This Court has jurisdiction to review a judgment of the highest
court of a state holding a national bank liable, under a statute of
the state, as a shareholder in a state savings bank when the answer
sets up that the stock of the savings bank was issued to it without
authority of law and the. motion for a new trial and the
specifications of error which were the basis of appeal from the
trial court to the supreme court of the state assert such want of
power under the laws of the United States.
The statutes of the United States relating to the organization
and powers of national banks prohibit such banks from purchasing or
subscribing to the stock of another corporation, although they may,
as incidental
Page 167 U. S. 363
to the power to loan money on personal security, accept stock of
another corporation as collateral, and thus become subject to
liability as other stockholders. The want of such authority may be
set up by a bank to defeat an attempt to enforce against it the
liability of a stockholder.
This action was commenced in the Superior Court of the County of
San Diego, State of California, against 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 a specified date, and a recovery was asked against the other
defendants upon the ground that they were stockholders in the
savings 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 authority from the bank in its 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 with the said defendant 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
business in January, 1890. Its stock consisted of 2,500 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, S. G. Havermale, D. D. Dare,
William Collier, and H. F. Norcross. Norcross had no official
connection with the national bank,
Page 167 U. S. 364
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
endorsement. In the stead of those certificates, however, on
September 10, 1890, three certificates, aggregating 990 shares,
were issued in the name of J. W. Collins, cashier, and two
certificates, each for five shares, were issued to Collier and
Norcross, respectively. On January 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 percent 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 1,500 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, however, 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
Page 167 U. S. 365
of the stock to the bank 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 for the 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
specification -- 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 Cal. 495. A writ of error was allowed, and the cause
has been brought here for review.
MR. JUSTICE WHITE, after stating the case, delivered the opinion
of the court.
Before discussing the merits, we will briefly consider and
dispose of a suggestion that no federal question appears by the
record to have been properly raised below, and therefore there is a
want of jurisdiction in this Court to review the judgment. The
answer averred that if any stock of the savings bank appeared to
have been issued to the national bank, it was "issued without
authority of this corporation defendant, and without authority of
law." In view of the fact that the defendant was a national bank,
deriving its powers from the statutes of the United States, the
averment that a particular transaction of the character of the one
in question, if entered into, was without authority of law can, in
reason, be construed only to relate to the law controlling and
governing the conduct
Page 167 U. S. 366
of the corporation -- that is, the law of the United States. But
if there were ambiguity on this subject, it is entirely removed by
the grounds which were presented on the motion for a new trial, and
the specifications of error which form the basis of the appeal
which was taken to the Supreme Court of the State of California,
for in both the motion and specifications, the want of power under
the laws of the United States was clearly asserted. The supreme
court of the state interpreted the case brought to it from the
court below as presenting the question of the power of the
corporation, under the law of the United States, to become a
stockholder in a savings bank, for in the opening sentence of its
opinion, it said:
"The California National Bank, one of the defendants, has
appealed upon the ground that, by virtue of the statutes under
which it is organized, it had no power to become a stockholder in
another corporation, and that its act in becoming such stockholder
is so far
ultra vires that it cannot be made liable for any
portion of the indebtedness of the corporation."
The suggestion as to the want of jurisdiction is therefore
without merit.
The federal questions which therefore arise on the record may be
thus stated: (1) do the statutes of the United States, Rev.Stat.
§ 5136
et seq., relating to the organization and
powers of national banks, prohibit them from purchasing or
subscribing to the stock of another corporation, and (2) if a
national bank does not possess such power, can the want of
authority be urged by the bank to defeat an attempt to enforce
against it the liability of a stockholder?
As to the first question: 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,
139 U. S. 73. No
express power to acquire the stock of another corporation is
conferred upon a national bank, 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
Page 167 U. S. 367
such business, accept stock of another corporation as collateral
and, by the enforcement of its rights 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 in good faith 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.
First National Bank v. National Exchange Bank,
92 U. S.
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.
2.
The transfer of the stock in question to the bank being
unauthorized by law, does the fact that, under some circumstances,
the bank might have legally acquired stock in the corporation estop
the bank from setting up the illegality of the
transaction?
Whatever divergence of opinion may arise on this question from
conflicting adjudications 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.
71;
Pennsylvania Railroad v. St. Louis, Alton
&c. Railroad, 118 U. S. 290;
Oregon Railway & Navigation Co. v. Oregonian Railway
Co., 130 U. S. 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. Louis &c. Railroad v. Terre Haute &
Indianapolis Railroad, 145 U. S. 393;
Union Pacific Railway v. Chicago &c. Railway,
163 U. S. 564, and
McCormick v. Market Nat. Bank, 165 U.
S. 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
Page 167 U. S. 368
opinion of the Court in
Central Transp. Co. v. Pullman's
Palace Car Co., 139 U. S. 24,
139 U. S.
59-60:
"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 conferred 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
Jacksonville &c. Railway v. Hooper, 160 U.
S. 514,
160 U. S.
524.
As said in
McCormick v. Market National Bank,
165 U. S. 538,
165 U. S.
549:
"The doctrine of
ultra vires, by which a contract made
by a corporation 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 obligation of anyone 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 have never
undertaken, and, above all, the interest of the public that the
corporation shall not transcend the powers conferred upon it by
law.
Pearce v. Madison & Indianapolis
Railroad, 21 How. 441;
Pittsburgh, Chicago
&c. Railway v. Keokuk & Hamilton Bridge Co.,
131 U. S.
371,
131 U. S. 384;
Central
Transp. Co. v. Pullman's Palace Car Co., 139 U. S.
24,
139 U. S. 48."
The doctrine thus enunciated is likewise that which obtains in
England.
Ashbury Railway Carriage & Iron Co. v. Riche,
L.R. 7 H.L. 653;
Attorney General v. Great Eastern Railway
Company, 5 App.Cas. 473;
Baroness Wenlock v. The River Dee
Company, 10 App.Cas. 354;
Trevor v. Whitworth, 12
App.Cas. 409;
Ooregum Gold Mining Co. v. Roper (1892),
App.Cas. 125;
Mann v. Edinburgh Northern Tramways (1893),
App.Cas. 70.
Page 167 U. S. 369
Applying the principles of law thus settled to the case at bar,
the result is free from doubt.
The power to purchase or deal in stock of another corporation,
as we have said, is not expressly conferred upon national banks,
nor is it an act which may be exercised as incidental to the powers
expressly conferred. A dealing in stocks is consequently an
ultra vires act. Being such, it is without efficacy.
Pearce v. Railroad
Company, 21 How. 441,
62 U. S. 445. Stock
so acquired creates no liability to the creditors of the
corporation whose stock was attempted to be transferred. (Cook on
Stock and Stockholders, vol. 1, p. 435, note 1 to sec. 316, and
authorities there cited.)
In
Royal Bank of India's Case 4 Ch. 252 (1869), while
it was held by the Court of Appeal that, as incidental to the power
to advance money on a deposit of shares of stock, a corporation
might do such acts as were reasonable and proper for making the
security available, it was conceded that a purchase of stock of
another company as a speculation would have been
ultra
vires, and, despite acts of ownership exercised by the
company, the shares might be repudiated at any time.
Sir C.J. Selwyn, L.J. said (p. 261):
"If it could have been shown that it was an act absolutely
prohibited by their memorandum of articles of association, then, no
doubt, a different question would have arisen. The act would have
been
ultra vires, and incapable of confirmation or
ratification."
Sir G. M. Giffard, L.J. said (p. 262):
"I quite agree that the Royal Bank of India had no authority to
speculate in shares, and that, if it had gone upon the stock
exchange and bought shares as a speculation, such a proceeding
would have been
ultra vires, and all that has taken place
would not have been enough to constitute the Royal Bank of India
shareholders in this bank, or prevent them from repudiating these
shares."
In
Ex Parte Liquidators British Nation Life Assurance
Association, 8 Ch.Div. 679 (1879), the Court of Appeals (Lords
Justices James, Baggally, and Thesiger) discharged
Page 167 U. S. 370
an order of an arbitrator which had put the British Nation
Association on the list of contributories of the British Commercial
Insurance Company, a corporation in the process of being wound up.
Pursuant to authority conferred by its deed of settlement, the
British Nation Association had, through its directors, purchased
the business of the British Commercial Insurance Company. Under the
agreement entered into between the companies, certain stock of the
British Commercial Company was transferred to the trustees
appointed the British Nation Company. Subsequently this stock was
transferred into the name of the association, and it was sought to
hold it liable as a stockholder because of its alleged ownership of
such stock. Lord Justice James delivered the opinion of the Court,
holding that while the British Nation Association was empowered to
purchase for investment shares of a certain character, it was not
empowered to purchase stock which would practically constitute it a
partnership in business speculations or adventures, and that the
transfer of the stock in question into the name of the bank was
ultra vires and void. It was further held that the
shareholders who had transferred the stock to the British Nation
Association had no power, as between themselves and the
association, to transfer their liability to the latter, and that
--
"No other person or body of persons could be prejudiced or
benefited or affected by an instrument to which they were
absolutely strangers, such instrument being void as between the
parties to it."
The case before the court was declared to be not one of a person
induced to become a shareholder, and who had become a shareholder
by fraud, but that of a person who had never in fact become a
shareholder.
The circumstance that the dealing in stocks by which, if at all,
the stock of the California Savings Bank was put in the name of the
California National Bank was one entirely outside of the powers
conferred upon the bank, and was in no wise the transaction of
banking business or incidental to the exercise of the powers
conferred upon the bank, distinguishes this case from the class of
cases relied upon by the defendant
Page 167 U. S. 371
in error.
National Bank v. Whitney, 103 U. S.
99;
National Bank v. Matthews, 98 U. S.
621. The difference between those cases and one like
this was referred to in
McCormick v. McCormick National Bank of
Chicago, supra, and it is therefore unnecessary to
particularly review them. The claim that the bank, in consequence
of the receipt by it of dividends on the stock of the savings bank,
is estopped from questioning its ownership and consequent liability
is but a reiteration of the contention that the acquiring of stock
by the bank under the circumstances disclosed was not void, but
merely voidable. It would be a contradiction in terms to assert
that there was a total want of power by any act to assume the
liability, and yet to say that, by a particular act, the liability
resulted. The transaction, being absolutely void, could not be
confirmed or ratified. As was said by this Court in
Union
Pacific Railway v. Chicago &c. Railway, 163 U.
S. 564, speaking through MR. CHIEF JUSTICE FULLER (p.
163 U. S.
581):
"A contract made by a corporation beyond the scope of its
powers, express or implied, on a proper construction of its charter
cannot be enforced, or rendered enforceable, by the application of
the doctrine of estoppel."
It follows from the foregoing that the judgment of the Supreme
Court of California against the bank was erroneous, and it must
therefore be
Reversed.
