CASES ARGUED AND DETERMINED DT '1'HB
UNITED STATES CIRCUIT COURTS OF APPEALS AND THE CIRCUIT AND DISTRICT COURTS.
CAMPBELL
ARGENTA GoLD
& SILVER MIN. Co. et at
{OiTCWI.t Oourt. D. Montana. April 18, 1892.}
1.
MINING COMPANms-VALIDITY OJ' MORTGAGE-PUBLICATION OJ' NOTIOE.
I.
SAME-AvAlLAIlILITY OJ' OBJECTION.
Be
SAME-ESTOPPEL.
InEquity. Suit by S. L. Campbell, trustee, against the Argenta Gold & Silver Mining Company and others. Heard on demurrer to the bill. Demurrer overruled. Henry G. McIntire and Henri J. Burleigh, for complainant. Forbis & Forbis, Edwin N07"I'i8, and Word & Smith, for defendants. KNOWLES, Distrlct Judge. This is a bill in equity seeking the foreclosure of a mortgage upon certain real property belonging to the defendant the Argenta Gold & Silver Mining Company. The property is situate in Beaverhead county, this state. The Argenta Company is a corporation organized under the laws of Montana. Most of the defendants reside in Montana, and are citizens of this state. None of the defendants are citizens of the state of Minnesota, of which state the plaintiff, it appears from the bill of complaint, is a citizen. The bill has the further object of declaring its mortgage lien a prior lien to that of liens claimed bl the defendants, other than the Argenta Company, upon tht: v.51F.no.l-l
2
FEDERAL REPORTER,
vol. 51.
property embraced in the mortgage. It is set forth in the bill that these defendants daim, for certain reasons which appear in the bill, that the mortgage se.curing the is void. The bill alleges that a certam other corporatIOn, known as the "P. J. Kelly Placer & Quartz, Mining & Reduction Company," was the owner of the premises described in involved, and judgments were obtamed agamst it. which it was unable to liquidate. With the view of raising money,)o. Ray this indebtedness, it appears that it was proposed that a new be formed and incorporated, ,()f ,Kepy: sh?uld,b,El, cop;v:eye4,to ali: afra\igemeI1t' made :15y WhICh'1t should 'becoiJe the; property of: saId, frpm the Hep!! 9f, lhesaid judgm,ent creditors. That new corporation then this new corpdtati6n shoul8:issue bonds in the Bum of $75,000, which should be secured by a first mortgage upon the said premises. In pursuance of this agreement. the indebtedness of the Kelly Company was all assigned to one H. Howes, and the said premises conveyed to him. The Argenta Gold & Silver Mining Company was incorporated. Howes propert,to this-'new'corporation, and received as a consideration therefor $75,000 in the first mortgage bouds of said Argenta Corilpahy, and 'a: Ifioi'tgage to\ ile'cure 'their payment. Some of th,e .creditors. of. the. Kelly Company. received some of bQIld"'tl.:ni,piLYment it. the suld, to 'the payment of the Kelly Company inwhic.h hllQbeen Howes. T,wQ. thollsand dollars, or aboll!ll1: 'l.bat surn, waereceived in' excess of the amount required to settle the Kelly Company clain,s, arid this 'was ttirnedqyct the genta:(J()mpnny, which.used it in its mining operations:' " ' dispute but that the,Kelly Cornpanycornpliedwith all the provisions of the statute law bearing upon the matter pefore tral}sferritlg"tts property to Howes. Tliereal controversy· in this case arises as to the validity of the mortgage of the ArgentaC()lnpany to Howes. al}eges,tpat this9f1mpany..on. 12th day ?f ataII:\eetIngthereof )'lc;Jld at. DIllQIl" Mont.· all of the stockholders, being present and assenting thereto; voted and resolved, in SUbstance" that, for the of raising funds to buy said property of the said Kelly Oompany,theArgen'ta CompanY'issue its. bonds in the sum of $75,000, in of $,j()O each, running five years, with interthe rate of 10 per cent. per ann';11Il' to"be secured by a mortgage upon .said property to be purchased from the said pany, in' case a pilfchase]hereof could be effected; and the th!l ArgfllltaGompany was, b'ythe unanimous vote of the stopkholders, duly authorized and empowered to mllke all necessary ar': procuring lilld negotiating said bonds, with full power in rahgements the: premises; that. is to :si\.Y" tq prqcure a conveyance of said property totne said 'mortgage thereon, and issue saId bOllds secured tbe same. That pursuance of theseresolutions and secretary of the Argenta Company executed for the same said mortgage, and signed the.said 9?mpany's name
,
CAMPBELl, 'fl. ARG:ENTA UOLD & SILVER MIN. CO.
3
theteto. was no of tbe meeting of" the" stockholders published in any n,eWi3paper or otherwise, for any time. There was no record of any resolutiQnsor authority duly allthorizing the trustees of tbe Argenta Company to make said mortgage,filt'din the office of the county :t:ecorder in and for said Beaverhead county. Whtit was done by the stoGkholders in regard to the mortgage was done before the company had obtained the title Lo tha' property. The creditorllof the Argenta Contpany, parties herein, and alleged ,to claim upon the premises de-. in the aforesaid mortgage, filed their demurrer to this bill, in which it is set forth that from the showing in the same it appears that the plaintiff isuot entitled to the relief asked. It is contended by defendants that the mortgage is, void, because it appears in the billthlit it was not executed in the manner provided in the statute law of Montana., Said statute is as follows: "Sec. 492. The board of trustt"es or oflicers of any milling corporation organized under the provisions ,of article one, cha,ter fitLeen, of the firth' division of the Revised [chapter 25 of the Compiled Statutes] of this territory, shllll not have power to sell, lease, mortgage. or other-wise dispose of the whole or any part of the mining ground. quartz mills,. sme!tl'rs, concentrators. or reduction works of such corporation, unless, they shall have lirst callt·d a meeting of the stockholders of such corporation in the manuer prescribed in section four hundred and sixty-eight of said article, [chaJ,lter 25.] for the purpose of submitting to the stockholders of slIch COl'" poration the proposition so tosell. lease, -mortgage. or otherwise dis{iose of the property of such corpol'Rtion. or some lJortion thereof. The notice so re;. quired to bepublls!H'd and sent to each stockholdpr shall distin('Uy specify each particular tract or pipce of property so to be leased. sold. mOl'tgagrd, or otherwise disposed of, and the particular disposition to be made thereof." The 468th section, above referred to, so far as it affects this question, is all follows: "Whenever any company shall dpsire to call a meeting of stockholders tor the purpose of availing itself of the privih'ge of this chapter. or for incrpasing or diminishing the amount of its capital stock, or for 01' changing its business. it shall be the duty of the trustees to publish a notice. signed by at least a lllajority of thl'm, in a newspaper in the county, if any shall be published therein, at least six successive weeks. and to deposit a written or printed copy thereof in the post office, addressed to each stockholder at his usual place of residence, at least six weeks previous to the day lixed for holdbig such meeting. specifying the object of the meeting, the time and place when and where such meeting shall be held," etc. Section 493: lng section, stockholders shall appear in persoll or by proxy, representing not less than three fourths of al1 the shares of stock of the corporation. they may organize by choosing one of their number chairman of the meeting, and also a SUitable person for secl'etary, and proceed to vote on the proposition mentioned in said notice. If there are distinct pieces or parcels of property embraced in the proposition, each separate piece of property capable of 1>eing disposed of in one parcel, without material injury to the remainder, shall be voted on separately.. If, on canvassing the votes. it shall be fQund that at least two thirds of all the shares of the capital stock of such "If. at the time and place specified in the notice provided for in the pr(>cM-
FEP,ERAL REPORTER,
corporlltion have been in favor of selling, leasing, mortgaging, or otherwise disposing of a or the whole of sd'd miiling property, then the chairman aud secretary of such meeting shall make a certificate showing the total Dumber of sharesofthe capital stock of such corporation represented in such meeting, and by'whom voted, the number of shares voted in favor of the Proposition, and the number of. a.hares voted against the same. Such certificate shall ,be signed by the chairman, countersigned by the secretary, and verified:.by their oaths, takeD before some officer qualified to administer oaths. Such verification Shall be to the effect that the matters and things therein contained are true, and that the meeting at which such proceedings were had was called and held in pursuance of law, to the best of their knowledge, informatioDj:and belief. Such certificate shall be spread at length on the record of stockholders' meetings of such corppration, and and a copy thereof under the seal Qf said corporation, /;lnd attested, by its president and secretary, and duly acknowledged, shall be recorded in the office of the county recorder of every county wherein any of such property is situated;"
It appears affirmatively from the bill that the trustees of the Argenta Compapy Qidnot perform any of the Quties required in the above statutes, and that no record in the county recorder's office of the action of any meeting and' votes of stockholders of that company was anywhere made. The property mottgaged consisted of anumber of mining claims and requction works. The legal decisions as to the validity of a mortgage,Il1/1.de underthe circumstances ph:sented in this case, are not uniform, -and often not entirely satisfactory. In Cook on Stock and Stockholders of Corporations,(2d Ed.,) section 682, it is said: "There is no dtlfinedprinciple of law that determines whether a particular act is ultra. mre8 or intra. vires. The decisions rest largely in the discretion and sound judgment of the 'court." I should think that the determination of the question as to whether an act of a corporation was ultra vire$ or not sqould' never be classed· al:/ aile resting in. the discretion of the court. The supreme court has maintained the doctrine, in several wellconsidered cases, that, where a corporation has no power in its charter or by virtue of 'the law under which it may be organized to make a specific contract, the same is ultra vires, although accompanied with the proper formalities for entering into a contract. In the case of Thomas v. Railroad. Co., 101 U. S.71, the supreme court say: take thedgeneral to be in this country, though there ·may be exceptional cases,and some aut·horities to the contrary. that the power, of a corporation organized under legislative statutes is such, and only such, as these statutes confer. Conceding the rule applicable to all statutes, that what is fairly implied is as much granted as what is expressed, it remains that the charter of a corporation is the measure of its powers, and that the enumeration of .these powers implies the exclusion of all otbers." To the same extent, and supporting the same doctrine, are Pearce v. Railroad Co., 21 ::How. 44fj .Oregon Ry. «Nav. Co. v. Oregonian Ry. Co., l30U. S. ,I, 9 Sup. Ct. ,Rep. 409j Pittsburgh, C. &; St. L. Ry. 00. v. Keokuk «H. Bridge 00., 131 U. S. 372,9 Sup. Ct. Rep. 770j Pennsylvania R. 00. v. St. Louis, etc., R. '00.,118 U. S. 290, 6 Sup. Ct. Rep. 1094. And in the case Head v. Insurance 00., 2 Cranch, 127, Chief Justice MARSHALL, in delivering the opinion of the court, said:
of
CA.MPBELL .,. ARGENTA GOLD &: SILVER MIN. CO.
5
"It is a rule that a corporation can only act in the manner prescribed by law. When its agents do not clothe their proceedings with the solemnities which are required by the incorporating act to enable them to bind the company, the informality of the transaction, as has been properly urged atthe bar, is itself. conducive to the opinion that such act was rather considered as manifesting the terms on which they are willing to bind the company, as negotiationspreparatory to a conclusive agreement, than as a contract obligatory on both. *. * * The act of incorporation is to them an enabling act. It gives them all the power they possess. It enables them to contract. andj when it prescribes a mode of contmcting, they must obtlerve that mode, the instrument no more creates a contract than if the body had never been in; eorporated."
This.last paragraph is quoted and approved by the supreme court iIi the recent case of Merrill v. Monticello, 138 U. S. 687, 11 Sup. Ct. Rep. 441. In the case of Bank v. Earle, 13 Pet. 519, TANEY, C. J., in speak; ing of what acts a corporation may perform, said: "And those acts must be done by such officers and agents, in such manner as the charter thorizes." In considering these cases, the conclusion would be reached that, where the officers of a corporation had not proceeded in the ner provided by law, their acts would be void. But there appears have .been drawn a between cases where the corporation has no power to act and those where it has such power, but fails to the actsin question in the mode or manner provided by law. In the former theaots are void; in the latter, voidable. In the case of kie v. Railroad Co., 23 now. 381, after citing the case of Bargate v.Shortridge, 5 H. L. Cas. 297 , (decided in the house of lords, England,) where certain directors of a ,company had not observed the precautions required in entering into it contract, and sought to have the same sub-' sequently declared void for the lack of those precautions, wherein it was held that, after having abided by the contract for several years,Jhey; should be estopped from setting up these defects in entering into iihe contract, the supreme court said: q, "This principle does not impugn the doctrine that a corporation cannolj vary from the objects of its creation, and that persons dealing with a company must take notice of whatever is contained in the law of their organization. This doctrine has been constantlv affirmed in this court, and has grafted upon the common law of Ohio. But the principle includes those cases in which It corporation acts within the range of its general authority, but fails to comply with some formality or regUlation which it should not have neglected, but which it has chosen to disregard. "
to
In the case of Hervey v. Railway Co., 28 Fed. Rep. 169, Justice LAN, sitting as circuit justice, said: "The objection under consideration can have no application to anyone of the sectional mortgages, except that executed by the Paris & Terre Haute Railroad Company, which was organized after the passage of the act of 1872; but it cannot avail the parties making it for several reasons. one of which is that. as the Paris & 'ferre Haute Railroad Company admits the execution and delivery of the mOl"tgage. it must. as between the company and its creditors; be deemed a valid instrument. The provision of the act of 1872, making the assent of a given number of stockholders essential to the Yalidity of a mort': gage, is primarily, if I',)t exclusively, for the benefit of stockholderS; If it be
conceded that I)f a rai'lrdaactldrpbration,: fortnedunder the act of 18'i2,,'OOUld. as against Mna fttte holders of bonds s6Cltred:by exeeuter!cbt a executed with the express aBsent:ofjtbe requisite' nUMbf'r of stockholders. it ddesnot follow that creditoi'8ottbe corpol'atiollcouldralse arty tluchquestiori. ,,; ,
.' xJi .this case it appeared that
of Illinois that the assent oftwo' thirds in amount of the stock of the corporation, expressed ina prescribed mode,Was essential to the validity ofa railroad mort,Wood v. U'ater')Vof'lcaCo.,',44 Fed., Rep. 147, it was held that only stockholders could complain of 8 transaction ultra. vires. In the case of Beechf/l' v. 00., 4.5.Mich. 103, 7 N. W. Rep·. 695, Justice COOLEY, in delivering theopinioli Of the court, said: "Courts Often speak of i\ctsand as void when they mean no more than that some party conc.ernedhas a rtght to avoid them. * * * If it is appart>ot that an act is prohibited and deClared void on grounds of general policy, wemust suppose the legislative intentt1> be that it shall be void to all Intents; whlIedfthe manifest intent Is tQ glvepootectJon to determinate individuals juris. the pqrpose ill sufficil:\uLlY accomplished if they are given Uberty of avoiding it," . In this
case it was necessary to interpret a
of Michigan which
"That no alienation, diversion, saJe, or mortgage of any part of the mine, works, real estate, or franchise of any corporation mentioned in the first section of this act should ha V6 any force or effl'ct, or pass any, tiUe thl'reto or in· terest therein. unless t'xpressly authorized 'by the vote of three.lifths in inter· est of the entirestQCkof E\8itl company, actually present or legally represented at some meeting of stockholders called and notified. If The notice required by statute for the meeting of such stockholders was as follows: ' "No meeting of stockholders shall be held to be It-Ital or valid, or the proceedings thereof of any force or effect. unless the directors or other parties or officers calling the sallie shall calise a notice of the ,time. place. alld oLject of holding the same to be puhlished two weeks for any allllnal meeting. and four weeks for any special meeting. pl'evious thereto, in sOllle"newspaper pUblished inthe county.'" ' The notice published in this case did not fully apprise the stockhold· the object of the meeting, and yet the court held ,that the mortgage executed in pursuance of a resolution of a stockholders' meeting, so called, was only voidable by the stockholders or corporation, and not by strangers to the same. '.... In the case of. Ditch Co. v. ZeUerbachi 87 Cal. 548, Justice SAWYER eiaborately discussed the subject of ultra vireB as applied to corporations. He said: . ilcope of the of the corporation to. perforll! it un(jer any eire umstSlIC6S or for any pUJ;pose·. An act is. also, som,¢timesssid to be ultra 'Vires with ref. erence to therigbt Of. certain parties,wheD. the corporation 18 not authorized
tn different senS\ls. An act is said
powers
·.u.ltra "ires,' whether with propriety or not, isalso used ultra vires when it is not within the
7 to perf.Qrm it .wit,hout their consent; or with reference t() some specific purpose, whehitisn9t authorized to perform it tor that purpose, although fully within the scope oftha' general powers of the eorporatlon, with the consent of the parties interested,or fOil BomeJothl'lf purpose; and the rights uf strangers deaUngwith corporations may vary according as the act is ultra vires in one 01' of these Senses. -kU.thes6 distinctions must be constantly borne in mind in considering .thequestion out of with a corporation, an act is ultra vires, in sense .meptioned. it is generally; if' not' aiwa:ys, void in toto, and the corporation may 'avail itself of the plea;' but ,When it' is ultm "'ires in the second sense, ,the right of the corporation toavl3i!: itsllif of the plea will depend upon the circumstances of the case." : Morawetz on Corporations (section 675) expresses this as the rule understatutes aillliHtrto thfl one underconsideratiort:' , or ge'neral requiring cer,tain tormalitia!!, lp in the c;lOrporate are not,as aru]e·. inten(led 8uch provisions will be treated lI)erely as shareholders, unless a. contrary indirections, imposed for the .\Jetlefit of tention is indicated by the I,egislature. Thus, a provision in the law or charter requirlng;a vote of the stOllkholders of a corporation to be taken In a particulal1.form, before the oorporation shall be authorized to' enter into certain engllgementfJwould CQllstitute /llimitation upon the powers of ,the .corporate agents, an4,of 11J,ajOl:itY, butw.ouldnot render an; i,nfol'male,llgagement void on the grourid of illegality. If the shareholders should unanhnously acquiesce a disregard of such a provision placed in the charter for their benefit, the tlompany cannot escape responsibility for the acts of its agents upon the gronnd that they have failed to comply with the prescribed forms. A corporation whose charter reqnires its contracts to be executed in a certain fprmmay, by its acqUiescence, become liable upon contracts made by its agents in luwther form. If the charter req uires the assent of the shareholders by reSolution or otherwise, their acquiescence in a contract made Without obtaininga resolution will cure the defect."
I think, in the light of these decisions, the doctrine in Head v. Insurance C,o., supra, and that of Bank v. Earle, aupra, must be held tn have in some been modified; and that the doctrine is that where a contract is within the power of acorpQration to perform, but its agents have not followe.d the mode prescribed, the contract mnst be considered voidable only, and not void. There is no doubt but that the Argenta Company had the power to mortgage the property in question, but the of the statute prohihited the trustees of the company from doing so .without first, in a certain manner, having obtained the consent of two thirds of its stockholders. This, it will be observed, was not a prohibition upon the corporatiOl}, but upon its agents. I am led to think .that such a contract as the one under consideration must be considered as a voidable contract, and not a void in toto contract ab initio, for reason that a contract of a corporation void ab initio as ultra vires cannot be ratified by acquiescence. "An act which is. in excess of thechl1-rter of a corporation involves an unauthorized of corporate power on the part of the company; and this objection cannot be obviated by. any subsequent ratification, either by the agents or by the shareholders." Mor. Priv. Corp. § 619.
by a corporawas ultra the supreme court)n the case of Pennsylvartia 1l. :Co.v. St. LowiB,ero.,R. R. Co., said: , "But we understand the rule in such cases to stand upon the broad ground that the contract itself Is void, and that neither what has been done under it Dor the action of the court can infuse any vitality into it." ,; In the ,of Pitt$ourgh, O. &8t. L.Ry. 00. v. Keokuk &: JI. Bridge 00.,. the court again, in speakin{t of a contract which ,was, beyond the power conferred by its charter, said, upon a point urged that the corporation was estopped because it had receivedbene-o under "According to many opinions of this coul't, a contract made by a wbl!lh is .unlawful and void, because beyon4 the scope of its cor'poratepowel'8;, does not, by being carried into execution, become lawful and valid; but the'proper remedy of the party aggrieved is by dlsattirming the 'contract. and suing to recover, as on a quantum merult, the value of what the defendant lias actually received the benefit of." There is no in the decisions to reverse that in the :case of Zabriski6 v. Raur.oad Co., supra, yet I do not see how they can ':t>e reconciled. in any other way than that the contracts in the above 'cases were considered void, and the coptracts in the last case voidable, Cook, 'Stocks,isays, (section 682:) " "The COUl-fa are becomiqg more liberal, and many acts which fifty yearll ago would have been heldtQ be ultra ",tre, would now be held to be intra ivirBJJ. "
of a contract which bad be,en entered
, Considering lill of these authorities, I think the contract under consideration must be classeq as a rather than as a void, contract·. This is perhaps not in accordance with the. views' expressed by the learned Ilupreme court of California in the cases of McShane v. Car· ter,80Cal. 810,22 Pac. Rep. 178, and Mining, etc.,Co.,v. K.en1l.edy, 81 'Cal. 356, 22 Pac. Rep. 679. In these cases I do not think the court 'fully considered the difference between contracts which are within the power of a corporation to perform, but where the forms and modes of entering into the contract have not been observed, and those where the corporation is without the' power to make the contract. These cases ,eannot be fully reconciled, I think, with the case of Ditch Co. v. ZellerQach, supra, and which appears to be a very well-considered case. The contract being a voidable one, the question arises I1S to who can take .advantage of any defect in ente.ing into the same. The rule that is 'established by the statute requiring a meeting of the stockholders, etc., and the giving of their consent to the making of a mortgage, was for the ,benefit of the stockholders of the corporation executing the same. This 'was the view taken of a similar statute by Justice COOLEY and Justice HARLAN in the cases of Beech(fJ' v. Rolling'Mill Co., 8upra, and Hervey v. Rauway Co., 8upra, The answer must be, then, that only the corpora,tion, or the stockholders of the corporation, can take advantage of the 'contraot under discussi<m. Rauroad Co. v. Ellerman, 105U. S. 166, This rule would exclude the right of auy of. the lienholders upon the
CAMPBELL V. ARGENTA GOLD & rILVER MIN. CO.
9
property embraced in the mortgage from raising the issue that the gage was not duly authorized by a vote of the stockholders at a meeting duly called. When a contract made by a corporation is only voidable, the corporation and stockholders can be estopped by their conduct from avoiding the same. Kent v. Mining Co., 78 N. Y. 185, 186. In the case of Railway Co. v. J1cCarthy, 96 U. S. 258, the supreme court !lay: "The doctrine of ultra Vi1'es, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice OJ;' work a legal wrong." ' This doctrine is ably ae:serted in Whitney Arms Co. v. Barlow. 63N. Y. 62. It is but proper to remark, however, that the decisions in courts of New York, and that of the supreme court, upon the doctrine of ultra'vire8, are not always in harmony. The courts of New York generally follow the rule expressed by COMSTOCK, J., in Bissell v. RailJ. roadCQ.,22 N. Y.259, while the views expressed by SEWEN,J., in t,hat case are morein accordance with those which have been maintained in the federal' courts; yet upon this point the courts of that state and the supreme court seem to have united. It is difficult to see upon what,: principleacontra<:t, whicQis void as in violation of public policy, as an actpf'a corporation is decided to be in Pittsburgh, C. « St. L .. By. Co. v. Keokuk & H. Bridge Co .· supm, and which is not authori2ed' by its charter or the law under which it is organized, can be maintained, because it might work a wrong or injustice. But this conrt1'ee18' botind by the rule expressed in Railway Co. v. McCarthy, lind in accordance with it would have to hold that even the corporation and' stockholders· in this case would be estopped from asserting that the mortgage waf' void,althbugh it might be held that it was beyond the power of 'the corporation to execute the same. But holding, as I do, that the gage was only a voidable contract. I have no difficulty in maintaining that theeorporation and stockholders in this case would be estopped from denying its validity. The bonds sued on in this case were the consideration for the property em braced in the mortgage; neither the corporation nor the stockholders have ever expressed any desire to disaffirm that contract. The contract was entered into with the knowl. edge ·of the stockholders; the corporation have held and enjoyed the property ao obtained; hence it would be a wrong to allow the corpora. tion to disaffirm this mortgage, and, if neither the stockholders 1101' the corporation could now object to this mortgage, much less could the credo itors of the Argenta Company object to the validity thereof. For the reasons assigned the demurrer is overruled.