As between creditor and stockholder, the provision of the
Constitution of Kansas that "dues from corporations shall be
secured by individual liability of the stockholders to an
additional amount equal to the stock owned by each stockholder"
applies to indebtedness incurred in the legitimate and contemplated
business of the corporation.
Where a judgment has been rendered in Kansas against a
corporation of that state, by default, on contracts which the
corporation had no power to make, a stockholder when sued by virtue
of the Constitution and laws of Kansas in that behalf, may insist,
in defense, on the invalidity of the contracts.
On the facts found, the judgment below is correct, and is
affirmed.
September 12, 1888, S. S. Hite and Mary L. Hite executed and
delivered to one J. E. Ethell their promissory notes in writing of
that date, whereby, for value received, they promised to pay to the
order of Ethell on September 12, 1892, the principal sum named in
each, with interest thereon at the rate of seven percent per annum,
payable semiannually, according to the tenor of eight interest
coupons bearing interest and attached to each of the notes, and
afterwards and before the maturity of the notes, Ethell indorsed,
transferred, and delivered
Page 186 U. S. 143
them to Ward. At that time, the Western Investment Loan &
Trust Company, a corporation of Kansas, guaranteed in writing the
payment of the notes in the following words indorsed on each:
"For a valuable consideration, the Western Investment Loan &
Trust Company hereby guarantees payment of the within obligation,
both principal and interest at maturity."
The notes not having been satisfied, Ward brought suit against
the Western Investment Loan & Trust Company on the guaranties
in the District Court of Smith County, Kansas, and recovered
judgment against the company by default, and execution having been
issued on the judgment and returned
nulla bona, Ward
brought this action December 15, 1896, against Edward Joslin in the
Circuit Court of the United States for the District of New
Hampshire to recover of him as a stockholder in said Western
Investment Loan & Trust Company an amount equal to the amount
of stock owned by him in said corporation.
The declaration contained two counts. The first alleged the
recovery of judgment; the issue of execution and return
nulla
bona; insolvency of the company July 1, 1894, and its want of
"property or assets of any kind or value whatever," that defendant
was the owner of one hundred shares of stock, and that,
"by reason of the premises and by virtue of the Constitution and
statutes of the State of Kansas in such case made and provided, a
right of action hath accrued"
to plaintiff.
The second count alleged that the loan and trust company
"was a corporation chartered and organized for the purpose of
transacting a general investment loan and trust business, and under
its charter, as it was authorized to do, indorsed and guaranteed
the payment of notes and obligations negotiated by it;"
that these notes and coupons "were in fact negotiated by said
corporation, the Western Investment Loan & Trust Company, in
the regular course of its business;" that judgment was recovered
and execution returned
nulla bona; "and that, by reason of
the premises and by virtue of the Constitution, statutes, and laws
of the State of Kansas in such case made and provided," the right
of action had accrued.
Page 186 U. S. 144
Among other special matters set up in defense was
"that the claim against the Western Investment Loan & Trust
Company, upon which a judgment in favor of the plaintiff against
said company was founded, was not a due from or debt of said
corporation, for which the defendant as a stockholder in said
corporation was liable under the Constitution and laws of
Kansas."
And that the Western Investment Loan & Trust Company
"never had any authority to indorse the said promissory notes
and obligations in the second count in plaintiff's declaration
described, or to guarantee the payment of said notes and
obligations."
A jury was waived and the cause submitted to the circuit court
for trial, and the court made and filed its findings of fact and
conclusions of law.
After finding that the defendant was a stockholder of one
hundred shares of the par value of fifty dollars each in the
company in question, the findings thus continued:
"I find as a matter of fact, upon the evidence contained in the
record and upon the arguments, that Ward's claim against the trust
company was upon a guaranty given upon a valuable consideration, of
the payment of certain promissory notes from one third party to
another, and was not a guaranty of the payment of securities
negotiated by the company."
"I find that the plaintiff brought an action at law in the
District Court of Smith County, in the State of Kansas, against the
trust company, on December 23, 1892, on these guaranties, by a writ
served upon the president of said corporation, and on March, 1893,
recovered judgment thereon against the company for $9,787.50, with
interest at 12 percent, and as shown in the record on December 11,
1893, $4,924.75 was paid thereon, and on September 14, 1896, an
execution issued for the balance and was returned wholly
unsatisfied as shown by the officer's return printed in the
record."
"I also find that the trust company was not a railway,
religious, or charitable corporation, and the business which the
corporation was authorized to do was"
"to buy and sell personal property, including stocks, bonds,
bills, notes, real and
Page 186 U. S. 145
chattel mortgages, and choses in action of every kind and
description, and to transact the business of a loan and trust
company;"
"that sometime after the organization of the company, and before
the defendant became a stockholder, the directors thereof
resolved"
"that the president and secretary of the company be, and they
hereby are, authorized to guarantee the payment of all securities
negotiated by the company by indorsing upon any such security one
of the following forms of a guaranty,"
"and the resolution of the corporation and the forms of
guaranties printed in the record are referred to and made a part of
the findings."
"Ascertaining the relations of the parties under the contract,
which resulted from the Kansas Constitution and the statutes and
the defendant's ownership of stock, I find, so far as it is a
question of fact, that the dues to be secured by the superadded
stockholders' liability were such as were within the reasonable and
proper scope of the business as contemplated by the parties, and
that a guaranty of this character was not intended by the defendant
stockholder, and was not contemplated by the Kansas Constitution as
a due or a debt within such scope. I also find, so far as it is a
fact, that it was not within the scope of the resolution which
assumed to authorize the president and secretary to guarantee
securities negotiated by the company, and there is no evidence that
the defendant stockholder had knowledge that the company was
assuming, through its president and secretary, to guarantee the
payment of claims not negotiated by itself, and there being no
evidence of notice, I find, as a matter of fact, that he was not
aware of it."
"I also make a general finding for the defendant."
The rulings of law were stated in the opinion of the court set
forth in the record and reported 100 F. 676.
The circuit court ruled that
"the relations of the parties are contractual, and the term
'dues' in the Kansas Constitution ought to be accepted as applying
only to claims resulting from the legitimate and contemplated
business of the corporation or company, such as arise in respect of
transaction within the reasonable scope of the business
contemplated, and, as between the creditor and the stockholder,
they should not be extended
Page 186 U. S. 146
to claims which arise from the transaction of unauthorized
business."
That,
"while under paragraph 1192 of the General Statutes of Kansas
providing a remedy, a judgment against the corporation may be
accepted under proper limitations as conclusive in a proceeding
against the stockholder as to the amount and liability of the
company upon claims in respect to transactions within the
contemplation of the Constitution and of the parties to the
contract, it should not be accepted as conclusive upon the question
of the nature and character of the claims, for the reason that
paragraph 1192 is only intended to give a remedy to the creditor in
respect to the kind of claims contemplated by the Constitution. The
judgment on this ground is accepted as conclusive, because it
relates to a corporate affair, and because the stockholder's
interests are supposed to be represented by the officers of the
bank in respect to affairs within the scope of its contemplated,
legitimate, and authorized transactions,"
but the stockholder ought not to be concluded
"as to the question whether the foundation and nature of the
claim were within the fair intendment of the constitutional
provision and the contract between the parties upon the ground of
representation, for the reason that such a question is not one
which, in the natural and usual course of litigation between the
bank and the creditor, would be presented or adjudicated."
That
"the contract under the Constitution is between the creditor and
the stockholder, and the bank, in a proceeding against it by the
creditor, to which the stockholder was not a party, would neither
be called upon nor be expected or allowed to present such a
question for adjudication."
That
"the amount of the bank's indebtedness, or its liability, on a
question of this kind could and would be put in issue in a suit
between the creditor and the corporation, but whether such a due is
within the scope of the contract between the creditor and the
stockholder under the Constitution would not and could not be put
in issue in a suit between a creditor and the bank to which the
stockholder is not a party."
That,
"in the original case against the bank by the creditor, the
question as to the character of the claim -- whether it was one
Page 186 U. S. 147
contemplated by the contract between the creditor and the
stockholder -- was neither presented nor litigated, nor was it in a
situation to be presented or litigated, while, in the case now
under consideration, the question is not whether the claim was an
indebtedness or a due for which the bank was liable, which question
was litigated and concluded by the judgment, but a question whether
it was the kind of a debt or due which the statutory contract
between the creditor and stockholder covered or contemplated. This
precise question, as has been said, was not presented -- could not
have been presented -- in that case, and therefore is not
concluded."
That this judgment came within "an exception to the general rule
that a judgment against the corporation is conclusive."
Plaintiff moved for a new trial, which was denied, and judgment
entered for defendant. The case was taken on error to the United
States Circuit Court of Appeals for the First Circuit, and the
judgment affirmed. 105 F. 224. This writ of certiorari was then
issued.
MR. CHIEF JUSTICE FULLER delivered the opinion of the Court.
When a case is tried by the court without a jury, its findings
on questions of fact are conclusive, although open to the
contention that there was no evidence on which they could be based.
The question remains whether or not the facts found are sufficient
to support the judgment, and rulings to which exceptions are duly
preserved may be reviewed.
Plaintiff excepted to the refusal of the court to rule that,
upon all the evidence, plaintiff was entitled to recover as matter
of law, and also to the refusal to make other rulings requested and
to the rulings made. The correctness of these rulings was
questioned in fifteen errors assigned in the circuit court of
appeals, but they need not be recapitulated.
Page 186 U. S. 148
The circuit court found as facts that the guaranties on which
plaintiff's judgment in the state court was based were not
guaranties of the payment of securities negotiated by the company;
that the business which the corporation was authorized to do
was
"to buy and sell personal property, including stocks, bonds,
bills, notes, real and chattel mortgages, and choses in action of
every kind and description, and to transact the business of a loan
and trust company,"
that the guaranty of these notes was not within the reasonable
and proper scope of the business of the company, and that defendant
had no notice that the company was assuming to guarantee the
payment of claims not negotiated by itself. The court referred to a
resolution of the board of directors authorizing the guaranty of
securities negotiated by the company, and found this guaranty not
within its scope.
This corporation was organized in 1888 under the general laws of
Kansas, authorizing the creation of loan and trust companies, by
voluntary association as prescribed, with the powers, among others,
"to make bylaws, not inconsistent with existing laws, for the
management of its property, the regulation of its affairs, and for
the transfer of its stock," and "to enter into any obligation or
contract essential to the transaction of its ordinary affairs." The
charter of each corporation was required to set forth "the purpose
for which it is formed," and the statute provided that:
"No corporation created under the provisions of this act shall
employ its stock, means, assets, or other property, directly or
indirectly, for any other purpose whatever, than to accomplish the
legitimate objects of its creation."
Comp.Laws, Kan. 1885, p. 210, c. 23, §§ 5, 6, 11,
26.
The purposes for which the corporation was formed were set forth
in its charter, and were as found by the circuit court. The bylaws
provided for a loan committee with power "to discount or purchase
bonds, bills, notes, and other evidences of debt," but did not
embrace the power to guarantee. As before stated, the circuit court
found that these guaranties were not "within the reasonable and
proper scope of the business, as contemplated by the parties."
The purview of the words "loan and trust" does not appear
Page 186 U. S. 149
to have been defined by statute or decision in Kansas, but the
declaration alleged that this company was organized "for the
purpose of transacting a general investment loan and trust
business, buying and selling commercial paper, obligations and
securities," and it must be assumed that the general rule is
applicable that such companies have no implied power to lend their
credit, or to bind themselves by accommodation indorsements. They
may guarantee paper owned by them, or paper which they negotiate in
due course of business and the proceeds of which they receive, but
the naked power to guarantee the paper of one third party to
another is not incidental to the powers ordinarily exercised by
them. The power as exercised here was certainly not "essential to
the transaction of its ordinary affairs," nor within "the
legitimate objects of its creation." And so far as the question
might be resolved by the usage in Kansas, the findings were adverse
to plaintiff.
In
Commercial Bank v. Cheshire Provident Institution,
59 Kan. 361, a judgment against a bank on a guaranty, where the
record did not contain any of the evidence and there was a general
finding for plaintiff, was sustained. The court said that it must
be presumed that the guaranty "was executed for a valuable
consideration, by the duly authorized officers of the bank, and in
due course of business," and that, while "it is true that, in this
case, the paper itself does not indicate that the Commercial Bank
ever owned it, nevertheless it may have received the proceeds and
the guaranty may have been made strictly in the interest of the
bank." But the findings in this case take it out of the range of
that decision, and forbid resort to presumption to make out
validity.
We are of opinion that, upon the facts found, the guaranties
were given without authority.
The second section of article twelve of the Constitution of
Kansas provides as follows:
"Dues from corporations shall be secured by individual liability
of the stockholders to an additional amount equal to the stock
owned by each stockholder, and such other means as shall be
provided by law, but such individual liabilities shall not apply to
railroad corporations, nor corporations for religious or charitable
purposes. "
Page 186 U. S. 150
In
Woodworth v. Bowles, 61 Kan. 569, it was held that
this constitutional provision was not self-executing, but required
legislative action to give it effect.
Section thirty-two of chapter twenty-three of the Compiled Laws
of Kansas of 1885 provided that when an execution had been issued
against a corporation, and property could not be found on which to
levy it, then
"execution may be issued against any of the stockholders, to an
extent equal in amount to the amount of stock by him or her owned,
together with any amount unpaid thereon, . . . or the plaintiff in
the execution may proceed by action to charge the stockholders with
the amount of his judgment."
Section 44:
"If any corporation, created under this or any general statute
of this state, except railway or charitable or religious
corporations, be dissolved, leaving debts unpaid, suits may be
brought against any person or persons who were stockholders at the
time of such dissolution, without joining the corporation in such
suit. . . ."
Section 45:
"If any stockholder pay more than his due proportion of any debt
of the corporation, he may compel contribution from the other
stockholders by action."
Section 46:
"No stockholder shall be liable to pay debts of the corporation
beyond the amount due on his stock and an additional amount equal
to the stock owned by him."
These sections were all carried forward into the Compiled Laws
of 1889, with the same chapter and numbers, but that compilation
also gives a general number, and the general number of section 32
is 1192. There was no compilation from 1889 to 1897. Sections 32,
44, 45, and 46 reappear in sections 49, 50, 51, and 53 of chapter
66 of the General Statutes of 1897.
The word "dues" thus appears to have been regarded as equivalent
to debts or that which is owing. Mr. Justice Story, in
United States v. State
Bank, 6 Pet. 29,
31 U. S. 36,
said, in construing the statute there referred to:
"The whole difficulty arises from the different senses in which
the term 'due' is used. It is sometimes used to express the mere
state of indebtment, and then is an equivalent to owed or owing.
And it is sometimes used to express the fact that the debt has
become payable. "
Page 186 U. S. 151
In
Whitman v. National Bank, 176 U.
S. 559, it was said that "the word
dues' is one of
general significance, and includes all contractual obligations."
Can an obligation which a corporation had no right to incur be a
contractual obligation and the basis of "dues," as that word is
used in the state constitution? We do not think so. It appears to
us that it was not intended by that instrument to impose individual
liability on stockholders in respect of risks which they had not
undertaken.
One of the grounds on which the doctrine of
ultra vires
rests is that the interest of the stockholders ought not to be
subjected to such risks. Rights of stockholders must be considered,
as well as those of creditors, and they should not be held directly
liable unless such liability was within their contract in legal
contemplation.
The rule in this Court is that a contract made by a corporation
beyond the scope of its powers, expressed or implied, cannot be
enforced, or rendered enforceable, by the application of the
principle of estoppel. The rule in Kansas seems to be that when the
contract has been executed and the corporation has received the
benefits of it, the corporation is estopped from questioning its
validity, and so in respect of evidences of indebtedness purchased
before maturity in good faith and without notice.
Atchison,
Topeka & Santa Fe Railroad Company v. Fletcher, 35 Kan.
236;
Sherman Center Town Company v. Morris, 43 Kan. 282;
Alexandria, Arcadia & Fort Smith Railroad Company v.
Johnson, 58 Kan. 175. But we are not persuaded that, if the
defense of
ultra vires had been interposed in the action
against this company, and the facts had been found to be as they
have been found here, the defense would not have been sustained in
the courts of Kansas. If, however, under the state decisions, the
corporation would be held estopped from denying the liability, it
does not follow that the stockholders must therefore be held liable
if the obligation was in fact incurred without authority. In other
words, alleged liabilities incurred without authority, and which do
not come within the meaning of the word "dues" as used in the state
constitution, cannot be properly treated as brought within the
scope of that
Page 186 U. S. 152
word simply because the corporation may be so situated as to be
estopped from denying their validity.
Whether in this case the corporation would have been estopped if
it had made the defense of
ultra vires, it did not make
it, and judgment went against it. We have held such judgments
conclusive in proceedings under the Kansas Constitution.
National Bank v. Farnum, 176 U. S. 640. But
we did not there hold that it was not open for a stockholder to
show that the judgment was not enforceable against him when
rendered against the corporation on a contract beyond its power to
make. It must be remembered that, in the case before us, the right
of action accrued, and the action was accordingly averred to have
been brought, "by virtue of the Constitution and the statutes of
the State of Kansas in such case made and provided." We think it
was not error to permit the stockholder to go behind the judgment
so far as to show, or at all events, to insist, for the judgment
record introduced below disclosed the invalidity of the guaranties,
that he was not liable under that Constitution and those laws.
In
Schrader v. Manufacturing Company, 133 U. S.
67, it was ruled that, although the individual liability
of the stockholders of a national bank, as imposed by and expressed
in the statute, was for all its contracts, debts, and engagements,
"that must be restricted in its meaning to such contracts, debts,
and engagements as have been duly contracted in the ordinary course
of its business," and that a judgment recovered against the bank in
a suit commenced some years after it went into liquidation "was not
binding on the stockholders in the sense that it could not be
reexamined."
In
Brownsville v. Loague, 129 U.
S. 493, it was held that if a petitioner for a writ of
mandamus to compel the levy of a tax to pay a debt evidenced by a
judgment recovered on coupons of municipal bonds is obliged to go
behind the judgment in order to obtain his remedy, and it appears
that the bonds were void, and that the municipality was without
power to tax to pay them, the principle of
res judicata
does not apply upon the question of issuing the writ. The petition
in that case set up the judgment and averred that
"petitioner's only
Page 186 U. S. 153
remedy to enforce the collection of his judgments is that
awarded by the act authorizing the issue of the bonds from which
the coupons were detached upon which said judgments were
obtained."
And we held that, as the relator was compelled to go behind the
judgments as money judgments merely,
"to obtain the remedy pertaining to the bonds, the court cannot
decline to take cognizance of the fact that the bonds are utterly
void, and that no such remedy exists."
As then the provision of the Constitution of the State of
Kansas, if properly construed, imposes the liability in question
only in respect of corporate indebtedness lawfully incurred -- that
is to say, in respect of dues resulting in regular course of
business and in the exercise of powers possessed -- plaintiff
cannot recover in this action by virtue of the constitution and
laws of the state, on the facts found, and the judgment must be
affirmed.
As to the denial of the motion for new trial, it is not within
our province to interfere with the discretion of the circuit
court.
Judgment affirmed.
MR. JUSTICE GRAY did not hear the argument, or take any part in
the decision.
