The Supreme Court of Iowa having repeatedly decided that in that
state the fact that a corporation of Iowa contracts a debt in
excess of its charter or statutory limitation does not render the
debt void, but, on the contrary, such debt is merely voidable, and
is enforceable against the corporation and those holding under it,
and gives rise only to a right of action on the part of the state
because of the violation of the statute, or entails a liability on
the officers of the corporation for the excessive
Page 173 U. S. 100
debts so contracted, this Court holds itself bound by those
decisions, without determining whether, as an independent question,
it would decide that the issue of stock by a corporation in excess
of a statutory inhibition is not void, but merely voidable.
The facts which are relevant to the controversy arising on this
record are as follows: the Sioux City Terminal Railroad &
Warehouse Company (hereafter designated as the "Terminal Company")
was, in 1889, incorporated under the general laws of the State of
Iowa, with an authorized capital of one million of dollars. In
January, 1890, the corporation, by authority of its board of
directors, authorized by its stockholders, mortgaged, in favor of
the Trust Company of North America, its
"grounds, franchises, liens, rights, privileges, lines of
railway, side tracks, warehouses, storage houses, elevators, and
other terminal facilities . . . within the corporate limits of the
City of Sioux City,"
all of which property was more fully described in the deed of
mortgage. The purpose of the mortgage was to secure an issue of
negotiable bonds, with the interest to accrue thereon, the bonds
being for the face value of one million two hundred and fifty
thousand ($1,250,000) dollars. The form of the bonds was described
in the deed, and they were numbered from 1 to 1,250, inclusive. The
deed contained a statement that the corporation
"has full power and authority, under the laws of the State of
Iowa, to create this present issue of bonds and to secure the same
by mortgage of all its property, leases, and franchises."
The bonds thus secured were negotiated to innocent purchasers
for value, and the proceeds were applied to the credit of the
company.
In 1893, the Terminal Company also mortgaged, in favor of the
Union Loan and Trust Company, an Iowa corporation, the property
previously mortgaged, as above stated, this second mortgage being
to secure one hundred and ninety promissory notes, fifty whereof
were for one thousand dollars each, and one hundred forty whereof
were for five thousand dollars each, the total aggregating seven
hundred fifty thousand ($750,000) dollars. All the notes referred
to in this mortgage bore the date of the deed, which contained
Page 173 U. S. 101
the following covenant:
"The said party of the first part [that is, the mortgagor]
hereby covenants that the said premises are free from all
encumbrances, excepting a deed of trust made on the first day of
January, A.D. 1890, by said party of the first part to the Trust
Company of North America of Philadelphia, to secure the sum of one
million two hundred and fifty thousand ($1,250,000) dollars of
bonds, and the said party of the first part will warrant and defend
the title unto the said party of the second part, its successors
and assignees, against all persons whomsoever claiming the same,
subject to the lien of the said prior deed of trust."
On the tenth day of October, 1893, in the United States Circuit
Court for the Northern District of Iowa, a bill was filed by
certain national banks, citizens of other states than the State of
Iowa, against the Terminal Company, E. H. Hubbard, as assignee of
the Union Loan and Trust Company, and others, having for its object
the foreclosure of the second mortgage above referred to. Without
fully recapitulating the averments of the bill, it suffices to say
that it alleged that the notes which were secured by the second
mortgage had been placed in the hands of the Union Loan and Trust
Company in part for the benefit of certain claims against the
Terminal Company held by the complainants; that the Union Loan and
Trust Company had, in April, 1893, made an assignment to E. H.
Hubbard for the benefit of all its creditors, and that Hubbard had
succeeded to the rights and obligations of the company of which he
was assignee, and in which capacity he held the notes secured by
the second mortgage, and the benefit of which the complainants were
entitled to invoke for the purpose of procuring the payment of
their claims. A receiver was prayed for and was appointed.
On the 23d of December, 1893, the Terminal Company, reciting the
fact that the notes which were secured by the second mortgage for
$750,000 had been drawn, and the mortgage given for the benefit of
certain outstanding creditors whose claims amounted to $728,000,
and that the notes covered by the second mortgage had been placed
in the hands of the Union Loan and Trust Company for the benefit of
such
Page 173 U. S. 102
creditors; that the company had made an assignment to Hubbard,
assignee, and in that capacity he had received the notes in
question; that in a suit pending in the Northern District of Iowa
to foreclose said second mortgage, a question had arisen whether
such creditors were entitled to avail themselves of the benefit of
the second mortgage. Therefore, in order to allay any such question
and to give the creditors intended to be covered by the second
mortgage an undoubted right to claim under it, the deed conveyed
absolutely to Hubbard, trustee, the property covered by the
mortgage, giving to the trustee full power to realize and apply the
property and rights to the discharge of the debts secured or
intended to be secured as above stated. It suffices for the purpose
of this case to give this outline of the deed in question, without
stating all the various clauses found in it intended to accomplish
the purpose which it had in view. The deed, however, contained this
declaration:
"This conveyance is made, however, with full notice of the
assertion of the following claims against the said property,
to-wit, a certain mortgage or trust deed to the Trust Company of
North America, of Philadelphia, Pennsylvania, as trustee, to secure
certain bonds for the sum of one million two hundred and fifty
thousand ($1,250,000) dollars, and also certain mechanics' liens to
the amount of about $55,000, and also certain judgments to the
amount of about $20,000. Nor shall said first party (that is, the
transferor) be understood to covenant that there are not other
claims than those hereinbefore expressly mentioned, none of which,
however, are to be considered and assumed by said second party
(Hubbard, trustee), nor by the acceptance of this deed is he in
anywise held to admit the validity of said trust deed liens,
judgments, or of any claims made or that may arise thereunder, nor
shall this deed be held in any manner to operate as the merger of
said mortgage to said Union Loan and Trust Company, but said
mortgage shall at all times be kept in full force until all persons
and corporations entitled and claiming benefits thereunder shall
consent to its discharge, or so long as it may be necessary to keep
said mortgage in force for the protection
Page 173 U. S. 103
of the title herein conveyed, or any interest claimed by virtue
hereof."
Default having taken place in the payment of the interest on the
bonds secured by the first mortgage, the Trust Company of North
America, as the trustee, filed its bill in the Circuit Court of the
United States for the Northern District of Iowa for foreclosure. On
the 20th of June, 1894, the court ordered the two foreclosure suits
-- that is, the one previously brought by certain national banks in
October, 1893, and the one brought by the Trust Company of North
America -- to be consolidated, and appointed the same person who
had been made receiver under the first bill also the receiver under
the second. On July 23, 1895, the Credits Commutation Company, a
corporation organized under the laws of the State of Iowa, filed
its suit against the Terminal Company in the state court of Iowa in
and for Woodbury County. It was alleged that the Credits
Commutation Company had become the holder and owner of a large
number of the claims against the Terminal Company, which were
intended to be secured by the second mortgage, and for whose
benefit the deed to Hubbard, trustee, had been made. The relief
sought was a judgment against the Terminal Company,
"without prejudice to any rights or interests which the
plaintiff (the Credits Commutation Company) may have as a holder of
said notes in the said trust deed"
-- that is, the deed of trust to Hubbard, trustee for the
benefit of the note holders, as already mentioned. On the day the
suit was filed, the Terminal Company answered, admitting the
correctness of the claim, and judgment was then entered for
$692,096.95, with interest, the whole without prejudice to the
rights of the parties under the deed of trust, as prayed for.
The Terminal Company, in its answer to the suit for foreclosure
brought by the Trust Company of North America, relied upon many
defenses, only one of which need be referred to -- that is, that
the bonds and the mortgage in favor of the said Trust Company of
North America were
ultra vires. However, it may be
observed that the Terminal Company, by its answer, asserted that
the rights of those entitled to claim
Page 173 U. S. 104
under the second mortgage or the conveyance, made for their
benefit to Hubbard, trustee, were paramount to the claims of the
Trust Company of North America or the bondholders under the first
mortgage in favor of that company. The Credits Commutation Company
intervened in the foreclosure proceedings, averring that the bonds
secured by the deed in favor of the Trust Company of North America
were void because the Terminal Company, at the time the bonds were
executed, was without lawful power to issue them or to secure them
by mortgage. It was also claimed that in virtue of the judgment
rendered in the state court, the Credits Commutation Company was a
creditor of the Terminal Company to the amount of the judgment, and
was entitled to avail itself of the rights accruing to it from the
deed of conveyance made by the Terminal Company to Hubbard,
trustee, and therefore that the Credits Commutation Company was
entitled to be paid from the proceeds of the property sought to be
foreclosed before the holders of the bonds secured by the deed
which had been made in favor of the Trust Company of North
America.
The trial court decided in favor of the validity of the bonds
issued to the Trust Company of North America and of the mortgage
securing the same. 69 F. 441. On appeal to the Circuit Court of
Appeals for the Eighth Circuit, the judgment of the trial court was
affirmed. 82 F. 124. The case then, by the allowance of a writ of
certiorari, was brought to this Court.
MR. JUSTICE WHITE, after making the foregoing statement,
delivered the opinion of the Court.
The errors assigned and the discussion at the bar confine
Page 173 U. S. 105
the question to be decided solely to the validity of the
negotiable bonds of the Terminal Company, which were issued to the
Trust Company of North America, and which were sold in open market
to innocent purchasers for value, and the proceeds of which inured
to the benefit of the Terminal Company. The issue for decision is
restricted to this question, since all the errors assigned, and the
contentions based upon them, depend on the assertion that the bonds
issued to the Trust Company of North America, and the mortgage by
which their payment was secured, were wholly void. This complete
want of power in the Terminal Company is predicated upon certain
requirements of the law of the State of Iowa existing at the time
of the incorporation of the Terminal Company, and of a provision in
the charter of that company inserted therein in compliance with the
Iowa statute. The law of Iowa relied on is section 1611 of the Iowa
Code of 1897, contained in the portion thereof relating to the
organization of corporations, and is as follows:
"Such articles must fix the highest amount of indebtedness or
liability to which the corporation is at any time to be subject,
which in no case, except risks of insurance companies and
liabilities of banks not in excess of their available assets, not
including their capital, shall exceed two-thirds of its capital
stock. But the provisions of this section shall not apply to the
bonds or other railway or street railway securities issued or
guaranteed by railway or street railway companies of the state in
aid of the location, construction, and equipment of railways or
street railways to an amount not exceeding sixteen thousand dollars
per mile of single track, standard gauge, or eight thousand dollars
per mile of single track, narrow gauge, lines of road for each mile
of railway or street railway actually constructed and equipped. Nor
shall the provisions of this section apply to the debentures or
bonds of any company incorporated under the provisions of this
chapter, the payment of which shall be secured by an actual
transfer of real estate securities for the benefit and protection
of purchasers thereof, such securities to be at least equal in
amount to the par value of such bonds or debentures, and to be
first
Page 173 U. S. 106
liens upon unencumbered real estate worth at least twice the
amount loaned thereon."
The part of the foregoing section commanding the insertion in
the charter of incorporated companies of the amount of liability
for which the corporation could at one time be subject and limiting
such amount to two-thirds of the capital stock, originated in the
State of Iowa in the year 1851, and was continuously in force from
the time of its adoption, in the year in question, up to the period
when it was embodied in the Code of 1897. Iowa Code 1851, Title 10,
c. 43, § 676; Code 1873, Title 9, § 1061. The subsequent
portions of the section creating exceptions as to certain classes
of railway bonds, and as to bonds secured by an actual transfer of
real estate securities, originated, the one in 1884 and the other
in the year 1886, and continued in force until they were also
incorporated in the Iowa Code of 1897. 20 Iowa Laws, c. 22; 21
ib., c. 54. And section 1622 of the Iowa Code also
contains the following cognate provision:
". . . If the indebtedness of any corporation shall exceed the
amount of indebtedness permitted by law, the directors and officers
of such corporation knowingly consenting thereto shall be
personally and individually liable to the creditors of such
corporation for such excess."
The portion of the charter of the Terminal Company fixing, in
obedience to the statutory requirement, the amount of the debt
which could at any one time exist was as follows:
"The highest amount of indebtedness to which this (Terminal)
company shall at any time subject itself shall not exceed
two-thirds of the paid-up capital stock of said company, aside from
the indebtedness secured by mortgage upon the real estate of the
company."
As the sum of the bonds which were issued and secured by the
mortgage in favor of the Trust Company of North America exceeded
the statutory limit and the amount stated in the charter, the
question which arises first for consideration is this: did this
fact render them void?, and secondarily, was the issue of bonds
taken from our the operation of the general rule laid down in the
statute by the exceptions mentioned in the
Page 173 U. S. 107
latter portions thereof? As the claim that the bonds were void
is based on the statutory provisions above referred to, it follows
that we are compelled to primarily ascertain the meaning and
operation of the state law. In making this inquiry, we are
constrained, in the first place, to inquire what construction has
been placed upon the Iowa statute by the supreme court of that
state; for it is an elementary principle that this Court, in
interpreting a state statute, will construe and apply it as settled
by the court of last resort of the state, and will hence only form
an independent judgment as to the meaning of the state law when
there was no binding construction of such state statute by the
court of last resort of the state.
Nobles v. Georgia,
168 U. S. 398;
Aberdeen Bank v. Chehalis Co., 166 U.
S. 440; Morley v. Railway County,@
146
U. S. 166, and authorities there cited.
The subject matter of the creation by an Iowa corporation of a
debt in excess of the maximum amount fixed in its charter in
accordance with the requirement of the statute, and also in excess
of the sum limited by the state law, was considered by the Supreme
Court of the State of Iowa in
Garrett v. Burlington Plow
Co. (1886), 70 Ia. 697. The case was this: an action was
brought in chancery to foreclose a mortgage executed by the
Burlington Plow Company, an Iowa corporation, to the plaintiff, as
a trustee for certain of its creditors, upon real estate and
personal property. The authorized capital stock of the corporation
was $50,000. The maximum limit imposed by the articles of
incorporation was the maximum imposed by the statute -- that is,
two-thirds of the amount of the capital stock. The corporation had
contracted an indebtedness in excess of the limitation fixed by the
statute and fixed by the charter -- that is, with an authorized
capital stock of $50,000, it had contracted an indebtedness
exceeding $50,000, of which total indebtedness the sums pressed in
the foreclosure suit were a part. The defense to the suit was
two-fold: first that the total debt of the corporation, including
that sued on, was in excess of the two-thirds limitation, and
second that the mortgage was void because it had been granted to
protect certain directors
Page 173 U. S. 108
of the corporation to the prejudice of its general creditors.
The fact that the debt exceeded the two-thirds allowed by the
charter and the statute was admitted on the face of the record and
stated by the court in its opinion to be unquestioned. The court
said (page 701):
"Do the facts alleged in the answer, that the holders of the
notes, as directors of the company, in the management of its
affairs, contracted indebtedness beyond the limit prescribed by the
articles of incorporation and caused the mortgage to be executed to
secure the amount due them, defeat their security and give other
creditors a right to share in the proceeds of the property
mortgaged? We do not understand counsel for the defendants to claim
that a debt of the corporation beyond the prescribed limits of its
indebtedness is invalid, and, if held by a director of the
corporation, cannot be enforced for that reason alone. It may be
that a director would be answerable to stockholders or others for
negligence or mismanagement of the affairs of a corporation whereby
debts were contracted in excess of the limitation prescribed in the
articles of incorporation, but it cannot be claimed that such a
debt, for a consideration received by the corporation, cannot be
enforced against it."
Again referring to the same subject, the court said (page
702):
"It is averred that the directors unlawfully contracted
indebtedness of the corporation in excess of the limit prescribed
by its articles of incorporation. But this has nothing to do with
the directors' claims in controversy. As we have before said, they
may be liable to proper parties for their negligence or unlawful
acts, but honest contracts made with them are not defeated
thereby."
In
Warfield v. Canning Co. (1887), 72 Ia. 666, where a
debt had been confessedly contracted by a corporation in excess of
its charter limitation, confining the power of the corporation to
create a debt to a sum not exceeding one-half of the capital stock
actually paid in, the court, in considering the legal consequences
of such excessive debt, said (page 672):
"The proposition is stated by counsel, but it is not, we
Page 173 U. S. 109
think, insisted upon, that the mortgage is
ultra vires,
because the articles of incorporation provide 'that it shall be
competent to mortgage the property of the company to the amount of
not exceeding one-half of the capital stock actually paid in.' This
question was determined adversely to appellant in
Garrett v.
Plow Co., before cited."
It follows, then, that at the time of the issue of the bonds in
favor of the Trust Company of North America, and of the execution
of the deed of mortgage by which such bonds were secured, the
Supreme Court of the State of Iowa had, in two cases, declared the
law of that state to be that a debt contracted in excess of the
maximum limitation stated in the charter, in virtue of the
provisions of the statute requiring that such maximum limit should
be fixed, was not void, although the consequence of contracting a
debt beyond the limitation might be to entail upon the officers of
the corporation a personal liability for the amount thereof.
Light is thrown upon the condition of the law of the State of
Iowa on the question now before us by a decision of the Supreme
Court of that state wherein it was called upon to consider issues
arising from the identical contracts which are involved in this
case. The cause was adjudged in the Supreme Court of Iowa after the
decision of the trial court in this cause, and after that of the
circuit court of appeals. Without deciding that the construction
given the statute by the Supreme Court of the State of Iowa at the
time and under the circumstances stated is necessarily controlling
on this Court, such interpretation, conceding that it is not
controlling, is manifestly relevant for the purpose of elucidating
the previous decisions of the Supreme Court of Iowa and as
indicating what was the settled law of that state at the time the
contract in question was entered into, and prior to the time when
the controversy which this case presents originated in the courts
of the United States. The decision in question is
Beach v.
Wakefield (1898) 76 N.W. 688 (not yet reported in the official
reports of the State of Iowa). The case, as stated in the report
thereof, was this: Beach, a subcontractor, commenced proceedings to
establish and foreclose a mechanic's
Page 173 U. S. 110
lien on a depot built by the Terminal Company. Wakefield was the
principal contractor for building the depot. He denied in part the
claim of Beach, and sought also, on his own behalf, to be
recognized as having a mechanic's lien upon the depot. The Terminal
Company, the Trust Company of North America, and the Credits
Commutation Company were parties to the cause. The decree of the
Supreme Court of Iowa recognized in part a mechanic's lien on the
depot building paramount to the mortgage in favor of the Trust
Company of North America, but adjudged that the bonds issued to the
Trust Company of North America and the mortgage by which they were
secured were paramount to the claim of the Credits Commutation
Company and others holding junior mortgage rights. In considering
the legal result of the creation of a debt in excess of the
statutory limitation, the court said (page 694):
"A distinction is to be taken between contracts like this and
those which, independent of statute, are in violation of public
policy. The creation of this indebtedness involved no moral
turpitude. The making of the mortgage did not disable the
corporation from performing its duties to the public. The Terminal
Company had a right to incur a debt, and to execute a mortgage to
secure it. The only ground of complaint is that it went further
than the law permitted. Of this the state may complain, but the
Terminal Company cannot, nor can any person whose rights are
derived through the Terminal Company, and who acquired such rights
with knowledge of the mortgage lien."
Again, in commenting on the same subject the court said (page
695):
"We are aware that the security has been held invalid, and a
right of recovery thereon denied, in many cases where an action has
been permitted upon the common counts. But we think these cases
will be found to involve contracts which were absolutely void, and
not, as in the case at bar, voidable only. This distinction is
clearly preserved in the cases. In
Garrett v. Plow Co.,
supra, the indebtedness exceeded the charter limit of the
corporation, and the creditors had notice
Page 173 U. S. 111
thereof when the transaction took place, and yet a right of
recovery was allowed and the lien of the mortgage upheld."
Recurring to the legal consequence, under the Iowa statute, of
contracting a debt in excess of the statutory limit, the court said
(page 695):
"It is said further that the plea of estoppel can be urged only
in favor of the innocent, and that the bondholders here are not of
that class, for they are held to notice of the corporate power of
the Terminal Company. This rule has been applied in cases where the
act done was wholly void because of an absolute want of power to
sustain it, and in cases where considerations of public policy
intervened. Here, as repeatedly said, the act is voidable only. The
statute does not even impose a penalty therefor."
The argument, then, reduces itself to this: although it was
conclusively settled by the decisions of the State of Iowa at the
time the contract in question was entered into that a debt
contracted by a corporation in excess of the statutory limitation
was in no sense of the word void, but, on the contrary, was merely
voidable, that we nevertheless should, in enforcing the state
statute, disregard the construction affixed to it by the Supreme
Court of the State of Iowa and hold that the act of the
corporation, in exceeding the limit of debt imposed by the statute
or fixed in the charter in compliance with the statute, was
absolutely void. But to so decide would violate the elementary rule
previously referred to, under which this Court adopts and applies
the meaning of a state statute as settled by the court of last
resort of the state. As, then, under the Iowa law, the fact that
the corporation contracted a debt in excess of the charter or
statutory limitation did not render the debt void, but, on the
contrary, such debt, by the settled rule in Iowa was merely
voidable, and was enforceable against the corporation and those
holding under it, and gave rise only to a right of action on the
part of the state because of the violation of the statute, or
entailed, it would seem, a liability on the officers of the
corporation for the excessive debt so contracted, it follows that
the whole foundation upon which the errors assigned in this Court
must rest is without support in
Page 173 U. S. 112
respect of federal law, and therefore the decrees below were
correctly rendered.
It is claimed, however, that this Court is not obliged to follow
the Iowa decisions interpreting the statute of that state, because
it is assumed that those decisions proceed alone upon the principle
of estoppel. Estoppel, it is argued, is a matter of general, and
not of local, law, upon which this Court must form an independent
conclusion, even although in doing so it may disregard the rule
established in the State of Iowa by the Supreme Court of that
state. Whatever, it is argued, may be the rule in state courts, in
this Court, it is settled that a corporation cannot be estopped
from asserting that it is not bound by a corporate act which is
absolutely void, citing, among other cases,
Pullman's Palace
Car Co. v. Central Transportation Co., 171 U.
S. 138;
California Bank v. Kennedy,
167 U. S. 362;
McCormick v. Market National Bank, 165 U.
S. 538;
Central Transp. Co. v. Pullman's Palace Car
Co., 139 U. S. 24.
But we are not called upon in the case before us to decide the
question thus raised, since it rests upon an assumption that the
court of Iowa has decided that the corporation was by estoppel
prevented from complaining of a void act. But the Supreme Court of
Iowa has not so decided. On the contrary, while in the course of
its opinions it has referred to the doctrine of estoppel, it
expressly, in the cases cited, made the application of the doctrine
depend upon the legal conclusion found by it that the act of a
corporation in contracting a debt in excess of the statutory limit
was not void, but merely voidable, and for this reason the
corporation, or those holding under it, could not be heard to
assail the act in question. The decisions of this Court which are
relied upon considered the application of the doctrine of estoppel
to corporate acts absolutely void, and not its relation to
contracts which were merely voidable. Whether, as an independent
question, if we were enforcing the Iowa statute, we would decide
that the issue of bonds by a corporation in excess of a statutory
inhibition was not void, but merely voidable need not be
considered, since, as we have said, in applying an Iowa law, we
follow
Page 173 U. S. 113
the settled construction given to it by the Supreme Court of
that state.
It necessarily follows that the decrees of the circuit court and
of the circuit court of appeals were correct, and both are
therefore
Affirmed.
