This suit was brought by petitioner as trustee of a mortgage.
Held that when a corporation sells or encumbers its
property, incurs debts, or gives securities, it does business, and
a statute regulating such transactions
does not regulate the internal affairs of the corporation.
This suit was brought by the petitioner as trustee of a mortgage
made by the Gold Hill Mining Company, a corporation of West
Virginia, upon certain mining ground in the State of California.
Subsequently to the execution of the mortgage,
Page 186 U. S. 158
the corporation, in the conduct of its mining operations in the
State of California, became indebted to the respondents for
materials, labor, and supplies. Mechanics' and materialmen's liens
were filed by respondents, and judgments obtained by them upon
which executions were issued and the property mortgaged was sold.
The respondents became its purchasers.
The corporation made default in the foreclosure suit, and a
decree
pro confesso was taken against it. The respondents
pleaded their judgments and the titles which were claimed
thereunder, and pleaded further that the mortgage was void because
it had not been ratified by the stockholders of the corporation, as
required by a statute of California, passed April 30, 1880, and
entitled "An Act for the Further Protection of Stockholders in
Mining Companies," section 1 of which act is as follows:
"SEC. 1. It should not be lawful for the directors of any mining
corporation to sell, lease, or otherwise dispose of the whole or
any part of the mining ground owned or held by such corporation,
nor to purchase or obtain in any way additional mining ground,
unless such act be ratified by the holders of at least two thirds
of the capital stock of such corporation. Such ratification may be
either in writing signed and acknowledged by such stockholders or
by resolution duly passed at a stockholders' meeting called for
that purpose."
The circuit court sustained the defenses, 96 F. 454, and its
ruling was affirmed by the circuit court of appeals. 102 F.
372.
The mortgage was given to secure one hundred coupon bonds of
$500 each. They were dated July 1, 1890. The mortgage bore the same
date, and the manner and authority for its execution the record
exhibits as follows, being the minutes of a meeting held June 5,
1890:
"The meeting was called to order by C. Littlefield, who
nominated G. Livingston Morse temporary chairman; nomination was
seconded by W. W. Tucker and unanimously carried."
"C. Littlefield then proposed W. W. Tucker for temporary
Page 186 U. S. 159
secretary; motion was seconded by R. H. Pettigrew, Jr., and was
unanimously carried."
"Waiver of notice of corporators was then agreed to by all
present as per roll call."
"Roll call of incorporators being made, all were found present
as follows: M. J. Shoecraft, Calvin Littlefield, G. Livingston
Morse, R. H. Pettigrew, Jr., and W. W. Tucker."
"The chairman said we were now ready for business, whereupon Mr.
M. J. Shoecraft presented a duplicate copy of papers of
incorporation, and a telegram from Secretary of State of West
Virginia stating that the charter of this company was duly filed
June 23, 1890, which was adopted."
"On motion of W. W. Tucker, seconded by R. H. Pettigrew, Jr., it
was --"
"
Resolved, That the said Gold Hill Mining Company issue
one hundred first mortgage bonds, of the denomination of five
hundred dollars each, each bond bearing date of July 1, 1890, and
bearing interest at the rate of ten percent per annum, payable
semiannually, on the first day of January and July in each year,
and to run five years from July 1, 1890, with the privilege of the
said company paying off and redeeming the same sooner by giving to
the holders of said bonds six months' notice of the company's
intention thus to do, to pay off said bonds and redeem the same on
any day interest is payable, or on payment of six months' interest
in advance, and the president and the secretary of said company are
hereby authorized and directed to execute said bonds and mortgage
for said company, and the said board hereby authorize and direct
the seal of said company to be affixed to the same."
"On motion of C. Littlefield, seconded by M. J. Shoecraft, the
chairman, G. L. Morse, was elected trustee for the bondholders.
Motion carried."
"On motion of W. W. Tucker, seconded by R. H. Pettigrew, Jr.,
Mr. G. L. Morse was appointed to draw up a proper bond, have same
executed and lithographed; also a stock certificate book of two
hundred certificates, total cost not to exceed ninety-five
dollars."
"On motion of M.J. Shoecraft, seconded by G.L. Morse, it
Page 186 U. S. 160
was voted that the incorporators of the Gold Hill Mining Company
be named as directors of said company. Motion carried."
"On motion of C. Littlefield, seconded by M. J. Shoecraft, the
company's seal was ordered to be made, and Mr. Shoecraft be a
committee to have the same made. Motion carried."
"Mr. Shoecraft reported that the bylaws were not quite ready,
and the chairman suggested that he report a full set at a future
meeting."
"On motion, the meeting was declared adjourned to the second
Tuesday in July, 8th inst."
"W. W. Tucker"
"
Temporary Secretary"
It was testified that the gentlemen present at the meeting held
all of the stock of the company.
The record also contains the minutes of a meeting held July 10,
1890, at which meeting a president, vice-president, secretary, and
treasurer and general manager were elected. The following
resolution was passed:
"On motion of Mr. Morse, seconded by Mr. Pettigrew, resolved,
That the directors of this company be authorized and directed to
purchase of M. J. Shoecraft the mines formerly known as the Nevada
City Gold Quartz Mining Company, and pay therefor one hundred and
sixty thousand shares of the capital stock of this company, being
its total issue, and twenty-five thousand ($25,000) dollars in
first-mortgage bonds. Motion carried."
"On motion adjourned, to meet at the call of the president."
It was also testified that a paper was "executed by the Gold
Hill Mining Company for the purpose of correcting the form of the
mortgage as originally executed."
The paper was introduced in evidence. It was dated August 28,
1890, and recited that --
"Whereas, by a resolution of the board of directors of the Gold
Hill Mining Company, duly passed and adopted on the twenty-fifth
day of June, 1890, and in accordance with and in pursuance of said
resolution, a mortgage was executed and delivered
Page 186 U. S. 161
to G. Livingston Morse, as trustee for the use and purposes
therein mentioned, on the first day of July, 1890, by the president
and secretary of said company, they being authorized and directed
in and by said resolution thus to do, and duly acknowledged by
them, and the corporate seal of said company duly affixed to said
mortgage by the like authority of said board of directors."
Certain mistakes were then stated to have been made in the
mortgage, and the secretary, Calvin Littlefield, was given
authority to correct them, and he and the president were directed
and authorized to execute a paper on behalf of the company and to
affix the corporate seal of the company thereto. The paper was duly
executed and recorded in Nevada County, California. Other facts are
stated in the opinion.
MR. JUSTICE McKENNA, after stating the case, delivered the
opinion of the Court.
The circuit court and the circuit court of appeals based their
judgments upon the act of 1880 as construed by the Supreme Court of
the State of California, regarding that construction as binding
upon the federal tribunals. The conclusion is attacked by
petitioner, and he urges the following propositions against it:
"I. The decision of the Supreme Court of California to the
effect that judgment creditors may take advantage of the act of
1880 is not binding upon the federal courts either as constructive
of that statute or determinative of a local rule of property."
"II. The act of 1880 does not apply to foreign corporations,
because the legislation of one state has no effect upon the powers
and internal management of corporations organized in other states.
"
Page 186 U. S. 162
"III. Even if it should be held that the California statute
(Statutes of 1880, p. 131) does apply to foreign corporations, the
mortgage is valid, and a decree of foreclosure and sale should be
directed."
(1) To sustain this proposition, the petitioner makes a
distinction between the construction of the statute and its
application, conceding the binding force of the state decisions as
to the former, but denying their authority as to the latter. The
contention enjoins a review of the decisions of the supreme court
of the state.
In
McShane v. Carter, 80 Cal. 310, the plaintiff
claimed title to mining property and certain appurtenant water
rights under two deeds from the Nevada Reservoir Ditch Company, a
mining corporation. He brought suit to enjoin the sale of the
property under a judgment obtained against the company by one of
its creditors. Judgment passed for the plaintiff in the trial
court, but was reversed by the supreme court of the state. The
latter court, by Hayne, Commissioner, said --
"The important question arising on the appeal is (p. 312)
whether the evidence is sufficient to show that the plaintiff was
the owner of the property which the sheriff was proceeding to sell,
and this depends upon whether the directors of said mining
companies had power or authority to convey the property in the
absence of a ratification by the stockholders as specified in the
act of 1880."
"1. We think that the provision of said act goes to the power or
authority of the directors. It cannot be construed to relate merely
to their personal liability, for no penalty is imposed upon them,
and to so construe it would be to practically nullify the act. In
our opinion, the directors of mining corporations have no power or
authority to convey the mining ground without the consent of
holders of two-thirds of the stock, given as prescribed by the act.
And it follows, without such consent, the title does not pass. And
if this be so, the question can be raised by anyone who connects
himself with the title of the corporation which owned the property,
as well as by the stockholders thereof."
"Nor can the consent of the stockholders be presumed from
Page 186 U. S. 163
the mere fact of the conveyance, whether under the corporate
seal or not, for such consent or 'ratification' may be after the
deed is executed, and hence is not necessarily or presumptively
involved in the execution of such deed."
Counsel for petitioner says that the supreme court, in its
opinion, not only construed but applied the act of 1880 --
construed it in that portion of the opinion which denied authority
to directors of mining corporations to convey mining property
without the consent of the stockholders; applied it in that portion
of the opinion which declares that, without the consent of the
stockholders, the title of mining property does not pass, and that
"the question can be raised by anyone who connects himself with the
title to the corporation, . . . as well as by the stockholders
thereof." This conclusion, it is asserted, is not warranted by the
words of the statute, is opposed to the decisions of the courts of
other states and of this Court construing similar statutes, and is
not binding upon the federal courts. And it is urged that the
circuit court of appeals
"failed to distinguish between a decision of the state court
construing the terms outlining the effect of the statute as enacted
and a decision declaring that certain other persons not mentioned
or referred to in the statute may by reason of relations existing
between them and the stockholders, under general principles of
corporation law, become beneficiaries of the statute under
consideration."
And it is further urged
"that a case of the latter class does not construe a statute or
establish a local rule of property, but is merely a decision upon
the general law of corporate relations."
We are unable to accept the distinction. To accept it would
deprive the state courts of the power to declare the implications
of state statutes, and confine interpretation to the mere letter.
The Supreme Court of California declared the effect of the act of
1880 as deduced from the language and purpose of the act, and this
was necessarily an exercise of construction. The very essence of
construction is the extension of the meaning of a statute beyond
its letter, and it can seldom be done without applying some
principle of law general in some branch of jurisprudence, and if
whenever such application occurs, the authority
Page 186 U. S. 164
of the state courts to interpret the statute ceases, the federal
tribunals, instead of following, could lead those courts in
declaring the meaning of the legislation of the states.
The construction of the act of 1880 was certainly directly
presented to the Supreme Court of California, and that construction
determined the judgment which was rendered. The court declared that
the provisions of the act extended "to the power or authority of
the directors," and that, without the consent of holders of
two-thirds of the stock, the title did not pass. In other words,
the title remained in the corporation, the property remained the
property of the corporation, and hence the deduction of the
court,
"the question can be raised by anyone who connects himself with
the title of the corporation which owned the property, as well as
by the stockholders thereof."
And this in consequence of the statute, and it is not the less
so because the statutes of other states have been interpreted
differently. It could hardly be contended that the Legislature of
California had not the authority to make such a consequence, and
whether the legislature expressed its purpose or left it to
inference, whether it expressed itself clearly or obscuredly, the
power of the state court to declare that purpose was nonetheless
plenary.
McShane v. Carter was followed and affirmed in
Pekin Mining Co. v. Kennedy, 81 Cal. 356;
Granite Gold
Mining Co. v. Maginness, 118 Cal. 131;
Johnson v.
California Lustral Co., 127 Cal. 289;
Curtin v. Salmon
River Co., 130 Cal. 351.
(2) That the act of 1880 applies to foreign corporations was
decided in
Pekin Mining Co. v. Kennedy, 81 Cal. 356. That
case, however, it is said, is practically overruled by
Miles v.
Woodward, 115 Cal. 308. Woodward was a stockholder in a mining
corporation organized under the laws of the State of California. He
brought an action against Miles, who was a director of the
corporation, for $1,000 damages for the violation of an act of the
state (Stats. 1880, p. 400), which required the directors of the
corporation to make, or cause to be made, posted, and filed, weekly
reports of the superintendent.
"It is first contended," the court said,
"that the act in question is unconstitutional for the reason
that it operates only upon
Page 186 U. S. 165
domestic corporations, and thereby allows foreign corporations
to transact business within this state upon more favorable
conditions than are prescribed by law to similar corporations
organized under the laws of this state, in violation of article
XII, section 15, of the constitution."
This was denied, and the act was held constitutional as being
properly confined to domestic corporations because it was "directed
to the internal affairs of the corporation, and not to its outside
dealings or to the conduct of its business."
As to the conduct of the business of foreign corporations, the
court said the state could "exercise full powers of control," but
over their organization and internal government the state had no
such power, because "the laws of the state did not have
extraterritorial force." And further, the court said:
"The law is designed to protect stockholders of domestic
corporations, and to that end has declared that the directors of
those corporations, the conduct of whose internal affairs is
subject to the control of the legislature, shall do specific acts
under a prescribed penalty for their failure and refusal."
The views expressed by the court were justified by the nature of
the reports required to be made. They were of matters which alone
concerned the stockholders -- did not affect in any way the rights
of others. To make such reports was not doing business; it was only
giving information of business done. But when a corporation sells
or encumbers its property, incurs debts or gives securities, it
does business, and a statute regulating such transactions does not
regulate the internal affairs of the corporation. And it is
certainly within the power of a state to say what remedies
creditors of corporations shall have over property situated within
the state. Therefore,
Miles v. Woodward is not an
authority for petitioners' position.
(3) Even if it be held that the act of 1880 applies to foreign
corporations, it is nevertheless contended that the mortgage is
valid, and a decree of foreclosure and sale should be directed. In
support of that position, it is urged that (a) the meeting of June
25, 1890, at which the execution of the bonds and mortgage were
resolved upon and authorized, though denominated a meeting of
incorporators, was really a meeting of stockholders;
Page 186 U. S. 166
(b) if this was not so, the corporation afterward, by its action
of July 30, 1890, after the board of directors was organized,
ratified the mortgage by the resolution which authorized its
correction; (c) that not only those who participated in the
meetings held more than two-thirds of the stock of the corporation,
but that the president, M. J. Shoecraft, at the time of the
execution of the mortgage, owned two-thirds of the stock. In other
words, it is urged that the corporation either executed the
mortgage or ratified it, and that the stockholders both authorized
and concurred in its execution. The evidence of the facts involved
in these claims is the minutes of the meetings set out in the
statement of facts and of the following testimony of a witness
(Calvin Littlefield) for complainant:
"Q. It appears that the following individuals were present at
that meeting, namely, M. J. Shoecraft, Calvin Littlefield, G.
Livingston Morse, R. H. Pettigrew, Jr., and W. W. Tucker. Can you
tell me whether these gentlemen held all of the stock of the
company at that time or not?"
"A. They did."
"
* * * *"
"Q. Do you know whether Mr. Shoecraft owned as much as
two-thirds of the stock of the company at the time when this
mortgage gage was acknowledged?"
"A. I do not."
"
* * * *"
"Q. Have you the certificate book of the defendant company in
your possession?"
"A. I have."
"Q. Tell me, if you can, the amount of stock in the name of M.
J. Shoecraft at the date when the mortgage was acknowledged,
namely, July 24, 1890?"
"A. One hundred and sixty thousand shares."
"Q. Shares at what value?"
"A. Five dollars each."
"Q. What was the entire capital of the company?"
"A. Eight hundred thousand dollars -- one hundred and sixty
thousand shares."
"Q. Can you tell me what date this mortgage was acknowledged by
the president and yourself?"
"A. I think the date of the acknowledgment."
"Q. That is what?"
"A. Twenty-fourth day of July, 1890."
"Q. Do you know why the mortgage was dated the 1st?"
"A. Yes. "
Page 186 U. S. 167
"Q. Can you say why?"
"A. The arrangement with the owner -- the first of July. By
agreement, the mortgage was to commence when the settlement
ended."
Cross-examination:
"Q. You say that, on the twenty-fourth day of July the whole
number of shares were issued to M. J. Shoecraft?"
"A. I do."
"Q. As appears by certificate No. 1?"
"A. Yes."
"Q. Certificate No. 1 (showing) is now before you?"
"A. Yes."
"Q. Is that in a book?"
"A. Yes."
"Q. What is it?"
"A. The stock book."
"
* * * *"
"Q. Certificate No. 1 has never been taken out of the book?"
"A. It has not."
"Q. It bears date the 24th day of July, 1890?"
"A. It does."
"
* * * *"
"Q. Certificate No. 1, marked Exhibit 'C,' has never been
separated from its stub?"
"A. It has not."
"Q. And certificate No. 2 has never been separated from its
stub?"
"A. It has not."
"Q. All the other certificates about which you have testified,
from No. 3 to No. 21, inclusive, have been separated from their
stub at some time or other?"
"A. Yes, sir."
The witness also testified that shares were issued in certain
amounts which were named and to certain persons who were named,
"from certificate No. 1." A number of certificates which the
witness testified about were introduced in evidence. They all bore
date of July 24, 1890.
But as to the effect of this testimony and of the contentions of
petitioners we are not called upon to express an opinion. The
statute of California prescribed the manner of ratification to be
"either in writing signed and acknowledged by such stockholders or
by resolution duly passed at a stockholders' meeting called for
that purpose." This manner of ratification was held to be necessary
as we have seen, in
McShane v. Carter, supra, and that
case has not been limited or varied by any subsequent case. And we
have no doubt of the power of the
Page 186 U. S. 168
state to so prescribe, not only from its power over the manner
of conveyance and the disposition of property situated within the
state, but from its power over foreign corporations doing business
within the state.
Clarke v. Clarke, 178 U.
S. 186;
Hooper v. California, 155 U.
S. 648. Nor can we contest that power, though we might,
if we were permitted to exercise an independent judgment, construe
the statute as only illustrative, and not as exhaustive of the
manner of ratification.
Judgment affirmed.
MR. JUSTICE HARLAN concurs in the judgment.
