 621; National Bank v. Whitney, Ragnolds v. Craufordeville Bank, 112 U.S. 405; Fritts v. Palmer, 132 U.S. 282; Leazure v. Hillegas, 7 Serg. & R. (Pa.) 313. Thus, although the statute by clear implication forbids a national bank from making a loan upon real estate, the security is not void and it cannot be suc- cessfully assailed by the debtor or by subsequent mortgagees be- cause the bank was without authority to take it; and the disregard of the provisions of the act of Congress upon that subject only lays the bank open to proceedings by the Government for exercising powers not conferred by law. National Bank v. Matthews, supra; National Bank v. Whitney, supra; Swope v. Leffingwell, 105 U.S. 3. SECT. It.] KERFOOT 2. FARMERS’ BANK. 691 In National Bank v. Matthews, supra, viewing that case in this aspect, the court said: — “Where a corporation is incompetent by its charter to take a title to real estate, a conveyance to it is not void, but only voidable, and the sovereign alone can object. It is valid until assailed in a direct proceeding instituted for that purpose. Leazure v. Hillegas, 7 Serg. & R. (Pa.) 318; Goundie v. Northampton Water Co., 7 Pa. St. 233; Runyon v. Coster, 14 Pet. 122; The Banks v. Poitiaux, 3 Rand. (Va.) 136; McIndoe v. The City of St. Louis, 10 Missouri, 575, 577. See also Gold Mining Co. v. National Bank, 96 U.S. 640.” This rule, while recognizing the authority of the Government to which the corporation is amenable, has the salutary effect of assuring the security of titles and of avoiding the injurious consequences which would otherwise result. In the present case a trust was de- clared and this trust should not be permitted to fail and the property to be diverted from those for whom it was intended, by treating the conveyance to the bank as a nullity, in the absence of a clear state- ment of legislative intent that it should be so regarded. The cases in this court, which are relied upon by the plaintiff in error, are not applicable to the facts here presented and are in no way inconsistent with the doctrine to which we have referred. McCormick v. Market Bank, 165 US. 538; California Bank v. Ken- nedy, 167 U.S. 362; Concord First National Bank v. Hawkins, 174 US. 364. It was also urged by the plaintiff in error that the deed was not accepted by the bank, and was inoperative for that reason. The Supreme Court of Missouri held upon the evidence that it was ac- cepted, and this court, on a question of that character, does not re- view the findings of fact which have been made in the state court. Waters-Pierce Oil Co. v. State of Texas, 212 U.S. 86; Egan v. Hart, 165 U.S. 188; Clipper Mining Co. v. Eli Mining & Land Co., 194- USS. 220. Assuming that the deed was accepted by the bank, it was effective to pass the legal title, and the plaintiff in error as heir at law of the grantor cannot question it. Judgment affirmed. Nors. —I. No collateral attack will be permitted on the power of a corporation to be a conduit of title. Morris v. Hall, 41 Ala. 510, 537; Sherwood v. Alvis, 83 Ala. 115 (A mortgages to M, B purchases at the foreclosure sale, and may maintain ejectment against A); Bigbee Co. v..Moore, 121 Ala. 379 (M subscribed to and took stock in N, and transferred to A. A may recover dividends from N); Barnes v. Suddard, 117 Il. 237; Lathrop v. Commercial Bank, 8 Dana (Ky.) 114; Shewalter v. Pirner, 55 Mo. 218; Ragan v. McElroy, 98 Mo. 349; Parish v. Wheeler, 22 N.Y. 494, 504; Matter of Long Acre 692 KERFOOT v. FARMERS’ BANK. [CHAP. II. Co., 188 N.Y. 361, 369; Mallett v. Simpson, 94 N.C. 37, 41; Leazure v. Hillegas, 78. & R. (Pa.) 313; Goundie v. Northampton Water Co., 7 Pa. St. 233; Gilbert v. Hole, 28.Dak. 164; National Bank v. Stewart, 107 U.S. 676; Fritts v. Palmer, 182 U.S. 282; Lantry v. Wallace, 182 US. 536. The grantee, B, from M, contracts to sell to C. B may have spe- cific performance, Walsh v. Barton, 24 Ohio St. 28. II. The grantor to a corporation of property which it was ultra vires for the corporation to receive cannot recover the property, or have his conveyance removed as a cloud on title. Morris v. Hatt, “AT Ala. 510, 587 (A may not maintain trover against M); Long v. Georgia Ry. Co., 91 Ala. 519, 521; Hough v. Cook County Land Co., 73 Il. 23; Hayden v. Hayden, 241 Ill. 183; Edwards v. Fairbanks, 27 La. Ann. 449 (judgment creditors of A seize the chattels, and M is allowed to intervene in the execution proceedings and recover the chattels); Ragan v. McElroy, 98 Mo. 349; Pittsburgh Co. v. Altoona Co., 196 Pa. 452. See also Miner’s Ditch Co. v. Zellerbach, 37 Cal. 543, 606; Barrow v. Nashville Co., 9 Humphrey (Tenn.) 304. Similarly as to any privy of A. Lathrop v. Commercial Bank, 8 Dana 114; De Witt Co. Bank v. Mickelberry, 244 Ill. 77 (creditor of mortgagor not entitled to show that M had no power to purchase the land at foreclosure sale) ; Baker v. Northwestern Co., 36 Minn. 185; Christian Union v. Yount, 101 U.S. 352, 361. Conversely, the corporation cannot sue A to recover back the purchase price. Hagerstown Mfg. Co. v. Keedy, 91 Md. 430. To the same effect is Baird v. Bank of Washington, 11 8S. & R. (Pa.) 411, 418. A had land bounded by a lake. He deeded it to M, whose purchase was ulira vires. A has not thereafter the rights of a riparian proprietor against third parties. Attorney-General v. Smith, 109 Wis. 532. III. The corporation may enforce the usual incidents of owner- ship against third persons. M may enjoin A, or a privy of A, from interference with the prop- erty. Alexander v. Tolleston Club of Chicago, 110 Ill. 65; Reynolds v. Crawfordsville Bank, 112 U.S. 405, 413. M may cause A to be indicted for a trespass upon Blackacre, which trespass is criminal because the ownership is in M, a municipal cor- poration. Commonwealth v. Wilder, 127 Mass. 1. A sold a three-quarters interest in Blackacre to B, and a one- quarter interest to M. The land was sold to satisfy a lien in favor of A’s grantor. The whole lien was satisfied out of B’s share of the pro- ceeds, on principles which would hold if M acquired title to the one- quarter. B was not allowed to show that M’s taking was ultra vires. Lntchfield v. Preston, 98 Va. 580. SECT. I1.] KERFOOT v¥. FARMERS’ BANK. 693 A conveyed to B, the conveyance being voidable because of the fraud of B. B conveyed to M, who paid value and had no notice of the fraud. M has the rights of a bona fide purchaser against A. Schneider v. Sellers, 98 Tex. 380. M may maintain ejectment against the casual possessor. Natoma Co. v. Clarkin, 14 Cal. 544, 552; Chicago R.R. Co. v. Keegan, 185 Ill. 70. Contra, Catholic Congregation v. Germain, 104 Ill. 440 (but see Hamsher v. Hamsher, 132 Ill. 273, 286) ; Trustees v. Dickenson, 1 Dev. L. (N.C.) 189 (M may not maintain detinue for shares against a stranger. Decided in 1827). If the municipality damages Blackacre by changing the grade of the street, M may recover damages. Lowisville Property Co. v. Nashville, 114 Tenn. 213 (foreign corporation). M may lease Blackacre to B, and maintain an action for the ren$ against the lessee, Rector v. Hartford Deposit Co., 190 Ill. 380, and the surety of the lessee, Nantasket Co. v. Shea, 182 Mass. 147. It may enforce other provisions of the lease. Springer v. Chicago Trust Co., 202 Ill. 17; Cowell v. Springs Co., 100 U.S. 55, 60. M may maintain a petition under the Burnt Records Act to con- firm its title. Cooney v. Booth Packing Co., 169 Ill. 370. M may acquire, by accretion, more land than it is authorized to hold and may maintain a bill to quiet its title to such land. Chesa- peake Co. v. Walker, 100 Va. 69. M conveys or sells to B, and may recover from B the purchase price according to the contract. Slater Woollen Co. v. Lamb, 148 Mass. 420; Holmes & Griggs Co. v. Holmes & Wessell Co., 127 N.Y. 252, 260; Rutland Co. v. Proctor, 29 Vt. 93. And enforce a vendor’s lien. Fayette Land Co. v. Louisville R.R., 93 Va. 274. If B contracts to buy, M may have specific performance. Davis v. Old Colony R.R., 131 Mass. 258, 273; Lancaster v. Amsterdam Improve- ment Co., 140 N.Y. 576, 584; Banks v. Poitiaux, 3 Rand. (Va.) 136. A municipality could compel the sale to it of the property of a water company at a valuation, and sought so to do. It was obliged to pay for all the property held by the company for the purposes of its incorporation, whether that was in excess of the amount author- ized or not. West Springfield v. Aqueduct Co., 167 Mass. 128. If M makes an wlira vires purchase of a negotiable instrument, it may enforce the note against prior parties. Prescott National Bank v. Butler, 157 Mass. 548 (and prior cases); Merchants’ Bank v. Hanson, 33 Minn. 40 (directly overruling Farmers’ Bank v. Baldwin, 23 Minn. 198, and Bank of Rochester v. Pierson, 24 Minn. 140); Hennessy v. St. Paul, 54 Minn. 219, 223; Franklin Institution v. Roscoe, 75 Mo. 408. Contra, Lazear v. National Union Bank, 52 Md. 78, 125 (but see United German Bank v. Katz, 57 Md. 128, 141; Black v. Bank of Westminster, 96 Md. 399, 429). 694 CALIFORNIA NATIONAL BANK Jv. KENNEDY. [CHAP. II. If M makes an ultra vires purchase of a non-negotiable chose in action, it may enforce it in the same manner in which any other assignee could have enforced it. State Ins. Co. v. Farmers Co., 65 Neb. 34, 41; Farwell Co. v. Wolf, 96 Wis. 10. CALIFORNIA NATIONAL BANK v. KENNEDY. 167 U.S. 362. 1897. Tus action was commenced in the Superior Court of the county of San-Dicgo; State of California, against the California Savi gainst_ the California Savings “Bank, and other defendants, including the plaintiff in error. In each “of five counts of an amended petition a separate cause of action was “stated, seeking a judgment against the savings bank for the amount “of a particular deposit of money alleged to have been made with it on @ specified date, and a recovery was asked against the other defendants upon the ground that they were stockholders in the say- ings bank on the dates of the various deposits, and in consequence liable under the laws of California to pay the debts of the savings bank in proportion to the amount of stock held and owned by each stockholder. A demurrer to the amended complaint was overruled, and the California National Bank answered, denying that it was ever ~the owner of any stock in the savings bank, and alleging that if any such stock was ever issued to it, it was issued without due ority from the bank inits corporate capacity and without authority of law. The answer also averred that the bank never acquired “in the usual course of business or now has as owner any stock of the said defend- ant, the California Savings Bank.” ~ No issue was taken upon the truth of the averments in the amended complaint as to the amount and date of the respective deposits which plaintiff alleged he had made in the savings bank. From the evidence it appeared that the savings bank began busi- ness in January, 1890. Its stock consisted of twenty-five hundred shares, and was originally distributed in five certificates, each for 500 shares, one certificate being made in the name of each of the following persons: J. W. Collins, 8. G. Havermale, D. D. Dare, William Collier and H. F. Norcross. Norcross had no official con- nection with the national bank, but Collier, Dare and Collins were, respectively, president, vice president and cashier of the national bank, and were also, with Havermale, directors of the bank during the period when the alleged transfers of stock were made to the bank. The certificates in the names of Collier and Norcross were never delivered, and when subsequently cancelled contained no indorse- ment. In the stead of those certificates, however, on September 10, 1890, three certificates, aggregating 990 shares, were issued in the SECT. 11.] CALIFORNIA NATIONAL BANK ¥. KENNEDY. 695 name of J. W. Collins, cashier, and two certificates, each for five shares, were issued to Collier and Norcross, respectively. On Jan- uary 2, 1891, the three certificates for 990 shares in the name of Collins, cashier, were surrendered, and a single certificate for that number of shares was issued in the name of the California National Bank. , In December, 1890, and January, 1891, five per cent dividends were declared and paid on the stock of the savings bank. The amount of each dividend received by the California National Bank was $750. No direct evidence was introduced accounting for these payments having been made on the basis of an ownership of 1500 shares, when the bank was sought to be held liable for and appeared to be the holder of but 990 shares, put in its name as above stated. Both the savings bank and the national bank became insolvent; the former suspending November 12, 1891, while the receiver of the national bank qualified December 29, 1891. The cause was tried by the court without a jury, and by findings of fact and conclusions of law rested thereon the court sustained the averments of the complaint, adjudged the national bank to be the holder of 990 shares of the stock of the savings bank, and responsible to the creditors of the savings bank in that proportion. Judgment was entered against the savings bank for $47,497.75, and against the national bank for $18,507.52, a payment to the savings bank, how- ever, to be a satisfaction of the judgment against the national bank. Both at the hearing, by objection to the introduction in evidence of the certificate of stock, and in a statement filed with the motion for a new trial, the point was made that the issue of the stock to the “park was void because not shown to have been acquired pursuant to authority of its board of directors, and because the stock was not taken in the ordinary course of the business of the bank as security S payment of a debt or otherwise. In addition, by the first, second and third specifications of errors of law occurring at the trial it was specially stated that error had been committed in admitting the certificate in evidence and holding the national bank liable — substantially the same language being employed.in each specifica- tion — because the national bank, a corporation under the banking laws of the United States, could ‘“‘not in law become a stockholder or incorporator in any other corporation.” The motion for a new trial was overruled, and an appeal was taken to the Supreme Court of the State, by which court the judgment was affirmed. 101 Cali- fornia, 495. A writ of error was allowed, and the cause has been brought here for review. Mr. Justice Wurre. [After holding that a national bank has no power to purchase or subscribe to the stock of another corporation.*] The transfer of the stock in question to the bank being unauthorized 1 The opinion on this point is set forth at p. 415, supra. a 696 CALIFORNIA NATIONAL BANK v. KENNEDY. [CHAP. II. by law, does the fact that, under some circumstances, the bank might have legally acquired stock in the corporation estop the bank from setiing up the illegality of the transaction ? Whatever divergence of opinion may arise on this question from conflicting adjudications 1 in some of the state courts, in this court it is settled in favor of the right of the corporation to plead its want ‘of power, that is to say, to assert the nullity of an act which is an ultra vires act. The cases of Thomas v. Railroad Company, 101 U.S. “TT; Pennsylvania Railroad v. St. Louis, Alton &c. Railroad, 118 U.S. 290; Oregon Railway & Navigation Co. v. Oregonian Railway Co., 130 US. 1; Pittsburgh, Cincinnati &c. Railway v. Keokuk & Hamilton Bridge Co., 131 U.S. 371; Central Transp. Co. v. Pullman’s Car Co., 139 U.S. 24; St. Lowis &c. Railroad v. Terre Haute & Indianapolis Railroad, 145 U.S. 393; Union Pacific Railway v. Chicago &c. Rail- way, 163 U.S. 564, and McCormick v. Market Nat. Bank, 165 US. 538, recognize as sound doctrine that the powers of corporations are such only as are conferred upon them by statute, and that, to quote from the opinion of the court in Central Transp. Co. v. Pullman's Palace Car Co., 189 U.S. 24, 59 to 60: “A contract of a corporation, which is ultra vires, in the proper sense, that is to say, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers con- ferred upon it by the legislature, is not voidable only, but wholly void, and of no legal effect. The objection to the contract is, not merely that the corporation ought not to have made it, but that it could not make it. The contract cannot be ratified by either party, because it could not have been authorized by either. No performance on either side can give the unlawful contract any validity, or be the foundation of any right of action upon it.” This language was also cited and expressly approved in Jackson- ville &c. Railway v. Hooper, 160 U.S. 514, 524, 530. As said in McCormick v. Market National Bank, 165 U.S. 538, 549: “The doctrine of ulira vires, by.which a contract made by a cor- poration beyond the scope of its corporate powers is unlawful and void and will not support an action, rests, as this court has often recognized and affirmed, upon three distinct grounds: The o tion of any one contracting with a corporation to take notice of the ] legal limits of its powers; the interest of the stockholders not to be | subject to risks which they haveiever undertaken; and, above all, the tterest of the public that the corporation shall not transcen assumed to make, or may acquire the right to invoke a similar | —estoppel in tts own behalf. Where this theory is accepted recovery may be had upon a contract which is in fact void, simply because its validity cannot be put in issue. The cases in point are gathered in volume 29 of the American and English Encyclopedia of Law, at page 57, note 1. These cases have been criticised for the use they make of the word “‘estoppel”’ as descriptive of the principle upon which they are based. It is argued that as a corporation must know the terms of its own charter, and as one dealing with it is charged with like knowledge, neither party to an ultra vires contract can be misled in that respect, and therefore there must always be lacking an essential element of what could with technical accuracy be called estoppel. This, how- ever, is a mere question of terminology. The requirement that one shall be consistent in conduct — shall not occupy contradictory positions — shall not retain the advantages of a transaction and reject its burdens — is often spoken of as a form of estoppel. The term is convenient, and, if inaccurate, is not misleading. This rule of estoppel affords a good working hypothesis to accomplish just results. If it fails to accomplish all that might be desired in a prac- tical way it is because it is not made sufficiently far-reaching. ‘It is generally held to be inapplicable to purely executory contracts, one 758 HARRIS v. GAS CO. [CHAP. II. reason stated being that “where neither party has acted upon the EE ee ee oa oss to the parties of prospective profits, and this is too slight a con- sideration to w the reasons of publi icy for declarin J 29 A. & E. Encycl. of L. 49. might seem reasonable that a system which attempts not only to protect a party to an ultra vires contract from actual loss, but, where ‘equity requires it, to insure to him the actual fruits of his bargain, ought for the sake of completeness and symmetry to enable him to insist upon the performance even of a purely executory con- tract. It certainly seems against conscience that _one who _has entered into a contract in the expectation of deriving a profit from it may upon discovering the probability ot a loss repudiate it and escape responsibility by raising an rate capacity. Parties to a contract, a “assumption that one of them is a corporation are ordinarily precluded from questioning the validity of ion. whether a corporation has power under its charter to engage in a particular business is so like the question whether a body has capacity to act as a corporation at all as to afford good ground for arguing that whatever circumstances work an estoppel to raise the one have the same effect with respect to the other. This is recognized in volume 10 of the Cyclopedia of Law and Procedure, at page 248, where it is said: ‘‘A person contracting with an ostensi- ble corporation to do an act which is not prohibited by law becomes estopped, in an action by the corporation to enforce the contract, either to deny the existence of the corporation or its power to enter into such a contract.” ({ 7.) ’ The cases cited in support of this text, however, arose upon exe- cuted contracts, and we do not discover that the principle has actu- ally been applied in actions upon purely executory agreements,-unless where the question sought to be raised was whether a body assuming to act as a corporation had a legal existence as such. Nevertheless, no good ground is apparent for a distinction in this regard. . The question whether a corporation has a legal existence is a question whether it has capacity to act at all. This is essentially of the same character as the question whether it has capacity to enter into a particular contract — in other words, whether it has a legal existence for that purpose. The State grants the corporation the right to do business under limitations expressed in language to which both agree. Whether the language of the charter shall be interpreted to authorize a given act is a matter between the parties to it. If the State is satisfied with the construction upon which the corporation -acts no reason is apparent why it should be open to question by a stranger, much less by one who has recognized it as valid by con- tracting with the corporation upon that basis. SECT. 11.] HARRIS ¥. GAS CO. 759 _No Kansas statute declares that a contract made by a corporation in excess of its legitimate powers shall be void, or in terms permits the question of corporate capacity to be raised by one of the parties. . Where it is held that no recovery can ever be had upon an ultra vires contract, as such, whatever relief is afforded is logically made to turn upon whether and how far the agreement has been acted upon. Where a recovery is sometimes permitted under the contract itself,’ upon the principle of estoppel, the question whether it has been car- ried out is likewise of manifest importance, there being a difference in degree at least: between the attitude of one who has merely entered into an engagement in expectation of obtaining an advantage from it and that of one who has actually reaped its benefits in whole or in. part. But the doctrine that only the state can challenge the validity of acts done under color of a corporate charter, if accepted, must necessarily protect an executory contract from collateral attack equally with one that has been executed.vThe court is convinced of the soundness of the view that in the absence of special circumstances | “ om alictting the matter neither party to even an executory contract _ “should be allowed to defeat its enforcement by the plea of ulira vires. “The doctrine is logical in theory, simple in application, and just in ~ result. It of course does not apply to contracts which are immoral or which are illegal, as distinguished from merely unauthorized, or to those made by public corporations. Nor does it forbid interfer- ence by a stockholder to protect his rights as such. Upon these considerations the judgment is affirmed. Note. —In Railroad Co. v. Railroad Co., 196 Pa. 452, a lease of railroad property, ultra vires of the parties, was treated. as the foun- dation of rights between the parties, and the court refused to set it aside, at the instance of the lessor. In Camden and Atlantic R.R. Co. v. Mays Landing R.R. Co., 48 N.J.L. 530, railroad corporation M agreed that, if a certain branch line were built by railroad corporation N, it would guarantee the bonds of N, and take a lease of the line for 999 years at a specified rental. It was uléra vires of M to make such an agreement. The road was built, the bonds of N guaranteed, the lease executed, and M took possession. Later it abandoned possession, and gave notice of such fact to N. M paid the rent for the full period during which it was in possession. This action was brought to recover rent thereafter accruing, and the court, by a vote of 11 to 3, allowed N to recover. The facts showed acquiescence in the transaction by-the stockholders (p. 571). The court regarded the transaction as in substance equiva- lent to a conveyance of the branch line to M, in consideration of the issue of M’s obligations, and therefore an executed transaction which would be a foundation of rights between tie parties until the state intervened. 4 760 HARRIS v. GAS CO. (CHAP. II. It would seem plain from Thomas v. Railroad Co., 101 U.S. 71, and the cases founded on the Central Transportation case, supra, that, in the federal courts, where there is, in form, a lease of railroad prop- erty, which lease is ultra wires of the lessor, or lessee, or both, the lessee may at any time abandon the possession, and thereby prevent any further liability from accruing against it. What can the lessor do? St. Louis R.R. Co. v. Terre Haute R.R. Co., supra, bars avoidance, through court help. Suppose the lessor seeks to resume possession by self-help. Will the court protect the lessee by an injunction? This was done by an inferior federal court in American Union Telegraph Co. v. Union Pacific R.R. Co., 1 McCrary, 188; but this case was cited, with disapproval, in St. Louis R.R. Co. v. Terre Haute R.R. Co. For cases holding that an absolute transfer of property could not be set aside, on the ground that it was ultra vires of one, or both, of the parties, see cases cited in the note to Kerfoot v. Farmers Bank, supra. For other cases in which the courts have treated ultra vires trans- actions as not being voidable, see First Presbyterian Church v. State Bank, 57 N.J.L. 27; Pannebaker v. Tuscarora R.R. Co., 219 Pa. 60. For authorities holding that, under certain circumstances, stock improperly issued may be cancelled, see cases cited in the note to Old Dominion Copper Co. v. Bigelow, supra (pp. 373-377). BOOK VI. OFFICERS, STOCKHOLDERS, AND CREDITORS. CHAPTER I. DIRECTORS AND OTHER OFFICERS. A. Unauthorized Action by de jure Officers. ROYAL BRITISH BANK v. TURQUAND. 6 E. & B. 327. 1856. Tue plaintiffs declared against the defendant, as official manager of Cameron’s Coalbrook Steam, Coal, and Swansea and London ailway Company, according to The Joint-Stock Companies Wind- ing-up Acts (the company being completely registered under Stat. 7 & 8 Vict. c. 110). The declaration alleged that the company, before defendant became official manager, to wit, on 6th March, 1850, by_ —their writing obligatory, sealed with their common seal, ‘acknow!- edged themselves to be paid to plaintiffs on request; for which payment. the said last- mentioned company did bind themselves and their successors. Yet the said sum, or any part thereof, has not been paid. ~Ptea (1), m which was set out the condition, which appeared to be for securing to the plaintiffs, who were bankers, such sum as the company should, to the amount of 1000/., owe to plaintiffs on the balance of the account current, from time to time, and for indemni- fying plaintiffs to that amount from losses incurred by reason of the account between plaintiffs and the company. The plea further set out clauses of the registered deed of settlement of the company, by which it appeared that the directors were authorized, under certain circumstances, to give bills, notes, bonds, or mortgages; and one clause provided that the directors might borrow on bonds such sums as should, from time to time, by a general resolution of the company, be authorized to be borrowed. The plea averred that there had been no such resolution authorizi maki bond, a same was given and made without the authority or consent of the “shareholders of the company. @ plaintit demurred to the plea, and Jervis, C.J., said on this point: — It seems to us that the plea, whether we consider it as a confession 762 ROYAL BRITISH BANK v. TURQUAND. (CHAP. I. and avoidance or a special Non est factum, does not raise any objec- tion to this advance as against the company. We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and that the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more. And the party here, on reading the deed of settlement, would find, not a prohibition Tom borrowing, but-a-per- mission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to “Gnfer the fact of a resolution authorizing that which on the face of the “document appeared to be legitimately done. Norte. — See, accord, In re Hampshire Land Co., [1896] 2 Ch. 748, where the meeting of shareholders at which the directors were authorized to borrow was not properly called. Buckley on Companies, 8th ed. p. 570, cites this case as an author- ity for the proposition that “a stranger dealing with a company has a right to assume, as against the company, that all matters of internal management have been complied with.” This is a large proposition. If the president of a company con- jects Ga beet eae ee with A, and the company has power to make such a contract, is the company bound, without more? The act of the directors in giving authority to the president would seem to be a matter of internal management. Again. If a person, who is not president of a company but who assumes to be, makes such a contract in behalf of the company with A, is the company bound without more? The election of a president would also seem to be a matter of internal management. In Duck v. Tower Galvanizing Co., Ltd., [1901] 2 K.B. 314, a de- benture was issued in the name, and under the seal, of the company by persons who assumed to be directors but who were not directors. The court held that “from the case of Royal British Bank v. Turquand down to Mahony v. East Holyford Mining Co., L.R. 7 H.L. 869, in the House of Lords, it has always been held that it is not incumbent on the holder of such a document purporting to be issued by a com- pany to inquire whether the persons pretending to sign as directors have been duly appointed....The memorandum of association allowed the company to borrow money on debentures, and the arti- cles of association of the company might very well have justified the issuing of such a debenture as this.” The facts of the case show that a person with a small business formed a limited company and con- veyed his business to it, and thereafter carried on the business in the name of the company, without consulting the other incorporators, and that the debenture was issued, with his approval, for an advance made to the company. The decision that the company was bound may well be supported, but, it is submitted, the proposition stated by the court is too broad. CHAP. 1.] ROYAL BRITISH BANK Uv. TURQUAND. 763 In the United States, the principal case was followed in Louisville Ry. Co. v. Louisville Trust Co., 174 U.S. 552. The directors of a cor- poration were authorized to guarantee bonds of another corporation, upon the petition of the majority of the stockholders. They caused the guaranty to be made in the corporate name, although there had been no such petition. It was held that the guaranty was enforceable by a person who purchased the bonds without notice of this detect. “Thre records of the railroad corporation and of its board of directors, which would naturally show whether such a petition had or had not been led, were private records, which a purchaser of the bonds was uld have been 1 the fact had been required by law to be ‘entered upon a public record.” In Commissioners of Knox County v. Aspinwall, 21 How. (U.S.) 539, one ground of decision was that an express representation by certain officials that certain acts had been done was binding upon the municipal corporation in question. The principal case may be explained as deciding (1) that a repre- sentation by the directors that certain acts have been done binds the corporation; and (2) that if the directors are authorized to do an act, only when certain conditions precedent have been satisfied, their doing the act is, without more, a representation that the conditions precedent have been satisfied. There is authority reaching a result opposite to that reached in the principal case, even when so explained. In McShane v. Carter, 80 Cal. 310, it was held that the act of directors in making a conveyance of corporate property did not bind the corporation. The statute required that the holders of two-thirds of the capital stock should assent, and there had been no- such assent. See also Williams v. Gaylord, 186 U.S. 157. vat It is submitted that the large proposition laid down by Buckley as to “matters of internal management” is not law in the United States. See chapter II of Book III, supra. But certain minor propositions with regard to matters of internal management have been established in this country. | here de jure directors have acted on a matter within their authority, their action will De-presumedto-be according to law, in —+the-abstnice of proof to the contrary. Barrell v. Lake View Land Co., 122 Cal. 129; Sargent v. Webster, 13 Metc. (Mass.) 497; Mining Co. v. Anglo-Californian Bank, 104 U.S. 192. 2. Where de jure directors have authorized an act to be done by the executive officers, and this act is done, but not in the mode indi- cated in the by-laws, and the irregularity was unknown to the out- “sider, the corporation is bound. Smith v. Smith, 62 Il. 493. ére de jure directors have authorized an act to be done, but thie m of the direct: roper place, and the irregularity was unknown to the outsider, the corporation is bound. “Galveston R.R. v. Cowdrey, 11 Wall. (U.S.) 459. 764 KUSER 0. WRIGHT. [CHAP. 1. B. De Facto Officers. KUSER v.. WRIGHT. 52 N.J. Eq. 825. 1894. Van SycxEL, J. The Ott & Brewer Company was organized under the laws of this State, with three directors, viz., Brewer, Tucker, and Bell. In June, 1891, Bell made an assignment for the benefit of creditors, and soon after that left the State. In November, 1891, the Ott & Brewer Company, by the two direc- . tors, Brewer and Tucker, executed a mortgage on its real estate and certain goods and chattels, to the First National Bank of Trenton, to secure a preéxisting indebtedness. This mortgage was recorded as a real estate mortgage, but was not sworn to or recorded as a chattel mortgage. : In August, 1892, the said company, by the same two directors, executed three several chattel mortgages to Anthony R. Kuser, John L. Kuser, and Albert Brewer respectively, to secure to each of them the sum of $5000, at that time loaned by them to the said company. In May, 1893, a bill was filed in the court of chancery, alleging that the said ‘“‘ The Ott & Brewer Company” was insolvent, and thereupon John Wright was appointed receiver of the said company. The receiver exhibited his bill to set aside all these mortgages. The alleged infirmity, chiefly relied upon, is that two directors had no power to establish a lien upon the property of the corporation. Our act concerning corporations, section 16, provides — “That the business of every such corporation shall be managed and conducted by the directors thereof, who shall respectively be shareholders therein.” Section 17 provides: — “The directors shall not be less than three in number, and they shall be chosen annually by the stockholders at such time and place as shall be provided by the by-laws of the company, and shall hold their office for one year, and until others are chosen and qualified in their stead.” Section 20 provides that — “when any vacancy occurs among the directors, or secretary, or treasurer, by death, resignation, removal, or otherwise, it shall be filled for the remainder of the year in such manner as may be pro- vided for by the by-laws of the said company.” Section 47 provides that — “it shall not be lawful for any person to be elected a director of any - CHAP. I.] KUSER 0. WRIGHT. 765 body corporate in this state issuing stock unless that person shall be, at the time of his election, a bona fide holder of some of the stock thereof.” Section 48 provides that — “‘when any person, a director of any body corporate, shall cease to be a bona fide holder of some of the stock thereof, he shall cease there-_ upon to be a director thereof.” SS The point made against these mortgagees is that under our statute there must be at least three directors to manage the corporate busi- ness*that by the assigament made by Bell for the benefit of his cred- itors he ceased to be a stockholder, and by force of the statute ceased, at the same time to be a director of the company, thereby leaving th corporation without a board of directors legally qualified to conduc its affairs. ; That such a result justly or legally flows from these premises can- not be conceded. It is apparent that dealing with these corporate bodies would be in the highest degree hazardous and unsafe if the public, without notice in fact, is chargeable in law with knowledge of a latent infirmity in the title of every director of the company. A doctrine so destructive to the security of commercial transactions, now so largely conducted by corporate action, has no support in the: law. The receiver stands for the corporation, and cannot impeach , any act which the corporation itself could not successfully assail. Bell’s original title to the office of director was good; it is not de- nied that he was legally elected. The corporation held him out to the public as one of its duly-authorized agents by failing to declare his office vacant and electing his successor. In Doremus v. The Dutch Reformed Church, 2 Gr. Ch. 349, Chan- cellor Vroom said ‘that where the original title of an officer is suffi- cient, though good cause of amotion be shown, even in a case where the charter declares that for such cause of amotion the officer shall vacate his office, the office is not determined until there be an amo- tion.” He also said spat where persans are officers de facto they are on } cols fa ata sahvai uu they aelaly-nete, and more especially as they respect third persons they are binding! on the a The authorities are cited in the opinion. This rule has never been departed from in this State. Vice-Chancellor Van Finer, in Mechanics’ Bank v. Burnet Com- pany, 5 Stew. Eq. 236, adopted it. He there declares “that if the | officers selected are ineligible or are elected irregularly or illegally, but are allowed by the proprietors of the corporation to take control | of its property, and to exercise its functions and powers, they become officers de facto, and as such may act for and bind the corpora- tion. An officer de facto is one who has the reputation of being s 766 KUSER v. WRIGHT. {cHap. I. the officer- he assumes to be, and yet is not a good officer in point of law. “From a very early time it has been held that the acts of de facto officers are binding upon the corporation until they are lawfully pg ed, especially so far as their acts create rights in favor of third persons.” “——That such is the current of authority will appear by reference to the books. Mining Company v. Bank, 104 U.S. 192; Beach Corp. §§ 233, 234; Ang. & A. Corp. § 287. In San Jose Savings Bank v. Sierra Lumber Company, 63 Cal: 179, a director who had ceased to be a stockholder, no judgment of ouster having been pronounced against him, was held to be a director de facto, and his acts valid as to third persons. Mr. Taylor, in his book on Private Corporations, §§ 187, 188, after stating the rule as formulated in the cases above cited, says that — “Tt is submitted that this statement of the rule does not give suffi- cient prominence to the principle of estoppel, on which the rule de- pends; a principle which, in its application to the responsibility of corporations for the acts of de facto officers, may be stated thus: If a body of men, acting as a corporation, permits certain persons to act openly as corporate officers, or if it is permitted by the directors, assuming them to have had the power to appoint the officer in ques- tion, the corporation will not, to the detriment of persons who, in good faith, have acted on the assurance that the persons acting as officers were the officers they assumed to be, be permitted to impeach the validity of their acts and contracts on the ground that such per- sons were not legally corporate officers.” Bottomley’s Case, L.R. 16 Ch. Div. 681, is not in conflict. In that case the contest was between the company and its own stockholders. Five directors were necessary to conduct the business. After one became disqualified by insolvency, the other four took proceedings by which they attempted to enforce a forfeiture against some of their stockholders. Sir GrorcE JEssEL, master of the rolls, held that the shareholders were entitled to have the business of the company conducted accord- ing to the articles of the association in relation to that proceeding. As between stockholders and the company, that was the correct rule. In In re Country Life Assurance Company, L.R. 5 Ch. App. Cas. 288, a policy signed by three de facto directors of the company was enforced in favor of the party insured. Lord Justice GrrrarD observed, in delivering his judgment, that he did not hesitate to say that the business of companies could not be carried on if this was not held to be the law. |__As to the public, Bell was clearly a director de facto, and the cor- “poration was represented in the affair before us by three directors, as reqqutredt by the stavute, CHAP, 1.] KUSER v. WRIGHT. 767 This court has adjudged that, as in favor of creditors and third persons dealing with a corporation in good faith, the regularity and validity of its organization, effected under color of its charter, cannot be impeached, and the acts of its officers, who are officers de facto under color of an election, are binding on the corporation. Hacken- sack Water Co. v. De Kay, 9 Stew. Eq. 548. A majority of the directors of a corporation, in the absence of any statutory regulation, is a quorum, and such majority, when convened, can do any act within the power of directors. Wells v. Rahway Rubber Co., 4 C. E. Gr. 402. Under these cases, the fact that no notice of the meeting of direc- tors, at which the mortgages were authorized, was given to Bell can- “not affect the validity of these securities. That is a subject into which those who are dealing with a corporation are not bound to in- quire. That duty falls on the company alone when it holds out its officers as its accredited agents. Nothing like an approach to safety could exist in transactions with corporate bodies if such an obliga- tion was laid upon third parties contracting with them. After the most careful inquiry, the question would still be open to contro- versy. The assignment by Bell for the benefit of creditors was not con- structive notice to the appellants that he had ceased to become a shareholder. Actual notice must be shown, and that was not proven. Those only are chargeable with constructive notice of the assign-, . ment who seek to establish a title to his individual property. The company is estopped from denying the authority of one who is, de facto, a director, and in that capacity authorized to represent it. | The fact that the mortgage to the bank was executed to secure an antecedent debt does not impair its standing as between the corpora- tion and its creditor. It was taken in good faith, and it was as much the duty of the company to pay the debt as though it had been con- tracted at the date of the mortgage. Nots. — See, accord, Robinson v. Blood, 151 Cal. 504. For other cases where the corporation was held to be bound by the action of de facto officers, in favor of a third person without notice of the irregularity, see Chandler v. Hart, 161 Cal. 405 (directors elected at a meeting of stockholders not validly called); Gleason v. Insurance Co., 73 N.H. 588 (directors elected at a meeting of stock- holders the proceedings in which were not regular); Wright v. Lee, 2 8.D. 596 (directors elected at a meeting of stockholders held with- out the State); Hall v. Publishing Co., 180 Pa. 561 (directors elected at meeting of directors, instead of meeting of stockholders); Baird v. Bank of Washington, 11 S. & R. (Pa.) 411 (elected by a proper body, but by a less number of that body than the charter authorized) ; Bradford v. Frankfort R.R. Co., 142 Ind. 383 (officers elected under 768 KUSER 0. WRIGHT. [CHAP. I. an unconstitutional act); Despatch Line v. Bellamy Co., 12 N.H. 205 (officer elected was ineligible when elected). Such action may bind the corporation, even though proceedings to oust the de facto officers are pending, and in such proceedings they’ are later ousted. Zearfoss v. Farmers Institute, 154 Pa. 449; Mining Co. v. Anglo-Californian Bank, 104 U.S. 192. In the later case, the de facto directors took action after a decision had been rendered ousting them (but before the judgment had been filed) and with knowledge of the decision. It did not appear that the outsider in whose favor the action was taken had knowledge of the decision. It has been held that a corporation may benefit by the action of de facto officers. Thus a contract made, by such officers, with an outsider is enforceable by the corporation. Delaware & Hudson’ Canal Co. v. Pennsylvania Coal Co., 21 Pa. 181; Ohio R.R. Co. v. McPherson, 35 Mo. 18, 27 (subscription to stock). And a conveyance to a corporation, having only a de facto board of directors, vests little in the corporation. Myott v. Greer, 204 Mass. 389, 393. Thus also, where the outsider has contracted with the corporation, and seeks.to defend on the ground that certain corporate acts, conditions prece- dent to a suit by the corporation on the contract, have not been performed, since the persons assuming to perform them were only de facto officers. Charitable Association v. Baldwin, 1 Metc. (Mass.) 359; Trustees of Vernon v. Hills, 6 Cowen (N.Y.) 23. This principle would cover a suit by a corporation on a subscription to its stock, where the call was made by de facto directors; and see, to that effect, contra to the dictum in the principal case, San Joaquin Co. v. Beecher. 101 Cal. 70. Similarly, a de facto board may make a valid discharge of an employee. Hillis v. North Carolina Institution, 68 N.C. 423. The conveyance of the right of redemption belonging to a corpora- tion, by de facto officers, is valid against a purchaser, at foreclosure sale, of the property to be redeemed. Baggot v. Turner, 21 Wash. 339. Fe Chicago Bite Co. 13h Gh bon Pree Teer Lad See Waterman v. Chicago R.R. Co., 139 Ill. 658; Franco-Texan Land Co. v. Laigle, 59 Tex. 339. CHAP. 1.] SPERING’S APPEAL, 769 C. Liability of Directors for Action or Inaction. SPERING’S APPEAL. 71 Pa. 11. 1872. Tue National Safety Insurance and Trust Company became insol- vent in the winter of 1860-1861, and losses to a large amount were sustained by its depositors. They made an assignment for the benefit of creditors on the 18th of April, 1861, to Henry L. Benner, and others. Spering, the plaintiff, was afterwards appointed trustee in their place. This bill was brought by the trustee to compel the direc- tors and others, alleged to be connected with them, to make good the losses, on the ground of fraudulent mismanagement. SHarswoop, J. Upon a careful examination of the record and paper-books, which make up nine hundred and sixty-six printed octavo pages, we have come to the following conclusions of fact, which are supported also by the opinion of the Master. First, That no fraudulent conduct is imputable to any one of the defendants, at any -period of time during their administration of the trust. No pecuniary advantage, to the amount of a dollar, was ever realized or sought by any one of them. There was no embezzlement or misap- propriation of the funds by any officer or agent of the corporation. There is no pretence that the defendants are liable to account upon either of these grounds. ... Third, Looking at the history of the institution in the light of subsequent events, its direction was unwise and unfortunate. The money of the depositors was not invested in first-rate and perfectly safe securities, as they engaged to do, and as the funds of such a charity unquestionably ought to be. Loans were largely made upon very doubtful collaterals. Their investments in real estate were injudicious. They lost from a failure to insure. They sought to realize large profits at usurious rates of interest. The crash came in 1860, just before the breaking out of the civil war. All doubtful securities fell in the market. Their debtors went to the wall. In the vain attempt to sustain their credit they sacrificed securities and collaterals. Had they stopped and made an assignment at once, a large amount of the loss which subsequently fell upon them would undoubtedly have been prevented. The story might be much am- plified by entering into a detail of particulars: but the conclusion would be the same. Such is a brief résumé of the facts. It is not the history of this institution alone, but of many others in this country. The broad question then is, whether upon such a state of facts, the directors of a corporation can be made to account for losses arising from mismanagement merely. 770 SPERING’S APPEAL. (CHAP. I. It is by no means a well-settled point what is the precise relation which directors sustain to stockholders. They are undoubtedly said in many authorities to be trustees, but that as I apprehend is only in a general sense, as we term an agent or any bailee intrusted with the care and management of the property of another. It is certain that they are not technical trustees.They can only be regarded as man- datories — persons who have gratuitously undertaken to perform certain duties, and who are therefore bound to apply ordinary skill and diligence, but no more. Indeed, as the directors are themselves stockholders, interested as well as all others that the affairs and busi- ness of the corporation should be successful, when we ascertain and determine that they have not sought to make any profit not commen to all the stockholders, we raise a strong presumption that they have brought to the administration their best judgment and skill. Ought they to be held responsible for mistakes of judgment or want of skill and knowledge? They have been requested by their co-stockholders to take their positions, and they have given their services without compensation. We are dealing now with their responsibility to stock- holders, not to outside parties — creditors and depositors.! It is unnecessary to consider what the rule may be as to them. Upon a close examination of all the reported cases, although there are many dicta not easily reconcilable, yet Ee oe eee ae . which has held directors to account,vexcept when they have them- ‘ selves been personally guilty of some fraud on the corporation, or —have known and connived at some fraud in others, or where such fraud might have been prevented had they given ordinary attention to their duties. [do not mean to say by any means that their respon- sibility is limited to the ot exist such a case of negligence or of acts clearly ultra vires, as would make per- _fectly honest directors personally liable. Butit is evident that gentle- men elected by the stockholders from their own body ought not to be judged by the same strict standard as the agent or trustee of a private estate. Were such a rule applied, no gentlemen of character- and responsibility would be found willing to accept such places. The authorities I think fully endorse these views. [After an examination of the authorities.] These citations, which might be multiplied, establish, as it seems to meYthat while directors are personally responsible to the stockholders for any losses resuiting ry losses resulti from fraud, embezzlement or wilful misconduct or breach of trust _for their own benefit and not for the benefit of the stockholders, for gross inattention and negligence by which such fraud or misconduct as been perpetrated by agents, officers or co-directors, yet they are 1 But the report of the case states that the corporation became insolvent, that losses to a large amount were sustained by its depositors, that it made an assignment for the benefit of its creditors, that this suit was by the successor to such assignee, and that the prayer of his bill was “for a decree against the defendants, to pay the plaintiff sufficient to make good the liabilities of the company.” CHAP. 1.] SPERING’S APPEAL, 771 not liable for mistakes of judgment, even though they may be so gross as to appear to us absurd and ridiculous, provided they are _ ~_honest_and provided they are fairly within the scope of the powers~ and discretion confided to the managing body. Pa Note. — In Overend & Gurney Co. v. Gibb, L.R. 5 H.L. 480, the question was whether a director was liable for using the funds of the company in making a purchase which had proved very unprofitable. The director had not derived any personal benefit from the purchase, and had acted in good faith. Lord Harruerty said (p. 486): “The question is then simply reduced to this, — whether or not the direc- tors exceeded the powers entrusted to them, or whether if they did not so exceed their powers they were cognisant of circumstances of such a character, so plain, so manifest, and so simple of apprecia- tion, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into? Was there crassa negligentia on their part which, though not charged in words, is, it is argued, shown by the facts, so that they should be fixed with the loss of the fund intrusted to their hands for the purpose of making the acquisition of the business; was the acquiring of that subject-matter, through the medium of those funds, with the amount of knowledge which the directors had attained, an instance of crassa negligentia?” In Yates v. National Bank, 206 U.S. 158, the court was consider- ing the standard of conduct required from a directér of a national bank. A director is required to swear “that he will, so far as the duty devolves on him, diligently and honestly administer the affairs of such association, and will not knowingly violate, or willingly per- mit to be violated, any of the provisions of this Title.” Mr. Justice Wuite said (p. 178): “Mark the contrast between the general com- mon law duty to ‘diligently and honestly administer the affairs of the association’ and the distinct emphasis embodied in the promise not to ‘knowingly violate, or willingly permit to be violated, any of the provisions of this Title.’ In other words, as the statute does not relieve the directors from the common law duty to be honest and diligent, the oath exacted responds to such requirements. But as, on the other hand, the statute imposes certain express duties and makes a knowing violation of such commands the test of civil liability, the oath in this regard also conforms to the requirements of the statute by the promise not to ‘knowingly violate, or willingly permit to be violated, any of the provisions of this Title.’” 772 < HUN ¥. CARY. [CHAP. 1. 7, HUN ». CARY: 82 N.Y. 65. 1880 fs X Ear, J. This action was brought by the receiver of the Central Savings Bank of the city of New York, against the defendants who were trustees of the bank, to recover damages which, it is al- leged, they caused the bank by their misconduct as such trustees. The first question to be considered is the measure of fidelity, care and diligence which such trustees owe to such a bank and its de- positors. The relation existing between the corporation and its trustees is mainly that of principal and agent, and the relation “TBetween the trustees and the depositors is similar to that of trustee iand_cestut_que trust. The trustees are bound to observe the limits placed upon their powers in the charter, and if they transcend such limits and cause damage, they incur liability. If they act fraudu-. lently or do a willful wrong, it is not doubted that they may be held for all the damage they cause to the bank or its depositors. But if they act in good faith within the limits of powers conferred, using proper prudence and diligence, they are not responsible for mere mis- ‘takes or errors of judgment. That the trustees of such corporations are bound to use some diligence in the discharge of their duties cannot be disputed. All the authorities hold so. What degree of care and diligence are they bound to exercise? Not the highest degree, not such as a very vigilant or extremely careful person would exercise. If such were required, it would be difficult to find trustees who would incur the responsibility of such trust positions. It would not be proper to answer the question by saying the lowest degree. Few persons would be willing to deposit money in savings banks, or to take stock in corporations, with the understanding that the trustees or directors were bound only to exercise slight care, such as inattentive persons would give to their own business, in the man- agement of the large and important interests committed to their hands. When one deposits money in a savings bank, or takes stock in a corporation, thus divesting himself of the immediate control of his property, he expects, and has the right to expect, that the trustees or directors, who are chosen to take his place in the management and control of his property, will exercise ordinary care and prudence in .) the trusts committed to them — the same degree of care and pru- dence that men prompted by self-interest generally exercise in their own affairs. When one voluntarily takes the position of trustee or \ director of a corporation, good faith, exact justice, and public policy “unite in requiring Of him such a degree of care and prudence, and it _ _i8 a gross breach of duty — crassa neqhigentia — not to bestow them. It is impossible to give the measure of culpable negligence for all cases, as the degree of care required depends upon the subjects to cuap. 1.] HUN 0. CARY. 773 which it is to be applied. (First Nat. Bank v. Ocean Nat. Bank, 60 N.Y. 278.) What would be slight neglect in the care of a quantity of iron might be gross neglect in the care of a jewel. What would be slight neglect in the care exercised in the affairs of a turnpike cor- poration, or even of a manufacturing corporation, might be gross neglect in the care exercised in the management of a savings bank intrusted with the savings of a multitude of poor people, depend- ing for its life upon credit and liable to be wrecked by the breath of suspicion. There is a classification of negligence to be found in the books, not always of practical value and yet sometimes service- able, into slight negligence, gross negligence, and that degree of negli- gence intermediate the two, attributed to the absence of ordinary care; and the claim on behalf of these trustees is that they can only be held responsible in this action in consequence of gross negligence, according to this classification. If gross negligence be taken accord- ing to its ordinary meaning — as something nearly approaching fraud or bad faith —I cannot yield to this claim; and if there are any authorities upholding the claim, I emphatically dissent from them. It seems to me that it would be a monstrous proposition to hold that trustees, intrusted with the management of the property, inter- ests and business of other people, who divest themselves of the man- agement and confide in them, are bound to give only slight care to the duties of their trust, and are liable only in case of gross inatten- tion and negligence; and I have found no authority fully upholding such a proposition. It is true-that authorities are found which hold that trustees are liable’ only for crassa negligentia, which literally means gross negligence; but that phrase has been defined to mean the absence of ordinary care and diligence adequate to the particular case. In Spering’s Appeal, Judge SHarswoop said that directors “are not liable for mistakes of judgment, even though they may be so gross as to appear to us absurd and ridiculous, provided they were honest, and provided they are fairly within the scope of the powers and discretion confided to the managing body.” As I understand this language, I cannot assent _to it as properly defining to any ex- tent the nature of a director’s responsibility. Like a mandatary, to i / “whom he has been likened, he is bound not only to exercise proper | al care and diligence, but ordinary skill and judgment. As he is bound) ~ to exercise ordinary skill and judgment, he cannot set up that he did ~not-pessessthem-—When damage is caused by his want of Tecan —ie cannot excuse himself by alleging his gross ignoran -voluntarily takes the position of director, and invites confidence i in that relation, undertakes, like a mandatary, with those whom he represents or for whom he acts, that he possesses at least ordinary | knowledge and skill, and that he will bring them to bear in the dis- charge of his duties. (Story on Bailments, § 182.) Such is the rule 774 HUN v. CARY. [cHap. I. applicable to public officers, to professional men and to mechanics, and such is the rule which must be applicable to every person who undertakes to act for another in a situation or employment requiring skill and knowledge; and it matters not that the service is to be~- rendered gratuitously. These defendants voluntarily took the posi- tion of trustees of the bank. They invited depositors to confide to them their savings, and to intrust the safe-keeping and management of them to their skill and prudence. Whey undertook not only that they DFE ce eager eR propia ge =a aE they would exercise the ordinary skill and judgment requisite for the dis- ~charge of eit deleale ius. Enough has now been said to show what measure of diligence, skill and prudence the law exacts from managers and directors of corporations; and we are now prepared to examine the facts of this case, for the purpose of seeing if these trustees fell short of this measure in the matters alleged in the complaint. [The bank was incorporated in 1867, and did business until 1875, when a receiver was appointed. During this time the deposits aver- aged about $70,000. From 1867 to 1873 the total expenses, including interest paid to depositors, exceeded the income. In 1873 the trustees of the bank, which had hitherto occupied hired premises, purchased, in behalf of the institution, four lots of land, with a view to erecting a bank building upon one of the lots. The greater part of the pur- chase price was secured by mortgages on the lots. At the time of purchase the bank became obligated to erect upon the corner lot a five story building. Such a building was thereafter erected at an expense of about $27,000. The other lots were disposed of without loss. The corner lot had cost the bank $29,250 (presumably its fair value), exclusive of the building. It was mortgaged for $30,500. When the receiver was appointed, that lot and building, and other assets which produced less than $1000, constituted the whole prop- erty of the bank, and subsequently the lot and building were swept away by a mortgage foreclosure. The present action was brought to recover the damages caused to the bank by the alleged improper investment of its funds, as above stated.] At the time of the purchase of the lot, the bank was substantially insolvent. If it had gone into liquidation, its assets would have fallen several thousand dollars short of discharging its liabilities, and this state of things was known to the trustees. It had been in existence about six years, doing a losing business. The amount of its deposits, which its managers had not been able to increase, shows that the enterprise was an abortion from the beginning, either be- cause it lacked public confidence, or was not needed in the place where it was located. It had changed its location once without any benefit. It had on hand but about $13,000 in cash, of which $10,000 were taken to make the first payments. The balance of its assets CHAP, 1.] HUN v. CARY. 775 was mostly in mortgages not readily convertible. One was a mort- gage for $40,000, which had been purchased at a large discount, and we may infer that it was not very salable, as the trustees resolved to sell it as early as May, 1878, and in August, 1873, authorized it to be sold at a discount of not more than $2500, and yet it was not sold until 1874. In this condition of things the trustees made the pur- chase complained of pind an obligation to place on the lot an expen- sive banking-house. ether, un umsta e purchase was such as the trustees, in the exercise of ordinary prudence, skill ~amd-care, could make; or whether the act of purchase was reckless, | | rash, extravagant, showing a want of ordimary-prudenee, skill-and rare; were questions for the jury. It isnot disputed that, under the charter of this bank, as amended in 1868 (chap. 294), it had the power to purchase a lot for a banking-house ‘‘requisite for the trans- action of its business.” That was a power, like every other pos-. sessed by the bank, to be exercised with prudence and care. Situated ; as this moribund institution was, was it a prudent and reasonable thing to do, to invest nearly half of all the trust funds in this ex-. pensive lot, with an obligation to take most of the balance to erect. thereon an extravagant building? The trustees were urged on by no real necessity. They had hired rooms where they could have re- mained; or if those rooms were not adequate for their small business, we may assume that others could have been hired. They put for- ward the claim upon the trial that the rooms they then occupied were not safe. That may have been a good reason for making them more secure, or for getting other rooms, but not for the extravagance in which they indulged. It is inferable, however, that the principal motive which influenced the trustees to make the change of location was to improve the financial condition of the bank by increasing its deposits. Their project was to buy this corner lot and erect thereon an imposing edifice, to inspire confidence, attract attention, and thus draw deposits. It was intended as a sort of advertisement of the bank, a very expensive one indeed. Savings banks are not organized as business enterprises. They have no stockholders, and are not to engage in speculations or money-making in a business sense. They are simply to take the deposits, usually small, which are offered, ag- gregate them, and keep and invest them safely, paying such interest to the depositors as is thus made, after deducting expenses, and pay- ing the principal upon demand. It is not legitimate for the trustees of such a bank to seek deposits at the expense of present depositors. It is their business to take deposits when offered. It was not proper for these trustees — or at least the jury may have found that it was not — to take the money then on deposit and invest it in a banking- house, merely for the purpose of drawing other deposits. In making this investment, the interests of.the depositors, whose money was taken, can scarcely be said to have been consulted. | | 776 HUN v. CARY. [CHAP. I. It matters not that the trustees purchased this lot for no more than a fair value, and that the loss was occasioned by the subsequent gen- eral decline in the value of real estate. They had no right to expose their bank to the hazard of such a decline. If the purchase was an improper one when made, it matters not that the loss came from the unavoidable fall in the value of the real estate purchased.VThe jury may have found that it was grossly careless for the trustees to lock up the funds in their charge in such an investment, where they could not be reached in any emergency which was likely to arise in the affairs of the crippled bank. We conclude, therefore, that the evidence justified a finding by the jury that this was not a case of mere error or mistake of judgment on the part of the trustees, but that it was a case of improvidence, of reckless, unreasonable extravagance, in which the trustees failed in —that measure of reasonable prudence, care and skill which the law requires. ee Judgment [on verdict for plaintiff] affirmed. Nots. — See, accord, Greenfield Savings Bank v. Abercrombie, 211 Mass. 252; Williams v. McKay, 46 N.J. Eq. 25 (“the duty was to lend the bank’s money, not only in the manner indicated and required by the charter, but also prudently; the prudence required being measured by the character and objects of the institution’’). There are many cases dealing with the liability of directors for inaction, — cases in which subordinate officers misconducted them- selves to the damage of the corporation, and the question was pre- sented whether the directors were responsible for not having pre- vented this. The fact that the director has gained no personal benefit and that he has acted honestly will not excuse him. All the authori- ties agree that there is a duty of reasonable supervision. In Briggs v. Spaulding, 141 U.S. 132, the judges divided, 5 to 4, as to whether, on the facts, certain directors were liable. As to the standard of con- duct, Mr. Chief Justice Futter, speaking for the majority, said (p. 165): ‘Without reviewing the various decisions on the subject, we hold that directors must exercise ordinary care and prudence in the administration of the affairs of a bank, and that this includes something more than officiating as figure-heads. They are entitled under the law to commit the banking business, as defined, to their duly-authorized officers, but this does not absolve them from the duty of reasonable supervision, nor ought they to be permitted to be shielded from liability because of want of knowledge of wrong- doing, if that ignorance is the result of gross inattention.” Mr. Justice Haran, speaking for the minority, said: “As to the degree of diligence and the extent of supervision, to be exercised by directors, there can be no room for doubt under the authorities. It is such diligence and supervision as the situation and the nature of the CHAP. I.] HODGES v. NEW ENGLAND SCREW CO. 777 business requires. Their duty is to watch over and guard the inter- ests committed to them. In fidelity to their oaths, and to the obliga- tions they assume, they must do all that reasonably prudent and careful men ought to do for the protection of the interests of others entrusted to their charge.” If the act done is, or is not, ultra vires of the corporation, accord- ing to the facts, it would seem to be plain that the director should be ~ required to use ordinary care and reasonable skill in determining the facts. See Leeds Co. v. Shepherd, L.R. 36 Ch.D. 787 (declaration of ~a dividend); Davenport v. Lines, 77 Conn. 473, 480 (same). But see Lyman v. Bonney, 118 Mass. 222 (return of capital to stockholders). HODGES v. NEW ENGLAND SCREW CO. _IRI. 312. 1850. Tue directors of a corporation caused some of its property to be__ sold, in part, for stock of another corporation. It was claimed that — this act was ultra vires of the corporation, and that the directors were “Tiable for the consequences. The directors had acted in good faith — and with GREENE, C.J. In 1845, the Screw Company were desirous of en- larging their business, and obtained an amendment of their charter, under which they erected a rolling-mill, and carried on the business of rolling iron; and, afterwards, finding this unprofitable, went into the business of making railroad iron, and carried on that business until it ceased to be profitable, which was in the latter part of the year 1847. The business was then suspended. The rolling-mill establishment was then without employment. It had cost $155,000, and was discredited in the market by the un- profitable business which had been carried on there. In erecting the rolling-mill establishment, and in carrying on the business there, the Screw Company had incurred a heavy debt. Under these circum- stances, the directors of the Screw Company formed the plan of purchasing the nail machine and patent for making wrought nails, and of forming a new company, who were to become the purchasers of the rolling-mill and works, and patent and nail machine, and to carry on the business of making wrought nails. The Screw Company were to sell their nail machine and patent, and rolling-mill, to the new company at cost, being $182,000, and to receive $82,000 in money, and the balance, being $100,000, in the stock of the new com- pany. The whole capital of the new company was to be $300,000, to be divided into six hundred shares of five hundred dollars each, of which the Screw Company were to take two hundred shares, pro- vided two hundred shares were taken by others, and the company organized in three months. 778 HODGES v. NEW ENGLAND SCREW CO. (CHAP. 1. One great object of the directors, in making this arrangement, was to effect a sale of their rolling-mill upon advantageous terms, and to realize from the sale, in order partially, at least, to relieve themselves from debt. Another object was the anticipated profits of the new business. The immediate effect of the arrangement was, that the Screw Company received $82,000 in cash, for their rolling-mill and nail eee and patent, and still retainets as a stockholder in the Jron the Screw Company, at a In considering the question of the personal responsibility of the directors, therefore, we shall assume that they violated the charter of the Screw Company. The question then will be, was such viola- tion the result of mistake, as to their powers, and if so, did they fall into this mistake from want of proper care, such care as a man of ordi- nary prudence practices in his own affairs. For, if the mistake be such as with proper care might have been avoided, they ought to be liable. If, on the other hand, the mistake be such as the directors might well make, notwithstanding the exercise of proper care, and if they acted in good faith and for the benefit of the Screw Company, they ought not to be liable.. Let us look at the circumstances, under which the directors sub- scribed for this stock. At the time of the transaction, no case, in which this question of authority was decided or considered, had occurred, either in England or this country. The law on the subject cannot be oonsidenes as known and settled. There are large classes of corporations in Rhode Island and “ths other States, which may and do rightfully invest their capital in the stock of other corporations; such, for instance, as religious and char- itable corporations, and corporations for literary and scientific pur- poses. So insurance companies may rightfully invest their capital in the stock of other corporations, such as banks and railroads, and the like. Nor have we any doubt that the Screw Company might have rightfully taken this stock in the Iron Company, in payment for their rolling-mill, if it had been taken with a view to sell again and not permanently to hold it. Again, it is to be observed, the directors were not investing the dividends of the Screw Company in the stock of the Iron Company. They had on hand an unsaleable rolling-mill, and they owed a heavy debt for it, and one great object in taking the stock in the Iron Company, was to realize for the rolling-mill and in part pay thereby the debt. The business, too, of the Iron Company was of a kindred nature with that carried on by the Screw Company; and, so far as the man- cuap. 1]. GILBERT v. FINCH. 79 ufacture of rods was concerned, intimately connected with the busi- ness of the Screw Company. It was like the case of a corporation for printing calicoes taking stock in the corporation which manufactured and supplied the print cloths. It deserves, also, to be remarked in this connection, that this question of power never seems to have been raised by the directors or the stockholders in either cofnpany, or, by the plaintiff himself until the present bill was filed. V Under these circumstances, and giv- | ing proper weight to the answers of the defendants, we feel _bound to say, that im subs¢ribing for this stock, they have acted in good faith and with as much care and discretion, as a man of ordinary prudence mistake in regard to their powers, it was an innocent mistake, for _which they ought not to be held-answarable. We have in Rhode sland a large number of corporations, whose affairs are managed by directors, who are generally large stockholders and act without compensation. If the innocent mistakes of these gentlemen, in cases where the law was unsettled or unknown, is to subject them for damages, great injustice would be done. The law requires ef them care and discretion, such as a man of ordinary prudence exercises in his own affairs; and if they practice this, and nevertheless make a mistake, the law does not hold them answerable. GILBERT »v. FINCH. 72 N.Y. App. Div. 38. 1902. McLaveauuin, J. The complaint alleges, and the evidence adduced upon the trial establishes, that the Commercial Alliance Insurance Company was incorporated in 1888 under the statutes of the State of New York, and that immediately following its incorporation it commenced, and thereafter continued, to do business until October, 1894, when the plaintiff was appointed receiver in an action brought for that purpose by the Attorney-General of the State; that on and prior to the 3d of May, 1893, the defendants and other persons be- yond the jurisdiction of the court were the directors of such com- pany, and as such entered into negotiations with the surviving incorporators (ten in number) of the Maine and New Brunswick Insurance Company, a corporation organized under the laws of the State of Maine, for the purchase and control of the latter company by the former; that such negotiations were finally consummated on the day last mentioned, when one Dunham, the president of the Commercial Alliance Company, acting in pursuance of the direction of the defendants and their associate directors, took from the funds of such company $35,000 and paid the same to the ten surviving 780 GILBERT v. FINCH. (CHAP. 1, incorporators of the Maine and New Brunswick Company, for “a valuable consideration,’”’ as expressed therein, and in connection with such bill of sale, Dunham and three others (all of whom were directors of the Commercial Alliance Company) received a transfer or assignment from such surviving incorporators, at the expressed consideration of $3,500 each, of “‘all their right, title and interest as corporators, associates or otherwise, in said Maine and New Bruns- wick Insurance Company;” that simultaneously with the execution and delivery of such papers, under an agreement previously made, all of the officers and directors of the Maine and New Brunswick Company resigned, and their places were filled by some of the defendants or persons acting for or on behalf of the Commercial Alliance Company; that on the 22d of July, 1893, the Maine and New Brunswick Company was judicially declared by the Supreme Judicial Court of Maine to be insolvent, and a receiver was appointed to wind up its affairs and distribute its assets among its creditors; that shortly thereafter, in an action brought by this plaintiff in the United States Circuit Court for the district of Maine, against the ten surviving incorporators of the Maine and New Brunswick Company, to recover the money paid to them, aggregating $35,000, the plaintiff received as a compromise of such action the sum of $25,000, and this action was brought to recover the difference be- tween said sum and the $35,000 paid to them, together with interest thereon. The real question is, whether the directors of an insurance com- pany can take its property and assets and give them away, in the belief and with the expectation that such gift will ultimately benefit the company by bringing to it new business. That directors have no such power cannot be seriously questioned. The transaction by which $35,000 in money was taken from the Commercial Company and paid to the surviving incorporators of the Maine and New Brunswick Company was not only an ultra vires act, but it constituted a waste of the funds of the Commercial Company, and to such an extent that those who acquiesced in it or consented to it were liable to respond not only to the stockholders but to the creditors of the Commercial Company to the extent of the funds used. Mason v. —Hrenry, 152 N.Y. 529. What was done was not a purchase of property at all or even of the good will of a competing company. The Maine Company had nothing which it could sell; it had no assets, and its good will, so far as value was concerned, was purely mythical, as evidenced by the fact that, within a few days after the consumma- tion of the transaction with the Commercial, it passed into the hands of a receiver on the ground that it was insolvent; and, had it been otherwise, it had no more power to sell its good will than had the Commercial Company the power to buy it. But what was done was not even an attempted purchase of either the assets or good will CHAP. 1.] GILBERT v. FINCH. 781 of that company. The most charitable view that can be taken of the whole transaction is that the $3,500 paid to each of the surviving incorporators of that company was a gift, because there is no claim made that they had anything to transfer, in return for which they permitted the control of the corporation which they represented to pass into the hands of the persons representing the Commercial Alliance Company. The Maine and New Brunswick Company parted with no property, nor did the Commercial Company receive anything for the money paid. The new officers and directors of the Maine and New Brunswick Company, substituted for those who had resigned, even had there been any property or assets of that eom- pany, could not have turned it over to or used it for the benefit of the Commercial Company. The Maine Company, it will be remem- bered, was a mutual company. Its assets were not represented by stock. Its officers and directors as such had no interest whatever in the company or its assets, except to manage the same for all the members. Huntington v. Savings Bank, 96 U.S. 388. The defendants, therefore, were not authorized, and they had no right whatever, to _ use the funds of the Commercial Alliance Company in the man- ~—nerin-which they did, and, upon every principle applicable to the — —nadogement of the Gisness sid alae of 4 earparation, they must poration, they must be held liable to make good the loss which was sustained. or is the fact that they acted in good faith of the slightest importance or any excuse for what they did. It may be conceded, and it is undoubtedly true, that what the defendants did was done in good faith upon the supposition that their acts would ultimately turn out for the best interests of the Commercial Company. It is not difficult to see the object sought to be accomplished by the trans- action. It was the destruction of the Maine and New Brunswick Company, upon the supposition that, when destruction had finally taken place, out of its ruins would come disappointed policy-holders, the majority of whom would be glad to surrender policies in that company and take new ones in the Commercial Company, for which the Commercial Company would receive the premiums, which would largely increase both its business and assets. But the directors, as indicated, had no power to use the funds of the Commercial Com- pany for this purpose, and the courts, so far as we have been able to discover, never yet have sanctioned, but, on the contrary, have always condemned, this method of acquiring business. Once judicial sanction is given to it, it is not difficult to see how the funds of an insurance company might be used in a stock speculation, a mining scheme, or lost in many other ways which might be suggested. Good business methods forbid it, and the statutes of the State prohibit it. Nore. — Affirmed, 173 N.Y. 455. If directors do acts in the name of the corporation which are ultra 782 MOBILE IMPROVEMENT CO. v. GASS. [CHAP. I, vires of the corporation, and from which damage to the corporation results, and if they could not have honestly and reasonably considered the acts to be inira vires, it would seem to be clear that they should be liable. Hill v. Murphy, 212 Mass. 1; In re National Funds Assur- ance Co., L.R. 10 Ch.D. 118. People ex rel. Perkins v. Moss, 187 N.Y. 410. Although it is ultra vires for an insurance corporation to contribute money to a political party, a director who made such contribution in behalf of the cor- poration out of his own money and then received reimbursement from the corporation is not guilty of larceny from the corporation. D. Contracts with the Corporation. MOBILE IMPROVEMENT CoO. v. GASS. 142 Ala. 520. 1904. Gass and three other directors voted to convey certain land belong- ing to the corporation to Gass, on the performance of certain acts by —Gass. The three other directors were less than a quorum. The con- “veyanteS were thereafter made, and the corporation sought the can- —peitation of the-theetts—The court granted relief against Class. Anperson, J. While the deeds sought to be cancelled purport to have been authorized by a resolution passed at a meeting in Mobile in the year 1891, it is an undisputed fact that they were made under and pursuant to a resolution of a bare quorum of directors, at a meeting held at Flmt, Michigan, in the year 1896. The evidence also discloses the fact that, at said meeting, the presence of and the participa- tion therein by the respondent, Gass, was necessary to constitute a quorum and to give it legal vitality, and that the vote of Gass secured the passage of the resolution. The directors of a corporation are the trustees and managing part- ners, and the stockholders @& Tust, and have & join i i € property and effects of the corporation. Robinson YS SPREE 222-232 Cummingham v. Pell, 5 1b. 607; Slee v. Bloom, 19 Johns. 479. “Tf this is the relation, then the rules of law applicable to pur- chasers by agents and trustees apply to the purchase in question. There is a manifest impropriety in allowing the same person to act as the agent of the seller and to become himself the buyer. There may be, in all such cases, a conflict between the duty and interest. Acting for the best interests of the corporation, his disinterested and un- biassed convictions of duty might be to advise against a sale of the entire property to one creditor, or against any sale at all. It is in CHAP. I.] MOBILE IMPROVEMENT CO. v. GASS. 783 view of these considerations that ‘the wise policy of the law hath put the sting of a disability into the temptation, as a defensive weapon against the strength of the danger which lies in the situation.’ Even these principles would not, in my judgment, apply in the case, if there had been a quorum without Buell. “Now the purchase of property by an agent or trustee, or by any person acting in a fiduciary capacity. is not void ab origins and abso gine and abso- Tutely. It is voidable only. It is made subject to the right of the _ ~principal or beneficiary, in a reasonable time, to say that he is not Satisfied with TEs Sita oqutty as welt ae law taless the parties — interested repudiate it, or complain of it; and these may set it aside without showing either fraud or injury. Bank of Old Dominion v. Dubuque Railroad Co., 8 Iowa, 227; Davoue v. Fanning, 2 Johns. Ch. 252; Bostwick v. Atkins, 3 Comst. 53, 60; 1 Parsons, Cont. 75, 76 and case in note; 1 Lead: Cases in Eq. 167; MacGregor v. Gardner, 14 Iowa, 326, 335. “As the principal or parties interested may confirm the sale, a mere stranger cannot make the objection, that the trustee was the pur- chaser, or that the sale was irregular. The remedy belongs only ‘to persons who had an interest in the property before the sale, and no other person can apply to set aside the sale.’” Corey v. Wadsworth, 118 Ala. 507, 508; Hawley v. Cramer, 4 Cow. 717, 744; Edmondson v. Welsh, 27 Ala. 578; Foster v. Goree, 5 Id. 428; Hannah v. Carrington, 18 Ark. 85; Herbert v. Henrick, 16 Ala. 581; Greenleaf v. Queen, 1 Pet. 138; 5 Barr. 97; Wightman v. Doe, 24 Miss. 675. The directors of a corporation are its agents. Their position im- plies that confidence is reposed in them. The duties which a director assumes to the corporation and the stockholders thereof, disqualifies him from binding the corporation in a transaction in which he is already interested. O’Connor Mining & Mfg. Co. v. Coosa Furnace Co., 88 Ala. 630. Note. — The authorities, accord, are very numerous. The tr ction is voidable, not void, and if the property came into the hands of a bona fide purchaser the equity of rescission would ~ pe cut off. In the principal case the plaintiff didnot ask the court to —disturb the title of the grantees from Gass of a portion of the prop- ~erty con See also Aberdeen Ky. Co. v. Blaikie, | Macq. .L. 461, 476. On the sale by a corporation of property held by it in trust to a person acting in behalf of a director, see Purchase v. Atlantic Safe Deposit Co., 81 N.J. Eq. 344, aff’d, 91 A. 1070. 784 MUNSON 2. SYRACUSE R.R. CO. [cHap. 1. bw MUNSON ». SYRACUSE R.R. CO. 103 N.Y. 58. 1886. A contract was made between Munson and his associates with the defendant, by the terms of which they were to transfer certain property to the defendant and the defendant was to issue to them certain of its bonds. They sought specific performance of the con- tract. Anprews, J... . Weare of opinion that the contract of September 14, 1875, is repugnant to the great rule of law which invalidates all contracts made by a trustee or fiduciary, in which he is personally interested, at the election of the party he represents. There is no controversy as to the facts bringing the case as to Munson within the operation of the rule. He and his associates were dealing with a corporation in which Munson was a director, in a matter where the interests of the contracting parties were or might be in conflict. The contract bound the corporation to purchase, and Munson, as one of the directors, participated in the action of the corporation in assum- ing the obligation, and in binding itself to pay the price primarily agreed upon between the plaintiffs and Magee. He stood in the attitude of selling as owner and purchasing as trustee. The law permits no one to act in such inconsistent relations. It does not stop to inquire whether the contract or transaction was fair or unfair. It stops the inquiry when the relation is disclosed, and sets aside the transaction or refuses to enforce it, at the instance of the party whom the fiduciary undertook to represent, without undertaking to deal with the question of abstract justice in the particular case. It prevents frauds by making them as far as may be ‘impossible, knowing that real motives often elude the most searching inquiry, and it leaves neither to judge nor jury the right to determine upon a consideration of its advantages or disadvantages, whether a con- tract made under such circumstances shall stand or fall. It can make no difference in the application of the rule in this case, that Munson’s associates were not themselves disabled from contracting with the corporation, or that Munson was only one of ten directors who voted in favor of the contract. The contract on its face, notified Munson’s associates of his relation to the corporation, and that the contract was subject to be defeated on that ground, and on the other hand a corporation in order to defeat a contract entered into by directors, in which one or more of them had a private interest, is not bound to show that the influence of the director or directors having the private interest, determined the action of the board. The law cannot accurately measure the influence of a trustee with his asso- ciates, nor will it enter into the inquiry, in an action by the trustee in his private capacity, to enforce the contract in the making of which CHAP. I.] FORT PAYNE ROLLING MILL v. HILL. 785 he participated. The value of the rule of equity, to which we have adverted, lies to a great extent in its stubbornness and inflexibility. Its rigidity gives it one of its chief uses as a preventive or discourag- ing influence, because it weakens the temptation to dishonesty or unfair dealing on the part of trustees, by vitiating, without attempt at discrimination, all transactions in which they assume the dual character of principal and representative. Nore. — Cf. Porter v. Lassen, 127 Cal. 261; Clark v. American Coal Co., 86 Iowa, 436, 449. FORT PAYNE ROLLING MILL »v. HILL. 174 Mass. 224. 1899. Homes, C.J. This is an action to recover a sum received or re- tained by the defendant by way of discount upon debts of the plaintiff company which the defendant settled. This discount was or might have been found to have been received by the defendant in pursuance of votes of the directors by which he was employed to settle claims against the plaintiff company, and was to be allowed five per cent of the face value of bonds used in payment and whatever discount he could get from the claims. He was a director, but took no part in the votes. The main question is, whether after the services have been rendered a receiver of the company has the right as matter of law to avoid the contract under which they were rendered. The jury have found that all parties acted in good faith and that the contract was not improvident. They may have found more specifically that the defendant advanced his own money to settle the claims, that the claims were secured by liens and were being pressed, and that the company had no other way of raising money. We are not prepared to say that the receiver may avoid the contract now. If made with any one else, it would have been binding. It was not illegal or void because made with a director, the only person likely to be willing to make it. In this country it very generally has been deemed impracti- cable to adopt a rule which absolutely prohibits such contracts. Nye v. Storer, 168 Mass. 53, 55. Whatever small conflict of interest be- tween himself and the company there may have been, was no greater or. other than that between a broker paid by a percentage and his principal. It was manifest and must have been understood. The contract called for action outside the defendant’s duty as director, or at least, on the defendant’s evidence, needed such action before it could have any effect, for it was no part of the defendant’s duty as director to advance his own money. Assuming the contract to have been a provident one, as it well may have been, and as the jury have 786 UNITED STATES STEEL CORPORATION v. HODGE. [CHAP. 1. found that it was, it seems to us not much more open to objection than a contract with a managing director to pay him a salary. Note. — Where the interested director took no part in the cor- porate proceedings, the weight of authority in the United States is that the contract is not void, if otherwise unobjectionable. (The burden of proving that the transaction was fair should, it is submit- ted, be upon the director. See Cumberland Co. v. Parish, 42 Md. 598.) But see, contra, Stewart v. Lehigh Valley Co., 38 N.J.L. 505, in which the court said (p. 523): “Nor is it proper for one of a board of directors to support his contract with his company, upon the ground that he abstained from participating as director in the negotiations for and final adoption of the bargains by his co-directors; the very words in which he asserts his right declare his wrong; he ought to have participated, and in the interest of the stockholders, and if he. did not, and they have thereby suffered loss, of which they shall be the judges, he must restore the rights he has obtained — he must hold against them no advantage that he has got through neglect of his duty towards them.” UNITED STATES STEEL CORPORATION v. HODGE. 64 N.J. Eq. 807. 1902. Tue directors of the United States Steel Corporation voted to retire $200,000,000, par value, preferred stock, by issuing to the holders in exchange for such stock its bonds or cash raised by a sale of its bonds. J. P. Morgan was a director of the corporation, and a member of the firm of J. P. Morgan & Co. The corporation, acting by its directors, entered into a contract with J. P. Morgan & Co., which provided that the firm was to purchase a certain number of the bonds, and to pay for them in preferred stock or cash, in consid- eration of certain commissions. This contract was expressly made subject to the approval of the stockholders. J. P. Morgan & Co. formed a syndicate to insure their performance of the contract. A special meeting of the.stockholders was called, the notice stating that some directors were interested in the syndicate. The stock- holders approved the contract. The court held that under these facts the contract bound the corporation. Van SyckzEL, J. The object of the rule is to prevent directors from secretly using their fiduciary position for their own emolument, and not to impair the right of stockholders to enter into any lawful engagement with a full disclosure of the facts. In Stewart v. Lehigh Valley Railroad Co., supra, Mr. Justice Dixon, in delivering the opinion of this court, says: “After an examination CHAP. 1] NORTHWESTERN TRANSPORTATION CO. Uv. BEATTY. 787 of all the cases cited, as also such others as I have found, and a careful consideration of the principle, and the results of regarding and disre- garding it, I have come to the conviction that the true legal rule is that such a contract is not void, but voidable, to be avoided at the option of the cestut que trust, exercised within a reasonable time; I can see no further safe modification or relaxation of the principle than this.” It is a settled rule of corporation law that the personal interest of directors renders a transaction voidable at the option of the stock- holders, and not void per se. Under the declaration of this court in the case last cited the share- holders may, within a reasonable time after the disclosure to them of the interest of a director, elect to avoid the contract; but if an unrea- sonable time is allowed to elapse without exercising such option, during which the position of directors become so changed that it would be inequitable to vacate the engagement, equity would refuse to interpose. A fortiori, when the contract is entered into by the stockholders with the directors, or when the stockholders expressly authorize the directors to enter into a contract, when the stockholders have notice of the directors’ interest, the agreement will be unassailable in the absence of actual fraud or want of power in the corporation. In the case sub judice, the contract was in effect made between the stockholders themselves and J. P. Morgan & Co., and it cannot be successfully assailed without maintaining that stockholders are without capacity to make a valid contract with the directors of their company. It would be manifestly contrary to fair dealing and good faith to permit stockholders to invite directors to enter into an engagement, ——anid alter the directors had put themselves in a position in which the _— Contact could be enforced again tract could be enforced, against them, to permit the stockholders 0 deprive them of the benefits of it. In my investigation no case has been found which will justify such a result. 4 . NORTHWESTERN TRANSPORTATION CO. v. BEATTY LR. 12 A.C. 589. 1887. BILL In Equity by Henry Beatty, a minority stockholder, against the Northwestern Transportation Company, and its directors, in- cluding James H. Beatty. The bill seeks to rescind the purchase by the corporation of the steamer United Empire. 4 The material facts are as follows: — The Transportation Company is a corporation, with a capital stock of $300,000, divided into 600 shares of $500 each. On January 1, 788 NORTHWESTERN TRANSPORTATION CO. v. BEATTY. [CHAP. I. 1883, James H. Beatty owned 200 shares, and was a director. He was then building a steamboat, to be called the United Empire; and desired to sell it to the company. In January, 1883, he purchased 101 additional shares. On the day of the annual meeting in February, 1883, he transferred 5 shares to Rose and 5 to Laird, whereby they became qualified to be directors; and they were then elected directors. The board was composed of five directors; and James H. Beatty, Rose, and Laird constituted a majority. The board of directors, while James H. Beatty was present and acting, passed a vote (called a by-law) to purchase the steamboat of James H. Beatty upon specified terms. The directors, at the same time, voted to submit the said by-law to a special meeting of the stockholders. At such meeting, a vote to adopt the by-law was car- ried by a vote of 306 to 289. Of the 306 affirmative votes, 291 were cast by James H. Beatty, and ten by his transferees, Rose and Laird. The bill charges that the purchase was not entered into by James H. Beatty et al. on behalf of the company in good faith for the pur- pose of promoting the best interests of the company, but for the pur- pose of serving their private interests contrary to their duty to the company and its stockholders. Subsequently all charges of fraud and. collusion were abandoned. It was proved by uncontradicted evi- dence, and was substantially admitted, that, at the date of the pur- chase, the acquisition of another steamer was essential to the efficient conduct of the company’s business; that the United Empire was well adapted for that purpose; that it was not within the power of the company to acquire any other steamer equally well adapted for its business; and that the price agreed to be paid for the steamer was not excessive or unreasonable. The case was heard in the Chancery Division, at Toronto, before Boyp, CHANCELLOR, who decreed that the purchase should be set aside. (6 Ontario, 300.) The Court of Appeal of Ontario (Hacarry, C.J., Burton’ and Oster, JJ.) unanimously reversed the decree of the Chancellor. (11 Ontario Appeal, 205.) The Supreme Court of Canada (Rircuts, C.J., Fourntmr, HENRY, TASCHEREAU, and GwYnnz, JJ.) unanimously reversed the last men- tioned decision, and restored the decree of the Chancellor. Sir W. J. Rircute, C.J. Though it may be quite true, as a general proposition, that a shareholder of a company, as such, may vote as he pleases, and for purposes of his own interest, on a question in which he is personally interested, does that proposition necessarily cover this case? Is it not abundantly clear that, whatever a simple stock- holder may do, no director is entitled to vote, as a director, in respect to any contract in which he is personally interested? Directors can- not manage the affairs of the company for their own personal and private advantage; they cannot act for themselves and, at the same CHAP. 1.] NORTHWESTERN TRANSPORTATION CO. v. BEATTY. 789 time, as the agents of the corporation whose interests are conflicting; they cannot be the sellers of property and the agents of the vendee; there must be no conflict between interest and duty; they cannot occupy 4 position which conflicts with the interests of the parties they represent and are bound to protect. Is it not somewhat of a mockery to say that this by-law and sale were invalid and bad, and not enforceable against the company as being contrary to the policy of the law by reason of a director entering into the contract for his personal benefit where his personal interests conflicted with the interests of those he was bound to protect, but that it can be set right by a meeting of the shareholders, by a resolution carried by the vote of the director himself against a large majority of the other shareholders? If this can be done, how has the conflict between self- interest and integrity ceased? While recognizing the general principle of non-interference with the powers of the company to manage its own affairs, this case seems to me to be peculiarly exceptional; a director, acting for the company, makes a sale, acting for himself, to the company, a transaction admit- tedly indefensible; this purchase is submitted to the shareholders, and the director, having acquired a controlling number of votes for this purpose, secures a majority by his own votes thus obtained with- out which the purchase would not have been sustained, and con- firms as a shareholder his invalid act as a director, and thus validates a transaction against which the policy of the law utterly sets its face. It does seem to me that fair play and common sense alike dictate that if the transaction and act of the director are to be confirmed, it should be by the impartial, independent, and intelligent judgment of the disinterested shareholders, and not by the interested director himself, who should never have departed from his duty. If he had -done his duty and refrained from acting in the transaction as a director the by-law might never have been passed, and the contract of sale never entered into; and having acted contrary to his duty to his co-shareholders he disqualified himself from taking part in the proceedings to confirm his own illegal act; and then to say that he was a legitimate party to confirm his own illegal act seems to me simply absurd, for nobody could doubt what the result in such a case would be, as the futileness of the interested, but discontented, share- holders attempting to frustrate the designs of the interested director with his majority is too manifest; but he, if he had done his duty towards them and refrained from entering into the transaction, would never have been in the position of going through this farce of submit- ting this matter to the shareholders, and when so submitted of him- self voting that he, though he had acted entirely illegally, had done right, and thereby binding all the other shareholders who thought the purchase undesirable; or in other words, by his vote carrying a reso- 790 NORTHWESTERN TRANSPORTATION CO. v. BEATTY. [CHAP. I. lution that the bargain he himself had made for the company as buyer, from himself as seller, was a desirable operation and should be confirmed. ... I rest this case entirely on the position Beatty held as a director, and the duty which pertained to that office. In that view it is not necessary to discuss how far, or rather under what circumstances a shareholder may vote at a general meeting of shareholders on mat- ters on which he is individually interested. I cannot, however, but look upon it as rather a beld and startling proposition that a share- holder should be able to offer a property for sale to the company from a bare majority of votes and by such vote, against the will of all the other shareholders, compel the company to become the pur- chaser at his own price and on his own terms, against the wish of all the other shareholders, who may, as in this case, be a minority of 289 votes against 306. The case was then carried by appeal to the Judicial Committee of the Privy Council. Sir Ricwarp BacGaLuay. ... The question involved is doubtless novel in its circumstances, and the decision important in its conse- quences; it would be very undesirable even to appear to relax the rules relating to dealings between trustees and their beneficiaries; on the other hand, great confusion would be introduced into the affairs of joint-stock companies if the circumstances of shareholders, voting in that character at general meetings, were to be examined, and their votes practically nullified, if they also stood in some fidu- ciary relation to the company. It is clear upon the authorities that the contract entered into by the directors on the 10th of February could not have been enforced against the company at the instance of the defendant J. H. Beatty, but it is equally clear that it was within the competency of the share- holders at the meeting of the 16th to adopt or reject it. In form and in terms they adopted it by a majority of votes, and the vote of the majority must prevail, unless the adoption was brought about by unfair or improper means. The only unfairness or impropriety which, consistently with the admitted and established facts, could be suggested, arises out of the fact that the defendant J. H. Beatty possessed a voting power as a shareholder which enabled him, and those who thought with him, to adopt the by-law, and thereby either to ratify and adopt a void- able contract, into which he, as a director, and his co-directors had entered, or to make a similar contract, which latter seems to have been what was intended to be done by the resolution passed on the 7th of February. It may be quite right that, in such a case, the opposing minority should be able, in a suit like this, to challenge the transaction, and to shew that it is an improper one, and to be freed from the objection CHAP. 1] 0’CONNER MINING CO. ¥. COOSA FURNACE CO. 791 that a suit with such an object can only be maintained by the com- pany itself. But the constitution of the company enabled the defendant J. H. Beatty to acquire this voting power; there was no limit upon the number of shares which a shareholder might hold, and for every share so held he was entitled to a vote; the charter itself recognised the defendant as a holder of 200 shares, one-third of the aggregate number; he had a perfect right to acquire further shares, and to exercise his voting power in such a manner as to secure the election of directors whose views upon policy agreed with his own, and to support those views at any shareholders’ meeting; the acquisition of the United Empire was a pure question of policy, as to which it might be expected that there would be differences of opinion, and upon which the voice of the majority ought to prevail: to reject the votes of the defendant upon the question of the adoption of the by- law would be to give effect to the views of the minority, and to dis- regard those of the majority. The judges of the Supreme Court appear to have regarded the exercise by the defendant J. H. Beatty of his voting power as of so oppressive a character as to invalidate the adoption of the by-law; their Lordships are unable to adopt this view; in their opinion the defendant was acting within his rights in voting as he did, though they agree with the Chief Justice in the views expressed by him in the Court of Appeal, that the matter might have been conducted in a manner less likely to give rise to objection. Their Lordships will humbly advise Her Majesty to allow the ap- peal; to discharge the order of the Supreme Court of Canada; and to dismiss the appeal to that Court with costs; the respondent must bear the costs of the present appeal. Norr. — See, accord, Bjorngaard v. Goodhue Bank, 49 Minn. 483; United States Steel Corporation v. Hodge, 64 N.J. Eq. 807, 813; Gamble v. Water Co., 123 N.Y. 91; Russell v. Patterson Co., 232 Pa. 113. See also Middleton v. Arastraville Mining Co., 146 Cal. 219. Cf. Klein v. Brewing Ass’n, 231 Ill. 594. (S O’CONNER MINING CO. v. COOSA FURNACE CO. 95 Ala. 614. 1891. ONE question presented was as to the validity of certain transfers of property by the Coosa Furnace Co. Waker, J....It thus plainly appears that the transactions were between the Coosa Furnace Company and some of its own stockholders and directors, and also two other corporations having 792 O’CONNER MINING CO. v. COOSA FURNACE CO. [CHAP. I. boards of directors composed of the same persons who managed and controlled the first named company. The directors of a business corporation are its agents. Though they may not be trustees in the technical sense, yet they exercise functions of a fiduciary character. Their position implies that confi- dence is reposed in them. The duties which a director assumes to the corporation and to the stockholders thereof disqualifies him from binding the corporation in a transaction in which he is adversely interested. He cannot at the same time act for himself and for his principal, without the full knowledge and free consent of the princi- pal. In Morawetz on Private Corporations, § 528, it is said: “A person who is agent for two parties cannot, in the absence of express authority from each, represent them both in a transaction in which they have contrary interests. This rule is based upon the same reason as the rule which prohibits an agent from representing his principal, when his personal interests are opposed to his duty. The principal stipulates for the judgment and skill of his agent, and the latter has no authority to act, when he is not in a position to give the principal the benefits of his best endeavors. It follows, therefore, that the directors, or other agents of a corporation, have no implied authority to bind the company by making a contract with another corporation which they also represent.’’ If the same persons as directors of two different companies represent both companies in a transaction in which their interests are opposed, such transaction may be avoided by either company, or at the instance of a stock- holder in either company, without regard to the question of advan- tage or detriment to either company. Both the corporations are armed with the right to repudiate such a transaction, no matter how fair and open it may beshown to be. Memphis & Charleston R. Co. v. Woods, 88 Ala. 630, 641. But the duty which disqualifies the directors from binding the corporation by a transaction in which they have an adverse interest, is one owing to the corporation which they represent, and to the stockholders thereof. A principal may consent to be bound by a contract made for him by an agent who, at the same time, represented an interest adverse to that of the principal. A cestui que trust may elect to confirm a transaction which he could have repudiated on the ground that the trustee had an interest in the matter not con- sistent with his trust relation. In like manner, dealings between corporations, represented by the same persons as directors, may be accepted as binding by each corporation and the stockholders thereof. The general rule is, that such dealings are not absolutely void, but are voidable at the election of the respective corporations, or of the stockholders thereof. They become binding, if acquiesced in by the corporations and their stockholders. CHAP. 1.] JANNEY v. MINNEAPOLIS INDUSTRIAL EXPOSITION. 793 Nortz. — Where a contract is made between corporations having common directors, either corporation may avoid the contract, if it was not represented by a quorum, excluding the common directors. See, in accord with the doctrine of the principal case, San Diego v. San Diego R.R. Co., 44 Cal. 106; Pittsburgh Ry. Co. v. Dodd, 115 Ky. 176; McLeod v. Lincoln Medical College, 69 Neb. 550, 555; Pearson v. Concord R.R. Corp., 62 N.H. 537; Metropolitan Telephone Co. v. Domestic Telegraph Co., 44 N.J. Eq. 568; Continental Ins. Co. v. New York & Harlem R.R. Co., 187 N.Y. 225, 238. As to ratification, see San Diego R.R. Co. v. Pacific Beach Co., 112 Cal. 53. Cf. Evansville Co. v. Bank of Commerce, 144 Ind. 34 (note not in- valid where it represented a just debt); Bank v. Prescott, 60 Kan. 490. But it may not be avoided if it was represented by a quorum, excluding the common directors. Booth v. Robinson, 55 Md. 419, 441; Rolling Co. v. Railroad, 34 Ohio, 450. Whether this is law in all jurisdictions, quere. On the effect of a director of one corporation being a stockholder in another corporation cf. Transvaal Lands Co. v. New Belgium Co., [1914] 2 Ch, 488, with Pierce v. Old eerie Copper Co., 67 N.J. Hq. 399, : J E. Purchases of Corporate Property or Obligations. ; JANNEY v. MINNEAPOLIS INDUSTRIAL EXPOSITION. 79 Minn. 488. 1900. Srart, C.J. The defendant the Minneapolis Industrial Exposition is and has been a corporation since November 5, 1885. The manage- ment of its affairs was vested in a board of twenty-five directors. The plaintiffs Janney and Nelson have been such directors since the organization of the corporation to the present time; the plaintiff Swift has been such director since 1890; and the plaintiff Donaldson was such director from 1890 until the time of his death, in 1899. Several of the appellants were also directors of the corporation at the time of the sale of its property here in question. The corporation became hopelessly insolvent, and on June 20, 1895, duly made to the Minneapolis Trust Company, pursuant to the insolvency laws of the State, an assignment for the benefit of its creditors. Such assignee was first, by order of court, directed to advertise for bids for the property, or any part or portion thereof, so assigned to it. But after due advertisement and effort it was unable to effect any sale thereof, except as to two certain lots of land which it was by order of the court directed to convey. As to the main part of the property so assigned, it was unable to and did not receive any bids. 794 JANNEY v. MINNEAPOLIS INDUSTRIAL EXPOSITION. [CHAP. I. Subsequently, by the order of the court, the assignee was authorized to advertise and sell the remaining assets and property so assigned to it at public vendue to the highest bidder. Accordingly the assignee duly advertised and held such sale, but there were no bidders for the property or any part thereof, except the plaintiff Janney, who then was, either in his own behalf or in behalf of himself and the other plaintiffs herein, a bona fide creditor of the corporation to an amount exceeding $54,948.82. The claim of Janney as such creditor, as well as the entire claim of the plaintiffs, amounting in the aggregate to the further sum of $25,905.32, had been, prior to the sale, duly proven in the insolvency proceedings, and had been duly allowed. The plaintiff Janney at such sale, in order to protect his interests and the interests of the plaintiffs, did, in good faith, bid for the property at the sale the sum of $25,100, which sum was the highest and the only sum bid therefor. The assignee duly reported the sale to the court for confirmation and approval, and after a hearing thereon it was duly confirmed by the court, and the assignee ordered to convey and turn over to Janney the property so sold to him, which was done, he paying the assignee in cash the sum of $25,100. The sale was fairly and lawfully conducted, and the amount realized thereat was the highest sum which the assignee was able to obtain for the property. The property so sold to the plaintiffs was, according to the expert testimony, then worth the sum of $100,000. The answer of the appellants shows that they had notice of the sale and transfer of the property to the plaintiffs, and made no objections thereto, because, as they alleged, the plaintiffs prom- ised that after they acquired the property they would organize a new corporation, and transfer the property to it, so as to liquidate the debts of the defendant corporation. There was, however, no evidence in this case tending to show that any such agreement was ever made by any of the plaintiffs; but Janney, shortly after he so purchased the property, tendered and offered the stockholders of the defendant corporation, by notice duly given to them, that, if they desired and would subscribe for stock in a new corporation to be formed for the purpose of taking the property so purchased by him to an amount necessary to liquidate the indebtedness against the corporation, he would cause the corporation to be organized, and transfer to it the property so purchased by him. Only an insig- nificant number of the defendant stockholders herein expressed any willingness to subscribe to the stock or to avail themselves of the: proposition, and stock in the proposed corporation to the amount of about $12,000 and no more was subscribed. It was nearly a year after the sale of the property to the plaintiffs that the appellants first objected to the sale, when they did so in their answer herein, and asked that the plaintiffs be charged with, and be required to account for, the difference between the purchase CHAP. I.] JANNEY v. MINNEAPOLIS INDUSTRIAL EXPOSITION. 795 price paid by the plaintiffs for the property and its value. Their answer also prayed for general relief. The trial court did not find that if a resale of the property was ordered it would bring an in- creased price, or that there was any reasonable probability that such would be the case, other than may be inferred, if at all, from the value of the property as found by the court... . The appellants further claim that the trial court erred in. its conclusions of law, for the reason that the court, upon the facts found, ought to have ordered a resale of the property at an upward bid above the amount paid by the plaintiffs, or applied pro tanto upon their debts against the corporation the difference between the amount they paid for the property and its value as found by the court. This conclusion rests upon the assumption that in purchas- ing the property at the assignee’s sale, pursuant to the order of the court, the plaintiffs violated their duties as directors. If the premises are correct, the conclusion would seem to follow that the stock- holders are entitled to some relief if not guilty of laches. But are the premises correct? This question must be answered from a con- sideration of the special facts of this case with reference to the gen- eral principles of law applicable to the rights, duties, and disabilities of directors of a corporation. The relation between a corporation and its directors is that of principal and managing agents. They are not trustees in the sense of holding the legal title to any of its property for its benefit, or that of its stockholders or its creditors. Still, the relation is essen- tially a fiduciary one, and upon sound principles of public policy directors are inhibited, as a general rule, from purchasing for their own benefit the property of the corporation, very much as a trustee is disqualified from purchasing for his own advantage the property of his cestut que trust. This proposition, upon principle and author- ity, is unquestionably the law. Beach v. Miller, 130 Ill. 162, 17 Am. St. Rep. 291, 298, notes; 3 Thompson, Corp. § 4071; 2 Cook, Stockh. § 653. It is, however, equally clear upon principle that where the legal title and control of all of the property of a corporation is vested in an assignee or receiver, in trust for the benefit of its creditors, and the court orders the property sold for the purposes of the trust, a director-creditor, having interests to protect, may in goad faith purchase the property at such sale, and acquire thereby the absolute title thereto. Especially is this so where there are other active direc- tors, and the sale is made subject to confirmation by the court, and is approved by it. But in all such cases the director must act in the utmost good faith, for the transaction will be jealously scrutinized. 1 Morawetz, Priv. Corp. § 527; 3 Thompson, Corp. §§ 4068, 4074; Barber v. Bowen, 47 Minn. 118, 49 N.W. 684; Twin-Lick Oil Co. v. Marbury, 91 U.S. 587; Appeal of Lusk, 108 Pa. St. 152. The facts of this case bring it within the exception to the general 796 SEYMOUR J. SPRING FOREST CEMETERY ASS’N. [CHAP. I. rule that directors cannot purchase the property of the corporation for their own benefit. The title, possession, and control of the property were in the hands of an officer of the court (the assignee), and had been for nearly a year prior to the sale. The sale was made. by direction of the court, and subject to its confirmation. The plain- tiffs had no control over the property or the assignee, who was the representative of the corporation, its creditors, and its stockholders. They had no power to prevent or control the sale, which was a judicial one, brought about by the court through its officer. They had material interests to protect by bidding at the sale. They pur- chased in good faith, at the best price obtainable. The appellants had notice of the sale, and did not object thereto until long after- wards. See Pinkus v. Minneapolis Linen Mills, 65 Minn. 40, 67 N.W. 643. The sale was fairly conducted, and was confirmed by the court. There were twenty-one directors at the time besides the plaintiffs. These facts justify the conclusion of the trial court to the effect that the plaintiffs, in purchasing the property to protect their own interests, did not violate their duties to the corporation. The facts found by the court justify its conclusions of law. Order affirmed. Nore. — Nowak v. National Car Coupler Co., 260 Til. 260. A director of a solvent corporation which is about to wind up its affairs because its charter has expired is not disabled from purchasing the property for himself or for a new corporation which has been organ- ized, provided he acts with the utmost fairness, so that the property shall bring its full value. SEYMOUR ». SPRING FOREST CEMETERY ASSOCIATION. 144 N.Y. 333. 1895. Finca, J... . But the further claim is made that, because Hotch- kiss and Seymour were officers of the corporation, holding a fiduciary relation as trustees or directors, they could not lawfully buy the valid and outstanding obligations of the company at less than par and en- force them for the full amount against the debtors. If that be sound doctrine, as is stoutly maintained, if directors cannot in any case invest in the bonds of their own companies except at the peril of a constructive fraud, if they cannot safely buy such bonds below par, because they deem them unduly depressed, if titles to corporate obli- gations passing through their hands become tainted by their touch, it is quite time that the courts should give, what they have not given, a very definite and distinct warning. Some citations of seeming authority are pressed upon us and others exist. The broad rule is CHAP. I.} SEYMOUR v. SPRING FOREST CEMETERY ASS’N. 797 stated in Perry on Trusts (§ 428), that “a trustee, executor or as- signee cannot buy up a debt or incumbrance to which the trust estate is liable for less than is actually due thereon, and make a profit to himself,” and that is the doctrine invoked in this case as applicable to a director regarded as a trustee of the corporation. But the state- ment, however correct in its application to specific instances, must be taken with the limitations which belong to it. Its foundation is that a fiduciary agent, owing a duty to his principal, cannot make a con- tract for his own benefit which is or may be inconsistent with that duty, and the cases generally are of two kinds. The trustee buys in the property of his principal at a sacrifice for his own benefit, when, if he bought it at all, it was his duty to do it for his principal, or he makes a contract in behalf of his principal with himself directly or indirectly as the other party to the agreement. The first class of cases is illustrated by Slade v. Van Vechten, 11 Paige, 26, where the assignee bought in assigned property at a sheriff’s sale and claimed the personal benefit of his bargain; and the second class by Munson v. S.G. & C. R.R. Co., 103 N.Y. 58, in which the directors con- tracting had a private and personal interest, possibly adverse to their fiduciary duty. Almost, if not quite all, of the cases cited by the learned counsel for the appellant belong to one or the other of these two classes. But they do not decide this case, for Hotchkiss and Seymour neither bought in any property of the company nor dealt with the corporation in any respect._They made their contract, not with it, but with third persons capable of protecting their own rights, —gni Bought nothing which the corporation owned orto which it hada Tight. We-must go to still other cases, founded it may be to some —extemt-upon similar ideas of fiduciary duty, to discover even an ap- proximate authority. There are cases of co-partnership in which the general rules pertaining to that specific relation might prove to be broad enough to cover the purchase of the debt owing by the firm (Am. Bk. Note Co. v. Edson, 56 Barb. 89), and other cases in which the duties flowing from a liquidation conducted by the trustee, and as to which he owes a specific trust duty, forbid a purchase by the trus- tee for his own benefit at a discount. But in every class of cases the rule is founded upon the unwillingness of the law to uphold contracts which bring into collision the trust duty and the personal interest, and it is because of that collision, and the temptations which surround it, that it declares the contract voidable at the election of the bene- ficiary without investigating the good or bad faith of the trustee. The entire basis of the rule consists in this collision between trust duty and personal interest, and the equitable prohibition has no application where there is no such possible inconsistency. There is no such conflict in the ordinary case of the purchase by a director in a going corporation of its outstanding obligations. There is no present duty resting upon him to extinguish them. The time for that has not 798 CROWELL v. JACKSON. [cHAP. 1. come, the duty has not arisen, may never arise, the corporation is not prepared to pay, does not contemplate paying, but intends and ex- pects to await the full maturity of the debt. Unless some special fund has been provided, or some special liquidation has been ordered, the director owes no duty to his company to discharge or buy in the outstanding bonds, and may purchase for himself because no incon- sistent trust duty has arisen. Why should he not? While the bonds are running to their maturity, and the corporation is not able to extinguish them, is not bound to do so, does not even wish or seek to do so, what does it matter who holds the securities or on what terms they pass from hand to hand? It seems to me that we are asked to crowd the rule almost to the verge of an absurdity, and to inflict a vital injury upon business interests b e olding by a director of the unmatured obligations of the corporation bought by him in the open market and not put in liquidation or sought to be extinguished. So uRtSe WHeI-a-present uty act Or cumstance which charges the trustee with a p uty to act for his company in respect to the bonds, which dutyi n- “sistent with a personal purchase. No such duty rested upon Hotch- old for their own benefit. ~ Indeed, there is a further and equally conclusive answer. If the doctrine invoked applied to this case it would make the purchase not void but voidable at the election of the corporation, and that election must be made promptly and upon sufficient knowledge of the facts. i The beneficiary cannot wait and speculate upon the chances of delay, but must act. Here the purchase was made before 1873, and in 1880 the corporation is found recognizing and ratifying the title of the vendees or their successors, making payments to them, and providing for future payments, and it is only after a delay of fifteen years that an attempt to repudiate the purchase is made. F. Relation to Stockholders. CROWELL »v. JACKSON. 53 N.J.L. 656. 1891. Tue action was for deceit in the purchase of certain shares of the capital stock 6 mpany by the defendant from the plaintiff. The declaration alleges that the plaintiff was a shareholder of the Holbrook Printing Company, and that the de- ~fendant-was a director and the treasurer-of that-company; that the company had made a favorable sale of property which enhanced the cuap. 1.] CROWELL v. JACKSON. 799 value of its stock; that the sale was known only to the directors and officers of the company; that the plaintiff had no knowledge of it and no knowledge of facts which put him on inquiry with reference to it; that the defendant knew of it, and knew that it enhanced-the ~value of the stock, and that the plaintiff was ignorant of it; that, —possessing this-knowtedeehe bought the plaintiff’s shares of stock _~ata price for which the plaintiff, in his ignorance of the advantageous sale by the corporation, was willing to sell them, which was much below the real value of the stock purchased. a The opinion of the court was delivered by THE CHANCELLOR. We are of opinion that, in contemplation of law, there can be no fraud without moral delinquency; in other words, that there is no actual fraud which is not also moral fraud. In purchase or sale, if there be no designed misrepresentation by words or deeds and no active intentional concealment, and no intentional silence where there is a duty to speak, an action for deceit will not lie. A director, or the treasurer, of a corporation, is not, because of his office, in duty bound to disclose to an individual stockholder, a ade ee eae may know as to the real “condition of the corporation affecting the value of that stock. He is, ~ to some extent, trustee for the stockholders, as a body, in respect to the property and business of the corporation, but does not sustain that relation to individual stockholders with respect to their several holdings of stock over which he has no control. RR Fig TOPS oe a pote ve, LS pe Nore. — In Hooker v. Midland Steel Co., 215 Ill. 444, the director opened negotiations. The court said (p. 450): “It is contended that Beatty, being the president and director of the Midland Steel Company, was a trustee for the complainant as a stockholder, and was therefore in a fiduciary and confidential relation requiring him to disclose all such facts within his knowledge, and that he could not retain a benefit acquired by a breach of that duty or use knowledge in his possession to obtain a bargain from the complainant. The management of the business and property of a corporation is en- trusted to its officers, and they are empowered to act for the whole body of stockholders. They therefore occupy the position of trustees for the stockholders as a body i in respect to such business and prop- erty, and cannot have or acquire any personal or pecuniary interest in conflict with their duty as such trustees. A director, however, does not sustain that relation to an individual stockholder with respect to his stock, over which he has no control whatever, but he may deal with an individual stockholder and purchase his stock practically on the same terms as a stranger. In the absence of actual fraud such a purchase will not be set aside for a mere failure to dis- close any information the director may have affecting the value of the stock.” 800 STRONG J. REPIDE. [CHAP. I. Celien uses ine Tisha Siteeian pupa see Sock home ack: holder, was held not to be under a fiduciary’s duty to disclose are Tippecanoe County v. Reynolds, 44 Ind. 509; Bawden v. Taylor, 254 Ill. 464; Walsh v. Goulden, 130 Mich. 531; Carpenter v. Danforth, 52 Barb. (N.Y.) 581; Deaderick v. Wilson, 8 Baxter (Tenn.) 108; Haarstick v. Fox, 9 Utah, 110; O’Netle v. Ternes, 32 Wash. 528; Percival v. Wright, [1902] 2 Ch. 421. STRONG v. REPIDE. 213 U.S. 419. 1909. Action brought by the plaintiff, as the owner of eight hundred shares of the capital stock of the Philippine Sugar Estates Develop- ment Company, Limited, to recover such shares from the defendant. ‘The defendant owned 30,400 of the 42,300 shares issued by the com- pany; was-one-of the five directors of the company, and had been “elected by the board of directors as the agent and administrator general of such company “with exclusive intervention in the man- agement” of its general business. Mr. Justice Peckuam. In 1902 it was thought important for the Government of the United States to secure title, if reasonably pos- sible, to what were called the friar lands in the Philippine Islands. To that end various inquiries were made on the part of the Govern- ment from time to time as to the possibility of obtaining title to all those lands and what would be the probable expense. The lands were not owned by the same people, but were divided among differ- ent and separate owners. The Philippine Sugar Estates Devel- opment Company, Limited, owned of these lands what are more particularly described as the Dominican lands, and they were regarded as nearly one-half the value of all the friar lands. On July 5, 1903, the governor of the Philippine Islands, on behalf of the Philippine Government, made an offer of purchase for the “total sum of $6,043;219-47-in gold for all the friar lands, though owned by—different—owners:-—Fhis—offer;-so-far as concerned that “portion of the tands owned by defendant’s company, was rejected by defendant in his capacity as majority shareholder, without any con- sultation with the other shareholders. The representatives of all the different owners of all the lands, including defendant’s company, in answer to the above offer, then fixed their selling price at $13,700,- 000 for all of such lands. During the negotiations consequent upon these different offers, which lasted for some time after the first offer was made, an offer was finally, and towards the end of October, 1903, made by the governor of $7,535,000. All the owners of all these friar lands, with the exception of the defendant who represented his com- CHAP. 1.] STRONG 0. REPIDE. 801 pany, were willing and anxious to accept this offer and to convey the lands to the Government at that price. He alone held out for a better offer while all the other owners were endeavoring to persuade him to accept the offer of the Government. The defendant continued his refusal to accept until the other owners consented to pay to his company $335,000 of the purchase price for their land and until the Government consented that a thousand hectares should be excluded from the sale to it of the land of defendant’s company. This being agreed to the contract for the sale was finally signed by the defend- ant as attorney in fact for his company, December 21, 1903. The , of course, as the negotiations progressed knew that the decision of the question lay with him, and that if he should decide to accept the last offer of the Government his decision would be the decision of his company, as he owned three-fourths of its shares, and the negotiations would then go through as all the owners of the balance of the land desired it. If the sale should not be consum- mated and things should remain as they were, the defendant also knew that the value of the lands and of the shares in the company would be almost nothing. He himself says, in speaking of these lands owned by his company, that had the Government “given the haciendas the protection which they ought to have received they would have been worth $6,000,000 gold; but, considering the abnor- mal condition in which they were on account of the failure of the Government to protect these haciendas, it is impossible to fix any value; they were worth nothing; they were a charge.”” Also, the com- pany had paid no dividends, and only lived on its credit, and could not even pay taxes. The company had no other property of any sub- stantial value than these lands. They were its one valuable asset. While this state of things existed, and before the final offer had been made by the governor, the defendant, although still holding out for a higher price for the lands, took steps, about the middle or _ latter part of September, 1903, to purchase the 800 shares of stock in his company owned by Mrs. Strong, which he knew were in the possession of F. Stuart Jones, as her agent. The defendant, havin decided to obtain these shares, instead of seeing Jones, who had an ‘Office next door, employed one Kauffman, a connection of his by “marriage, and Kauffman employed a Mr. Sloan, a broker, who had ~an office some distance away, to purchase the stock for him, and told —Stoan-that the stock was for a member of his wife’s family. Sloan comiMiunicated with the husband of Mrs. Strong and asked if she desired to sell her stock. The husband referred him to Mr. Jones for consultation, who had the stock in his possession. Sloan did not know who wanted to buy the shares, nor did Jones when he was spoken to. Jones would not have sold at the price he did had he known it was the defendant who was purchasing, because, as he said, it would show imcreased value, as the defendant would not be likely a RT RH Ee PG i seedeats 802 STRONG 0. REPIDE. [CHAP. I. to purchase more stock unless the price was going up. As the articles “of incorporation, by subdivision twenty, required a resolution of the general meeting of stockholders for the purpose of selling more than one hacienda, and as no such general meeting had been called at the time of the sale of the stock, Mr. Jones might well have supposed there was no immediate prospect of a sale of the lands being made, while at the same time defendant had knowledge of the probabilities thereof, which he had acquired by his conduct of the negotiations for their sale, as agent of all the shareholders, and while acting spe- cially for them and himself. The result of the negotiations was that Jones, on or about October 10; 1903, assuming that he had the power, and without consulting ~Mrs. Strong, sold the 800 shares of stock for $16,000, Mexican “currency, delivering the stock to Kauffman in Sloan’s office, who plus $2,000 being arranged for, and Kauffman being paid $1,800 by ~ defendant for his services. The defendant thus obtained the 800 shares for about one-tenth of the amount they became worth by the sale-of-the lands between two and three months thereafter. In all the negotiations in regard to the purchase of the stock from Mrs. Strong, through her agent Jones, not one word of the facts affecting the value of this stock was made known to plaintiff’s agent by defend- ant but, on the contrary, perfect silence was kept. The real state of the negotiations with the Government was not mentioned, nor was the fact stated that it rested chiefly with the defendant to complete the sale. The probable value of the shares in the very near future was thus unknown to any one but defendant, while the agent of the plaintiff had no knowledge or suspicion that defendant was the one seeking to purchase the shares. The agent sold because, as he testi- - fied, he wanted to invest the money in some kind of property that would pay dividends, and he was expecting nothing from this com- pany, as negotiations for the sale of the lands had gone on so long, and there appeared no prospect of any sale being made, at any rate not for a very long time. Itis undeniable that during all this time the subject. of the sale of the friar lands was frequently mooted and its probabilities publicly discussed in a general way. Such discussion was founded upon rumor gid pesipas ints eeiion ot the negotiations. The public press referred to it not infrequently, but the actual state of the negotia- tions, the actual probabilities of the sale being consummated, and the particular position of power and influence which the defendant occupied in such negotiations, prior to the time of the purchase of plaintiff’s stock, were not accurately known by plaintiff’s agent or by any one else outside those interested in the matter as negotiators. The question in this case, therefore, is whether, under the circum- stances above set forth, it was the-duty-ofthe-defendant,-acting-in CHAP. 1.] STRONG v. REPIDE. 803 good faith, to disclose to the agent of the plaintiff the facts bearing upon or which might affect the value of the stock._ ~ T£it were conceded, for the purpose of the argument, that the ordinary relations between directors and shareholders in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a shareholder the general knowledge which he may possess regarding the value of the shares of the cc com- ‘Dany before he purchases any from a shareholder, yet there are cases where, by reason of the special facts, such duty exists. The supreme courts of Kansas and of Georgia Have held the relationship existed in the cases before those courts because of the special facts which took them out of the general rule, and that under those facts the director could not purchase from the shareholder his shares without informing him of the facts which affected their value. Stewart v. Harris, 69 Kansas, 498; s.c., 77 Pac. Rep. 277; Oliver v. Oliver, 118 Georgia, 362; s.c., 45 8.E. Rep. 232. The case before us is of the same general character. On the other hand, there is the case of Board of Commissioners v. Reynolds, 44 Indiana, 509-515, where it was held (after referring to cases) that no relationship of a fiduciary nature exists between a director and a shareholder in a business corporation. Other cases are cited to that effect by counsel for defendant in error. These cases involved only the bare relationship between director and shareholder. It is here sought to make defend- ant responsible for his actions, not alone and simply in his character as a director, but because, in consideration of all the existing cir- cumstances above detailed, it became the duty of the defendant, acting in good faith, to state the facts before making the purchase. That the defendant was a director of the corporation is but one of the facts upon which the liability is asserted, the existence of all the others in addition making such a combination as rendered it the —ptain-duty of the defendant to speak. He was not only a director, but he owned three-fourths of the shares of its stock, and was, at the time of the purchase of the stock, administrator general of the company, with large powers, and engaged in the negotiations which finally led to the sale of the company’s lands (together with all the other friar lands) to the Government at a price which very greatly enhanced the value of the stock. He was the chief negotiator for the sale of all the lands, and was acting substantially as the agent of the shareholders of shares of stock in the oa and by the acquiescence of all € negotiations were for the sale of the _—whote oF The property-of fhe company. By reason of such ownership and agency, and his participation as such owner and agent in the negotiations then going on, no one knew as well as he the exact condition of such negotiations. No one knew as well as he the prob- ability of the sale of the lands to the Government. No one knew as 804 STRONG v. REPIDE. [CHAP. I. well as he the probable price that might be obtained on such sale. The lands were the only valuable asset owned by the company. Under these circumstances and before the negotiations for the sale were completed the defendant employs an agent to purchase the stock, and conceals from the plaintiff’s agent his own identity and his knowledge of the state of the negotiations and their probable result, with which he was familiar as the agent of the shareholders and much of which knowledge he obtained while acting as such agent and by reason thereof. The inference is inevitable that at this time he had concluded to press the negotiations for a sale of the lands to a successful conclusion, else why would he desire to purchase more shares which, if no sale went through, were, in his opinion, worthless, because of the failure of the Government to properly protect the lands in the hands of their then owners? The agent of the plaintiff was ignorant in regard to the state of the negotiations for the sale of the land, which negotiations and their probable result were a most material fact affecting the value of the shares of stock of the company, and he would not have sold them at the price he did had he known the actual state of the negotiations as to the lands and that it was the defendant who was seeking to purchase the stock. Concealing his identity when procuring the purchase of the stock, by his agent, was in itself strong evidence of fraud on the part of the defendant. Why did he not ask Jones, who occupied an adjoining office, if he would sell? But by concealing his identity he could by such means the more easily avoid any questions relative to the negotiations for the sale of the lands and their probable result, and could also avoid any actual misrepresentations on that subject, which he evidently thought were necessary in his case to constitute a fraud. He kept up the concealment as long as he could, by giving the check of a third person for the purchase money. Evidence that he did so was objected to on the ground that it could not possibly even tend to prove that the prior consent to sell had been procured by the subsequent check given in payment. That was not its pur- pose. Of course, the giving of the check could not have induced the prior consent, but it was proper evidence as tending to show that the concealment of identity was not a mere inadvertent omission, an omission without any fraudulent or deceitful intent, but was a studied and intentional omission to be characterized as part of the deceitful machinations to obtain the purchase without giving any information whatever as to the state and probable result of the negotiations, to the vendor of the stock, and to in that way obtain the same at a lower price. After the purchase of the stock he contin- ued his negotiations for the sale of the lands, and finally, he says, as administrator general of the company, under the special authority of the shareholders, and as attorney in fact he entered into the con- tract of sale December 21, 1903. The whole transaction gives con- cHapP. 1.] SMITH v. HURD. 805 clusive evidence of the overwhelming influence defendant had in the course of the negotiations as owner of a majority of the stock and as agent for the other owners, and it is clear that the final con- summation was in his hands at all times. If under all these facts he purchased the stock from the plaintiff, the law would indeed be impotent if the sale could not be set aside or the defendant cast in damages for his fraud. The Supreme Court of the islands, in holding that there was no fraud in the purchase, said that the responsibility of the directors of a corporation to the individual stockholders did not extend beyond the corporate property actually under the control of the directors; that they did not owe any duty to the members in respect to their individual stock, which would prevent them from purchasing the same in the usual manner. While this may in general be true, we think it is not an accurate statement of the case, regard being had to the facts above mentioned. It is said that by the code of commerce of the Philippine Islands the directors are declared to be mandatories of the society, and that by article 1459 of the Spanish Civil Code they are prohibited from acquiring by purchase, even at public or judicial auction, the prop- erty the administration or sale of which may have been entrusted to them, and that this is the extent of the prohibition. This provi- sion has no reference to the purchase for himself, under such facts as existed here, by an officer of a corporation, of stock in the corpora- tion owned by another. The case before us seems a plain one for holding that, under the circumstances detailed, there was a legal obligation on the part of the defendant to make these disclosures. Norts. — Other cases in which a director, purchasing stock from a stockholder, was held to be under a fiduciary’s duty to disclose are Oliver v. Oliver, 118 Ga. 362; Stewart v. Harris, 69 Kan. 498; Com- monwealth Trust Co. v. Seltzer, 227 Pa. 410 (but note the remarks of the court on p. 418); Fisher v. Budlong, 10 R.I. 525. Von An v. Magenheimer, 126 N.Y. App. Div. 257 (aff’d, 196 N.Y. 510). Directors may not abuse their power by actually or appar- ently depressing the value of stock for the purpose of acquiring it ~from a stockholder at an undervaluation. SMITH v. HURD. 12 Met. (Mass.) 871. 1847. THs was a special action on the case, by a stockholder of the Pheenix Bank against the directors. There were two counts; one founded in non-feasance of official duty, the other in misfeasance. 806 SMITH v. HURD. [cHap. 1, The first count alleged (inter alia) that it was the duty of the direc- tors to direct and superintend the proceedings of the officers, and to exercise reasonable vigilance in seeing that the property of the bank was not lost, wasted, or misused; but that the directors disregarding their duty, and contriving together to injure and deceive the plaintiff therein, neglected to give reasonable personal attention to the busi- ness of the bank; and negligently permitted the whole business to be managed by the president, Wyman, who loaned its monies on insufficient securities, used certain sums himself, and made loans to individual directors exceeding the limits of the law; whereby the bank capital became wholly lost, and plaintiff was made liable, under the law, for his proportion of the capital lost by the official mismanagement of the directors, and further liable to pay large sums for the redemption of the bills of the bank. The second count alleged (inter alia) that the directors, disregard- ing their duties, and contriving together to injure and deceive the plaintiff therein, concurred with each other that the whole business should be managed by the president, Wyman, as he should see fit; and that defendants themselves declared dividends when there were no profits, and caused false returns to be made to the state authori- ties, by which means plaintiff was misled and induced to rely on the security of his investment. And, generally, the second count charged as acts of the defendants (done through Wyman) the matters which, in the first, count, were charged as negligences and permissions, and deduced therefrom in like manner the failure of the bank, and the special damage to the plaintiff. The count concluded with an aver- ment that defendants, by ‘‘misconducting the business of said bank, as aforesaid, so wilfully, deceitfully and fraudulently mismanaged the business and property of, the said bank, that the whole capital thereof was utterly lost and wasted.” Defendants demurred to the declaration. SHaw, C.J. This is certainly a case of first impression. We are not aware that any similar action has been sustained in England, or in any of the courts of this country. It is founded on no statute. It “ an action on the case, at common law, brought by an individual nm incorporated bank, Ss, no including the presttent-vettine forttr various-nets-of negligence-and Ts, i , as _the declaration alleges, the whole capital of the bank was wasted and \Tost, and the shares of the plaintiff became of no value. The circum- stance that no such action has been maintained, would certainly be no decisive objection, if it could be shown to be maintainable on principle. But the fact, that similar grievances have existed to a great extent, and in numberless instances, where such an action would have presented an obvious and effective remedy, affords strong proof, that in the view of all such suffering parties, and their CHAP. 1.] SMITH ¥. HURD. 807 legal advisers and guides, there was no principle on which such an action can be maintained. If an action can be brought by one stockholder, it may be brought by the holder of a single share; so that for one and the same default of these directors, thirty-five hundred actions might be brought. If it may be sustained by proof of an act, or series of acts, of carelessness, neglect, and breach of duty, in managing the affairs of the bank, by which the whole value of the stock is destroyed, it may, on the same principle, be maintained on any act or instance of such negligence, by which the shares are diminished in value fifty, ten, five, or one per cent. Still, notwithstanding these consequences, if the plaintiff has a good right of action, upon recognized and sound legal princi- ples, his action ought to be sustained. But the court are of opinion that the action cannot be maintained; and that on several grounds, a few of the more prominent of which sa a cee to. [here is no legal privity, 1 relation, or immediate connexion, be- ae the holders of shares in a bank, in their individual capacity, on the one side, and the directors of the bank on the other. The directors are not the bailees, the factors, agents or trustees of such individual_ stockholders. The bank is a corporation and body politic, having a separate existence as a distinct person in law, in whom the whole stock and property of the bank are vested, and to whom all agents, debtors, officers and servants are responsible for all contracts, express or implied, made in reference to such capital, and for all torts and injuries diminishing or impairing it. The very purpose of incorpora- tion is, to create such legal and ideal person in law, distinct from all the persons composing it, in order to avoid the extreme difficulty, and perhaps it is not too much to say the utter impracticability, of such a number of persons acting together in their individual capacities. The practical difficulty would be nearly as great, whether it were held that all must join in an action to recover damage for an injury to the com- mon property, or that each might sue separately. The stockholders do, indeed, ordinarily elect the directors; but it is as parts and members of the corporation, in their corporate capacity, in modes pointed out by the charter and by-laws, so that the directors are the appointees of the corporation, not of the individuals. Indeed, T believe there is a provision in the bank charters — there certainly was formerly — which is equally to the present purpose; namely, that the Commonwealth shall be at liberty to add a certain amount to the capital of various banks, and appoint a proportional number of directors. Such directors, so appointed, pursuant to the charter regulating the legal organization of the body, would stand in all respects on the footing of directors chosen by the stockholders. If ‘these were liable to the action of individual stockholders, those would be, in like manner. 808 SMITH v. HURD. [CHAP. I. 2. The individual members of the corporation, whether they should all join, or each act severally, have no right or power to intermeddle ~ with the property or concerns of the bank, or call any officer, agen: agent or servant to account, or dischar any_liability. Should all @ stockholders join in a power of attorney to any one, he could not take possession of any real or personal estate, any security or chose in action; could not collect a debt, or discharge a claim, or release dam- age arising from any default; simply because they are not the legal owners of the property, and damage done to such property is not.an injury to them. Their rights and their powers are limited and well defined. They are members of an organized body, and exercise such powers as the organization of the institution gives them. Stockhold- ers in banks have a separate right to-dividends, when declared, and to a distributive share of the capital stock, if any remains when the charter of the bank is at an end, and its debts paid. 3. But another important consideration is, that-the-injury_done to the capital stock by wasting, impairing, and diminishing its value, is not, in the first instance, nor necessarily, a damage to the stock- holders. All sums which could, in any form, be recovered on that Ground, would be assets of the corporation, and when collected and “Teceived by directors, receivers, or any other persons entitled to ‘Teceive the same, they-would-bethett-in-trust, first-to redeem the bills and pay the debts of the bank; and it would be only after these debts were paid, and in case any surplus should remain, that the stockholders would be entitled to receive any thing. It is, therefore, an indirect, contingent and subordinate interest, which each stock- holder has, in damages so to be recovered against directors. If, upon such indirect, contingent, and remote interest, individual stock- holders could recover for the defaults of directors, and especially, as is alleged in this case, where these defaults have been so great as to sink the capital, a fortiort would the creditors of the bank individ- ually have a right to maintain similar actions; because their claim upon the funds, being prior to that of stockholders, would be some- what more immediate and direct. In the same connexion, it is obvious to remark, that a judgment in favor of one stockholder would be no bar to an action by a creditor, nor a judgment by both, to an action by the corporation. 4, But it is said, that although the real and personal estate, the securities and capital stock, are, in legal contemplation, vested in the corporation, yet the individual has a separate and distinct property and interest in his particular shares, by any injury to which he may have a separate damage. To some extent, it is true that he has a sev- eral interest in his shares; but it is to be taken with some qualifica- tions. cis speakin shares .in_a bank do not constitute a legal the stockholder has to participate, in a certain proportion, in the CHAP, I.] GENERAL RUBBER CO. v. BENEDICT. 809 _benefits of a common fund, vested in a corporation for the common use; it is a qualified and equitable interest, a valuable interest, mani- fested usually by a certificate, which is transferable. To the extent of this separate and peculiar interest, a stockholder, no doubt, might maintain his separate and special action, according to the nature of the wrong done to him in respect to it; as trover or trespass, for the conversion or tortious taking of his certificate; trespass on the case for refusing to make a transfer on a proper occasion; assumpsit for a dividend declared, and the like. But an injury done to the stock and capital, by negligence, or misfeasance, is not an injury to such sepa- rate interest, but to the whole body of stockholders in common._ It is like the case of a common nuisance, where one who suffers a special damage, peculiar to himself, and distinguishable in kind from that which he shares in the common injury, may maintain a special action. Otherwise, he cannot. Co. Lit. 56 a. 3 Steph. N. P. 2372. Lansing v. Smith, 8 Cow. 146. But we are pressed with the argument, that for every damage which one sustains, which is caused by the wrongful act of another, he ought to have a remedy. This is far from being universally true. Another maxim in regard to claims for damage is, causa proxima, non remota, spectatur. Thousands of instances occur, in which one sus- tains consequential and incidental damage from the misconduct of another, without a remedy at law. By the misconduct of the officers or agents of a parish, town, county, or even of the State or the Union, defalcations may take place, treasure be squandered and wasted, and all the members of the respective aggregate bodies suffer damage, for which the law, from the nature of the case, can afford no direct remedy. But the true answer to the objection is, that stock- holders have a remedy, a theoretic one indeed, and perhaps often inadequate, in the power of the corporation, in its corporate capac- ity, to obtain redress for injuries done to the common property, by the recovery of damages; and each individual stockholder has his remedy, through the powers thus vested in the corporation, for the common benefit. On the whole, the court are of opinion that the demurrer is well taken, and that the action cannot be maintained. GENERAL RUBBER CO. v. BENEDICT. 215 N.Y. 18. 1915. Carpozo, J. This case comes here on a demurrer to a complaint. The plaintiff is a corporation. It is organized under the laws of New Jersey. The defendant is one of its directors. There is another corporation, organized in the same State, known as General Rubber 810 GENERAL RUBBER CO. ¥. BENEDICT. [CHAP. 1. Company of Brazil. The capital stock of the latter company is made up of three thousand shares; and all the shares, with the exception of eighteen, are held and owned by the plaintiff. For convenience, we shall refer to the plaintiff as the holding, and the General Rubber Company of Brazil as the subsidiary company. The general man- ager of the subsidiary company at Para, Brazil, was one Arnold J. Hutter. While acting as manager for that company, he became the manager of a rival business. This business was conducted at first under the name of E. Levy, and later, after a corporation had been organized, under the name of the Moju Company. The defendant was the owner of more than one-fourth of the stock. He was also its vice-president. The Moju Company met with reverses, and fin- ally became insolvent. To relieve its embarrassments, Hutter, ac- cording to the allegations of the complaint, took the moneys of the General Rubber Company of Brazil and gave them from time to time to the Moju Company. The defalcations extended over a period of more than a year, and caused a loss of $185,000. The charge is made that the defendant knew of this misuse of moneys, and that he acquiesced in it and approved of it. He neglected, it is said, to inform the plaintiff of Hutter’s wrongdoing; he withheld and con- cealed the truth, so it is charged, intentionally and for his own profit; and the averment is that if such information had been given, the plaintiff could and would have prevented the misapplication and ‘the loss. Because of this violation of his duty, the value of the plain- tiff’s shares in the subsidiary company is said to have been lessened, and the plaintiff to have been otherwise damaged, in a sum exceeding $185,000. For the amount of this loss with interest, judgment is demanded. The foregoing summary states in briefest outline the averments of a voluminous complaint. It suffices, however, to indicate the prob- lem of law which is involved. We are to determine whether the defendant is-liable to the holding company for the diminished value of its shares resulting from the waste of the assets of the subsidiary company. The defendant was not a director of the subsidiary company. He was a director of the plaintiff. Because of that relation he owed to the plaintiff the duty of good faith and vigilance in the preservation of its property. The duty and the breach, coupled, it is here alleged, with damage, make out a cause of action. Ashby v. White, 3 Ld. Raym. 320. Such cases as Smith v. Hurd, 12 Mete. 375, and Niles v. N.Y.C. & H.R. R.R. Co., 176 N.Y. 119, are pressed upon us by the defendant. They are inapplicable here. The distinction was well put by Tart, J., writing for the Circuit Court of Appeals in Ritchie v. McMullen, 79 Fed. Rep. 522, 533: “It is undoubtedly true, as the Circuit Court held, that a stockholder, merely as such, cannot have an action in his own behalf against one who has injured the corpora- CHAP. 1.] GENERAL RUBBER ‘CO. v. BENEDICT. 811 tion, however much the wrongful acts have depreciated the value of his shares (citing Smith v. Hurd, supra, and other cases). But we are of opinion that this principle has no application where the wrongful acts are not only wrongs against the corporation, but are also viola- tions by the wrongdoer of a duty arising from contract or otherwise, and owing directly by him to the stockholders.”’ The stockholder in those cases did not sue his own agent. He sued another’s agents, i.e., the directors of a company, and sued them for the waste of the company’s property. In his own right, and not in a derivative action, he attempted to recover his own damages, which he measured by the diminution in the value of his shares. The decision was that the delinquent directors were the agents of the company; that they owed a duty to the company and not to the individual stockholders; and that if there had been any breach of that duty the company must redress the wrong. But here the situation is a different one. Here the stockholder is not suing the agent of another company; it is suing its own agent. The stockholder happens to be itself a corpora- tion; the defendant happens to be a director; but the legal problem would be the same if the plaintiff were a natural person, and the defendant an executor or trustee. It would also be the same if the plaintiff, instead of being substantially the sole stockholder, were one stockholder among many. If the trustee of an estate, holding shares in a bank, should learn that the cashier was looting it, and with that knowledge should keep silent, the defendant would have us say that the beneficiaries under the will would have no remedy for the ensuing loss. A trustee in the case supposed would owe no duty of active vigilance to the bank whose property was stolen. If not liable to those interested in the estate, he would not be liable to any one. Yet his duty to preserve the estate, the breach of that duty, and the resulting damage, would seem to call for the application of the prin- ciple that there is no wrong without a remedy. The case supposed does not differ in its essence from the case presented. The defendant, as a director of a corporation should have taken the same care of its property that men of average prudence take of their own property. Hun v. Cary, 82 N.Y. 65; Latimer v. Veader, 20 App. Div. 418, 428; Bosworth v. Allen, 168 N.Y. 157. A jury might not unreasonably find that the care exacted by that rule would involve at least a warning that the subsidiary company was in the management of a thief, and that the value of the shares was vanishing. It is argued that even if the warning had been given, the plaintiff was only a stockholder in the subsidiary company, and hence was not in a posi- tion to stop the waste. The allegation is, however, that it could and would have done so; and we must hold this sufficient on demurrer. There are many things it could have done. It could at least have sounded an alarm that might have led to Hutter’s removal. The trial will show whether its intervention would or would not have 812 GENERAL RUBBER CO. v. BENEDICT. [CHAP. I. been efficient. In any event, we cannot say, and least of all as a matter of law, that the opportunity to intervene was valueless. Leather Mfrs. Bank v. Morgan, 117 U.S. 96, 115; Continental Nat. Bank v. Nat. Bank of Commonwealth, 50 N.Y. 575; Voorhis v. Olm- stead, 66 N.Y. 118, 118; Rothschild v. Title Guarantee & Trust Co., 204 N.Y. 458; Cassidy v. Uhlmann, 170 N.Y. 505, 518, 521. It is strongly argued, however, that the defendant is answerable for the same wrong to the subsidiary company, and is thus exposed to the risk of a double liability. We think the wrong to the plaintiff does not cease to be remediable because it may also be a wrong to some one else. If the defendant-has violated any duty to the sub- sidiary company, it is not the same duty that he owes to the plain- tiff. He is not liable to the subsidiary company qua director. He is not liable to that company for mere neglect. He is liable to it, if at all, only as a stranger might be liable. If he has joined in a conspiracy to plunder it, he must, like any other tort feasor, make compensation for the plunder. There are allegations in the complaint which are broad enough to be construed as charging that he was a party to such a conspiracy. We cannot know whether they will be proved. If they are proved in all their fullness, they will show that the subsidiary company as well as the plaintiff has been wronged. Less, however, may be proved; the defendant may not have counseled or ratified Hutter’s acts, or otherwise made himself a party to them; and still if he knew of them, and was silent, he may have failed in the stricter duty that he owes to the plaintiff. It is not for us at this time to say to what extent the duties are coterminous. It is enough that they have a different origin, a different standard, and a different measure. The argument is made, however, that since the duties overlap, a double liability is threatened. To-day the defendant is called upon to make good the diminished value of the plaintiff’s shares. To- morrow he may be called upon at the suit of the subsidiary company to replenish its wasted treasury. We think the argument confuses the cause of action with the damages. If the defendant is solvent, and has so made himself a party to the conspiracy that he is liable as a tort feasor to the subsidiary corporation, the existence of such a cause of action will be reflected, like the ownership of any other asset, in the value of the shares. The diminution in value will be one thing if the subsidiary corporation is without a remedy against any one. It will be another thing if there is a remedy against a solvent wrongdoer. It will be one thing if the cause of action in favor of the company is conceded or certain. It will be another thing if the cause of action is contested or doubtful. A contested claim is rarely appraised at its face value. The expenses of litigation, its delays, its uncertainties, these and like elements may make the shares less val- uable, even though a remedy at the suit of the company exists, than CHAP. 1.] GENERAL RUBBER CO. v. BENEDICT. 813 they would be if the wasted moneys were back in the treasury. The extent of the reduction in value is to be measured by the jury. We must keep in mind steadfastly the essential nature of the cause of action. It is not an action to restore to the subsidiary company the money that has been abstracted. It is an action to restore to the holding company the diminished value of its shares. If the subsidiary company were suing the defendant for a conversion of its assets, it would, of course, be no answer for him to say that there was a remedy also against Hutter. He would be bound to restore what he had taken, or permitted others to take. It is possible that if his offense was merely one of negligence, he might through subrogation have a remedy over against the principal offender. Steele v. Leopold, 135 App. Div. 247, 256, 257; aff’d., 201 N.Y. 518; Chillingworth v. Cham- bers, L.R. [1896] 1 Ch. 685; Mozham v. Grant, L.R. [1900] 1 Q.B. 88. But in this action he is under a very different duty. Nothing has been taken directly from the plaintiff. What has been taken belongs to the subsidiary company. The defendant is not sued for a wrong- ful taking. He is sued for the wrongful failure to preserve the value of the plaintiff’s shares. Only to the extent that the taking has made the individual shares less valuable, has a liability arisen. In such circumstances there is no right of action in favor of the plaintiff against the primary wrongdoer to which the defendant can be sub- rogated. The ultimate devolution of the burden must, therefore, be determined, not in some other action, but here and now. In these conditions, it becomes our duty, through a sound definition of the measure of damages, to work out a result which will be just alike to plaintiff and to defendant. The existence of a cause of action does not depend, however, upon the extent of the recovery. If the subsidiary company has no remedy that will enable it to make good the loss, the reduction in the value of the shares may be equal to the fund converted. If it has a plain and certain remedy either against the defendant or against some other solvent party to the wrong, the reduction in the value of the shares may be less than the converted fund, or, it may be, almost nominal. We can imagine a case where a director has borrowed money illegally, and may, therefore, be required to repay it. The corporation in such circumstances has a cause of action to compel the money to be restored, yet the value of the shares in the hands of the stockholders may not be reduced at all. Whatever difficulty there is in determining the measure of the loss is inherent in the very nature of these problems of appraisal. To determine the value of the shares, every asset of the subsidiary company must be reckoned, and the defendant’s liability to that company, if it exists, must be included like any other. We think, for these reasons, that the menace of a double liability is illusory. The defendant owes a duty to the plaintiff; if the com- 814 GENERAL RUBBER CO. Uv. BENEDICT. [CHAP. I. plaint speaks truly, he has violated that duty; and to the extent of the resulting damage he must answer for the wrong. Couuin, J. (dissenting). The facts alleged as constituting a cause of action at law in favor of the plaintiff against the defendant, ade- quately stated for the purposes of this discussion, are: The plaintiff, a New Jersey corporation, owned, as an asset, all the three thousand shares of the capital stock of another corporation hereinafter de- nominated the Brazil company, except eighteen. The defendant was a director of the plaintiff. He was not a director of or connected with the Brazil company. An agent of the Brazil company, wrongfully and without the knowledge of it or the plaintiff and with the knowl- edge, acquiescence and approval of the defendant, abstracted from time to time, through the period of about one year, from its treasury and delivered to a third corporation, the Moju Company, moneys aggregating $185,000, no part of which has been repaid to the Brazil company. The defendant owned about one-quarter of the issued shares of the capital stock, and was the vice-president of the Moju Company. The defendant did not inform the plaintiff, which re- mained ignorant, while it progressed, of the misapplication of the moneys of the Brazil company. The plaintiff, had it known of the misuse, “could and would have taken such action as would have caused the funds and moneys (of the Brazil company) theretofore so misapplied to have been recovered and as would have prevented the said further misapplication of said funds and moneys to such wrong- ful uses.”” The Moju Company is insolvent. The misappropriations by the agent of the Brazil company of its moneys have lessened the value of the assets of the plaintiff, to wit, the shares of stock of the Brazil company in a sum exceeding $185,000. Judgment for the said sum of $185,000 with interest is prayed for. Certain facts are clear. This is an action at law. The Brazil company was an independent legal being or entity, and its status was unaffected by the ownership of the plaintiff of its capital stock. Buffalo Loan, T. & S. D. Co. v. Medina Gas & EH. L. Co., 162 N.Y. 67, 76; Saranac & L. P. R.R. Co. v. Arnold, 167 N.Y. 368. The Brazil company owned exclusively the abstracted moneys. The plaintiff did not at law have right, title or interest in or to them, the whole title of which was in the despoiled corporation. United States Radi- ator Corp. v. State of New York, 208 N.Y. 144. The plaintiff, by virtue of its shares of the capital stock of the Brazil company, had merely the right to partake, proportionately, of the surplus profits or fund of the company as declared or distributed by its directors. Burrall v. Bushwick R.R. Co., 75 N.Y. 211; Plimpton v. Bigelow, 93 N.Y. 592, 599; United States Radiator Corp. v. State of New York, 208 N.Y. 144. The action is not derivative, that is, it is not brought in behalf of the Brazil company. The pith of the alleged cause of action CHAP, 1.] GENERAL RUBBER CO. ”. BENEDICT. 815 is, the abstraction of the moneys and the neglect of the defendant to inform the plaintiff of it. _ The injury to the assets of the plaintiff was not direct, and came from and through the injury to those of the Brazil company. Those assets were not taken or directly injured or interfered with. They, as it is alleged, were depreciated in value by the “ wrongful misappro- priation”’ of the funds of the Brazil company, no part of which the plaintiff then owned or had a right to possess or control or has now the right to recover. The Brazil company owned them and was entitled to possess and dispose of them and it alone has the right to recover them. Whenever recovery or restitution of them is made to it, the alleged injury to the plaintiff will be obliterated. The subse- quent disposition of them will be wholly within the authority of the Brazil company and it may naturally and lawfully result, through the hazards of business, that the plaintiff will not receive directly or indirectly any advantage from them. If at the commencement of this action the Moju Company or Hutter, the general manager and despoiler of the Brazil company, or this defendant had paid that company the sum abstracted, the plaintiff would not have had the alleged cause of action, because the plaintiff has no right to those moneys and upon their return to their owner, the Brazil company, it is not under any damages. If the defendant should pay the sum of them or any part to this plaintiff, he, under the allegations of the complaint, which permit proof that the defendant conspired with the agent of the Brazil company, would remain liable to the Brazil company for them, because they were taken from and belong to the Brazil company, but if he paid them to the Brazil company, he would not thereafter be liable to the plaintiff, because it had no right to them and its damage or loss would have been wholly remedied. There was but a single loss, although that loss may indirectly and collaterally affect the creditors and stockholders of the one loser, to wit, the Brazil company. A single recovery by the Brazil company would afford complete indemnity to the plaintiff and all interested parties. Each of the Brazil company and the plaintiff has not the right to recover the one hundred and eighty-five thousand dollars. The general rule of the law is, that an action must be brought by the person having the title to the damages which are sought to be recovered for the injury and not the person or persons who are indirectly damaged by it. If the defendant at his first knowledge of the spoliation during its progress had informed the plaintiff of it, the plaintiff would not have had the right to any of those moneys or any damages, a fact which the complaint recognizes in the averment that if he had done so “the plaintiff could and would have taken such action as would have caused the funds and moneys (of Brazil company) theretofore so misapplied to have been recovered and as would have prevented the 816 GENERAL RUBBER (0. ¥. BENEDICT. {CHAP, 1. said further misapplication of said funds and moneys to such wrong- ful uses.” The quoted allegation is a conclusion of law based upon the ownership by the plaintiff of nearly all of the capital stock of the Brazil company, but treating it as an allegation of fact, there remains the truth that the plaintiff has not been injured by the neglect of the defendant. The power and authority which it then had to cause the Brazil company to recover the misapplied funds, it still has. While the Moju Company is insolvent, Hutter, the agent of the Brazil company, and this defendant, presumptively, are solvent. Solvency of the individual, no refuting circumstance appearing, is presumed. First National Bank of Meadville v. Fourth National Bank, N.Y. City, 77 N.Y. 320; Potter v. Merchants’ Bank of Albany, 28 N.Y. 641. The plaintiff in proving the alleged cause of action would prove a cause of action in favor of the Brazil company against Hutter and this defendant, as tort feasors, through which that company could recover the full amount of the funds appropriated by them with interest — a result the equivalent of that obtainable under full and immediate information of the misappropriation to the plaintiff by the defendant. The plaintiff is seeking to recover, through the alleged wrong of the defendant, a sum which it never had, and would not have had if the defendant had told it all that he knew, which is recoverable by the Brazil company, and the recovery of which by that company will make whole the value of the plaintiff’s shares of its stock. The law does not permit such a result. In Wells v. Dane, 101 Me. 67,.the plaintiff was a shareholder in the corporation, and brought the action against the defendants, officers of the corporation, to recover damages, alleging that the wicked and wrongful acts were with the specific intent and malicious and fraudulent design of injuring the plaintiff. The court held that the plaintiff did not have a cause of action, and for reasons which I think determine the question here in accord with complete and final justice. It said: ‘There may be cases of injuries to’ the individual rights of the shareholder where he and not the corporation must seek redress, such for instance as the levying of an unlawful tax on shares held by the individual stockholder, mutilation or destruction of his certificate, or circulating false and scandalous reports or is- suing spurious certificates thus creating uncertainty as to the title or validity of existing shares. In all such cases, however, the wrongful act affects the shares directly. They are readily distin- guished from the case at bar, where the plaintiff claims his shares were depreciated by wrongful acts making possible the issue of six hundred shares of stock without payment therefor. Such a wrong being primarily against the corporation, the redress for it must be sought by the corporation. ... Whatever injury befell him he suf- fered as a stockholder; and in a case like this, where the direct in- jury was to corporate rights and interests, the right to share in the CHAP. 1.] GENERAL RUBBER CO. v. BENEDICT. 817 compensation which the corporation may recover passes to the transferee of the plaintiff’s shares. Winsor v. Bailey, 55 N.H.-218. Neither does it matter that the misconduct is charged against the defendants as individuals and not as officers. By whomsoever the wrongful acts were committed and in whatsoever capacity the wrongful doers acted, their acts directly injured the corporate body. Redress must be sought by the party injured. The plaintiff was injured only indirectly and collaterally. When the corporation is indemnified the plaintiff ceases to be a loser. It is for this rea- son, viz., that the plaintiff sustained no loss in addition to the loss to the corporation, that the action cannot be maintained notwith- standing the allegation that the wrongful acts were done with the specific intent and malicious and fraudulent design of injuring the plaintiff. If the plaintiff had suffered any loss in addition to that suffered by the corporation such an allegation would be sufficient although the injury suffered was indirect and consequential. Greg- ory v. Brooks, 35 Conn. 487; St. J. & L. C. R. Co. v. Hunt, 55 Vt. 570. In those cases a wrongful act was done to one with an unlaw- ful intent and design to indirectly injure another, and both were injured. Here there is but one loser and one injury. When the injury is to the collective rights of the shareholders and the corpo- rate property is made good, the plaintiff, who has suffered only in these, will be fully indemnified. There is therefore nothing for which he can maintain a separate suit. Where there is but one loss and one loser there can be but one suit, and that must be by the party who has suffered the loss.”’ See, also, Allen v. Curtis, 26 Conn. 456; Niles v. N.Y.C. & H. BR. R.R. Co., 176 N.Y. 119. The gist of the wrong in any aspect is the abstraction of the moneys which were those of the Brazil company, and that company’s ownership of the damages resulting from it. It is true that in the present case the defendant was a director of the shareholder, and it is alleged that such relation gave an additional element to his wrong- doing, making him liable to the plaintiff. But the fundamental facts exist that the direct and primary injury and single loss is to the Brazil company; that the loss to the plaintiff was simply an indirect consequence of that loss and not additional to or independent of it; that the Brazil company can recover its loss and that being done the plaintiff will be fully indemnified. The fact that the despoilers of the Brazil company were not its directors does not affect the natural results of their acts and is immaterial. Wells v. Dane, 101 Me. 67; Converse v. United Shoe Mach. Co., 185 Mass. 422. The case of Ritchie v. McMullen, 79 Fed. Rep. 522, does not con- flict with the foregoing reasoning and conclusions. There the defend- ant directors of the corporation were pledgees of the plaintiff’s shares of its capital stock, and combined together and wrongfully reduced the value and income of the pledged shares with the intention of 818 MCCLURE 0. LAW. [cHAP. I. defaulting the pledgor, forcing the shares to a public sale, depriving the plaintiff of the means of redeeming them or buying them in, of buying them in at less than their value, and of thus increasing their holdings and causing the plaintiff to cease to be a stockholder and lose the benefits from his development of the properties. The basis of the decision there was that the pledgees used their positions as majority directors and their votes as stockholders intentionally to depreciate the stock of their pledgor with the dishonest purposes as mentioned. Clearly, the injury to the plaintiff was direct and pecu- liar. The case, in this aspect, belongs to the class of which is St. J. & L. C. R. Co. v. Hunt, 55 Vt. 570. For the reasons stated, I vote for reversal. Cuasz, Minuer and Srasury, JJ., concur with Carpozo, J.; Coun, J., reads dissenting opinion, and Hiscock, J., concurs; WILLARD BaRTLETT, Ch.J., absent. Order affirmed. a4 G. Dealings with Third Persons. McCLURE »v. LAW. 161 N.Y. 78. 1899. Haicut, J. This action was brought to recover of the defendant, . a former president and director of the Life Union, the sum of $3,000, . which the plaintiff claims was profits made by the defendant out of his trust relationship with the company. The facts established by the evidence are, in substance, as follows: An agreement was entered into on the 28th day of December, 1891, between one Horace Moody, party of the first part, and Lucius O. Robertson and Lewis P. Levy, parties of the second part, by which the party of the first part undertook to deliver to the parties of the second part the absolute control and management of the Life Union Association in consideration of the sum of $15,000. This was to be accomplished by the resignation, from time to time, of one or more directors of the corporation and the election of the parties of the second part, or the persons that they should designate, as directors. This agreement was entered into by Moody under the directions of the defendant, for whom he was acting as agent and attorney. It was modified on the 5th day of February, 1892, with reference to details in payments, etc., but not in any respect affecting the question here presented. These agreements were subsequently executed. Mr. Levy was elected a director to fill a vacancy theretofore existing, and then the defendant resigned as president and had Mr. Levy elected in his place. Subsequently, the defendant, with other directors from time CHAP. 1.] MCCLURE v. LAW. 819 to time resigned, and their places were filled by persons designated by Levy. The money was paid over to a person designated by the defendant and then was distributed among the directors, the de- fendant receiving $3,000. His excuse for this proceeding was that this transfer was made for the purpose of reimbursing himself and other directors for moneys that they had theretofore invested in the purchase of promissory notes which had been issued by the corpo- ration for the purpose of purchasing the property and assets of the Flour City Life Association of Rochester. The notes, however, were, by their terms, payable out of the expense funds to be derived from the transfer membership of the Flour City Association, and inas- much as the transfer was never effected, the notes were not collec- tible from the Life Union. McClure v. Levy, 147 N.Y. 215. The defendant held three of these notes of $1,000 each, but they cannot be accepted as a justification of the transaction, or be received as a defense to this action. The question is, therefore, presented, whether the defendant is bound to account for the money received from Levy for the transfer to him and his associates of the management and control of the Life Union, together with its property and effects. The learned Appellate Division has treated this transaction as a bribe paid to the directors of the Life Union by Levy, and reached the conclusion that the money did not belong to the corporation. We think, however, that the law does not permit the defendant to avail himself of his own wrong as a defense to this action. As presi- dent and director of the Life Union he was bound to account to that association for all moneys that came into his hands by virtue of his official acts, and he cannot be permitted to shield himself from such liability under the claim that his acts were illegal and unauthorized. As an officer he had the right to resign, but the money was not paid to him for his resignation. It was paid over upon condition that he procure Levy and his friends to be elected directors and given the control and management, together with the property and effects of the corporation. The election of directors and the transfer of the management and property of the corporation were official acts, and whatever money he received from such official acts were moneys derived by virtue of his office for which we think he should account. In Sugden v. Crossland, 3 Sm. & Gif. 192, Horsefield was a trustee under a will. Crossland paid him seventy-five pounds to withdraw from the trust and have Crossland appointed in his place. It was held that the seventy-five pounds belonged to the estate. Perry on Trusts, at § 427, says: “Trustees hold a position of.- trust and confidence, the legal title to the trust property is in them, and generally its whole management and control is in their hands. ... They cannot use the trust property nor their relation to it for their own personal advantage. All the power and the influence which the possession of the trust fund gives must be used for the 820 MCCLURE v. LAW. [CHAP. I. advantage and profit of the beneficial owners and not for the per- sonal gain and emoluments of the trustees. . . . So, where a trustee retired from the office in consideration that his successor paid him a sum of money, it was held that the money so paid must be treated as a part of the trust estate, and that the trustee must account for it as he could make no profit directly or indirectly from the trust property or from the position or office of trustee.” In Cook on Corporations, § 650, it is said: “It is a well-established principle of law that a director commits a breach of trust in accept- ing a secret gift or secret pay from a person who is contracting or has contracted with the corporation, and that the corporation may com- pel the director to turn over to it all the money or property so re- ceived by him.” See, also, Chandler v. Bacon, 30 Fed. Rep. 538; Rutland El. L. Co. v. Bates, 68 Vt. 579; Farmers & Merchants’ Bank v. Downey, 53 Cal. 466; Sheridan v. Sheridan El. Light Co., 38 Hun, 396. The order of the Appellate Division should be reversed and judg- ment entered on the verdict affirmed, with costs in all courts. All concur, except Parker, Ch.J., not sitting, and BarTLert, J., dissenting. Order reversed, etc. Norte. — Landes v. Hari, 1381 N.Y. App. Div. 6. A contract by a director of X with A, under the terms of which A is to pay the di- rector asum of money for procuring a contract between X and A, is illegal, even if the other directors know the facts. See also Billings v. Shaw, 209 N.Y. 265. Pearson’s Case, L.R. 5 Ch.D. 336. A director of a company re- ceived from one of the promoters a number of paid-up shares . sufficient to qualify him as a director, and then took an active part in carrying out a conditional contract for the purchase by the com- pany of a colliery belonging to the promoters. JessEL, M.R., held that he must account to the company for the value of the shares, saying (p. 840): ‘That being the position of Sir Edwin Pearson, can he be allowed to say in a Court of Equity that he, having received a present of part of the purchase money, and being knowingly in the position of agent and trustee for the purchasers, can retain that pres- ent as against the actual purchasers? It appears to me that, upon the plainest principles of equity and good conscience, he cannot. Whether the purchase was or was not an advantageous one for the company, whether the property which they purchased at this large profit was or was not worth the increased price that they paid for it, is a question wholly immaterial for us to consider; he cannot, in the fiduciary position he occupied, retain for himself any benefit or advantage that he obtained under such circumstances. He must be deemed to have obtained it under cireumstances which made him CHAP. 1] JACOBUS v. JAMESTOWN MANTEL CO. 821 liable, at the option of the cestuis que trust, to account either for the value at the time of the present he was receiving, or to account for the thing itself and its proceeds if it had increased in value. The company elect on the present occasion to ask to charge him with the value of the twenty-five share warrants at the time of their delivery.” In re London & South Western Canal, Limited, [1911] 1 Ch. 346. Directors who accept and hold their qualification shares in trust for and at the will of the promoter, to whom they hand blank transfers, are guilty of misfeasance, and the measure of damages is the highest value of the shares during their holding. In Godley v. Crandall & Godley Co., 212 N.Y. 121, the court said (p. 181): “There is authority and sound reason in support of the proposition that, in the absence of some provision of statute, by-law or charter, the directors have no authority to vote salaries to each other as mere incidents of their office.” H. Executive Officers. fey JACOBUS v. JAMESTOWN MANTEL CO. 211 N.Y. 154. 1914. Cuassz, J. This action is brought on a promissory note, of which the following is a copy: “$2,500.00 New York, Oct. 8, 1909. “Six months after date we promise to pay to the order of our- selves, Two thousand five hundred & 00/100 dollars at Newton Trust Co., Newton, N.J., value received. “JamMEsTOWN Mantes: Co. “Guo. M. Turner, Treas.” Said note was indorsed ‘‘ Jamestown Mantel Co., Geo. M. Turner, Treas.,” and it was thereafter delivered to and discounted by the Newton Trust Company, the assignor of the plaintiff. It is the last one of a series of like notes, the original of which was given in Au- gust, 1907. At the times herein mentioned the trust company had an investment committee consisting of Hough, its president, Searing, its vice-president; and George, a director. Searing and George were partners doing business in New York city. In August, 1907, Searing was the president of the Delaware and Eastérn Railroad Company. One Welch, an attorney at law, had done business as such for said railroad company and for Searing individually. Welch asserted that the railroad company and Searing owed him considerable money for services; he told Searing that he needed money for his immediate use, and Searing said to him that the company was not in a position 822 JACOBUS v. JAMESTOWN MANTEL CO. [CHAP. I. to pay him at that time, but that if he would borrow a note from somebody for a short time, he, Searing, would have it discounted at one of his trust companies. Welch went to Turner and told him that he wanted to borrow a note of the Jamestown Mantel Company for $2,500 to have it discounted, and that if he, Turner, would furnish him with such a note he would take care of it when it was due. . Turner in the name of the mantel company, and in the form shown, made and indorsed a note for $2,500, and gave it to Welch. Welch delivered it to Searing, who sent it to the trust company, and received in return for it a draft of $2,425, being the amount of the note less the discount thereon. Searing retained the proceeds of the draft and told Welch that his trust companies were notin funds to discount the note. Before the note became due, however, Searing told Welch that the note had been actually discounted and that he had used the money. It was thereafter renewed from time to time until the note now in suit became due when further renewals were refused by the mantel company and it also refused to pay the note. The defendant was in no way directly or indirectly interested in the transaction. The note was given in its name wholly without authority. If Searing was acting for and ‘on behalf of the trust company, it is of course chargeable with his knowledge that the note was borrowed for discount to accommodate Welch and Searing and the defendant is not liable thereon. If he was not acting for and on behalf of the trust company then he was acting independently of it and the trust company is in no way chargeable with his knowledge or.information. The first question for consideration on this appeal is whether the knowledge of Searing, under the circumstances disclosed, is attrib- utable to the trust company. We think not. Searing conceived the idea of obtaining money from the trust company on a note to be borrowed for the purpose, and he was the one actively engaged in carrying out the plan. In carrying it out he was reckless of the consequences to the trust company. In all the transaction he acted for himself individually or in his capacity as president of the Delaware and Eastern Railroad Company. There was no meeting of the investment committee of the trust company and no action thereon by it as a committee. Searing acted at his place of business and not at the place of business of the trust com- pany, and wholly independent of his official relation to it. His knowl- edge was intentionally concealed from the trust company with the fraudulent purpose probably formed at the time the note was first suggested of retaining the proceeds thereof for himself. If we admit that the evidence is insufficient to justify the conclusion that Searing intended to keep the proceeds of the note for his personal use when he first suggested to Welch that he borrow a note to be discounted, CHAP. I.] JACOBUS v. JAMESTOWN MANTEL CO. 823 it must at least be conceded that he either intended at that time to obtain the money for his personal use or to use it for the benefit of the corporation of which he was president. Searing is a lawyer, and he must have known that the note being entirely apart from the business of the corporation was not a binding obligation upon it. In any event the concealment of his knowledge from the trust com- pany was necessary to enable him to obtain from it the proceeds of a note which he knew had been executed without authority, and which would at least be of doubtful value in the hands of.the trust company. The trust company should not be held cognizant of his knowledge. Brooklyn Distilling Co. v. Standard Dis. & Dist. Co., 193 N.Y. 551. There are other objections to the plaintiff’s recovery upon the note that are fatal to his contention. The defendant is a domestic manufacturing corporation. A corporation is an artificial entity having only such powers as are given to it by law and such implied powers as are necessary to the exercise of the powers expressly given to it. The defendant was organized to ‘‘manufacture wood mantels, interior finish, bank, office and bar fixtures and generally to carry on any manufacturing business which can conveniently be carried on in conjunction with any of the matters aforesaid.” The treasurer of the defendant corporation had no express authority by its by- laws or otherwise to sign or indorse a promissory note. The presi- dent of the trust company had never had a transaction with the defendant corporation and did not know its treasurer. He does not remember that Searing said anything to him whatever at the time the note was sent to him for discount. It was taken by him on behalf of the trust company without inquiry either as to the respon- sibility of the corporation or as to the authority of its treasurer to make a promissory note even in the usual course of its business. It affirmatively appears as we have seen that the treasurer had no express authority to make a promissory note, and that the note as made was not made in the regular transaction of the business of the corporation, but wholly as an accommodation to a friend of such treasurer. A manufacturing corporation has no power to make or indorse notes for the accommodation of others. National Park Bank of N.Y. v. Ger. Am. M. W. & S. Co., 116 N.Y. 281; Fox v. Rural Home Co., 90 Hun, 365; affd. on opinion below, 157 N.Y. 684. One who deals with the officers or agents of a corporation is bound to know their powers and the extent of their authority. Alexander v. Cauld- well, 83 N.Y. 480. Notwithstanding the general rule stated, a cor- poration is bound if it makes or indorses commercial paper for the accommodation of another in respect to a bona fide holder who dis- counts it before maturity on the faith of its being business paper. Mechanics’ Banking Association v. N.Y. & S. White Lead Co., 35 824 JACOBUS v. JAMESTOWN MANTEL CO. [CHAP. 1. N.Y. 505. The decision in the White Lead Co. Case, supra, and other similar decisions are based upon the assumption that the officers making or indorsing a promissory note had authority from the cor- poration to make and indorse such notes in the ordinary course of its business. Such decisions do not apply to a case where the officers purporting to act for a corporation do not have authority to sign commercial paper in the ordinary course of its business. A treasurer of a manufacturing corporation has no power to make promissory notes in its name unless such power is expressly given to such officer by the by-laws of the corporation or by resolution of its board of directors. Thompson on Corporations (2d ed.), § 1564; Daniels on Negotiable Instruments (5th ed.), vol. 1, § 394; Edwards on Bills, § 65; Beach on Private Corporations (2d ed.), vol. 2, § 804; McCul- lough v. Moss, 5 Denio, 567; National Bank of Newport v. Snyder Mfg. Co., 107 App. Div. 95; Niagara Falls Susp. Bridge Co. v. Bach- man, 66 N.Y. 261; Dabney v. Stevens, 40 How. Pr. 341; Marine Bank v. Clements, 3 Bosw. 600; National Bank of the Republic v. Navassa Phosphate Co., 56 Hun, 186; People’s Bank v. St. Anthony’s R. C. Church, 109 N.Y. 512. No presumption existed that the defendant’s treasurer had power to make or indorse business paper. It was necessary, therefore, for the plaintiff to show that the treasurer had authority to execute promissory notes in the name of the corporation in the ordinary course of its business, or that the defendant was estopped from denying such authority. It is urged that there is some evidence that the treasurer of the defendant had on one or more occasions signed a promissory note in its name in the regular course of defendant’s business, and that such note or notes had,thereafter been paid by the corporation. It does not appear that said treasurer had ever signed such a note prior to the execution of the note which was given in August, 1907. Whether he had done so or not is of little importance for the purpose of creating an estoppel against the defendant because it affirmatively appears that the trust company did not know of any of the acts claimed to have been done by the defendant’s treasurer in its name. If the defendant had, prior to August, 1907, in the usual course of its business permitted its treasurer from time to time to make pro- missory notes in its name which it ratified and approved by paying them, and knowledge of such acts had come to the trust company, and it had relied upon such acts as showing authority in the defend- ant’s treasurer to make promissory notes in its name in taking the note in controversy, a question of estoppel would have arisen as against the defendant in this action. It is essential for one claiming that another is equitably estopped from denying liability because of his previous acts and conduct to show that he was influenced by and relied upon such acts and con- duct on making the promise or performing the act upon which the CHAP. I.] JACOBUS v. JAMESTOWN MANTEL CO. 825 liability is asserted. Draper v. Oswego Co. Fire R. Assn., 190 N.Y. 12, 16. The defendant is not estopped from denying its liability in this case. If the president of the trust company had made inquiry in regard to the practice of the defendant in making promissory notes and the authority of its treasurer to sign its name to such notes, and he had ascertained all the facts presented by the record, there would have remained a question of fact as to whether the inquiry was a reasonable one, and whether the facts shown were sufficient to warrant the action of the trust company in discounting the note in question. It may also be assumed that the record presents a question of fact as to whether Turner as the treasurer of the corporation had author- ity to sign promissory notes in the usual course of defendant’s busi- ness by reason of one or more notes having been signed by him which were thereafter paid by the corporation. The plaintiff at the trial insisted that the court direct a verdict, and it having directed a verdict for the defendant the plaintiff is bound by the decision of the court upon all questions of fact then open for its determination. There is evidence on which the trial court was authorized to make the findings necessary on which to base its direction of a verdict for the defendant. , The judgment should be affirmed, with costs. WitiarD Bartiett, Ch.J., Werner, Hiscock, Cottin, Hogan and Miuumr, JJ., concur. aes Judgment affirmed. Notes. — By the weight of authority, the treasurer of a corpora- tion has not, by virtue of his office, authority to borrow money or issue obligations of the corporation. As to the law of Massachusetts, however, see Merchants’ Bank v. Citizens’ Gas Light Co., 159 Mass. 505. A president has no authority, by virtue of his office, to execute a mortgage on the corporate property. Frederick v. Letteney, 214 Mass. 46. A president of a building construction company has no authority, by virtue of his office, to award subcontracts on construction work for which his company has the main contract. Murphy v.W.H.& F. W. Cane, Inc., 80 N.J.L. 163. The vice-president of a trust company acting as trustee under a mortgage has no authority, by virtue of his office, to make repre- sentations as to what property the mortgage covered. Davidge v. Guardian Trust Co., 203 N.Y. 331, 339. A vice-president of a cor- poration owning and operating an amusement park has no authority, by virtue of his office, to contract for the purchase of the corpora- tion’s own capital stock and bonds. Beach v. Palisade Amusement Co., 86 N.J.L, 238. Cf. Prairie du Rocher v. Milling Co., 248 Ill. 57. 826 JACOBUS ¥. JAMESTOWN MANTEL CO. [CHAP. I. The secretary of a newspaper corporation has no authority, by virtue of his office, to make a certificate of publication for such corporation. Chicago v. Stein, 252 Ill. 409. The secretary of a cor- poration has no authority, by virtue of his office, to alter the terms of a contract made by the corporation with a third person. Scott v. New York Filling Co., 79 N.J.L. 231. As to the authority of a general passenger agent, see Parrot v. Mexican Central Railway, 207 Mass. 184. As to the authority of a superintendent, see Hall v. Passaic Water Co., 83 N.J.L. 771. As to action by an executive committee see Young v. Canada 8.8. Co., Ltd., 211 Mass. 453. As to delegation of the entire management to one man, see Cumberland Trust Co. v. Ayars & Sons Co., 83 N.J. Eq. 479. SECT. 1.] VARNEY v. BAKER. 827 CHAPTER II. STOCKHOLDERS. SECTION 1. RIGHTS OF A STOCKHOLDER EVEN WHEN HE IS IN THE MINORITY. A. To inspect the Corporate Books and Records. VARNEY v. BAKER. 194 Mass. 239. 1907. Know tron, C.J. This is a petition for a writ of mandamus to obtain an examination of the books of account of the defendant corporation. The petitioner is the owner of eighty shares of the capital stock of the corporation, the whole number of shares being three hundred and fifty. The respondent Baker admitted that he told the son of the petitioner, three or four months before the peti- tion was filed, that the company had lost several thousand dollars. The truth of the statement was not denied, although officers of the company testified that, at the time of the hearing, the company was in a prosperous condition. : The single justice who heard the case found that the petitioner honestly believes that the company is being mismanaged, and de- sires in good faith, for the protection of his interest in the corpora- tion, to examine the books and records of the company for the pur- pose of ascertaining its condition and the value of its stock, and of determining what to do with his stock, and whether there has been mismanagement of the corporation, and if so, what effect it has had upon the assets and business of the corporation, in order that he may be enabled to bring a bill in equity for the appointment of a receiver, or to take other proper proceedings for the benefit of the corporation and of his interest therein. He also found that an examination could be conducted without interfering unduly with the business of the corporation. It was not proved to the satisfaction of the justice that there was any mismanagement in fact, or any incapacity on the part of the managing officers. The justice reserved the case for our deter- mination, and his report presents the question of law whether, on 828 VARNEY ¥. BAKER. [CHAP. II. these facts, the petitioner should have an opportunity to examine the books of account and deposit of the corporation, and if so, to what extent. - The stockholders of a corporation are the equitable owners of its assets, and the officers act in a fiduciary relation as agents of the corporation and of the stockholders. They should be ready to account to the stockholders for their doings at all reasonable times, and the stockholders have a right to inspect their records and ac- counts, and to ascertain whether they are faithful, honest and intel- ligent in the performance of their duties. There is no good reason why the stockholders, acting in good faith for the purpose of ad- vancing the interest of the corporation and protecting their rights as owners, should not be permitted to examine the corporate property, including the books and accounts. It was formerly held in England that this right could be exercised, against the will of the managing officers, only when there was a specific dispute about some corporate matter, between the stock- holders and the officers. Rex v. Merchant Tailors’ Co.,2 B. & Ad. 115. But this rule has been modified by statute. See St. 8 & 9 Vict. c. 16, §§ 117, 119, and St. 25 & 26 Vict. c. 89, Table A 78. The doctrine has not been adopted in America, the cases which go furthest in that direction holding that a dispute as to the alleged mismanagement of the corporation is enough to entitle the stockholder to an examina- tion of the accounts to see whether there is a ground for an action. _ Commonwealth v. Phenix Iron Co., 105 Penn. St. 111; Phenix Iron , Co. v. “hy eunty i Penn. St. 563. According to the general tule in this country,/At is not necessary that there should be any particular dispute to entitle the stockholder to exercise this right. Nothing more is required than that, acting in good faith for the pro- tection of the interests of the corporation and his own interests, he desires to ascertain the condition of the company’s business/Guthrie v. Harkness, 199 U.S. 148; In re Steinway, 159 N.Y. 250;/Huylar v. Cragin Cattle Co., 13 Stew. (N.J.) 392; State v. Pacific Brewing & Malting Co., 21 Wash. 451; Cockburn v. Union Bank of Louisiana, 13 La. Ann. 289; State v. Laughlin, 53 Mo. App. 542; Heminway v. Heminway, 58 Conn. 443. See Union Bank v. Knapp, 3 Pick. 96, 108. Of course the right at common law is not absolute, so that it can be exercised for mere curiosity, or for merely speculative purposes, or vexatiously. If the court is appealed to for the enforcement of the right, a sound discretion will be exercised to determine whether the petitioner is acting for an honest purpose, not adverse to the inter- ests of the corporation. The court will consider whether his desire for an examination is reasonable, having reference to the interests of the corporation and his personal interest as a member of it. Its effect upon the corporation in reference to competitors and other interests will not be disregarded. But as was stated in Dunphy v. Traveller SECT. 1.] HENRY Vv. BABCOCK & WILSON CO. 829 Newspaper Association, 146 Mass. 495, “Courts of equity are swift to protect helpless minorities of stockholders of corporations from the oppression and fraud of majorities.” In the present case the findings of the justice show that the peti- tioner should be permitted to examine the books in accordance with his request. His right to such an examination includes the right to have the assistance of an expert, or other person, if he desires to make transcripts from the books for subsequent use. There is nothing in our statutes which enlarges or diminishes this right as it exists at common law. The provision of the St. 1903, c. 437, § 30, relates only to the copies, books and records therein re- ferred to, and is not applicable to the present case. Peremptory writ of mandamus to issue. Nors. — In Huylar v. Cragin Cattle Co., 40 N.J. Eq: 392, the court said (p. 398): ‘They are entitled to such inspection, though their only object is to ascertain whether their affairs have been properly conducted by the directors or managers. Such a right is necessary to their protection. To say that they have the right, but that it can be enforced only when they have ascertained, in some way without the books, that their affairs have been mismanaged, or that their interests are in danger, is practically to deny the right in the majority of cases. Oftentimes frauds are discoverable only by examination of the books by an expert acgountant.” See also Matter of Steinway, 159 N.Y. 250, 263; Neubert v. Armstrong Co., 211 Pa. 582; Guthrie v. Harkness, 199 U.S. 148. Cf. Lyon v. American Screw Co., 16 R.1. 472. HENRY v. BABCOCK & WILSON CO. 196 N.Y. 302. 1909. WI tLarD Bartuett, J. The defendant is a corporation organized under the laws of New Jersey, having its main office for the trans- action of business in this state at No. 85 Liberty street in the borough of Manhattan in the city of New York where it keeps its stock book. On January 17, 1908, during the usual hours of business, the plain- tiff, being a resident of New York and the owner of one share of stock in said corporation, demanded of its treasurer, who was the officer having charge of the stock book, “to be allowed to inspect the said stock book and to copy therefrom the names of the persons therein set down as stockholders of the defendant together with their places of residences and the number of shares of stock held by them respectively.” The treasurer asked the plaintiff his purpose in making the request. This the plaintiff declined to state, saying that 830 HENRY v. BABCOCK & WILSON CO. [CHAP. II. he understood his right was absolute under the law. The treasurer thereupon said: “If you will tell me your purpose and if such pur- pose appears to me to be proper I will then allow you to inspect the stock book but not otherwise.” The plaintiff still declined to dis- close his purpose whereupon the treasurer finally refused the desired inspection. This controversy was then stated between the parties and duly submitted to the Appellate Division, the plaintiff contending that the refusal to permit an inspection of the defendant’s stock book entitled him to recover a penalty of $250 under section 53 of the Stock Corporation Law. The Appellate Division has rendered judgment in favor of the defendant and from that judgment the plaintiff now appeals. Section 53 of the Stock Corporation Law, as in force at the time of this transaction (now section 33 of chapter 59 of the Consolidated Laws) provided that every foreign corporation having an office for the transaction of business in this state should keep a stock book containing a list of its stockholders, showing their places of residence, the number of shares cf stock held by them respectively, ete. It further provided as follows: ‘‘Such stock book shall be open daily, during business hours, for the inspection of its stockholders. . . . For any refusal to allow such book to be inspected, such corporation and the officer or agent so refusing shall each forfeit the sum of two hun- dred and fifty dollars ($250) to be recovered by the person to whom such refusal was made.” Laws of 1892, ch. 688, § 58, as amended by Laws of 1897, ch. 384. Referring to those cases in which it has been held that the courts in the exercise of their discretion may properly refuse to compel by mandamus the production of the books of a corporation for inspec- tion by a stockholder where it does not appear that the inspection is sought for a legitimate purpose, the learned judge who wrote the prevailing opinion below saw no reason why the same rule should not be adopted in the present case. He thought that the plaintiff’s refusal to disclose his motive authorized the inference that the motive was improper; and that the desired permission to inspect and copy was rightfully denied, not only for that reason, but because the statute did not expressly entitle a stockholder to copy the names and addresses of the other holders of stock from the stock book. In Matter of Steinway, 159 N.Y. 250, the question certified to this court for decision was: “Has the Supreme Court the power, upon the petition of a stockholder, to compel by mandamus the corpora- tion to exhibit its books for his inspection?” In the opinion of the court, Judge VaANN carefully inquired into the origin and extent of the authority of the Supreme Court and its power of visitation or of examining into the affairs of corporations according to the common law; and the conclusion was reached that the common-law right of SECT. 1.] HENRY 0. BABCOCK & WILSON CO. 831 a stockholder with reference to the inspection of the books of his corporation still exists unimpaired by legislation, and that the Supreme Court has power, in its sound discretion upon good cause shown, to enforce such right. That decision, so far as it goes, tends to sustain the position of the appellant; but it did not pass upon the force and effect of the statute whose operation is invoked in the present case. No doubt the legislature could make the stockholder’s privilege of inspection dependent upon the motive or purpose with which it is sought; but it has not seen fit to do so. Asc er agb inthe stoces plain and mandatory. It recognizes an absolute rig) e stock= _teldey and mapa oe absolute duty upon the corporation an and the custodian of the stock book. The law requires no statement or proof of any particular intent upon the part of the person demanding the “nspection. He must be a stockholder and must prefer his request during busimess hours; that is all. If it appeared in good faith that the book was then in actual use for other corporate purposes, he could, of course, be required to wait a reasonable time until such use terminated ; but no such matter of defense is suggested here. The plaintiff was refused any inspection at all in the absence of a dis- closure of his purpose; and this action of the defendant has been sanctioned by the judgment of the Appellate Division. We think that judgment is based upon a mistaken construction of the statute in this respect. Nor was the refusal justified on the ground that the law confers upon the stockholder no express right to copy from the book. The right to inspect the book includes the right on the part of the stockholder to aid his memory by copying therefrom to the extent indicated in the agreed statement of facts in the present case. In Cotheal v. Brouwer, 5 N.Y. 562, it was held that the custodian of a register of stockholders which the stockholder had a statutory right to examine could not close the book because a stockholder desired to make a memorandum in the course of his examination in order to assist his recollection. .“‘Unless the stockholder is permitted to take memorandums from the books,” said Paien, J., “or copies of the names of the stockholders, the plain object of the statutory ae would be defeated” (p. 567). The judgment of the Appellate Division should be reversed and judgment directed for the plaintiff in accordance with the terms of the submission, with costs in both courts. CuLLEN, Cu.J.. VaNN, WERNER, Hiscock and Cuass, JJ., con- cur; Gray, J., not voting. Judgment reversed, etc. Se ee Nots. — See, accord, Cobb v. Lagarde, 129 Ala, 488; Venner v. Chicago City Ry. Co., 246 Ill. 170; Kimball v. Dern, 39 Utah, 181; Davies v. Gas Light Co., [1909] 1 Ch. 708, 832 GOODNOW v. AMERICAN WRITING PAPER CO. [CHAP. II. B. To Dividends. GOODNOW v. AMERICAN WRITING PAPER CO. 73 N.J. Eq. 692. 1907. Swayze, J. The appellant filed his bill to have a resolution for the payment of a dividend upon the preferred stock of the defendant declared unlawful, null and void, and to restrain payment thereof. The bill charges that the capital stock of the company was for the most part issued for property purchased, which included trade-marks and good will taken at a grossly excessive valuation, and that what- ever the value of the property given in exchange for the stock may have been at the time of purchase, it now falls short of the aggregate of the debts and the par value of the stock; that the operations of the company have been successful, and to some extent profitable, a considerable sum of morey having been earned in excess of the in- terest upon the mortgage, and of the $100,000 required annually to be set aside as a sinking fund for the mortgage bonds, and of the cost of operating the company and keeping up its manufacturing plant; that the net annual gains as reported by the directors to the stockholders prior to 1906 were used in part to purchase the com- pany’s own bonds for its treasury and for the sinking fund, and in part were set aside for working capital; and that on July 1st, 1906, the balance sheet of the company showed accumulated profits to an amount several times the amount required to pay the proposed dividend; that the dividend was authorized by resolution of October 2, 1906 (1905 in the printed case seems to be a clerical error), which directed the treasurer to pay the dividend out of net profits on April 1, 1907. The gravanien of the bill is that the payment of this divi- dend would constitute a division and withdrawal and payment to the holders of preferred shares of a part of the capital stock of the company, and would constitute an unlawful reduction of the capital stock in violation of the Corporation Act. To this bill the defendant demurred, and the court of chancery ye allowed the demurrer. We think it unnecessary to discuss the question dealt with by the learned vice-chancellor as to the right of the stockholders to raise this question, or the question so thoroughly discussed at the bar as to the meaning of net profits under our Corporation Act as it stood prior to the enactment of chapter 143 of the Laws of 1904. The question seems to us to involve only the construction of that act, and to turn upon the change introduced thereby. Cases cited from other jurisdictions are therefore of little assistance. SECT. I.] GOODNOW v. AMERICAN WRITING PAPER CO. 833 The material language in the act of 1896 (P.L. 1896, p. 286) is as follows: ‘‘No corporation shall make dividends, except from the surplus or net profits arising from its business, nor divide, withdraw, or in any way pay to the stockholders, or any of them, any part of its capital stock, or reduce its capital stock, except according to this act.” Tn the act of 1904 this section is changed so as to read as follows: “The directors of a corporation shall not make dividends except from its surplus, or from the net profits arising from the business of such corporation, nor shall it divide, withdraw, or in any way pay to the stockholders, or any of them, any part of the capital stock of such corporation, or reduce its capital stock except as authorized by law.” Under the act of 1896 there was room to contend that the words “net profits” were intended to be synonymous with the word “‘sur- plus”; the language used was “from the surplus or net profits.”’ Under the act of 1904, this contention is no longer possible; the lan- guage used is “from its surplus, or from the net profits.” The evident intent of the change is to point out two funds from which dividends may be made. Although the change in language indicates that the legislature made a distinction between surplus and net profits, it does not necessarily follow that net profits mean the difference between gross earnings and what may be called operating expenses. Such profits may be called annual profits, and it may be that by net profits the legislature meant the net profits upon the whole of the company’s business from its organization. If either of these meanings is adopted, the declaration of the present dividend is justified. There was an- excess of gross earnings over the operating expenses of the current year, and the value of the present assets exceeded the value of the —actual assets with which the company began business. The com- ~plainant contends, however, that the term “net profits” is used in “neither of these senses, but in the sense of an excess of the value of the present assets over ‘the par value of the capital stock issued and’ ~~ outstanding; and the claim is that since that stock was issued for property at a gross overvaluation, there can be no dividend until the difference between the actual value of the property and the value _at which it was taken over is made up. The argument is that the “Gntent of § 30 is to prevent the capital “stock being distributed in the form of dividends, and the words ‘capital stock”’ are supposed to be used in that section as synonymous with “share capital.” The ambiguity in the term “capital stock” was noticed by this court in Wetherbee v. Baker, 35 N.J. Eq. (8 Stew.) 501. It may mean either the capital subscribed (the share capital) or the capital paid in, the actual assets with which the company does business. It seenis to be used in both senses in this very section. When the legislature 834 GOODNOW J. AMERICAN WRITING PAPER CO. [CHAP. IL. forbids the dividing, withdrawing or paying to the stockholders any part of the capital stock it means the capital actually invested; when it forbids the reduction of capital stock it means the share capital subscribed, or the authorized capital. We are led to the conclusion that the words ‘capital stock” in the first instance mean capital actually invested, by the fact that it is only actual assets that can be divided, withdrawn, or paid over. These words are not apt words to apply to nominal or share “capital, which may be reduced, but can hardly be withdrawn, divided, or paid over. This capital actually invested’ does not in- clude net profits arising from the business of the company, for the reasons that the language of the section itself makes a distinction between the declaration of dividends and of profits and the with- drawing of capital; that another method of securing payment of the par value of the stock is provided in other sections of the act; that the policy to be served by the prohibition of § 30 is to prevent the frittering away of the actual assets with which the company is to do business, not the nominal assets which it has never received and for which it still has a claim against the subscribers for unpaid stock. The section distinguishes between surplus and net profits; but if the complainant is correct in his contention that net profits mean only the excess above the share capital, we see no distinction in fact, but only in bookkeeping entries. It may not infrequently happen that stock is issued on which avowedly only a partial payment is made of the amount subscribed, which is therefore subject to further calls. We cannot think that in such a case, where the company prospers, there-are_no net profits available for dividends until the earnings accumulate to an amount “equal tothe par value of the shares. The complainant’s brief con=~ The language of § 47 supports this view. It requires the directors, after reserving over and above its capital stock paid in such sum as shall have been fixed as a working capital, to declare a dividend of the whole accumulated profits. Here the profits are clearly to be ascertained by reference to the capital stock paid in, and not to the nominal share capital. It would be quite inconsistent to require by § 47 a dividend out of profits to be ascertained with reference to capital stock paid in, and to forbid by § 30 a dividend, unless there were net profits over and above the amount of the nominal share capital. Norr. —In Roberts v. Roberts-Wicks Co., 184 N.Y. 257, the court said (p. 266): \“‘ Dividends, as the rule, are not payable out of-the capital of a corporation, but. only from the surplus profits arising from the business carried on, and that was the contract here. When the property of a corporation has accumulated in excess of its char- SECT. 1.] MCNAB ¥. MCNAB & HARLIN MFG. CO. 835 tered capital, the excess may be regarded and dealt with as constitut- ing a surplus of profits.” If assets are wasting in their nature, as mines or patents, a sinking- fund to offset the waste may not be necessary. See Excelsior Mining Co. v. Pierce, 90 Cal. 131; Mellon v. Mississippi Glass Co., 77 N.J. Eq. 498; People v. Roberts 156 N.Y.585; Lee v. Neuchatel Asphalte Co., L.R. 41 Ch.D. 1. McNAB v. McNAB & HARLIN MFG. CO. 62 Hun (N.Y.) 18. 1891. Dantets, J. The defendant was incorporated on or about the 28th of April, 1871, under the laws of this State providing for the incor- poration of manufacturing companies. Its business was declared to be that of manufacturing brass and iron goods for sale, and since its incorporation it has carried on that business. The plaintiff was the owner of eight shares of its capital stock, which consisted of one hundred and fifty shares, of $1000 each, and the other defendants were officers and shareholders in the company. After its formation, and in or about the year 1877, the company became unable to pay its debts, and a proceeding in bankruptcy was instituted to discharge it from its debts. Soon after the proceeding was commenced the defendant Harlin became the president of the company. He owned seventy-eight shares of its capital stock, and compromised the debts owing to the creditors of the company. The agreement for the com- promise was to pay seventy-five per cent within the period of three years. After he took charge of the affairs of the company as its president, and under his management, the business became prosper- ous, and the seventy-five per cent was paid to the creditors, and afterwards they were paid the additional sum of twenty-five per cent, making payment of their demands in full. The prosperity of the company continued, owing to the judicious management of the president, and for eight years prior to the time of the trial, which took place in May, 1891, its net profits amounted to the sum of $100,000 a year, or a sum slightly in advance of that amount, and from the year 1881 to the year 1891 it made and paid a dividend. on its shares amounting to an average exceeding the sum of twenty-five per cent; and, in addition to the dividends made in this manner, it accumulated a large surplus, which was mainly used in its business, but to the extent of about one hundred thousand dollars was in its deposit accounts. And it was stated by the treasurer in his evidence upon the trial that there was at that time an actual surplus owned by the company amounting to the sum of $152,209, and the plaintiff, whose action was brought to secure the distribution of the surplus by way of dividends, alleged and claimed that a still larger surplus 836 MCNAB UV. MCNAB & HARLIN MFG. CO. [CHAP. Il. had been earned and was owned by the company; and it was one of the principal objects of the action to secure the division of this sur- plus by way of dividends among the shareholders. But it was ~proved in the course of the trial that the surplus maintained by the company was profitably employed in purchasing the material used “by it in the course of its manufactures, and that it was considered for the best interests of the company not to divide this surplus among ee directors, in restricting the dividends as they id, seem to have been impressed with the propriety of this convic- tion, and the dividends were accordingly limited to such amounts from year to year as did not intrench upon the large surplus which had been earned and secured. In their action upon this subject the trustees appear to have exercised the judgment which they deemed to be most consistent with the prosperity and maintenance of the interests of the company, and the statute under which the incorpora- tion took place delegated the authority of the trustees to manage the stock, property, and concerns of the company (2 Rev. St., 5thed., p. 508, § 29); and to what amount the dividends shall be made, and the extent of the surplus which the interests of the company may require to be retained, are within this delegation of authority con- fided to the trustees. And it was so regarded in Williams v. Telegraph Co., 93 N.Y. 162, where it was said, with the apparent approval of the court, that pager alr surplus, whether a divi- dend shall be made, and, if made, ch -it-shall-be, and-when __and where it shall be payable, rest in the fair and honest discretion _of the directors, uncontrollablé by-the-courts.* Id. 192. And no broader principle than this was either stated or sanctioned in Scott v. Fire Co., 7 Paige, 198, or in either of the other authorities which have been brought to the attention of the court. The principle to be applied is that which shall secure the observance of good faith on the part of the directors, and this principle was neither denied nor in- trenched A Seeley v. Bank, 8 Daly, 400, which was affirmed in 78 N.Y. 60 ‘he trustees are chosen by the shareholders, to exer- cise their best judgment, depending upon their knowledge of the affairs and condition of the company; and when that has been done, the courts do not undertake to control their action, although they might differ in their views of the proper management to be adopted and followe o reason has been disclosed by the case for doubting or impeaching the good faith of these trustees. Neither can it be affirmed justly, in view of the large business carried on by the com- pany, that they acted unreasonably or capriciously in declining to order a larger dividend than that which was in fact paid to the shareholders. Norse. —In Burland v. Earle, [1902] A.C. 83, the court said (p. 95): “Their Lordships are not aware of any principle which SECT. I.] FORD v. EASTHAMPTON RUBBER THREAD CO. 83" compels a joint-stock company while a going concern to divide the whole of its profits amongst its shareholders. Whether the whole or any part should be divided, or what portion should be divided and what portion retained, are entirely questions of internal man- agement which the shareholders must decide for themselves, and the court has no jurisdiction to control or review their decision, or to say what is a ‘fair’ or ‘reasonable’ sum to retain undivided, or what reserve fund may be ‘properly’ required. And it makes no difference whether the undivided balance is retained to the credit of profit and loss account, or carried to the credit of a rest or reserve fund, or appropriated to any other use of the company. These are questions for the shareholders to decide subject to any restrictions or directions contained in the articles of association or by-laws of the company.” In the United States, the authorities in accord with the reasoning and result of the principal case are very numerous. But the courts have jurisdiction to compel the declaration of a dividend, and will do so in a proper case. See Crichton v. Webb Press Co., 113 La. 167; Cratty v. Peoria Ass’n, 219 Ill. 516 (preferred stock); Blanchard v. Prudential Insurance Co., 78 N.J. Eg. 471 (and cases cited); Matter of Rogers, 161 N.Y. 108, 112; Morey v. Fish Bros. Wagon Co., 108 Wis. 520. On the right of preferred stockholders to dividends see Equitable Life Assurance Society v. Union Pacific R.R. Co., 212 N.Y. 360. On the mooted question as to whether, in a suit to compel the declaration of a dividend, the directors must be made parties, see Purchase v. Atlantic Safe Deposit Co., 81 N.J. Eq. 344, 346 (as a cor- poration can only act through its board of directors, a duty of the corporation ‘ necessarily belonged to the board and to each mem- ber of the board’’); Wilson v. United States, 21 U.S. 361, 376 (“a command to the corporation is in effect a command to those who are officially responsible for the conduct of its affairs”’). It is ultra vires for oration to guarantee dividends on its own stock. See Strickland v. National Salt Co., 79 N.J. ‘Eq. 182.” = FORD v. EASTHAMPTON RUBBER THREAD CO. 158 Mass. 84. 1893. Cowrract for money had and received. At the trial in the Superior Court, without a jury, before Atpricu, J., there was evidence tend- ing to show that the plaintiff on June 16, 1891, owned fifty-two shares _ italstock of the defendant company, of the par value of one —hundred dollars per share; that on that day the directors passed the Owing vote, namely, “That a dividend of 20 per cent be paid to 838 FORD ¥. EASTHAMPTON RUBBER THREAD CO. [CHAP. Il, stockholders of this date, payable Tuesday, June 23d, 1891”; that on said June 16th the annual meeting of stockholders of the company ~for the election of directors was held immediately after the meeting __ of directors; according to custom, and duly lected five directors, as provided by the by-laws of the company, two only of the old directors spate iclesfely and no dinoatar het re-elected who voted for the _ —twemty per cent dividend, though the two who were re-elected were ~present-at the meeting when it was voted; and that on said June 16th, “as soon as the stockholders’ meeting adjourned, the directors elected and re-elected thereat met, qualified, organized for the year, and passed the following votes: “That the vote passed by the directors of this company this day declaring a dividend of 20 per cent_on the_ - capital stock of the company, payable Tuesday, June 23d, 1891, be reconsidered and rescinded; the same is hereby rescinded. That a dividend of six per cent, payable June 23d instant to stockholders of record this day, be declared in place of the dividend voted at earlier — meeting of this board this day.” It also appeared that no money was _ set aside or provided to pay said dividend of twenty per cent, but the company had ample means and facilities for paying the twenty per cent dividend; that always before money had been provided to pay a dividend before it was declared; that money to pay said six per cent dividend was provided after the meeting and before said 23d of June by borrowing, and the same was set aside and deposited in bank therefor; that the treasurer sent the check of the defendant on the bank where the money was deposited to each stockholder of record of said June 16th to pay the dividend on his stock at six per cent, in- cluding the plaintiff, on said 23d June, 1891; and that the plaintiff de- clined to accept the check, and returned the money to the treasurer. It further appeared in evidence that no stockholder of the defendant had been paid the twenty per cent dividend for June, 1891; that a majority of the stockholders had accepted the dividend of six per cent paid by checks as aforesaid on June 23, 1891, in full; that the plaintiff, by his attorney, by letter of June 30, 1891, demanded pay- ment of the twenty per cent dividend from the defendant; and that the plaintiff made no objection to the check of the defendant sent him to pay the dividend of June 16, 1891, except that it was for a dividend of six per cent, instead of twenty per cent. The defendant asked the court to rule that the directors elected on June 16 had a right on that day to rescind the vote whereby the twenty per cent dividend was declared payable at a future day; and that the plaintiff could not recover. The judge declined so to rule, ordered judgment for the plaintiff, and reported the case for the determination of this court. If the refusal to rule and order of judg- ment were correct, judgment was to be affirmed; otherwise, judgment was to be ordered for the defendant. Fietp, C.J. It seems to be settled that, when a dividend has been SECT. I.] FORD v. EASTHAMPTON RUBBER THREAD CO. 839 fully declared, the corporation thereby manifests its intention that the amount of the dividend should be considered as having been separated from the other property of the corporation, and as having become the individual property of the stockholders, and that there- fore, when the dividend becomes payable according to the terms of the vote declaring it, each stockholder has a right to demand pay- ment of the proportional part of the dividend which belongs to his shares of stock, and to sue the corporation for it, if itis not paid on demand. In some cases money or other property equal to the whole amount of the dividend declared has been specifically set apart as a fund appropriated to the payment of the dividend, and the stock- holders have been regarded as the cestuis que trust of this fund, each entitled to his share. In other cases, the corporation has credited the stockholders with the amount of their shares of the dividend, and the stockholders have assented to this, and the amount so credited has been regarded as a debt of the corporation to the stock- holders; or the corporation has paid to some of the stockholders their shares of the dividend, and has refused to pay anything to the others, and it has been held that the corporation must pay all alike. See Beers v. Bridgeport Spring Co., 42 Conn. 17; State v. Baltimore & Ohio Railroad, 6 Gill, 363; King v. Paterson & Hudson River Railroad, 5 Dutch. 504; Jermain v. Lake Shore & Michigan Southern Railway, 91 N.Y. 483; Hopper v. Sage, 112 N.Y. 530; Jackson v. Newark Plankroad Co., 2 Vroom, 277; Wheeler v. Northwestern Sleigh Co., 39 Fed. Rep. 347. When a dividend has been declared payable at a definite future time, but no fund has been set apart for the payment of the dividend, and the corporation meanwhile becomes insolvent, whether the stockholders to the extent of their proportions of the dividend should share ratably with the creditors of the corporation in its property has not, so far as we know, been recently considered, but the decision in Lowene v. American Ins. Co., 6 Paige, 482, is that they should. The setting apart of a fund to pay a dividend has been held to give a lien upon it to the stockholders, which they can enforce to the exclusion of the general creditors of the corporation. In re Le Blanc, 14 Hun, 8, and 75 N.Y. 598; Le Roy v. Globe Ins. Co., 2 Edw. Ch. 657. The English Companies’ Act, 1862 (25 & 26 Vict. c. 89, § 38, cl. 7), provides that ‘‘no sum due to any member of a com- pany, in his character of a member, by way of dividends, profits, or otherwise, shall be deemed to be a debt of the company, payable to such member in a case of competition between himself and any other creditor not being a member of the company; but any such sum may be taken into account, for the purposes of the final adjustment of the rights of the contributories amongst themselves.” Upon these questions, however, we desire to express no opinion. It has been argued that there is no consideration for the promise of a corporation to pay a dividend to its stockholders, but we think that 840 FORD ¥. EASTHAMPTON RUBBER THREAD CO. [CHAP. II. the doctrine of consideration applicable to a simple contract between persons having no fiduciary relations to each other is not applicable to such promise. It is the object of a private business corporation to make money for its stockholders, and, under our laws, it is ordinarily the duty of the directors from time to time to declare dividends out of the net earnings, if there are any, and it must be left largely to the discretion of the directors to determine when and for how much such dividends should be declared. The whole property of the corporation is held on a sort of trust for the stockholders, and the directors are, in a general sense, the managers; and when a dividend is declared by the directors, the declaration is a determination by a body authorized to make it that the amount of the dividend should be taken from the property of the corporation and paid over to the stockholders. The cause of action of each stockholder against the corporation for non- payment of the dividend does not arise from any actual contract between the corporation and its stockholders, but from the nature of the organization, and the relation of the stockholders to the corpo- ration and its property. Unless the rights of creditors intervene, or the corporation is enjoined from paying the dividend, on the ground that the dividend has not been earned, or on some other ground, the amount of the dividend, after it has been declared and has become payable, is considered as property held by the corporation for the use of the stockholders individually, and the stockholders may re- cover their shares as money or property had and received to their use. We have been able to find little or no authority on the precise ques- tion involved in this case, namely, whether, after a dividend has been duly declared by a vote of the directors, but payable at a future time, the vote can be rescinded at a subsequent meeting of the directors, held before the time at which the dividend becomes payable accord- ing to the vote, when the fact that a dividend has been declared has not been made public, or in any manner communicated to the stock- holders, and when no fund has been set apart for the payment of the dividend. On principle, we do not see why the directors may not rescind such a vote, under the circumstances stated. By the vote no specific property passed to the stockholders. Ifthe vote be —tégarded as a declaration of trust in favor of the stockholders, it— ~could be revo prop- was identified an ide for them. Indeed, cases may easily Supposed of such a change in the affairs of a corporation, between the time when a dividend is declared and the time when it becomes payable, as to make the exercise of such a power by the directors useful, if not necessary, for the successful continuance of the business of the corporation. It appears in the present case that the meeting of the new directors at which the vote was rescinded was held after the annual meeting of the stockholders, but on the same day as the meeting of the directors at which the vote was passed, which was SECT. 1.] BURROUGHS v. NORTH CAROLINA R.R. CO. 841 held just before the meeting of the stockholders; and that at the meeting of the stockholders “the president did not, as had for many years been the custom, announce that any dividend had been de- clared, or promulgate the same to the stockholders’’; and it does not appear that any of the stockholders, except the directors, knew of the original vote, or that any of the stockholders had made any con- tracts, incurred any liability, or done anything relying on the vote. It also appears that no fund was distinctly set apart for the payment of the dividend before the vote was rescinded. As the passage of the vote did not constitute an actual contract of the corporation with its Ts, bu Things of the —property-ofthe corporation among the stockholders, we are of opin- fon-thatbet hedivision had J iby mad ef. ha: position of the stockholders had been changed in reliance.on. the vote, — certainly before Se passage of the vote had _been. made public, or communicate e —power of the directors, at a meeting subsequent tc to that at which the ‘this action at law, we cannot VO Supervise the exercise of this power by the directors. Tudgment for the defendant. Nors. — Cf. McLaran v. Planing Mill Co., 117 Mo. App. 40. BURROUGHS v. NORTH CAROLINA R.R. CO. 67 N.C. 376. 1872. Ropman, J. On 16th February, 1870, the North Carolina Railroad Company declared a dividend by the following resolution: ‘‘The Board of Directors of the North Carolina Railroad Company do de- clare an annual dividend of six per cent on the capital stock of this company, for the fiscal year ending the 31st of May, 1870. Three per cent to be paid on 1st April, and three per cent payable on the first day of July, 1870, and the transfer books be closed from first day of March to the first of April, and from the first day of June until the first day of July.” On the 17th February, the plaintiffs, in writing in the usual form, at the foot of their certificate for thirty-four shares of stock in the company, transferred the same to Samuel H. Wiley for value, and authorized F. A. Stagg, attorney, to transfer the same on the books of the company. The transfer was accordingly made on the 21st February. The certificate of stock to the plaintiffs was cancelled, and a new certificate issued to Wiley. On the same day plaintiffs notified the company that they claimed the dividend declared cn 16th ‘February. The company, nevertheless, paid the same to Wiley, and 842 BURROUGHS ¥. NORTH CAROLINA R.R. CO. [CHAP. It, this action is brought to recover it. One would suppose, that in a case which must be of frequent occurrence, there would be proved some established usage, or that some decided cases could be found fixing the rights of the parties. If there be any established usage, either general or special to this corporation, there has been no evi- dence of it offered in this case. And the learned counsel inform us that they have been able to find no authority whatever on it. The absence of authority is the more remarkable, as the rule as to a divi- dend following the stock or not, under the present circumstances, would seem to be of a general nature, not confined to sales, but cover- ing the case of a life tenant with remainder, when the life tenant dies after the dividend is declared, and before it is payable, and the case of a will bequeathing stock when the testator dies under the like cir- cumstances. \ Before proceeding to the particular consideration of this case, it is necessary to observe: — 1. It was clearly within the power of the seller and purchaser of the stock in this case, to have contracted with respect to the dividend declared on the day before. But, 2. If we assume for the moment, that the effect of the resolution, declaring the dividend, was to make it payable to whoever should appear by the books of the company to be the owner of the stock on the days on which it was payable, then, notwithstanding any differ- ent contract between the plaintiffs and their vendee, the company was justified in paying to the vendee, and the redress of the plaintiffs would be by an action against their vendee for money had and re- ceived. It is important to notice that the question is, not as to the contract between plaintiffs and Wiley, but, to whom did the company agree to pay the dividend; for if the company agree to pay to one who turned out to be Wiley, its liability cannot be affected by any collateral agreement between the plaintiffs and Wiley (even if there were express proofs of such) without its consent. Without adverting to the principle, that the contract between plaintiffs and Wiley must be supposed to have been made in reference to the resolution of the day before, as to which it does not appear that either party had any advantage in point of knowledge; yet, in the absence of a contrary agreement, the sale must necessarily have been of the subject-matter with its rights and incidents at the date, or perhaps when the transfer should be completed. So that the true question is, what was the effect and meaning of the resolution? Did it mean that the dividend should be payable to those who held the stock on 15th February, or to those who should hold it on 1st April? If the resolution had been clear and explicit in either sense, I conceive there could be no room for a controversy. Being of uncertain meaning, the courts have to give it a certain one. SECT. 1.] STOKES ¥. CONTINENTAL TRUST CO. 843 But whatever shall be determined to be its meaning in law, that must be taken to be as plainly its meaning as if it had been expressly written so. What was the object in declaring the transfer books of the com- pany closed from 1st March to 1st April? If the dividend was intended to be payable to any one who was the holder on 16th February, there could be no sue in closing the books. In any case, upon a demand for payment, it would only be necessary to see from the books who was the holder on that day. But if the usage be, to put the dividend on the books of the company to the credit of the holders on 1st March, we can see a reason for closing the books, viz., to give time for the company to make out its accounts with its stockholders on that day. Suppose an assignment of stock between Ist March and 1st April, would the company be bound to notice it, in reference to a dividend payable Ist April? I think not. Nore. — Cf. Hopper v. Sage, 112 N.Y. 530. Nisbet v. Philp, [1913] 2 Ch. 697. Where preference shares carry- ing a fixed cumulative preferential dividend are bequeathed in trust for a life tenant and remaindermen, and no dividend is declared or paid for the financial years including the life tenancy, the life ten- ant’s executors are not entitled to have the arrears made good out of future preferential dividends. C. To subscribe to New Issues of Stock. STOKES ». CONTINENTAL TRUST CO. 186 N.Y. 285. 1906. AppEaL from an order of the Appellate Division of the Supreme Court in the first judicial department, entered January 4, 1905, re- versing a judgment in favor of plaintiff entered upon a decision of the court on trial at Special Term and granting a new trial. This action was brought by a stockholder to compel his corporation to issue to him at par such a proportion of an increase made in its capital stock as the number of shares held by him before such increase bore to the number of all the shares originally issued, and in case such additional shares could not be delivered to him for his damages in the premises. The defendant is a domestic banking corporation in the city of New York, organized in 1890, with a capital stock of $500,000, con- sisting of 5000 shares of the par value of $100 each. The plaintiff was one of the original stockholders, and still owns all the stock 844 STOKES V. CONTINENTAL TRUST CO. [CHAP. II. issued to him at the date of organization, together with enough more acquired since to make 221 shares in all. On the 29th of January, 1902, the defendant had a surplus cf $1,048,450.94, which made the book value of the stock at that time $309.69 per share. On the 2d of January, 1902, Blair & Company, a strong and influential firm of private bankers in the city of New York, made the following propo- sition to the defendant: “If your stockholders at the special meeting to be called for January 29, 1902, vote to increase your capital stock from $500,000 to $1,000,000 you may deliver the additional stock to us as soon as issued at $450 per share ($100 par value) for ourselves and our associates, it being understood that we may nominate ten of the twenty-one trustees to be elected at the adjourned annual meeting of stockholders.” The directors of the defendant promptly met and duly authorized a special meeting of the stockholders to be called to meet on January 29, 1902, for the purpose of voting upon the proposed increase of stock and the acceptance of the offer to purchase the same. Upon due notice a meeting of the stockholders was held accordingly, more than a majority attending either in person or by proxy. A resolution to increase the stock was adopted by the vote of 4197 shares, all that were cast. Thereupon the plaintiff demanded from the defendant the right to subscribe for 221 shares of the new stock at par, and offered to pay immediately for the same, which demand was refused. A resolution directing a sale to Blair & Company at $450 a share was then adopted by a vote of 3596 shares to 241. The plaintiff voted for the first resolution but against the last, and before the adoption of the latter he protested against the proposed sale of his proportionate share of the stock and again demanded the right to subscribe and pay for the same, but the demand was refused. On the 30th of January, 1902, the stock was increased, and on the same day was sold to Blair & Company at the price named. Although the plaintiff formally renewed his demand for 221 shares of the new stock at par and tendered payment therefor, it was refused upon the ground that the stock had already been issued to Blair & Company. Owing in part to the offer of Blair & Company, which had become known to the public, the market price of the stock had increased from $450 a share in September, 1901, to $550 in January, 1902, and at the time of the trial, in April, 1904, it was worth $700 per share. Prior to the special meeting of the stockholders, by authority of the board of directors a circular letter was sent to each stockholder, including the plaintiff, giving notice of the proposition made by Blair & Company and recommending that it be accepted. There- upon the plaintiff notified the defendant that he wished to subscribe for his proportionate share of the new stock, if issued, and at no time did he waive his right to subscribe for the same. Before the special meeting, he had not been definitely notified by the defendant that he SECT. 1] STOKES v¥. CONTINENTAL TRUST CO. 845 could not receive his proportionate part of the increase, but was informed that his proposition would “be taken under consideration.” After finding these facts in substance, the trial court found, as conclusions of law, that the plaintiff had the right to subscribe for such proportion of the increase, as his holdings bore to all the stock before the increase was made; that the-stockholders, directors, and officers of the defendant had no power to deprive him of that right, and that he was entitled to recover the difference between the mar- ket value of 221 shares on the 30th of January, 1902, and the par value thereof, or the sum of $99,450, together with interest from said date. The judgment entered accordingly was reversed by the Appellate Division, and the plaintiff appealed to this court, giving the usual stipulation for judgment absolute in case the order of reversal should be affirmed. Vann, J.... The leading authority is Gray v. Portland Bank, decided in 1807 and reported in 3 Mass. 364. In that case a verdict was found for the plaintiff, subject, by the agreement of the parties, to the opinion of the court upon the evidence in the case whether the plaintiff was entitled to recover, and, if so, as to the measure of dam- ages. The court held that stockholders who held old stock had a right to subscribe for and take new stock in proportion to their respective shares. As the corporation refused this right to the plain- tiff he was permitted to recover the excess of the market value above the par value, with interest. In the course of its argument the court said: “‘A share in the stock or trust when only the least sum has been paid in is a share in the power of increasing it when the trustee determines or rather when the cestuis que trustent agree upon em- ploying a greater sum. . . . A vote to increase the capital stock, if it. was not the creation of a new and disjointed capital, was in its nature an agreement among the stockholders to enlarge their shares in the amount or in the number to the extent required to effect that in- crease. ... If from the progress of the institution and the expense incurred in it any advance upon the additional shares might be obtained in the market, this advance upon the shares relinquished belonged to the whole, and was not to be disposed of at the will of a majority of the stockholders to the partial benefit of some and exclusion of others.” This decision has stood unquestioned for nearly a hundred years, and has been followed generally by courts of the highest standing. It is the foundation of the rule upon the subject that prevails, almost without exception, throughout the entire country. [After reviewing the authorities.] If the right claimed by the plain- tiff was a right of property belonging to him as a stockholder he could not be deprived of it by the joint action of the other stockholders and of all the directors and officers of the corporation. What is the nature of the right acquired by a stockholder through 846 STOKES v. CONTINENTAL TRUST CO. [cHAP. II. the ownership of shares of stock? What rights can he assert against the will of a majority of the stockholders and all the officers and directors? While he does not own and cannot dispose of any specific property of the corporation, yet he and his associates own the corpo- ration itself, its charter, franchises, and all rights conferred thereby, including the right to increase the stock. He has an inherent right to his proportionate share of any dividend declared, or of any surplus Busing upon dsso"ution, anche can prevert waste or misappropria- tion of the property of the corporation by thosé in control. Finally, ~ he has the right to vote for directors and upon all propositions sub- "ject by law to the contro! of the stockholders, and this is his supreme “Tight and main protection. Stockholders-haveno direct voice in —transacting the corporate business, but through their right to vote ey can sele the power of manage- ment and control. 7 ~——X*x corporation is somewhat like a partnership, if one were possible, conducted wholly by agents where the copartners have power to ap- point the agents, but are not responsible for their acts. The power to manage its affairs resides in the directors, who are its agents, but the power to elect directors resides in the stockholders. This right to vote for directors and upon propositions to increase the stock or mortgage cthie tists about alllthe power the sieckhel lacing: Soleugas tie =management is honest, within the corporate powers and involves no waste, the stockholders cannot interfere, even if the administra- tion is feeble and unsatisfactory, but must correct such evils through their power to elect other directors. Hence the power of the indi- vidual in-propertion-te-the- number of his shares cannot be cut rtailed by the action of all the other stockholders even with the codperation of the directors-and- OLlicers. ——Tr the case before us the new stock came into existence through the exercise of a right belonging wholly to the stockholders. As the right to increase the stock belonged to them, the stock when increased be- longed to them also, as it was issued for money and not for property or for some purpose other than the sale thereof for money. By the increase of stock the voting power of the plaintiff was reduced one half, and while he consented to the increase he did not consent to the disposition of the new stock by a sale thereof to Blair & Company at less than its market value, nor by sale to any person in any way ex- cept by an allotment to the stockholders. The increase and sale in- volved the transfer of rights belonging to the stockholders as part of their investment. The issue of new stock and the sale thereof to Blair & Company was not only a transfer to them of one half the voting power of the old stockholders, but also of an equitable right to one half the surplus which belonged to them. In other words, it was a partial division of the property of the old stockholders. The SECT. 1.] STOKES v. CONTINENTAL TRUST CO. 847 right to increase stock is not an asset of the corporation any more than the original stock when it was issued pursuant to subscription. The ownership of stock is in the nature of an inherent but indirect power to control the corporation. The stock when issued ready for delivery does not belong to the corporation in the way that it holds its real and personal property, with power to sell the same, but is held by it with no power of alienation in trust for the stockholders, who are the beneficial owners and become the legal owners upon paying therefor. The corporation has no rights hostile to those of the stockholders, but is the trustee for all including the minority. The new stock issued by the defendant under the permission of the statute did not-belong—to it, but was held by it the same as the -ormininl stack wie Gist cued: was held in trust for the stockholders— € same VO wer as the old, share for share. ‘The stock- ~ holders decided to enlarge their holdings, not by increasing the amount of each share, but by increasing the number of shares. The new stock belonged to the stockholders as an inherent right by virtue of their being stockholders, to be shared in proportion upon paying its par value or the value per share fixed by vote of a majority of the stockholders, or ascertained by a sale at public auction. While the corporation could not compel the plaintiff to take new shares at any price, ére issued for money and not for property, it could not lawfully dispose of those shares without giving him a chance to “get hits proportion at the same price that outsiders got theirs. He had by him of the old stock, provided he was ready to. pay the price fixed” by the stockholders. If so situated that he could not take it himself, “he was entitled to sell the right to one who could, as is frequently done. Even this gives an advantage to capital, but capital neces- sarily has some advantage. Of course, there is a distinction when the new stock is issued in payment for property, but that is not this case. The stock in question was issued to be sold for money, and was sold for money only. A majority of the stockholders, as part of their power to increase the stock, may attach reasonable conditions to the disposition thereof, such as the requirement that every old stock- holder electing to take new stock shall pay a fixed price therefor, not less than par, however, owing to the limitation of the statute. They may also provide for a sale in parcels or bulk at public auction, when every stockholder can bid the same as strangers. They cannot, how- ever, dispose of it to strangers against the protest of any stockholder i is proportion. Otherwise the ma- _jority could deprive the minority of their proportionate power in the election of directors and of their proportionate right to share in the surplus, each of which is an inherent, preémptive, and vested right of property. It is inviolable and can neither be taken away nor lessened without consent, or a waiver implying consent. The plain- 848 STOKES v. CONTINENTAL TRUST CO. (CHAP. II. tiff had power, before the increase of stock, to vote on 221 shares of stock, out of a total of 5000, at any meeting held by the stockholders for any purpose. By the action of the majority, taken against his will and protest, he now has only one half the voting power that he had before, because the number of shares has been doubled while he still owns but 221. This touches him as a stockholder in such a way as to deprive him of a right of property. Blair & Company acquired virtual control, while he and the other stockholders lost. it. We are not discussing equities, but legal rights, for this is an action at law, and the plaintiff was deprived of a strictly legal right. ‘If the result gives him an advantage over other stockholders, it is because he stood upon his legal rights, while they did not. The question is what were his legal rights, not what his profit may be under the sale to Blair & Company, but what it might have been if the new stock had been issued to him in proportion to his holding of the old. The other stockholders could give their property to Blair & Company, but they could not give his. A share of stock is a share in the power to increase the stock, and belongs to the stockholders the same as the stock itself. When that power is exercised, the new stock belongs to the old stockholders in proportion to their holding of old stock, subject to compliance with the lawful terms upon which it is issued. When the new stock is issued in payment for property purchased by the corporation, the stockholders’ right is merged in the purchase, and they have an ad- vantage in the increase of the property of the corporation in propor- tion to the increase of stock. When the new stock is issued for money, while the stockholders may provide that it be sold at auction or fix the price at which it is to be sold, each stockholder is entitled to his proportion of the proceeds of the sale at auction, after he has had a right to bid at the sale, or to his proportion of the new stock at the price fixed by. the stockholders, We are thus led to lay down the rule that a stockholder has an in- herent right to a proportionate share of new stock issued for money only and not to purchase property for the purposes of the corporation or to effect a consolidation ;.and while he can waive that right, he can- not be deprived of it without his consent except when the stock is issued at a fixed price not less than par and he is given the right to take at that price in proportion to his holding, or in some other equit- able way that will enable him to protect his interest by acting on his. own judgment and using his own resources. This rule is just to all and tends to prevent the tyranny of majorities which needs restraint, as well as virtual attempts to blackmail by small minorities which should be prevented. The remaining question is whether the plaintiff waived his rights by failing to do what he ought to have done, or by doing something he ought not to have done. He demanded his share of the new stock SECT. 1.] STOKES v. CONTINENTAL TRUST CO. 849 at par, instead of at the price fixed by the stockholders, for the authorization to sell at $450 a share was virtually fixing the price of the stock. He did more than this, however, for he not only voted against the proposition to sell to Blair & Company at $450, but as the court expressly found, he “protested against the proposed sale of his proportionate share of the stock and again demanded the right to subscribe and pay for the same, which demands were again re- fused,” and “the resolution was carried notwithstanding such pro- test and demands.” Thus he protested against the sale of his share before the price was fixed, for the same resolution fixed the price and directed the sale, which was promptly carried into effect. If he had not attended the meeting, called upon due notice to do precisely what was done, perhaps he would have waived his rights; but he attended the meeting, and before the price was fixed demanded the right to subscribe for 221 shares at par and offered to pay for the same immediately. It.is true that after the price was fixed he did not offer to take his share at that price, but he did not acquiesce in the sale of his proportion to Blair & Company, and unless he acquiesced -the sale as to him was without right. He was under no obligation to put the corporation in default by making a demand. The ordinary doctrine of demand, tender, and refusal has no application to this case. The plaintiff had made no contract. He had not promised to do anything. No duty of performance rested upon him. He had an absolute right to the new stock in proportion to his holding of the old, and he gave notice that he wanted it. It was his property, and could not be disposed of without his consent. He did not consent. He protested in due time, and the sale was made in defiance of his protest. While in connection with his protest he demanded the right to subscribe at par, that demand was entirely proper when made, because the price had not then been fixed. After the price was fixed -it was the duty of the defendant to offer him his proportion at that price, for it had notice that he had not acquiesced in the proposed sale of his share, but wanted it himself. The directors were under the legal obligation to give him an opportunity to purchase at the price fixed before they could sell his property to a third party, even with the approval of a large majority of the stockholders. If he had remained silent and had made no request or protest he would have waived his rights, but after he had given notice that he wanted his part and had protested against the sale thereof, the defendant was bound to offer it to him at the price fixed by the stockholders. By selling to strangers without thus offering to sell to him, the defendant ‘wrongfully deprived him of his property and is liable for such dam- ages as he actually sustained. The learned trial court, however, did not measure the damages according to law. The plaintiff was not entitled to the difference be- tween the par value of the new stock and the market value thereof, 850 NATUSCH v. IRVING. [CHAP. II. for the stockholders had the right to fix the price at which the stock should be sold. They fixed the price at $450 a share, and for the failure of the defendant to offer the plaintiff his share at that price we hold it liable in damages. His actual loss, therefore, is $100 per share, or the difference between $450, the price that he would have been obliged to pay had he been permitted to purchase, and the market value on the day of sale, which was $550. This conclusion requires a reversal of the judgment rendered by the Appellate Division and a modification of that rendered by the trial court. —: The order appealed from should be reversed and the judgment of the trial court modified by reducing the damages from the sum of $99,450, with interest from January 30, 1902, to the sum of $22,100, with interest from that date, and by striking out the extra allowance of costs, and as thus modified the judgment of the trial court is affirmed, without costs in this court or in the Appellate Division to either party. Nors. — In Archer v. Hesse, 164 N.Y. App. Div. 493, the court said (p. 497): “A corporation may use its original unissued author- ized capital sto¢ y legitimate or lawful purpose it sees fit... . Before making such use it is not obligated to give to existing stock- holders an opportunity to purchase.” But see, contra, Reese v. Bank, 31 Pa. 18: Way ¥- American Grease Co., 60 N.J. Eq. 263, 269. Wall v. Utah Copper Co., 70 N.J. Eqr 17. Existing stockholders have a right to subscribe for bonds, convertible into stock, similar to their right to subscribe to new issues of stock. D. To enjoin any Act which the Corporation is unauthorized to do, or which it was unauthorized to do when Plaintiff became a Stockholder. NATUSCH »v. IRVING. Gow on Partnership, Appendix No. VI, p. 398. 1824. PriarntiFr, on behalf of himself and all others the shareholders, members, or partners of the Alliance British and Foreign Life and Fire Assurance Company, filed this bill against the president and directors, praying, inter alia, for an injunction to restrain them from carrying on the business of marine insurance in the name or on the account of the company, and from applying the capital of the com- pany to any such purpose. The case made by the bill and affidavits was, in part, as follows: A prospectus was issued for the formation of an unincorporated company to grant fire and life insurance, with a capital of five million sEcT. 1.] NATUSCH ¥. IRVING. 851 pounds divided into fifty thousand shares, plaintiff subscribed for fifteen shares, paid the required deposit, insured his life in the com- pany and paid the insurance premium. He was willing also to exe- cute a proper deed of settlement. After the plaintiff had subscribed, etc., the majority of the company undertook to carry on the addi- tional business of marine insurance. They prepared a deed of settle- ment which contained provisions for enabling the company to carry on marine insurance; and. which plaintiff refused to execute. Plain- tiff objected to the company’s carrying on a marine insurance busi- ness. The directors informed plaintiff that, if he was dissatisfied with the course intended to be pursued, he might receive back his deposit with interest, and also have his life policy cancelled and the premium returned. Lorp Epon, CHANCELLOR. ... An offer is made to the plaintiff that he may receive back his deposit with interest from the date of the payment, and he is desired to consider himself as having received notice thereof. But it is not, I apprehend, competent to any number of persons in a partnership (unless they show a contract rendering it competent to them) formed for specified purposes, if they propose to form a partnership for very different purposes, to effect that formation by calling upon some of their partners to receive their sub- scribed capital and interest and quit the concern; and, in effect, merely by compelling them to retire upon such terms, so to form a new company. This would, as to partnerships, be a most dangerous doctrine. Where a partnership is dissolved (even where it can be in a sense dissolved the instant after notice to dissolve is given, if there be no contract to the contrary), it must still continue for the purpose of winding up its affairs, of taking and settling all its ac- counts, and converting all the property, means and assets of the partnership existing at the time of the dissolution as beneficially as may be for the benefit of all who were partners, according to their respective shares and interests; and the other partners cannot say to him, to whom they have given an offer of his deposit and interest, Take that, and we are a new company, keeping the effects, means, assets, and property of the old, as the property of the new partner- ship. The company will indemnify the plaintiff against loss by its trans- actions already had, or hereafter to be had, not for the specified pur- poses of the institution. But the right of a partner is to hold to the specified purposes his partners whilst the partnership continues, and not to rest upon indemnities with respect to what he has not con- tracted to engage in. A dissatisfied partner may sell his shares for double what he originally gave for them. But he cannot be compelled to part with them for that reason; it may be his principal reason for keeping them, having the partnership concern carried on according to the contract. 852 STEVENS UV. RUTLAND & BURLINGTON R.R. CO. [CHAP. II. The original contract and the loss which his partners would suffer by a dissolution, is his security that it shall be so carried on for him and them beneficially, and with augmented improvement in the value of his shares and their shares. . ... If six persons joined in a partnership of life assurance, it seems clear that neither the majority, nor any select part of them, nor five out of the six, could engage that partnership in marine insurances, unless the contract of partnership expressly or impliedly gave that power; because if this was otherwise, an individual or individuals, by en- gaging in one specified concern, might be implicated in any other concern whatever, however different in its nature, against his consent. It may be taken that the principle that would apply to the partner- ship of six, will apply to this partnership of 600 or 700. Nots. — A stockholder in a corporation has a similar right. The antes to that effect are very numerous. In Offield v. New York, New Haven & Hartford R.R. Co., 203 U.S. 872, it was held that, on the facts, a statute permitting the condem- nation of minority stock of a railroad corporation was constitu- tional. By statute it may be provided that the objects of a corporation may be changed on the vote of the holders of a specified fraction (say, two thirds) of the stock, but that dissentient stockholders shall have a right to have their stock paid for at a valuation. See, for example, sections 40 and 43 of chapter 437 of the Acts of 1903, Massachusetts. STEVENS v. RUTLAND & BURLINGTON R.R. CO. 29 Vt. 545. 1851. At the time the orator became a shareholder, the defendant was authorized to run a, railroad between specified points. Thereafter, in 1850, the legislature authorized an extension, and this act was accepted by the directors and a majority of the shareholders. The orator sought to restrain the use of the corporate funds or credit in constructing such extension. BENNETT, CHANCELLOR. The question is, can the orator, upon such a state of facts, claim, at the hands of the chancellor, his in- junction. It is an admitted principle, that in partnerships, and joint-stock associations, they cannot by a vote or the Majority change or alter their fundamental articles of co-par , agains the will of the minority, however small, unless there is an express or implied provision in the articles themselves that they may doit. It is equally well settled, that a court of chancery will, upon the applica- SECT. I.] STEVENS v. RUTLAND & BURLINGTON R.R. CO. 853 tion of an individual member of a partnership, or joint-stock associ- ation, restrain, by injunction, the majority from using the funds or pledging the credit of the partnership or association in a business not warranted, and not within the scope of their fundamental articles of agreement. Courts of equity treat such proceedings by a majority, as a fraud upon the other members, which they will neither sanction nor permit. To prevent the commission of fraud, by injunction, has been one of the earliest and most appropriate heads of equity juris- diction, as well as to relieve against it, when committed. It was well conceded, in the argument on the defense, that if the corporation had been about to proceed to a construction of the con- templated extension without the act of 1850, it would have been a proper case for an injunction. The only question which can be open to debate is, as to what shall be the effect of the act of 1850, and a subsequent adoption of the act by the corporation, upon the indi- vidual rights of a shareholder who does not assent to its adoption? If bound by it, there is no equity in this bill. It is, and must be admitted, that the legislature has no constitutional power, unless it be reserved in the grant, to change or alter an act of incorporation without consent, and thereby cast upon the company new and addi- tional obligations, or take from them rights guaranteed under the original charter. And indeed this the legislature have not attempted to do. It is also equally true that it is a part of the law of corpora- tions, that they act according to the voice of the majority. But it is to be remembered, that this is not a suit in which the plaintiff seeks to protect himself in any corporate right, but in his own individual right, growing out of the fact of his having become a corporator by his subscription and its payment, to the capital stock of the com- pany. One of an aggregate corporation may contract with the com- pany, as well as a third person; and the rights of the individual so contracting are no more distinct and independent in the one case than in the other. The plaintiff, by his subscription, assumed to pay to the corporation, and only for the purpose specified in the charter, its amount, according to the assessments; and there was at the same time a trust created, and an implied assumption on the part of the corporation, to apply it to that object, and none other. The corpora- tion also assumed upon themselves to account to this corporator for his share of the dividends, when this road should be completed and put in operation, and for his share of capital stock, though not in numero. The charter, in this case, gives to the state the right to purchase out the road of the corporation, after a given number of years, upon certain terms therein specified. The relation between each original shareholder and the corporation is the same. The obligation of the contract between the legislature and the corpora- tion, after an acceptance of the charter, is no more sacred than that which is created between the corporation and the individual corpo- 854 STEVENS v. RUTLAND & BURLINGTON R.B. CO. [CHAP. II. rator. Does any one suppose the legislature could, without the con- sent of parties, absolve a corporator from liability on his subscription to the corporation, or modify it? and can they do the reverse of it? It is conceded that there is a class of alterations in a charter, which the corporation may obtain and adopt, that would not so essentially change the contract as to absolve the corporator from his subscrip- tion, or give him a right to complain in a court of justice, in case he had previously paid it. Where the object of the modification or alteration of the charter is auxiliary to the original object of it, and designed to enable the corporation to carry into execution the very’ purpose of the original grant, with more facility and more beneficially than they otherwise could, the original corporator cannot complain; and I should apprehend it would make no difference with the rights of a corporation, in such a case, though he could show that the char- ter, as amended, was less beneficial to the corporators than the origi- nal one would have been. The ground upon which such amendments bind the corporator, I deem to be his own consent. When he becomes a corporator by his signing for a portion of the capital stock, he in effect agrees to the by-laws, rules, and votes of the company, and there is an implied assent, on his part, with the corporation, that they may apply for, and adopt such amendments as are within the scope, and designed to promote the execution of the original purpose; and he signs, and the corporation receive his subscription, subject to such implied contingency; and if we regard it in the nature of a license, only, it would not alter the principle. Both parties having acted upon it, it would not be countermandable. But suppose the object of the alteration is a fundamental change in the original purpose, and designed to superadd to it something which is beyond and aside of it; does the same principle apply? Chief Justice Nexson lays down this general proposition, ‘‘that corpora tions can exercise no power over the corporators, beyond those, con- ferred by the charter to which they have subscribed, except on the _ condition of then-agreement-or-consent” ‘This is a sound proposition. The consent or assent may, however, be implied in a class of cases, as has already been stated, where the amendment is not regarded as fundamental, and can be brought within the scope of the original purpose of the association; and this is going to the very verge of the powers of the corporation. It is diffi- cult, and would be unwise, to attempt to lay down any general rules to determine in what precise cases the assent of the corporator should be implied, and in what not. It is sufficient for the present purpose to_say, that-his-assent-cannet-be-implied, in a case like the present, from_a majority vote. Courts may aifter—mmd-doubtless will, in regard to what alterations shall be sufficient to constitute a funda- mental change. But in the present case, I think, on this point there can be but one opinion. The termini of the road, as fixed by the SECT. 1.] STEVENS v. RUTLAND & BURLINGTON R.R. CO. 855 charter, are Burlington, and some point on the west bank of Con- necticut River, in the county of Windsor or Windham. The capital stock is one million of dollars, with a right in the corporation to in- crease it to an amount sufficient to complete said road, and furnish the necessary apparatus for conveyance. The supplementary act of 1850 purports to authorize the corporation, within three years, to construct and extend their railroad from the terminus in Burlington, to some point in Swanton, in the county of Franklin, a distance of about thirty miles; and the act provides that in the construction of the road, they shall have all the rights and privileges, and be subject to all the liabilities, contained in their original charter, and the acts in addition to it. The franchise granted to this company was territorial; and an ex- tension of the termini necessarily is an extension of the franchise. It cannot remain the same thing in substance, until it can be established that a part is equal to the whole. Besides, the company may increase the capital stock to such additional sum as shall be necessary to con- struct the extension. The statute of 1850 is little less in effect, if anything, than an at- tempt to create in a Summary manner, and by the way of reference a nev fporation, and to osfer_all the old ato it. It is not necessary that the business should be changed in kind, to change the original purpose. If this is not a change in purpose, it would not —be to extend the road in one direction to Canada line, and in the other to Massachusetts line; and there would be no limits to the control which the corporation might acquire over the individual corporators, and this, too, without their consent, except what arises from the confines of legislative authority. The change, then, in the charter being fundamental and the corpo- ration not being able to bind the plaintiff by a majority vote, what must be the result?. If he had been sued for an assessment upon his stock, he might have claimed that he was absolved from all liability upon the acceptance of the amendment. And is not this reasonable? Shall it be said that the legislature and the corporation have power to embark this corporator in a speculation to which he has never con- sented? If it can be done in one case it can in another. But having paid his funds into the corporation, he has a right in chancery to “compel a faititul performance of the-trust-by-the corporation, in conformity to the original charter, and to keep them within its pur= view. ——Th the case before us, it must follow, if the plaintiff is not bound by the conjoined effect of the act of 1850, and a majority vote of the corporation, the defendants can stand on no better ground, than a voluntary association, who are about to go beyond and aside of their original articles, against the will of a minority. This, in effect, was conceded in the argument. There was nothing improper in the pas- a 856 STEVENS v. RUTLAND & BURLINGTON R.R. CO. [CHAP. II. sage of the act of 1850, though upon the application of a portion of the directors of the company, as stated in the bill. No attempt is made by the legislature to impair the obligation of any contract between themselves and the corporation, or to cast upon the com- pany any new and additional burthens without their consent. There was no attempt to impair any contract arising under the prior char- ter, between the corporation and the corporator as an individual, or disturb any vested right in either. The act is not mandatory; and there is, in fact, an implied condition annexed to it, that it is to be accepted by all whose individual and corporate interests are to be affected by it, before it shall become operative. But suppose this act had been mandatory upon the corporation and the several stock- . holders, to build this extension in the road within three years; would not all cry out against its palpable injustice? Suppose, instead of this, the legislature had left it optional with the corporation to accept or reject the act of 1850, and had provided, that in case of the accept- ance of the amendment by the corporation, it should bind the cor- porators who dissented from it, or did not assent to it, and this too, in their individual rights; would there not be the same reason to cry out against it? Would it not, by its carrying a stockholder into an enterprise which he had never consented to, and changing the prin- ~ciples of Habiity between-the corporation and the individual cor- porator from what they were under the original compact, impair and] isin Vested rights under tt? imeve mo hesitation in saying, that, in my opinion, it would be beyond the pale of the constitutiona authority of the legislature. Not. —It has been held that a reservation by a State of the power to alter, amend, or repeal corporate charters simply affects the relations of the corporation to the State, and not the relations of the majority of the stockholders to the minority. See Avondale Land Co. v. Shook, 170 Ala. 379; Zabriskie v. Hackensack & New York R.R. Co., 18 N.J. Eq. 178. But there is important authority contra. See Durfee v. Old Colony R.R. Co., 5 All. (Mass.) 230; Buffalo & New York City R.R. Co. v. Dudley, 14 N.Y. 336. SECT. 1.] BREWER Jv. BOSTON THEATRE. 857 E. To prevent and redress an Appropriation of Corporate Assets by the Majority. BREWER »v. BOSTON THEATRE. 104 Mass. 378. 1870. Tuts was a bill in equity, brought by minority stockholders, against the corporation and against certain directors and other indi- viduals, for fraudulently conspiring to lease the corporate property on arent much below the market value and share in the profits of the lessees. The bill (as amended) alleged that individual defendants own or control a majority of the stock and control the proceedings at stockholders’ meetings; also that a majority of the directors are fraudulently colluding with these defendants to continue to them the control of the corporation and its property. Wetts,' J. The defendants contend that the corporation cannot be deprived of its right to determine, in all matters not ultra vires, . whether to impeach or to ratify transactions supposed to be preju- dicial to its interests. Granting this position, it would result that in no case, as to matters intra vires, could a suit be maintained by indi- vidual stockholders to enforce rights or redress wrongs of the cor- porate body, except where the delay necessary in order to secure corporate action might defeat or endanger the attainment of appro- priate relief. If, when called upon to act, the corporate body should elect to confirm the supposed wrongful transactions, or should do so indirectly by refusal to act, they would no longer be open to impeach- ment. If, on the other hand, it should determine to take action, it would do so in its own name and behalf; and there would be no ground of necessity for proceedings in the name of the individual corporator. We are not prepared to say that this would not be the case in all matters to which the only objection is that they are prejudicial, or supposed to be so, to the corporate interests merely, but not illegal in themselves, and affecting all the corporators alike. Perhaps it would be so whenever the surrender of property or the release of rights, acquired by the corporation through the transactions sought to be impeached, is necessary in order to reach the proper remedy. Great Luxembourg Railway Co. v. Magnay, 25 Beav. 586. The corpo- ration might be entitled to determine for itself exclusively whether it would retain or release property or rights thus acquired, although it thereby precluded, or rendered ineffectual, all proceedings against par- ties who may have made illegal or fraudulent gains out of the trans- actions. These questions, however, we need not at present decide. 858 BREWER Uv. BOSTON THEATRE. [CHAP. II. The cases now before us involve no release of property or rights by the corporation. The alleged wrongs are not merely prejudicial to the interests of the corporation; but are such as tend to deprive Ee ere ae ace ca eee ee re Saran Grete Aid. Pniies= Tot the st aitene of others of the orators. This inequality and injustice is ished by means —of the control over the corporate organization and management, which has been secured by the parties so benefited. By the amend- ments to the several bills it is alleged that such control has been exer- cised since the year 1866, inclusive, by Tompkins and Thayer, with the aid of the other defendants. That which is important is the fact of such control and its exercise for s purpose, rather than the means by which it has been cising ZA majority of the corporators have no right to exercise the controYover the corporate management, which legitimately belongs to them, for the purpose of appropriating the corporate property or its avails or income to themselves or’ to any of the shareholders, to the exclusion or prejudice of the otherg And if any have obtained such unfair advantage by fraud or abuse of the trust confided to them as officers or agents of the corporation, it is not in the power of a majority to ratify or condone the fraud and breach of trust, so far as it affects the rights of the others, without reasonable restitution. This proposition, if stated in reference to formal transactions, such as assessments of capital or dividends of income, would not be questioned. Preston v. Grand Collier Dock Co., 11 Sim. 327. Hodgkinson v. National Live Stock Insurance Co., 26 Beav. 473. Bure indirect appropriation of the common property, profits or medns of profit, to their own benefit, by any portion of the corporators, in fraud of their associates, is equally incapable of being authorized or ratified by the vote of a majority 9f the corporators, or by any act or omission of the corporate boy repr v. Patchett, 33 Beav. 595. Atwool v. Merryweather, Law Rep. 5 Eq. 464, note. If it were otherwise, the minority would be without means of protec- tion or redress against inequality and injustice. They would be equally so if they could obtain redress only in the neme and through— —the action of the corporati ch = marily to the corporation; and therefore the restitution or redress is to be secured to the corporation. But in their effect and essential character they are wrongs to the individual shareholder, infticted-—— “—uporhis torporate interests by means of the control over those "interests secured through the corporate organization and manage- ec ek hi D. Ou, —thardoes not give the corporation the right to deprive him of all redress. Any attempt to do so, whether regarded as the action of the corporation or of a majority of shareholders, would have the “same voidable character as the original wrong. Officers of a corpora- tion, dealing with it in matters of their own individual interest, SECT. 1.] CHAMBERS J. MCKEE & BROS. 859 stand very differently in this respect from strangers, who have no occasion to regard any other than the corporate body. If by means of their relations to the corporate management they secure to them- selves undue advantage over their associates, they cannot retain it. Such transactions are voidable, not merely for want of authority in the officers by whom they are done, but because neither the officers nor the corporation itself, by whatever majority of votes it may act, can do, assent to, or confirm them. The wrong to the individual shareholder is the same, whether committed with the concurrence or subsequent approval and adoption of his associates controlling the corporation, or without it. In our opinion, the facts of these cases, as set forth in the several amended bills, show such abuse of authority and breaches of trust by the defendants, in misappropriating the income of the corporate property to the benefit of themselves or of some of them, as cannot be ratified or remitted by the corporation; and also such incapacity of the plaintiffs to move the action for their redress, as entitles them, from necessity, to seek it in the form of these proceedings. Nore. — The authorities in accord are very numerous. For recent cases see Palmbaum v. Magulsky, 217 Mass. 306; Godley v. Crandall Co., 212 N.Y. 121. a F. To compel the Corporation to assert Valid Claims, and to resist Invalid Claims. CHAMBERS ». McKEE & BROS. 185 Pa. 105. 1898. Opinion BY Mr. Justice Wriuu1ams, March 21, 1898: — McKee & Brothers is a partnership engaged in the manufacture of glass tableware. The Chambers & McKee Glass Co. is a corporation organized under the act of 1874 and its supplements, for the manu- facture of window glass. The manufacturing plants of the partner- ship and the corporation are in close proximity, and are supplied with natural gas as a fuel from wells owned and operated by the corpora- tion, under an agreement that the expense of furnishing the natural gas shall be shared, as near as may be, in proportion to the amount used at each plant. Mrs. Chambers, the plaintiff, is a large stock- holder in the Chambers & McKee Glass Co., but has no interest in the partnership of McKee & Brothers. Operations were begun in both factories some time in 1889. A dif- ference of opinion arose as to the relative proportions of the expense 860 CHAMBERS Jv. MCKEE & BROS. [CHAP. II. of the natural gas used and to be paid for by each. This difference was submitted to two competent experts for decision, who were to determine what sum should be paid by McKee & Brothers from the commencement of operations to December 21, 1891. If unable to agree they were empowered to select an umpire and decide by a ma- jority. They entered upon an examination of the subject and sub- mitted a report without selecting an umpire, in which they fixed the amount to be paid by McKee & Brothers at seventeen and seventy- two one hundredths per cent of the entire cost of the natural gas for both plants, and that to be paid by the Chambers & McKee Glass Co. at eighty-two and twenty-eight one hundredths. On December 29, 1891, the report was presented to the board of directors, and on the same day one of the arbitrators communicated to them the fact that his assent to the award had been given under the influence of an im- portant mistake of fact, and that the award was not assented to by him. The reference to the arbitrators does not seem to have been made a rule of court or to have been drawn under any statute relat- ing to arbitration, but to have been made by the parties with a view to securing the judgment of competent persons upon the quantity of gas used by each, and to relieve Mr. H. Sellers McKee from the very embarrassing position in which he found himself. He was the presi- dent and a large stockholder in the corporation. He was also the largest contributor to the capital of the partnership of McKee & Brothers. He was thus the head of the creditor corporation, and he was personally, as a member of his firm, the debtor. Without further meeting of the arbitrators, or other effort to investigate the alleged mistake asserted by one of them, the board of directors of the corpo- ration, H. Sellers McKee being one of them, decided in March, 1892, to settle with McKee Brothers on the basis of the discredited award, and this was accordingly done. Four years afterwards Mrs. Cham- bers served the notice attached to her bill requiring the directors of the corporation to take steps to compel McKee & Brothers to pay to the corporation the money it owed for natural gas both before and after such settlement, within two weeks after such notice, and stating her intention, if this was not done, to proceed on her own behalf as a stockholder to Gompel such settlement. This bill was filed pursuant to the notice given by her. It is against the corporation of which she is a stockholder, and the partnership which she alleges to be its debtor, and the relief asked includes the taking of an account of the gas used by McKee & Brothers from the wells and pipe lines of the Chambers & MeKee Glass Company, and the payment therefor in the proportion which the amount so used bears to the whole amount consumed by both plants. Is she entitled to have an account taken of the gas consumed by McKee & Brothers? We do not think the award is in her way. We fully agree with the learned judge of the court below that the mistake brought to the attention of the parties SECT. 1.] CHAMBERS ¥. MCKEE & BROS. 861 by George H. Browne, one of the arbitrators, soon after the award was made, and before any action was taken upon it by either party, was of such a character as to prevent its enforcement at law or in equity. As the learned judge well said, “‘It was not a mere error in judgment based upon established facts, but an error in reference to the facts themselves upon which his judgment was based, and which he hastened to correct as soon as he became aware of his mistake by notifying defendant company to that effect.” After this mistake was brought to the attention of the directors, and the fact was made known to them that the relative proportion of gas consumed by McKee & Brothers was, so far at least as Mr. Browne was concerned, fixed under the influence of this mistake at much less than it should have been, it was no longer binding upon them. But corporations are governed and their business is directed by persons chosen by the stockholders for that purpose. Their action legally taken is the action of the corporation, and as between it and the persons with whom it deals, it is binding. The board of directors of the Chambers & McKee Glass Company, with full notice of the mistake of Browne, and against the protest of one or more of its members, resolved to settle the claim of the corporation they repre- sented on the basis of the award. The amount so fixed was paid by McKee & Brothers, and received by the corporation in full settle- ment of the demand which had been considered by the arbitrators. If this was done in good faith by the board of directors of the corpo- ration; every stockholder was bound by it, even though it was an error in judgment and resulted in a serious loss to the corporation. If it was not so done, but was collusive and fraudulent, it is not con- clusive, but may be investigated, and upon a proper showing held to be a nullity, and an account taken for the purpose of determining the true amount of gas consumed by McKee & Brothers and the actual amount of their indebtedness to the corporation therefor. The real question, therefore, on which the plaintiff’s right as a stockholder to an account depends, is the validity of the action of her agents, the board of directors. They have settled this claim. That action binds the stockholder unless it was fraudulently taken. Fraud is not pre- sumed. The natural presumption is in favor of innocence and good faith. The plaintiff has this presumption to overcome both in her bill and by her proofs, and until she presents such a case as will justify a finding that the conduct of the board of directors in making the settlement with McKee & Brothers was fraudulent, and in bad faith toward the corporation represented by them, she has no title to the relief she seeks. It would seem from the evidence before us that the settlement complained of was not an advantageous one to the corporation or its stockholders. It is possible that personal con- siderations may have influenced the result; but stockholders take the risk of the business qualifications and business judgment of those 862 FOSS V. HARBOTTLE. [cHaP. 1. whom they may select as directors, and as a general rule they cannot be heard to complain if the action of their agents is not the most dis- creet and the most careful that could have been taken. But when a director betrays his trust and defrauds those whom he ought to serve with fidelity, every stockholder has a right to complain, and it is the duty of the courts to assist in relieving against the consequences of such frauds whenever it is practicable: The learned judge who heard the testimony in this case reached this conclusion from it: “It is true the plaintiff alleges that this was done (the settlement of this claim) in violation and fraud of her rights, but I can find nothing which will justify me in coming to the conclusion that the directors acted in bad faith or knowingly or intentionally disregarded the interests of the stockholders of the company.” In the absence of the finding of bad faith on the part of the directors, or an intentional disregard of the interests of the corporation confided to their care, the only ground on which the relief sought could be extended was absent, and there was nothing left for the learned judge to do but dismiss the plaintiff’s bill without prejudice to her right to proceed in any proper way to relieve herself from the consequences of any fraudulent acts of her agents, the directors of the Chambers & McKee Glass Company, in connection with the settlement of which she complains. We are not disposed to allow the costs in this case to follow the re- sult of this appeal, but will modify the decree appealed from by im- posing one third of the costs in this case upon the plaintiff, one third upon the directors of the Chambers & McKee Glass Co., as individ- uals, and one third upon McKee & Brothers. As so modified the decree is affirmed. FOSS ». HARBOTTLE. 2 Hare, 461. 1843. Bru in equity by Foss and Turton, shareholders in a corporation styled the Victoria Park Company, on behalf of themselves and all other shareholders, against five persons who had been directors, and also against several other persons. The case stated in the bill was, in part, as follows: At or after the formation of the company was agreed upon, an arrangement was fraudulently concerted between certain parties (including a majority of the directors), with the object of enabling themselves to derive a profit or personal benefit from the establish- ment of the company. The arrangement was, that certain of the parties should be appointed directors, and should purchase for the company certain lands owned by themselves and by other parties to the combination, at greatly increased and exorbitant prices. The SECT. 1.] FOSS v. HARBOTTLE. 863 directors, accordingly, before the passing of the act, agreed to pur- chase certain lands at rents or prices greatly exceeding those at which the vendors had purchased the same. After the passing of the -act of incorporation, the directors and their confederates proceeded to carry into execution the previously formed design of fraudulently profiting by the establishment of the company and at its expense. Wicram, V.C. The Victoria Park Company is an incorporated body, and the conduct with which the Defendants are charged in this suit is an injury not to the Plaintiffs exclusively; it is an injury to the whole corporation by individuals whom the corporation entrusted with powers to be exercised only for the good of the corporation. And from the case of the Attorney-General v. Wilson, Cr. & Ph. 1 (without going further), it may be stated as undoubted law, that a bill or information by a corporation will lie to be relieved in respect of injuries which the corporation has suffered at the hands of persons standing in the situation of the directors upon this record. This bill, however, differs from that in the Attorney-General v. Wilson in this, — that instead of the corporation being formally represented as plaintiffs, the bill in this case is brought by two individual corpora- tors, professedly on behalf of themselves and all the other members of the corporation, except those who committed the injuries com- plained of, — the plaintiffs assuming to themselves the right and power in that manner to sue on behalf of and represent the corpora- tion itself. It was not, nor could it successfully be argued, that it was a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation. In law, the corporation, and the aggregate members of the corporation, are not the same thing for purposes like this; and the only question can be, whether the facts alleged in this case justify a departure from the rule which primé facie would require that the corporation should sue in its own name and in its corporate character, or in the name of some one whom the law has appointed to be its representative. The first objection taken in the argument for the Defendants was, that the individual members of the corporation cannot in any case sue in the form in which this bill is framed. During the argument I intimated an opinion, to- which, upon further consideration, I fully adhere, that the rule was much too broadly stated on the part of the Defendants. I think there are cases in which a suit might properly be so framed. Corporations like this, of a private nature, are in truth little more than private partnerships; and in cases which may easily be suggested, it would be too much to hold, that a society of private persons associated together in undertakings, which, though certainly beneficial to the public, are nevertheless matters of private property, are to be deprived of their civil rights, inter se, because, in order to make their common objects more attainable, the crown or the legis- 864 FOSS Uv. HARBOTTLE. [CHAP, II, lature may have conferred upon them the benefit of a corporate character. If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that the principle so forcibly laid down by Lord CotrEnHam in Wallworth v. Holt, 4 My]. & Cr. 635; see also 17 Ves. 320, per Lord Epon, and other cases, would apply, and the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue. But, on the other hand, it must not be without reasons of a very urgent character that established rules of law and practice are to be departed from, — rules, which, though in a sense technical, are founded on general principles of justice and convenience; and the question is, whether a case is stated in this bill, entitling the Plain- tiffs to sue in their private characters. [By the constitution of the company] the directors are made the governing body, subject to the superior control of the proprietors assembled in general meetings; and, as I understand the act, the proprietors so assembled have power, due notice being given of the purposes of the meeting, to originate proceedings for any purpose within the scope of the com- pany’s powers, as well as to control the directors in any acts which they may have originated. There may possibly be some exceptions to this proposition, but such is the general effect of the provisions of the statute....The corporation might elect to adopt those transactions. Whilst the supreme governing body, the proprietors at a special general meeting assembled, retain the power of exercising the func- tions conferred upon them by the act of incorporation, it cannot be competent to individual corporators to sue in the manner proposed by the Plaintiffs on the present record. This in effect purports to be a suit by cestut que trusts, complaining of a fraud committed or alleged to have been committed by persons in a fiduciary character. The complaint is, that those trustees have sold lands to themselves, ostensibly for the benefit of the cestui que trusts. The proposition J] have advanced is, that although the act should prove to be voidable, the cestui que trusts may elect to confirm it. Now, who are the cestut, que trusts in this case? The corporation, in a sense, is undoubtedly the cestut que trust; but the majority of the proprietors at a special general meeting assembled, independently of any general rules of law upon the subject, by the very terms of the incorporation in the pres- ent case, has power to bind the whole body, and every individual corporator must be taken to have come into the corporation upon the terms of being liable to be so bound. How then can this Court act in a suit constituted as this is, if it is to be assumed, for the pur- SECT. 1.] FOSS v. HARBOTTLE. 865 poses of the argument, that the powers of the body of the proprietors are still in existence, and may lawfully be exercised for a purpose like that I have suggested? Whilst the Court may be declaring the acts complained of to be void at the suit of the present, Plaintiffs, who in fact may We the only proprietors who disapprove of them, the govern- ing body of proprietors may defeat the decree by lawfully resolving upon the confirmation of the very acts which are the subject of the suit. The very fact that the governing body of proprietors assembled at the special general meeting may so bind even a reluctant minority, is decisive to shew that the frame of this suit cannot be sustained whilst that body retains its functions. In order then that this suit may be sustained, it must be shewn either that there is no such power as I have supposed remaining in the proprietors, or, at least, that all means have been resorted to and found ineffectual to set that “body in motion: this latter point is nowhere suggested in the bill. Note. — In Burland v. Earle, [1902] A.C. 83, Lord Davey said (p. 93): “It is an elementary principle of the law relating to joint- stock companies that the Court will not interfere with the internal management of companies acting within their powers, and in fact has no jurisdiction to do so. Again, it is clear law that in order to redress a wrong done to the company or to recover moneys or dam- ages alleged to be due to the company, the action should primdé facie be brought by the company itself. These cardinal principles are laid down in the well-known cases of Foss v. Harbottle, (1843) 2 Hare, 461, and Mozley v. Alston, (1847) 1 Ph. 790, and in numer- ous later cases which it is unnecessary to cite. But an exception is made to the second rule, where the persons against whom the relief is sought themselves hold and control the majority of the shares in the company, and will not permit an action to be brought in the name of the company. In that case the Courts allow the sharehold- ers complaining to bring an action in their own names. This, how- ever, is mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress, and it is obvious that in such an action the plaintiffs cannot have a larger right to relief than the company itself would have if it were plaintiff, and cannot complain of acts which are valid if done with the approval of the majority of the shareholders, or are capable of being confirmed by the majority. The cases in which the minority can maintai such_an action a: onfined to those in which the acts complained of are of a fraudulent character or beyond the powers of the company. A familiar example is where the majority are en- deavoring directly or indirectly to appropriate to themselves money, property, or advantages which belong to the company, or in which the other shareholders are entitled to participate, as was alleged in the case of Menier v. Hooper’s Telegraph Works, (1874) L.R. 9 Ch. 866 GROEL 0. UNITED ELECTRIC COMPANY. (CHAP. II. 350.” See also Dominion Cotton Mills Co., Ltd., v. Amgot, [1912] A.C. 546. See Pollitz v. Wabash R.R. Co., 207 N.Y. 118. yy GROEL v. UNITED ELECTRIC COMPANY. 70 N.J. Eq. 616. 1905. Garrison, V.C. From the above statement of the contents of the pleadings, it will appear that the following excerpts from the brief of counsel for the defendants correctly define the issue: — “The bill in this case was filed to compel the United Gas Improve- ment Company to account to the United Electric Company of New: Jersey for the profits alleged to have been made by the gas company secretly in the promotion of the electric company. The gas company and the electric company are named in the bill as defendants, but it is obvious that the gas company is the only defendant against which a decree can be made. The electric company was made a party as required by the practice in cases where a stockholder is permitted to bring suit to enforce a claim which the company should have prose- cuted voluntarily. ... “The electric company filed the plea for the reasons stated therein, and in the schedules thereto annexed, and insists that as it thinks the bringing of such a suit is inexpedient, all things considered, it has a right to prohibit any stockholder from doing so who differs with the judgment of its board of directors on that subject.” A stockholder sets up that approximately $20,000,000 of stock as a secret profit was made by the promoter out of the incorporation of the company of which he is a stockholder. He sues the promoter and joins his corporation, which has refused to bring the suit, to recover the $20,000,000 of stock. His corporation responds that it deenis it inexpedient to bring the suit. The single point is whether’a board of directors may prohibit a stockholder from bringing a suit in behalf of the corporation to recover moneys secretly made by a promoter out of the incorporation of the company, if, in the judgment of the board, it is inexpedient to bring such a suit. | There can be no question that promoters are liable to the corpora- tion for profits secretly made by them in its promotion, and that such liability arises in cases where future allottees of stock are concerned. There can be likewise no question that where the corporation re- fuses to bring a suit stockholders may sue in its behalf, joining it as a defendant. It is true that courts will not interfere, as a rule, with the manage- ment of corporations by the directors thereof when they are acting within their powers and in good faith. But whether the directors SECT. I.] GROEL v¥. UNITED ELECTRIC COMPANY. 867 are acting in good faith and as honest, diligent trustees, or not, will be inquired into by the courts at the instance of stockholders in cases like the present. . “‘A stockholder has no standing in the court to prosecute such an action except on the refusal of the directors, either actual or presump- tive, to prosecute. But such refusal of the directors to prosecute must be an unjustifiable refusal.’ Willoughby v. Chicago Junction Railways Co., 50 N.J. Eq. (5 Dick.) at p. 667 (Vice-Chancellor GREEN, 1892). In the case of Kessler v. Ensley Company, 129 Fed. Rep. 397 (at p. 400), the court said: ‘Of necessity, then, the governing body, in every intra vires matter, has a discretion to determine what action to take on the stockholder’s request to sue, and when the stockholder comes into court the first question it must determine is whether that discretion has been properly or improperly exercised.” The Supreme Court of the United States reviewed the previous decisions concerning this matter, and announced the true rule in the case of Corbus v. Alaska Treadwell Gold Mining Co., 187 U.S. 455; 47 L. Ed. 256: — ’ “This court will examine the bill in its entirety and determine whether, under all the circumstances, the plaintiff has made such a showing of wrong on the part of the corporation or its officers and injury to himself as will justify the suit.” And it likewise quoted with approval the following language: “The circumstances of each case must determine the jurisdiction of a court of equity to give the relief sought.” Viewing this case in the light of the principles which must be ap- plied to it, and of the authorities which have been quoted, can it be said that the director's have shown justification for refusing to bring a suit to recover approximately $20,000,000 of stock improperly ob- tained by a promoter? Would it not clearly be held by any court to be a breach of trust for directors to neglect or refuse to recover, or seek to recover, such an amount of stock improperly obtained from it by a promoter? It is perfectly clear that if the complainant sets forth a good cause of action, and there isa right in the corporation to recover $20,000,000 of stock from the promoter, it is a clear breach of trust on the part of the directors not to proceed to recover the same. For them to reply that it is by them deemed inexpedient to do so, is only to emphasize the breach of trust they are committing by not doing so. I am aware that counsel for the defendant argues that their un- willingness to bring the suit, and that which in their judgment makes it inexpedient to bring the suit, proceeds from their view that the suit cannot succeed. I think I have sufficiently expressed my idea that this issue is not present before me for determination. If, on the 868 DODGE ¥. WOOLSEY. [CHAP. II. face of the bill, it appears that the complainant cannot succeed, then demurrer is the proper remedy. If the bill, however, does set up a good cause of action, then, as I have already pointed out, the plea does not set up any other facts excepting the passage by the directors of a resolution refusing to bring the suit because in their judgment inexpedient. There was much argument before me upon issues which I do not find in the case, the defendant contending that it had sufficiently shown that the suit ought not to be brought because it could not be successful, and the complainant replying that the statements in the report of the committee, as incorporated into the plea, show clearly that there is a cause of action, and that the defendant has not, on the merits, shown any reason why the suit should not be brought. I do not stop to consider these questions for the reasons given. I find that the complainant sets out a cause of action, and that the defend- ant replies by plea that it deems it inexpedient to bring a suit for this cause of action, and that the complainant, its stockholder, is precluded by reason of this fact. I find that the principle to be applied is that the stockholder may appeal to the discretion of the court in this respect, and upon con- sidering the whole case, I do not think it appears that the defendant was justified in refusing to bring the suit, with the result that the complainant may proceed, and the plea must be overruled. Notes. — See Hill v. Murphy, 212 Mass. 1. two! DODGE »v. WOOLSEY. 18 How. (U.S.) 331., 1855. Tuis is a suit in equity by John M. Woolsey, to enjoin the collec- tion of a tax, assessed by the State of Ohio, on the Commercial Branch Bank of Cleveland, a branch of the State Bank of Ohio. The defendants are Dodge, the tax collector, the directors of the pank, and the bank itself. Woolsey avers that he is a citizen of Connecticut, that he is the owner of thirty shares in the Branch Bank of Cleveland, that Dodge and the other defendants are all citizens of Ohio, and that the Com- mercial Branch Bank is a corporation, made such by an act of the legislature of Ohio. He alleges that, by the act of incorporation, the Bank was to pay semiannually to the State a certain percentage on its profits, which was to be in lieu of all taxes to which the corpora- tion, or the stockholders on account of their stock, would otherwise be subject. He further alleges that subsequent changes were made by the constitution and statutes of Ohio, undertaking to tax the SECT. I.] DODGE ¥. WOOLSEY. 869 Bank at a different and more burdensome rate. He asks the court to enjoin Dodge from collecting by distress a tax which has been assessed against the Bank under this law; contending that the subse- quent statute and assessment are in violation of the clause in the U.S. Constitution, which prohibits States from passing laws impair- ing the obligation of contracts. He finally declares that, as a stock- holder of the Bank, he had requested the directors to take measures, by suit or otherwise, to assert the franchises of the Bank against the collection of what he believes to be an unconstitutional tax, and that they had refused to do so. Dodge filed an answer, in which he denied that Woolsey had.made any application to the directors to prevent the collection of the tax. But it was agreed by the counsel that such an application had been made; and that the directors replied that, though concurring in the view that the tax was illegal, yet, in consideration of the many ob- stacles in the way of testing the law in the courts of the State, they could not consent to take the action which they were asked to take. Wayne, J. Upon the foregoing pleadings and admission, the cir- cuit court rendered a final decree for the complainant, perpetually enjoining the treasurer against the collection of the tax, under the act of the 13th February, 1852, and subjecting the defendant, Dodge, to the payment of the costs of the suit. From that decision the de- fendant, Dodge, has appealed to this court. His counsel have relied upon the following points to sustain the appeal: — 1. The complainant does not show himself to be entitled to relief in a court of chancery, because the charter of the bank provides that its affairs shall be managed by a board of directors, and that they are not amenable to the stockholders for an error of judgment merely. And that in order to make them so, it should have been averred that they were in collusion with the tax collector in their refusal to take legal steps to test the validity of the tax. 2. It was urged that this suit had been improperly brought in the circuit court of the United States for the district of Ohio, because it is a contrivance to create a jurisdiction, where none fairly exists, by substituting an individual stockholder in place of the Commercial Bank as complainant, and making the directors defendants; the stockholder being made complainant, because he is a citizen of the State of Connecticut, and the directors being made defendants to give countenance to his suit... . ‘ We will consider the points in their order. The first comprehends two propositions, namely: that courts of equity have no jurisdiction over corporations, as such, at the suit of a stockholder for violations of charters, and none for the errors of judgment of those who manage their business ordinarily. . There has been a conflict of judicial authority in both. Still, it has 870 DODGE ¥. WOOLSEY. [cHap. 11. been found necessary, for prevention of injuries for which common- law courts were inadequate, to entertain in equity such a jurisdiction in the progressive development of the powers and effects of private corporations upon all the business and interests of society. It is now no longer doubted, either in England or the United States, that courts of equity, in both, have a jurisdiction over corporations, at the instance of one or more of their members; to apply preventive remedies by injunction, to restrain those who administer them from doing acts which would amount to a violation of charters, or to pre- vent any misapplication of their capitals or profits, which might result in lessening the dividends of stockholders, or the value of their shares, as either may be protected by the franchises of a corporation, if the acts intended to be done create what is in the law denominated a breach of trust. And the jurisdiction extends to inquire into, and to enjoin, as the case may require that to be done, any proceedings by individuals, in whatever character they may profess to act, if the subject of complaint is an imputed violation of a corporate franchise, or the denial of a right growing out of it, for which there is not an adequate remedy at law. 2 Russ. & Mylne Ch. R., Cunliffe v. Man- chester and Bolton Canal Company, 480, n.; Ware v. Grand Junction. Water Company, 2 Russ. & Mylne, 470; Bagshaw v. Eastern Counties Railway Company, 7 Hare Ch. R. 114; Angell & Ames, 4th ed. 424, and the other cases there cited. It was ruled in the case of Cunliffe v. The Manchester and Bolton Canal Company, 2 Russ. & Mylne Ch. R. 481, that where the legal remedy against a corporation is inadequate, a court of equity will interfere, and that there were cases in which a bill in equity will lie against a corporation by one of its members. “It is a breach of trust towards a shareholder in a joint stock incorporated company, established for certain definite purposes prescribed by its charter, if the funds or credit of the company are, without his consent, di- verted from such purpose, though the misapplication be sanctioned by the votes of a majority; and, therefore, he may file a bill in equity against the company in his own behalf to restrain the company by injunction from any such diversion or misapplication.”’ In the case of Ware v. Grand Junction Water Company, 2 Russell & Mylne, a bill filed by a member of the company against it, Lord BroucHam said: “It is said this is an attempt on the part of the company to do acts which they are not empowered to do by the acts of parliament,” meaning the charter of the company; “so far I restrain them by injunction.” ‘Indeed, an investment in the stock of a corporation must, by every one, be considered a wild speculation, if it exposed the owners of the stock to all sorts of risk in support of plausible projects not set forth and authorized by the act of incorporation, and which may possibly lead to extraordinary losses.’’ The same jurisdiction was invoked and applied in the case of Bagshaw v. The Eastern SECT. 1.] DODGE ¥. WOOLSEY. 871 Counties Railway Company; so, also, in Coleman v. the same company, 10 Beavan’s Ch. Reports, 1. It appeared in that case that the directors of the company, for the purpose of increasing their traffic, proposed to guarantee certain profits, and to secure the capital of an intended steam packet company, which was to act in connection with the railway. It was held, such a transaction was not within the scope of their powers, and they were restrained by injunction. And in the second place, that in such a case one of the shareholders in the railway company was entitled to sue in behalf of himself and all the other shareholders, except the directors, who were defendants, although some of the shareholders had taken shares in the steam packet company. It was contended in this case that the corporation might pledge, without limit, the funds of the company for the encouragement of other transactions, however various and exten- sive, provided the object of that liability was to increase the traffic upon the railway, and thereby increase the traffic to the shareholders. But the master of the rolls, Lord Lanepats, said, ‘there was no authority for anything of that kind.” But further, it is not only illegal for a corporation to apply its cap- ital to objects not contemplated by its charter, but also to apply its profits. And therefore a shareholder may maintain a bill in equity against the directors and compel the company to refund any of the profits thus improperly applied. It is an improper application for a railway company to invest the profits of the company in the pur- chase of shares in another company... . The result of the cases is well stated in Angell & Ames, paragraphs 391, 393. “In cases where the legal remedy against a corporation is inadequate, a court of equity will interfere, is well settled, and there are cases in which a bill in equity will lie against a corporation by one of its members.” ‘Though the result of the authorities clearly is, that in a corporation, when acting within the scope of and in obedi- ence to the provisions of its constitution, the will of the majority, duly expressed at a legally constituted meeting, must govern; yet beyond the limits of the act of incorporation, the will of the majority cannot make an act valid; and the powers of a court of equity may be put in motion at the instance of a single shareholder, if he can show that the corporation are employing their statutory powers for - the accomplishment of purposes not within the scope of their institu- tion. Yet it is to be observed, that there is an important distinction between this class of cases and those in which there is no breach of trust, but only error and misapprehension, or simple negligence on the part of the directors.” ... We have then the rule and its limitation. It is contended that this case is within the limitation; or that the.directors of the Commercial Bank of Cleveland, in their action in respect to the tax assessed upon it, under the act of April 18, 1852, and in their refusal to take proper 872 DODGE v. WOOLSEY. [cHap. 11. measures for testing its validity, have committed an “error of judg- ment merely.” ... Now, in our view, the refusal upon the part of the directors, by their own showing, partakes more of disregard of duty, than of an error of judgment. It was a non-performance of a confessed official obligation, amounting to what the law considers a breach of trust, though it may not involve intentional moral delinquency. It was a mistake, it is true, of what their duty required from them, according. to their own sense of it, but, being a duty by their own confession, their refusal was an act outside of the obligation which the charter imposed upon them to protect what they conscientiously believed to be the franchises of the bank. A sense of duty and conduct con- trary to it, is not ‘‘an error of judgment merely,” and cannot be so called in any case. It amounted to an illegal application of the profits due to the stockholders of the bank, into which a court of equity will inquire to prevent its being made. Thinking, as we do, that the action of the board of directors was not ‘‘an error of judgment merely,”’ but a breach of duty, it is our opinion that they were properly made parties to the bill, and that the jurisdiction of a court of equity reaches such a case to give such a remedy as its circumstances may require. This conclusion makes it unnecessary for us to notice further the point made by the counsel that the-suit should have been brought in the name of the corpora- tion, in support of which they cited the case of the Bank of the United States v. Osborn. The obvious difference between this case and that is, that the Bank of the United States brought a bill in the circuit court of the United States for the district of Ohio, to resist a tax assessed under an act of that State, and executed by its auditor, and here the directors of the Commercial Bank of Cleveland, by refusing to do what they had declared it to be their duty to do, have forced one of its corporators, in self-defense, to sue. If the directors had done so in a state court of Ohio, and put their case upon the uncon- stitutionality of the tax act, because it impaired the obligation of a contract, and had the decision been against such claim, the judgment of the state court could have been re-examined, in that particular, in the supreme court of the United States, under the same authority or jusridiction by which it reversed the judgment of the supreme court of Ohio, in the case of the Piqua Branch of the State Bank of Ohio v. Jacob Knoop, treasurer of Miami County, 16 How. 369. Decree of Circuit Court affirmed. Catron, J., Danruz, J., and CAMPBELL, J., dissented. SECT. I.] DAVENPORT v. DOWS. 873 G. Procedure in a Suit by Stockholder to assert a Corporate Right. ey DAVENPORT »v. DOWS. 18 Wall. (U.S.) 626. 1873. Dows, a citizen of New York, in behalf of himself and all other non-resident citizens of Iowa, who were stockholders in the Chicago, Rock Island, and Pacific Railroad Company, filed a bill in the court below against the city of Davenport, and its marshal, to arrest: the collection of a tax, alleged to be illegal, levied by the said city for general revenue purposes, on the property of the company within its limits. The bill assigned as a reason for its being filed by Dows, a stockholder in the company, instead of by the company itself, that the company neglected and refused to take action on the subject. A demurrer was interposed to the bill, which was overruled, and on the defendants refusing to answer over, the circuit court ordered that the collection of the tax be perpetually enjoined. From this, its: action, the defendants appealed, insisting that the circuit court erred in overruling the demurrer, for three reasons: First. Because the railroad company was not made a party to the bill.... Mr. Justice Warne. That a stockholder may bring a suit when a corporation refuses is settled in Dodge v. Woolsey, 18 Howard, 340, but such a suit can only be maintained on the ground that the rights of the corporation are involved. These rights the individual share- holder is allowed to assert in behalf of himself and associates, because the directors of the corporation decline to take the proper steps to assert them. Manifestly the proceedings for this purpose should be so conducted that any decree which shall be made on the merits shall conclude the corporation. This can only be done by making the cor- poration a party defendant. The relief asked is on behalf of the cor- poration, not the individual shareholder, and if it be granted the complainant derives only an incidental benefit from it. It would be wrong, in case the shareholder were unsuccessful, to allow the cor- poration to renew the litigation in another suit, involving precisely the same subject-matter. To avoid such a result, a court of equity will not take cognizance of a bill brought to settle a question in which the corporation is the essential party in interest, unless it is made a party to the litigation. 874 DUNPHY v. TRAVELLER NEWSPAPER ASSOCIATION. [CHAP. II. sie DUNPHY v. TRAVELLER NEWSPAPER ASSOCIATION. 146 Mass. 495. 1888. Knowt.ton, J.... The only exception to the rule that a stock- holder must apply to the directors, and also if need be to the corpora- tion, for redress of a wrong done it, before he can sue in a court of equity, for himself and in behalf of other stockholders, is when it appears that such application would be unavailing to protect his rights. Brewer v. Boston Theatre, 104 Mass. 378; Allen v. Wilson, 28 Fed. Rep. 667; Hawes v. Oakland, 104 U.S. 450; Detroit v. Dean, 106 US. 5387; Dimpfell v. Ohio & Mississippi Railway, 110 U.S. 209; Foss v. Harbottle, 2 Hare, 461. That may happen when the directors themselves are the wrongdoers, or are in fraudulent combination with them, or when the corporation is controlled by them, or when it is necessary that action should be taken too speedily to leave time for a corporate meeting of stockholders. In the case at bar there is an averment that Roland Worthington, the alleged wrongdoer, has for a long time controlled a majority of » the stock, and has elected such persons directors as he chose. That states a sufficient reason for not applying to the corporation, at a meeting of its members, for action to redress its wrongs. But it is not alleged that the plaintiff ever attempted to move the directors in the interest of the corporation in the matters complained of, or that any good reason existed for his failure so to do. It does not even appear who or how many the directors are. It is said that the defend- ants Roland Worthington and Roland Worthington the younger are directors, but no others are named. The law provides that there shall be at least three, and it is to be presumed that there are others be- sides these defendants. Rev. Sts. c. 38, § 3; Pub. Sts. c. 106, § 25. There is no allegation of fraud, or of wrongful combination with Roland Worthington, or of other misconduct, on the part of any of them. And it cannot be presumed, in the absence of such averments, that they would refuse to do their duty if their attention were called to it. In Brewer v. Boston Theatre, ubi supra, — a much stronger case for the plaintiff than this, — an allegation was in these words: ‘“‘A ma- jority of the present board of directors of said defendant corporation are acting in the interest of, and are under the control of, Tompkins and Thayer,” the authors of the alleged frauds; and it was held that this allegation did not set forth a sufficient reason for bringing a suit without first requesting the directors to do it. SECT. I.] CONTINENTAL SECURITIES CO. v. BELMONT. 875 CONTINENTAL SECURITIES CO. v. BELMONT. 206 N.Y. 7. 1912. Cuasz, J. This is a representative action derived from the Inter- borough Rapid Transit Company. It is brought in behalf of the plaintiffs and all others similarly interested, as stockholders of said company, against the directors of said company and said company to require said individual defendants to account to said company for fifteen thousand shares of its capital stock, alleged to have been issued fraudulently and illegally, and without any valid or adequate consideration therefor, but upon an alleged consideration that was a pretense and subterfuge and intended to cover a gift or bonus to the defendants Belmont and Luttgen, and their nominees, and also to require said individual defendants to account for the dividends which have been paid on said stock. It is alleged that by reason of the facts set forth in the complaint the defendant corporation has suffered damage to an amount exceeding $4,500,000. It is conceded that an action in equity cannot be maintained by the plaintiffs as individual stockholders for themselves and all others similarly interested unless it is necessary because of the neglect and refusal ofthe corporate body to act. It is necessary, therefore, in an action by the plaintiffs to set forth two things, first, a cause of action in favor of the corporation with the same detail of facts as would be proper in case the corporation itself had brought the action; second, the facts which entitle the plain- tiff to maintain the action in place of the corporation. Kavanaugh v. Commonwealth Trust Co., 181 N.Y. 121; O’Connor v. Virginia Pas- senger & Power Co., 184 N.Y. 46. It is not seriously contended that the complaint does not state a good cause of action in favor of the defendant corporation. It is insisted by the defendants that it was necessary for the plaintiffs in addition to alleging a demand upon the defendant corporation and its board of directors to bring the action and their neglect and refusal to do so, to allege that they had given notice of the alleged fraud to the body of stockholders of the defendant corporation and had de- manded of said stockholders that some action be taken by them to redress the wrong, and that such body of stockholders had neglected and refused to take any action relating thereto. The cause of action belongs to the corporate body and not to the plaintiffs and other stockholders individually, nor to the body of stockholders collec- tively. The board of directors represents the corporate body. It is pro- vided by statute in this state that the affairs of every corporation shall be managed by its board of directors. General Corporation Law, § 34. The directors are not ordinary agents in the immediate 876 CONTINENTAL SECURITIES CO. ¥. BELMONT. [CHAP. II. control of the stockholders. The directors hold their office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reason- able exercise and performance of such duty. The corporation is the owner of the property, but the directors in the performance of their duty possess it and act in every way as if they owned it. People ex rel. Manice v. Powell, 201 N.Y. 194. They are trustees clothed with the power of controlling the property and managing the affairs of a corporation without let or hindrance. As to third persons they are its agents, but as to the corporation itself, equity holds them liable as trustees. 2 Pomeroy’s Equity Jurisprudence, §§ 1061, 1073, 1088, 1097; People ex rel. Manice v. Powell, supra. The claim of the appellants that the body of stockholders has some immediate or direct authority to act for the corporation or to control the board of directors in the matters set forth in the com- plaint is based upon an erroneous conception of the duties and powers of the body of stockholders in this state. As a general rule stockholders cannot act in relation to the ordinary business of a corporation. The body of stockholders have certain authority con- ferred by statute which must be exercised to enable the corporation to act in specific cases, but except for certain authority conferred by statute, which is mainly permissive or confirmatory, such as consent- ing to the mortgage, lease or sale of real property of the corporation, they have no express power given by statute. They are not by any statute in this state given general power of initiative in corporate affairs. Any action by them relating to the details of the corporate business is necessarily in the form of an assent, request or recom- mendation. Recommendations by a body of stockholders can only be enforced through the board of directors, and indirectly by the authority of the stockholders to change the personnel of the directors at a meeting for the election of directors. Such action may or may not result in securing adequate corporate action with reference to illegal or fraudulent acts. For reasons wholly apart from the matter in dispute the stockholders may not desire to change a majority of the persons comprising its board of directors. Some of the reasons why the power vested in stockholders to elect directors is inadequate as a remedy for specific fraudulent acts are stated by Cook in his work on Stock and Stockholders, § 740, in which he says: “There has been considerable discussion as to whether the stockholder in addition to his request to the corporate officers to institute the suit, should not also be required to attempt to induce the stockholders in meeting assembled to take action by directing the directors to bring suit, or by refusing to re-elect them at the next election. The facts, however, that the stockholders in meeting assembled cannot control the discretion of the directors in bringing such a suit; that the rem- edy of refusing to re-elect them involves delay, and the assumption s SECT. I.] CONTINENTAL SECURITIES CO. v. BELMONT. 877 that a minority of the stockholders can by the election control such a suit; that irreparable injury or the vesting of great financial inter- ests may occur in the meantime; and that laches may arise as a bar to the stockholder’s suit, have settled the rule that the stockholder’s request to the corporate directors to institute the suit is sufficient. He need not also apply to'a stockholders’ meeting.” Although it is said that the authority of stockholders in the management of business corporations is exhausted when they elect the directors (Thompson on Corporations [2d ed.], § 1178) nevertheless it is generally recognized that certain acts of boards of directors that are legal, but voidable, can be ratified and confirmed by a majority of the body of stockhold- ers as the ultimate parties in interest and thus make them binding upon the corporation. Morawetz on Corporations (2d ed.), §§ 625, 626. Such recognized authority in stockholders to ratify and confirm the acts of boards of directors is confined to acts voidable by reason of irregularities in the make up of the board or otherwise or by reason of the directors or some of them being personally interested in the subject-matter of the contract or act, or for some other similar reason which makes the action of the directors voidable. No such authority exists in case of an act of the board of directors which is prohibited by law or which is against public policy. Kent v. Quick- silver Mining Co., 78 N.Y. 159. In any case where action is taken by stockholders confirming and ratifying a fraud and misapplication of the funds of the corporation: by the directors or others the action is binding only by way of estoppel upon such stockholders as vote in favor of such approval. Morawetz on Corporations (2d ed.), § 625. The distinction between acts that can and those that cannot be confirmed and ratified is shown in the report of two frequently cited English decisions, namely, Foss v. Harbottle, 2 Hare, 461, and Bag- shaw v. Eastern Union R’way Co., 7 Hare, 114. The former of these cases was limited to the approval of a legal but voidable act. In the Bagshaw case where the directors of a corporation had misapplied or were about to misapply certain moneys of the corporation, the court say: ‘‘No majority of the shareholders, however large, could sanction the misapplication of this portion of the capital. A single dissenting voice would frustrate the wishes of the majority. Indeed, in strictness, even unanimity would not make the act lawful. This appears to me to take it out of the case of Foss v. Harbottle, to which ‘I was referred. That case does not, I apprehend, upon this point, go further than this: That if the act, though it be the act of the directors only, be one which a general meeting of the company could sanction, a bill by some of the shareholders on behalf of themselves and others, to impeach that act, cannot be sustained, because a general meeting of the company might immediately confirm and give valid- ity to the act of which the bill complains.” It is the governing body or bodies of a corporation with power to 878 WATHEN v. JACKSON OIL CO. [CHAP. II. enforce a remedy to whom complaining stockholders must go with their demand for relief. The governing body of corporations in this state, as we have seen, is the board of directors. A complaining stock- holder must go to such board for relief before he can bring an action, unless it clearly appears by the complaint that such application is useless. If the subject-matter of the stockholder’s complaint is for any reason within the immediate control, direction or power of con- firmation of the body of stockholders, it should be brought to the attention of such stockholders for action, before an action is com- menced by.a stockholder unless it clearly appears by the complaint that such application is useless. The decision reported in Hawes v. Oakland, 104 U.S. 450, and other similar decisions in the Federal and state courts are not in conflict with the decision about to be rendered herein. In such cases, as in this case, it is asserted that an application to the body of stockholders is unnecessary when it is unreasonable to require it. If the body of stockholders has no adequate power or authority to remedy the wrong asserted by the individual stockholders it is un- reasonable and unnecessary to require an application to it to redress the wrong before bringing a representative action. See opinion of Carr, J., in the Appellate Division herein, 150 App. Div. 298. See, also, Delaware & H. Co. v. Albany & S. R.R. Co., 213 U.S. 435. Nore. —See Baillie v. Oriental Telephone Co., [1915] 1 Ch. 503. CN WATHEN »v. JACKSON OIL CO. 235 U.S. 635. 1915. Mr. Justice Hueues delivered the opinion of the court. The appellant brought this suit in the District Court to restrain the Jackson Oil & Refining Company, its manager and officers, from complying with a statute of Mississippi prohibiting employment in described occupations for more than ten hours a day, except in cases of emergency or public necessity (Chapter 157, Laws of Mississippi, 1912, p. 165) and to enjoin the other defendants (certain public officers) from enforcing its provisions as against that company. It was alleged in the bill, in substance, that the defendant corpora- tion was engaged in operating a cotton seed oil mill of the value of $100,000; that the complainant owned five hundred and two shares of its stock of the par value of one hundred dollars each and of the actual value of $60,000; that the business required that the mill should be operated continuously, both day and night, two shifts of laborers being employed; that the employment was under wholesome condi- tions, without any detriment to the physical, mental and moral well- SECT. 1.] WATHEN v. JACKSON OIL CO. 879 being of those employed; that the statute, if enforced, would work a deprivation of liberty of contract and of property, and an arbitrary discrimination, contrary to the Fourteenth Amendment; that com- pliance with the statute would involve greatly increased cost of operation and render the corporation insolvent and its property. valueless, to the complainant’s injury; that the statute had been sustained by the Supreme Court of Mississippi in a suit against another manufacturing company; that, although the officers of the defendant corporation desired to disobey -the statute, they were complying therewith being constrained to obedience through fear of the enormous penalties imposed; and that these penalties were so severe that no owner or operator in the position of the defendant corporation could invoke the jurisdiction of a court to test the valid- ity of the statute, except at the risk of confiscation. Those defendants who were public officers demurred to the bill upon the grounds (among others) that the complainant as a stock- holder of the corporation had no right to sue; that the bill could not be maintained to restrain the enforcement of the criminal law of the State; and that the statute was constitutional. An application for a preliminary injunction was heard on the bill and.demurrer and was denied, and from the order entered to this effect the complainant appeals to this court. Judicial Code, § 266. The objection urged below, and repeated here, that the complain- ant has failed to show any right to maintain this suit must be sus- tained. The right of action to restrain the enforcement of the statute as an unconstitutional deprivation of the liberty and property of the corporation was a right existing in the corporation itself, and a stock- holder was not entitled to sue without showing to the satisfaction of the court that he had exhausted the means within his reach to obtéin action by the corporation in conformity with his wishes. Hawes v. Oakland, 104 U.S. 450, 460, 461; Detroit v. Dean, 106 U.S. 537, 541, 542; Quincy v. Steel, 120 U.S. 241, 248; Doctor v. Harrington, 196 U.S. 579, 588. The former equity rule (Rule 94, 210 U.S. 541) pro- vided not only that the bill must allegé that the suit was “not a collusive one to confer upon a court of the United States jurisdiction - of a case of which it would not otherwise have cognizance,” but that the bill ‘must also set forth with particularity the efforts of the plain- tiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the cause of his failure to obtain such action.” The present rule (Rule 27, 226 U.S. Appx., p. 8) adds to this provision the words, — “or the reasons for not making such effort’’; and these reasons, of course, must be adequate. The rule embraces those cases where the wrong to the corporation arises from unconstitutional legislation. Corbus v. Alaska Gold Mining Co., 187 U.S. 455; Davis & Farnum Mfg. Co. v. Los Angeles, 189 US. 207, 220; Ex parte Young, 209 U.S. 128, 148. 880 WATHEN v. JACKSON OIL CO. [CHAP. II. | Here, while it is averred that the suit is not a collusive one in order to confer a jurisdiction which would not otherwise exist, there is no allegation that the complainant has made any request that the corporation should bring the suit to s/revent the alleged invasion of its rights; nor does it appear that, by reason of antagonistic control of the corporation, such a request would be futile. Although ap- parently the holder of a majority of its stock, the complainant does not show any effort whatever to induce the corporation to sue. He contents himself with asserting in effect that, though the directors and officers do not wish to comply with the statute, they will do so through fear of its penalties. But this reason is palpably inadequate inasmuch as the corporation itself would be entitled to protection against the imposition of such penalties as would virtually deny access to the courts for the protection of rights guaranteed by the Federal Constitution. Ex parte Young, 209 U.S., p. 147; Willcox v. Consolidated Gas Co., 212 U.S. 19, 53, 54; Missouri Pacific Rwy. v. Tucker, 230 U.S. 340, 351; Ohio Tax Cases, 232 U.S. 576, 587; Wadley Southern Rwy. v. Georgia, 235 U.S. 651. The allegations of the bill show no ground for dispensing with efforts to procure action by the corporation; and in this view, without discussing the merits of the case, we are of the opinion that the complainant was not entitled to the injunction sought. Order affirmed. Nots. — Rule 27 of the Rules of Practice in Equity, promulgated by the U.S. Supreme Court, and in force on and after February 1, 1913 (taking the place of Rule 94 of the Rules adopted in 1882), is as follows: “Every bill brought by one or more stockholders in a cor- poration against the corporation and other parties, founded on rights which may properly be asserted by the corporation, must be verified by oath, and must contain an allegation that the plaintiff was a share- holder at the time of the transaction of which he complains, or that his share had devolved on him since by operation of law, and that the suit is not a collusive one to confer on a court of the United States jurisdiction of a case of which it would not otherwise have cognizance. It must also set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of his failure to obtain such action, or the reasons for not making such effort.” Personal exception to the plaintiff. If the plaintiff has approved of the corporate action, now complained of, or has taken any benefit to himself from it, such fact is, without more, a sufficient defense to a suit instituted by him. Wormser v. Metropolitan Street Ry. Co., 184 N.Y. 83. It has been held that, if the plaintiff is a puppet, acting in behalf SECT. 1.] POLLITZ v. GOULD. 881 of some third person having interests hostile to the corporation, such fact is a defense. Forrest v. Manchester Ry. Co., 4 De Gex, Fisher & Jones, 126; Jenkins v. Auburn City Ry. Co., 27 N.Y. App. Div. 553. But cf. Central R.R. Co. v. Collins, 40 Ga. 582; Carver v. Southern Iron Co., 78 N.J. Eq. 81, 94. There is authority that if the plaintiff is suing for his own purposes, - fae will not inquire into his motives. Seaton v. Grant, L.R. 2 Ch. 459. H. Rights of Persons who became Stockholders at a time subsequent to the Commission of the Alleged Wrong. POLLITZ ». GOULD. 202 N.Y.11. 1911. AppEAL, by permission, from an order of the Appellate Division of the Supreme Court in the first judicial department, entered Jan- uary 13, 1911, which affirmed an order of Special Term denying a motion to dismiss the complaint upon the pleading. The following questions were certified: “1. Does the fact that the plaintiff acquired his stock of the defendant, the Wabash Rail- road Company, upon which he bases his right to ask the court to enforce a cause of action in favor of the railroad company against the individual defendants, after all the transactions which the plain- tiff insists imposed a liability in favor of the railroad company against the individual defendants had been consummated, all stocks and bonds issued and the transactions complained of in all respects completed, prevent the plaintiff from maintaining this action? 2. Is the enforcement of such a cause of action confined to stockholders who actually owned stock at the time the transactions complained of were consummated and completed?” * Hiscock, J. This action was brought by plaintiff as a stock- holder in the Wabash Railroad Company in behalf of said company for the benefit of himself and all other stockholders to set aside as fraudulent a transfer and exchange of several millions of dollars par value of its stock for an equivalent amount of the capital stock of the Wabash Pittsburg Terminal Railway Company. It is unnecessary to go into the details of the transaction which is being attacked by the plaintiff through and in behalf of the company, for the sole ques- tion presented for our consideration may be discussed without doing this. This question is whether a stockholder may bring an action of this character for the purpose of avoiding an improper transaction consummated at the expense of the corporation before he acquired his stock, and as presented here the question is unembarrassed by 882 POLLITZ 0. GOULD. [CHAP. II. any incidental considerations, as, that the prior holder of the stock consented to the transaction or that plaintiff’s subsequent acqui- sition of the stock was accompanied by any circumstances which would render it inequitable for him to seek relief. While somewhat strangely this question does not appear to have been decided by this court, it has been passed on by the lower courts of this state and by those of many other states and by the Supreme Court of the United States. It has also been somewhat considered by the courts of England. Conflicting conclusions have been reached by these decisions. Without reviewing the English authorities, which so far as cited do not seem to be very decisive, reference may be made to the decisions in this country. The question was presented in Hawes v. Oakland, 104 U.S. 450, and it was there held that a stockholder might not bring an action in behalf of the corporation to avoid a fraudulent transaction con- summated before he acquired his stock. While the question was directly passed on it is fair to state that it was not considered at any great length and that the court seems to have been more concerned with establishing this rule as one of practice than of substantive law. The decision resulted in the adoption of a rule requiring the plaintiff in such an action to show before bringing suit that he owned the stock on which it was brought at the time the transaction com- plained of occurred, and whether it be regarded as establishing a - principle of law or a rule of practice this authority has been subse- quently followed in the United States courts. In addition, this rule in such a stockholder’s action has been approved in the following cases: Alexander’ v. Searcy, 81 Ga. 536; Boldenweek v. Bullis, 40 Colo. 253; Rankin v. 8S. W. B. & I. Co., 12 N. Mex. 54; Moore v. Stlver Valley Co., 104 N.C. 534; Clark v. Amer- ican Coal Co., 86 Ia. 436; Home Fire Ins. Co. v. Barber, 67 Neb. 644. The contrary doctrine that a stockholder acquiring his stock sub- sequent to the occurrence complained of may maintain this char- acter of an action has been affirmed in the following cases outside of this state: Winsor v. Batley, 55 N.H. 218; City of Chicago v. Cameron, 22 Ill. App. 91 (affirmed, 120 Ill. 447); Montgomery Light & Power Co. v. Lahey, 121 Ala. 131; Forrester v. B. & M., etc., Co., 21 Mont. 544, 565; Just v. Idaho, etc., Co., 102 Pac. Rep. 381; Rafferty v. Donnelly, 197 Pa. St. 423; Appleton v. Am. Malting Co., 65 N.J. Eq. 375. It has also been approved in this state directly or indirectly in the following cases: Ramsey v. Gould, 57 Barb. 398; Young v. Drake, 8 Hun, 61; Ervin v. Oregon Ry. & N.Co., 35 Hun, 544; Frothingham v. Broadway & Seventh Ave. R.R. Co., 9 Civ. Pro. Rep. 304; Sayles v. Central Nat. Bank, 18 Misc. Rep. 155; O’Connor v. Virginia P. & P. Co., 46 Misc. Rep. 530, 535. Assuming this question to be an open one in this court, we have SECT. 1.] POLLITZ v. GOULD. 883 no hesitation in approving the rule which has heretofore prevailed in this state, that in the absence of special circumstances this char- acter of action may be maintained by a stockholder acquiring his stock subsequent to the transaction which is challenged, rather than the contrary one prevailing elsewhere. We do this not only because a long and uniform line of decisions by our own courts ought to have weight, but because the rule established by these decisions seems tc be the sounder one. A stockholder has an indivisible interest in the property and assets of a corporation subject to the discharge of its obligations. This indivisible interest generally speaking is represented by certifi- cates of stock and is transferred by their transfer. The general character of these certificates and the effect of their transfer in passing the interest of the holder is too well established and under- stood to require any discussion. As an original proposition it would seem to be clear that a right of action by or in behalf of the cor- poration for fraud to set aside a conveyance of its assets or to avoid obligations imposed upon it is part of its rights, property and assets in which a stockholder has this indivisible interest transferable by the transfer of his certificates. I am unable to see any real or sub- stantial distinction by virtue of which a stockholder transferring his certificates would transfer all of his indivisible interest in bonds or real estate on hand, but would not transfer his interest in a right of action to recover bonds or real estate which had been fraudu- lently withdrawn from the possession of the corporation, and which it was entitled to recover. And if the subsequent holder by acquir- ing the certificates does acquire such latter interest, it seems to fol- low that he may if necessary, in behalf of the corporation, assert and prosecute an action to protect and enforce the same. Brief reference may be made to some of the reasons advanced in opposition to this view. Counsel points out practical inconvenience which he says will result from its application owing to the difficulties in tracing stock and distinguishing that which has not assented to the transaction from that which has or from that which perhaps has been issued since its consummation. These arguments, however, are so counterbalanced by corresponding claims from the opposite standpoint as to be of little weight. Again, it is argued that if one buys stock subsequent to the trans- action he should be regarded as buying subject to it and not be per- mitted to question it. If the prior holder should give binding consent to the transaction, this under certain circumstances undoubtedly would prevent the subsequent purchaser from questioning it. But, in the absence of special circumstances, I fail to see any principle of estoppel or logic which makes a subsequent purchase of stock so subject to a fraudulent corporate transaction that the purchaser may not insist upon its being set aside. There is scarcely any analogy 884 POLLITZ ¥. GOULD. [CHAP. II. between the situation of one who buys from an individual some property which has been subjected to a transaction which has not been disaffirmed and that of one who purchases stock in a corpora- tion which has the continuing right both before and after the pur- chase to disaffirm a wrong which has been perpetrated on it by its agents. There is little or no basis for the practical consideration that one who buys stock should be deemed to have adjusted his price to an existing transaction even though voidable. If he knows of it he may just as properly be assumed to have adjusted his price to the knowledge that the transaction may still be disaffirmed and avoided. Then, lastly, an argument is made which seems to be founded on the idea that in order to bring an action of this nature the stockholder must in effect disaffirm the corporate transaction and that this dis- affirmance involves a personal right of election which vests in the one holding the stock when the transaction is consummated and which cannot be transferred. It is said ‘the right to question a fraud is not a purchasable commodity,” and is not ‘‘capable of assignment and transfer,” and does not pass ‘‘as an implied incident to every sale of corporate stock,’ and this view seems to be supported by some of the many cases which have been collected and reviewed by counsel with manifest industry and care. So far as this argument means to assert that a mere naked right to question a corporate transaction could not be transferred to a stranger, if such an attempt can be conceived of, it may be assumed to be true. But the assertion that the right to protect stock by pro- curing an improper corporate transaction to be vacated does not pass on a transfer of the stock is a very different proposition. The election to disaffirm a fraudulent corporate transaction be- longs to and is exercised in the right and name of the corporation and not of the stockholder. The stockholder demands that the right shall be exercised and the cause of action be prosecuted by the corporation or does it himself for the corporation. It is conceded that the one holding the stock when the fraud is consummated has this right. When he transfers his certificates the transaction still stands a continuing wrong impairing the surplus of the company and affect- ‘ing the stock. If the transferee has the right to have it avoided this will protect and increase the value of his stock. If he has not ac- quired this right it is the only one held by his predecessor in or through the corporation, which has been thought of, which has not been transferred by the transfer of the stock. It will be an anomalous exception if the prior holder retains the right to maintain or have maintained this action while he passes all of his other rights by the transfer of his stock. The only justification pleaded for this is the idea suggested of a personal and non-transferable right of election to disaffirm vested in the original holder. But this theory is entirely unsubstantial. Such prior holder does not acquire this right to object SECT. 1.] PARSONS ¥. JOSEPH. 885 to the transaction and bring an action to set it aside as a power con- ferred upon him by reason of any personal qualities, but because of his character as a stockholder, and when he loses this character and transfers it to another with his stock there is no reason why the latter should not exercise the right as a proper and necessary inci- dent to his stock ownership. The order should be affirmed, with costs, and both questions certi- fied to us answered in the negative.. CuLten, Ch.J., VAnN, WeRNER, WILLARD BaRTLeTT and Cuassz, JJ., concur; Hareut, J., absent. Order affirmed. PARSONS »v. JOSEPH. 92 Ala. 403. 1890. Tue bill in this case was filed on the 19th day of July, 1890, by Henry Joseph, as a stockholder in the Birmingham, Powderly & Bessemer Street Railroad Company, against the said corporation and J. H. Parsons; and sought the cancellation of certain certificates of stock issued by the corporation to said Parsons, on the ground that the stock was fictitious and fraudulent. There was a demurrer to the bill, and a motion to dissolve the injunction, each of which was over- ruled; and this appeal is sued out by the defendants from that inter- locutory decree. Coteman, J. Among other averments, the bill substantially al- leges that plaintiff is a bona fide stockholder in said company; that shortly after the organization of the company, the defendant sub- scribed for one hundred and seven shares of the capital stock of the company, of the par value of fifty dollars each, and paid for the same in full by conveying to the company thirty-nine acres of land (de- scribing the land) at an agreed price and valuation of one hundred and thirty-seven dollars per acre, when the land was not worth more than twenty-five dollars per acre, and for this land Parsons was to receive one hundred and seven shares of the stock; that shortly thereafter, the capital stock of the company was doubled, and with- out further consideration than the thirty-nine acres of land, Parsons’ stock was doubled, and he received two hundred and fourteen shares of the capital stock. The bill, as amended, charges the excessive valuation of the land was made knowingly, willfully, and with the fraudulent intent of having issued to Parsons the fictitious stock, in violation of law. The answer denied that plaintiff was a bona fide stockholder, and set up that plaintiff was the transferee of one E. Lesser. The answer admits that defendant’s stock was doubled with- out the payment of any additional consideration than that of the land; but by way of explanation and defense, avers that the lands 886 FARSONS v. JOSEPH. [CHAP. II. were not truly and properly valued at first, and the increased valu- ation of the lands only raised them to their real and true value, and the additional issue of stock was for’property at its fair valuation. The answer continues, however, as follows: that if said transaction had been illegal and fraudulent, and not done in good faith, com- plainant is estopped from setting up fraud in said transaction, or seeking to cancel said stock, because E. Lesser, who was complain- ant’s transferer, participated in all of said transactions and himself, fixed the value of said lands, with full knowledge of and after full investigation of the value of said land. A transferee of stock is not necessarily disqualified as a suitor in all cases, because the prior holders were personally disqualified. If the transferee purchased the shares in good faith, and without notice of the fact that the prior holder had precluded himself from suing, he would have as just a title to relief, as if he had purchased from a share- holder who was under no disability; but, if the purchaser was aware that the prior holder had barred his right to relief, neither justice nor public policy would require that the transferee, under these circum- stances, should be accorded any greater rights than his transferer. Morawetz, § 267. Note. — See also Warren v. Robison, 25 Utah, 205. The prin- cipal case is not, however, supported by the present weight of authority. Thus in Babcock v. Farwell, 245 Ill. 14, the court said (p. 41): “Neither can an assignee of stock maintain a suit in regard to transactions with the corporation done or assented to by his assignor. The purchaser of shares of stock acquires no greater rights than his vendor. He holds by the same title and subject to the same liability. Shares of stock are merely choses in action, and the succes- sive owners acquire only the rights held by their predecessors in title.” In support of this doctrine, see Boldenweck v. Bullis, 40 Colo. 253; Callanan v. Windsor, 78 Iowa, 193; Trimble v. American Sugar Refining Co., 61 N.J. Eq. 340; McCampbell v. Railroad, 111 Tenn. 55. It is submitted that, on principle, the principal case is sound. Three things are to be distinguished: (1) a right which is not trans- ferable, such as a chose in action at the common law; (2) a right which is transferable, even by the casual holder who has acquired his holding in an improper fashion, such as a negotiable instrument; (3) a right which is transferable, but not by the casual holder. Now it is settled that shares of stock do not belong to the second class, and it is easy to reason from this that they are subject to all the rules governing ordinary choses in action. But shares of stock do not fall into the first class, but into the third. The objection to allowing a chose in action to be transferred was twofold: (1) it was conceived to be against public policy; and (2) it was conceived as a hardship upon an obligor to make him bound to some one to whom he had SECT. 1.] PARSONS v. JOSEPH. 887 not consented to be bound. But both of these objections drop when shares of stock are considered. The State, by granting the franchise of incorporation, has consented that there should be succession among the members. Nothing is more characteristic of a corpora- tion than this “capacity for succession.” This means that, where corporate membership is determined by the ownership of stock, the stock is transferable. Of course this is no hardship to the cor- poration. There is therefore no good reason why the bona fide purchaser of a share of stock should not stand as well as the purchaser of land or a chattel. He gets the legal title, and he should hold that legal title free from equities or estoppels that would have bound his transferor. Suppose A, president of X, misappropriates its assets. The stock is freely sold on the market, and is bought by purchasers on the sup- “position that the affairs of X are being honestly managed. B, an innocent stockholder, sells his stock to C. A sells some of his stock to D. C may require X to assert its right against A. Pollite v. Gould, supra. Why should not D have a similar right? The student should consider the cases in this subsection in con- nection with Old Dominion Copper Co. v. Lewisohn, p. 341, supra; Old Dominion Copper Co. v. Bigelow, p. 349, supra, and the cases on “Setting Aside Ultra Vires Transactions,” p. 753, supra. 888 TISDALE v. HARRIS. [CHAP. 11, SECTION 2. TRANSFER OF SHARES. TISDALE ». HARRIS. 20 Pick. (Mass.) 9. 1838. ASSUMPSIT on an oral agreement of the defendant, to sell to the plaintiff two hundred shares, with all the earnings thereon, in a Con- necticut corporation. Verdict for plaintiff. Motion to set aside verdict. One ground of" the motion was, because the contract set up was within the statute of frauds. Suaw, C.J. [After deciding another question.] But by far the most important question in the case, arises on the objection, that the case is within the statute of frauds. This statute, which is copied precisely from the English statute, is as follows: “No contract for the sale of goods, wares or merchandise for the price of ten pounds ($33.33) or more, shall be allowed to be good, except the purchaser shall accept part of the goods so sold, and actually receive the same or give something in earnest to bind the bargain, or in part payment, or that some note or memorandum in writing of the said bargain, be made and signed by the parties to be charged by such contract, or their agent, thereunto lawfully authorized.” This being a contract for the sale of shares in an incorporated com- pany in a neighboring State, for the price of more than ten pounds, and no part having been delivered, and no purchase money or earnest paid, the question is, whether it can be allowed to be good, without a note or memorandum in writing, signed by the party to be charged with it. This depends upon the question, whether such shares are goods, wares or merchandise within the true meaning of the statute. It is somewhat remarkable that this question, arising on the St. 29 Car. 2, in the same terms, which ours has copied, has not been defini- tively settled in England. In the case of Pickering v. Appleby, Com. Rep. 354, the case was directly and fully argued, before the twelve judges, who were equally divided upon it. But in several other cases afterwards determined in Chancery, the better opinion seemed to be, that shares in incorporated companies, were within the statute, as goods or merchandise. Mussell v. Cooke, Prec. in Ch. 533; Crull v. Dodson, Sel. Cas. in Ch. 41. We are inclined to the opinion, that the weight of authorities, in modern times, is, that contracts for the sale of stocks and shares in SECT. 11.] TISDALE v, HARRIS. 889 incorporated companies, for more than ten pounds, are not valid, unless there has been a note or memorandum in writing, or earnest or part payment. 4 Wheaton, 89, note; 3 Starkie on Evid. 4th Amer. Edit. 608. Supposing this.a new question now for the first time calling for a construction of the statute, the Court are of opinion that as well by its terms, as its general policy, stocks are fairly within its operation. The words “goods” and “merchandise,” are both of very large sig- nification. Bona, as used in the civil law, is almost as extensive as personal property itself, and in many respects it has nearly as large a signification in the common law. The word “merchandise”’ also, including in general objects of traffic and commerce, is broad enough to include stocks or shares in incorporated companies. There are many cases indeed in which it has been held in England, that buying and selling stocks did not subject a person to the opera- tion of the bankrupt laws, and thence it has been argued that they . cannot be considered as merchandise, because bankruptcy extends to persons using the trade of merchandise. But it must be recollected that the bankrupt acts were deemed to be highly penal, and coercive, and tended to deprive a man in trade of all his property. But most joint-stock companies were founded on the hypothesis at least, that most of the shareholders took-shares as an investment and not as an object of traffic; and the construction in question only decided, that by taking and holding such shares merely as an investment, a man should not be deemed a merchant so as to subject himself to the highly coercive process of the bankrupt laws. These cases, therefore, do not bear much on the general question. The main argument relied upon, by those who contend that shares are not within the statute, is this. That statute provides that such contract shall not be good, etc., among other things, except the pur- chaser shall accept part of the goods. From this it is argued, that by necessary implication, the statute applies only to goods, of which part may be delivered. This seems however to be rather a narrow and forced construction. The provision is general, that no contract for the sale of goods, etc., shall be allowed to be good. The exception is, when part are delivered; but if part cannot be delivered, then the exception cannot exist to take the case out of the general prohibition. The provision extended to a great variety of objects, and the excep- tion may well be construed to apply only to such of those objects to which it is applicable, without affecting others, to which from their nature it cannot apply. There is nothing in the nature of stocks, or shares in companies which in reason or sound policy should exempt contracts in respect to them from those reasonable restrictions, designed by the statute, to prevent frauds in the sale of other commodities. On the contrary, these companies have become so numerous, so largé an amount of the 890 EAST BIRMINGHAM LAND CO. ¥. DENNIS. [CHAP. II. property of the community is now invested in them, and as the ordi- nary indicia of property, arising from delivery and possession, cannot take place, there seems to be peculiar reason for extending the provi- sions of this statute to them. As they may properly be included under the term goods, as they are within the reason and policy of the act, the Court are of opinion, that a contract for the sale of shares, in the absence of the other requisites, must be proved by some note or memorandum in writing; and as there was no such memorandum in writing, in the present case, the plaintiff is not entitled to maintain this action. As to the argument, that here was a part performance, by a payment of the money on one side, and the delivery of the certificate on the other, these acts took place after this action was brought, and cannot therefore be relied upon to show a cause of action when the action was commenced. Verdict set aside and plaintiff nonsuit. Nore. — See, accord, North v. Forest, 15 Conn. 400; Hightower v. Ansley, 126 Ga. 8 (overruling Rogers v. Burr, 105 Ga. 432); Pray v. Mitchell, 60 Me. 430; Sprague v. Hosie, 155 Mich. 30; Tompkins v. Sheehan, 158 N.Y. 617. See also Southern Life Insurance Co. v. Cole, 4 Fla. 359, 378 (statute covers contracts for the sale of ‘any per- sonal property, goods, wares, or merchandise”); Snow Storm Co. v. Johnson, 186 Fed. 745 (statute covered sale of “things in action’). See, contra, Duncuft v. Albrecht, 12 Sim. 189. See also Vawter v. Griffin, 40 Ind. 593, 602; Webb v. Baltimore Co., 77 Md. 92, 98; Sed- don v. Rosenbaum, 85 Va. 928. Ryers v. Tuska, 14 N.Y. Supp. 926. A contract for the sale of stocks, of which there is no memorandum in writing, as required by the statute-of frauds, cannot be enforced, though the contract was made in a stock exchange of which both parties were members, the constitution and by-laws of which provides that “‘all offers to buy and sell securities shall be binding,” and that “‘any member who may fail to comply with his contracts, or who may become insolvent, shall be suspended until he has settled with his creditors.” EAST BIRMINGHAM LAND CO. v. DENNIS. 85 Ala. 565. 1888. AppEAL from the City Court of Birmingham, in equity. Heard before the Hon. H. A. SHARPE. The bill in this case was filed on the 13th April, 1888, by J. F. Dennis, against J. P. Mudd, and the East Birmingham Land Com- pany, a private corporation; and sought to compel the transfer, on the books of the corporation, of a certificate for ten shares of stock, SECT. I1.] EAST BIRMINGHAM LAND CO. v. DENNIS. 891 of which the complainant claimed to be the owner, and to compel the delivery of the certificate to him by said Mudd, who had possession of it under claim of ownership. The certificate was issued in the name of A. R. Dearborn, and was indorsed by him in blank. The complainant claimed that he had bought the certificate, with the blank indorsement thereon, from a holder who had acquired it by purchase from said Dearborn; and that it was lost by him, or stolen from him, without fault on his part. Mudd purchased the certificate, for full value, from Wilson, Sage & Clark, stockbrokers in Birming- ham; and while denying complainant’s ownership, claimed that he acquired a good title by the custom and usage of brokers and mer- chants in Birmingham. A decree pro confesso was taken against the corporation. On final hearing, on pleadings and proof, the court rendered a decree for the complainant; and this decree is now assigned as error, by each of the defendants separately. SoMERVILLE, J. We concur in the conclusion reached by the judge of the City Court, that the appellee, Dennis, complainant in the bill, is the owner of the ten shares of stock which are the subject of litiga- tion in the present suit. The testimony satisfactorily proves that the certificate of stock, indorsed in blank by Dearborn, who was the owner on the books of the defendant corporation, was the property of the appellee, and was taken or stolen from his possession, without any negligence on his part whatever, several months before it was purchased by the defendant Mudd, who innocently bought and paid value for it, some time in March, 1888. The only question is, whether Mudd, who paid full value for this stock, without notice of the complainant’s claim to it, acquired a title superior to that of complainant. The established rule is that no person can ordinarily be deprived of his ownership of property save by his own consent, or his negligence. The only exception to this rule is the case of a bona fide purchaser for value, of negotiable paper. We have no reference, of course, to the taking of property for public uses by judicial condemnation, which may be done without the owner’s consent. It can not be contended, with any degree of plausibility, that, under the facts of this case, the complainant was guilty of negligence, or the want of ordinary care in the custody of the certificate. He kept it in a box in the vault of a banking-house, whence it was ab- stracted by some unknown person, apparently, without any fault on his part. Nor does any question arise involving the rights of a subsequent bona fide purchase of stock, from one shown to be owner on the cor- porate books, who has already made a prior unregistered transfer of it to another purchaser. All such transfers made by the true owner, and not registered on the books of the corporation within fifteen days, are declared by statute to be “void as to bona fide creditors, or 892 EAST BIRMINGHAM LAND CO. ¥. DENNIS. [CHAP, IT. purchasers without notice.” — Code 1886, § 1671; Fisher v. Jones, 82 Ala. 117. If the defendant Mudd had claimed by a subsequent purchase from Dearborn, the owner of the stock on the corporate books, this question would arise. But he does not so claim, his title being derived through the complainant Dennis himself, by two or more intermediate transferees, the first of whom was a fraudulent holder without title. Whether Mudd’s title to the stock, there- fore, is superior to that of Dennis, depends on whether a certificate of stock, indorsed in blank by the owner, is to be treated as negotiable paper. The rule is well settled, that a bona fide purchaser of a negotiable bill, bond or note, although he buys from a thief, acquires a good title, if he pays value for it without notice of the infirmity of his vendor’s title. The authorities are clear in support of the view, that a certificate of corporate shares of stock, in the ordinary form, is not negotiable paper, and that a purchaser of such certificate, although indorsed in blank by the owner, where no question arises under the registration laws, obtains no better title to the stock than his vendor had, in the absence of all negligence on the part of the owner, or his authority to make the sale. This question arose, and was decided by the New York Court of Appeals, in Mechanics’ Bank v. New York & New Haven R.R. Co., 138 N.Y. (1856), 599. It was there held, that such a certificate does not partake of the character of a negotiable instrument, and that a bona fide assignee, with full power to transfer the stock, takes the certificate subject to the equities which existed against his assignor. Such certificates, said Comstock, J., ‘contain no words of negotiability. They declare simply that the person named is entitled to certain shares of stock. They do not, like nego- tiable instruments, run to the bearer, or order of the party to whom they are given.” They were said to be, in some respects, like a bill of lading, or warehouse receipt, being ‘‘the representative of property existing under certain conditions, and the documentary evidence of title thereto.” The most that can be said is, that all such instruments possess a sort of quasi negotiability, dependent on the custom of merchants and the convenience of trade. They are not, in the matter of transferability, protected strictly as negotiable paper. In Shaw v. Spencer, 100 Mass. 382; s.c., 97 Amer. Dec., 1 Amer. Rep. 115 (1868), it was also decided that a certificate of corporate stock, transferred in blank on its back, was clearly not a negotiable . instrument. “No commercial usage,” it was said, ‘“¢ould give to such an instrument the attribute of negotiability. However many intermediate hands it may pass through, whoever would obtain a new certificate in his own name, must fill out the blanks, . . . so as to derive title to himself directly from the last recorded stockholder, who is the only recognized and legal owner of the shares.” The case of Sewall v. Boston Water Power Co., 4 Allen, 282;s.c., 81 Amer. Dec. SECT. 41.] EAST BIRMINGHAM LAND CO. v. DENNIS. 893 701, decided by the same court a few years before, is referred to as @ precedent in support of this conclusion. The precise point in the present case was also decided in Barstow v. Savage Mining Co., 64 Cal. 388; s.c., 49 Amer. Rep. 705, where it was expressly held that a bona fide purchaser of stock standing on the company’s books in the name of the former owner, regularly indorsed by him, and stolen from the present owner without his fault, gets no title. The decision was based on the fact, that such certificates are not negotiable instruments, but simply muniments of title, and evi- dences of the holder’s right to a given share in the property and franchises of the corporation. It was observed, in regard to the mat- ter of negligence, as follows: ‘‘But, if the purchaser from one who has not the title, and has no authority to sell, relies for his protection on the negligence of the true owner, he must show that such negli- gence was the proximate cause of the deceit.” The same principle was applied to bills of lading, in Gurney v. Beh- rend, 3 Ellis & Bl. 622, decided by the English Queen’s Bench, where an instrument of that kind, indorsed in blank by the consignor, and sent by him to his correspondent, had been misappropriated. The correspondent, without authority, fraudulently transferred the bill for value; and it was held by Lord Campbell, that for the want of the element of negotiability in the paper, the title to the goods was unaffected by the transaction. - The doctrine of Barstow v: Savage Mining Co., supra, is well sup- ported by authority, and, in our judgment, announces a correct prin- ciple of law, and we fully approve it. — Woolley v. Sargeant, 14 Amer. Dec., Nore, on page 427, and cases there cited; Cook on Stock and Stockholders, §§ 368, 437, 192, 7, 10; 2 Daniel’s Neg. Instr. (8d Ed.), § 17089: It harmonizes entirely with the declaration of our statute, that shares of stock in private corporations ‘‘are personal property, transferable on the books of the corporation” in accordance with the rules and regulation of the corporation. — Code 1886, § 1669; Campbell v. Woodstock Iron Co., 83 Ala. 451. There is a class of cases, not to be confounded with the one in hand, where the holder of such a certificate of stock, indorsed in blank, is clothed with power as agent or trustee, to deal with such stock to a limited extent, and transfers it by exceeding his powers, or in breach of his trust. In such cases, it has often been held that the true owner, having conferred on the holder, by contract, all the external indicia of title, and an apparently unlimited power of dis- _position over the stock, “is estopped to assert his title as against a third person, who, acting in good faith, acquires it for value from the apparent owner.” — 2 Dan. Neg. Inst. (8d Ed.), § 17089; McNeil v. Tenth Nat. Bank, 46 N.Y. 325; Mount Holly Turnpike Co. v. Ferree, 17 N.J. Eq. 117; Prall v. Tilt, 28 Ib. 479; Merchant’s Nat. Bank v. Livingston, 74 N.Y. 223. These cases rest on the principle, 894 MCNEIL ¥. TENTH NATIONAL BANK. (CHAP. II. that it is more just and reasonable, where one of two innocent parties must suffer loss, that he should be the loser who has put trust and confidence in the deceiver, than a stranger who has been negligent in trusting no one.” — Allen v. Maury & Co., 66 Ala. 10. It being an established principle of law, that certificates of stock are not to be regarded as negotiable paper, it is not permissible to prove a custom or usage among stock-brokers to the contrary. No usage is good which conflicts with an established principle of law, any more than one which contravenes or nullifies the express stipu- lations of a contract. Dickinson v. Gay, 83 Amer. Dec. 656, and note, 664; BE. T., Va. & Ga. R.R. Co. v. Johnston, 75 Ala. 576; Lehman v. Marshall, 47 Ala. 362. The decree of the court below is in accordance with these views, and must be affirmed. Nore. — There are several cases, accord. For recent cases, see Schumacher v. Greene Cananea Co., 117 Minn. 124; Barstow v. City Trust Co., 216 Mass. 330. ‘ Swim v. Wilson, 90 Cal. 126. If a stock-broker, acting in good faith, receives from a thief certificates of stock indorsed in blank, sells them, and pays the net proceeds to the thief, he converts the stock. See Warren’s Cases on Property, p. 400. McNEIL ». TENTH NATIONAL BANK. 46 N.Y. 325. 1871. Tue plaintiff pledged with Goodyear Brothers & Durant, stock- brokers, certain certificates of stock endorsed in blank. These were tortiously pledged by the stockbrokers to Fred. Butterfield, Jacobs & Co. for a debt larger than the debt due from the plaintiff. The defendant, at the request of the stockbrokers, paid Butterfield, Jacobs & Co. and took the pledged securities from them. The ques- tion was whether plaintiff was entitled to the certificates on paying the defendant the amount due from him to the stockbrokers, or whether the defendant was entitled to be treated as a pledgee of the certificates for the amount due from the stockbrokers to them. Rapatwo, J. The pledge of the plaintiff’s shares by his brokers, for a larger sum than the amount of their lien thereon, was a clear viola- tion of their duty, and excess of their actual power. And if the effect of the transaction was merely to transfer to the appellant, through Fred. Butterfield, Jacobs & Co., the title or interest of Goodyear Brothers & Durant in the shares, the judgment appealed from was right. It must be conceded, that as a general rule, applicable to property SECT. II.] MCNEIL v. TENTH NATIONAL BANK. 895 other than negotiable securities, the vendor or pledgor can convey no greater right or title than he has. But this is a truism, predicable of a simple transfer from one party to another where no other element in- tervenes. It does not interfere with the well-established principle, that where the true owner holds out another, or allows him to appear, as the owner of, or as having full power of disposition over the prop- erty, and innocent third parties are thus led into dealing with such apparent owner, they will be protected. Their rights in such cases do not depend upon the actual title or authority of the party with whom they deal directly, but are derived from the act of the real owner, which precludes him from disputing, as against them, the existence of the title or power which, through negligence or mistaken confi- dence, he caused or allowed to appear to be vested in the party mak- ing the conveyance. Pickering v. Busk, 15 East, 38; Gregg v. Wells, 10 Adol. & El. 90; Saltus v. Everett, 20 Wend. 268, 284; Mowrey v. Walsh, 8 Cow. 238; Root v. French, 13 Wend. 570. The true point of inquiry-in this case is, whether the plaintiff did confer upon his brokers such an apparent title to, or power of disposi- tion over, the shares in question, as will thus estop him from assert- ing his own title, as against parties who took bona fide through the brokers. Simply intrusting the possession of a chattel to another as deposi- tary, pledgee or other bailee, or even under.a conditional executory contract of sale, is clearly insufficient to preclude the real owner from reclaiming his property, in case of an unauthorized disposition of it by the person so intrusted. Ballard v. Burgett, 40 N.Y. R. 314. ‘The mere possession of chattels, by whatever means acquired, if there be no other evidence of property or authority to sell from the true owner, will not enable the possessor to give a good title.” Per Dxwnio, J., in Covill v. Hill, 4 Den. 323. But if the owner intrusts to another, not merely the possession of the property, but also written evidence, over his own signature, of title thereto, and of an unconditional power of disposition over it, the case is vastly different. There can be no occasion for the delivery of such documents, unless it is intended that they shall be used, either at the pleasure of the depositary, or under contingencies to arise. If the conditions upon which this apparent right of control is to be exer- cised, are not expressed on the face of the instrument, but remain in confidence between the owner and the depositary, the case cannot be distinguished in principle, from that of an agent who receives secret instructions qualifying or restricting an apparently absolute power. In the present case, the plaintiff delivered to and left with his brokers, the certificate of the shares, having indorsed thereon the form of an assignment, expressed to be made “for value received,” and an irrevocable power to make all necessary transfers. The name of the transferee and attorney, and the date, were left blank. This Fie: See ee 896 MCNEIL v. TENTH NAT.ONAL BANK. [CHAP. II. document was signed by the plaintiff, and its effect must be now considered. It is said in some English cases, that blank assignments of shares in corporations are irregular and invalid; but that opinion is expressed in cases where the shares could only be transferred by deed under seal, duly attested, and is placed upon the ground that a deed cannot be executed in blank. : Without referring to the American doctrine on that subject, it is sufficient to say that no such formality was requisite in this case. It was only necessary to a valid transfer as between the parties, that the assignment and power should be in writing. The common practice of passing the title to stock by delivery of the certificate with blank as- signments and power, has been repeatedly shown and sanctioned in cases which have come before our courts. Such was established to be the common practice in the city of New York, in the ease of the New York and New Haven Railroad Company v. Schuyler, 34 N.Y. 41, and the rights of parties claiming under such instruments were fully rec- ognized in that case. And in the case of Kortright v. The Commercial Bank of Buffalo (20 Wend. 91, and 22 Wend. 348), the same usage was established as existing in New York and other States, and it was expressly held that even in the absence of such usage, a blank transfer on the back of the certificate, to which the holder has affixed his name, is a good assignment; and that a party to whom it is delivered is authorized to fill it up, by writing a transfer and power of attorney over the signature. ... The holder of such a certificate and power, possesses all the exter- nal indicia of title to the stock, and an apparently unlimited power of disposition over it. He does not appear to have, as is said in some of the authorities cited, concerning the assignee of a chose in action, a mere equitable interest, which is said to be notice to all persons deal- ing with him that they take subject to all equities, latent or other- wise, of third parties; but, apparently, the legal title, and the means of transferring such title in the most effectual manner. Such, then, being the nature and effect of the documents with which the plaintiff intrusted his brokers, what position does he oc- cupy toward persons who, in reliance upon those documents, have in ’ good faith advanced money to the brokers or their assigns on a pledge of the shares? When he asserts his title, and claims, as against them, that he could not be deprived of his property without his consent, cannot he be truly answered that, by leaving the certificate in the hands of his brokers, accompanied by an instrument bearing his own signature, which purported to be executed for a consideration, and to convey the title away from him, and to empower the bearer of it irrevocably to dispose of the stock, he in fact “substituted his trust in the honesty of his brokers, for the control which the law gave him over his own property,” and that the consequences of a betrayal of SECT. 11.] CLEWS ¥. FRIEDMAN. 897 that trust, should fall upon him who reposed it, rather than upon innocent strangers from whom the brokers were thereby enabled to obtain their money? . My conclusion is, that the Tenth National Bank must, on the facts found, be deemed to have advanced bona fide on the credit of the shares, and of the assignment and power executed by the plaintiff, and is entitled to hold the stock for the full amount so advanced, and remaining unpaid after exhausting the other securities received for the same advance. Nors. — See, accord, Nelson v. Owen, 113 Ala. 372; Brittan v. Oakland Bank, 124 Cal. 282; Otis v. Gardner, 105 Ill. 436; Baker v. Davie, 211 Mass. 429; Walker v. Detroit Transit Co., 47 Mich. 338; Gass v. Hampton, 16. Nev. 185; Mount Holly Co. v. Ferree, 17 N.J. Eq. 117; Beckwith v. Galice Mines Co., 50 Or. 542; Wood’s Appeal, 92 Pa. 379; State Bank v. Cox, 11 Rich. Eq. (S.C.) 344; Cherry v. Frost, 7 Lea (Tenn.) 1; Strange v. H. & T.C.R. R. Co., 53 Tex. 162. See also American Exchange Bank v. Woodlawn Cemetery, 194 N.Y. 116, 126. See, contra, Merchants’ Bank v. Williams, 110 Md. 334. ; CLEWS v. FRIEDMAN. 182 Mass. 555. 1903. BIL IN EQuITY, filed June 20, 1902, against the trustee in bank- ruptcy of A. H. Zunz to restrain him from enforcing an attachment. against four shares of the capital stock of the Boston and Albany Railroad Company, attached as the property of Rosa W. Zunz, who sold the shares to the plaintiffs. The bill alleged, that the plaintiffs were copartners carrying on a banking business in the city of New York, that on March 1 or 2, 1900, Rosa W. Zunz, being the owner of the certificate representing - the four shares of stock in question and having owned it since Octo~ ber 17, 1899, sold and delivered it to the plaintiffs, together with a written transfer of it signed by her on the back of the certificate, and that the plaintiffs purchased the certificate from her in good faith and paid her for it the full market value of $239.75 per share; that on March 3, 1900, the plaintiffs caused the certificate to be presented to the railroad company for transfer to them, and the plaintiffs then for the first time learned, that on February 20, 1900, the defendant, Friedman, as trustee in bankruptcy of one A. H. Zunz, had brought an action in the Superior Court against Rosa W. Zunz, for $5,000, and on February 21, 1900, had caused the writ in that action to be served upon the railroad company by an attachment of the four shares of stock standing in her name; and that the railroad company 898 CLEWS Jv. FRIEDMAN. [CHAP. II. refused to make the requested transfer to the plaintiffs unless and until the attachment should be dissolved. The answer admitted all the allegations of the bill. It was agreed that the following was a by-law of the Boston and Albany Railroad Company: “Art. VII. The directors shall be, and they are hereby authorized to determine the form of the certificates for the capital stock of the corporation, and the manner of transfer- ring and recording the same. They shall also establish a corporate seal, and determine the form thereof.” It was also agreed : “if competent and material, that by custom the certificates of stock in: Massachusetts corporations, when endorsed in blank and delivered by the owner, are accepted by transferees like negotiable instruments, without inquiry as to the rights, if any, of third parties.” The case came on to be heard before Hammonn, J., who reserved it for determination by the full court. Know ton, C.J. This case calls for a construction of the St. 1884, c. 229 (R. L. ce. 109, § 37), which is as follows: “The delivery of a stock certificate of a corporation to a bona. fide purchaser or pledgee, for value, together with a written transfer of the same, or a written power of attorney to sell, assign and transfer the same, signed by the owner of the certificate, shall be a sufficient delivery to transfer the title as against all parties; but no such transfer shall affect the right of the corporation to pay any dividend due upon the stock, or treat the holder of record as the holder in fact, until such transfer is. re- corded upon the books of the corporation, or a new certificate is issued to the person to whom it has been so transferred.’”’ This enact- ment was a new departure and a change of policy in the legislation of this Commonwealth. Previously to the St. 1881, c. 302, transfers of shares of railroad and manufacturing corporations and of many cthers, could not be made effectual against the rights of subsequent attaching creditors unless recorded on the books of the corporation. Blanchard v. Dedham Gas Light Co., 12 Gray, 213; Fisher v. Essex Bank, 5 Gray, 373; Pub. Sts. c. 112, § 56. Except in reference to the small number of corporations in which there was no provision of statute or of the charter requiring a transfer to be made on the books of the corporation (see Boston Music Hall Association v. Cory, 129 Mass. 435) a creditor, by examining the books, could be certain to obtain a valid attachment against the owner of record. No purchaser of stock could be sure that his title was good against possible attach- ments without an examination of the books of the corporation, nor could he be protected against attachments that might be made subse- quently, unless he recorded his transfer immediately. This St. 1881, c. 302, was enacted at the instance of purchasers and pledgees of stock, but it did not give them nearly all that they sought to obtain from the Legislature. It was in the nature of 3 compromise between SECT. I1.] CLEWS 0. FRIEDMAN. 899 the conflicting interests of creditors and of those who desired that stock might safely be bought and sold by a transfer of the certificates from hand to hand. It left purchasers subject to the rights of credi- tors whose attachments had been made previously, and it gave every purchaser ten days in which to record his transfer before he could be affected by a subsequent attachment. In 1884 purchasers and pledgees sought to obtain greater security and convenience, and the result was the statute now before us. By the language of the act “Delivery of a stock certificate... with a written transfer . . . signed by the owner of the certificate, shall be a sufficient delivery to transfer the title as against all parties.”’ Here the certificate is treated as evidence of a title. The assignment is to be made by the owner of the certificate, and the transfer of the cer- tificate transfers the title. What is meant by title? Evidently the title to the stock. A certificate in common form purports to represent a perfect title to the stock. The transfer of the certificate, by virtue of the statute, transfers the title referred to as against all parties, including attaching creditors. The statute declares in effect that an attachment shall be of no avail against a bona fide transaction of this kind. To obtain legislation of this kind was the purpose of the plain- tiffs for the enactment, as is shown by the history of the proceedings which appears in the legislative proceedings. Russell v. American Bell Telephone Co., 180 Mass. 467, discloses the existence of a usage that the possession of such a certificate, duly indorsed, enables the possessor to give title to a bona fide purchaser, good against every- body. The parties to this suit agree that by custom such certificates, indorsed in blank, and delivered by the owner, are accepted by trans- ferees like negotiable instruments, without inquiry as to the rights, if any, of third persons. The case of Andrews v. Worcester, Nashua, & Rochester Railroad, 159 Mass. 64, 66, indicates that in the opinion of this court this usage is well founded in law. That this is the con- struction of the commissioners on the last revision of the statutes and of the Legislature that enacted the revision, appears by the R. L. c. 109, § 37, where the words “‘signed by the person named as the shareholder in such certificate,” are substituted for the words, “ signed by the owner of the certificate,” and the words “against all persons” are substituted for “against all parties.” A like construc- tion seems to be put upon an identical statute by the Supreme Court of Wisconsin in Wright Lumber Co. v. Hixon, 105 Wis. 153, 158. Except as affected by this statute the law authorizing the attach- ment of shares in a corporation is left in full force, and it is not neces- sary now to consider what remedy, if any, an attaching creditor would have, in equity or otherwise, to prevent the transfer of a certificate after an attachment. Decree for the plaintiffs. 900 CLEWS v. FRIEDMAN. [CHAP. II. Nore. — If by statute shares of stock are attachable by serving specified papers at the office of the corporation, and there is no coun- tervailing statute in favor of bona fide purchasers of the certificate, a prior attaching creditor will prevail over the bona fide purchaser of the certificate. See Young v. South Tredegar Co., 85 Tenn. 189. If, however, the certificate has been indorsed and delivered to the purchaser prior to the attachment, it is submitted that the bona fide purchaser should be protected. A ‘‘transfer’’ of a chose in action can, it is true, only be made by way of novation, but the corporation has consented in advance to this novation, and it is therefore to be re- garded as completed when the prior holder has delivered the certifi- cate, so indorsed, to the new holder. Nor should a requirement in the by-laws of the company that its stock be “transferable only on the books of the corporation, on surrender of the certificate’ change this result. The corporation will of course be protected in itself treating the registered holder as the owner, until it has notice of the transfer; but the requirement of registry should be interpreted as inserted only for the protection of the corporation, — just as the requirement that the certificate be surrendered on a transfer should be interpreted. The cases on this point are very numerous. The weight of authority supports this view. See Smith v. American Coal Co., 7 Lans. (N.Y.) 317. Tue law has been frequently changed by statute, so as to protect the bona fide purchaser even from a prior attachment. This result necessarily limits the rights of creditors of the regis- tered holders of stock. See the Uniform Stock Transfer Act, sections 13 and 14. Section 33 of No. 141 of the Public Acts of Vermont, 1915, pro- vides as follows: ‘‘The delivery of a certificate of stock by the person named as the stockholder in such certificate or by a person entrusted by him with its possession for any purpose to a bona fide purchaser or pledgee for value, with a written transfer thereof, or with a written power of attorney to sell, assign or transfer the same, signed by the person named as the stockholder in such certificate, shall be a suffi- cient delivery to transfer title as against all persons, including credi- tors of the record holder; but no such transfer shall affect the right of the corporation to pay any dividend due upon the stock to the holder of record, or otherwise to treat the holder of record as the holder in fact, until it has been recorded upon the books of the cor- poration, or until a new certificate has been issued to the person to whom it has been transferred. Such transferee, upon delivery of the former certificate to the treasurer of the corporation, shall be en- titled to receive a new certificate. No attachment or levy upon shares of stock shall be valid until such certificate is actually seized by the officer making the attachment or levy. A creditor of the stockholder shali be entitled to such aid from courts of appropriate jurisdiction, SECT. 11.] IN RE BAHIA & SAN FRANCISCO RY. CO. 901 by injunction or otherwise, as is allowed in regard to property which cannot readily be attached or levied upon by ordinary legal pro- cess.” Inre BAHIA & SAN FRANCISCO RY. CO. L.R. 3 Q.B. 584. 1868. Miss Tritrrin was a shareholder in the Bahia & San Francisco Railway Company. The company accepted a transfer upon which her name had been forged, and issued new certificates to Stocken and Goldner which were sold to bona fide purchasers, Mr. Burton and Mrs. Goodburn. The questions for the opinion of the court were: 1. Whether, as against the company, Mr. Burton and Mrs. Goodburn are entitled to the said shares in the company, or an equivalent number. 2. Whether they are entitled to any and what damages to be paid to them by the company under the above circumstances. Biacxsurn, J. When joint-stock companies were established, the great object was that the shares should be capable of being easily transferred; and the legislature has made provision by 25 & 26 Vict. c. 89, § 25, that the company shall keep a register of the members, and when the capital is divided into shares, each share is to be distin- guished by a number, and the shares held by each member is to be specified, and the dates at which each person’s name was entered on the register. In order to keep up such a register, the company must alter its register whenever a transfer of shares is mage, on the appli- cation and payment of a certain sum to them by the person to whom the shares are alleged to be transferred. And the first thing the com- pany would have to do when ‘a transfer was tendered to them, would be to inquire into its validity; but a company may be deceived, and induced, as the company were in the present case, without any neg- ligence, to receive as genuine a forged transfer. They accordingly made an alteration in the register, and made it in fact inaccurate by putting the names of Stocken and Goldner on the register as the holders of particular shares, when in fact they were net so. The statute (§ 31) further provides that the company may give certifi- cates, specifying the shares held by any member; and the object of this provision is expressly stated to be that this certificate should be prima facie evidence of the title of the person named to the shares specified; and the company, therefore, by granting the certificate, do make a statement that they have transferred the shares specified to the person to whom it is given, and that he is the holder of the shares. If they have been deceived and the statement is not perfectly true, they may not be guilty of negligence, but the company, and no one else, have power to inquire into the matter; and it was the in- 902 BOSTON & ALBANY R.R. CO. ¥. RICHARDSON. ([CHAP. II. tention of the legislature that these certificates should be documents on which buyers might safely act. Now, on the facts of this case, al- though according to the practice on the stock exchange, the claim- ants did not originally contract for these particular shares, the money was paid by them or their broker on the execution by Stocken and Goldner of a transfer, and on the certificate under the seal of the company being handed over to them that Stocken and Goldner were the holders of these particular shares; and it is quite clear that a statement of a fact was made by the company, on which the com- pany, at the very least, knew that persons wanting to purchase shares might act. And the claimants having bona fide acted upon that statement, and suffered damage, can they recover from the com- pany? I think they can, on the principle enunciated in Freeman v. Cooke, 2 Ex. 654, 18 L.J. Ex. 114. Suppose an action by the claimants against the company, asserting that the shares were the plaintiffs’ and that the company refused to pay them the dividends and de- prived them of the use of the shares, in effect an action of trover. The only plea would be that the plaintiffs were not the true owners of the shares, and there would be a replication by way of estoppel, that the company were estopped from saying that the plaintiffs were not the owners, because they had purchased on a statement of title made by the company, and intended by them to be acted upon; this would clearly amount to an estoppel within the rule defined in Free- man v. Cooke, 2 Ex. 654, 18 L.J. Ex. 114. The claimants, therefore, would be entitled to a verdict, and it follows that they are entitled as damages to the value of the shares at the time they were con- verted; that is, at the time when Miss Trittin interfered and claimed the shares. BOSTON & ALBANY R.R.CO. »v. RICHARDSON. 135 Mass. 473. 1883. Morton, C.J. This case, which is an action of contract with a count in tort, presents an important question, referred to, but not decided, in-Machinists’ National Bank v. Field, 126 Mass. 345. In January, 1876, Mrs. Pratt owned five shares of the stock of the Boston and Albany Railroad Company, and held a certificate run- ning in her name. Her son forged her name to a blank power of attor- ney, printed upon the back of the certificate, and delivered it to one Field, a broker. Field sold the shares to the defendants, and deliv- ered to them the certificate with the forged signature thereon. The defendants presented it to the transfer clerk of the plaintiff by Brown, their clerk, who filled up the blanks so as to make it a power of attorney to Brown to transfer the shares to Richardson, Hill and Company, the defendants. Throughout, Brown was acting as the SECT. I1.] BOSTON & ALBANY R.R. CO. ». RICHARDSON. 903 agent and on behalf of the defendants. Thereupon the transfer clerk permitted Brown to transfer the shares upon the books of the cor- poration, and issued a new certificate to the defendants. .Subse- quently, and before the discovery of the forgery, the defendants sold the stock to a third person, and, at their request, the corporation issued a new certificate to the purchaser. Upon these facts, it is clear that Mrs. Pratt never parted with her property in the shares, and therefore the plaintiff was obliged to procure five shares of its corporate stock, and issue a certificate to her, and also to pay her the dividends upon the five shares. Pratt v. Taunton Copper Co., 123 Mass. 110, and cases cited. It is also settled that the corporation has no remedy against the person who pur- chased of the defendants, because, as to him, the corporation is estopped to deny its certificate issued to the defendants and trans- ferred to the purchaser. Machinists’ National Bank v. Field, ubi supra, and cases cited. The question in this case is whether it has a remedy against the person who presented a forged transfer or power of attorney, upon the faith of which it issued to such person a new certificate. - This question has never been directly decided in this Common- wealth, but the adjudged cases furnish analogies which aid us in its solution. It is familiar law that, in a sale of chattels, a warranty of title is implied, unless the circumstances are such as to give rise to a contrary presumption. Shattuck v. Green, 104 Mass. 42. The pos- session and offer to sell a chattel is held equivalent to an affirmation that the seller has title to it. This is founded upon the reason that -men naturally understand that a seller who offers a chattel for sale owns it. The same rule has been extended to the case of a sale of a promis- sory note. The seller impliedly warrants that the previous signa- tures are genuine. Cabot Bank-v. Morton, 4 Gray, 156. Merriam v. Wolcott, 3 Allen, 258. So it has been held that, if one, honestly believing himself to be authorized, acts as agent for another, and procures money or goods upon the credit of his supposed principal, and it turns out that he is not authorized, he is liable for the value of the money or goods. Chief Justice SHaw says: ‘If one falsely represents that he has an author- ity, by which another, relying on the representation, is misled, he is liable; and by acting as agent for another, when he is not, though he thinks he is, he tacitly and impliedly represents himself authorized without knowing the fact to be true, it is in the nature of a false war- ranty, and he is liable.” Jefts v. York, 10 Cush. 392. The chief jus- tice adds: “But in both cases his liability is founded on the ground of deceit, and the remedy is by action of tort.” We do not understand him as intending to say that the only remedy is the technical action of deceit, and that a guilty knowledge must be proved. He used the 904 BOSTON & ALBANY R.R. CO. ¥. RICHARDSON. [CHAP. II. word “‘deceit”’ in the sense of tort. In numerous other cases, the remedy is said to be an action on the case for falsely assuming to be an agent. Bartlett v. Tucker, 104 Mass. 336, and cases cited. And- in the recent case of May v. Western Union Telegraph, 112 Mass. 90, it was held that the proper remedy is not an action of deceit; but “it is an action in the nature of a false warranty against one act- ing as agent, who represents that he has authority when he has not. Whether such representation is made in terms, or tacitly and im- pliedly, he supposing but not knowing the fact to be true, he is liable to the person misled.’’ We can see no good reason why an action of contract upon the implied warranty should not be maintained, in the same manner as it may be upon the implied warranty in the sale of chattels. Randell v. Trimen, 18 C.B. 786. Richardson v. Williamson, L.R. 6 Q.B. 276. Balizen v. Nicolay, 53 N.Y. 467. But it is not necessary to discuss this, because in the case at bar there is both a count in contract and a count in tort in the nature of case, for falsely assuming to act as an agent. Perhaps these considerations are sufficient to dispose of this case; but it seems to us that the result would be the same if Pratt had signed the transfer on the back of the certificate, instead of the power of attorney. The difference between the two modes of effecting a transfer is theoretical rather than practical. There is in either case a similar implied representation or warranty. If one buys stock and takes a transfer, and presents the certificate to the corporation and demands a new one, he thereby impliedly represents that he is entitled to the new certificate. He demands it as his right; this implies that he is the owner and has a right to it. The corporation has the right to understand him as asserting this. It is not bound to question or investigate the genuineness of the transfer, and see if the purchaser has not been defrauded. When the purchaser presents his transfer and certificate, the transfer officer naturally understands that he claims the transfer to be valid, and to have a right to a certificate; he has the right +o act as if this had been said in terms. And if, relying upon such tacit and implied represen- pee the corporation suffers a loss, the purchaser who misled it is iable. See also Clarkson Home v. Missouri Ry. Co., 182 N.Y. 47; Oliver v. Bank of England, [1902] 1 Ch. 610. SECT. 11.] NEW ENGLAND TRUST CO. v. ABBOTT. 905 NEW ENGLAND TRUST CO. ». ABBOTT. 162 Mass. 148. 1894. Morton, J. This is a bill brought by the plaintiff to compel the transfer to it by the defendant, as executor of the will of Josiah G. Abbott, of certain shares in the plaintiff corporation which were held by said Abbott at his decease, and which it is alleged he agreed, when the certificates were #ssued to him, should be appraised at his death by the directors, and transferred to the plaintiff at the appraisal, if the directors so elected. The bill also seeks to enjoin the defendant from prosecuting an action at law brought by him against the plain- tiff to recover certain dividends upon said shares that have been declared by it. The plaintiff was organized in 1869 under a special charter (St. 1869, c. 182), with a capital of five hundred thousand dollars, which was afterwards increased to a million. The terms of the alleged agreement are found in the by-laws, of which all that is now material is as follows: — “ Article 7. Any member of this corporation who shall be desirous of selling any of his shares, the executor or administrator of any member deceased, and the grantee or assignee of any shares sold on execution, shall cause such, their shares respectively, to be appraised by the directors, which it shall be their duty to do on request, and shall thereupon offer the same to them for the use of the corporation at such appraised value; and if said directors shall choose to take such shares for the use of the corporation, such member, executor, administrator, or assignee shall, upon the payment or tender to him ° of such appraised value thereof, and the dividends due thereon, transfer and assign such share or shares to said corporation; pro- vided, however, the said directors shall not be obliged to take such shares at the appraised value aforesaid, unless they shall think it for the interests of the company; and if they shall not, within ten days after such shares are offered to them in writing, take the same, and pay such member, executor, administrator, or assignee therefor the price at which the same shall have been appraised, such member, executor, administrator, or assignee shall be at liberty to sell and dis- pose of the same shares to any person whatever. “Article 8. The directors shall have power, and it shall be their duty, to sell and dispose of the shares which may be transferred as aforesaid to the corporation, whenever, in their judgment, it can be done with safety and advantage to the corporation; and in all sales made by the directors, under any of the aforesaid provisions, it shall be their duty to sell the shares to such persons as shall appear to them, from their situation and character, most likely to promote confidence in the stability of the institution; no greater number than 906 NEW ENGLAND TRUST CO. ¥. ABBOTT. [CHAP. II. one hundred shares being assigned to any one person; nor, in the case of a person already a member, a greater number than will be sufli- cient to increase his previous number to one hundred shares.” These by-laws were adopted before any certificates of stock were issued. Afterwards, but before the capital was increased, Article 7 was duly amended by adding to it the following: “Tt shall be the duty of such executor, administrator, grantee, or assignee to offer said shares for appraisal and to-be taken by the corporation, if it shall so elect, whenever req@ested by the actuary or secretary, and no dividends or interest shall be paid or allowed after a failure to comply with such request; provided that such re- quest shall not be made until after the payment of one dividend and the expiration of six months from the death of the owner or sale as aforesaid; but the offer may be made at any earlier period if the party shall prefer.” Every certificate contained on its face, as part of the certificate, the provision that “‘said shares are transferable only in person, or by attorney duly constituted, on the books of the company, and in the manner and upon the conditions expressed in the by-laws of the company printed upon the back of this certificate.”” On the backs of the certificates were printed By-laws 7 and 8. By-law 7 was printed as amended on the backs of those issued after the increase. There were also on the stubs from which the certificates were detached in the certificate-books two receipts given and signed by the defend- ant’s testator at the time the two certificates were issued to him in the original and increased capital, which were each as follows: “‘ Re- ceived the above certificate subject to the conditions and restrictions ’ therein referred to, and to the by-laws of the company, to which I agree to conform.” The defendant contends that these by-laws are void. We have not found it necessary to consider that question, and we express no opin- ion upon it. We think that the case well may stand on the ground that the defendant’s testator entered into an agreement with the plaintiff to do what the plaintiff now seeks to compel his executor to do. It is manifest that a stockholder may make a contract with a cor- poration to do or not to do certain things in regard to his stock, or to waive certain rights, or to submit to certain restrictions respecting which the stockholders might have no power of compulsion over him. In Adley v. Whitstable Co., 17 Ves. 315, 323, Lord Expon says: “It has been frequently determined, that what may very well be made the subject of contract between the different interests in a partner- ship would not be good as a by-law; for instance, an agreement among the citizens of London, who have as extensive a power of making by-laws as any corporation, that they would not sell, ex- cept in thé markets of London, would be good; yet it has been SECT. II.] NEW ENGLAND TRUST CO. v. ABBOTT. 907 declared by the legislature, that a by-law to that effect is bad.” See also Davis v. Second Universalist Meeting-House, 8 Met. 321; Bank of Aitica v. Manufacturers & Traders’ Bank, 20 N.Y. 501, 505, 506; Cook, Stock & Stockholders, § 408. In the present case the certificates were issued to the defendant’s testator in consideration of the payment by him to the corporation of the amount due for the stock, and of the agreements with it on his part which they contained. By accepting them without objection, and by signing the receipts, he agreed to the conditions printed on the backs of the certificates. The fact that the conditions were con- tained in by-laws which may have been invalid as such, does not render his agreement void, if the contract was in substance one which the corporation had power to make. We think that it had such power. It is held in this State that a corporation unless prohibited may purchase its own stock (Dupee v. Boston Water Power Co., 114 Mass. 37), and we see nothing opposed to public policy in such an agreement as this with corporations like this. If honestly carried out by the directors it tends to secure a trustworthy body of stockholders, from which those having the care and management of the affairs of the corporation naturally would be selected. It certainly cannot be contrary to public policy that the managers of this and similar institutions should be persons of skill, who possess the confidence of the public, and the restraint upon alienation is no greater than is often agreed to. In England it is not unusual to find in the deeds of settlement or articles of association under which corporations or joint-stock com- panies have been organized, and which correspond to the charter and by-laws here, provisions requiring the stockholder, in case he wishes to transfer his stock, to offer it to the directors, or to submit to them the name of the transferee for approval. Bargate v. Shortridge, 5 H.L. Cas. 297; Poole v. Middleton, 29 Beav. 646; Chappell’s case, L.R. 6 Ch. 902; Ex parte Penney, L.R. 8 Ch. 446; Moffat v. Farquhar, 7 Ch.D. 591. No objection seems to have been made to: these provisions. In this State the Legislature in numerous instances has provided in the charters of corporations like this, that the shares shall be transferable according to such rules and regulations as the stock- holders shall establish, and not otherwise. It is hardly possible that the Legislature was ignorant of the construction which has been put upon the power thus conferred, and which in the case of the first corporation of the kind chartered in this Commonwealth, the Massa- chusetts Hospital Life Insurance Company (St. 1818, c. 180), was shown, it is said, by the adoption of by-laws from which those in this case were copied. It is true that this charter contains no provision in regard to by-laws, or to the transfer of shares. But the policy of the Legislature cannot be affected by such an omission, in view of the 908 MCDONALD Uv. DEWEY. [CHAP. II, fact that many of the charters since granted contain this provi- sion. Norz. — A stockholder-may. transfer his stock to whomsoever he __ pleases, a by-law to the contr. rary notwithstanding. McNulta v. Corn Belt Bank, 164 Ill. 427, 447; Bloede Co. v. Bloede, 84 Md. 129; Trust & Savings Co. v. Home Lumber Co., 118 Mo. 447; Miller v. Farmers’ Co., 78 Neb. 441; Ireland v. Globe Milling Co., 21 R.I.9; In re Klaus, 67 Wis. 401. See also Third National Bank v. Buffalo German Ins. Co., 193 U.S. 581. See, contra, Star Telephone Co. v. Longfellow; 85 Kan. 353; Nicholson v. Frankbin Brewing Co., 82 Ohio, 94. There is authority that the stockholder’s right to transfer is un- is un- affected, even if the declared restriction appears on the certificate of _ stock. Finch v. MaCoupin Tel. Co., 146 Ill. App. 158; Herring v. uskin Co.-op. Ass’n, 52 8.W. (Tenn.) 327; Feckheimer v. National Exchange Bank, 79 Va. 80. . But restrictions on the right to transfer may be made by contract. Bee Lindsay's Estate, 210 Pa. 224; Garrett v. Philadetphia-Lawn Mower Co., 39 Pa. Sup. Ct. 78. And it is submitted that, if the stock ~certfcate contains a statement of fhe restriction, this isa suficient asis from which to predicate a contract _to transfer the stock only “r-accordancé with the restriction. For authorities in support of this “ propositiorsee-Sennings-v-Bank of California, 79 Cal. 323; Barrett v. King, 181 Mass. 476; Farmers’ Co. v. Laun, 146 Wis. 252. See also Bank v. Kerdolff, 75 Mo. App. 297; Stafford v. Produce Exchange Co., 61 Ohio St. 160. As a-share of stock is a chose in action tion against the corporation, and as every chosé in action is created by contract, effect may be given to “suck restriction on the short graund that his restriction was inherent in the chose in action as and when created. See Barreti v. King, 181 ass. —Wicholson v. Franklin Brewing Co., 82 Ohio, 94; Farmers’ Co. v. Laun, 146 Wis. 252; Borland v. Steel Brothers & Co., Lid., [1901] 1 Ch. 279. The corporation’s right must be exercised with fairness. Adams-v. Protective Union Co., 210 Mass. 172. McDONALD »v. DEWEY. 202 U.S. 510. 1906. Section 5151 of the National Bank Act provides: “The sharehold- ers of every national banking association shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such association, to the extent of the amount of their stock therein, at the par value thereof, in ad- dition to the amount invested in such shares.” s SECT. 11.] MCDONALD v. DEWEY. ~ 909 The defendant transferred some of his shares in a national bank at a time when the bank was insolvent, and when he knew or ought to have known the fact. The Circuit Court of Appeals held there could be no recovery against the defendant without proof of the additional fact that the several transferees were likewise insolvent. Mr. Justice Brown. That the transfer of stock in corporations, even when in failing circumstances, should not be unduly impeded, is essential not only to the prosperity of such corporations and the value of their stock, but to the interest of stockholders who may desire for legitimate reasons to change their investments or to raise money for debts incurred outside the business of such corporation. Bank v. Lanier, 11 Wall. 369, 377. At the same time the frequency with which’such transfers are made for the purpose of evading the double liability imposed by the National Banking Act, has given rise to a large amount of litigation turning upon their legality. In this con- nection certain propositions have been laid down by so many courts and in so many cases that they may be regarded as fundamental prin- ciples of law applicable to all cases of this character. (1) That a party, who by way of pledge or collateral security for a loan of money, accepts stock of a national bank and puts his name on the registry as owner, incurs an immediate liability as a stockholder, and cannot relieve himself therefrom by making a colorable transfer of his stock to another person for his own benefit, as was done by the sale.to Jewett in this case. National Bank v. Case, 99 U.S. 628; Marcy v. Clark, 17 Mass. 329; Nathan v. Whitlock, 9 Paige, 152; Cook on Stockholders, § 263. (2) The same result follows if the stockholder, knowing, or having good reason to know, the insolvency of the bank, colludes with an ir- responsible person with design to substitute the latter in his place, and thus escape individual lability, and transfers his stock to such person. It is immaterial in such case that he may be able to show a full or partial consideration for the transfer as between himself and the transferee. Bowden v. Johnson, 107 U.S. 251. Upon the other hand, in Whitney v. Butler, 118 U.S. 655, certain stockholders employed an auctioneer to sell their shares at public auction. They were bidden in by a purchaser who paid the auction- eer for them and received from him the certificate of stock with a power of attorney to transfer thé same in blank. The auctioneer paid the money to the original owner of stock, but no formal transfer was made on the books of the bank. Shortly afterwards the bank became insolvent and went into the hands of a receiver, who made an assess- ment upon the original stockholders. We held that the responsibility of the stockholders ceased upon the surrender of the certificate to the bank, and the delivery to its president of a power of attorney to transfer the stock on the books of the bank. The controlling consid- erations were the good faith of the stockholders in making the sale, 910 MCDONALD Uv. DEWEY. [CHAP. II, believing the bank to be solvent, and the fact that they had done all that they could reasonably be expected to do to make a valid sale of the stock and a transfer of the certificate on the stock register. Under the English law a shareholder may transfer his shares to an irresponsible party for a nominal consideration, though the sole pur- pose of the transfer be to escape liability, provided the transfer be out and out, and not merely colorable or collusive, with a secret trust attached. Under such circumstances the person making the transfer is yeleased from liability, both as to corporate creditors and the other shareholders. Cook on Stockholders, § 266; 2 Morawetz on Private Corporations, § 859. ; The law is quite different in this country. At the same time the original stockholder cannot be held liable, unless the bank were prac- tically insolvent at the time the transfer was made, and its condition was known or ought to have been known to the stockholder making the transfer. If the bank were in fact solvent and able to pay its debts as they matured when the transfer was made, the creditors having ample security in the solvency of the bank, have no special interest in knowing who the stockholders are, since their only re- course to them would be in the remote contingency of the insolvency of the bank. The transferrer can only be held liable if the bank be insolvent, and such insolvency be known, or ought to have been known, to him from his relations to the bank, since the transfer is prima facie valid, and shifts to the transferee the burden of the re- sponsibility, which can be laid upon the original stockholder only in case of bad faith, or evidence of a purpose to evade liability. This bad faith may be shown by the fact that the bank was known to him to be insolvent; but notwithstanding this the transfer would be valid if made to a person of known financial responsibility, since the creditors could not suffer by the substitution of one solvent stock- holder in place of another. The Court of Appeals, however, went further and held that the transfer would be valid unless made to an irresponsible person unable to respond to an assessment, whose finan- cial condition was known, or ought to have been known, to him. [After reviewing the authorities.] We think it a proper deduction from the prior cases, and such we hold to be the law, that the gist of the liability is the fraud implied in selling, with notice of the insol- vency of the bank and with intent to evade the double liability im- posed upon the stockholder by the National Banking Act. In short, the question of liability is largely determinable by the presence or absence of an intent to evade liability. The fact that the sale was made to an insolvent buyer is doubtless additional evidence of the original fraudulent intent, but would not be in itself sufficient to con- stitute fraud without notice of the insolvency of the bank. The stockholder is not deprived of his right to sell his stock by the fact that the sale is made to an insolvent person, unless it be made with SECT. 11.] MCDONALD v. DEWEY. 911 knowledge of the insolvency of the bank. This was practically the ruling in Earle v. Carson, in which we held that a bona fide sale would not be void, though the vendee were insolvent, if the fact of such insolvency were at the time unknown to the seller. The case of Earle v. Carson, so far from lending countenance to the argument of the appellees, bears strongly in the opposite direction. The solvency of the vendeé, however, is pertinent in showing that no damage could have resulted to the creditors of the bank by the transfer. Though not a necessary part of the plaintiff’s case, it may be a complete defense, if it be shown that the sale, however fraudu- lent, was made to a vendee who was as able to respond to the double liability as was the vendor. The proposition that the executors are not responsible because the sales were made to solvent vendees, being. defensive in its character, the burden of proof was upon them. In this particular the case is not unlike that of an ordinary action upon a contract, where the plaintiff relies upon the contract and the breach, and sues for such damages as may be reasonably supposed to follow therefrom. But it may be shown in defense that no damages really resulted, as, for instance, in an action for services, that plaintiff might have obtained other employment at the same wages, or, in an action for a failure to deliver goods, that plaintiff might have gone into the market and purchased other goods at the same price at which the de- fendant had agreed to sell them. In such case defendant assumes the burden of proving that no damage in fact resulted. The argument in this case really is that the receiver was bound to show, not only that Dewey was guilty of fraud, but that damages necessarily resulted and that he knew that fact. The reply is that the fraud was consum- mated by the sale of the stock of a bank known to be insolvent, with intent to evade liability, and that the fraud is not less though the transferees happened to be solvent, but that their solvency may be proved to rebut the presumption that injury resulted to the creditors from the transfers. While there is no express finding of the Court of Appeals (though there was in the Circuit Court) that Dewey knew, or should have known, of the insolvency of the bank at the time of the transfer, and that the transfer was made with the intent to evade his double lia- bility as stockholder, the decree of both courts is based upon this assumption; and as stated in the dissenting opinion “that the final suspension of the bank, though it occurred two years and five months after Dewey’s transfer of stock, is traceable, in the line of cause and effect, to the insolvency of the bank at the time of the transfer.” We do not understand these facts to be seriously disputed. Norr. — For a statement of the English law, see In re Discoverers Finance Corporation, Ltd., [1910] 1 Ch. 312. 912 LUTHY v. REAM. [cHaAP. IL. SECTION 3. VOTING TRUSTS. LUTHY v. REAM. 110 N.E. (Il.) 373. 1915. Tue complainants sought the cancellation of the voting trust agree- ment set forth in the opinion. Dunn, J. The Peru Plow & Wheel Company is a corporation or- ganized under the laws of Illinois, having a capital stock of $400,000, engaged in the manufacture of plows, metal wheels, and farm imple- ments. The complainants are the owners of 2,027 of the 4,000 shares of its stock; Thomas Cahill being the owner of 70 shares purchased in November, 1912. In September, 1912, 41 of the stockholders, owning 2,001 shares of the stock, entered into the trust agreement in con- troversy. After reciting that the stockholders deemed it to their in- terest that all of their stock should be voted as a unit upon all ques- tions affecting the business and management of the company, and that Henry Ream had consented to hold and vote such stock on behalf of the stockholders, the agreement provided: — “That for a valuable consideration, the receipt whereof is hereby acknowledged, and in further consideration of the mutual covenants and agreements expressed in this agreement, the stockholders hereby assign, convey, and transfer unto the trustee above named the num- ber of shares of stock of the Peru Plow & Wheel Company, a corpora- tion of the state of Illinois, as set opposite their respective names, to be held in trust by the said trustee for the respective stockholders by whom it is severally assigned, their personal representatives and assigns, upon the following terms and conditions: “(1) The said trustee shall hold, control, and vote said stock as if he was the owner of all of said stock. “*(2) Said trustee shall determine how said stock shall be voted upon any question, at any time and every meeting of the stock- holders. “*(3) All of said stock so held by the trustees shall be voted as a unit. “*(4) At all elections of directors of the Peru Plow & Wheel Com- pany said trustee shall nominate three directors to be voted for at such election, and said trustee shall vote all said stock held by him as a unit for each and all of the directors so nominated by him. “(5) A vacancy in the office of trustee, as herein provided for, shall be filled in the following manner, viz.: In the event of the death, res- SECT. i11.] LUTHY v. REAM. 913 ignation, or removal, for any cause whatever, of said trustee herein, the vacancy in the office of trustee shall be filled by a majority in amount of the then holders of the stock now owned by the following stockholders [here appear the names of the signers of the agreement], parties to this agreement, as appears set opposite their respective names subscribed hereto. ““(6) Said trustee shall prepare, and issue to the stockholders, cer- tificates showing the amount of stock held on behalf of each stock- holder, respectively, and the stock so held may be divided and trans- ferred in like manner as if it had not been assigned in trust, subject to the rights and powers of the trustee under this agreement. But no such assignment or transfer of stock shall be effective for any purpose until surrender of the certificate issued by said trustee and the issue of a new certificate to the purchaser or assignee thereof. ““(7) No fees shall be charged by such trustee herein designated for any services performed in connection with the trust hereby created. (8) Said trustee shall collect and receive all dividends on the stock transferred to and held by him, and shall immediately pay over the same to the holders of trust certificates representing such stock as their respective interests appear. The trustee shall not demand or receive any compensation for receiving and paying over such dividends. ““(9) The rights, duties, and powers hereby conferred upon said trustee shall expire and wholly cease on the Ist day of September, A.D. 1922, and the trustee shall at said time assign and transfer to the persons who then hold trustee’s certificates evidencing their owner- ship of shares-of stock the amount of stock to which each holder thereof is shown by his trustee’s certificate to be entitled. (10) Said trustee hereby accepts the trust hereby created by the above and foregoing instrument, and hereby undertakes to hold, own, and vote said stock as therein provided, and to retransfer the same on the Ist day of September, a.p. 1922, to the holders of trus- tee’s certificates evidencing their right to receive the same. Said trustee further undertakes at all times to vote the said stock by him- self or by proxy, and exercise his powers as trustee in such manner as he shall deem to be for the best interests of the stockholders of the Peru Plow & Wheel Company. Said trustee further undertakes to accept additional assignments of stock from any and all stockholders of the Peru Plow & Wheel Company, and to permit any stockholder thereof to become a subscriber to this agreement. It is expressly understood and agreed that Henry Ream, trustee herein referred to, shall not be liable, either directly or indirectly, to any person, firm, or corporation for any loss or damage whatever occurring on account of the trusteeship, or from any act done by the said trustee in con- nection with the duties and trusts herein imposed upon him.” 914 LUTHY v. REAM. (CHAP. II, The certificates of stock of the stockholders signing the agreement were canceled, and two certificates, for 2,001 shares in the aggregate, were issued to Ream as trustee. He issued to each stockholder a trustee’s certificate stating that the stockholder to whom it was issued was the owner of a certain number of shares of the capital stock of the Peru Plow & Wheel Company held by him as trustee, subject and pursuant to the terms, conditions, and stipulations of a certain agreement between him, as trustee, and certain stockholders of the said Peru Plow & Wheel Company joining in the said agree- ment of date September 4, 1912, a copy of which agreement was on file with the trustee, and reference was had to it as to all the terms, conditions, and requirements of the trust. The certificates were stated to be transferable only on the books of the trustee by the owner thereof in person or by attorney, upon its surrender properly indorsed, when like new certificates would be issued to the proper owner of record. On the back of each certificate was a form for its assignment. Among the stockholders signing the agreement were Kate Cahill, John D. Cahill, and Cornelius J. Cahill, who together owned 70 shares of stock. They sold their shares to the appellant Thomas Cahill, and assigned to him their trust certificate. He presented the certificate so assigned to him to Henry Ream, who was president of the corporation, and demanded that a certificate should be issued to him by the president and secretary of the corporation for 70 shares of its capital stock; but the said Henry Ream refused to issue such certificate, and stated that said 70 shares of stock were included in the trust agreement, and that he could not and would not issue a certificate for them to Thomas Cahill for that reason. Thomas Cahill thereupon notified him that as the owner of 70 shares he with- drew the same from the said trust agreement and would no longer be bound thereby, and demanded that a certificate be issued to him free from any restraint, obligation, or condition under said trust agree- ment; but said Henry Ream refused to issue such certificate. The effect of the agreement was to place the legal title of the ma- jority of the stock in Henry Ream, who was given the power to vote the stock for 10 years upon all questions and at every meeting of the stockholders according to his own discretion, uncontrolled by the stockholders in any way. He then owned 37 shares of stock, and thus the entire control of the corporation was conferred upon the owner of less than 1 per cent. of the stock, with no power in the owners of the remaining 99 per cent. to interfere in any way. We have held that it oleae ior (he exners ot Seon by ot akin eee ine for the purpose of controlling the corporation. Faulds v. ~Yates, 57 Ill. 416, 11 Am? Rep. 24; Venner v. Chicago City Railway Co., 258 Ill. 523, 101 N.E. 949. In this case, however, the agreement goes much farther than any case which has heretofore arisen in this SECT. 11] LUTHY v. REAM. 915 court. The voting power of the stock is absolutely separated from its ownership for a term of years, so that the real owners of the prop- erty are during that time entirely divested of its management and control, or of any participation therein. Our law contemplates that corporations shall be controlled by a majority of the stockholders, acting through directors elected by them in person or by proxy, and it has been held that a by-law of a corporation which authorizes bondholders to vote for directors at stockholders’ meetings is in vio- lation of both the constitutional and statutory provisions requiring directors to be elected by a majority of the shares of stock of the cor- poration. Durkee v. People, 155 Ill. 354, 40 N.E. 626, 46 Am. St. Rep. 340. The power to vote for directors can be exercised only by stockholders in person or by proxy, and they cannot be deprived or “Tarive thonselves of this power Stogkhglders cannot evade the — “duty imposed upon them by taw of using their power as stockholders for the welfare of the corporation and the general interest of its stockholders. A stockholder may refuse to exercise his right to vote -and participate in stockholders’ meetings, but he cannot deprive himself of the power to do so. [The court quoted from the Shepaug Voting Trust Cases, 60 Conn. 579.] G A stockholder may ordinarily withdraw from a combination to control the majority of the stock of a corporation, and a contract not to transfer his shares to the opposition or vote against the combina- tion, although it is expressly agreed that the contract shall be irre- vocable. 1 Beach on Corporations, § 305. In § 306 of the same work it is said: ‘‘On general principles, the right to vote on stock cannot be separated from the ownership in such sense that the elective franchise shall be in one man and the entire beneficial interest in another, nor to any extent unless the circumstances take the case out of the general rule. It matters not that the end is beneficial and the motive good, because it is not always possible to ascertain objects and motives, and if such a severance were permissible it might be abused.”’ While the pooling of stock for the purpose of electing directors and officers and controlling the management and business of the corpora- tion is not necessarily illegal, an agreement the purpose and effect of which are to permit the affairs of the corporation to be managed by the determination of persons other than its stockholders or by a minority of its own stockholders is invalid. Shepaug Voting Trust Cases, supra; Kreissl v. Distilling Co. of America, 61 N.J. Hq. 5, 47 Atl. 471; White v. Thomas Inflatable Tire Co., 52 N.J. Eq. 178, 28 Atl. 75; Warren v. Pim, 66 N.J. Eq. 353, 59 Atl. 773; Bache v. Cen- tral Leather Co., 78 N.J. Eq. 484, 81 Atl. 571; Morel v. Hoge, 130 Ga. 625, 61 S.E. 487, 16 L.R.A. (N.S.) 1136, 14 Ann. Cas. 935; Harvey v. Linville Improvement Co., 118 N.C. 693, 24 8.E. 489, 32 L.R.A. 265, 54 Am. St. Rep. 749; Bridgers v. First Nat. Bank of Tarboro, 152 N.C. 916 LUTHY ¥. REAM. [CHAP. II. 293, 67 S.E. 770, 31 L.R.A. (N.8.) 1199. The principle to be deduced from these cases is that the holders of the majority of the shares of stock in a corporation may control its management, and every person who becomes an owner of stock has a right to believe that the cor- poration will, and to insist that it shall, be managed by the majority; that the power to vote is inherently attached to and inseparable from the real ownership of each share, and can only be delegated by proxy, with power of revocation; that each stockholder must be free to cast his vote, whether by himself or by proxy, for the best interest of the corporation; and that each stockholder has the right to demand that every other stockholder, if he desires to do so, shall have the right to exercise at each annual meeting his own judgment as to the best interest of all the stockholders, untrammeled by dictation, and un- fettered by the obligation of any contract. We held in Venner v. Chicago City Railway Co., supra, that the election of directors under the provisions of the trust agreement there involved, in the manner therein provided, was really an election by the stockholders through their proxies, and so was not in violation of any constitutional or statutory provisions. There is no such thing as an irrevocable proxy to vote stock not coupled with any interest in the stock itself other than the right to vote it. A proxy, though stated to be irrevocable, may be revoked at any time. 1 Cook on Corporations, § 610. This contract gave to Henry Ream alone the power for ten years to elect three of the five directors of the corpora- tion and to formulate and determine its policy, unrestrained and un- influenced by all the other stockholders or any of them. The surren- der of their duties by the stockholders is complete, and the majority have no power to direct the trustee; for he alone is to determine how the stock shall be voted, and to vote it, upon any question, at any time and every meeting of the stockholders. He no longer represents the majority of the stock, for 70 shares have been sold to the com- plainant Cahill, who has the entire beneficial interest therein. Other shares may be sold, so that before the expiration of the trust the trustee, who originally represented a majority of the stock, but now represents only a minority, may represent only his own 37 shares, and yet, if the trust agreement is to be enforced, have absolute manage- ment and control of the corporation. In Smith v. San Francisco & North Pacific Railroad Co., 115 Cal. 584, 47 Pac. 582, 35 L.R.A. 309, 56 Am. St. Rep. 119, it was ‘held that an agreement by several purchasers of stock in a corporation to vote it as a unit for five years, in accordance with the decision of the ma- jority, is binding upon the parties and irrevocable. In Carnegie Trust Co. v. Security Life Ins.-Co. of America, 111 Va. 1, 68 S.E. 412, 31 L.R.A. (N.S.) 1186, 21 Ann. Cas. 1287, the Supreme Court of Vir- ginia held that an agreement among stockholders to place their stock in the hands of trustees for 25 years, to enable the trustees to manage SECT. III] MOBILE & OHIO R.R. CO. v. NICHOLAS. 917 the corporation, constitute a valid trust. These cases are inconsistent with the views which we have expressed and the cases cited in sup- port of them, but.in our judgment the latter cases state the true rule. Although Thomas Cahill purchased his stock with notice of the agreement, that agreement was not binding upon him or his vendors if he or they wished to withdraw from it, and upon his demand for a certificate of stock he was entitled to receive it. MOBILE & OHIO R.R. CO. v. NICHOLAS. 98 Ala. 92. 1893. Bm in equity by stockholder in Mobile & Ohio R.R. Co. against the railroad company, the Farmers’ Loan & Trust Co., e¢ al. In 1876, the railroad company was in the hands of a receiver; de- crees of foreclosure had been rendered in suits on mortgages; and its total indebtedness largely exceeded the value of the entire railroad property. An arrangement was made between the creditors and the company whereby the creditors accepted debentures in lieu of their original evidences of debt; and the great majority of the stockholders, in effect, conferred upon a trustee irrevocable power to vote upon the shares so long as any of the debentures should be outstanding. The shareholders assigned their stock to the committee of reorganization; the committee gave the Farmers’ Loan & Trust Company an irre- vocable power of attorney to vote upon the stock so long as any of the debentures should be outstanding. The shareholders who had thus assigned their stock to the committee received in exchange new certificates entitling them to all the rights and privileges which per- tain to the ownership of the said shares, saving and excepting that such ownership is subject to the power heretofore granted by the owners of said shares to the Farmers’ Loan & Trust Company, in trust for the security of the debentures, to vote upon said shares. Under the foregoing adjustment, all the creditors, except those secured by newly issued first mortgage bonds, accepted the deben- tures provided for, in lieu of their former evidence of debt; the fore- closure decrees were assigned to the Farmers’ Trust Company; the receiver, under the orders of the court, turned the property over to the railroad company; and the corporation resumed its control and management of its property and business. In 1892, the plaintiffs denied the authority of the Trust Company, under the power of attorney held by it to vote their stock, and claimed for themselves the right to vote their own stock. The right of plaintiffs to vote at the stockholders’ meeting was denied. There- upon plaintiffs filed the present bill; praying, among other things, that the Farmers’ Loan & Trust Company be enjoined from voting 918 MOBILE & OHIO R.R. CO. ¥. NICHOLAS. (CHAP. 11. on the stock under the power of attorney; and that the railroad com- pany be enjoined from refusing to accept the votes of plaintiffs and of other stockholders. . A preliminary injunction was granted. The defendants moved to dismiss the bill for want of equity, and to dissolve the injunction. The Chancellor overruled the motions. From his decrees an appeal was taken. . Cotreman, J. The facts stated in the bill show, that by the reor- ganization and compromise of 1876, perfected in 1879, the voting power was severed from the stockholder, and until the payment of the debentures, irrevocably vested in the Farmers’ Trust Company and the debenture holders. It is contended for complainants that the agreement was, and “‘is void per se,” because Ist: ‘It contravenes the language of the charter of tne railroad company; and 2d, because it is against public policy.” The charter expressly provides, ‘‘Each share shall entitle the holder thereof to one vote, which vote may be given by said stock- holder in person, or by lawful proxy.” So far, then, as the right to vote by proxy is questioned, the charter expressly grants the power, and the legislature has thus declared that it is not unlawful, per se, to separate the voting power from the stock- ‘holder, so far as the appointment of a proxy may be considered a sev- erance of the voting power. Where.a proxy is duly constituted, and the power of the appointment is without limitation, a vote cast by the proxy binds the stockholder, whether exercised in behalf of his interest or not, to the same extent as if the vote had been cast by the stockholder in person. We do not hold that a power of attorney, absolute in its terms, will authorize the agent or proxy, to effect con- tracts, or legalize acts, outside of the scope of his authority, or con- trary to law or public policy, neither could the stockholder in person by his vote effectuate such a result. The invalidity of acts of this character by a proxy, rightly understood, is not made to rest upon the ground that there has been a separation of the voting power from the stockholders, but because of the unlawful purpose for which the proxy was appointed, or the unlawful end, attempted to be effected by the exercise of the voting power. The distinction should be kept in view.... Take the case of Hafer v. New York, Lake Erie & Western R.R. Co., 14 Weekly Law Bulletin, p. 68. The case is thus stated: “A control- ling interest in the stock of the Cincinnati, Hamilton, and Dayton Railroad Company was bought up in 1882, and placed in the name of H. I. Jewett, who was Vice-President of the New York, Lake Erie, and Western Railway Company, under the agreement that he should give irrevocable proxy to such persons as the Erie should appoint to vote on the stock; that his stock certificates should be left in the hands of trustees, and that they should issue to the respective owners SECT. 111.] MOBILE & OHIO R.R. CO. ¥. NICHOLAS. 919 of the stock trust, or pool certificates for amounts equal to their respective equitable interest. On all stock thus pooled, the Erie agreed to guarantee a certain dividend.” The court declared the contract void “both on the ground that the . power is denied to one corporatian thus to acquire control of another, and that the stockholder can not barter away the right to vote upon his stock.”’ True the opinion declares as an independent proposition, “that the stockholder can not barter away the right to vote upon his stock,” and yet it is shown, by the facts of the case and the opinion, that the purpose to be effected by the barter of the right to vote, to wit, the placing “of an Ohio corporation into the hands of a New York corporation,” the enabling “‘one corporation to acquire control over another”’ was illegal. Speaking of the facts of the case the opin- ion proceeds as follows: “It is obvious that the rule as to executed contracts can not be applied to the plaintiff for any such reason as that last mentioned, for he was not a party to the contract. There are other cases wherein special circumstances made it imperative, as a matter of good faith, that the contract should not be interfered with, and others, when the protection of interests acquired by innocent parties caused the court to refrain.” There is no rule of law which requires contracts to be upheld which are void as against public policy, in order to preserve “good faith” or “innocent parties.” The rule of estoppel is often applied to prevent undue advantage by one person over another, but the rule does not extend to contracts which are void because contravening public policy. Considering the opin- ion as an entirety, we do not regard it as authority to the proposition, that an agreement which provides for a separation of the right to vote from the holder of the stock is “per se,” at all times and under all circumstances contrary to public policy and void. We have ex- amined case after case and find generally that the agreements de- clared void by the courts, where the power to vote was separated from the stockholder and vested in third persons, were under circum- stances which showed that the purpose to be accomplished was un- lawful, such as the courts would not sanction if the principal had voted and not a proxy; and in cases of a mere dry trust, it is held that the stockholder might revoke a power of attorney in form irrevocable. The doctrine as to dry trust does not arise in this case. . . . If there were no precedents, upon principle, we would hold that in determin- ing the validity of an agreement, which provides for the vesting of the voting power in a person other than the stockholder, regard should be had to the condition of the parties, the purpose to be ac- complished, the consideration of the undertaking, interests which have been surrendered, rights acquired, and the consequences to re- sult. The law does not make contracts for parties, neither will it annul them except to preserve its own majesty, and to conserve the greater interest of the public. Let us examine the conditions of the 920 MOBILE & OHIO R.R. CO. Uv. NICHOLAS. [CHAP. IL parties, the purpose in view and effect of the agreement of 1876, consummated in 1879, the consideration and interest surrendered and rights acquired by the readjustment, and issue of the debentures, the position of the complainants thereto, and the results of holding that reorganization, per se, void. - The complainants belong to the class known as “ Assenting Stock- holders.” They surrendered their stock to the committee of reor- ganization in order that the power of attorney, executed to the trust company by the committee of reorganization, might be executed, and that the debentures should be issued to the creditors of the railroad corporation. The certificates of stock held by them show, upon their face, that they are subject to the power of attorney and to the rights of the debenture-holders. At the time the plan of adjustment was agreed upon the railroad company was in the hands of a receiver. Decrees of foreclosure rendered against the company. The indebted- ness far exceeded the value of the railroad company’s property. The execution of the decrees of foreclosure, by a sale of the property, and the prosecutions of the admitted claims against the railroad com- pany, would necessarily have transferred the property to other parties and wiped out every vestige of present available interest or right of the stockholder, or hope of future profit. The creditors held the van- tage ground, and in law their rights and interest were paramount to the stockholders. The latter might accept propositions but were in no position to dictate terms. These were the circumstances under which the settlement and agreement was made. Stated in short, the com- promise and settlement led to the issue of the debentures to the cred- itors in lieu of their original evidences of debt, arid a mortgage upon certain property to secure them, a plan for a sinking fund for their benefit, and the right and privilege under an irrevocable power of attorney to vote the stock until the debentures were paid. The power of attorney was not in perpetuity, or absolute, but only until the debentures were paid, and a fair construction under the circum- stances required that the voting power should be used fairly and honestly to this end, or as stated in the agreement itself, “for the uses and purposes declared in said memorandum, and until the same are fully accomplished.” In consideration therefor the decrees of foreclosure, at first suspended, were transferred to the trust com- pany, creditors surrendered their claims and accepted in lieu thereof the debentures, the receiver under the orders of the court restored the property to the Mobile & Ohio Railroad Company, which resumed management and control of its property and affairs, and the stock preserved to the stockholder. To this agreement over forty-five thousand out of a total of about fifty-three thousand of shares of stock assented, and among those which assented were complainants. The creditors had the right to accept debentures for their debts. The agreement continued in ex- SECT. I11.] BRIGHTMAN 2. BATES. 921 istence the corporation and preserved to the stockholders their stock. It did not violate the charter of the railroad corporation. The pur- pose was legal, the means used did not contravene any statute of the State or principle of public policy, and was within the scope of the power of the contracting parties. Good faith on the part of the as- senting stockholders, whose interests were thus preserved, and to those who accepted the debentures in lieu of other evidences of debt and securities, and to those who have since purchased them upon the faith of the plan of compromise demand that the terms of the con- tract be fulfilled. BRIGHTMAN ov. BATES. 175 Mass. 105. 1900. Homes, C.J. These are actions upon a covenant executed by the defendants. The covenant recites that 1,360 shares of the stock of the Union Street Railway Company in New Bedford have been or are about to be purchased by a syndicate, under an agreement of Sep- tember 4, 1894, that the plaintiff has been largely instrumental in organizing the syndicate, and that “he considers that for his services therein in case the syndicate is formed, and the aforesaid shares pur- chased, he should receive for his compensation” a certain amount of stock. These recitals are followed by several covenants on the part of the defendants and one other to give the plaintiff, in stock of the company at $169 a share, a commission of $4 a share “upon the number of shares of said stock we sell to said syndicate, less the num- ber of shares we have severally subscribed as members of said syndi- cate,” and certain other deductions, in case the compensation was not got from the syndicate. The judge before whom the case was tried found for the plaintiff, and the case is here upon a report of requests for rulings which in various forms raise the question whether such a finding can be justified in law. . The syndicate referred to was formed under another written agrec- ment, whereby the subscribers recite their desire to become members of it to the end that control of the railway company and advantage to them may be gained, agree to take the shares set against their names at $169 a share, and further agree after the purchase to enter into a pooling contract whereby all the syndicate stock “shall be voted at each annual meeting for a period of not less than three years, for such board of directors as shall be named” by a committee of five of the subscribers, with power to a majority of them to fill any va- cancy in the committee. It is said that this agreement was illegal, and that the covenant sued upon was so directly aimed at helping to ring the unlawful arrangement about that it must fall with the 922 BRIGHTMAN JU. BATES. [cHAP. IL. other. Barnes v. Smith, 159 Mass. 344, 347; Gibbs v. Consolidated Gas Co., 180 U.S. 396. Without deciding whether, if the covenant was dependent upon the rendering of further services, it was so closely connected with the syndicate agreement as to fall if the latter cannot be sustained, we pass to the question whether the latter agreement is unlawful on its face, bearing in mind that unless it is unlawful on its face it has the advantage of a finding in favor of the plaintiff. In dealing with this question it does not need to be said that combination of common in- terests is necessary, and constantly is taking place. It is as legitimate for a majority of stockholders to combine as for other people. The fact that they expect “gain and advantage” — in the words of the syndicate agreement — to accrue to them, does not make the combi- nation unlawful. That expectation and intent would have that effect only if the gain was to be at the expense of the corporation, or in some way was intended to work a wrong to the other stockholders. No such intent appears, and although it is impossible not to view such an arrangement with suspicion, it is also impossible to let suspi- cion take the place of proof. The only serious ground of objection is the agreement that the stock “shall be ‘voted at each annual meeting”’ for three years, for a board of directors named by the committee. It is suggested that this was an unlawful attempt by the contracting parties to deprive them- selves in advance of their deliberative power and duty as stockhold- ers, and to submit themselves to the dictation of five men who in the future might not be even members of the corporation. Perhaps. the notion upon which these suggestions are founded has been pressed somewhat further than would be warranted by more far-seeing views, but we have no occasion to discuss it in this broad form. The ques- tion before us is not whether it would be possible to carry out the contract in a way which would have made the contract bad if speci- fied in it, but whether it was impossible to carry out the contract in a way which might lawfully have been specified in advance. We put the question in this form because there is no doubt that the sub- scribers might actually have done the things stipulated without giv- ing any one aright to complain. That is to say, they might have held their stock and voted by previous understanding according to the advice of the committee, as long as they chose. The question is what they might contract to do; for this is supposed to be a case where a contract to do lawful acts is unlawful. The syndicate agreement does not specify how it is to be carried out. It contemplates.the making of another contract. As the later contract is to be a pooling contract, it was possible, if not probable, that one element of the arrangement would be that the title to the stock should be given to a trustee, and this happened in fact. During the three years the stock seems to have been held by a bank. The SECT. 111.] BRIGHTMAN UV. BATES. 923 stock was transferred to it, and was not transferred to the members of the syndicate. But it would have been possible, consistently with the terms of the syndicate agreement, that the committee who were to name the board of directors themselves should be the trustees. In that case the trustees, of course, would have voted on the stock. They, not their cestuis que trust, would have been the stockholders for the time being. We know nothing in the policy of our law to prevent a majority of stockholders from transferring their stock to a trustee with unrestricted power to vote upon it. Brown v. Pacific Mail Steamship Co., 5 Blatchf. 525, 527. See Greene v. Nash, 85 Maine, 148. Supposing that the committee had been trustees, what would the syndicate agreement have amounted to then? Merely an agreement by each of the trustees to vote as they should jointly agree to vote, and an agreement by the subscribers not to demand back their shares for three years. The latter term certainly is not illegal, whether valid or not. A stockholder has a right to put his shares in trust, whatever his motive. If the trust is an active one he cannot termi- nate it at will, and the attempt to cut himself off by contract, instead of by the imposition of duties, from ending it, certainly is not enough to poison the covenant with the plaintiff. See Walliams v. Mont- gomery, 148 N.Y. 519, 525. It might be held that the duty of voting incident to the legal title made such a trust an active one in all cases. As to the arrangement for the trustees uniting to elect their candi- dates, the decisions of other States show that such arrangements have been upheld, and we do not think that it needs argument to prove that they are lawful. If stockholders want to make their power felt, they must unite. There is no reason why a majority should not agree to keep together. Faulds v. Yates, 57 Ill. 416; Smith v. San Francisco & North Pacific Railway, 115 Cal. 584; Havemeyer v. Have- meyer, 11 Jones and Spen. 506, 512, 513, affirmed, according to Beach, Corporations, § 304, n. 6, and Fisher v. Bush, 35 Hun, 641, in 86 N.Y. 618. See Brown v. Pacific Mail Steamship Co., 5 Blatchf. 525, 527. We have considered such decisions elsewhere as have been called to our attention or found by us. Few of them are by courts of final resort. Nothing that we have found in them satisfies us that the judge below was not warranted in finding for the plaintiff. Judgment for the plaintiff. Nore. — See also Smith v. San Francisco Ry. Co., 115 Cal. 584; Greene v. Nash, 85 Me. 148; Bowditch v. Jackson Co., 76 N.H. 351; Boyer v. Nesbitt, 227 Pa. 398 (cf. Commonwealth v. Roydhouse, 233 Pa. 234); Thompson-Starrett Co. v. Ellis Granite Co., 86 Vt. 282; Carnegie Trust Co. v. Security Insurance Co., 111 Va. 1; Winsor v. Commonwealth Coal Co., 63 Wash. 62. 924. BRIGHTMAN Jv. BATES. [cHAP. 11, New York Consolidated Laws, 1909, chapter 28, section 25 (p. 1327), authorizes voting trusts on the terms there stated, one of which is that “every other stockholder, upon his request therefor, may, by a like agreement in writing, also transfer his stock to the same person or persons and thereupon may participate in the terms, conditions and privileges of such agreement.”’ CHAP. 111.] SAWYER v. HOAG. 925 CHAPTER III. CREDITORS.! , SAWYER v. HOAG. 17 Wall. (U.S.) 610. 1873. Apprat from the U.S. Circuit Court for the Northern District of Illinois. Bill in equity by Sawyer against Hoag, assignee of the Lumber- man’s Insurance Company of Chicago, to enforce an alleged right of set-off. In 1865 the company was incorporated and authorized to begin business on a capital of $100,000, of which not less than one- tenth should be paid in, the residue to be secured. The directors stated to most of those invited to subscribe that only 15 per cent would be required to be paid down in cash, and that the remaining 85 per cent would be lent back to the subscriber, and a note taken there- for payable in five years, with seven per cent interest, secured by col- lateral. In 1865 Sawyer, upon the above understanding, subscribed for fifty shares of the par value of $100 each. He gave his check to the company for $5000, and his note payable to it in five years for $4250 (85 per cent of the par value of the stock) with interest; delivered to the company satisfactory collateral security; and received from the company a check for $4250, by way of, and as for a joan thereof, from the company. He also gave the company authority to sell the securities in case of default in payment of the note or the interest thereon. Subsequently Sawyer took up the above note, and gave in substi- tution another note. The original transaction was treated by the company and by Sawyer as a loan by the company to him, and his stock was treated as fully paid for. At various times after the giving of the note, the com- pany reported to the authorities of the State of Illinois and of other States that its capital stock was fully paid. In October, 1871, the company was rendered insolvent by the great fire in Chicago. In January, 1872, Sawyer, having then good reason to believe that the company was insolvent, purchased of one Hayes, for 33 per cent 1 See also the Chapter on Issues of Stock at a Discount or for Overvalued Property, supra, and the Chapter on the Rights of Creditors as affected by Reorganizations, infra. 926 SAWYER 0. HOAG. [CHAP. III. of its par value, a certificate of an adjusted loss for $5000 against the company. ; In June, 1872, a petition in bankruptcy was filed against the com- pany; and, it having been adjudicated a bankrupt, Hoag was ap- pointed its assignee. Hoag demanded of Sawyer payment of the note for $4250. Sawyer insisted that, under Section 20 of the Bankrupt Act, he had a right to set off the certificate of adjusted loss for $5000. Hoag refused to allow the set-off, and was about to sell the collateral securities in ac- cordance with the authority given by Sawyer to the company. There- upon Sawyer filed the present bill to enforce the set-off; alleging, among other things, that the note given by him to the company was for money lent to him. The assignee, in his answer, denied that the note was for money lent, and averred that it was in fact for a balance due by Sawyer for his stock subscription which had never been paid. The case was submitted to the court below on an agreed statement of facts. That court decreed against the complainant, Sawyer, who appealed to this court. Miter, J. The first and most important question to be decided in this case is whether the indebtedness of the appellant to the insurance company is to be treated, for the purposes of this suit, as really based on a loan of money by the company to him, or as representing his unpaid stock subscription. The charter under which the company was organized authorized it to commence business upon a capital stock of $100,000, with ten thousand paid in, and the remainder secured by notes with mortgages on real estate or otherwise. The transaction by which the appellant professes to have paid up his stock subscription is, shortly, this: He gave to the company his check for the full amount of his subscrip- tion, namely, $5000. He took the check of the company for $4250, being the amount of his subscription less the 15 per cent required of each stockholder to be paid in cash, and he gave his note for the amount of the latter check, with good collateral security for its pay- ment, with interest at 7 per cent per annum. The appellant and the company, by its officers, agreed to call this latter transaction a loan, and the check of the appellant payment in full of his stock; and on the books of the company, and in all other respects as between them- selves, it was treated as payment of the subscription and a loan of money. It is agreed that at this time the current rate of interest in Chicago was greater than 7 per cent, and it is not stated as a fact whether these checks were ever presented and paid at any bank, or that any money was actually paid or received by either party in the transaction. It must, therefore, be treated as an agreement between the corporation, by its officers, on the one part, and the appellant, as a subscriber to the stock of the company, on the other part, to con- vert the debt which the latter owed to the company for his stock into CHAP. -I11.] SAWYER v. HOAG. 927 oo for the loan of money, thereby extinguishing the stock ebt. Undoubtedly this transaction, if nothing unfair was intended, was one which the parties could do effectually as far as they alone were concerned. Two private persons could thus chan ge the nature of the indebtedness of one to the other if it was found to be mutually con- venient to do so. And in any controversy which might or could grow out of the matter between the insurance company and the appellant we are not prepared to say that the company, as a corporate body, could deny that the stock was paid in full. And on this consideration one of the main arguments on which the appellant seeks to reverse the decree stands. He assumes that the assignee in bankruptcy is the representative alone of the corporation, and can assert no right which it could not have asserted. The weak- ness of the argument is in this assumption. The assignee is the repre- sentative of the creditors as well as the bankrupt. He is appointed by the creditors. The statute is full of authority to him to sue for and recover property, rights, and credits, where the bankrupt could not have sustained the action, and to set aside as void transactions by which the bankrupt himself would be bound. All this, of course, is in the interest of the creditors of the bankrupt. Had the creditors of this insolvent corporation any right to look into and assail the transaction by which the appellant claims to have paid his stock subscription? Though it be a doctrine of modern date, we think it now well estab- lished that the capital stock of a corporation, especially its unpaid subscriptions, is a trust fund for the benefit of the general creditors of the corporation. And when we consider the rapid development of corporations as instrumentalities of the commercial and business world in the last few years, with the corresponding necessity of adapting legal principles to the new and varying exigencies of this business, it is no solid objection to such a principle that it is modern, for the occasion for it could not sooner have arisen. The principle is fully asserted in two recent cases in this court, namely, Burke v. Smith, 16 Wall. 390, and in New Albany v. Burke, 11 Wall. 96. Both these cases turned upon the doctrine, we have stated, and upon the necessary inference from that doctrine that the governing officers of a corporation cannot, by agreement or other transaction with the stockholder, release the latter from his obliga- tion to pay, to the prejudice of its creditors, except by fair and honest dealing and for a valuable consideration. In the latter case, a judgment creditor of an insolvent railroad com- pany, having exhausted his remedy at law, sought to enforce this principle by a bill in chancery against the stockholders. The court, by affirming the right of the corporation to deal with the debt due it for stock as with any other debt, would have ended the case without 928 SAWYER v. HOAG. [cHaP. 111. further inquiry. But asserting, on the contrary, to its full extent, that such stock debts were trust funds in their hands for the benefit of the corporate creditors, and must in all cases be dealt with as trust funds are dealt with, it was found necessary to go into an elaborate inquiry to ascertain whether a violation of the trust had been committed. And though the court find that the transaction by which the stock- holders had been released was a fair and valid one, as founded on the conditions of the original subscription, the assertion of the general rule on the subjeet is none the less authoritative and emphatic. In the case before us the assignee of the bankrupt, in the interest of the creditors, has a right to inquire into this conventional payment of his stock by one of the shareholders of the company; and on that inquiry, we are of opinion that, as to these creditors, there was no valid payment of his stock by the appellant. We do not base this upon the ground that no money actually passed between the parties. It would have been just the same if, agreeing beforehand to turn the stock debt into a loan, the appellant had brought the money with him, paid it, taken a receipt for it, and carried it away with him. This would be precisely the equivalent of the exchange of checks be- tween the parties. It is the intent and purpose of the transaction which forbids it to be treated as valid payment. It is the change of the character of the debt from one of a stock subscription unpaid to that of a loan of money. The debt ceases by this operation, if effect- ual, to be the trust fund to which creditors can look, and becomes. ordinary assets, with which the directors may deal as they choose. And this was precisely what was designed by the parties. It di- vested the claim against the stockholder of its character of a trust’ fund, and enabled both him and the directors to deal with it freed from that charge. There are three or four of these cases now before us in which precisely the same thing was done by other insurance com- panies organized in Chicago, and we have no doubt it was done by this company in regard to all their stockholders. It was, therefore, a regular system of operations to the injury of the creditor, beneficial alone to the stockholder and the corporation. We do not believe we characterize it too strongly when we say that it was a fraud upon the public who were expected to deal with them. The result of it was that the capital stock of the company was neither paid up in actual money, nor did it exist in the form of de- ferred instalments properly secured. It is said by the appellant’s counsel that conceding this, it is still a debt due by him to the corporation at the time that he became the owner of the debt due by the corporation to Hayes, and, therefore, the proper subject of set-off under the twentieth section of the Bank- rupt Act. That section is as follows: “In all cases of mutual debts or mutual credits between the parties, the account between them shall be stated, and one debt set off against the other, and the balance only | CHAP. 111.] SAWYER v. HOAG. 929 shall be allowed or paid, but no set-off shall be allowed of a claim in its nature not provable against the estate: Provided, that no set-off shall be allowed in favor of any debtor to the bankrupt of a claim eee by or transferred to him after the filing of the peti- ion. This section was not intended to enlarge the doctrine of set-off, or to enable a party to make a set-off in cases where the principles of legal or equitable set-off did not previously authorize it. The debts must be mutual; must be in the same right. The case before us is not of that character. The debt which the appellant owed for his stock was a trust fund devoted to the payment of all the creditors of the company. As soon as the company became insolvent, and this fact became known to the appellant, the right of set-off for an ordinary debt to its full amount ceased. It became a fund belonging equally in equity to all the creditors, and could not be appropriated by the debtor to the exclusive payment of his own claim. It is unnecessary to go into the inquiry whether this claim was acquired before the commission of an act of bankruptcy by the com- pany, or the effect of the bankruptcy proceeding. The result would be the same if the corporation was in the process of liquidation in the hands of a trustee or under other legal proceedings. It would still remain true that the unpaid stock was a trust fund for all the cred- itors, which could not be applied exclusively to the payment of one claim, though held by the stockholder who owed that amount on his subscription. Nor do we think the relation of the appellant in this case to the cor- poration is without weight in the solution of the question before us. It is very true, that by the power of the legislature there is created in all acts of incorporation a legal entity which can contract with its shareholders in the ordinary transactions of business as with other persons. It can buy of them, sell to them, make loans to them, and in insurance companies, make contracts of insurance with them, in all of which both parties are bound by the ordinary laws of contract. The stockholder is also relieved from personal liability for the debts of the company. But after all, this artificial body is but the representative of its stockholders, and exists mainly for their benefit, and is gov- erned and controlled by them through the officers whom they elect. And the interest and power of legal control of each shareholder is in exact proportion to the amount of his stock. It is, therefore, but just that when the interest of the public, or of strangers dealing with this corporation is to be affected by any transaction between the stock- holders who own the corporation and the corporation itself, such transaction should be subject to a rigid scrutiny, and if found to be infected with anything unfair towards such third person, calculated to injure him, or designed intentionally and inequitably to screen the 930 OAKES v. TURQUAND. [cHap. x11, stockholder from loss at the expense of the general creditor, it should be disregarded or annulled so far as it may equitably affect him. These principles require the affirmation of the decree in the present case, and it is accordingly Affirmed. Mr. Justice Hunr dissented, holding that the transaction was a loan by the company to the appellant. OAKES v. TURQUAND. L.R. 2 H.L. 325. 1867. OvEREND, GuRNEY & Co., Limirep, a company formed under the Companies Act of 1862, became financially involved and was wound up. Oakes moved that his name be stricken from the list of contribu- tories, on the ground that he had been induced to become a member of the company by the fraudulent representations of its directors. The motion was denied. Lorp Cranwortu. My Lords, the appellant, Mr. Oakes, in order to sustain his appeal, must make out two propositions. He must satisfy the House, first, that he was induced to take his shares in Overend, Gurney & Co., Limited, by the fraud of the company, or of those for whom the company became responsible; and, secondly, if that is made out, that he ought not to be retained on the list of con- tributories. The first question is one of fact, and its determination, however important to the parties concerned, is of no general interest. The other question is of very extensive consequence in the mercantile world. It is of the utmost importance that persons dealing with joint- stock companies should be in no doubt as to who are the persons to whom they are entitled to look as liable to perform the obligations and pay the debts of the partnership. I shall proceed at once to consider this second question — to deter- mine what are the relative rights of Mr. Oakes and the creditors, and for this purpose shall assume it to be true that he was induced to take shares by the fraud of the company, or of those for whom the company became responsible. There is no doubt that the direct rem- edy of a creditor is solely against the incorporated company. He has no dealing with any individual shareholder, and if he is driven to bring an action to enforce any right he may have acquired, he must sue the company, and not any of the members of whom it is com- posed. This being so, the argument of the appellant is, that it is only to the assets of the company that the creditor can resort, and so that the only question is, of what those assets consist. This question, he contends, so far as the assets consist of money to be recovered by legal process against other persons, whether shareholders or not, can only be solved by ascertaining what rights the company has against CHAP. 111.] OAKES ¥. TURQUAND. 931 those other persons. If in any proceeding by the company instituted for the purpose of recovering money from any person, that person has a valid defence, whether legal or equitable, the appellant contends that the sum claimed from him does not form part of the assets of the company. These assets, he says, consist solely of property in the actual possession of the company, or which the company can recover by means of legal proceedings. In this case the appellant contends that he was induced to become a shareholder by means of a fraud which entitles him to repudiate the status of shareholder, and to say, as between himself and the company, that he never held a share. And if he can say this against the company, then the appellant con- tends he can say it against all the world, for his liability is a liability to the company and to no one else. “ .. . Section 74 [of the Companies Act] defines contributories to be all persons liable to contribute to the assets in the event of the com- pany being wound up; and section 38 declares that on that event every present and past member shall be liable to contribute subject to certain qualifications. In order to ascertain who are designated by the word ‘‘members” in section 38, we must refer to section 23, which states that every person who has agreed to become a member, and whose name is entered on the register, shall be deemed to be a mem- ber of the company. The name of Mr. Oakes was certainly entered on the register; if, therefore, he agreed to become a member within the meaning of this 23d section, he is a contributory. The argument is, that he did not so agree, because all which he did, he did under the influence of fraud and misrepresentation. But assuming all that to be, and I believe it was, just as Mr. Oakes represents it, still he did agree to become a member — that is, he in fact agreed. He may have full rights‘against those who deceived him, but with that the outer world can have no concern. Appeal dismissed. Norts. — Although a stockholder was induced by corporate fraud to take stock, his right of rescission is cut off by the insolvency of the corporation, — at least, as to creditors who became such after his subscription. See Gress v. Knight, 135 Ga. 60; Meholin v. Carlson, 17 Idaho, 742; Foster v. Row, 120 Mich. 1; Olson v. Bank, 67 Minn. 267; Howard v. Turner, 155 Pa. 349; Burleson v. Davis, 141.5.W. (Tex.) 559; Jordan v. Annex Corporation, 109 Va. 625; Cox v. Dickie, 48 Wash. 264; Scott v. Deweese, 181 U.S. 202. But see Marion Trust Co. v. Blish, 170 Ind. 686; Hinkley v. Oil Co. (insolvency proceedings not instituted), 132 Iowa, 396; Ky. Mutual Co.’s Assignee v. Schaefer, 120 Ky. 227 (cf. Reid v. Owensboro Co., 141 Ky. 444, 451); Fear v. Bartlett, 81 Md. 435 (stockholder gave cor- poration notice of rescission while it was solvent); Ramsey v. Thompson Mfg. Co., 116 Mo. 313. 932 MCDONALD, RECEIVER, ¥. WILLIAMS. (CHAP. IIL McDONALD, RECEIVER, »v. WILLIAMS. 174 U.S. 397. 1899. Surr by receiver of the Capital National Bank of Lincoln, Ne- braska, to recover from defendants, stockholders in the bank, the amount of certain dividends previously received by them. When the dividend of January 6, 1889, was declared and paid, and when each subsequent dividend, down to and including July, 1891, was declared and paid, there were no net profits. The capital of the bank was impaired, and the dividends were paid out of the capital, but the bank was still solvent. When the dividends of January and July, 1892, were declared and paid there were no net profits, the capital of the bank was lost, and the bank actually insolvent. : The defendants, neither of whom was an officer or director, were ignorant of the financial condition of the bank, and received the divi- dends in good faith, relying on the officers of the bank, and believing the dividends were coming out of the profits. Upon these facts the court desired the instruction of this court on the question: Can the receiver of a national bank recover a dividend paid not at all out of profits, but entirely out of the capital, when the stockholder receiving such dividend acted in good faith, believing the same to be paid out of the profits, and when the bank, at the time such dividend was declared and paid, was not insolvent? Precxuam, J.... The complainant bases his right to recover in this suit upon the theory that the capital of the corporation was a trust fund for the payment of creditors entitled to a portion thereof, and having been paid in the way of dividends to the shareholders that portion can be recovered back in an action of this kind for the purpose of paying the debts of the corporation. He also bases his right to recover upon the terms of section 5204 of the Revised Statutes. We think the theory of a trust fund has no application to a case of this kind. When a corporation is solvent, the theory that its capital is a trust fund upon which there is any lien for the payment of its debts has in fact very little foundation. No general creditor has any lien upon the fund under such circumstances, and the right of the corporation to deal with its property is absolute so long as it does not violate its charter or the law applicable to such corporation. In Graham v. Railroad Company, 102 U.S. 148, 161, it was said by Mr. Justice BRaDLEY, in the course of his opinion, that ‘‘when a cor- poration becomes insolvent, it is so far civilly dead that its property may be administered as a trust fund for the benefit of its stockholders and creditors, and a court of equity, at the instance of the proper parties, will then make those funds trust funds, which, in other cir- CHAP. I11.] MCDONALD, RECEIVER, ¥. WILLIAMS. 933 cumstances, are as much the absolute property of the corporation as any man’s property is his.” . . . These cases, while not involving precisely the same question now before us, show there is no well-defined lien of creditors upon the capital of a corporation while the latter is a solvent and going con- cern, so as to permit creditors to question, at the time, the disposition of the property. The bank being solvent, although it paid its dividends out of capital, did not pay them out of a trust fund. Upon the subsequent insolvency of the bank and the appointment of a receiver, an action could not be brought by the latter to recover the dividends thus paid on the theory that they were paid from a trust fund, and’ therefore were liable to be recovered back. It is contended on the part of the complainant, however, that if the assets of the bank are impressed with a trust in favor of its creditors when it is insolvent, they must be impressed with the same trust when it is solvent; that the mere fact that the value of the assets of the corporation has sunk below the amount of its debts, although as yet unknown to any body, cannot possibly make a new contract be- tween the corporation and its creditors. In case of insolvency, how- ever, the recovery of the money paid in the ordinary way without condition is allowed, not on the ground of contract to repay, but be- cause the money thus paid was in equity the money of the creditor; that it did not belong to the bank, and the bank in paying could bestow no title in the money it paid to one who did not receive it bona fide and for value. The assets of the bank, while it is solyent, may clearly not be impressed with a trust in favor of creditors, and yet that trust may be created by the very fact of the insolvency, and the trust enforced by a receiver as the representative of all the cred- itors. But we do not wish to be understood as deciding that the doctrine of a trust fund does in truth extend to a shareholder receiv- ing a dividend, in good faith believing it is paid out of profits, even though the bank at the time of the payment be in fact insolvent. That question is not herein presented to us, and we express no opin- ion in regard to it. We only say, that if such a dividend be recover- able, it would be on the principle of a trust fund... . Without reference to the statute, therefore, we think the right to recover the dividend paid while the bank was solvent would not exist. But it is urged on the part of the complainant that section 5204 of the Revised Statutes makes the payment of a dividend out of capital illegal and ultra vires of the corporation, and that money thus paid remains the property of the corporation, and can be followed into the hands of any volunteer. The section provides that ‘‘no association, or any member thereof, shall, during the time it shall continue its banking operations, with- draw, or permit to be withdrawn, either in the form of dividends or 934 MCDONALD, RECEIVER, v. WILLIAMS. (CHAP. III. otherwise, any portion of its capital.”” What is meant by this lan- guage? Has a shareholder withdrawn or permitted to be withdrawn in the form of a dividend any portion of the capital of the bank when he has simply and in good faith received a dividend declared by a board of directors of which he was not a member, and which dividend he honestly supposed was declared only out of profits? Does he in such case within the meaning of the statute withdraw or permit to be withdrawn a portion of the capital? The law prohibits the making of a dividend by a national bank from its capital or to an amount greater than its net profits then on hand, deducting therefrom its losses and bad debts. The fact of the declaration of a dividend is in effect the assertion by the board of directors that the dividend is made out of profits. Believing that the dividend is thus made, the share- holder in good faith receives his portion of it. Can it be said that in thus doing he withdraws or permits to be withdrawn any portion of the capital of the corporation? We think he does not withdraw it by the mere reception of his proportionate part of the dividend. The withdrawal was initiated by the declaration of the dividend by the board of directors, and was consummated on their part when they permitted payment to be made in accordance with the declaration. We think this language implies some positive or affirmative act on the part of the shareholder by which he knowingly withdraws the capital or some portion thereof, or with knowledge permits some act which results in the withdrawal, and which might not have been so withdrawn without his action. The permitting to be withdrawn can- not be founded upon the simple receipt of a dividend under the facts stated above. One is not usually said to permit an act which he is wholly igno- rant of, nor would he be said to consent to an act of the commission of which he had no knowledge. Ought it to be said that he with- draws or permits the withdrawal by ignorantly yet in entire good faith receiving his proportionate part of the dividend? Is each shareholder an absolute insurer that dividends are paid out of profits? Must he employ experts to examine the books of the bank previous to receiving each dividend? Few shareholders could make such examination themselves. The shareholder takes the fact that a divi- i dend has been declared as an assurance that it was declared out of profits and not out of capital, because he knows that the statute pro- : hibits any declaration of a dividend out of capital. Knowing that a dividend from capital would be illegal, he would receive the dividend as an assurance that the bank was in a prosperous condition and with unimpaired capital. Under such circumstances we cannot think that Congress intended by the use of the expression “withdraw or permit to be withdrawn, either in the form of dividends, or otherwise,” any portion of its capital, to include the case of the passive receipt of a dividend by a shareholder in the bona fide belief that the dividend CHAP, 111.] MCDONALD, RECEIVER, ¥. WILLIAMS. 935 was paid out of profits, while the bank was in fact solvent. We think it would be an improper construction of the language of the statute to hold that it covers such a case. We are strengthened in our views as to the proper construction of this act by reference to some of its other sections. The payment of the capital within a certain time is provided for by sections 5140 and 5141. Section 5151 provides for the individual responsibility of each shareholder to the extent of his stock at the par value thereof in addition to the amount invested therein. (These shareholders have already been assessed under this section.) And section 5205 pro- vides for the case of a corporation whose capital shall have become impaired by losses or otherwise, and proceedings may be taken by the association against the shareholders for the payment of the deficiency in the capital within three months after receiving notice thereof from the Comptroller. These various provisions of the statute impose a very severe liability upon the part of holders of national bank stock, and while such provisions are evidently imposed for the purpose of securing reasonable safety to those who deal with the banks, we may nevertheless say, in view of this whole system of liability, that it is unnecessary, and that it would be an unnatural construction of the - language of section 5204 to hold that in a case such as this a share- holder, by the receipt of a dividend from a solvent bank, had with- drawn or permitted to be withdrawn any portion of its capital. We may concede that the directors who declared the dividend under such circumstances violated the law, and that their act was therefore illegal, but the reception of the dividend by the shareholder in good faith, as mentioned in the question, was not a wrongful or designedly improper act. Hence the liability of the shareholder should not be enlarged by reason of the conduct of the directors. They may have rendered themselves liable to prosecution, but the liability of the shareholder is different in such a case, and the receipt of a dividend under the circumstances is different from an act which may be said to be generally illegal, such as the purchase of stock in one national bank by another national bank for an investment merely, which is never proper. Concord First National Bank v. Haw- kins, just decided, ante, 364. The declaration and payment of a dividend is part of the course of business of these corporations. It is the thing for which they are established, and its payment is looked for as the appropriate result of the business which has been done. The presumption of legality attaches to its declaration and payment, because declaring it, is to assert that it is payable out of the profits. As the statute has pro- vided a remedy under section 5205 for the impairment of the capital which includes the case of an impairment produced by the payment of a dividend, we think the payment and receipt of a dividend under the circumstances detailed in the question certified do not permit of 936 McDONALD, RECEIVER, ¥. WILLIAMS. [CHAP. III. its recovery back by a receiver appointed upon the subsequent insol- vency of the bank. The facts in the various English cases cited by counsel for com- plainant are so entirely unlike those which exist in this case that no useful purpose would be subserved by a reference to them. Not one holds that a dividend declared under such facts as this case assumes can be recovered back in such an action as this. We answer the question in the negative. Norr. — After the Supreme Court had given the above opinion, the Circuit Court of Appeals rendered judgment against the receiver as to the dividends in the years when the bank was still solvent, and against the defendant stockholders for the dividends paid during insolvency. Lacomss, J., said: “No question was propounded” (i.e., to the Supreme Court) ‘‘as to the dividends paid when the bank was actually insolvent, as we had no doubt the receiver could recover them in a proper action.” Hayden v. Williams, 96 Fed. Rep. 279, pp. 283, 284. See also Hammond v. Hammond Co., 72 Conn. 130. See, in accord with the principal case, In re Denham & Co., L.R. 25 Ch.D. 752. See, contra, Lexington Insurance Co. v. Page, 17 B. Mon. (Ky.) 412 (dividends declared by the directors, and received by the stock- holders, may be reclaimed by the directors, if illegally declared under a misapprehension of the right to declare them); American Steel & Wire Co. v. Eddy, 1388 Mich. 403 (statute); Williams v. Boice, 38 N.J. Eq. 364, 367. BOOK VII. THE REORGANIZATION OF CORPORATIONS. CHAPTER I. ISSUES OF STOCK BY A CORPORATION WITH IMPAIRED CAPITAL. HANDLEY »v. STUTZ. 139 U.S. 417. 1891. Crepitors of the Clifton Coal Company sought to require stock- holders to pay the difference between the par value of their stock and the amount they had paid for such stock. Some of this stock had be uu ars aft oration was organized, and at a time when the market value of it The lower court held that all creditors who became such after this issue of stock were entitled to the relief asked for. “Mr. Justice Brown. Some three years after the company was organized it became apparent that the enterprise, as originally con- templated, namely, the mining and selling of coal for steam and do- mestic purposes, was not likely to be a success, owing to the inferior character of the product; and the only hope of the company lay in the manufacture of the coal into an iron-making coke, that is, a coke containing a percentage of sulphur low enough to admit of the manu- facture of merchantable pig iron. To embark in this, however, money was needed, and as the stock of the company was not worth more than 50 cents on the dollar, it was evident this could not be effected simply by the issue of new stock. It was proposed at the meeting in March that money should be raised by the issue of $50,000 of bonds, with which to add the requisite structures ‘to the plant. But it was soon evident that the bonds could not be negotiated with- out the stock, and, acting upon the suggestion of a Nashville banker, it was resolved at the meeting in May that the stock should be in- creased 800 shares, 500 of which should be turned over to the sub- scribers to the bonds, as a bonus or an additional consideration. The evidence is uncontradicted that the bonds could not have been ne- gotiated without the stock; that they were both sold as a whole; that the transaction was in good faith, and, considering the risk that was taken by the subscribers, the price paid for the stock and bonds was 938 HANDLEY v. STUTZ. [CHAP. I. fair and reasonable. The directors appear to have done all-in their power to obtain the best possible terms, and there is no imputation of unfair dealing on the part of any one connected with the transac- tion. At that time the mines and property of the company were in good condition, and the prospects of success were fair. The case then resolves itself into the question whether an active corporation, or as it is called in some cases, a ‘‘ going concern,” find- ing its original capital impaired by loss or misfortune, may not, for the purpose of recuperating itself and providing new conditions for the successful prosecution of its business, issue new stock, put it upon the market and sell it for the best price that can be obtained. The question has never been directly raised before in this court, and we are not, consequently, embarrassed by any previous decisions on the point. In the Upton Cases, arising out of the failure of the Great Western Insurance Company; in Hatch v. Dana, 101 U.S. 205, and in Hawkins v. Glenn, 131 U.S. 319, the defendants were either origi- nal subscribers to the increased stock, at a price far below its par value, or transferees of such subscribers; and the stock was issued, not as in this case to purchase property or raise money to add to the plant, and facilitate the operations of the company, but simply to increase its original stock in order to carry on a larger business, and the stock thus issued was treated as if it formed a part of the original capital. In County of Morgan v. Allen, 103 U.S. 498, the same prin- ciple was applied to a subscription by a county to the capital stock of a railroad company, for which it had issued its bonds, although such bonds had been surrendered to the county with the consent of certain of its creditors. To say that a corporation may not, under the circumstances above indicated, put its stock upon the market and sell it to the highest bidder, is practically to declare that a corporation can never increase its capital by a sale of shares, if the original stock has fallen below par. The wholesome doctrine, so many times enforced by this court, that the capital stock of an insolvent corporation is a trust fund for the payment of its debts, rests upon the idea that the creditors have a right to rely upon the fact that the subscribers to such stock have put into the treasury of the corporation, in some form, the amount represented by it; but it does not follow that every creditor“has a right to trace each share of stock issued by such corporation, and inquire whether its holder, or the person of whom he purchased, has paid its par value for it. ‘It frequently happens that corporations, as well as individuals, find it necessary to increase their capital in order to raise money to prosecute their business successfully, and one of the most frequent methods resorted to is that of issuing new shares of stock and putting them upon the market for the best price that can be obtained; and so long as the transaction is bona fide, and not a mere cover for “watering” the stock, and the consideration ob- cHap. 1] HANDLEY v. STUTZ. 939 tained represents the actual value of such stock, the courts have shown no disposition to disturb it. Of course no one would take stock so issued at a greater price than the original stock could be purchased for, and hence the ability to negotiate the stock and to raise the money must depend upon the fact whether the purchaser shall or shall not be called upon to respond for its par value. While, as before observed, the precise question has never been raised in this court, there are numerous decisions to the effect that the general rule that holders of stock, in favor of creditors, must respond for its par value, is subject to exceptions where the transaction is not a mere cover for an illegal increase. Thus in New Albany v. Burke, 11 Wall. 96, a city subscribed to the stock of a railroad, and issued bonds for a part of the subscription, agreeing to issue them for the rest of it, when the road should be built to a certain point. The road relied mainly upon these bonds to raise the necessary money. The validity of the bonds being denied by tax- payers, who had filed bills to enjoin the raising of a tax to pay the interest, their value in the market was largely impaired, and it was found they could not be sold without a sacrifice. Under these circum- stances the company applied to the city to pay a certain sum which had been borrowed by the road upon the pledge of the bonds already issued, with sundry other moneys, and in consideration thereof the city obtained from the company a large number of bonds which had not been negotiated, and a cancellation of the subscription. In a suit brought by a judgment creditor to enforce the original subscription, it was held that the compromise was legal, and the payment of such subscription would not be enforced, although it subsequently turned out that the bonds were worth more than they could have been sold for. Said Mr. Justice Strona, speaking for the court: ‘‘Had the company sold to a stranger, and then the city become a purchaser from the stranger, it will not be contended that any creditor of the company could complain. And it can make no difference whether the purchase was made directly or indirectly from the-first holder of the bonds, assuming that there was no fraud. The transaction . . . was, in substance, plainly nothing more than a purchase by the city of its own bonds, some of which had been issued and others of which it was under obligation to issue, at the call of the vendor. . . . Look- ing at it in the light of subsequent events, it was no doubt an advan- tageous purchase for the city; and, if the uncontradicted evidence is to be believed, it was deemed at the time an advantageous sale or arrangement for the company. . . . We may add, the evidence is con- vincing that the contract between the city and the company was made in the utmost good faith, with no intention to wrong creditors of the latter; that it was at the time considered advantageous to the com- pany, and it is not proved that all was not paid for the bonds issued and to be issued that they could have been sold for in the market.” 940 HANDLEY 0. STUTZ. [CHAP. 1 So in Coit v. Gold Amalgamating Company, 119.U.S. 348, it was held that where the charter of a corporation authorizes the capital stock to be paid for in property, and the shareholders honestly and in good faith pay for their subscriptions in property instead of money, third parties have no ground of complaint, although a gross and obvious over-valuation of such property would be strong evi- dence of fraud in an action by a creditor to enforce personal liability. The court held that where full-paid stock was issued for property received there must be actual fraud in the transaction to enable credi- tors of the corporation to call the stockholders to account. In deliv- ering the judgment of the court in that, case at the circuit, 14 Fed. Rep. 12, Mr. Justice BrapLBy observed: ‘That trust [in favor of creditors] does not arise absolutely in every case where capital stock has been issued, and where it has been settled for by arrangement with the company. It is not as if the stockholders had given their promissory notes for the amount, these notes being in the treasury of the company; but there are often equities to which the stockholders are entitled — on which they are to stand.” As one of them, he mentioned the case of stock dividends fairly made in consideration of profits earned and cf accumulations of the property of the com- pany, and observed: ‘It is not true that it is in the power of a credi- tor in every case, and in all cases, as a mere matter of right, to insti- tute an inquiry as to the valuation of the amount of the consideration given for the stock, and disturb fair arrangements for its payment in other ways than by cash. If the stock has been fairly created and paid for, there is an end of trusts in favor of any bedy; and this does not affect the general proposition that unpaid subscriptions of stock are a trust fund to be administered for the benefit of creditors after a corporation becomes insolvent.” A case nearer in point is that of Clark v. Bever, 189 U.S. 96, de- cided at the present term of this court. In this case, a railroad com- pany, of which defendant’s intestate was president and stockholder, had a settlement: with a construction company, of which defendant’s intestate was also a member, for work done in building the road. The railroad company, being unable to pay the claim of the construc- tion company, delivered to it thirty-five hundred shares of its stock at 20 cents on the dollar, and the same were accepted in full satisfac- tion of the debt. The stock was not worth anything in the market, and was issued directly to the defendant’s intestate. No other pay- ment than the 20 per cent was ever made on account of this stock. A judgment creditor of the railroad company filed a bill to compel the payment by the defendant of his claim, upon the theory that he was liable for the actual par value of such stock, whatever may have been its market value at the time it was received. It was held he oould not recover. “Of course, under this view,” says Mr. Justice HARLAN, in delivering the opinion of the court, “every one having claims CHAP. 1.] HANDLEY v. STUTZ. 941 against the railway company, — even laborers and employés, — who could get nothing except stock in payment of their demands, became bound, by accepting stock at its market value in payment, to account to unsatisfied judgment creditors for its full face value, although, at the time it was sought to make them liable, the cor- poration had ceased to exist, or its stock had remained, as it was when taken, absolutely worthless. . . . To say that a public corpora- tion, charged with public duties, may not relieve itself from embar- rassment by paying its debt in stock at its real value, — there being no statute forbidding such a transaction, — without subjecting the creditor, surrendering his debt, to the liability attaching to stock- holders who have agreed, expressly or impliedly, to pay the face value of stock subscribed by them, is, in effect, to compel them either to suspend operations the moment they become unable to pay their current debts, or to borrow money secured by mortgage upon the corporate property.” So in Fogg v. Blair, 189 U.S. 118, also decided at the present term, it was held to be competent for a railroad, exercising good faith, to use its bonds or stock in payment for the construction of its road, although it could not, as against creditors or stockholders, issue its stock as fully paid without getting some fair or reasonable equivalent for it. It: was there said: “What was such an equivalent depends primarily upon the actual value of the stock at the time it was con- tracted to be issued, and upon the compensation which, under all the circumstances, the contractors were equitably entitled to receive for the particular work undertaken or done by them.” It appeared in that case that full and adequate compensation for the work done had been paid by the company in its mortgage bonds, and, as the bill contained no allegation whatever as to the real or market value of such stock, it was held that the contractors receiving this stock were not liable to creditors for its par value. It was added: “If, when disposed of by the railroad company, it was without value, no wrong was done to creditors by the contract made with Blair and Taylor. If the plaintiff expected to recover in this suit on the ground that the stock was of substantial value, it was incumbent upon him to distinctly allege facts that would enable the court — assuming such facts to be true — to say that the contract between the railroad com- pany and the contractors was one which, in the interest of creditors, ought to be closely scrutinized.” It would seem to follow from this that if the stock had been of some value, that value, however much less than par, would have been the limit of the holder’s liability. In Morrow v. Nashville Iron and Steel Co., 87 Tennessee, 262, 275, 276, the Supreme Court of Tennessee held, that a contract with a subscriber to stock of a corporation, that for every share subscribed he should receive bonds to an equal amount, secured by mortgage on the company’s plant, is void as against creditors, and also between 942 HANDLEY v. STUTZ. ‘[cHAP. L the subscriber and the corporation. But the court drew a distinction between such a case and sales of or subscription to the stock of an organized and going corporation. It said: “The necessities of the pasties of orion ed a ed ae \ talstock, and if such stock is lawfully issued, it may very well be ~offered upon special terms. In such case, if the market price was less _ | Fat par itis clear that. «purchaser or subscriber for such stock at contract price. So a case might arise where the stock of a going con-- +-cerfi was much depreciated, and where its bonds were tikewise below — ; re was lawlul authority to issue additional stock and bonds. Now; insuch case, the real market value of an equal amount of Stock and bonds might not exceed, or even equal, the par value of either. In such cases, the question of fraud aside, a purchaser would only be held for his contract price.”” This case from Tennessee puts as an illustration the exact case with which we are now dealing. The liability of a subscriber for the par value of increased stock taken by him may depend somewhat upon the circumstances under which, and the purposes for which, such increase was made. If it be. merely for the purpose of adding to the original capital stock of the corporation, and enabling it to do a larger and more profitable busi- ness, such subscriber would stand practically upon the same basis as a subscriber to the original capital. But we think that an active cor- poration may, for the purpose of paying its debts, and obtaining money for the successful prosecution of its business, issue its stock and dispose of it for the best price that can be obtained. Stein v. Howard, 65 California, 616. As the company in this case found it impossible to negotiate its bonds at par without the stock, and as the stock was issued for the purpose of enhancing the value of the bonds, and was taken by the subscribers to the bonds at a price fairly repre- senting the value of both stock and bonds, we think the transaction should be sustained, and that the defendants cannot be called upon to respond for the par value of such stock, as if they had subscribed to the original stock of the company. Mr. Cuter Justick Futier, with whom concurred Mr. Justice Lamar, dissenting. I dissent from the conclusion of the court in respect of the stock received by the subscribers to the bonds. That stock was not paid for in money or money’s worth, or issued in payment of debts due from the company, or purchased at sale upon the market. It was a mere bonus, thrown in with the bonds as furnishing the inducement to the bond subscription, of larger control over the corporation, and of possible gain without expenditure. Becoming secured creditors through the bonds, the subscribers increased their power through the stock. In my view, there was no actual payment for the stock, and to treat it as paid up, is to sanction an arrangement to relieve those CHAP. 1.] KRAFT v. GRIFFON CO. 943 who would reap the benefit derived from the possession of the stock, in the event of the success, from liability for the consequences, in the event of the failure, of the enterprise. When the capital stock of a corporation has become impaired, or the business in which it has engaged has proven so unremunerative as to call for a change, creditors at large may well demand that experiments at, rehabilitation should not be conducted at their risk. My brother Lamar concurs with me in this dissent. Nore. — See, accord, Stein v. Howard, 65 Cal. 616; McDowell v. Lindsay, 213 Pa. 591 (W.Va. statute). KRAFT ». GRIFFON CO. 82 N.Y. App. Div. 29. 1903. ‘ Laueuuin, J. This is an action by a stockholder of the Griffon .Company to enjoin a second issue of stock to be given as a bonus on the sale of company bonds for their value. The original capital stock was $25,000, one-half of which was issued to the plaintiff and the other half to the defendant Ernest F. Greff, Jr. Down to the 1st day of July, 1900, there was a continuous and increasing impairment of the capital, and the company was seriously in need of funds. At a meeting of the stockholders, held for that purpose on the 11th day of September, 1900, the capital stock . was increased to $150,000, of which $50,000 was preferred. This pre- ferred stock was sold at par, but the common stock was not sold at all. The company being again pressed for funds, on the 26th of Feb- ruary, 1901, determined to issue certificates of indebtedness to the extent of $30,000, but only one-half of the amount was sold. On the 25th day of May, 1901, public accountants employed to investigate and make statement of the financial condition of the company, re- ported that its then capital of $75,000 was impaired to the extent of $41,602.85. The company being unable to make a further sale of the capital stock or otherwise raise necessary funds for paying current obligations and continuing the business, the board of directors on the 20th day of August, 1901, adopted a resolution authorizing the issue of bonds to the extent of $75,000 with interest at six per cent payable quarterly or semi-annually and authorizing the president and treas- urer to issue, negotiate and sell the same upon the best terms obtain- able and authorizing the issue and delivery of $75,000 capital stock to be offered and delivered as a bonus to the purchasers of the bonds to an extent not exceeding the par value of the bonds purchased. One-half of this issue of bonds and stock was tendered to the plain- , 944 KRAFT v. GRIFFON CO. [cHap. 1. tiff, who declined the offer, and the other half to the defendant Ernest F. Greff, Jr., who accepted and paid par for the bonds to the extent of $37,000 and the bonds and an equal amount of stock were delivered to him. The plaintiff then brought this action to enjoin the further issue of stock to be given as a bonus on the sale of bonds and to cancel the stock already issued as a bonus. The appellant contends that the issue of stock to be delivered as a bonus to the purchasers of bonds of the corporation is unauthorized. The questions presented upon the appeal depend upon the.construc- tion of § 48 of the General Corporation Law of New Jersey (Laws of N.J. of 1896, chap. 185), which provides as follows: “‘ Nothing but money shall be considered as payment of any part of the capital stock of any corporation organized under this act, except as herein- after provided in case of the purchase of property, and no loan of money shall be made to a stockholder or officer thereof; and if any such loan be made the officers who make it, or assent thereto, shall be jointly and severally liable, to the extent of such loan and interest, for all the debts of the corporation until the repayment of the sum so loaned.” The exception referred to in this section is contained in § 49 and it relates exclusively to the issue of stock in payment for property purchased by the corporation and necessary for its benefit and pro- vides that the stock so issued shall not exceed the value of the prop- erty to pay for which it is issued. It is conceded that these are the only provisions of New Jersey law applicable. Manifestly, neither the stock nor bonds are issued in payment for property purchased by the corporation within the exception contained in § 48. It will be observed that § 48 makes no distinction between the consideration for which the original stock may be issued and that for which an authorized increase of stock may be issued. No authoritative deci- sion on the point is cited and we find none. The trial court has found, and the finding is, we think, sustained by the evidence, that. on ac- count of the impairment of the capital the par value of the bonds is all that the bonds together with the stock issued as a bonus were worth, and that, therefore, the transaction is not inequitable as against existing stockholders. There is a dictum in Morrow v. Iron & Steel Co. (87 Tenn. 262) to the effect that where the original capital has become impaired, the corporation may issue new stock at its actual or market value, and Morawetz on Corporations (2d ed. § 306) to the same effect is cited as authority for that proposition. The only point decided in that case, however, was that the original stock could not be issued for less than par, and it does not appear that there was any statute of the State under which the company was incorporated prohibiting the issue of stock for less than its face value. This dictum in the Morrow case was approved in Handley v. Stutz (189 U.S. 417) where it appears, however, that the subsequent CHAP. I] KRAFT 0, GRIFFON CO. 945 issue of stock for less than par was authorized by all the stockholders, and in that case, apparently, there was no statutory prohibition against such action, and the complaint was by prior creditors who could not be affected thereby. In Dickerman v. Northern Trust Co. (176 U.S. 181) it was held that bonds issued and stock given there- with as a bonus were valid in the hands of bona fide purchasers as - against stockholders suing in the right of the corporation, but it was intimated that they might not be as against creditors. In Donald v. American Smelting & Refining Co. (62 N.J. Eq. 729) the issue of an increase of corporate stock in payment for property worth less than the par value of the stock was enjoined. (See, also, Peck v. Elliott, 79 Fed. Rep. 10.) By analogy, the Donald case would seem to be an authority against the issue of stock as a bonus with the bonds, for there seems to be no reason for distinction between subsequent issue of stock for property worth less than its par value and the subsequent issue of stock with bonds for money. In Dummer v. Smedley (110 Mich. 466) it was held that stock issued to a mortgagee as a bonus for moneys advanced was valid as to prior creditors, and also as to subse- ‘quent creditors if issued in good faith and for full market value. Itis clear that the issue of this stock as a bonus with the bonds would not be binding upon subsequent creditors-of thecompany,for-the stock=—— ~ holders cannot thus enable the company to obtain credit upon the ~ strength of its capita into the treasury of the _ corporation the par value a their stock or delivering to it property of | equal value. (See v. Heppenhemer, 55 N.J. Eq. 240; Boney v. Wil- “hams, id. 691; Edgerton v. Electric Improvement, &c., "Co., 50 id. 354; Rickerson Roller-M tll Co. v. Farrell Foundry & M: achine Co., 75 Fed. Rep. 554; Scovill v. Thayer, 105 U.S. 148, 153; Donald v. American Smelting & Refining Co., supra; Dickerman v. Northern Trust Co., supra.) In Hebberd v. Southwestern Land & Cattle Co. (55 N.J. Eq. 31) it was stated that where a, aati contracted with the purchaser ori Sto issue bonus stoc ract is binding upon the womparry and its shareholders,” Ga that the purchaser of the stock could be compelled to pay the par value of the stock for the benefit of subsequent creditors. The effect of the decisions seems to be that ~~ neither before nor after consummation of a sale of bonds, with a delivery to the purchaser of the stock as a bonus, can the purchaser at the instance of the corporation or of a stockholder be compelled to pay into the treasury of the corporation the par value of the stock, and that an innocent bona fide holder of the stock for value and with- out notice probably would not be forced to contribute further even for the benefit of creditors. Subscriptions for capital stock and the money or property paid therefor constitute a trust fund for the bene- fit of creditors who, in dealing with the corporation, have a right to assume that the stock has been issued for cash or for property of 946 KRAFT 0. GRIFFON CO. [CHAP. I. equivalent value, and the persons to whom the stock was originally issued may, for the benefit of subsequent creditors, be compelled to restore the difference between the par value of the stock and the amount they paid therefor. This seems clear under the New Jersey statute and decisions. Such being the case, the issue of this stock at less than par will be a fraud upon creditors. We are asked to permit this fraud to be perpetrated merely because it is not inequitable as to existing stockholders who only at the present time are complaining. We are of opinion, however, that § 48 of the New Jersey General Corporation Law, already quoted, should be given full force and effect according to its tenor. _It in express terms prohibits the issue of any stock except for its par value in cash or the equivalent in property. Hence it appears to us that the issue made and the other issue contemplated is unauthorized and, therefore, illegal. So far as the bonds have not been sold and stock issued, there appears to be no difficulty in the way of affording injunctive relief. The case is somewhat different, however, with reference to the bonds and stock already issued. As to that, two questions may arise, first, the right of the corporation, for this action is brought by a stock- holder in its right, to rescind, and, second, whether the bonds and stock have reached the hands of an innocent purchaser for value who may in any event be entitled to protection to the extent of the value paid therefor. If this, instead of being an executed contract, were an executory contract between the corporation and a purchaser for the sale and purchase of these bonds with the stock as a bonus and the corporation refused to perform, we think it clear that the purchaser could not enforce performance; but, it being an executed contract, the corporation, probably, cannot rescind in any event without re- turning the moneys received by it, and we are not informed as to whether it is in a position to do that. Furthermore, it appears that the defendant Ernest F. Greff, Jr., has sold the stock and bonds to the copartnership of Greff & Co., of which he is a member, although the stock still stands in his name on the books of the company, and the other members of the firm are not parties. It may be, even if the corporation is not in a position to rescind as to the consummated transaction, that in the interests of future creditors the court should enjoin the further transfer of the stock to prevent the same reaching the hands of bona fide purchasers without notice. These questions, however, should not be decided on this appeal. Notre. — See also Vaughn v. Alabama National Bank, 143 Ala. 572; New Haven Trust Co. v. Gaffney, 73 Conn. 480; Jackson v. Traer, 64 Iowa, 469; Peter v. Union Mfg. Co., 56 Ohio, 181. A corporation organized to take over the assets of a bankrupt cor- poration may not issue debentures at 93, convertible into preferred — stock at 70. Carver -v. Southern Iron & Steel Co., 78 N.J. Eq. 81. CHAP. II.] ELYTON LAND CO. ¥. DOWDELL. 947 CHAPTER II. RIGHT OF STOCKHOLDERS TO PREVENT A SALE, OR LEASE, OF CORPORATE ASSETS. ELYTON LAND CO. v. DOWDELL. 113 Ala. 177. 1896. Brit in equity filed by Annie Dowdell, the owner of five shares in the Elyton Land Company, for the purpose of annulling a convey- ance of its property by that corporation to the Elyton Company, and also of annulling a mortgage executed by the latter company to se- cure certain bonds —Bome years before the conveyance the Elyton Land Company hav- ing on hand, as profits, a large amount of notes, had issued dividend certificates to the amount of $1200 per share. These certificates had subsequently been paid for in bonds of the company, denominated “Dividend Trust Bonds.” The plaintiff had disposed of her bonds. Her rights as a. bondholder are not involved in this litigation, but only her rights as a shareholder. The Elyton Land Company, under its charter and amendments, was authorized to buy land and sell lots; to borrow and lend money; to guaranty indebtedness; to build, rent, lease, and use buildings; to issue bonds in amount not to exceed five millions of dollars; and to take stock in other corporations. In 1893, the Elyton Company was incorporated, with authority to engage in many enterprises not included in the original or amended charter of the Elyton Land Co. The fourth section of the act incor- porating the Elyton Co. enacts, “that said corporation may purchase the property, real, personal, and mixed, of the Elyton Land Com- pany: provided that such sale is made under the laws now in force, and nothing in this act shall be construed to impair or in any manner whatsoever to affect the rights of any stockholder of the Elyton Land Company.” ..- — At a regular meeting of the stockholders of the Elyton Land Com- pany, a majority of the stockholders voted to sell its entire assets to the Elyton Company. The terms of the sale were, that the Elyton Company should pay all the liabilities of the Elyton Land Company; and issue $2,500,000 bonds, $1,796,000 of which were to be issued to the holders of the dividend trust bonds in payment thereof; and in addition issue 10 shares of its stock to each holder of 1 share of stock | 948 ELYTON LAND CO. ¥. DOWDELL. [crrap. 11. in the Elyton Land Co. Thereupon the Elyton Land Company trans- ferred all its property to the Elyton Company. The latter issued the bonds provided for, and executed a mortgage to secure them. The stipulated amount of stock was also issued, and was delivered to such of the stockholders as were willing to receive it in exchange for the stock held by them in the Elyton Land Company. No other arrange- ment or provision was made to pay the stockholder in the Elyton Land Company for his share, except to accept the stock in the Elyton Company. It is alleged in the bill, and not traversed in the plea, that complainant was not present, was not represented, and had no notice of the meeting of the directors of the Elyton Land Company at which it was resolved to sell its property to the Elyton Company. Immedi- ately after the consummation of the transaction between the two corporations, complainant filed her bill. To the bill, the respondent filed a plea and answer in support of the plea. The plea set forth the history of the ‘‘ Dividend Trust Bonds”; alleged that they were valid obligations of the Elyton Land Com- pany; and that the plaintiff, having accepted her proportion of the bonds with full knowledge of the facts, is estopped to deny that they are binding obligations of the Elyton Land Company. . The court ruled that the plea was insufficient as a defense to the bill. Appeal. CoLEemaNn, J. We do not doubt the right of complainant to relief, so far as the defense is rested upon the plea. In the first place, by its charter, The Elyton Company was authorized to purchase the prop- erty of The on Land Comp: at such sale 1s made __under the laws now in force, and nothing in this act shall be construed to impair, or in any manner whatsoever to affect the rights of any stockholder of The Elyton Land Company.” At the time of the sale and transfer of its property, The Elyton Land Company was solvent, a going corporation, and its stock was very valuables duties and— powers were fixed by its charter, and its business evidently managed with great skill and success, for the benefit of its shareholders. The Elyton Company by its charter was authorized to engege in many “enterprises not within the scope of the powers of The Etyton Land Company. A shareholder in the latter might not be willing to be- tome er. By the sale and transfer of the property, The Elyton Land Company divested itself of all its prop- erty and capacity to continue the business for which it was organized. If the sale stands, the owner of stock in The Elyton Land Company is compelled to accept the stock of the new corporation, or holdstock— “in a corporation without capital assets. Wé lay no stress on the argu- ment, that by its amended charter, The Elyton Land Company is authorized “to take stock” in other corporations. It was certainly never intended by that provision, to authorize The Elyton Land Company to effect its own dissolution by a sale of all its assets, and CHAP. 11.] ELYTON LAND CO. v. DOWDELL. 949 “take the stock” of another company in payment for distribution to the shareholders or any shareholder, without the consent and contrary to the preference of the shareholder. But it is too clear for argument, that the two million shares of stock of The Elyton Com- pany were to be issued to The Elyton Land Company, as a mere conduit to the shareholder of The Elyton Land Company, and not to be held and owned as capital assets of The Elyton Land Company. It may be that a private business corporation may sell out its entire property by and with the consent of less than all its stockholders, for the purposes of paying its debts, or for the purposes of dissolu- tion and settlement, but when this is the purpose, it must, be clearly understood, and the terms and conditions of the sale must be within the contractual relations between the corporation and its creditors or shareholders. There can be no presumption that a creditor or stock- holder of the dissolved corporation will accept in payment of his demand anything but money. He cannot be required to do so arbi- trarily. While the plea shows the consent and ratification of the complainant to the issue of the certificate of twelve hundred dollars to the shareholder for each share of stock, and its subsequent pay- ment by a dividend bond, it does not show consent or ratification of the sale of the property and the execution of the mortgage. It is et pany was in the interest of those wh ividend bonds, with- out reference to the interest of the stockholder. These bonds at first maturing within three or four years were a lien or charge only upon $2,400,000 of its promissory notes, leaving all its other property unin- cumbered. By the arrangement, the dividend bonds, amounting to only $1,796,000, secured by a lien upon $2,400,000 of notes, were con- verted into gold bonds, running thirty years, and were secured by a mortgage upon all the property owned by The Elyton Land Com- pany. The bonded indebtedness was increased over a half million dollars. The Elyton Company, from the pleading, did not own a dol- lar of capital other than that acquired by the purchase from The Elyton Land Company. Decree of City Court affirmed. Nortr. — There are numerous authorities to the effect that if the assets of a prosperous corporation-are-transferred to a second corpor- ation, which 1s to pay for those assets with its stock and continuethe- business, such transfer is a wrong to any dissenting stockholder of the first corporation. Suppose that, at the instance of a dissenting stockholder, a threat- ened transfer of this kind has been enjoined. Ought the injunction to be dissolved upon the corporation’s giving adequate security. for the payment, in cash, to the plaintiff of the value of his stock? In Lauman v. Lebanon Valley R.R. Co., 30 Pa. 42, one railroad corpora- 950 ELYTON LAND CO. v. DOWDELL. [CHAP. IL. tion proposed, pursuant to legislative authority, to consolidate with another railroad corporation. The court held that a dissenting stock- holder was entitled to an injunction, but that this should be dissolved if the defendants secured the payment to the plaintiff of the value of his stock. See Barnett v. Philadelphia Market Co., 218 Pa. 649. And in Tanner v. Lindell Ry. Co., 180 Mo. 1, the court refused to set aside such a transfer, which had been made, and remitted the plaintiff to his remedy for a proportionate share of the proceeds of the sale, or for damages. Lauman v. Lebanon Valley R.R. Co. sanctions, it is submitted, an exercise of the power of eminent domain without legislative author- ity. (There was no suggestion in the opinion of the court that the legislative sanction of the consolidation included legislative sanction of the condemnation of the interests of dissenting stockholders.) The weight of authority is against the Lawman case. Thus, in Morris v. Elyton Land Co., 125 Ala. 263 (another suit arising out of the transactions stated in the principal case), the lower court held that the relief to which the dissenting stockholder was entitled was the payment of the value of her stock in cash. The Supreme Court held that this was error. ‘To do so would be nothing more nor less than compelling the shareholder to sell his stock, which a court of , equity has not the power to do. That it would be to the benefit of the corporation and all other shareholders in it, to let the transaction stand and compel the dissentient to accept compensation for his stock, is an argument that rests upon no higher ground than that of expediency.” See, accord, Kean v. Johnson, 1 Stockton (N.J.) 401, 412; Abbot v. American Hard Rubber Co., 33 Barb. (N.Y.) 578; People v. Ballard, 134 N.Y. 269, 295. See also Natusch v. Irving, Gow on Partnership, Appendix No. VI, p. 398; where Lord ELpon said: ‘The company will indemnify the plaintiff against loss by its transactions already had, or hereafter to be had, not for the specified purposes of the institution. But the right of a partner is to hold to the specified purposes his partners whilst the partnership continues, and not to rest upon indemnities with respect to what he has not contracted to engage in. A dissatisfied partner may sell his shares for double what he originally gave for them. But he cannot be com- pelled to part with them for that reason; it may be his principal rea- son for keeping them, having the partnership concern carried on according to the contract. The original contract and the loss which his partners would suffer by a dissolution, is his security that it shall be so carried on for him and them beneficially, and with augmented improvement in-the value of his shares and their shares.” CHAP. 11.] PHILLIPS ¥. PROVIDENCE STEAM ENGINE CO. 951 PHILLIPS ». PROVIDENCE STEAM ENGINE CO. 21 R.I. 302. 1899. BI in equity to restrain a sale of the property of a corporation, ordered by a vote of the majority of the stockholders, brought by a minority stockholder. The facts are stated in the opinion. Heard on bill, answer, and replication. Bill dismissed. Stinzss, J. The complainant, a stockholder, seeks to restrain the respondent corporation from disposing of its property. The company is doing business under an extension by its creditors, in the terms of which an installment becomes due in November next. It is agreed that this cannot be met, and that the company will be unable to go on in business because the creditors refuse a further extension. In view of these facts, an arrangement has been made to form a new company, in which creditors holding extension notes will take preferred stock to the extent of one-half of their claims, while other subscribers will furnish enough cash to pay for the plant and provide a working capi- tal. The terms of the proposed sale give to the present stockholders $70,000 over and above the indebtedness of the company, amount- ing to about $228,009, making a total payment of about $298,000. The estimates of the value of the property vary from $327,009 to $397,000, the latter being the complainant’s estimate; but it does not appear that either party has reason to expect that either sum would be realized at a forced sale. This is not a sale in which the other stockholders are to gain any advantage beyond the privilege, which is also offered to the complainant, of taking his proportionate amount of cash or its equivalent stock in the new company, as he may prefer. Tt is in effect a cash sale to strangers, approved by stockholders representing 3675 shares against 75 held by the complainant. While this majority cannot affect any rights to which he is entitled, it tends to show a fair price. It is a well-known result, to which courts of justice cannot be blind, that large plants of this kind are often, if not usually, sold at a great sacrifice in case of a forced sale. We should not have to go outside of the records of our own court to find proof of this fact. A sale being necessary, the question is how shall it be made. The prayer of the bill is that a receiver may be appointed; that the business may be wound up and the company dissolved; and the argument is that the sale of the effects should be at public auction. The question, then, is whether the complainant is entitled to such a decree. There is a difference of opinion as to the power of a corporation to sell its entire property and thus practically to retire from business. Some courts hold that it may be done by the consent of all the stock- holders (Am. & Eng. Ency. L. 2 ed. vol. 7, p. 734, note 1), and others hold that it may be done by a majority. Ditto, notes 2, 3, and 4. All 952 PHILLIPS ¥. PROVIDENCE STEAM ENGINE CO. [CHAP. IL. of the authorities cited in note 1, however, do not hold that the con- sent of all the stockholders is necessary, e.g., Treadwell v. Salisbury, 7 Gray, 393; Wilson v. Miers, 100 Eng. Com. Law, 248, et al. But the editor adds: ‘There seems to be no doubt that it may do so when it is no longer able to profitably continue its business.” We think that this is the correct rule. It has been recognized in this State. Hodges v. N.E. Screw Co., 1 R.I. 312, 350. In Wilson v. Prop’rs Central Bridge, 9 R.I. 590, Brayton, C.J., said: “No case has been cited, and, in view of the diligence of counsel in this case, we may say there is no case which holds that where the purpose of the incorporation could not be accomplished, the business contem- plated could not be carried on; where the capital had been exhausted in endeavors to go on, having no means to go further; a company thus laboring under burdens which they could no longer bear, could not re- lease themselves by a surrender of their franchise to the State which granted and which was willing to receive it, and that by a majority. This is not only for their benefit, but it is a necessity, and it would be hard indeed if one stockholder could by his dissent prevent such relief against the prayer of all other members of the company.” In Peabody v. Westerly Water Works, 20 R.I. 176, a necessary limita- tion to this rule was recognized in the words: “The action of the company was taken by a vote of more than 1100 out of a total of 1350 shares. There is no proof of unfairness, oppression, or fraud in such action. The case as presented is simply that of a stockholder who differs from a large majority of his fellow stockholders as to the expediency of a sale.” The principle upon which these cases rest is that a corporation may dispose of its property by a majority vote, in cases which are free from unfairness, oppression, and fraud. Against wrongs of this kind equity will interfere. To this effect are Lauman v. Lebanon R.R., 30 Pa. St. 42; Treadwell v. Salisbury, 7 Gray, 393; Leathers v. Janney, 41 La. Ann. 1120; Sewell v. East Cape May Co., 50 N.J. Eq. 717; Sargent v. Webster, 13 Met. 497; Warfield v. Marshall, 72 Ia. 666; Wilson v. Miers, 100 Eng. Com. Law,.348; see also Miner’s Ditch Co. v. Zellerbach, 37 Cal. 543. The complainant does not charge improper conduct, but simply that he considers the price inadequate and unjust; and hence he prays for a receiver and a sale of the property by auction. Ordinarily when a court orders a sale it can only be done by auction. A court cannot negotiate a private sale, and it orders an auction as the fairest chance for all parties to bid and buy. But when the parties in interest have negotiated a sale which is fair to all concerned, and there is nothing to show that a larger price may reasonably be expected, it does not follow that an auction sale would be ordered. This question was con- sidered in Quidnick Co. v. Chafee, 13 R.I. 402, in which the trustee had an offer for the entire property, approved by nearly all the cred- CHAP. 11.] PHILLIPS ¥. PROVIDENCE STEAM ENGINE CO. 953 itors. Then other parties intervened, agreeing to bid the amount named at auction, and the court ordered a sale by auction. In the present case there is no evidence that anybody is willing to give as much as the offer proposed, or that there is any reason to suppose that it will bring as much or more. The only testimony put in by the complainant is that the tools will probably bring more than they are valued at by the company, while as to the bulk of the property, the real estate, etc., there is no evidence of market value. Moreover, the complainant does not show that he desires to bid upon the property himself, or that he knows of any one who would bid at a sale. In this absence of evidence that a larger total might be expected from an auction sale we see no reason to disturb the agreement already made, which, upon the testimony given, seems to be fair. The complainant relies strongly on Mason v. Pewabic Co., 133 U.S. 50. In that case the court had appointed a master to value the prop- erty, which he reported to be nearly $500,000. A majority of the company had arranged a sale to themselves at $50,000. Naturally, in view of such gross inadequacy, the court ordered a sale by auction. The case was very different in its-details from the case before us. In Wilson v. Prop’rs Central Bridge, 9 R.I. 590, the city of Provi- dence had control of the corporation and had sold the corporate property to itself. The court restrained the city from taking posses- sion and ordered a sale by auction. That, too, was a different case from this one. The court is bound to look to the interests of all parties, and espe- cially to protect the rights of a minority from oppression and fraud. But where, as in this case, no such thing is charged, and nothing is shown to lead to the belief of a better total price, the complainant makes no case for interference. To show that movable tools may be sold at a price somewhat, but not largely, higher than that at which they are scheduled, is quite a different thing from showing that the plant as a whole would sell for more than the price offered. To set aside the sale under these circumstances would be to risk a certainty for an uncertainty, without any testimony on which to base a hope of benefit to the stockholders from such interference. We see no reason for such a step in the dark. Bill dismissed. Notes. — There are numerous authorities, accord. As to dissolu- tion, see Arents v. Durham Co., 101 Fed. 338. In Treadwell v. Salisbury Mfg. Co., 7 Gray (Mass.) 393, it was proposed to convey the real estate of the defendant to a second cor- poration at a specified price, payable in the stock of the second cor- poration. The evidence tended to prove (p. 398) that this step was part of a plan made necessary by the financial difficulties of the de- fendant. BicELow, J., said: ‘‘ We entertain no doubt of the right of a corporation, established solely for trading and manufacturing pur- 954 PHILLIPS ¥. PROVIDENCE STEAM ENGINE CO. [CHAP. Il. poses, by a vote of the majority of their stockholders, to wind up their affairs and close their business, if in the exercise of a sound dis- cretion they deem it expedient so to do. At common law, the right of corporations, acting by a majority of their stockholders, to sell their property is absolute, and is not limited as to objects, circumstances or quantity. Angell & Ames on Corp. § 127 & seg.; 2 Kent Com. (6th ed.) 280; Mayor, etc., of Colchester v. Lowton, 1 Ves. & B. 226, 240, 244. Binney’s case, 2 Bland, 142. To this general rule there are many exceptions, arising from the nature of particular corporations, the purposes for which they were created, and the duties and liabili- ties imposed on them by their charters. Corporations established for objects quasi public, such as railway, canal and turnpike corpora- tions, to which the right of eminent domain and other large privileges are granted in order to enable them to accommodate the public, may fall within the exception; as also charitable and religious bodies, in the administration of whose affairs the community or some portion of it has an interest to see that their corporate duties are properly dis- charged. Such corporations may perhaps be restrained from alienat- ing their property, and compelled to appropriate it to specific uses, by mandamus or other proper process. But it is not so with corpora- tions of a private character, established solely for trading and manu- facturing purposes. Neither the public nor the legislature have any direct interest in their business or its management. These are com- mitted solely to the stockholders, who have a pecuniary stake in the proper conduct of their affairs. By accepting a charter, they do not undertake to carry on the business for which they are incorporated, indefinitely, and without any regard to the condition of their cor- porate property. Public policy does not require them to go on at a loss. On the contrary, it would seem very clearly for the public wel- fare, as well as for the interest of the stockholders, that they should cease to transact business as soon as, in the exercise of a sound judg- ment, it is found that it cannot be prudently continued. If this be not so, we do not see that any limit could be put to the business of a trading corporation, short of the entire loss or destruction of the cor- porate property. The stockholders could be compelled to carry it on until it came to actual insolvency. ... Upon the facts found in the case before us, we see no reason to doubt that the vote of the majority of the stockholders, for the sale of the corporate property, and the closing of the business of the corporation, was justified by the con- dition of their affairs. Without available capital, and without the means of procuring it, the further prosecution of their business would be unprofitable, if not impracticable. Under these circumstances it was in furtherance of the purposes of the corporation, to pay their debts, close their affairs and settle with their stockholders on terms most advantageous to them. Sargent v. Webster, 13 Met. 504. Nor can we see anything in the proposed sale to a new corporation, and CHAP. I1.] MASON v, PEWABIC MINING CO. 955 the receipt of their stock in payment, which makes the transaction illegal. It is not a sale by a trustee to himself, for his own benefit; but it is a sale to another corporation for the benefit and with the consent of the cestuis que trust, the old stockholders. The new stock is taken in lieu of money, to be distributed among those stockholders who are willing to receive it, or to be converted into money by those who do not desire to retain it.” In Maben v. Gulf Coal Co., 173 Ala. 259, the court upheld a transfer of substantially all the assets of the corporation, although it did not appear that this transfer was made necessary by the financial condi- tion of the corporation. The court relied on Treadwell v. Salisbury Mfg. Co., and did not mention the Elyton cases, supra. In Tanner v. Lindell Ry. Co., 180 Mo. 1, the court said (p. 24): “It is said that if the corporation is doing business at a loss the majority may close it out. But suppose it is not running at an actual loss, yet at a profit so small that in the judgment of the majority the capital invested is not yielding what it should, and from a business stand- point it should be diverted into a channel that promises better results, is there no discretion lodged in the majority to act in such emergency?” The company was earning a dividend of five per cent per annum. If this line of reasoning is sound, it undermines Elyton Land Co. v. Dowdell, and similar authorities. Transfers of the assets of solvent corporations (if not made for any fraudulent purpose) are made because the majority believe that thereby their profits will be increased. The question remains whether an attempt to increase the profits by such a transfer is permitted by the compact between the stockholders. It is to be noted that no court has yet held that there is a discretion lodged in the majority to change the purposes of the corporation when that “promises better results,” so that the action of the majority binds the minority. MASON »v. PEWABIC MINING CO. 133 U.S. 50. 1890. Tur Pewabic Mining Company was about to be dissolved. The holders of a majority. of the stock approved the transfer of its assets to a new corporation for $50,000, the stockholders in the old corpora- tion to be entitled, at their option, to their pro rata share of the stock of the new corporation, or their pro rata share, in cash, in the value of the assets transferred, such value being taken to be $50,000. Minority stockholders sought to enjoin the sale. A special master was appointed, who found the value of the assets to be nearly $500,- 000. The Circuit Court directed that the property be sold at public auction for cash to the highest bidder. 956 MASON J. PEWABIC MINING CO. [CHAP. II. Mr. Justice Mitier. With regard to the main question, the power of the directors and of the majority of the corporation to sell all of the assets and property of the Pewabic Mining Company to the new corporation under the existing circumstances of this case, we concur with the Circuit Court. It is earnestly argued that the majority of the stockholders — such a relatively large majority in interest — have a right to control in this matter, especially as the corporation exists for no other purpose but that of winding up its affairs, and that, therefore, the majority should control in determin- ing what is for the interest of the whole, and as to the best manner of effecting this object. It is further said that in the present case the dissenting stockholders are not compelled to enter into a new cor- poration with a new set of corporators, but have their option, if they do not choose to do this, to receive the value of their stock in money. It seems to us that there are two insurmountable objections to this view of the subject. The first of these is that the estimate of the value of the property which is to be transferred to the new corpora- tion and the new set of stockholders is an arbitrary estimate made by this majority, and without any power on the part of the dissent- ing stockholders to take part, or to exercise any influence, in making this estimate. They are therefore reduced to the proposition that ‘they must go into this new company, however much they may be convinced that it is not likely to be successful, or whatever other objections they may have to becoming members of that corporation, or they must receive for the property which they have in the old company a sum which is fixed by those who are buying them out. The injustice of this needs no comment. If this be established as a principle to govern the winding up of dissolving corporations, it places any unhappy minority, as regards the interest which they have in such corporation, under the absolute control of a majority, who may themselves, as in this case, constitute the new company, and become the purchasers of all the assets of the old company at their own valuation. The other objection is that there is no superior right in two or three men in the old company, who may hold a preponderance of the stock, to acquire an absolute control of the whole of it, in the way which may be to their interest, or which they may think to be for the interest of the whole. So far as any legal right is concerned, the mi- nority of the stockholders has as much authority to say to the ma- jority as the majority has to say to them, ‘‘ We have formed a new company to conduct the business of this old corporation, and we have fixed the value of the shares of the old corporation. We propose to take the whole of it and pay you for your shares at that valuation, unless you come into the new corporation, taking shares in it in pay- ment of your shares in the old one.” When the proposition is thus presented, in the light of an offer made by a very small minority to a CHAP. 11.] MASON ¥. PEWABIC MINING CO. 957 very large majority who object to it, the injustice of the proposition is readily seen; yet we know of no reason or authority why those hold- ing @ majority of the stock can place a value upon it at which a dis- senting minority must sell or do something else which they think is against their interest, more than a minority can do. We do not see that the rights of the parties in regard to the assets of this corporation differ from: those of a partnership on its dissolu- tion, and on that subject Lindley on Partnership says, Book 3, chap. 10, § 6, sub-div. 4, p. 555, original edition: “In the absence of a special agreement to the contrary, the right of each partner on a dis- solution is to have the partnership property converted into money by a sale, even though a sale may not be necessary to the payment of debts. This mode of ascertaining the value of the partnership effects is adopted by courts of equity, unless some other course can be followed consistently with the agreement between the partners, and even where the partners have provided that their shares shall be ascertained in some other way; still, if owing to any circumstance their agreement in this respect cannot be carried out, or if their agreement does not extend to the event which has in fact arisen, realization of the property by a sale is the only alternative which a court of equity can adopt.” ... We do not say that there may not be circumstances presented to a court of chancery, which is winding up a dissolved corporation and distributing its assets, that will justify a decree ascertaining their value, or the value of certain parts of them, and making a distribu- tion to partners or shareholders on that basis; but this is not the general rule by which the property in such cases is disposed of in the absence of an agreement. Nore. — It is probably lav be required 5 D CaAsA-O s-equivaten or-his interest in the fOrporation, even if a sale of the corporate assets is made because the_ corporation is in financial di ies... See People v. Anglo-Ameri- can Ass’n, 60 N.Y. App. Div. 389. ‘But there would seem to be no objection to a sale of the assets to a new corporation at a fair price to be paid by. the new corporation in its stock at par, or cash, at the option of the old stockholders. See Slattery v. Greater New Orleans Co., 128 La. 871; Treadwell v. Salis- bury Mfg. Co., supra. The ultimate question, it is submitted, is therefore this: is the plan of reorganization proposed by the majority such that a sale at auc- tion for cash may be dispensed with without unfairness to the minority? 958 SMALL v. MINNEAPOLIS ELECTRO-MATRIX CO. [CHAP. IL. * fs x - SMALL v. MINNEAPOLIS ELECTRO-MATRIX CO. 45 Minn. 264. 1891. Dickinson, J. The Minneapolis Electro-Matrix Company is a Minnesota corporation, of which the plaintiff, and the several indi- vidual defendants who have answered in this action, are the stock- holders and directors. The American Electro-Matrix Company is a foreign corporation, organized and existing under the general laws of the state of New Jersey. For the sake of brevity, the former cor- poration will be hereafter designated as the ‘‘ Minneapolis Company ” and the latter as the ‘‘American Company.” The case is here on appeal by the Minneapolis Company and the individual defendants above referred to, from an order refusing to dissolve a temporary injunction. Speaking comprehensively, it may be said that the in- junction restrained the Minneapolis Company and the individual defendants, its directors and stockholders, from carrying into effect a resolution of the board of directors, which, as set forth in the answers of the appellants, was as follows: — “Resolved, that the directors of the Minneapolis Electro-Matrix Company recommend to the stockholders of the company the adop- tion of the following proposition from the American Electro-Matrix Company: ‘That the Minneapolis Electro-Matrix Company lease for twenty-five years whatever rights and property of every description it has under the laws of Minnesota a right to lease, to the American Electro-Matrix Company, a corporation organized under the laws of the state of New Jersey, upon the following terms, namely: The American Electro-Matrix Company shall assume and pay all in- debtedness of this company, and meet all obligations arising under any contracts made by it; shall furnish all capital that may be re- quired for the prompt prosecution of its patent applications, inter- ferences or other suits, for the speedy development of its business in this country, for the negotiation of franchises in foreign countries on the best possible terms, and for the manufacture of machines in the most speedy and perfect manner; shall bring into the direction and practical management men of high reputation and business experi- ence, and shall enlist in the different states the active co-operation of efficient men, through organization of franchise companies or otherwise if more desirable arrangements for the interests of this company can be made; and shall pay to the Minneapolis Electro- Matrix Company one-half of the net receipts from all sources, after deducting all expenditures under the provisions of this lease.’ “Resolved, that T. C. Bates, Erastus Wiman, and C. W. Davison be a committee to prepare, in conference with the American Electro- Matrix Company, and with the advice of Duncan, Curtis & Page, on behalf of this company, a lease in accordance with the above terms, CHAP. 11.] SMALL Uv. MINNEAPOLIS ELECTRO-MATRIX CO. 959 * to be executed on behalf of this company by its officers, upon the approval of the stockholders at a meeting hereby called to be held at Minneapolis.” : After the adoption of these resolutions, a meeting of the stockhold- ers was called to take action upon this matter. By the injunction, as subsequently modified, the Minneapolis Company and its directors were restrained from executing a lease or transfer of its franchises or property to the American Company, and the stockholders were enjoined from voting to ratify any such lease or transfer ; but it was expressly provided that the corporation should not be thereby pro- hibited from carrying on its ordinary and lawful business through its board of directors and its officers in its accustomed, usual, and eeskin manner, retaining to itself the control and management of its affairs. The facts bearing upon the propriety of the injunction are dis- closed only so far as they are set forth in the pleadings. The pre- cise purposes for which the Minneapolis Company was organized are not ‘stated in the pleadings of either party. The facts are disclosed, however, that the corporation owns valuable patents for a new sys- tem of printing, which it purchased by the issue of the entire amount of its authorized capital stock, — $1,000,000; and the answers of the defendants justify the inference that the proper business of the cor- poration consisted in part, if not principally, in the construction of machines or apparatus for printing, under such patents, and in intro- ducing them into use by others so as to derive a royalty therefrom. But however this may be, and whatever may have been the particu- lar nature and scope of the purposes for which this organization was effected, we are of the opinion that the learned judges of the district court were right in considering the acts to which the injunction was directed as being a violation of the legal rights of the plaintiff as a stockholder of the corporation, in that the carrying into effect of what was contemplated in these resolutions would have been sub- stantially a surrender and transfer of the property and business of the Minneapolis Company to another and foreign corporation, not for the purposes of winding up the affairs of the former, and distribut- ing its property to those who would in that event be entitled to it, but in order that the business which this corporation was organized to prosecute might be for the period named carried on by the for- eign corporation, in consideration of a percentage of the proceeds of the business to be paid by it. That such was the purpose contem- plated seems very apparent from the terms of the resolution above recited. It is to be assumed from the pleadings and from the reso- lution itself that this corporation was organized for the purpose of carrying on some business, whatever its precise nature may have been, and the resolution discloses the purpose that for the period of twenty-five years such business should not be conducted by the Min- 960 SMALL 0. MINNEAPOLIS ELECTRO-MATRIX CO. [CHAP. II, nesota corporation, but that it should be taken up and carried on solely by the American Company. As justifying these conclusions, it is only necessary that attention be directed to the facts that the transfer of rights and property is to be for the period of twenty-five years; that the American Company is to assume and pay all the debts and perform all the contract obligations of the Minneapolis Com- pany; to furnish the capital for the prosecution of the patent appli- cations of the domestic corporation, for the conduct of its suits, the speedy development of its business, for the negotiation of franchises, the manufacture of machines; and to pay to the Minnesota corpora- tion, whose continued existence is plainly contemplated, a specified percentage of the proceeds of the business. Other provisions, recited above, but not here again referred to, go to support the conclusions announced. We need not inquire how far, or under what circumstances, con- siderations of public policy and of the general interests of the state may affect the right of a corporation to discontinue the business for which it was created, and to surrender to another corporation its property and the conduct of such business. We do decide that such a surrender of the property, and, so far as possible, of the functions, of a corporation, in order that, while it is to still continue in exist- ence, its business may be carried on by another corporation, to which such transfer is made, would violate the rights of a non-assenting stockholder arising from the contract implied, if not expressed, in the creation of such an organization; and he would be entitled to have such acts restrained by injunction. Stewart v. Erie & Western Trans. Co., 17 Minn. 348 (372, 398); Cook, Stocks, §§ 667, 668; 1 Mor. Priv. Corp., §§ 413, 416; Black v. Delaware, etc., Canal Co., 24 N.J. Eq. 455; Zabriskie v. Hackensack & N.Y. R. Co., 18 N.J. Eq. 178; Abbot v. Am. Hard Rubber Co., 33 Barb. 578; Middlesex R. Co. v. Boston & Chelsea R. Co., 115 Mass. 347. In the absence of express provision to the contrary, it is to be considered as the law concern- ing business corporations that their affairs are to be managed in the interest of their stockholders, and by directors or agents appointed by them. This is to be taken to be implied in the contract, unless in some manner a, different intention is expressed. It is not to be in- ferred from the pleadings in this case, even if such a thing be possible, that the original purposes of this corporation may have included the project of surrendering its business to some other corporation, to be carried on for a period of years by the latter, under the direction and control of its officers and stockholders, the stockholders of the com- pany thus transferring its business having no voice in the selection of such officers nor in the management of the business. If in fact the contract involved in the corporate organization did express any such extraordinary purpose as the committing of the business and inter- ests of this company to the sole management and control of strangers CHAP. I1.] BARTHOLOMEW Jv. DERBY RUBBER CO. 961 to this corporation and its stockholders, for a period of twenty-five years, we think that it was incumbent upon the defendants, upon this motion to dissolve the injunction, to show that fact by present- ing the articles of incorporation. Order affirmed. Nors, — See, accord, Parsons v. Tacoma Smelting Co., 25 Wash. 492, and cases cited. A fortiori, a stockholder may object to a lease by a public service corporation, not sanctioned by the legislature. See Dow v. Northern Teas 67 N.H. 1; Oregon Ry. Co. v. Oregonian Ry. Co., Ltd., 130 USS. 1. x qs BARTHOLOMEW »v. DERBY RUBBER CO. 69 Conn. 521. 1897. Suit by minority stockholders of a manufacturing corporation, to compel the surrender and cancellation of a lease of its plant to Loe- wenthal. The directors voted to make the lease, and gave notice of a special stockholders’ meeting to eonfirm their action. The action of the directors was approved by all the stockholders present at the meeting. The term of the lease thus confirmed was for one year, with a privi- lege upon the part of the lessee to renew the lease from year to year, for a period not exceeding nine years, upon the same rent and con- ditions. The lease also provided that at the expiration of any year the lessee might purchase the property if he chose, at a price to be determined upon by an appraisal made in conformity to the mode therein designated. The respondents demurred to the complaint. AnpREws, C.J. The plaintiffs are a minority of the stockholders of the Derby Rubber Company. They ask that a certain contract called a lease, between the said company and the other defendants, . be set aside and declared to be void. The record shows that this con- tract was made by the directors of the company; that it was, before delivery, submitted to a meeting of the stockholders duly called for that purpose, and that by a unanimous vote of the stockholders pres- ent at that meeting and holding a majority of all the stock, it was affirmed and ratified. The plaintiffs, although duly notified of said meeting and the purposes for which it was to be held, voluntarily femained away. If the contract was really ultra vires of the corporation, the plain- tiffs may claim that it should be set aside. The contract contains an option to the lessee to become the purchaser of the property at a price 962 BARTHOLOMEW UV. DERBY RUBBER CO. [cHaAP. IL. to be fixed by a sort of arbitration. The complaint avers that it is the intention of the directors and the majority stockholders, in. case the option is used, to divide the money received among all the stock- holders and wind up the affairs of the corporation. As a conditional contract to sell the property, this agreement is not questioned; nor could it well be questioned. It is competent for any business corpo- ration to sell its property, pay its debts, divide its assets and wind up its affairs. Especially is this so if the corporation is in an embarrassed condition. It is as a lease for ten years without a sale, that the con- tract is said to be ultra vires. We speak of the contract hereafter as a lease. The sole question then is: Was the vote ratifying the lease, and so the lease itself, ultra vires and void? We are inclined to think the lease was not void. The lessee is to continue the same business which the corporation was organized to carry on. The lease, therefore, is not a change in the business, but only a change in the management of the business. The financial con- dition of the corporation is now depressed, and its business cannot be made profitable under its own management, for want of capital. Ad- ditional capital is not available. But neither the directors nor the majority stockholders have so far lost confidence in the concern as to be willing peremptorily to wind up its affairs. The lease was entered into as the best, perhaps the only, means of carrying the corporation over this period of depression, and in the meantime obtaining some income for the stockholders. If a sale take place it is certain that the property will be worth more in operation than if left idle. Such leases have repeatedly been sustained by the courts of equity. ... We have considered this case on the assumption that the action of the directors and the majority stockholders was done in good faith and in the honest belief that they served the best interests of all con- cerned. If fraud had been charged a very different case would have been presented. Nore. — In Parsons v. Tacoma Smelting Co., 25 Wash. 492, the defendant contended that the lease in question was justified by financial difficulties, but the court refused, on the facts, to support the contention. On the other hand there are cases where the court has held that a lease was proper, even though the corporation was not in financial difficulties. See Hennessy v. Muhleman, 40 N.Y. App. Div. 175 (lease for development of mineral lands); Starke v. Guffey Petroleum Co., 98 Tex. 542 (same. Lease for 20 years). CHAP. II.] RIKER & SON CO. ¥. UNITED DRUG CO. 963 RIKER & SON CO. ». UNITED DRUG CO. 79 N.J. Eq. 580. 1911. GummeErs, C.J. This is an appeal from an order denying a pre- liminary injunction restraining the defendant, its officers, directors, tellers and inspectors from submitting to the stockholders of the company a proposition to take action upon a resolution of the board of directors providing that the defendant corporation should be dis- solved, and prohibiting them from passing any resolution or receiv- ing or counting any votes in favor of any resolution designed to carry into effect or accomplish any proposition to dissolve the said company. The United Drug Company is a New Jersey corporation. The proposed dissolution is a step in the carrying into execution of a plan formulated by the board of directors of the company for its ‘“reor- ganization,” and outlined by the board in a communication, sent by it to the several stockholders of the company upon the same day that a resolution was passed by it, reciting that, in the judgment of the board, it was for the benefit of the corporation that it should be forthwith dissolved and that a meeting of the stockholders should be held to take action upon that resolution. The material parts of the resolution (so far as the matter before us is concerned) are as follows: ‘To the stockholders of the United Drug Company. Your directors have had under consideration for some time the desirability of a reorganization of the affairs of the United Drug Company. They have had in mind, among other things, the accomplishment of the following results — first, owing to the remarkable increase in the business of the company, it is necessary to provide not only for additional capital to meet its immediate re- quirements, but also to put the company on such a basis that it can obtain from time to time in the future such additional capital as may be needed; second, . . . ; third, a substantial part of the business of the company is now conducted by the United Laboratories Com- pany, the United Perfume Company, the United Candy Company and the United Stationery Company, all subsidiary, corporations of the parent company. It is proposed to eliminate these subsidiary companies, to place the ownership of all these in one corporation, and obtain greater simplicity in accounting, and to some extent elimi- nate an unnecessary duplication of expense. With the approval of your directors, therefore, the following plan for the reorganization of the affairs of the United Drug Company has been proposed: Your directors have authorized the organization of a corporation under the laws of Massachusetts by the name of United Drug Company. ... The United Drug Company (of Massachusetts) has offered to pur- chase all the property and assets of the United Drug Company (of 964 RIKER & SON CO. ¥. UNITED DRUG CO. [cHap. 11. New. Jersey), subject to all its indebtedness, and to pay therefor as follows’’: viz., by delivering to the holders of stock of the New Jersey corporation in exchange for that stock shares of the stock of the Massachusetts corporation. The communication then concludes thus: ‘Your directors unanimously recommend the acceptance of the proposed plan of reorganization, and pending action by the New Jersey Company recommend an immediate exchange of the stock of the New Jersey company for stock of the Massachusetts company in accordance with the terms of the offer. If for any reason it should become either necessary or desirable to delay the dissolution of the New Jersey corporation and the transfer of its assets, or even to continue its corporate existence, the practical accomplishment of the plan would not be affected, as the Massachusetts corporation would by the exchange become the controlling stockholder of the New Jer- sey corporation.” Manifestly, the prime purpose of the scheme outlined in this com- munication is not the winding up of the New Jersey corporation and the distribution of its assets, or the proceeds of the sale thereof, among its stockholders, but the absorption of that company by the Massachusetts corporation, the transfer not only of its assets but of its business, to that corporation, and the future carrying on of that business by the Massachusetts corporation under the name of the defendant company. The scheme, in its essence, whatever it may be in form, is not a plan for the reorganization of the New Jersey company, nor even for the winding up of its business and its disso- lution within the meaning of the latter word as used by our Corpora- tion Act, but is a scheme for its merger into or consolidation with the Massachusetts corporation. State v. Atlantic City and Shore Railroad Co., 77 N.J. Law (48 Vr.) 466, 483. Consequently, the fundamental question now to be decided is whether a corporation of this State, organized under our General Corporation Act, may legally be merged into or consolidated with a corporation created by and organized under the laws of a sister State. The answer to this question seems to us not to be in doubt. As was said by this court in Colgate v. United States Leather Co., 75 N.J. Eq. (5 Buch.) 229, the power of corporations to consolidate and merge is not to be implied, and exists only by virtue of plain legislative enactment; and no statute of our State can be found which authorizes the proposed scheme. The only right given, by our legislature, to two or more corporations to merge or consolidate into a single corporation, is expressly limited to those which are organized under the laws of our own State. Revised Corporation Act, § 104; P. L. 1896, p. 309. The proposed plan for the so-called “‘reorganiza- tion” of the defendant company is, therefore, in violation of the law of the State whose creature it is; and, this being so, any stockholder who refuses to consent thereto is entitled to the aid of a court of CHAP. 11.] RIKER & SON CO. ¥. UNITED DRUG CO. 965 equity to prevent its being carried into execution. Each stockholder of the company owns a share in its property and assets, and is entitled to have a proportionate share in its profits. They have in- vested their capital in it, and in it alone, and they are entitled to every dollar that it earns. This is the agreement of the stockholders among themselves. They each contract with the other that their money shall be employed for the purposes specified in the certificate of incorporation, and for no other purpose, and that the profits of the enterprise shall be ratably apportioned among them. In the absence . of legislation permitting a variation of the provisions of this funda- mental contract, by vote of a majority of the stockholders, no majority, however large, has a right to divert any part of the joint capital, however small, to any purpose not consistent with and grow- ing out of this original, fundamental agreement. Black v. Delaware and Raritan Canal Co., 24 N.d. Eq. (9 C. E. Gr.) 456, 463; Mills v. Central Railroad Co. of New Jersey, 41 N.J. Eq. (14 Stew.) 1; Colgate v. United States Leather Co., supra. The scheme, in the carrying out of which the dissolution of the company is a proposed step, is a fraud upon the statute (the word is used in a legal, not a moral sense); and every act done in furtherance thereof, no matter whether it be legal, standing alone, or not, is equally a fraud upon the statute. This being so, the complainants were entitled to an injunction to restrain the proposed invasion of their rights under the contract of incorporation, as soon as it was made manifest that such invasion was in fact contemplated. The order denying the preliminary injunction will be reversed and the case remitted to the court of chancery, with a direction that an injunction do issue restraining the defendant company, its officers and directors, from submitting to its stockholders for action thereon by them the resolution of the board of directors of the company advising its dissolution. Nots. — People v. Ballard, 134 N.Y. 269. A business corporation cannot sell all of its property to a foreign corporation, organized through its procurement with a majority of non-resident trustees, for the purpose of taking its place and its assets and carrying on its business; as this is a practical dissolution of the corporation. Theis v. Spokane Falls Co., 34 Wash. 23. By statute a corporation. might be dissolved upon the vote of the holders of two-thirds of the stock. Held, that this authorized a dissolution only upon the bona fide intent of the stockholders to discontinue the business. If the dis- solution is made that the property may be sold to, and the business carried on by, a new corporation controlled by the majority stock- holders, any single stockholder is entitled to restrain (and to set aside, if consummated) the sale of the corporate assets made in such dissolution proceedings. 966 MATTER OF TIMMIS. [cHap. 1. MATTER OF TIMMIS. 200 N.Y. 177. 1910. AppraL from an order of the Appellate Division of the Supreme Court in the second judicial department, entered July 29, 1910, which affirmed an order of Special Term directing an appraisal of the stock of the petitioner pursuant to section 17 of article 2 of the Stock Corporation Law. The Sackett & Wilhelms Company is a domestic corporation organized to carry on the business of lithographing and printing. In August, 1909, at a meeting of its stockholders, held pursuant to notice, a resolution was adopted by the votes of the holders of more than two-thirds of the capital stock, authorizing the board of direc- tors to ‘sell the good-will, business, Assets and property of what is known as its Calendar Department, the same being and constituting a separately conducted department of its business, upon such terms and for such consideration” as the directors should prescribe. The respondent, who owned forty shares of preferred stock and thirty-five of common, voted against the resolution, and within twenty days after the meeting served a notice objecting to the sale and demend- ing payment for his stock, ‘‘pursuant to the provisions of the Stock Corporation Law.” As the demand was not complied with, upon a petition showing these facts among others, he moved at Special Term on due notice for the appointment of appraisers, and that he be paid for his stock the amount of the appraisal thereof, when made. Upon the hearing before the Special Term it appeared that tlie business of the calendar department was to obtain orders and create a demand for calendars and other advertising specialties through traveling salesmen; to secure designs and plates for the decoration thereof; to procure the same to be lithographed and printed by the regular department of the company, accounting for the work at cur- rent rates and to sell the same through its salesmen; that it did no printing or lithographing; that the sales of the calendar department, which has always been separately conducted and the accounts thereof separately kept, amounted to about one-thirteenth of the entire business of the corporation; that the successful conduct of the de- partment required the continued use of a large amount of capital which the corporation was unable to provide; that the business, assets and good-will comprised among other things pictures, plates, finished calendars, contracts with salesmen of calendars and the good-will of buyers of calendars; that a corporation known as the Robert Chapman Company had been organized with power to “‘ac- quire, as a going concern,” the calendar business of the Sackett & Wilhelms Company, and the terms of sale required the purchaser to give all the printing and lithographing to the parent company at CHAP. 11.] MATTER OF TIMMIS. 967 current rates for the period of ten years; that the purchase price was to be $20,000 in cash, all the common stock amounting to $150,000 and $60,000 of the entire issue of $300,000 of preferred stock. The motion was granted, appraisers were appointed and the court further ordered that within ten days after their report “the said Sackett & Wilhelms Company pay in cash to the petitioner the value of his stock as estimated and certified by said appraisers and that thereupon the petitioner surrender the certificates for said shares to said company for cancellation.”” The corporation appealed from the order of the Special Term to the Appellate Division and from the order of affirmance by that court to the Court of Appeals. Vann, J. This appeal involves the construction of sections 16 and 17 of the Stock Corporation Law. Section 16, which is entitled “Voluntary sale of franchise and property,” provides that “A stock corporation .. . with the consent of two-thirds of its stock, may sell and convey its property, rights, privileges and franchises, or any interest therein or any part thereof to a domestic corporation, en- gaged in a business of the same general character . . . and such sale and conveyance shall, in case of a sale to a domestic espa vest the rights, property and franchises thereby transferred . the corporation to which they are conveyed for the term of its cor- porate existence. .. . Before such sale or conveyance shall be made such consent shall be obtained at a meeting of the stockholders called upon like notice as that required for an annual meeting.” The provisions authorizing a sale of property only to a foreign cor- poration are not now material. Section 17, entitled, ‘Rights of non-consenting stockholders on voluntary sale of franchise and property,” provides that “If any - stockholder not voting in favor of such proposed sale or conveyance shall at such meeting, or within twenty days thereafter, object to such sale, and demand payment for his stock, he may, within sixty days after such meeting, apply to the Supreme Court... for the appointment of three persons to appraise the value of such stock, and the court shall appoint three such appraisers, and . . . also direct the manner in which payment fcr such stock shall be made to such stock- holder. ... When the corporation shall have paid the amount of such appraisal, as directed by the court, such stockholder shall cease to have any interest in such stock and in the corporate property of such corporation and such stock may be held or disposed of by such corporation.” (Stock Corporation Law [L. 1909, chap. 61], §§ 16 and 17; Consolidated Laws, chap. 59, §§ 16 and 17.) The appellant claims that the sale of the calendar department is in the line of its ordinary business; that it is a lawful corporate act regardless of section 16 and that it did not give to the dissenting stock- holder the rights created by section 17. The substance of the sections in question was first enacted by 068 MATTER OF TIMMIS. (CHAP, II. chapter 638 of the Laws of 1893, probably to meet the situation as it was left by a line of judicial decisions ending in 1892. The valuable opinion of Judge ALLEN in Abbot v. American Hard Rubber Co. (33 Barb. 578), after standing the test of time and criticism for thirty years, was followed by People v. Ballard (134 N.Y. 269). These cases and those which intervened established the law that a corporation cannot sell all its property, or even a part thereof so integral as to be essential for the transaction of its ordinary business, because such a sale is wholly or partly an act of self-destruction and a practical dissolution without compliance with law. The discussion of the subject in the various opinions suggested two evils: (1) The injustice to the bulk of the stockholders from want of power in a corporation to sell its business or an essential part thereof to another corporation organized for the purpose, frequently from its own membership, on terms deemed advantageous by the holders of a large majority of the stock. (2) The injustice to mi- nority stockholders of requiring them to abandon, change or limit their business if the majority should have the power to direct such a sale. An incidental evil was the power of a dissenting stockholder to compel the majority to buy him out on his own terms in order to se- cure unanimous consent with no one left to question the transaction. These evils could be remedied only by legislation, for the courts cannot provide against inherent defects in the creation of corpora- tions. The Act of 1893 is reproduced and amplified by sections 16 and 17 of the statute now in force. This legislation was designed to meet the evils pointed out by the courts by enabling a majority of two-thirds to sell if they deemed it was the best policy, and at the same time to protect the minority, if they regarded the sale as op- posed to their interests. The situation when the original act was passed points to the purpose of the legislature and throws light on the meaning of the words used to express its intention. Notwith- standing the broad language of section 16, it is obvious that it was not addressed to ordinary sales by a corporation, nor even to those extraordinary in size but still in the regular line of its business, for such sales would have been valid without amending the Stock Cor- poration Law. We are not now called upon to lay down a rule em- bracing all the cases covered by the statute, but simply to decide whether the facts of this case bring it within the sections under consideration. "The sale before us was not made in the ordinary course of the busi- ness of the corporation, for it was not organized to sell calendar departments, or any department that would involve going out of business pro tanto. It was not a sale of calendars over the counter or on the road, but of the “business assets and property,” including the good-will, of an independent and important branch of its business, and the large price agreed upon indicates the actual value of what CHAP. 11.] MATTER OF TIMMIS. 969 was sold. The parent company lacked capital to carry on the depart- ment, and, as the learned counsel for the appellant states, “the sale was a business necessity,” which implies that it was not in the ordi- nary course. By the sale of the good-will the corporation would be prevented from ever engaging in that kind of business again, and while not in form a sale of its franchise to that extent, it would be in effect, because it could no longer exercise its franchise to make and sell calendars. One of the powers conferred by the charter would thus be parted with, and the right to carry on a line of business authorized by the law of its being would be permanently gone. It could not do a kind of business duly authorized by its charter as it had before. As an arm of a living man may become paralyzed and useless, so an arm of the appellant would become paralyzed and use- less by such a sale as the one described. As the living arm could no longer lift, or touch, or exercise its cunning, so the arm of the arti- ficial being could no longer make calendars, or sell them, or enter into contracts relating thereto. Its own action would result in com- plete paralysis of every power required to conduct a calendar de- partment, and to this extent it would go out of business. Sucha sale would, therefore, be corporate suicide to a certain extent, and to that extent a sale or abandonment of the charter. While a natural person may do anything within the limits of his physical and mental capac- ity not forbidden by law, an artificial person can do nothing except as authorized by law. The sale in question would not be valid with- out resorting to section 16, and by resorting to that section the appel- lant opened the door for the respondent to enter and demand his rights under section 17. The claim that the earlier section was not invoked by specific mention in the notice calling a meeting of stock- holders to authorize the sale, is met by the statement therein that “under the charter of the corporation the calendar department can- not be transferred to a separate corporation without the authoriza- tion of the holders of two-thirds of the capital stock.”” While this did not refer directly to the Stock Corporation Law, it did indirectly, for every statute which adds to or takes from the power of a corporation is a part of its charter. As the appellant availed itself of the privilege conferred by the statute, it must comply with the condition prescribed for the exercise thereof. The order appealed from should be affirmed, with costs. Cutten, Ch.J., Gray, Hatcut, WERNER, WILLARD BARTLETT and Cuass, JJ., concur. Order affirmed. Nors. — See Mass. Laws of 1903, chap. 487, §§ 40 and 4A. Koehler v. St. Mary’s Brewing Co., 228 Pa. 648. Although by the Act of 1876, P. L. 30, § 5, the holders of the majority of the stock 970 COTTON v. IMPERIAL CORPORATION. [CHAP. II, of specified corporations may cause all its property to be sold to other corporations, this act is not to be construed to require any dissenting stockholder to accept anything but cash or its equivalent for his interest. re * ov OOTTON ». IMPERIAL CORPORATION. [1892.] 3 Ch. 454. Tue Imperial and Foreign Agency and Investment Corporation, hereinafter called the Old Company, was formed in 1889. The capital consisted of founders’ shares, preferred shares, and deferred shares. The memorandum of association stated that the object of the company, amongst other. things, was (S) to sell, lease, or otherwise dispose of the company’s undertaking, or any part thereof, or any property, or interest in property, from time to time belonging to the company, for such consideration as the company might think fit; and in particular for shares, stock, obligations, debentures, deben- ture stock, scrip, or securities of any company; and (T) to divide any shares, stock, bonds, obligations, debenture stock, scrip, or securities belonging to the company among the members in specie. It having been deemed expedient to wind up the company, an extraordinary general meeting of the company was held on the 13th of April, 1892, at which a resolution was passed approving of the sale and transfer of the undertakings of the Old Company to a New Company, to be incorporated for the purpose, under the same name with the word New prefixed, in accordance with the terms of a draft agreement submitted to the meeting. On the same 138th of April, at the same meeting, a special resolution was proposed for the vol- untary winding up of the Old Company and for the appointment of two liquidators; but such resolution was lost. On the 2d of May, 1892, the agreement between the Old Company and the New Company was executed for the sale and transfer of the Old Company’s undertaking to the New Company, in consideration of the allotment to the Old Company of fully paid-up shares in the New Company. At an extraordinary general meeting of the Old Company, held on the 4th of May, 1892, a special resolution was passed for the volun- tary winding-up of that company and the appointment of two liqui- dators; and on the 25th of May, at another extraordinary general meeting, the resolution passed at the meeting of the 4th of May was confirmed, and it was resolved that the liquidators should be author- ized to divide among the members of the Old Company, so far as possible, the paid-up shares receivable under the agreement of the 2d of May, 1892. CHAP. 11.] COTTON v. IMPERIAL CORPORATION. 971 ce plaintiff was the holder of founders’ shares as well as other shares. In July, 1892, the plaintiff took out a summons in the winding-up of the Old Company, before Mr. Justice VAUGHAN Wiurams, asking that it might be declared that he was entitled to compel the liquida- tors to purchase the shares and all other (if any) the interest held by or belonging to him in the Old Company, at a price to be deter- mined in accordance with the provisions of §§ 161 and 162 of the’ Companies Act, 1862, and that the liquidators might be restrained from transferring the assets of the Old Company to the New Com- pany, when his Lordship held, that the transaction did not come within the 161st section, and was of opinion that if the plaintiff had any remedy it was by an action to set aside the agreement. The plaintiff thereupon commenced this action on behalf of himself and all other the shareholders in the Old Company, asking that it might be declared that the agreement of the 2d of May, 1892, was ultra vires the Old Company; and for an injunction to restrain such company and the liquidators from proceeding to carry the agreement into effect; or, in the alternative, for a declaration that the plaintiff and all other dissentient shareholders of the Old Company were entitled to require the liquidators either to abstain from carrying the agreement into effect or to purchase the interest held by them at a price to be determined in manner prescribed by § 161 of the Com- panies Act, 1862; ' and to restrain the liquidators from dealing with the assets of the Old Company without providing for the payment of the amount due to them in respect of the purchase of such interest. The plaintiff now moved in the terms of his writ. 1 25 & 26 Vict. chap. 89, § 161: ‘‘ Where any company is proposed to be or is in the course of being wound up altogether voluntarily, and the whole or a portion of its business or property is proposed to be transferred or sold to another company, the liquidators of the first-mentioned company may, with the sanction of a special resolu- tion of the company by whom they were appointed, conferring either a general author- ity on the liquidators, or an authority in respect of any particular arrangement, receive in compensation or in part compensation for such transfer or sale shares, policies, or other like interests in such other company, for the purpose of distribution amongst the members of the company being wound up, or may enter into any other arrange- ment whereby the members of the company being wound up may, in lieu of receiving cash, shares, policies, or other like interests, or in addition thereto, participate in the profits of or receive any other benefits from the purchasing company; and any sale made or arrangement entered into by the liquidators in pursuance of this section shall be binding on the members of the company being wound up; subject to this proviso, that if any member of the company being wound up who has not voted in favour of the special resolution passed by the company of which he is a member at either of the meetings held for passing the same expresses his dissent from any such special resolu- tion in writing addressed to the liquidators or one of them, and left at the registered office of the company not later than seven days after the date of the meeting at which such special resolution was passed, such dissentient member may require the liquida- tors to do one of the following things as the liquidators may prefer; that is to say, either to abstain from carrying such resolution into effect, or to purchase the interest held by such dissentient member at a price to be determined in manner hereinafter mentioned, such purchase-money to be paid before the company is dissolved, and to be _Yaised by the liquidators in such manner as may be determined by special resolution.” 972 COTTON Vv. IMPERIAL CORPORATION. [cHap. Il. Cutty, J. The motion is to restrain the Old Company, in which the plaintiff is a shareholder, and the liquidators of that company, from proceeding to carry into effect the agreement of the 2d of May, 1892. That agreement was entered into between the Old Company and a New Company which has the same name, with the addition of the word “New,” and who are also defendants. In the memorandum of association of the Old Company there is the usual clause stating the objects for which the company is estab- lished, and they are numerous; but I need only to refer to that one under the letter ‘“‘S.” [His Lordship read the clause as set out above.] , Now it is said that the power which is thus taken by the company to itself, and assented to by all the persons who were or were to become members of the company, is ultra vires; and I have been at a loss to understand from the beginning of the argument to the present moment how that can be. The company might have for one of its objects the buying and working of an hotel, and it buys the hotel and works it, but it takes power in its memorandum of association to sell the whole of its undertaking. That is a good power. It can sell the hotel, and, when it has got the money, the money will have to be dealt, with according to the constitution of the company. Instead of selling for money, this company by its memorandum says that the sale may be for shares in another company.’ I see nothing unlawful in that whatever. I'am really at a loss to know how to put the argument, because, when the shares in the other company are thus acquired through the medium of a sale, these shares become the property of the selling company, and have to be dealt with according to the con- stitution of that company. In the memorandum before me, there is under the letter ‘‘T”’ power to divide the shares, debenture stock, and securities belonging to the company among the members in specie. I am not concerned with that power at the present moment; but it shews that the Old Company contemplated selling, as it clearly did, for shares, and dividing them among the members. Of course, that must be subject to all the rights of the members as defined by the memorandum and articles of association. They must divide the shares and the other securities mentioned if they take them upon the sale according to the rights of the members inter se; but they may clearly, in my opinion, take, as the consideration for the sale, shares in another company. That being so, it was necessary, in conformity with clause 8, which provided that the consideration was to be such as the company might think fit, that there should be a meeting of the Old Company to determine whether they would take shares as a consideration for a sale. A meeting was duly convened and held, and a resolution was passed, the effect of which was that the directors were authorized by thé company to enter into the agreement of the 2d of May, 1892. It is in substance an agreement for the trans- CHAP. 11.] COTTON ¥v. IMPERIAL CORPORATION. 973 fer of the whole of its undertaking by the Old Company to the New Company, the consideration being shares. In my opinion what has been done by the directors is authorized by the memorandum, and by the resolution of the company acting in pursuance of the memorandum. Now, it certainly is the case that when the directors proposed the resolution in regard to this sale for shares to the meeting they also proposed that there should be a winding-up, which proposition was, however, not carried, while the other was. Afterwards the directors thought it would still be advisable to wind up if the shareholders were of that opinion; and subsequent meetings were held, and the result was that a resolution was passed to wind up voluntarily. These latter facts form another ground upon which the argument in support of this motion is based. It is said that now the 161st sec- tion of the Act of 1862 is brought in, and that inasmuch as there was at the time when the first resolution was carried, a proposal before the meeting to wind up, the resolution as to the sale was ulira vires. because the clause in the memorandum of association was rendered void by the 161st section. With great respect to those who put the argument before the Court, it seems to me that that is extravagant. This was a good resolution when it was passed, and it is contrary to the settled decisions upon the construction of Acts of Parliament to go upon a “tendency.” You must find that the thing which is done, and which is said to be void, is, when the Act of Parliament is properly understood, a violation of the Act: Jeffries v. Alexander, 8 H.L.C. 594; Philpott v. St. George’s Hospital, 6 H.L.C. 338. The 16l1st section is in substance this — when there is a wind- ing-up, whether voluntarily or by the Court or under supervision, the duty of the liquidators under the Act of Parliament is to turn all the assets of the company into money, and, having paid the creditors and the costs of the winding-up, then to distribute among the mem- bers according to their equities the surplus, if there be any. Then it was seen that there were many cases in which a company might wind itself up voluntarily or the like merely for the purpose of re- construction, and that it would be very advantageous that there should be taken a power in substance for the company to reconstruct itself. That was one of the objects that was sought to be accom- plished by the 161st section; but the gist of the enactment is-this — that the liquidators in a winding-up, instead of selling for money, may sell for shares; but, as a safeguard against that, and against im- posing possibly a liability upon a member of the company which is being wound up by seeking to force upon him shares which were not fully paid up, the Legislature has, by way of protecting his interest, said in substance that if he dissents he may receive the value of his shares in money. That is, in short, an explanation of the meaning and effect of the 161st section. It relates to what may be done where 974 SCHWAB Jv. POTTER CO. [cHaP. 1. there is a winding-up; and although the section commences with the words, ‘‘Where any company is proposed to be. . . wound up,” the result is plain that the power is only conferred upon the liquidator. Now, I take this clause, and endeavour to apply it to the power in the memorandum. The company has sold its undertaking for shares in another company. What then? This 161st section may still have an operation upon the shares which have thus been taken as the con- sideration. I can see no inconsistency in saying that the liquidators, if otherwise duly authorized according to the 161st section, might actually sell the shares which they take from the new company, they being part of the assets of the old, and sell them to some other com- pany on the terms of their taking shares in that other company. I can see therefore upon this short statement no inconsistency be- tween the 161st section and the power taken by the memorandum of association. There is no prohibition in the 161st section. It is a power conferred upon the liquidators for the more convenient wind- _ing-up of a company, and it is not a violation of anything to be found in that section for a company, by its own memorandum of associa- tion, to take power to sell its assets for shares in another company, and even if it should think fit (because this would be the agreement of all the members of the company) to divide in specie amony the share- holders the shares which have been thus acquired. Nore. — See also, Republican Mines, Ltd., v. Brown, 58 Fed. 644, 650. Traer v. Lucas Prospecting Co., 124 Iowa, 107. Although minority stockholders dissent, a prosperous corporation may sell all its prop- erty for stock in another corporation, if its articles of incorporation, taken in connection with the law under which the organization takes place, authorize such transfer. ‘‘When a person becomes a share- holder in a corporation, he assents to the transaction of the business expressly or impliedly authorized by the charter; and therefore, if the charter authorizes the sale or other disposition of all its property, he cannot complain.” See also Maben v. Gulf Coal Co., 173 Ala. 259, 261, 265. SCHWAB »v. POTTER CO. 194 N.Y. 409. 1909. AppEAL, by permission, from an order of the Appellate Division of the Supreme Court in the first judicial department, entered Decem- ber 11, 1908, which reversed an interlocutory judgment of Special Term overruling a demurrer to the answer and sustained such demurrer, CAP. 11.] SCHWAB v. POTTER CO. 975 The case made by the complaint is substantially as follows: The defendant, ‘““E. G. Potter Company,” is a domestic corporation organized in 1905 for a purpose not disclosed, with a capital stock of $350,000, divided into 3500 shares of the par value of $100 each. Three thousand shares have been issued and are outstanding, but the remainder have not been issued. On the 31st of December, 1907, said company owned a parcel of real estate in the city of New York known as 477 Fifth Avenue, with an office building thereon six stories in height. Said property, being all the real estate owned by the company, was subject to a mortgage thereon of $350,000, but was otherwise free from incumbrance. On the day last named ‘“‘said company, at a special meeting of its stockholders called for the purpose... passed a resolution” the material portions of which are as follows: ‘Resolved, that the board of directors of this company be and they hereby are authorized, empowered and directed to cause to be organized a corporation at the expense of this company under the laws of the State of New York, with a capital stock of $100,000, with the name ‘Library Realty Company,’ or such other name as may be satisfactory to the officers of this company, for the purpose of acquiring the real estate of this company, No. 477 Fifth Avenue, in consideration of the issuance to this company of all the capital stock of said new corporation; . That the board of directors be and they are hereby authorized, em- powered and directed to transfer to said new corporation when formed, the equity in the real estate of this company known as 477 Fifth Avenue, subject to the existing mortgage thereon amounting to $350,000 and to receive in exchange for said equity in said real estate all the capital stock of said new corporation to be formed, viz.: capital stock of the par value of $100,000;... That the board of directors of this company be and they hereby are authorized, em- powered and directed to cause the said $100,000 par value of stock of said new corporation when acquired by this company to be offered by proper notice to the stockholders of this company for subscription at par, each stockholder of this company to have the right to sub- scribe for an amount of the stock of the new corporation at par equal to one-third of the par value of said stockholders’ holdings of this company, each stockholder not wishing to subscribe to have the right to assign his rights to so subscribe, and, in the event of failure of any stockholder or his assignee to so subscribe, his rights to sub- scribe to terminate and the company to have the right to receive subscriptions for all or any part of such unsubscribed for stock in the new corporation from the stockholders of this company or from out- side parties, the time in which to subscribe to be limited as the direc- tors may deem best and the said subscription to be in cash as follows ... That the board of directors be and they hereby are authorized, empowered and directed to do or cause to be done all acts that may 976 SCHWAB v. POTTER CO. [CHAP. II. be necessary, convenient or desirable in order to carry out the fore- going resolutions and to properly safeguard the rights of this com- pany and of the stockholders to the stock of the new company.” This resolution was adopted by a vote of 2450 shares in favor as against 550 opposed, after the stockholders in attendance at the meeting had been furnished with a statement of the assets and liabil- ities of the company in which said real estate is valued at the sum of $498,301.90, less $350,000, the amount of the mortgage thereon. The plaintiff subsequently had the property appraised by competent and reputable real estate dealers familiar with the values of real property in the locality in question, who reported it worth the sum of $525,000, said sums being respectively $48,000 and $75,000 “in excess of the prices at which it is proposed to convey the same to the corporation.” The rest of the assets, valued at about $100,000, were described in said statement as ‘merchandise in store, fixtures in store, labor on contracts in progress, etc.” The bills and accounts owing by the corporation amounted to $98,199.23, and while a surplus of $1,642.97 was reported, unless the equity in the real estate was worth more than $100,000, the sum at which it was proposed to sell it, there was not only no surplus, but the capital was impaired to the extent of $46,658.03. The plaintiff was one of the original corporators of the defendant company and has owned 100 shares of its capital stock from the outset, having paid $10,000 in cash therefor. He voted and protested against the adoption of said resolution, and, alleging that $100,000 is an inadequate price for the equity in the real estate, he brought this action in behalf of himself and the other dissenting stockholders, to restrain the company, its directors and officers from taking the pro- posed action, upon the ground that it “is illegal and calculated to injuriously affect the rights of” the minority. The complaint con- tains no express allegations of fraud or bad faith. It alleges that the directors all favor the plan and that they are about to carry it into effect. The defendants answered, and the following is a copy of their sec- ond and third separate defenses: “Second. That it was necessary to sell the property at said sum of $450,000, or even less, if said price could not have been obtained, to conserve the interests of the stock- holders of the defendant company.” “Third. That the agreement to sell the property pursuant to the resolution marked in the com- plaint ‘Exhibit A,’ was ratified and confirmed by stockholders repre- senting over two-thirds of the capital stock of the company.” To these defenses the plaintiff demurred on the ground that each is insufficient in law upon the face thereof. The court at Special Term overruled the demurrer, holding that the answers were good, only because the complaint was bad, but the Appellate Division, by CHAP. 11.] SCHWAB 0. POTTER CO. 977 a vote of three to two, reversed the interlocutory judgment and sus- tained the demurrer upon the ground that the complaint was good and the answers bad. The defendants appealed to this court by permission of the Appel- late Division, which certified the following question for decision: “Does the complaint state facts sufficient to constitute a cause of action?” Vann, J. The main question presented by this appeal is whether the proposed transaction is beyond the powers of the defendant corporation, for it is well established that in the absence of fraud or bad faith courts have nothing to do with the internal management of business corporations, provided they keep within their corporate powers. (Gamble v. Queens County Water Co., 123 N.Y. 91; Flynn v. Brooklyn City R.R. Co., 158 N.Y. 493, 507.) Thus we said in the case last cited: ‘Whatever may lawfully be done by the directors or stockholders, acting through majorities prescribed by law, must of necessity be submitted to by the minority, for corporations can be conducted upon no other basis. All questions within the scope of the corporate powers which relate to the policy of administration, to the expediency of proposed measures, or to the consideration of con- tracts, provided it is not so grossly inadequate as to be evidence of fraud, are beyond the province of the courts. The minority directors or stockholders cannot come into court upon allegations of a want of judgment or lack of efficiency on the part of the majority and change the course of administration. Corporate elections furnish the only remedy for internal dissensions, as the majority must rule so long as it keeps within the powers conferred by the charter.” The complaint does not disclose the purposes for which the defend- ant corporation was organized, nor set forth its corporate powers except as it may be inferred from the statement of assets and liabili- ties that it carries on a manufacturing business, while the new cor- poration apparently was to be a “realty” company. If, however, no corporation in this state is authorized to organize another, divide its assets with it and take in exchange its entire capital stock, then the proposed plan is ultra vires and the execution thereof may be re- strained by injunction. : Corporations are created by statute and have no powers except those conferred by statute, directly or indirectly. (L. 1892, chap. 687; L. 1895, chap. 672, § 10.) There is no statute in this state which directly authorizes one corporation to organize another and, as we think, such action is not indirectly authorized by any reasonable inference from the most extensive powers committed to any class of corporations known-to our law. Corporations are organized by natu- ral persons, acting under the direction of a statute, and they only can become corporators, directors or officers. “ Artificial persons,” without brain or body, existing only on paper through legislative 978 SCHWAB v. POTTER CO. [CHAP. II. command and incapable of thought or action except through natural persons, cannot create other “‘artificial persons,” and those, other still, until the line is so extended and the capital stock so duplicated and reduplicated, as to result in confusion and fraud. If, in the case before us, the proposed plan is carried into effect, the old corporation will be the only stockholder of the new corporation when it comes into being, which is the time to test its legality, and the entire capital stock of the latter will have been taken from the assets of the former. After the old corporation has thus split itself into two corporations, both together will have only the capital that the old corporation had before. Not a dollar of new capital will have been contributed either in money or property, and only when the old corporation sells to sub- scribers or outsiders, — and it is not alleged that it will be able to sell to either, — all or a part of the shares of stock, issued to it by the new, can any money come from the transaction. This shows that the purpose of the strange action proposed is to increase the capital stock of the old company without complying with the provisions of the statute governing the subject. The increase is to be obtained by what is in effect a forced assessment upon the full paid and non-assess- able shares of the stockholders, for unless they take new stock they lose a material part of their investment, although something they do not want is given in exchange. Thus they are virtually compelled by an unlawful scheme to enter into new contractual relations with strange parties. (Mason v. Pewabic Mining Co., 133 U.S. 50.) This would be an obvious evasion of the law which the courts will restrain when applied to by the proper party. As was well said by the pre- siding justice below in a useful opinion: ‘But it is evident from the allegations of this complaint and from the inferences that fairly may be drawn from such allegations that what was in the contemplation of the directors and majority stockholders of the defendant corpora- tion was not to have that corporation make an actual sale of the real estate to another corporation and receive shares of stock as the con- sideration therefor, but to resort to a device by which to increase its capital by dismembering itself and organizing another corporation of which it should be the only stockholder, and thus evade the pro- visions of the statute relating to the increase of the capital stock of a corporation. The defendant corporation, by the resolution, is au- thorized and directed to create a new corporation at the expense of the old one. What it is to do, therefore, is to be a corporate act done in its capacity as a corporation. Instead of increasing its capital stock in the manner provided by law, it is to separate its assets, deliver one portion of them to its own creature, capitalize that portion at a fixed valuation, and receive back all the shares of stock issued by its creature; and there that transaction really ends. Affording an oppor- tunity to the stockholders of the old corporation to subscribe to the stock of the new one is merely an offer to them to buy from the old CHAP. 11.] SCHWAB v. POTTER CO. 979 corporation this new stock after it comes into the possession of the old corporation.” (129 App. Div. 36, 40.) We cannot assume from the allegations of the complaint that the old corporation will be able to sell the shares of new stock when issued as fully paid and delivered to it. Apparently it has not been able to sell all its own stock, for five hundred shares of the amount authorized have not been issued. It is possible, therefore, that the old corporation will be compelled to permanently hold a part at least of the new shares, while the new corporation will have no individual stockholders to act as officers or directors. The law permits no such anomaly as one corporation organized by another corporation, which furnishes all its capital, takes all its shares of stock and holds them for sale. The new organization could never have a valid existence, for the disposition of the shares by the old corporation would not validate an illegal charter. Section 40 of the Stock Corporation Law does not aid the defend- ants. That statute authorizes a stock corporation, if permitted by its charter, to acquire, hold and dispose of shares of stock issued by another corporation, and in any case to acquire, hold and dispose of shares of stock issued by certain classes of corporations, including those engaged in a similar business and those with which it might be consolidated. (L. 1892, chap. 688, § 40.) It does not permit one cor- poration to create another, endow it with capital from its own assets and take all its shares of stock in exchange. Moreover, it is not alleged in the complaint that the defendant company is authorized by its charter to acquire stock in another corporation, or that it is engaged in a business similar to that of the corporation it proposes to organize. Corporations cannot resort to ingenious and original methods of action with the freedom of individuals, for they are confined to those expressly authorized by statute and such as are incidental thereto and necessary to carry them into effect. If the purpose of the old corporation was to increase its capital stock, the object was lawful but the method was unlawful and this is true if its object was merely to sell its real estate. Whatever the purpose may have been, the plan was unlawful, because it would have caused an increase of the capital stock of the corporation by an unauthorized method. While the majority stockholders, or the directors, acting as individuals, could have organized the new corporation, they could not use the real estate of the old corporation to provide it with capital stock, for that was not their property. According to the scheme adopted, how- ever, the majority stockholders were not to effect the new organiza- tion, but. the board of directors, acting as such, were ‘‘authorized, empowered and directed to cause’’ the new corporation to be organ- ized, “at the expense of the old” and by a division of its assets. This was beyond the powers of the corporation, its stockholders and direc- 980 SCHWAB JU. POTTER CO. [CHAP. II. tors. Whatever is done by a corporation without authority is done in violation of law, for all action, not authorized directly or indirectly, is prohibited. (General Corporation Law. [L. 1890, chap. 563, as amended], § 10.) Any minority stockholder who opposed the scheme was entitled to an injunction, even without alleging actual injury, or the certainty thereof in the future, for he is entitled to stand on his legal rights and may refuse to accept “something better” in exchange. His legal right was to continue a member of one corpora- tion and not to be forced into the membership of a second corpora- tion, all the capital of which was to be taken from the assets of the former. The plaintiff is now the equitable owner of one-thirtieth of the assets of the defendant company. By the proposed plan he will be deprived of his one-thirtieth interest in the real estate and either lose it altogether or be forced to buy stock in another company, organized without the sanction of law, in order to save himself. That would in effect be a forced sale by the corporation to its own stock- holders, and would result in an increase of the capital stock by an unauthorized method. If we have reasoned correctly thus far, it is obvious that the alle- gations in the second and third divisions of the answer constitute no defense. Even if a sale of the real estate was ‘“‘necessary,’’ as alleged in the second defense, that did not permit the organization of a cor- poration without authority, nor justify the spoliation of the defend- ant company in order to give it capital; and, if the agreement to sell was “ratified” by two-thirds of the stockholders, as alleged in the third defense, that did not validate the method of selling, as to any stockholder who objected. Ratification may confirm a voidable act, but not one utterly void. We think that the complaint sets forth a good cause of action and that the answer, so far as before us, sets forth no defense. The order appealed from should be affirmed, with costs, with leave to the defendants to plead over within twenty days on payment of costs, and the question certified answered in the affirmative. Cutten, Ch.J., Hargot, Werner, WILLARD BarTiett, Hiscock and Cuasg, JJ., concur. Order affirmed. Note. — Such a sale or lease as is considered in this chapter is, it is submitted, usually objectionable only because it is contrary to the compact among the stockholders. See Farish v. Cieneguita Copper Co., 12 Ariz. 235, 239. But it may be objectionable because the transaction is ultra vires the corporation, using that word in the sense stated at p. 378, supra. Thus, (1) of a sale or lease of the assets of a public service corpora- tion, without legislative sanction; or (2) of a sale or lease in consider- ation of stock which it is ulira vires for the corporation to acquire. CHAP. I] SCHWAB v. POTTER CO. 581 For cases, in addition to the principal case, where the transaction was objectionable on the ground that it involved an ultra vires hold- ing of stock, see Byrne v. Schuyler Co., 65 Conn. 336; Easun v. Buck- eye Brewing Co., 51 Fed. 156. Cf. Holmes Mfg. Co. v. Holmes Metal Co., 127 N.Y. 252, holding that it is not ultra vires for a manufacturing corporation, with the consent of all its stockholders to transfer its assets for the stock of another corporation. ‘‘Inasmuch as this was done with the consent of all the stockholders, it being the act of a private corporation, not in any manner harming the public, we see no reason for condemning its title to the stock so obtained.” 982 EWING ¥. COMPOSITE BRAKE SHOE CO. [CHAP. I. CHAPTER III. RIGHTS OF CREDITORS AS AFFECTED BY REORGANIZATIONS. EWING v. COMPOSITE BRAKE SHOE CO. 169 Mass. 72. 1897. Action at law upon a contract. Laturop, J. The plaintiff was a creditor of a Maine corporation to the amount of $787. This corporation ceased to do business, and the stockholders, together with at least one other person, formed a new corporation with a different name under the laws of Massa- chusetts. The new corporation is the defendant in this case. It took all the assets of the old corporation except its books, but it did not assume to pay all of the debts of the old corporation, although there was evidence that one Whitcomb, who was the manager of both of the corporations, told the plaintiff that the new company would be liable for the debts of the old. It is obvious, however, that where a new corporation is formed, the creditors of the old corporation do not, without something further being done, become creditors of the new corporation. They have an equitable right to follow the assets of the old corporation; but they cannot maintain an action at law against the new corporation, for there is no privity of contract. To render the new corporation liable there must be a new contract made, such as will amount to a novation. See Moraw. Corp. (2d ed.) §§ 808 et seq. Notes. — A covenant made by a corporation will run with the land owned by the corporation when the covenant was made if, but only if, a similar covenant by a natural person would run. See Warren, Cases on Property, pp. 840 et seq. But there is no rule of law, special to corporations, that corporate liabilities run with corporate assets, even if those assets aré acquired as an entirety. The authorities in accord with the principal case are numerous. A fortiori, the purchaser is not bound if the purchase is made at a sale in foreclosure of a mortgage upon the corporate assets. Lake Erie Co. v. Griffin, 92 Ind. 487; Cook v. Detroit Ry. Co., 43 Mich. 349; Smith v. Chicago Ry. Co., 18 Wis. 17. Usually the vendee promises the vendor, in consideration of the CHAP, IIIl.] NEW BEDFORD RAILROAD ¥. OLD COLONY RAILROAD. 983 transfer of the assets, to discharge all the liabilities of the vendor. This promise is an asset of the vendor and may be reached in equity by the creditors of the vendor; and.in many jurisdictions the creditors of the vendor may sue the vendee at law. See Wald’s Pollock on Contracts (3d American edition by Williston), pp. 256 et seq.; Haw- kins v. Central of Georgia Ry. Co., 119 Ga. 159; Harvey v. Milk Co., 92 Me. 115; Tecumseh National Bank v. Saunders, 50 Neb. 521 : Billmyer Lumber Co. v. Merchants Coal Co., 66 W.Va. 696. NEW BEDFORD RAILROAD ». OLD COLONY RAILROAD. 120 Mass. 397. 1876. Cott, J. The Statute of 1874, chap. 55, authorizes the defendant corporation “to purchase the rights, franchise and property of the Middleborough and Taunton Railroad Corporation,” and gives to the latter corporation, upon such purchase, power to convey to the Old Colony Railroad Company “‘its franchises and property, and all the rights, easements, privileges and powers granted to it.” It also declares that upon such conveyance the defendant corporation shall “have and enjoy all the rights, powers, privileges, easements, fran- chises and property of said Middleborough and Taunton Railroad Corporation, and be subject to all the duties, liabilities, obligations and restrictions to which said last named corporation may be subject.” This action is to recover damages for a tortious act of the Middle- borough and Taunton Railroad Corporation, for which it was liable previously to the time of the purchase; and the questions raised by the demurrer are, whether the defendant is liable for that act, and, if so, whether an action can be maintained directly against it, or must be first brought against the other corporation. The answer to these questions depends upon the intention of the Legislature, to be deduced from the terms of the statute and the manifest purpose of the act. The language is broad enough to place the defendant in all respects in the position of the other corporation, upon the conveyance and assignment provided for. It is equivalent to an amalgamation of the two; all the franchises, privileges and powers are transferred, without reservation; not merely the franchise to own and manage a railroad, but the franchise of being a body politic, with rights of succession, of acquiring, holding and conveying property, and of suing and being sued by its corporate name. It puts out of the reach of creditors all property liable to attachment to satisfy claims, either in contract or tort. It practically terminates the corporate existence of the selling corporation, except, perhaps, 984 IRVINE J. NEW YORK EDISON CO. [cHAP. In. so far as such existence may be necessary in order to hold and distrib- ute the consideration received for the sale, or to meet the require- ments of the statute which prolongs the life of all corporations for three years after dissolution, for the purpose of enabling them to close their concerns. Gen. Sts. chap. 68, § 36. It operates as a dis- solution of the corporation by force of the statute and of the assent manifested by the sale. Lauman v. Lebanon Valley Railroad, 30 Penn. St. 42. In view of these results, it would be a narrow construction to hold that when the statute subjects the purchasing corporation ‘‘to all the duties, liabilities, obligations and restrictions” of the other, it only intended to impose those obligations which the corporation owed the public under its charter and the laws of the Common- wealth, and that the property transferred was only that by which it served the public in the exercise of its franchise. In the absence of express provision, it cannot be inferred that it was the intention of the act to impair claims of third parties for existing liabilities, or to shorten the time within which the remedy must be pursued. The question is not whether the statute compels the creditor to accept the defendant corporation as a new debtor against his will, or an injured person to resort to a stranger for satisfaction, but whether it empowers the creditor or the person injured to resort, if he chooses, in the first instance, to the corporation which, by the terms of the statute, is made liable to him. And we are of opinion that it does, and that the privity necessary to support this action is created by the statute and the purchase and conveyance under it. Demurrer overruled. IRVINE v. NEW YORK EDISON CO. 207 N.Y. 425. 1913. Cuasz, J. The Block Lighting and Power Company, No. 1, trans- ferred its property, real and personal, including its franchises, by bill of sale to the Manhattan Lighting Company on December 13, 1898. The consideration of such transfer does not appear. The Block Company and the Manhattan Company were merged into and with the New York Gas and Electric Light, Heat and Power Company on February 1, 1900. The gas company and the Edison Electric Illuminating Company of New York were consolidated and became the defendant, The New York Edison Company, on May 20, 1901. The transactions mentioned were each independent acts, not having so far as appears any relation to one another. The plaintiff’s claim is against the Block Company. The assets, if any, of the Block Company are in the possession of the defendant, expressly subject, CHAP. 111] IRVINE Vv. NEW YORK EDISON CO. 985 as will hereinafter appear, to the rights of the creditors of the Block Company. The question in this case is reduced to a consideration of the plaintiff’s remedy. Can the plaintiff maintain this action as one of debt against the defendant? I think not, and I concur in the opinion written by Justice McLauGHLin in the court below. , The legislature has provided two ways of uniting two or more corporations by transfer of their property to a single corporation. One statute provides that “Any two or more corporations organized under the laws of this state for the purpose of carrying on any kind of business of the same or of a similar nature” which a corporation organized under the Business Corporations Law might carry on, may consolidate such corporations into a single corporation. (Busi- ness Corporations Law, § 7 [Cons. Laws, chap. 4]. See, also, §§ 7 to 11 inclusive; former Business Corporations Laws [Laws of 1890, chap. 567], §§ 8 to 12 inclusive, as amended prior to 1909.) Another statute provides that “Any domestic stock corporation and any foreign stock corporation authorized to do business in this state lawfully owning all the stock of any other stock corporation organized for, or engaged in business similar or incidental to that of the possessor corporation may file in the office of the secretary of state, under its common seal, a certificate of such ownership, and of the resolution of its board of directors to merge such other corpora- tion, and thereupon it shall acquire and become, and be possessed of all the estate, property, rights, privileges and franchises of such other corporation, and they shall vest in and be held and enjoyed by it as fully and entirely and without change or diminution as the same were before held and enjoyed by such other corporation, and be managed and controlled by the board of directors of such posses- sor corporation, and in its name, but without prejudice to any liabili- ties of such other corporation or the rights of any creditors thereof. ...” (Stock Corporation Law, § 15 [Cons. Laws, chap. 59]; former Stock Corporation Law [Laws of 1890, chap. 564], § 58, as amended prior to 1909.) It is also provided in the Transportation Corporations Law (Laws of 1909, chap. 219, § 61 subd. 3 [Cons. Laws, chap. 63]) that “subject to the permission and approval of the proper public service commis- sion, any two or more corporations organized under this article or under any general or special law of the state for the purpose of carrying on any business which a corporation organized under this article might carry on, may consolidate such corporations into a single corporation, and any such corporation may with the like per- mission and' approval be merged with any other such corporation, upon complying with the provisions of the Business Corporations Law relating to the consolidation of business corporations and the Stock Corporation Law relating to the merger of stock corporations.” 986 IRVINE Vv. NEW YORK EDISON CO. [cHap. mn, The Transportation Corporations Law thus expressly recognizes the right of corporations to consolidate under the Business Corpora- tions Law, and also to merge under the Stock Corporation Law. Each form of procedure is independent of the other. Where a consoli- dation is consummated pursuant to the statute it is expressly pro- vided that the rights of creditors of any corporation that shall be so consolidated shall not in any manner be impaired, and also “such new corporation shall succeed to and be held liable to pay and dis- charge all such debts and liabilities of each of the corporations con- solidated in the same manner as if such new corporation had itself incurred the obligation or liability to pay such debt or damages.” (Cons. Laws, chap. 4, § 11.) If the gas company was liable for the indebtedness to the plaintiff ~ described in the complaint, the action will lie against the defendant therefor because of the statute quoted. Whether the gas company became liable for the debts of the Block Company depends upon the statute, pursuant to which the merger took place. In the statute authorizing a merger of corporations, there is no provision making the possessor corporation liable for the debts of the corporation merged. It is expressly provided in that statute that the merging of corporations shall be ‘without prejudice to any liabilities of such other corporation or the rights of any creditors thereof.” This reservation of the rights of creditors permits them to proceed against the debtor corporation, notwithstanding such corporation is merged into another. The rights of creditors include the right to sue the debtor corporation and to take the property which was of the debtor corporation by execution issued upon a judgment obtained against such debtor. Such right rests upon the express terms of the statute and does not necessarily depend, as has been suggested, upon the existence and a finding of a fraudulent transfer. This court has recently considered the effect, of a merger of bank- ing corporations. (Matter of Bergdorf, 206 N.Y. 309.) Upon a merger of banking corporations (Banking Law [Cons. Laws, chap. 2], §§ 36 to 40 inclusive) it is expressly provided that the corporation into which they are merged shall “be held liable to pay and discharge all such debts and liabilities, and to perform all such trusts of the merged corporation in the same manner as if such corporation into which the other shall become merged had itself incurred the obliga- tion or liability.” But it is provided by the statute that no “action or other proceeding then pending before any court or tribunal in which any corporation that; may be merged is a party shall be deemed to have abated or discontinued by reason of any such mer- ger, but the same may be prosecuted to final judgment in the same manner as if the said corporation had not entered into the said agreement.” This court, in considering the effect of a merger in the Bergdorf CHAP. u1.] IRVINE 0. NEW YORK EDISON CO. 987 case, say: “It could not have taken place without statutory author- ity and the legislature fixed the indisputable and exclusive effects of it. (People v. N.Y., Chicago & St. Lowis R.R. Co., 129 N.Y. 474.)” Referring again to the statutory provisions under which the mer- ger was consummated, the court further say: “Those statutory pro- visions state -plainly the effects of the merger of the Morton Com- pany into the Guaranty Company. The former company became (with the nominal exception hereinafter stated) rightless, property- less and powerless; and the latter company was enlarged by the absorption of all that the former surrendered. .. . But the Morton Company did not surrender its corporate existence. It was not dis- solved. It remained a corporation, but for the single purpose and with the sole power of being sued or proceeded against upon and defending against causes of action alleged to exist against it at the time of the merger. All the other powers bestowed upon it and which were evidenced by its certificate of incorporation and the statute law relating to it were by the merger transferred to the Guaranty Com- pany. A corporation may exist though it possesses no property. A corporation may have a partial as well as a total extinction, and a legislature may enact that the merged corporation shall be extin- guished by the merger, except in so far as the statute shall keep it “nominally alive for a specified purpose. Our conclusion is that the Morton Trust Company does not exist within or as a part of the Guaranty Company, and the two are not identical. As a legal being, a corporate entity, it retained the one activity and power, and other- wise is non-existent”’ (p. 315). The language of the court in the Bergdorf case is applicable to this case. The Block Company never existed within the gas company, and does not exist within or as a part of the defendant. Although the Block Company has become extinct, its corporate existence is re- tained for the one purpose of carrying out in good faith the reserva- tion in the statute of the rights of the creditors thereof. We repeat that for that purpose the Block Company can be sued. The plaintiff after obtaining judgment against the Block Company may, by execu- tion or otherwise, reach the assets of such company as though the merger had never taken place. The provisions of the merger statute and of the consolidation statute were considered together by the legislature in 1890, and they have since been considered by it from time to time. There would seem to be little or no objection and much reason for making a cor- poration which takes all of the assets of other corporations by con- solidation or merger liable for the indebtedness of such consolidated or merged corporations. The acceptance of such property could be made an assent to such liability. The whole matter was, however, clearly before the legislature for its consideration, and it was con- sidered by it, and it made a corporation accepting the assets of 988 IRVINE ¥. NEW YORK EDISON CO. (CHAP. I. other corporations under the statute authorizing the consolidation of corporations liable for the indebtedness of the corporations so con- solidated. It declined so to do in the case of corporations transferring assets under the merger statute. The rights of creditors were not overlooked, as the legislature expressly provided that the rights of such creditors should be preserved and that the merger should be without prejudice as to them. In view of the history of the acts referred to it must be assumed that the omission to make the possessor company directly liable for the debts of the merged corporations was intentional. The courts should not attempt to supplement the legislative provision-relating to the creditors of the merged corporations by making the pos- sessor company liable as upon contract for the indebtedness of such companies, either wholly or to the extent of the property trans- ferred to it, particularly in view of the fact that it appears that the subject has been fully considered and acted upon by the legisla- ture itself. The reservation by the legislature of the rights of creditors nega- tives the suggestion that a transfer in pursuance of the statute would be a crime. Such a transfer is not one made ‘with intent to defraud prior or subsequent purchasers, or to hinder, delay or defraud cred- itors or other persons”’ within the meaning of § 1170 of the Code of Criminal Procedure. If the property of the Block Company is not of such a nature that it can be reached directly by execution or otherwise, it constitutes a trust fund for the benefit of such creditors and can be reached as such precisely as if a merger of the Block Company had never taken place. The rule in equity is that as between cestui que trust and trustee, and all parties claiming under the trustee otherwise than by purchase for a valuable consideration, without notice, all property belonging to a trust, however much it may be changed or altered in its nature or character, and all the fruit of such property, whether in its original or altered state, continues to be subject to or affected by the trust. (Matter of Hicks, 170 N.Y. 195.) A creditor of a corporation has the right to follow the assets of a corporation and appropriate the property by due process of law, including any property which has been changed, provided the trust fund can be clearly ascertained, traced and identified. (Matter of Hicks, supra.) In my view the objection to sustaining the action now before us may be summarized by stating that the defendant has never con- tracted directly or by inference to pay the debts of the Block Com- pany; and the statute, which is the authority for the transfer of the property, if any, from the Block Company to the gas company, does not provide that the possessor company shall assume the indebted- CHAP. 111.] COLE v. MILLERTON IRON CO. 989 ness of the merged company, but expressly provides that the rights of creditors of the merged company are preserved. The statute was not carelessly drawn and the omission to make the possessor company liable for the debts of the merged company was not an oversight. COLE ». MILLERTON IRON CO. 133 N.Y. 164. 1892. Apprat from order of the General Term of the Supreme Court in the second judicial department, made May 12, 1891, which re- versed a judgment in favor of defendants, entered upon a decision of the court on trial at Special Term, and granted a new trial. This action was brought by plaintiff, a judgment creditor of the National Mining Company of Pawling, to set aside a conveyance made by it of all its property to defendant, the Millerton Iron Com- pany, and also to release said property from the lien of a mortgage executed by that company to defendant, the Mercantile Trust Com- pany, and for the appointment of a receiver, ete. Fincu, J. The plaintiff is a creditor of the National Mining Com- pany, a corporation formed and existing under the laws of this state. He commenced an action to recover damages done to his property by the wrongful act of the corporation, serving the summons in October, 1887, and recovering judgment in July of the next year. During the pendency of the action all the property and assets of the debtor corporation were transferred to the Millerton Iron Company, also a domestic corporation, upon a nominal consideration, except an assumption by the vendee of the debts of the vendor, and thereupon the former executed a mortgage to the Mercantile Trust Company covering all its property, including that acquired from the National Mining Company. When the plaintiff obtained his judgment nothing remained upon which it was a lien and his execution was returned unsatisfied. He then began this action, in which he assailed the transfers made, with a view of subjecting the property of the debtor corporation to the satisfaction of his debt. Upon the trial his com- plaint was dismissed, but the General Term reversed the judgment and ordered a new trial. From that order the Trust Co. alone appeals and has given the usual stipulation for judgment absolute. The trial court has refused to find that the National Company was insolvent at the date of its transfer, but did find that such transfer suspended and terminated the regular business of the grantor, and was made and accepted with that purpose and intention. The prac- tical effect was to dissolve the grantor corporation and subject its charter to forfeiture at the hands of the state, for it voluntarily stripped itself of all its property and assets and became incapable, 990 COLE v¥. MILLERTON IRON CO. (CHAP. II. and intended to be and remain incapable of performing its corporate duties. Such a transfer, which involves the destruction of the cor- poration and an abandonment of the purposes of its organization, is illegal as against creditors whose rights are thereby sacrificed and their remedies destroyed. The transfer was illegal also because made in contemplation of insolvency. Those who accomplished it knew that its necessary and inevitable effect would be to make the cor- poration unable to pay its debts and must be held to have intended that consequence of their acts. I do not agree to that reading of the statute which limits its prohibition to cases in which payment of some note or obligation has been previously refused. An interpreta- tion so narrow would seriously maim and distort the.obvious purpose of the statute and make a transfer, in contemplation of insolvency, good the day before a note matured and bad the day after. As against the creditor the transfer to the Millerton Company was il- legal and in fraud of his rights. The assets of a corporation are a trust fund for the payment of its debts upon which the creditors have an equitable lien both as against the stockholders and all trans- ferees, except those purchasing in good faith and for value. (Bartlett v. Drew, 57 N.Y. 587; Brum v. Ins. Co., 16 Fed. Rep. 143; Morawetz on Corporations, § 791.) The Millerton Company was not such a purchaser. It parted with nothing. It knew and participated in the illegal purpose to destroy the National Company, to make it utterly insolvent, and to deprive its creditors of the trust fund upon which they had a right to rely, and so they were at liberty to set aside the transfer so far as it barred their remedy, and to enforce their equita- ble lien upon the property in the hands of the transferee. : It is not a sufficient answer to say that the transfer was rather formal than real, because before its occurrence the Millerton Com- pany, having the same stockholders and officers, managed and con- ducted the business of the National Company before the transfer, as well as after, and that what occurred was a practical consolida- tion. Companies may consolidate, but under the permission and safeguards of the statute, all of which were disregarded, and what is called the formal transaction cuts off and destroys the right of the creditor, and is being used for that exact purpose. Neither is it an answer to say that the creditor is not harmed by a change of the party liable to pay, unless there be some disproportion in the assets. He cannot be forced to change his debtor against his will, and it appears in the proof that the transfer to the Millerton Company was followed by a mortgage sweeping in to its lien and peril the very property transferred. The rights of the mortgagee, who is the present appellant, need not now be accurately determined. Whether that mortgage was valid at all for want of proper consents, or whether any of the bond- holders have acquired equities superior to those of the plaintiff, may CHAP. I111.] COLE v. MILLERTON IRON CO. 991 or may not become questions in the future. Enough appears to show that some of them do not stand in the attitude of bona fide creditors, and that the remedies of all may be confined to the property of the Millerton Company not derived from the National, until at least the former is exhausted. Those questions, however, may be left to the developments consequent upon further proceedings. The order of the General Term should be affirmed and judgment absolute for the plaintiff be rendered upon the stipulation, with costs. All concur. Order affirmed and judgment accordingly. Nore. — It is plain that the assets of a corporation should not pass to the stockholders (except as dividends properly declared and paid) until the creditors have been satisfied or protected. If stockholders of a corporation cause its assets to be transferred to a new corporation organized by them, the stock of which is issued in payment thereof to the old stockholders, the new corporation should be liable, to the extent of the value of the assets received, to any creditor of the old corporation. San Francisco R.R. Co. v. Bee, 48 Cal. 398; Hancock v. Holbrook, 40 La. Ann. 53. It is not necessary to disregard the corporate fiction to reach this result. Cf. Bank v. Trebein, p. 125, supra, and the note thereto. Usually the corporation would be chargeable with knowledge that it was participating in an act which was a wrong to creditors. If the case can be imagined where the new corporation would not be chargeable with notice, it might well be held that the issue of stock, which had no value except as it represented an interest in the assets transferred, did not con- stitute a purchase for value. If all the assets of a corporation are transferred to a second cor- poration having other assets, and the vendee issues its stock for such assets directly to the old stockholders, and is chargeable with notice that there are creditors of the old corporation, it has participated in a wrong to those creditors, and should be liable to them to the extent of the value of the assets received. Luedecke v. Des Moines Co., 140 Iowa, 223; Grenell v. Detroit Gas Co., 112 Mich. 70; Hurd v. New York Laundry Co., 167 N.Y. 89. If all the assets are transferred to a second corporation having other assets, and the vendee issues its stock for such assets directly to the old stockholders, it is submitted that the vendee should be exposed to the liability stated in the preceding paragraph, even if it was not chargeable with notice that there were creditors of the old corporation. The second corporation knows that it is participating in an act which will embarrass such creditors as there may be. See Camden Ry. Co. v. Lee, 84 8.W. (Ky.) 332; Grenell v. Detroit Gas Co., 112 Mich. 70, 72; Railway Co. v. Catar, 103 Miss. 616; Cooper v. Light & Power Co., 35 Utah, 570, 591; Tacoma Ledger Co. v. Western Home Ass’n, 37 Wash. 467. 992 PENNSYLVANIA TRANSPORTATION CO.’S APPEAL. [CHAP. III. If the second corporation purchases all the stock of the first cor- poration, and then causes the assets of the first corporation to be transferred without any consideration paid therefor to the first cor- poration, the same result should follow. Standard Distilling Co. v. Coal Co., 239 Ill. 600. But there is a regrettable decision to the contrary. Hageman v. Railroads, 202 Mo. 249. If all the assets of a corporation are transferred for a consideration paid into the corporate treasury, is the purchaser liable to the credi- tors of the corporation, who, as it turns out, cannot collect their judgments from the corporation because the proceeds of the sale have been improperly divided among the stockholders without pro- viding for creditors? In Standard Distilling Co. v. Coal Co., 239 IIL. 600, the court said (p. 605): ‘The Company might rightfully discon- tinue its business and dispose of its assets and property and a pur- chaser dealing in good faith and paying for the property with money or other property would not assume any liability.” But what con- stitutes acting in good faith toward creditors, known or unknown? If it is improper for the purchaser to pay the consideration directly to the stockholders, it would seem also to be improper for him to pay it to the corporation where he has notice that the corporation is to act as a mere conduit, and that the consideration is forthwith to be divided up among the stockholders. It is suggested that a purchaser, who is unwilling to assume the liabilities of the old corporation, should not only pay the consideration into the corporate treasury, but should also make it a condition of the purchase that the old cor- poration should be forthwith dissolved. In dissolution proceedings the rights of all creditors would be protected. The law on this point is not clear. PENNSYLVANIA TRANSPORTATION COMPANY’S: APPEAL. 101 Pa. 576. 1882. Mr. Justice Mszrcur. This bill prays for a decree that the Pitts- burgh, Titusville & Buffalo Railway Company shall pay to the appellant a certain judgment which the latter holds against the Oil Creek & Allegheny River Railway Company. The claim against the appellee is based mainly on the following facts. In 1868, under certain agreements and an Act of Assembly, the Farmers’ Railroad Company, the Warren & Franklin Railroad Company, and the Oil Creek Railroad Company were consolidated, and the new corporation took the name of ‘Oil Creek & Allegheny River Railway Company.” In 1874 the mortgage indebtedness of the three several corpora- CHAP. II1.] PENNSYLVANIA TRANSPORTATION CO.’S APPEAL. 993 tions, resting on their property prior to the consolidation, aggregated more than two and a half millions of dollars; and the consolidated company had executed a mortgage on the whole property for more than one million of dollars. With this load of indebtedness, exceeding three and a half millions of dollars resting on its property, the Oil Creek & Allegheny River Railway Company on the Ist of May, 1874, made default in payment of the interest due on its consolidated mortgage. In July following a receiver was placed in possession of the property of the company. Soon thereafter a bill was filed for a foreclosure of the mortgage, and a decree therefor made. This was afterwards set aside for want of jurisdiction. In July, 1875, a bill was filed in the United States Circuit Court against the Oil Creek and Allegheny River Railway Company for a foreclosure of the con- solidated mortgage. In September following upon full hearing of the bill and answer a decree was made for the sale of all the railroad property and its franchises. The sale was made, and in January, 1876, was duly confirmed. Afterwards and pursuant to law the per- sons, for whose benefit the property was purchased, proceeded and erected themselves into a new corporation under the name of the “Pittsburgh, Titusville & Buffalo Railway Company,” which is the appellee in this case. The Oil Creek and Allegheny River Railway Company was indebted to the appellant before the decree for a sale of the property was made; but no judgment therefor was recovered until April thereafter. After the sale was decreed, but before it was made, the appellant as a creditor presented its petition to the court and asked to intervene, and that the decree of sale be vacated; but the court refused to allow the intervention. The master found as a fact that in that petition the appellant “did set up and charge more fully than in the present bill the fraudulent purpose of the default and sale,” but it was dismissed, and the specific grounds of that judgment are not shown. On the hearing in the present case before the master, it was urged that the default in the payment of interest on the Ist of May, 1874, was not bona fide, but fraudulent, and that the default and sale were brought about with intent to defraud the appellant. The master found ‘that these facts are nowhere charged in the bill and are not sufficiently shown by the testimony.” He further found that three months after the default, certain of the bondholders held a meeting at which it was resolved to take measures to foreclose the mortgage and sell the road. It is conceded that if the sale was fair and valid, it passed the property to the purchasers discharged from all claim of the appellant thereon. The argument is that a certain written agreement, entered into between the purchasers before the sale, changed the effect thereof — in substance that it operated as a fraud on the appellant. It was entered into between the bondholders, all of the stockhold- ers, and by most of the unsecured creditors entitled to sign by the 994 PENNSYLVANIA TRANSPORTATION CO.’S APPEAL. [CHAP. III. terms of the agreement. It recited the default of the company in paying interest and the threatened sale of its property, and then declared, for the protection of their several and respective interests in the property from great loss and sacrifice, they desired to unite together for the purpose of bidding on the property, should the same be offered for sale, and of purchasing it for and on their respective accounts, as therein more particularly stated, and to organize a new company. It proceeded, inter alia, to classify the parties to the con- tract according to the nature of their several claims, and stated the sum each should pay towards the purchase of the property, and the character of the bonds that the bondholders should be entitled to in the corporation to be formed, and the shares of capital stock therein to which each should be entitled. What then was there illegal or invalid in so agreeing? It was not to depress the property or cause it to be sold for a sum less than its value but to enhance it. It has been held that bondholders may unite for the purchase of the property: Ketchum v. Duncan, 6 Otto, 659; Sage v. R.R. Co., 9 id. 342. It is a fair and wise course for them to pursue, to prevent a sacrifice of their property. If they may so unite, we see no valid reason why stockholders may not unite with them, in a purchase at a sale made in good faith. They as well as bondholders are interested in protecting their property from sacri- fice, and may resort to like lawful means to protect it. So, when an agreement was made between a railroad company, its bondholders and most of its creditors, whereby the property of the company was to be sold under judicial process and a new company organized in which the bondholders were to have a like amount of new bonds, and the stockholders and general creditors take new stock, in the absence of actual fraud, it was held that the new company duly organized took title to the property purchased clear of incumbrances and equities existing against the old company: Smith v. Chicago & North-Western R.R. Co., 18 Wis. 17. In that case there was an agree- ment to sell and work the conversion. In the present case the agree- ment was merely contingent on a sale occurring. The property of the corporation was about to be sold at a judicial sale on a mortgage executed by the consolidated company. The sale was to be subject to prior mortgages aggregating more than two and a half millions of dollars. Any small number of those interested in the property might be unable or unwilling to buy property of such value and so incumbered. Why then shall the appellees be denied the privilege of uniting in a legal mariner to protect their property by buying at an honest and fair sale? Their agreement was neither hurried nor secret. Its execution extended over more than one year. The first names were put to it on the 23d November, 1874, and the last on the 29th December, 1875. The appellant had ample knowledge of the sale and an opportunity of bidding thereat. He laid by for nearly CHAP. III.] NORTHERN PACIFIC RAILWAY CO. v. BOYD. 995 three and a half years; without objection permits the new company to be organized, and then files this bill, We fully concur in the con- clusion of the learned judge that the whole evidence is insufficient to establish a fraud on the part of the appellees or create a trust in them for the benefit of the appellant. We deem many of the authori- ties cited by counsel for appellant inapplicable to the facts as we understand them. We will therefore not review them, nor answer the specifications of error seriatim. We discover no error in dismiss- ing the bill. Decree affirmed and appeal dismissed at the costs of the appellant. NORTHERN PACIFIC RAILWAY CO. v. BOYD. 228 U.S. 482. 1912. Boyp was entitled to a judgment for $71,278 against the Coeur D’Alene Railway and Navigation Company. The litigation in this matter was begun in 1887, and was not concluded until 1905. The Northern Pacific Railroad Company was indebted to the Coeur D’Alene Railway and Navigation Company, owing to an improper diversion of its assets, to an amount greater than the amount of this judgment. The Railroad Company’s property passed in 1896 to the Northern Pacific Railway Company. The question was whether the Railway Company could be charged with the obligation of the Railroad Company to the Coeur D’Alene Company, and hence to Boyd. The circumstances attending the acquisition of the property of the Railroad Company by the Railway Company were as follows: — On August 15, 1898, Winston and others filed in the United States Court for the Eastern District of Wisconsin a creditors’ bill against the Northern Pacific Railroad alleging that it was insolvent, its mortgage bonds amounting to about $140,000,000 and its floating debts to $11,000,000, and praying for the appointment of a receiver to preserve the property as an entirety and to prevent it from being dismembered by separate sales under attachments and other liens. The company owned or controlled 54 subsidiary companies, and main and branch lines 4700 miles in length. It also owned or was entitled to receive about 40,000,000 acres under land grants. There were six mortgages —- some on one part of the property, some on another and a general mortgage on the entire railroad lines. It also owned a large body of land’ which was not encumbered by liens. Interest had been paid on some of the bonds, but there had been a default in the interest on those secured by the junior mortgages. Shortly after the filing of the creditors’ bill a suit was brought in the same court by the trustees to foreclose these latter mortgages. 996 NORTHERN PACIFIC RAILWAY CO. ¥. BOYD. [CHAP. III. The cases were consolidated and the receivership continued under the consolidated causes. The Railroad demurred. As the road ran through several States, there were many questions of conflicting jurisdiction which were not settled until January 31, 1896, so that ‘except for administrative orders, no steps were taken in the litigation roper. . The representatives of the stockholders intended to resist the foreclosure, and while recognizing the superior claim of the bonds, advised that “if properly protected, stockholders can secure equit- able terms in any reorganization.” There were also representatives of the bondholders, and ultimately the two interests agreed upon a plan, the terms of which were stated by the Reorganization Commit- tee which, March 16, 1896, issued a circular to “holders of bonds and stocks issued or guaranteed by the Northern Pacific Railroad.” This circular outlined a plan under which all of the stocks and bonds of the Railroad were to be transferred to a new company (the present Northern Pacific Railway Company) which was to purchase the property of the Railroad, issue new bonds, part of which were to~ be sold to raise money with which to discharge Receivers’ Certifi- cates, purchase needed equipment and make necessary betterments. The balance was to be issued in exchange for the bonds of the old company. The plan also contemplated the issuance of preferred and common stock, part to be used in paying debts of the subsidiary companies, for which the Northern Pacific Railroad was liable, part for the ex- penses of the reorganization, and the balance to be issued in exchange for the outstanding stock of the Northern Pacific Railroad. Under the proposed plan the holder of $100 of preferred stock in the old company, upon paying $10 per share was to receive $50 of preferred and $50 of common stock in the new company. For each $100 of common stock the holder was to receive one share of common in the new corporation upon paying $15 per share. The aggregate of these cash payments on stock was about $11,000,000. The records showing the cost of the original construction were not accessible, and in some particulars, the costs of the main and sub- sidiary lines appear to have been combined. But there is testimony tending to show that the cost of the railroad property, subject to the mortgage, was about $241,000,000. What was the value of the 40,000,000 acres of land is not stated. For several years prior to the receivership the road’s net earnings had varied between $10,000,000 and $4,449,000. Its fixed charges amounted to $11,000,000 — show- ing an annual deficit of about $5,000,000. The bonds, unpaid interest and Receivers’ Certificates aggregated at date of sale $157,000,000. The unsecured debts proved before the master amounted to about $15,200,000. The reorganization contemplated an issue of new bonds for $190,000,000 at lower rates of interest, $75,000,000 of CHAP. I11.] NORTHERN PACIFIC RAILWAY CO. v. BOYD. 997 preferred stock, $80,000,000 of common stock — a’ total in bonds and stock of $345,000,000. The reorganization agreement contained a statement that the property intended to be purchased was mutually agreed to be of the value of $345,000,000, payable in the stocks and bonds as above described. The plan of reorganization was accepted, and on April 27, 1896, the decree of foreclosure was entered and the property ordered to be sold, on a date later fixed for July 25, 1896. On July 22, 1896, Paton and others, holding contingent and unse- cured claims for $5,500,000 against the Northern Pacific Railroad, filed a Bill, in the same court that had jurisdiction of the Creditors’ Bill and Foreclosure suit, charging that the sale was the result of a conspiracy between bondholders and stockholders to exclude general creditors, and to award to stockholders in the old company rights in the new which were valuable and could not be legally reserved for the stockholders until first offered to and declined by the general creditors. It prayed that the decree of foreclosure should be opened; that the court would formulate a just and fair plan for distribution, and that the sale be enjoined. This was later modified so as to per- mit the sale to proceed, but asking an injunction to prevent the dis- tribution of the proceeds and securities. The court held that the company was insolvent; that the assets were insufficient to pay the mortgage debts; that practical operation had demonstrated that the net earnings would not pay the fixed charges; that there was no equity in the property out of which unsecured creditors could be paid and no reason existed why the stockholders could not go into a reorganization plan whereby they would become stockholders in the new company, if it should become the purchaser. The prayer for injunction was denied. No appeal was taken. On July 25 the railroad property was sold at public outcry to the newly organized Railway Company at a price representing $61,500,- 000, or $86,000,000 less than the secured debts. On July 27 the sale was reported to the court, and, all parties consenting, was three days later confirmed. The Railway Company entered into possession, and the first year its earnings were $489,000 above fixed charges, which had been lessened under the reorganization. The second year it de- clared a dividend of $3,000,000 and carried $3,000,000 to surplus. Since that time the earnings have been continually large, the business profitable and the value of the securities correspondingly great; but for a year after the sale, stock on which $10 and $15 had been paid in cash sold at prices varying from $18 to $51 for preferred and $13 and $18 for common. In addition to the property covered by the mortgage, the Northern Pacific Railroad owned large quantities of land which were not en- cumbered, and in May, 1896, the Farmers’ Loan and Trust Company 998 NORTHERN PACIFIC RAILWAY CO. v. BOYD. [CHAP. IIL. filed its Supplemental Bill describing this unmortgaged property and alleging that various intervening creditors had obtained judgments against the Railroad Company, some of which had been assigned to the trust company. It prayed that these lands of the Railroad should be sold and the proceeds applied to the satisfaction of the unsecured claims. On the same day that this Supplemental Bill was filed, the Railroad Company and other parties to the consolidated causes answered, the court adjudged that the complainant was en- titled to the decree asked for, and appointed a Receiver of the property. It was not, however, until April 27, 1899, that the sale was or- dered. The property was thereupon sold to the Northern Pacific Railway for $1,623,000. The parties stipulated that the sale should be confirmed and on the same day in September, 1899, this was done. Mr. Justice Lamar. Boyd claimed that the foreclosure sale was void because made in pursuance of an illegal plan of reorganization, between bondholders and stockholders of the Railroad, in which, though no provision was made for the payment of unsecured credi- tors, the stockholders retained their interest by receiving an equal number of shares in the new Railway. There was no question as to parties and no demurrer to the bill. The Railway answered and on the trial of the merits offered evidence tending to support its con- tention that the decree was regular in form, free from fraud and that the property brought a fair price at public outcry. ... The original and supplemental decrees were free from any moral or actual fraud and were, in form and nature, sufficient to have passed a title good against him, unless the contract of reorganization, reserving a stock interest in the new company for the old share- holders, left the property still subject to the claims of non-assenting creditors of the Northern Pacific Railroad. Corporations, insolvent or financially embarrassed, often find it necessary to scale their debts and readjust stock issues with an agree- ment to conduct the same business with the same property under a reorganization. This may be done in pursuance of a private contract between bondholders and stockholders. And though the corporate property is thereby transferred to a new company, having the same shareholders, the transaction would be binding between the parties. But, of course, such a transfer by stockholders from themselves to themselves cannot defeat the claim of a non-assenting creditor. As against him the sale is void in equity, regardless of the motive with which it was made. For if such contract reorganization was consum- mated in good faith and in ignorance of the existence of the creditor, yet when he appeared and established his debt the subordinate in- terest of the old stockholders would still be subject to his claim in the hands of the reorganized company. Cf. San Francisco & N.P. R.R. v. Bee, 48 California, 398; Grenell v. Detroit Gas Co., 112 Michi- CHAP. 111.] NORTHERN PACIFIC RAILWAY CO. v. BOYD. 999 gan, 70. There is no difference in principle if the contract of-reor- ganization, instead of being effectuated by private sale, is consum- mated by a master’s deed under a consent decree. It is argued that this is true only when there is fraud in the decree, — the appellants insisting that in all other cases a judicial sale oper- ates to pass a title which cuts off all claims of unsecured creditors against the property. They rely on Wenger v. Chicago, &c., R.R., 114 Fed. Rep. 34; Farmers’ Loan & Trust Co. v. Louisville, &c., Ry. Co., 103 Fed. Rep. 110; Pennsylvania Transportation Co.’s Appeal, 101 Pa. St. 576; Kurtz v. R.R., 187 Pa. St. 59; Paton v. N.P. RB.R., 85 Fed. Rep. 838; Shoemaker v. Katz, 74 Wisconsin, 374; Bame v. Drew, 4 Denio, 287; Ferguson v. Ann Arbor R.R., 17 App. Div. 336; McArdell v. Olcott, 104 App. Div. 263; S.C., 189 N.Y. 368, 384; Candee v. Lord, 2 N.Y. 269. Some of these cases hold directly, and others inferentially, that, in the absence of fraud, as here, a judicial sale is binding upon non-assenting creditors even though the decree was entered and the sale was made in pursuance of a contract, to which the stockholders were parties, and by which they were to re- tain a stock interest in the purchasing company. This makes the creditor’s legal right against the shareholders’ interest depend upon the motive with which they act and the method by which they carry out the scheme. If they do so by means of a private contract, though in ignorance of the existence of the creditor, the property remains liable for his debts. If they do so by means of a judicial sale under a consent decree and in like ignorance or. disregard of his existence, the result is said to be different, although the shareholders should reserve exactly the same interest and deprive the creditor of exactly the same right. Such and similar possibilities at one time caused doubts to be ex- pressed as to whether a court could permit a foreclosure sale which left any interest to the stockholders. But it is now settled that such reorganizations are not necessarily illegal, and, as proceedings to sub- ject the property must usually be in a court where those who ask equity must do equity, such reorganizations may even have an effect more extensive than those made without judicial sale, and bind cred- itors who do not accept fair terms offered. The enormous value of corporate property often makes it impossible for one, or a score, or a hundred bondholders to purchase, and equally so for stockholders to protect their interests. A combination is necessary to secure a bidder and to prevent a sacrifice. Codperation being essential, there is no reason why the stockholders should not unite with the bond- holders to buy in the property. That was done in the present case. And while the agreement con- tained no provision as to the payment of unsecured creditors, yet the Railway Company purchased unsecured claims aggregating $14,000,- 000. Whether they were acquired because of their value, to avoid 1000 NORTHERN PACIFIC RAILWAY CO. ¥. BOYD. [CHAP. III. litigation, or in recognition of the fact that such claims were superior to the rights of stockholders, does not appear, nor is it material. For, if purposely or unintentionally a single creditor was not paid, or provided for in the reorganization, he could assert his superior rights against the subordinate interests of the old stockholders in the prop- erty transferred to the new company. They were in the position of insolvent debtors who could not reserve an interest as against credi- tors. Their original contribution to the capital stock was subject to the payment of debts. The property was a trust fund charged primarily with the payment of corporate liabilities. Any device, whether by private contract or judicial sale under consent decree, whereby stockholders were preferred before the creditor, was invalid. Being bound for the debts, the purchase of their property, by their new company, for their benefit, put the stockholders in the position of a mortgagor buying at his own sale. If they did so in good faith and in ignorance of Boyd’s claim, they were none the less bound to recognize his superior right in the property, when years later his contingent claim was liquidated and established. That such a sale would be void, even in the absence of fraud in the deeree, appears from the reasoning in Louiswille Trust Co. v. Louisville Ry., 174 US. 674, 683, 684, where “assuming that foreclosure proceedings may be carried on to some extent at least in the interests and for the ben- efit of both mortgagee and mortgagor (that is, bondholder and stock- holder)” the court said that “no such proceedings can be rightfully carried to consummation which recognize and preserve any inter- est in the stockholders without also recognizing and preserving the interests, not merely of the mortgagee, but of every creditor of the corporation. ... Any arrangement of the parties by which the sub- ordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of creditors comes within judicial denunciation.” The Railway seeks to distinguish that case from this, insisting that even if the stockholders’ participation in the reorganization would have invalidated the proceeding, such result does not follow here because the court having charge of the foreclosure passed on this very question before the sale in 1896 and dismissed the Bill of Paton, an unsecured creditor, when he made exactly the same at- tack upon the reorganization as that by Boyd in this bill. That court then held that as the property was insufficient to pay the mortgage debts of $157,000,000, there was nothing which could come to the unsecured creditors, and they, therefore, had no ground to complain if the bondholders were willing to give new shares to the old stock- holders. No appeal was taken from that decision — possibly bécause the Paton claim was purchased by the Railway. But inasmuch as Boyd was not a party to the record that decree was not binding upon him as res adjudicata, and the opinion not being controlling author- CHAP. III.] NORTHERN PACIFIC RAILWAY CO. v. BOYD. 1001 ity, cannot be followed in view of the principles declared in Chicago, R.I. & P. R.R. v. Howard, 7 Wall. 392; Louisville Trust Co. v. Louis- ville R.R., 174 US. 674. In saying that there was nothing for unsecured creditors the argu- ment assumes the very fact which the law contemplated was to be tested by adversary proceeding in which it would have been to the interest of the stockholders to interpose every valid defense. If, after a trial, a sale was ordered, they were still interested in making the property bring its value, so as to leave a surplus for themselves as ultimate owners. Even after sale they could have opposed its confirmation if the bids had been chilled, or other reason existed to prevent its approval. In the present case all these tests and safe- guards were withdrawn. The stockholders, who, in lawfully pro- tecting themselves, would necessarily have protected unsecured creditors, abandoned the defense that the foreclosure suit had been prematurely brought. The law, of course, did not require them to make or insist upon that defense if it was not meritorious, nor does it condemn the decree solely because it was entered by consent. But the shareholders were not merely quiescent. They, though in effect de- fendants, became parties to a contract with the creditors, who were in effect complainants, by which, in consideration of stock in the new company, they transferred their shares in the Railroad to the Rail- way. The latter then owning the bonds of the complainant and con- trolling the stock in the defendant, became the representative of both parties in interest. In such a situation there was nothing to litigate, and so the demurrer to the bill was withdrawn. An answer was immediately filed admitting all the allegations of the bill. On the same day, ‘‘no one opposing,” a decree of foreclosure and sale was entered. Two months later the property was sold to the agreed purchaser at the upset price named in the decree. In a few days and by consent that sale was confirmed. As between the parties and the public generally, the sale was valid. As against creditors, it was a mere form. Though the Northern Pacific Railroad was divested of the legal title, the old stockholders were still owners of the same railroad, encumbered by the same debts. The circumlocution did not better their title against Boyd as a non-assenting creditor. They had changed the name but not the relation. The property in the hands of the former owners, under a new charter, was as much sub- ject to any existing liability as that of a defendant who buys his own property at a tax sale. The invalidity of the sale flowed from the character of the reor- ganization agreement regardless of the value of the property, for in cases like this, the question must be decided according to a fixed principle, not leaving the rights of the creditors to depend upon the balancing of evidence as to whether on the day of sale the property was insufficient to pay prior encumbrances. The facts in the present 1002 NORTHERN PACIFIC RAILWAY CO. ¥. BOYD. [CHAP. III. case illustrate the necessity of adhering to the rule. The railroad cost $241,000,000. The lien debts were $157,000,000. The road sold for $61,000,000 and the purchaser at once issued $190,000,000 of bonds and $155,000,000 of stock on property which, a month before, had been bought for $61,000,000. It is insisted, however, that not only the bid at public outcry, but the specific finding in the Paton case, established that the property was worth less than the encumbrances of $157,000,000, and hence that Boyd is no worse off than if the sale had been made without the reorganization agreement. In the last analysis, this means that he cannot complain if worthless stock in the new company was given for worthless stock in the old. Such contention, if true in fact, would come perilously near proving that the new shares had been issued without the payment of any part of the implied stock subscriptions except the $10 and $15 assessments. But there was an entirely differ- ent estimate of the value of the road when the reorganization con- tract was made. For that agreement contained the distinct recital that the property to be purchased was agreed to be “‘of the full value of $345,000,000, payable in fully paid non-assessable stock and the prior lien and general lien bonds to be executed and delivered as hereinafter provided.” The fact that at the sale, where there was no competition, the property was bid in at $61,000,000 does not disprove the truth of that recital, and the shareholders cannot now be heard to claim that this material statement was untrue and that as a fact there was no equity out of which unsecured creditors could have been paid, al- though there was a value which authorized the issuance of $144,000,- 000 fully paid stock. If the value of the road justified the issuance of stock in exchange for old shares, the creditors were entitled to the benefit of that value, whether it was present or prospective, for divi- dends or only for purposes of control. In either event it was a right of property out of which the creditors were entitled to be paid before the stockholders could retain it for any purpose whatever. Mr. Justice Lurron, dissenting. (Mr. Chief Justice Wurtz, Mr. Justice Hotmss, and Mr. Justice Van DrvanTER concurred in the dissent.) I find myself unable to agree with the opinion of the court. The consequences which may result from the decision to the numerous reorganizations of railroad companies which occurred about the time of this reorganization or since, are, to my mind, alarming. Arrange- ments and agreements in advance of judicial sales between creditors interested for the common benefit are the usual incidents of fore- closures, and if fairly and openly entered into and approved by the court are not subject to criticism. Nor do I agree that every plan of reorganization which in any way includes stockholders of the reorganized company is for that reason CHAP. I1.] NORTHERN PACIFIC RAILWAY CO. v. BOYD. 1003 alone to be regarded as an illegal withholding from creditors of cor- porate property which should go to the payment of corporate debts. That corporate property must be applied to corporate debts before shareholders can participate, is plain. But I think every case should stand upon its own facts, and the remedy be shaped to do justice and equity in the particular case, and not tried out by any hard and fast rule such as indicated when this court says that the invalidity of a judicial sale must turn upon the character of the reorganization agreement and is not affected by actual consequences to creditors. Here is a single creditor who comes forward many years after a judicial sale under a general creditors’ bill and a mortgage foreclos- ure bill which had been pending several years, and asserts the right to ignore the judicial sale and the title resulting and asks to have the property of the old company subjected to his non-lien claim, not because of any actual fraud in the sale, nor because he can show that he has in any way suffered a loss by reason of the plan of reorganiza- tion under which the sale was conducted, but solely and simply be- cause the shareholders of the debtor company are said to have partic- ipated in some way in the benefits of the sale. I think this goes too far and that there is no just foundation for upsetting a judicial sale upon the complaint of an unsecured creditor of the debtor company in the absence of proof of fraud in the decree. The cases supporting this view which I venture to say should control this case are cited in the opinion of the court. It is not a case of the transfer by stockhold- ers of one company to themselves as stockholders of another. The railroad company was hopelessly insolvent. Its annual deficit was about five million dollars. Its general creditors, represented by the general creditors’ bill, and its mortgage creditors, represented in the mortgage foreclosure proceeding, were endeavoring to prevent a dis- integration and to bring the property to sale. The stockholders, represented by the company, were resisting. The receivership had already lasted for several years and the situation was growing stead/ ily worse. The lien creditors, to save themselves, devised a plan for the sale and purchase of the property by a new company which should assume their claims, so far as possible, and put the new com- pany in shape to meet its obligations. A large sum of actual money was necessary, and also the consent of the stockholders, to bring about a speedy sale. This money might be in part procured by the sale of the bonds of the new company; but if fixed charges were to be reduced, and the deficit of the old company turned into a surplus, the bonded debt and interest must be reduced. Therefore it was that most of this necessary money must come from the sale of stock. That was not a hopeful outlook. The value of this new stock was obviously speculative. The very basis of the plan to receive any large sum upon stock sales was believed to depend upon making a market among the stockholders of the old company. This was the 1004 NORTHERN PACIFIC RAILWAY CO. v. BOYD. [CHAP. III. motive that led to the proposal that they should exchange their shares for those in the new company, paying the price stated. This actually produced about eleven of the twenty-five million dollars deemed essential to any arrangement which would save to the bond- holders any large part of their debt. The price fixed turned out to be little below what the stock actually sold for on the open market for the year following the operation of the property by the purchasers. The subscription price to the shareholders, as the situation then ap- peared, was deemed fair, full and just by the very court which had approved the plan and decreed the sale, as is shown by the opinion of Judge JenKrns in the Paton Case, 85 Fed. Rep. 838. It is true that Boyd was not a party to that suit. But it was a bill filed after the decree and before the sale, attacking the reorganiza- tion plan upon the precise grounds here advanced, and is highly persuasive as to the good faith of the plan and the fairness of the subscription price. The upset price of sixty-one million dollars was fixed by the court, — probably as large as could be expected at the sale. As observed by this court in Louisville Trust Co. v. Louisville, &c., Ry., 174 U.S. 674, 683, “railroad mortgages, or trust deeds, are ordinarily so large in amount that on foreclosure thereof only the mortgagees, or their representatives, can be considered as probable purchasers.” Hence it was that the upset price must be fixed at such a sum as was rea- sonably within the range of any bidding which the property might be started at by the only probable bidders. The case last cited goes to the very verge of the law, but in that case the denunciation of such a plan of reorganization goes no farther than to condemn any ar- rangement by which the subordinate rights of stockholders are saved at the expense of creditors. That was not done here. The sale price was about eighty million dollars less than the lien claims entitled to be paid before creditors of the class to which Boyd belongs. Many ‘ of his class were actual parties to the consolidated cause in which the reorganization plan was approved and the sale decreed. They might have sought a larger-upset price, but did not. They might have objected to the plan upon the grounds now brought forward, but they did not. They consented to the decree. They were doubtless hopeless of any sale price which could by any possibility save them, and therefore they stood aside. Notes. — The discussion of the question whether the complainant was barred by laches has been omitted. It was held that he was not barred. There was a brief filed by an amicus curie insisting that the com- plainant’s remedy was against stockholders of the Railroad Com- pany, and not against the Railway Company or its property, but this brief was not discussed in the opinions. CHAP. Ill.) NORTHERN PACIFIC RAILWAY CO. v. BOYD. 1005 Condenser Co. v. Electric Co., 87 Kan. 848. Property of the cor- poration had been sold at a receiver’s sale, and transferred to a new corporation pursuant to a plan of reorganization in which the stock- - holders had participated. An unsecured creditor of the old corpora- tion was allowed to enforce his claim against the new corporation. APPENDIX OF CORPORATE FORMS CERTIFICATE OF INCORPORATION OF UNITED STATES STEEL CORPORATION. We, the undersigned, in order to form a corporation for the pur- poses hereinafter stated, under and pursuant to the provisions of the Act of the Legislature of the State of New Jersey, entitled “An Act concerning corporations (Revision of 1896),” and the acts amenda- tory thereof and supplemental thereto, do hereby certify as follows: I. The name of the corporation is Unrrep States STEEL Corpo- RATION. ’ II. The location of its principal office in the State of New Jersey is at No. 51 Newark Street, in the City of Hoboken, County of Hud- son. The name of the agent therein and in charge thereof, upon whom process against the corporation may be served is Hudson Trust Com- pany. Said office is to be the registered office of said corporation. III. The objects for which the corporation is formed are: — To manufacture iron, steel, manganese, coke, copper, lumber and other materials, and all or any articles consisting, or partly consist- ing, of iron, steel, copper, wood or other materials, and all or any products thereof. To acquire, own, lease, occupy, use or develop any lands containing coal or iron, manganese, stone, or other ores, or oil, and any wood lands, or other lands for any purpose of the Company. To mine, or otherwise to extract or remove, coal, ores, stone and other minerals and timber from any lands owned, acquired, leased or occupied by the Company, or from any other lands. ; To buy and sell, or otherwise to deal or to traffic in, iron, steel, manganese, copper, stone, ores, coal, coke, wood, lumber and other materials, and any of the products thereof, and any articles consist- ing, or partly consisting thereof. ; To construct bridges, buildings, machinery, ships, boats, engines, cars and other equipment, railroads, docks, slips, elevators, water works, gas works and electric works, viaducts, aqueducts, canals and other water-ways, and any other means of transportation, and to sell the same, or otherwise to dispose thereof, or to maintain and operate the same, except that the Company shall not maintain or operate any railroad or canal in the State of New Jersey. ; To apply for, obtain, register, purchase, lease, or otherwise to 1008 APPENDIX OF CORPORATE FORMS. acquire, and to hold, use, own, operate and introduce, and to sell, assign, or otherwise to dispose of, any trade-marks, trade names, patents, inventions, improvements and processes used in connection with, or secured under letters patent of the United States, or else- where, or otherwise; and to use, exercise, develop, grant licenses in respect of, or otherwise to turn to account any such trade-marks, pa- tents, licenses, processes, and the like, or any such property or rights. To engage in any other manufacturing, mining, construction or transportation business of any kind or character whatsoever, and to that end to acquire, hold, own and dispose of any and all property, assets, stocks, bonds and rights of any and every kind; but not to engage in any business hereunder which shall require the exervise of the right of eminent domain within the State of New Jersey. To acquire by purchase, subscription or otherwise, and to hold or to dispose of, stocks, bonds or any other obligations of any corpora- tion formed for, or then or theretofore engaged in or pursuing any one or more of the kinds of business, purposes, objects or operations above indicated, or owning, or holding any property of any kind herein mentioned; or of any corporation owning or holding the stocks or the obligations of any such corporation. To hold for investment, or otherwise to use, sell, or dispose of, any stock, bonds or other obligations of any such other corporation; to aid in any manner any corporation whose stock, bonds or other obli- gations are held or are in any manner guaranteed by the Company, and to do any other acts or things for the preservation, protection, improvement or enhancement of the value of any such stock, bonds or other obligations, or to do any acts or things designed for any such purpose; and, while owner of any such stock, bonds or other obliga- tions, to exercise all the rights, powers and privileges of ownership thereof, and to exercise any and all voting power thereon. The business or purpose of the Company is from time to time to do any one or more of the acts and things herein set forth; and it may conduct its business in other States and in the Territories and in foreign countries, and may have one office or more than one office, and keep the books of the Company outside of the State of New Jersey, except as otherwise may be provided by law; and may hold; purchase, mortgage and convey real and personal property either in or out of the State of New Jersey. Without in any particular limiting any of the objects and powers of the corporation, it is hereby expressly declared and provided that the corporation shall have power to issue bonds and other obligations, in payment for property purchased or acquired by it, or for any other object in or about its business; to mortgage or pledge any stocks, bonds or other obligations, or any property which may be acquired by it, to secure any bonds or other obligations by it issued or incurred ; to guarantee any dividends or bonds or contracts or other obliga- tions; to make and perform contracts of any kind and description ; and in carrying on its business, or for the purpose of attaining or furthering any of the objects, to do any and all other acts and things; and to exercise any and all other powers which a copartnership or natural person could do and exercise, and which now or hereafter may be authorized by law. APPENDIX OF CORPORATE FORMS. 1009 IV. The total authorized capital stock of the corporation is three thousand dollars, divided into thirty shares of the par value of one hundred dollars each. Of such total authorized capital stock, fifteen Shares, amounting to fifteen hundred dollars, shall be preferred stuck, and fifteen shares, amounting to fifteen hundred dollars, shall be common stock, From time to time, the preferred stock and the common stock may be increased according to law, and may be issued in such amounts and proportions as shall be determined by the board of directors, and. as may be permitted by law. The Holders of the preferred stock shall be entitled to receive when and as declared, from the surplus or net profits of the corpora- tion, yearly dividends at the rate of seven per centum per annun, and no more, payable quarterly, on dates to be fixed by the by-laws. The dividends on the preferred stock shall be cumulative, and shall be payable before any dividend on the common stock shall be paid or set apart; so that, if in any year dividends amounting to seven per cent. shall not have been paid thereon, the deficiency shall be pay- able before any dividends shall be paid upon or set apart for the common stock. Whenever all cumulative dividends on the preferred stock for all previous years shall have been declared and shall have become pay- able, and the accrued quarterly installments for the current year shall have been declared, and the company shall have paid such cumu- lative dividends for previous years and such accrued quarterly install- ments, or shall have set aside from its surplus or net profits a sum sufficient for the payment thereof, the Board of Directors may declare dividends on the common stock, payable then or thereafter, out of any remaining surplus or net profits, In the event of any liquidation or dissolution or winding up (whether voluntary or involuntary) of the corporation, the holders of the preferred stock shall be entitled to be paid in full both the par amount of their shares, and the unpaid dividends accrued thereon before any amount shall be paid to the holders of the common stock ; and after the payment to the holders of the preferred stock of its par value, and the unpaid accrued dividends thereon, the remaining assets and funds shall be divided and paid to the holders of the com- mon stock according to their respective shares. V. The names and post-office addresses of the incorporators, and the number of shares of stock for which severally and respectively we do hereby subscribe (the aggregate of our said subscriptions, being three thousand dollars, is the amount of capital stock with which the corporation will commence business), are as follows: NuMBER oF SHARES NAME Post OrricE ADDRESS Preperved | Common Stock Stock Charles C. Cluff . . 51 Newark Street, Hoboken, New Jersey’ 5 5 William J. Curtis. Ditto 5 5 Charles MacVeagh . Ditto 5 5 1010 APPENDIX OF CORPORATE FORMS. VI. The duration of the corporation shall be perpetual. VII. The number of directors of the Company shall be fixed from time to time by the by-laws; but the number if fixed at more than three, shall be some multiple of three. The directors shall be classi- fied with respect to the time for which they shall severally hold office. by dividing them into three classes, each consisting of one-third of the whole number of the Board of Directors. The directors of the first class shall be elected for a term of one year; the directors of the second class for a term of two years; and the directors of the third class for a term of three years; and at each annual election the suce- cessors to the class of directors whose terms shall expire in that year shall be elected to hold office for the term of three years, so that the term of office of one class of directors shall expire in each year. The number of the directors may be increased as may he provided in the by-laws, In case of any increase of the number of the directors the additional directors shall be elected as may be provided in the by-laws, by the directors or by the stockholders at an annual or spe- cial meeting; and one-third of their number shall be elected for the then unexpired portion of the term of the directors of the first class, — one-third of their number for the unexpired portion of the term of the directors of the second class, and one-third of their number for the unexpired portion of the term of the directors of the third class, so that each class of directors shall be increased equally. In case of any vacancy in any class of directors through death, resignation, disqualification or other cause, the remaining directors, by affirmative vote of a majority of the Board of Directors, may elect a successor to hold office for the unexpired portion of the term of the director whose place shall be vacant, and until the election of a suc- cessor. The Board of Directors shall have power to hold their meetings outside of the State of New Jersey at such places as from time to time may be designated by the by-laws or by resolution of the Board. The by-laws may prescribe the number of directors necessary to constitute a quorum of the Board of Directors, which number may be less than a majority of the whole number of the directors. Unless authorized by votes given in person or by proxy by stock- holders holding at least two-thirds of the capital stock of the corpo- ration, which is represented and voted upon in person or by proxy at a meeting specially called for that purpose or at an annual meeting, the Board of Directors shall not mortgage or pledge any of its real property, or any shares of the capital stock of any other corporation ; but this prohibition shall not be construed to apply to the execution of any purchase-money mortgage or any other putchase-money lien. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the whole Board of Directors. Any other officer or employe of the Com- pany may be removed at any time by vote of the Board of Directors, or by any committee or superior officer upon whom such power of removal may be conferred by the by-laws or by vote of the Board of Directors. The Board of Directors, by the affirmative vote of a majority of the whole board, may appoint from the directors an executive committee, APPENDIX OF CORPORATE FORMS. 1011 of which a majority shall constitute a quorum; and to such extent as shall be provided in the by-laws, such committee shall have and may exercise all or any of the powers of the Board of Directors, includ- ing power to cause the seal of the corporation to be affixed to all papers that may require it. The Board of Directors, by the affirmative vote of a majority of the whole board, may appoint any other Standing Committee, avd such Standing Committees shall have and may exercise such powers as shall be conferred or authorized by the by-laws. The Board of Directors may appoint not only other officers of the Company, but also one or more vice-presidents, one or more assist- ant treasurers and one or more assistant secretaries; and, to the extent provided in the by-laws, the persons so appointed respectively shall have and may exercise all the powers of the president, of the treasurer and of the secretary, respectively. The Board of Directors shall have power from time to time to fix and to determine and to vary the amount of the working capital of the Company ; and to direct and determine the use and disposition of any surplus or net profits over and above the capital stock paid in; and in its discretion the Board of Directors may use and apply any such surplus or accumulated profits in purchasing or acquiring its bonds or other obligations, or shares of its own capital stock, to such extent and in such manner and upon such terms as the Board of Directors shall deem expedient; but shares of such capital stock so purchased or acquired may be resold, unless such shares shall have been retired for the purpose of decreasing the Company’s capital stock as provided by law. : The Board of Directors from time to time shall determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the corpora- tion, or any of them, shall be open to the inspection of the Stock- holders, and no Stockholder shall have any right to inspect any account or book or document of the corporation, except as conferred by Statute or authorized by the Board of Directors, or by a resolution of the Stockholders. Subject always to by-laws made by the Stockholders, the Board of Directors may make by-laws, and, from time to time, may alter, amend or repeal any by-laws; but any by-laws made by the Board of Directors may be altered or repealed by the Stockholders, at any annual meeting, or at any special meeting, provided notice of such proposed alteration or repeal be included in the notice of the meet- ing. Iw WITNESS WHEREOF, we have hereunto set our hands and seals of February, 1901. meena ss Cuartes ©. Cxurr — [L.8.] Wittiam J. Curtis [L.S.] Cuartes MacVzeacx [L.8.] Signed, sealed and delivered in the presence of Francis LynpE STETSON. Victor MoRAweEtTz. 1012 APPENDIX OF CORPORATE FORMS. Strate oF New JERSEY, County or Hupson. Be it remembered that on this 23rd day of February, 1901, before the undersigned, personally appeared Charles OC. Cluff, William J, Curtis and Charles MacVeagh, who, I am satisfied, are the persons named in and who executed the foregoing certificate; and I having first made known to them, and to each of them, the contents thereof, they did each acknowledge that they signed, sealed and delivered the same as their voluntary act and deed. ss: Gero. Hoimes, Master in Chancery of New Jersey. (10¢ I. R. Stamp Can.) Enporsep: “ReEcEIvED in the Hudson Co., N.J., Clerk’s Office Feby 25th a.p. 1901, and Recorded in Clerks Record, No. on Page “Maurice J. Stack, Clerk.” “Fiiep Fess. 25, 1901. “GrorGE WoRTs, : “ Secretary of State.” APPENDIX OF CORPORATE FORMS. 1013 BY-LAWS OF CONSOLIDATED STEEL COMPANY. ARTICLE I. STOCKHOLDERS. 1. Annual Meeting. A meeting of the stockholders shall be held annually at the principal office of the company in New Jersey at ten o’clock in the forenoon on the second Monday in June, for the purpose of electing directors, and for the transaction of any other business au- thorized or required to he transacted by the stockholders. In case such second Monday shall be a legal holiday, the meeting shall be held on the next succeeding day which is not a legal holiday. Notice of the annual meeting shall be mailed at least ten days prior to the meeting to each stockholder at the address last furnished by him to the company, provided he shall have furnished such address. : 2. Special Meeting. Special meetings of the stockholders shall be held at the principal office of the company in New Jersey. The board of directors may at any time call a special meeting of the stockholders, and it shall call the same whenever the holders of not less than one quarter of the stock of the company outstanding shall in writing make application therefor to the president, stating the object or objects of such meeting. Notice of such special meeting and of the object or objects thereof shall be mailed to each stockholder in like manner as notice of an annual meeting. 8. Quorum. The holders of one-third of all the shares of the cap- ital stock of the company outstanding shall constitute a quorum at any meeting for all purposes, including the election of directors; but the holders of a majority of the stock represented at any meeting may, at the end of one hour from the time for which the meeting was called, ad- journ the meeting from time to time without further notice, and at any such adjourned meeting at which a quorum shall attend all business may be transacted which might have been transacted at the meeting as originally called. , 4. Organization. The president, or in his absence a vice-presi- dent, shall call meetings of stockholders to order, and act as chairman 3014 APPENDIX OF CORPORATE FORMS. thereof. In case neither the president nor any vice-president is pre- sent, any stockholder present may call the meeting to order, and the stockholders present may then elect a chairman of such meeting. The secretary of the company shall act as secretary at all meetings of the stockholders. In his absence, the chairman. may appoint any person to act as secretary. 5. Voting. Atany annual or special meeting each stockholder shall have one vote for each share of stock standing in his name on the books of the company at the time of the closing of the transfer books for said meeting. Every stockholder shall be entitled to vote in person, or by proxy appointed by an instrument in writing, signed by such stockholder or by his duly authorized agent, and delivered to such person or persons as the chairman of the meeting may direct. A stockholder shall be deemed to be present whether present in person or represented by TOXY. . Voting for directors shall be by ballot, and upon the demand of any stockholder present the voting upon any question shall be by ballot. 6. Inspectors. Whenever the vote of the stockholders shall be taken by ballot, the chairman of the meeting shall appoint two persons to be inspectors. The inspectors shall be sworn to the faithful per- formance of their duties; they shall open and close the polls; they shall decide all questions as to the validity of proxies and the quali- fication of voters; and they shall, in writing, certify to the results. ARTICLE II. BOARD OF DIRECTORS. 1. Number. The board of directors shall consist of fifteen mem- bers. 2. Term of Office. At the first election of directors, five directors shall be elected to hold office until the first annual meeting thereafter ; five to hold office until the second annual meeting thereafter, and five to hold office until the third annual meeting thereafter. At each an- nual meeting, the successors to the directors whose term shall expire in that year shall be elected to hold office for the term of three years, so that the term of office of five directors shall expire in each year. A majority of votes cast shall be necessary to elect. Each director shall serve for the term for which he shall have been elected, and until his successor shall have been duly elected and qualified. 3. Vacancies. In case of any vacancy in any class of directors, through death, resignation, disqualification or other cause, the remain- ing directors, by affirmative vote of a majority of their number, whether APPENDIX OF CORPORATE FORMS. 1015 constituting a quorum or not, may elect a successor to hold office for the unexpired portion of the term of the director whose place shall be vacant, and until his successor shall have been duly elected and qualified. 4. Meetings. The board of directors may hold its meetings and have one or more offices and keep the books of the company, except the stock and transfer books, at such place or places-in the State of New Jersey or outside of the State of New Jersey as it may from time ° to time determine. Stated meetings shall be held on the first Wednesday of each month at 12 o’clock noon. If such day is a legal holiday, the meeting shall be held on the next succeeding day which is not a legal holiday. No notice shall be required for any stated meeting. Special meetings may be called by the president or any three direc- tors. Each director shall furnish to the secretary an address to which notices of special meetings may be sent. Notice of the time and place of each special meeting shall be sent to each director who has fur- nished such address, and such notice shall be sent, if by mail, at least two days, or, if by telegram, at least six hours, prior to the meeting. A majority of the directors in office shall constitute a quorum. A majority of those present at the time and place of any stated or special meeting, although less than a quorum, may adjourn the meeting from time to time, without notice. 5. Powers. The board of directors shall have the management of the business of the company. The board may exercise all such powers of the company and do all such lawful acts and things as are not by statute, or by the certificate of the company, or by these by-laws directed or required to be exercised or done by the stockholders. 6. Compensation. Each director shall receive $10 for attendance at any meeting of the board. 7. Executive Committee. The directors shall elect from their number an executive committee, to consist of six members, and shall designate one of such six members to be the chairman of the commit- tee. The members of the committee and the chairman thereof shall serve during the pleasure of the board. During the intervals between the meetings of the board of directors the executive committee shall possess and may exercise all the powers of the board of directors in such manner as the executive committee shall deem best for the interests of the company in all cases in which specific directions shall not have been given by the board of directors. All action by the executive committee shall be reported to the board of directors at its meeting next succeeding such action, and shall be subject to revision or alteration by the board of directors ; provided that no rights or acts of third parties shall be affected by any such revision or alteration. The executive committee may hold its meetings at such times and places as it may determine. . 1016 APPENDIX OF CORPORATE FORMS. In every case the affirmative vote of a majority of all the members of the committee shall be necessary to the adoption of any resolu- tion. The compensation of members of the executive committee shall be fixed by the board of directors. * ARTICLE III. OFFICERS. 1. Election or Appointment. The board of directors shall elect from their number a president, and shall appoint a treasurer and a sec- retary. The board may also appoint one or more vice-presidents, one or more assistant treasurers, one or more assistant secretaries, and such other officers as it may deem advisable. The same person may be treasurer and an assistant secretary, or secretary and an assistant treasurer, or an assistant treasurer and an assistant secretary. 2. Term of Office and Compensation. The officers so elected or appointed shall hold office during the pleasure of the board, and their compensation shall be fixed by the board. 8. Duties of Officers. The president shall preside at meetings of the stockholders and of the bodrd of directors. He shall be the chief executive officer of the company and shall have general charge of the business of the company, subject to the executive committee and the board. The treasurer shall give such bond for the faithful discharge of his duties as the board may require. He shall have custody of all the funds and securities of the company which may have come into his hands, and shall keep full and accurate accounts of all moneys received and paid by him on account of the company. The secretary shall keep the minutes of all meetings of the stock- holders and of the board, and of the executive committee; he shall attend to the giving and serving of all notices; and he shall have the custody of the seal of the company. The president, treasurer, and secretary shall, in general, perform the duties incident to their offices, and any other duties designated by the board. All other officers shall perform such duties as may be designated by the board. 4. Execution of Instruments on behalf of the Company. All certificates for shares of the capital stock of the company, all bills of exchange, promissory notes and checks issued, drawn, or made by the company shall be signed by the president or a vice-president, and by the treasurer or an assistant treasurer. All other contracts or obliga- tions of the company shall be executed by such officer or officers as the board may direct. The seal of the company shall be affixed to such APPENDIX OF CORPORATE FORMS. 1017 instruments as the board may direct, and, when so affixed, shall be attested by a secretary or an assistant secretary, if the board shall so direct. ARTICLE IV. CAPITAL STOCK. DIVIDENDS. SEAL. 1. Certificates of Shares. The certificates for shares of the cap- ital stock shall be in such form, not inconsistent with the certificate of incorporation, as shall be approved by the board of directors. , No certificate shall be valid unless it is sealed with the corporate seal of the company, and signed by the president, or a vice-president, and the treasurer, or an assistant treasurer, and such other persons as the board may determine. All certificates shall be consecutively numbered. The name of the person owning the shares represented thereby, with the number of such shares and the date of issue, shall be on the company’s books. 2. Transfer of Shares. Shares of the capital stock of the com- pany shall be transferred only on the books of the company by the holder thereof in person, or by his attorney, upon surrender and can- cellation of certificates for a like number of shares, or (in case of lost or destroyed certificates) upon the receipt of a bond satisfactory to the board. The board of directors shall have power to make all such rules and regulations as they may deem expedient concerning the issue, transfer, and registration of certificates for shares of the capital stock of the company; and to appoint a transfer agent and a registrar of transfers, and to require all stock certificates to bear the signature of such trans- fer agent and of such registrar of transfers. The stock transfer books shall be closed for the meetings of stock- holders and for the payment of dividends during such periods as may be fixed by the board, and during such periods no stock shall be trans- ferable. 83. Dividends. The board of directors in its discretion may from time to time declare dividends upon the capital stock from the surplus or net profits of the company, subject to the provisions of the certitfi- cate of incorporation. 4. Working Capital. The board of directors may fix a sum which may be set aside or reserved, over and above the company’s capital stock paid in, as a working capital for the company, and from time to time the board may increase, diminish, and vary the same in its abso- lute judgment and discretion. 5. Corporate Seal. The board of directors shall provide a suitable seal containing the name of the company, which shall be in the cus- tody of the secretary. 1018 APPENDIX OF CORPORATE FORMS. ARTICLE V. AMENDMENTS. These by-laws may be altered or amended by the stockholders at any regular or special meeting, or by the directors at any regular or special meeting, provided not less than eight directors shall vote in favor of such alteration or amendment. APPENDIX OF CORPORATE FORMS. 1019 MINUTES OF FIRST MEETING OF INCORPORATORS OF CONSOLIDATED STEEL COMPANY. The first meeting of the incorporators of Consolidated Steel Com- pany was held at Number 10 Day Street, Hoboken, New Jersey, designated in the certificate of incorporation as the location of the principal and registered office of the company, on the sixth day of April, 1909, at ten o’clock in the forenoon, pursuant to a written waiver of notice signed by all the incorporators, fixing the time and place aforesaid. The following incorporator was present in person: NAME. NUMBER OF SHARES. John Adams, 10. The following incorporators were represented by proxy : NAME. NAME OF PROXY. NUMBER OF SHARES. James Brown, John Adams, 10. Charles Clark, John Adams, 10. Mr. John Adams was elected chairman, and Mr. Hugh Knowles was appointed secretary of the meeting. The chairman reported that the certificate of incorporation of the company was recorded in the office of the Clerk of Hudson County on the fifth day of April, 1909, and was filed on the same date in the office of the Secretary of State of New Jersey. The chairman pre- sented a certified copy of said certificate of incorporation, which was ordered to be filed, and a copy thereof to be spread upon the records of the meeting. The said certified copy was as follows: [Here take in certified copy of certificate of incorporation. ] The secretary presented and read the waiver of notice of the meet- ing, which was ordered to be filed, and a copy thereof to be spread. upon the records of the meeting. The said waiver was as follows: “WAIVER OF NOTICE OF FIRST MEETING OF INCORPORATORS OF CONSOLIDATED STEEL COMPANY. We, the undersigned, being all of the incorporators of Consolidated 1020 APPENDIX OF CORPORATE FORMS. Steel Company, a New Jersey corporation, DO HEREBY WAIVE NOTICE of the time, place, and purpose of the first meeting of the incorpora- tors of said company, and do fix the sixth day of April, 1909, at ten o’clock in the forenoon, as the time, and the office of the Security Trust Company, Number 10 Day Street, Hoboken, New Jersey, as the place of said meeting, and do hereby waive all the requirements of the statutes of New Jersey as to notice of such meeting, and the publication thereof, and we do consent to the transaction of such business as may come before said meeting. Dated, April 6th, 1909. Joun ADAMS. James Brown. CHARLES CLARK.” The secretary presented a form of by-laws for the regulation of the affairs of the company which were read, article by article, and unani- mously adopted. The said by-laws were as follows: [Here take in by-laws. ] Upon motion, Resolved, that the meeting proceed to the election of directors. Messrs. G. H. Ivins and K. L. Munro were appointed. inspectors of election, and the oath was duly administered to them. Messrs. Henry Chamberlain, Frank M. Converse, Richard T. Frances, Lawrence K. McIntyre, and Philip Talbot were nominated for directors to hold office until the next annual meeting of the com- pany; Messrs. George Bathurst, Arthur K. Livingston, Samuel P. Stacy, Amasa Thompson, and William K. Waring were nominated for directors to hold office until the second annual meeting of the company; Messrs. Hiram A. Hilbreth, George Ivins, Isaac Jones, Herbert 8. Pendreigh and Walter M. Stickney were nominated for directors to hold office until the third annual meeting of the com- pany. No other nominations having been made, the polls were declared open. All the stockholders having voted by ballot, the polls were declared closed, and the inspectors presented their certificate showing that the aforesaid gentlemen had been elected directors of the com- pany for the aforesaid terms. Upon motion, , Resolved, that the principal and registered office of the company in New Jersey be established and maintained at Number 10 Day Street, Hoboken, County of Hudson, and that the Security Trust Company be, and it hereby is, appointed the agent of this corporation in charge of such principal and registered office, upon whom process against this company may be served. Upon motion duly made and seconded, and by the affirmative vote of all the stockholders, it was APPENDIX OF CORPORATE FORMS. 1021 ~ Resolved, that the board of directors be and they hereby are author- ized to issue shares of the capital stock of this company to the full amount authorized by the certificate of incorporation, in such amounts, and at such time or times, and for such consideration as the board may determine. Upon motion duly made and seconded, and by the affirmative vote of all the stockholders, the following preambles and resolution were adopted : Whereas, Mr. James Wakefield, of Pittsburg, Pennsylvania, has offered, in consideration of the issue to him or upon his order of pre- ferred stock in this company to the amount of one hundred thousand dollars ($100,000) par value, and of common stock in this company to the amount of one hundred and fifty thousand dollars ($150,000) par value, to sell to this company the following described property, to wit: [Here take in description of property]; and Whereas, in the judgment of the stockholders such property is neces- sary for the business of this company, and is of the fair value of two hundred and fifty thousand dollars ($250,000) ; Resolved, that the directors of this company be and they hereby are authorized, in their discretion, to purchase the aforesaid property for the aforesaid price, and to issue stock as aforesaid in payment thereof. On motion, the meeting adjourned. Hueu Know es, Secretary of the Meeting. 1022 APPENDIX OF CORPORATE FORMS, MINUTES CF FIRST MEETING OF BOARD OF DIRECTORS OF CONSOLIDATED STEEL COMPANY. The first meeting of the board of directors of Consolidated Steet Company was held at Number 17 Wall Street, New York City, on the sixth day of April, 1909, at two o’clock in the afternoon, pursuant to a written waiver of notice signed by all the directors, fixing the time and place aforesaid. The following directors were present: Messrs. Chamberlain, Con- verse, Talbot, Bathurst, Livingston, Stacy, Jones, and Pendreigh, being a quorum of the board. . On motion, Mr. Talbot was chosen temporary chairman, and Mr. Hugh Knowles was appointed secretary of the meeting. The secretary presented and read the waiver of notice of the meeting, which was ordered to be filed, and a copy thereof to be spread upon the records of the meeting. The said waiver was as follows: [Here take in waiver of notice. | The minutes of the first meeting of the incorporators of the com- pany were read. Upon motion, the following gentlemen were elected officers of the company, to hold office during the pleasure of the board. President : Mr. George Bathurst. Vice-Presidents: Mr. John Adams and Mr. Philip Livermore. Treasurer: Mr. John G. Holmes. Assistant Treasurer: Mr. Hugh Knowles. Secretary: Mr. Hugh Knowles. Assistant Secretary: Mr. John G. Holmes. Upon motion, the following gentlemen were chosen to constitute the executive committee of the company: Messrs. Bathurst, Chamber- lain, Converse, Livingston, Jones, and Pendreigh. Upon motion, Mr. Converse was designated to be chairman of the executive committee. Upon motion, Mr. Brandon Livermore was appointed counsel to the company. 7 The president thereupon took the chair. The secretary thereupon took and subscribed the oath of office, and entered upon the discharge of his duties. The said oath was as fol lows: APPENDIX OF CORPORATE FORMS. 1023 “OATH OF SECRETARY OF CONSOLIDATED STEEL COMPANY. State or New York, oe Country or New Yorx. f°" Hugh Knowles, secretary of Consolidated Steel Company, a New Jersey corporation, being by me duly sworn, upon his oath deposes and says that he will faithfully discharge the duties of secretary of the aforesaid corporation to the best of his skill and ability. Hvuexu Know tes. Subscribed and sworn to before me, this sixth day of April, 1909. Joun K. ANDREWS, Notary Public (17), New York County.” Upon motion, Resolved, that the treasurer give a bond in the sum of fifty thou- sand dollars ($50,000). The treasurer thereupon presented his bond, signed by himself as principal and by the Attorneys Surety Company as surety, and the same was approved, and ordered to be filed with the secretary. Upon motion, Resolved, that the seal presented at this meeting, an impression of which is directed to be made in the minute book, be and the same hereby is adopted as the seal of the company. The impression of said seal follows: [Seal.] Upon motion, Resolved, that the stock book and transfer book presented at this meeting be and the same hereby are adopted as the stock book and the transfer book of the company, and the secretary is hereby directed to send the same to the registered office of the company. Upon motion, Resolved, that the treasurer be, and he hereby is, authorized to open a bank account in behalf of the company with the Empire State Na- tional Bank. : Further Resolved, that, until otherwise ordered, checks, notes, and other obligations may be endorsed on behalf of the company for col- lection, by either the treasurer, or an assistant treasurer, and deposited to the credit of the company in the said bank. 1024 APPENDIX OF CORPORATE FORMS. Further Resolved, that, until otherwise ordered, the said bank be and it hereby is authorized to make payments from the funds of this .company on deposit with it, according to the check of this company signed by its president, or a vice-president, and countersigned by the treasurer or an assistant treasurer. Upon motion, Resolved, that the forms of certificates for shares of the common and preferred stock of the company presented at this meeting be and they hereby are adopted, and that such forms be spread upon the records of the meeting. The forms of stock certificates were as follows : {Here take in forms of stock certificates. ] Upon motion, Resolved, that the Security Trust Company, a New Jersey corpora- tion, be and it hereby is designated as the transfer agent of this company, and the New Jersey Bonding Company, a New Jersey cor- poration, be and it hereby is designated as the registrar of transfers, and that all certificates for shares of the capital stock of the company shall be countersigned by such transfer agent and also by such regis- trar of transfers. Upon motion, Resolved, that this company establish and maintain an office in Room 10, Number 17 Wall Street, New York City, and that all meet- ings of the board of directors shall be held at such office until other- wise ordered. Upon motion duly made and seconded, and on the affirmative vote of all present, the following preambles and resolutions were adopted: Whereas, Mr. James Wakefield, of Pittsburg, Pennsylvania, has offered, in consideration of the issue to him or upon his order of pre- ferred stock in this company to the amount of one hundred thousand dollars ($100,000) par value, and of common stock in this company to the amount of one hundred and fifty thousand dollars ($150,000) par value, to sell to this company the following described property, to wit: : [Here take in description of property]; and Whereas, in the judgment of the directors such property is necessary for the business of this company, and is of the fair value of two hun- dred and fifty thousand dollars ($250,000) ; Resolved, that it be adjudged and declared that said -property is of the fair value of two hundred and fifty thousand dollars ($250,000), and that the same is necessary for the business of the company. Further Resolved, that the form of agreement for the purchase of said property presented at this meeting by the counsel to the com- pany, be, and the same hereby is, approved, and the president or a vice-president, and the secretary or the assistant secretary are hereby APPENDIX OF CORPORATE FORMS. 1025 authorized and directed to execute the same, in the name of, and on behalf of the company, and under its corporate seal. Further Resolved, that upon the conveyance or transfer to this com- pany of the said property by instruments of conveyance or transfer satisfactory to the counsel to the company, the officers of this com- pany be and they hereby are authorized and directed to prepare, sign, and seal certificates of stock pursuant to the by-laws, and to issue cer- tificates of the full paid preferred stock of this company to the aggre- gate amount of one hundred thousand dollars (100,000), and of the common stock of this company to the aggregate amount of one hun- dred and fifty thousand dollars ($150,000) to the said James Wakefield, or upon his order. Upon motion, the meeting adjourned. Huen Knowtes, Secretary. 1026 APPENDIX OF CORPORATE FORMS. LISTING OF SECURITIES OF CONSOLIDATED STEEL COMPANY. To the Committee on Stock List of the Stock Exchange : Consolidated Steel Company hereby makes application to have the following bonds and stock of said company placed on the regular list of the Stock Exchange: Ten million dollars ($10,000,000) first mortgage five per centum gold bonds, consisting of nine thousand (9000) bonds for one thousand dollars ($1000) each, numbered from M1 to M9000 both inclusive, and of two thousand (2000) bonds for five hundred dollars ($500) each, numbered from D 9001 to D 11000 both inclusive; Ten million dollars ($10,000,000) seven per centum cumulative pre- ferred stock ; Ten million dollars ($10,000,000) common stock. Consolidated Steel Company was organized on April 6, 1909, uader the laws of the State of New Jersey, and its certificate of incorpora- tion was amended on April 26, 1909. The company has acquired under the laws of the States of New Jersey, Pennsylvania, and New York, by direct conveyance, free of liens, the following property: The plant, stock in trade, good will, and all other assets of the iron business formerly carried on in Pittsburg, Pennsylvania, by James Wakefield, doing business as James Wakefield and Company ; The plant, stock in trade, good will, and all other assets of the business formerly carried on in Lebanon, Pennsylvania, by the Leba- non Iron Company, a Pennsylvania corporation ; The plant located in Buffalo, New York, formerly owned by the Delaware Iron Company, a Pennsylvania corporation, and commonly known as the Buffalo Mill, together with all the stock in trade in said plant. The company has also acquired the following securities : Three million dollars ($3,000,000) six per centum first mortgage bonds of the Delaware Iron Company, part of a total of four million eight hundred thousand dollars ($4,800,000) of such bonds issued by said company and now outstanding; Five thousand and thirty-three (5033) shares of the common stock of the Delaware Iron Company out of a total of ten thousand (10,000) shares of common stock issued by said company and now outstanding (no preferred stock having been issued by said company). Consolidated Steel Company had on the 27th day of April, 1909,. one APPENDIX OF CORPORATE FORMS. 1027 million eight hundred seventy-three thousand four hundred thirty-two dollars and forty-three cents ($1,87 3,432.43) in its treasury. First Morreace Five Per Centum Gotp Bonps. These bonds bear date April 27, 1909; mature January 1, 1929; bear interest from January 1, 1909, payable J anuary 1 and July 1; are payable, principal and interest, at the office of Black and Company in the city of New York in gold coin of the United States of America of or equal to the present standard of weight and fineness without deduction for any tax or taxes which the company may be required to pay thereon and retain therefrom under any present or future law of the United States of America or of any state, county, or munici- pality thereof; and they or any of them are redeemable at the option of the company on six months’ notive on January 1, 1919, or any in- terest day thereafter, at five per centum premium and accrued interest. The said bonds are of an issue limited to the principal amount of twenty million dollars ($20,000,000) at any one time outstanding. The bonds are in coupon form with the right of registration as to principal. The trustee of the mortgage is Interborough Trust Com- pany of New York. The transfer agency for the registered bonds will be at the office of the company in New York City. To secure said bonds the company has executed and delivered to Interborough Trust Company of New York its first mortgage dated April 27, 1909, covering the properties in Pittsburg, Lebanon, and Buffalo above mentioned, and the stock and bonds also above men- tioned, and such other properties as are in said mortgage more par- ticularly described. Srven Per Centum CUMULATIVE PREFERRED STOCK. The holders of such preferred stock are entitled to receive from the surplus or net profits arising from the business of the corporation a fixed yearly dividend of seven per centum, payable semi-annually on the 2d days of January and July in each year, before any dividend is set apart or paid on the common stock. Should the surplus or net profits arising from the business of the corporation prior to any dividend day be insufficient to pay the dividend upon the preferred stock, such dividends are payable from the future profits, and no dividend is at any time to be paid upon the common stock until the full amount of seven per centuin per annum up to that time upon all the preferred stock shall have been paid or set apart. The holders of preferred stock are entitled to no dividends beyond the seven per centum aforesaid. The holders of preferred stock are entitled in case of the liquidation or dissolution of the company to be paid in full both the principal of their shares and accrued dividends before any amount is paid to the holders of the common stock. 1028 APPENDIX OF CORPORATE FORMS. The total amount of the preferred stock authorized is twenty mil- lion dollars ($20,000,000), ten million dollars ($10,000,000) of which has been issued. Common Srocx. The total amount of the common stock authorized is twenty million dollars ($20,000,000), of which ten million dollars ($10,000,000) has been issued. The board of directors of Consolidated Steel Company is constituted as follows: Messrs. Henry Chamberlain, Frank M. Converse, Richard T. Frances, Lawrence K. McIntyre, Philip Talbot, George Bathurst, Arthur K. Livingston, Samuel P. Stacy, Amasa Thompson, William K. Waring, Hiram A. Hilbreth, George Ivins, Isaac Jones, Herbert S. Pendreigh, and Walter M. Stickney. The officers of Consolidated Steel Company are as follows: President : Mr. George Bathurst. Vice-Presidents: Mr. John Adams and Mr. Philip Livermore. Treasurer: Mr. John G. Holmes. Assistant Treasurer: Mr. Hugh Knowles. Secretary: Mr. Hugh Knowles. Assistant Secretary: Mr. John G. Holmes. The principal office of Consolidated Steel Company is at No. 10 Day Street, in the city of Hoboken, County of Hudson, State of New Jersey; the company also maintains offices at No. 17 Wall Street, New York City, and at No. 3 Scranton Street, Lebanon, Pennsylvania. Herewith are submitted: 1. Copy of the certificate of incorporation of Consolidated Steel Company. : 2. Copy of the amended certificate of incorporation of Consolidated Steel Company. 3. Seven copies of the first mortgage of Consolidated Steel Com. pany, including one copy certified by Interborough Trust Company of New York to be a true copy of the original. 4. Certificate of Interborough Trust Company of New York ac: knowledging the acceptance of the trust under said first mortgage, stating the securities held under the trust, and giving the numbers of the first mortgage bonds executed in accordance with the terms of the : mortgage. 5. Copy of the by-laws of Consolidated Steel Company. 6. Opinion of counsel. 7. Balance sheet of Consolidated Steel Company, as of May 1, 1909, certified by Strong, Longmead, and Company. 8. Statement of earnings and expenses of the three businesses car- APPENDIX OF CORPORATE FORMS. 1029 ried on in the plants above mentioned for the year ending January 1, 1909, also certified by Strong, Longmead, and Company. 9. Sample copies of bonds, coupons, and stock certificates. Consouipatep Stee, Company, By Grorcr Baruurst, President. Accompanying the foregoing application was the following opinioy of counsel : To the Committee on Stock List of the Stock Exchange: GENTLEMEN : We have examined the certificate of incorporation of Consolidated Steel Company, a New Jersey corporation, and the amendments thereto, and the proceedings relating to the organization of that company and to the issue of its preferred and common stock. We are of opinion that said company has been legally incorporated and organized under the laws of the State of New Jersey; that it has power to issue seven per centum cumulative preferred stock to the par amount of twenty million dollars ($20,000,000) and common stock to the par amount of twenty million dollars ($20,000,000); that pre- ferred stock to the amount of ten million dollars ($10,000,000) and common stock to the amount of ten million dollars ($10,000,000) has been issued in due form, and that the action of the directors and stock- holders of said company in respect of said stock, both preferred and common, was in conformity with the laws of the State of New Jersey. We have also examined the first mortgage dated April 27, 1909, made by said company to Interborough Trust Company of New York as trustee to secure an issue of its five per centum first mortgage gold bonds, and we are of opinion that the action of the directors and stock. holders of said company in respect to this mortgage was in conformivp with law, that the said mortgage is a valid lien on the properties therein mentioned, and that the bonds issued under said mortgage are valid and binding obligations of said company. Yours faithfully, StockTon AND LIVFRnwar. 1030 APPENDIX OF CORPORATE FORMS. SYNDICATE AGREEMENT. Agreement, made this fifth day of April, one thousand nine hun- dred and nine, by and between Brown & Company and Jones & Com- pany, of New York, and Smith & Company, of London, as Readjust- ment Managers (hereinafter called the ‘“‘ Readjustment Managers ”’), parties of the first part; Talbot & Company, of London, Watkins & Company and Weill & Company, of New York, as Syndicate Man- agers (hereinafter called the “ Syndicate Managers ”’), parties of the second part; and the Syndicate Subscribers hereto (hereinafter called the ‘‘ Subscribers”), parties of the third part, who together with the Syndicate Managers constitute the Syndicate, each subscriber being bound only ratably to the extent of his own subscription and not for any other subscriber or subscription. Whereas, pursuant to acertain plan and agreement of readjustment, dated April 5, 1909, about to be issued, it is proposed to undertake a readjustment of the affairs of the New York & Buffalo Railroad Com- pany on the basis of an issue of twenty million dollars ($20,000,000) Prior Lien 43 per cent-Gold Mortgage Bonds (which issue may for the purposes in said plan specified be increased as therein stated), and fifteen million dollars ($15,000,000) First Consolidated Mortgage 4 per cent Gold Bonds (which issue may be increased for the purposes in the said plan specified as therein stated), and of an issue of twenty- five million dollars ($25,000,000) in Four Per Cent Non-Cumulative Preferred Stock (which issue may for the purposes in said plan speci- fied be increased as therein stated), and of thirty-three million three hundred and fifty thousand dollars ($33,350,000) in New Common Stock ; it being understood that to the extent that the existing bonds shall not be exchanged for new securities under the offer in the plan, or not retired by payment on redemption or in dissolution proceedings, or otherwise, the new securities respectively apportioned to such bonds under the plan shall be reserved for the ultimate redemption thereof; and Whereas, in order to provide the cash requirements of said plan as _hereinafter set forth, the Readjustment Managers have undertaken to form a syndicate to which the parties of the third part desire to be admitted as subscribers, and it is proposed that to the extent and in the manner hereinafter provided the Syndicate shall provide such cash requirements of the said plan and purchase the new securities as here- inafter provided ; Now, this Agreement Witnesseth, that in consideration of the mutual promises herein contained, the parties hereto agree with each other and with the Readjustment Managers and the Syndicate Managers, the said Syndicate Subscribers agreeing each for himself and not for any other, as follows: APPENDIX OF CORPORATE FORMS. 1031 First. The parties of the second and third parts hereto hereby form a syndicate for the purpose of providing the cash requirements of the said Plan of Readjustment of the New York & Buffalo Railroad Company. The maximum amount or obligation of the syndicate shall not exceed the sun of twenty-five million dollars ($25,000,000), and such obligations shall be divided and apportioned as recited in this agreement. This agreement shall not take effect until the said maxi- mum amount shall have been subscribed. : Second. The syndicate agrees to take and pay for and the Read- justment Managers will sell and deliver the following new securities when issued, or certificates therefor entitling the holders to the new securities when issued, viz. : (1) $9,221,000.00 Prior Lien 43 Per Cent Gold Mortgage Bonds. $3,595,312.50 First Consolidated Mortgage 4 Per Cent Gold Bonds. $2,400,000.00 New 4 Per Cent Preferred Stock (Trust Certificates) for the sum of twelve million nine hundred and sixty-seven thousand three hundred and sixty-seven dollars ($12,967,367), plus any interest accrued on said bonds when delivered. (2) The Syndicate, if so requested by the Readjustment Managers, will further take and pay for such part of the $10,779,000 new Prior Lien 43 Per Cent Gold Mortgage Bonds (or Certificates therefor en- titling the holders to such new Bonds when issued), which under the Plan are to be offered to the holders of the. present outstanding New York & Buffalo Railroad Company First Mortgage (Prior Lien) 6 Per Cent Bonds, as may not be taken by them within the time limit fixed by the Readjustment Managers, at the price of $985 per bond, plus any interest accrued on said bonds when delivered. (3) The Syndicate further agrees with the Readjustment Managers to advance to them or on their order cash not exceeding in the aggre- gate the sum of ten million dollars ($10,000,000) if the Readjustment Managers shall in their discretion deem that such cash advances will tend to promote the consummation of the Plan of Readjustment, as follows, viz.: (a2) To advance moneys on the security of the existing bonds or coupons or stock trust certificates of the New York & Buffalo Rail- road or certificates issued by the Readjustment Managers entitling their holders to new securities when issued, or upon other securities satisfactory to the Syndicate Managers. (2) To advance cash to purchase any properties whose securities are owned by the New York & Buffalo Railroad Company, or any part thereof, on any sale of said properties in dissolution proceed- ings or otherwise. . ‘The Syndicate shall make such advances from time to time upon twenty days’ written notice from the Readjustment Managers to the Syndicate Managers. Such advances shall be repaid with interest at the rate of 6 per cent per annum out of the proceeds of the new secu- tities deliverable hereunder. The Readjustment Managers, however, 1032 APPENDIX OF CORPORATE FORMS. shall in no event be personally liable in respect of any obligation, advance, purchase or loan hereunder. Third. Each subscriber signing this agreement shall set opposite his name and address the amount of his subscription to the Syndicate, and shall from time to time and at any time on call of the Syndicate Managers make cash payments on account of his subscription here- under. Not over five million dollars ($5,000,000) (twenty per cent) in money in the aggregate shall be called from the Syndicate sub- scribers in any one month. Payments from the subscribers shall be due ten days after the sending of written notice from the Syndicate Man- agers to the subscribers, and such notice shall be by letter to the sub- scribers in the United States and by cable or letter to those in Europe at the addresses of the respective subscribers written below, or at such other addresses as may be furnished in writing to the Syndicate Man- agers by the subscribers respectively. Each subscriber shall be called upon to pay and shall be liable only for such amount as shall bear to the total obligation payable by the Syndicate as ascertained from time to time the same ratio or proportion as his subscription hereunder written bears to the ‘maximum obligation of the Syndicate as fixed in this agreement. The Syndicate Managers may at any time in their discretion distribute among the subscribers pro rata any securities acquired or held hereunder; but until the termination of the Syndi- cate, unless the Syndicate Managers shall otherwise notify the sub- scribers in writing, no securities so delivered to subscribers shall be sold by them, but they shall all be held by the subscribers subject to the order and control of the Syndicate Managers, to be returned to said Syndicate Managers upon demand or their order, for sale or exchange on Syndicate account. Fourth. The Readjustment Managers shall pay to the Syndicate Managers for the benefit of the several Syndicate subscribers in pro- portion to their respective subscriptions a commission or compensation of three per cent (3 per cent) in cash on the amount of their subscrip-, tions hereunder regardless of the amount which the Syndicate shall be called upon to pay or advance. Such compensation shall be paid from time to time, as the Readjustment Managers and Syndicate Man- agers shall determine. Fifth. Deliveries of the respective new securities shall be made with reasonable promptness after completion of the readjustment in New York and London in such proportions as the Syndicate Managers shall request. The Syndicate shall continue in force and operation until one year after the delivery of the new securities, unless sooner terminated by the Syndicate Managers in their discretion and at their option upon notice to the subseribers. Sixth. The Plan of Readjustment may be modified from time to time by the Readjustment Managers as provided in the Readjustment Agreement. Thereupon this agreement shall apply to such modified plan, and, if, as a result of such modification, a less amount of cash shall APPENDIX OF CORPORATE FORMS. 1033 be required for the purposes of the readjustment, the amount of any class or classes of securities to be sold as specified in Paragraph Second, may be reduced. In such case the amount to be paid by the Syndicate shall be diminished, as may be agreed upon, between the Syndicate Managers and the Readjustment Managers. The Readjust- ment Managers may finally abandon the plan, including all modifica- tions thereof, and in such event this agreement shall cease to be of any future effect, and no compensation thereunder shall be due to the Syndicate; but any advance theretofore made by the Syndicate under subdivision 3 of Article Second of this agreement shall be repaid with interest at the rate of six per cent per annum, and any securities there- tofore purchased and then held for Syndicate account may thereafter be sold and the proceeds distributed among the Syndicate subscribers at such time or times and in such amounts as the Syndicate Managers shall determine, not later, however, than one year after the final aban- donment of the plan. Seventh. The failure of any Syndicate subscriber to perform any of his undertakings hereunder shall not affect or release any other Syndi- cate subscriber, and upon such failure the Syndicate Managers shall have the right at their option to exclude such subscriber from further interest and participation in the Syndicate and to forfeit any payments he may have theretofore made thereunder, and to recover all damages resulting from his failure. The Syndicate Managers may in their dis- cretion by written consent release any subscriber, and may accept new subscribers from time to time in the place of any subscriber so failing or released. Each subscriber shall be liable hereunder solely to the Syndicate Managers and the Readjustment Managers and their as- signs and only for such ratable part of the obligations of the Syndicate as the amount of his subscription bears to $25,000,000. Nothing con- tained in this agreement or otherwise shall constitute the subscribers partners with one another or with the Syndicate Managers or render them liable to contribute in any event more than their ratable amount as aforesaid. ‘The Readjustment Managers shall in no event be per- sonally liable in respect to any loss incurred hereunder. Eighth. All the bonds and stocks purchased by the Syndicate as aforesaid, and all net proceeds resulting from the sales of any such bonds or stock, or from any other transaction of the Syndicate Man- agers for account of the Syndicate under any of the provisions hereof, after payment of any and all expenses and obligations incurred by the Syndicate Managers under the provisions of this agreement, and the repayment of any advances made by the Syndicate, shall be distributed among the Syndicate subscribers pro rata by the Syndicate Managers at any time when they shall decide to terminate this agreement, or from time to time when and as the Syndicate Managers may deem ex- pedient. The word “stock,” whenever used herein to describe any securities to be deposited hereunder, shall include stock voting trust certificates. 1034 APPENDIX OF CORPORATE FORMS. Ninth. The Syndicate Managers may sell any bonds or stocks held hereunder to any other subscriber, and any such other subscriber may make any purchase from the Syndicate Managers. The Syndicate Managers shall have absolute control over the disposition of all stock held by them, and they may cause the same to be transferred to them- selves, or as they deem expedient, to any person or persons, corpora- tion or corporations. While so held by them or under their control the Syndicate Managers shall have the exclusive right, and discretion- ary power is hereby conferred upon them, to vote upon such stock or to cause the same to be voted by their nominees or by any proxies appointed or selected by them at all meetings of stockholders for the election of directors of the company, stock in which is so held, and for any and all purposes whatsoever. The Syndicate Managers shall have the sole management and conduct of the Syndicate. The subscribers therefore nominate and irrevocably appoint the Syndicate Managers their agents and attorneys, with full power and authority to do any and all acts and enter into and execute any and all agreements and arrangements deemed by the Syndicate Managers necessary, proper - or expedient to carry out and perform the objects and terms of this agreement substantially as herein set forth, or to promote or protect what they may deem the best interests of the Syndicate, including full power and authority to make purchases and sales in the market, or otherwise, for account of the syndicate, of the existing bonds and stock (voting trust certificates) of the New York & Buffalo Railroad Com- pany, or of other existing securities for which new securities are pro- vided to be issued under the Plan; or of Certificates of Deposit or receipts for any such bonds or stock, or in coupons now or ‘subse- quently matured and unpaid belonging to any such bonds; deposits of the same under the Plan; purchases and sales of the new securities (or certificates entitling the holders to the new securities as issued), and generally to have such transactions in said existing and other bonds and stock and new securities or certificates therefor as they may deem best for the interests of the Syndicate; provided, however, that the total cash obligation to be incurred by the Syndicate for such purehases and for advances shall never exceed the sum of twenty-five million dollars ($25,000,000) at any one time as stated in Paragraph First hereof. Tenth. To accomplish the objects and purposes of this Syndicate, each subscriber hereby ratifies and assents to any action of the Syn- dicate Managers taken under this agreement, and agrees to perform his undertakings hereunder from time to time promptly on the call of the Syndicate Managers to the full extent of the amount of his sub- scription set opposite his name hereto subscribed. The enumeration of particular or specific powers in this agreement shall not be con- sidered as in any way limiting or abridging the general powers and discretion intended to be conferred upon and reserved to the Syn- dicate Managers in order to fully authorize them to do any and all APPENDIX OF CORPORATE FORMS. 1035 things by them in their discretion deemed necessary, proper or expe- dient to carry out the purposes of this agreement, and to aid, effectu- ate or consummate the Plan for readjusting the finances of the New York & Buffalo Railroad Company. Eleventh. The Syndicate Managers shall not be liable under any of the provisions of this agreement or any matter connected therewith, and in like manner, the Readjustment Managers shall not be liable under any of the provisions of this agreement or any matter connected therewith, except in each instance for good faith and the exercise of reasonable diligence. The Syndicate Managers and the Readjustment Managers, and each of the above-named firms or any member of any of said firms, may respectively become Syndicate subscribers hereto, and in that event they shall be Hable for their Syndicate subscriptions, and shall participate in the profits and losses of the Syndicate in the samme way as and ratably with other Syndicate subseribers. All ex- penses of the Syndicate Managers, including counsel fees, brokerages paid in marketing bonds, &c., shall be charged to the Syndicate and all profits and losses of the Syndicate divided and borne pro rata, and each Syndicate subscriber agrees to pay to the Syndicate Managers on demand his ratable share of any such losses. Twelfth. So far as practicable, the three firms, as such Syndicate Managers, shall act and concur in all steps and proceedings hereunder, but in event of the three firms not concurring, the concurrent action of any two of said firms shall be the action of the Syndicate Managers, and no action shall be taken except with the assent of at least two of said firms. The said firms shall each act as a co-partnership, and in case of any change in any of said firms the respective firms of Talbot & Company, Watkins & Company, and Weill & Company, or their respective successor firms as from time to time constituted, shall con- tinue as Syndicate Managers, with all the powers, rights and title vested in the Syndicate Managers hereunder. Thirteenth. Fach and every party hereto upon reasonable request, will from time to time execute, deliver and perform all written agree’ ments necessary or proper to carry this agreement into effect. Fourteenth. All notices to American members of the Syndicate shalt be signed by or for Watkins & Company and by or for Weill & Com- pany, for the Syndicate Managers, but if for any reason it be imprae- ticable to have the signature of both firms the signature of either firm shall be sufficient, provided the notice has been authorized by the Syn- dicate Managers, as provided in Paragraph Twelfth hereof. All notices to other members shall be sufficient if signed by or for Talbot & Com- any. : Fifteenth. This agreement shall be deemed to apply to and bind the legal representatives and assigns of the respective subscribers, but no assignment hereunder shall be valid unless assented to in writing by the Syndicate Managers. ; Sixteenth. Nothing herein contained shall be construed as creating 1036 APPENDIX OF CORPORATE FORMS. any trust or obligation whatsoever in favor of the New York & Buffalo Railroad Company, or in favor of any person or corporation other than the subscribers, nor any obligation in favor of the subscribers, except only as is herein expressly provided. : Seventeenth. Six copies of this agreement shall be signed by the Syndicate Managers and the Readjustment Managers, and one of such copies lodged with each of the firms composing the Syndicate Man- agers and one with each of the firms composing the Readjustment Managers, and other copies may be signed by any of the subscribers, but all of the different copies so signed shall together constitute but one agreement. In witness whereof, the parties of the first and second parts hereto have hereunto subscribed their names, and the Subscribers, parties of the third part, have hereunto subscribed their names, addresses and the amounts of subscriptions made by them respectively the day and year aforesaid. Brown & Co., Jones & Co., > Readjustment Managers. Smiru & Co., Taxtsor & Co., Warxins & Co., | Simin Managers. Weitt & Co., ADDRESS TO WHICH : AMOUNT OF NAME OF SUBSCRIBER. el a aoe TO SUBSCRIPTION. H APPENDIX OF CORPORATE FORMS. 1037 ALBEMARLE AND BRISTOL RAILROAD COMPANY. VOTING TRUST AGREEMENT. Dated April 5th, 1909. Agreement, made the 5th day of April, 1909, by and between Norcross & Co., Robinson, Cromwell & Co., and Tracy Brothers, all of New York City (hereinafter called the Managers), as Readjustment Managers under a certain plan and agreement for the readjustment of The Albemarle, Charlton, and Bristol Railroad Company, dated the Ist day of October, 1908, parties of the first part; George A. Norcross, William A. Robinson, and Edward C. Tracy (hereinafter called the Voting Trustees), parties of the second part; and holders of the trust certificates, hereinafter mentioned, parties of the third part, Witnesseth : Whereas, Albemarle and Bristol Railroad Company has been organ- ized under the laws of the State of Alabama, and, pursuant to said plan and agreement of readjustment, has acquired certain railroads and property formerly of The Albemarle, Charlton, and Bristol Rail- road Company ; and ; Whereas, said Albemarle and Bristol Railroad Company has au- thorized an issue of its First Mortgage Gold Bonds, payable J. anuary 1, 1939, with interest from January 1, 1909, at the rate of four per cent per annum, secured by a mortgage or deed of trust dated April 5, 1909, to Interborough Trust Company of New York, as Trustee, on certain of its railroads and property ; and has also authorized an issue of its First Consolidated Mortgage Gold Bonds, payable January 1, 1959, with interest from January 1, 1909, at the rate of four per cent per annum, secured by a mortgage or deed of trust dated April 5, 1909, to Mutual Trust Company of New York, as Trustee, on its railroads and property ; and Whereas, in pursuance of said plan and agreement of readjustment, the Managers, as additional protection to said mortgage bonds, have delivered to the Voting Trustees certificates for two hundred and ninety-nine thousand, nine hundred and fifty full-paid shares, of one hundred dollars each, of the capital stock of Albemarle and Bristol Rail- road Company, and said certificates, together with such other similar certificates as hereafter from time to time may be delivered hereunder, are to be held and disposed of by the Voting Trustees under and pursu- ant to the terms and conditions hereof; 1038 APPENDIX OF CORPORATE FORMS. Now, therefore, the Voting Trustees do agree with the Managers, and with each and every holder of certificates issued as hereinafter provided, as follows: First : The Voting Trustees will from time to time, upon request, cause to be issued to the Managers, or upon their order, in respect of all certificates of stock received from them, certificates in substan- tially the following form : [Here take in form of trust certificate.] Second: On the first day of January, 1914, if Albemarle and Bris- tol Railroad Company shall then have paid, for two consecutive years, a four per cent cash dividend on its stock, or, if not, then as soon as such dividend shall for two consecutive years have been so paid; or when- ever, although prior to the payment of such dividends, the Voting Trustees shall decide to make such delivery, the Voting Trustees, in exchange for and upon surrender of any trust certificate then out- standing, will, in accordance with the terms hereof, deliver certifi- cates of stock of Albemarle and Bristol Railroad Company, and may require the holders of trust certificates to exchange them for certifi- eates of stock. Third: The Voting Trustees possess and shall be entitled to ex- ercise until the actual delivery of certificates of stock in exchange for ‘trust certificates, all rights and powers of owners of said stock including the unrestricted right to vote for every purpose and to consent to any corporate act of said Railroad Company, it being ex- pressly stipulated that no voting right passes by or under said trust certificates, or by or under this agreement, or by or under any agree ment express or implied. The Voting Trustees will not, however, during the pendency of this agreement, vote in respect of the shares of stock held by them to authorize any mortgage, additional to the First Mortgage and the First Consolidated Mortgage of said Railroad Company, upon the property acquired under said plan and agreement of readjustment dated October 1, 1908, or to authorize the issue of preferred stock of said Railroad Company, except with the consent in each instance of the holders of trust certificates representing a major- ity of the whole amount of the stock of said Railroad Company held by the Voting Trustees, such consent to be given in person or by proxy at a meeting called by the Voting Trustees for that purpose. Fourth: The trust certificates issued hereunder shall be transfer- able upon the books of the Voting Trustees by the registered holder, either in person or by attorney, on surrender of the trust certificates, properly indorsed, and according to the rules established by the Voting Trustees for the regulation of transfers. Until so transferred, every registered holder for the time being of every such trust certificate may be treated by the Voting Trustees as the owner thereof for all purposes whatsoever. APPENDIX OF CORPORATE FORMS. 1039 Fifth: So long as any trust certificate is properly outstanding the registered holder thereof shall be entitled to the payment of a sum equal in amount to any and all dividends that have been declared on the shares held by the Voting Trustees against such trust certificates as soon as such dividends have been collected by the Voting Trustees, less such fraction of the expenses of the Voting Trustees herein pro- vided for as the shares so held against such trust certificate are of the total number of the shares held by the Voting Trustees at the time such expenses were incurred. Sixth: In voting the stock held by them, the Voting Trustees will exercise their best judgment from time to time in selecting suitable directors to the end that the affairs of the said Railroad Company shall be properly managed; and in voting and in taking action on other matters which may come before them as stockholders they -will likewise exercise their best judgment; but they assume no responsi- bility in respect to such management or in respect of any action taken pursuant to their consent thereto as such stockholders. The Voting Trustees may execute any of the trusts or powers hereof and perform any duty hereby required by or through their at- torneys, officers, agents, or servants, and shall be entitled to advice of counsel in all matters concerning the trusts hereof and their duties hereunder. The Voting Trustees shall be answerable only for their own several acts, receipts, neglects, and defaults, and not for those of each other, nor for those of any person employed by them and selected with reasonable care, nor for loss unless the same shall happen through the individual wilful default of the individual trustee charged therewith. The Voting Trustees shall be authorized in all cases to pay such reasonable remuneration as they shall deem proper to all attorneys, officers, agents, and employees that they may reasonably employ in the management of the trusts and powers hereof, and all such remunera- tion and all other reasonable expenses and disbursements of the Voting Trustees including their own reasonable remuneration shall be paid out of dividends received in respect of the shares of stock held by them. ; ; Any Voting Trustee may act as a director or officer of the said Rail- road Company. Seventh: Any Voting Trustee may, at any time, resign by deliver- ing to the other Voting Trustees his resignation in writing to take effect ten days thereafter; and, in every case of death or resignation or of the inability of any Voting Trustee to act, the vacancy so occur- ring shall be filled as follows: the successor or successors from time to time of George A. Norcross shall be appointed by Norcross & Co., or the successors of said firm; the successor or successors from time to time of William A. Robinson shall be appointed by Robinson, Cromwell & Co., or the successors of said firm; the successor or suc- cessors from time to time of Edward C. Tracy shall be appointed by 1040 APPENDIX OF CORPORATE FORMS. Tracy Brothers, or the successors of said firm, the instruments of appointment being lodged with the other Voting Trustees. The term Voting Trustees, as herein used, shall apply to the parties of the sec- ond part and their successors hereunder. Eighth ; All action to be taken by, or questions arising among, the Voting Trustees from time to time shall be determined by the de- cision of a majority of those then acting as Voting Trustees. Such decision may be evidenced by a writing signed by the Voting Trus- tees, or a majority thereof, and, if so evidenced, no meeting of the Voting Trustees for the purpose of considering the matter so decided shall be requisite. Ninth: All notices to be given to the holders of trust certificates shall be mailed to such holders at the addresses last furnished by them to the Voting Trustees, provided they shall have furnished addresses. No holder of a trust certificate who fails to furnish an address to the Voting Trustees shall be entitled to receive any notice from the Voting Trustees of any proceedings taken hereunder. Tenth: The term Albemarle and Bristol Railroad Company for the purpose of this agreement, and for all rights hereunder, including the issue and delivery of stock, shall be taken to mean the said corpora- tion organized under the laws of the State of Alabama or any successor or consolidated corporation. Eleventh: From time to time hereafter, the Voting Trustees may receive certificates for additional full-paid shares of the stock of said Railroad Company, and, in respect of all such certificates so received, the Voting Trustees may issue and deliver trust certificates similar . to those above mentioned, entitling the holders to the rights therein specified. IN WITNESS WHEREOF, the parties of the first and second parts have hereunto set their hands in the city of New York the day and year first above written. This agreement shall become binding upon the holders of trust certiticates upon their acceptance of such certifi- cates. Norcross & Co., Rozsinson, CRoMWELL & Co., Tracy BrotHeErs, Readjustment Managers. GrorcEe A. Norcross, Wiitiam A. Rosinson, Epwarp C. Tracy, Voting Trustees. Countersigned: April 28, 1909, Security Truet Company, Transfer Agent. By G. E. Goodspeed, Treasurer. soreys OO} ueyr 882] 10} eR ROIYIPIID, uopIseIg-s01A ‘o1oulaeary dripiqg Ese enee "IaInSveI], JULISISSW ‘SopMOUY YSN}T Treg “606T ‘Tady jo Aep 1917 STyy ‘steoqjo pezizoyyne A[np sz Jo somngeusis oy pue Auedmoy oY} JO [eos oY} BHIUpI gE “SIOJSUCAY, jo reqsisoy oy} Aq puv ‘uosy rJejsuviy, oy} Aq pousisiequnod ssoTuN pryVa oq 4OU T[[BYs oyVOGIZ100 STU, ‘yuourfed 10 pueprarp Toyo OU 07 yng ‘predun usqy spueprATP aATye[NUIND Yous Fo yUNOUIe 944 pue onyea sed sq Jo quoutfed 04 syosse Jo WOTNqIaystp uo pus ‘Ayrvek uINQUeD Jed UsAES JO O4vI BT} 4B SPUSPLATP oATyL[NUIND 09 ‘YO0}g UOUIMIOD oY4 03 souereyjerd ut ‘peruse st ‘eyvoyy100 popuome pres ul paptaoad AT[nz o1our sB “YOoYG poilezetg oy, ‘aqeoyly1eo pepusme pres oq} Aq peziioyyne OS[® St SIeT[OP worpror syUaM4 Jo y003s porsojord [e}0} W “606T ‘THdy jo Avp yyxIs-AyuoM, 04} uo Lasi0r MON Jo ayexg Jo Arvjo109g ey} Jo sdqJo oy ut pary Auedu0g ey} Jo uoWesodiooUt Jo oyvoyT4109 popuewe oy} Aq pozisoyyne ‘srerjop uorpim 4yueM4 Jo Yooys uoMIMIOD [eyo} B Jo Javed ¥ Iv PoqlIOSep eacge SorVYs OY, -pasioput Ayredoad ‘eyeoy14100 sty} Jo Iopuermns uo ‘Louz043e Lq 10 ‘uosied ut Jepyoy ay} Aq Auedutog ey4 Jo syooq oyy uo A[uO oTqeaazsueTy ‘Auedut0N [2049 peqepl[osuoH jo Wooyg uowulop fuedurog 12939 Pa ayy Jo sareys pred-[[nyz wag Jo Japloy peroysiser oy4 St suDpp uyor yey 93p1329y 39D ‘yovs OOTS soreyg 000000068 Ho0Ig TomUM0D 000‘000‘0Z$ 49038 pedzejorg, >IVLIdVO GHZIYOHLNV ‘Kosiae MON FO 972g oT} JO SMV] OY Iopan poqerods0oUy or ANVdWOD THHLS GHLVATTIOSNOO ed ealeys sequin ‘Areyoioeg queysrsey ‘ourearyoyy ‘A *O Ag “g10JSUBIT, JO avrys{Zey ‘Auedurog Jurpuog Aesiar MeN ‘606L ‘83 Idy + poxeqs1 Boy saseys 001 ueyy SSO] JO} 07891}1329 For value Received_______hereby sell, assign, and transfer unto shares of the Capital Stock represented by the within Certificate and do hereby irrevocably constitute and appoint pie Attorney, to transfer the said stock on the Books of the within named Company with full power of substitution in the premises. Dated 19 In presence of Countersigned: April 28, 1909, Security Trust Company, Transfer Agent. By G. E. Goodspeed, Treasurer. selvys OO} ueyy $93) 104 OBI }1}I8D “‘{UOPISeTg-90lA ‘OIOUIIAATT apy Beaprroenog ‘IOINSVOIT, JURASISSY ‘SsoTMOU YSNyT tg "606T ‘Tdy jo kep y91z stqy ‘Sse0qyo peztioyyne Amp sqrt Jo somnyeuSis oy pue Auedw0g oy} Jo [ees oy SSIUN GE *sIaysued, jo reaysiSoy oy Aq pur “yue8y seysuezy, oyy Aq peUStsIeyUNOD ssoTUN prTea oq YOU T[eYS oyvoyII100 SII, ‘yuoursed Jo pueprarp T9Y}0 Ou 09 4nq ‘predun wsyy spuePIAIp eAtye[NUIND Yons Jo yUNOUTe o4y pue onTea red sq Jo yueurAed 04 syosse JO WOINGIIysTp uo pus ‘ATIveL uNyUeD Jed UsAeS Jo oYeI OY} Ye SPUEPLAIP oATyL[NUIND 09 ‘y00}g UOTIMIOD 244 0} eouerezoad ut ‘poyyique St ‘oyeoyTy100 papueue pres ul poepraoad AT[NyZ oX0W sv ‘yO04g perIeyaIg eu, ‘aqvoyiy1e0 pepuamie pres ey} fq pozizoyyne Os[e SI sxe][op worprar AyU944. Jo YOo}s ouTUIOD [eI09 YW ‘GOGT ‘dy Jo Lep yyxis-quemy 944 Uo ‘Lassop MON JO 09249 Jo ATeJoIOAg 944 JO SOTO 9y3 Ut party Auvdum0D oY} Jo uoTyerodiooUt Jo oyvoyIZI100 papusMIe 944 Aq pozizoyyne ‘sreyjop uorypior £yW9M4 Jo yo04s porzozoad [eyoq v Jo yavd B axe paqiiosep eAoge sarvys OUT, ‘*possoput Aysedoad ‘aqyvogty109 sty} Jo Iapuerins uo ‘Leur094e Aq 10 ‘uosaed ut s9pjoy eq} kq Auedurop ey} Jo syooq ey} uo ATUO oTqvieysuesy ‘Auedu0g Je01g poyepljosuoy Jo 403g perlejoig favdmog 1003g * eq} Jo soreys pred-[[nz uaq JO Jopfoy pareqsiser oy} SI Oia prof sd DL FEY} BIQAID 94D “goB9 COTS soreyg 000'000'02$ 390}g momuI0D 000000‘0%% 4903g pols9ejorg *IVLIdVO GHZIYOHLAV ‘AasIor MAN JO 094g Oty JO SMT OYY Jepun poyeiodzoouT or ANVdWOO THHLS AHLVALIOSNOO a soleus daquinn ‘e06I ‘8¢ Lady : peroqsrfoq ‘Areqoroeg queysresy ‘ourealqow *M °O Ag “BOJBUVIT, JO avsys[soy ‘Lavdmog Zurpuog fesiar Mon soleys 001 uey} $89] 103 SPEED For value Received_______hereby sell, assign, and transfer unto shares of the Capital Stock represented by the within Certificate and do hereby irrevocably constitute and appoint a Attorney, to transfer the said stock on the Books of the within named Company with full power of substitution in the premises. Dated 19 In presence of CONSOLIDATED STEEL COMPANY FIRST MORTGAGE TWENTY YEAR FIVE PER CENT. GOLD BOND No. M1783 $1000 Consolidated Steel Company, a corporation created under the laws of the State of New Jersey, for value received hereby promises to pay to the bearer or, if registered, to the registered holder hereof, on the first day of January, 1929, at the office of Black and Com- pany, or the successors of said firm, in the city of New York, ONE THOUSAND DOLLARS in gold coin of the United States of America of or equal to the present standard of weight and fineness, and to pay interest thereon from the Ist day of January, 1909, at the rate of five per cent. per annum in like gold coin semi-annually on the first days of January and July in each year at said office upon presentation and surrender of the coupons hereto annexed as they severally mature. Both the principal and interest of this bond are payable without deduction for any tax or taxes which the company may be required to pay or to retain therefrom under any present or future law of the United States of America or of any state, county, or municipality thereof, the company hereby agreeing to pay all such tax or taxes. This bond is one of a series of bonds known as the First Mortgage Five Per Cent. Gold Bonds of the company, all of which bonds have been issued or are to be issued under and in pursuance of, and are to be secured ratably by, a mortgage or deed of trust bearing date the 27th day of April, 1909, executed by the company to Interborough Trust Company of New York, as Trustee, known as the First Mortgage. Said bonds are numbered from one consecutively upwards and are limited to the principal sum of twenty million dollars ($20,000,000) at any one time outstanding. For a description of the properties mortgaged, the nature and extent of the security, the rights of the holders of bonds, and the terms and conditions upon which bonds of said series may be issued and are secured, reference is made to the said First Mortgage. This bond is subject to redemption at the option of the company on six months’ notice on January Ist, 1919, or at any interest day thereafter, at five per cent. premium and accrued interest as provided in the said First Mortgage. This bond may, at the holder’s option, be registered as to the principal thereof on the books of the company at its transfer agency in the city of New York, and be made payable only to the registered holder named therein, but such registration shall not affect the nego- tiability of the coupons by delivery. After such registration, certified hereon, no transfer except on the books of the company shall be valid, unless the last transfer on said books shall have been to bearer and transferability by delivery thereby restored; but successive registrations and transfers to bearer as aforesaid may be made at the option of the holder. Neither this bond nor any coupon for interest thereon shall become valid or obligatory antil the certificate indorsed hereon has been duly executed by the Trustee under said First Mortgage. In Witness WHEREoF, the company has caused these presents to be signed by its presi- dent or a vice-president, and its corporate seal to be hereunto affixed and attested by its secretary or an assistant-secretary, and coupons for such interest with the engraved fac- simile signature of its treasurer to be hereunto attached this 27th day of April, 1909. CONSOLIDATED STEEL COMPANY. Attest: Seal of By Parr Livermorg, Hucn Know es, Consolidated Vice-President. Secretary. Steel Company ‘WUapsatq-aiyg ‘NAVY ‘OQ souoay Ag ‘yto¢ aay Jo fiuvdwog jsnuz yOnosog..aqUuy *O} Pallezad UNYITM 3n11 JO paap oy} UL pauorjueur AuBdwoy jaaiIg payepljosuog JO Spuog JO salias B Jo aUO St PpUOg SITY} FLY) AZIQALaZ) 0} SI SIU, awoyijlay 8,aajsnt J wyoX AEN ‘ANVAWOO ¥ MOVIA 40 HOIddo Ly ATOL INV AUVONVE JO SAVE ISuld AHL NO ATVIVOANNY-INAS AIAVAVd LSTUDLNI 6c6T ANd TWdHIONIUd 606L ‘2g “INA ‘peyeq aaisn4y, ‘HIOX mony Jo Luedmog ysnry, YFnos0qsoquy OL ISAUL JO GHAd AT GANNDAS GNY YAANA aWASsI ooots prog PIop ‘4U9O Jeg oaly vax Auomy, o8eSq10yy sat avaLsIony CUUALSIONY ANVN ASOHA NT AULSIODY {0 FLYT ANVdWOO THALS GCHLVAIIOSNOD Auedwoy E8IT WON ayy Jo reysisey oy} Aq ydooxy ‘puog SI} UO SUuIPITA ON : HOILON Consolidated Steel Company. $25 On the ist day of July, 1909, Consolidated Steel Company, a New Jersey corporation, will pay to bearer at the office of Black and Company in the city of New York twenty-five dollars ($25) in gold coin, without deduction for taxes, for six months’ interest then due on its First Mortgage Gold Bond, No. M 1783 Joun G. 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