Bell & Coggeshall Co. v. Kentucky Glass Works Co.

JUDGE DoRELLE

delivered the opinion of the court. ’

The questions presented by this appeal grow out of a contest between the creditors of the Kentucky Glass Works Company, an insolvent corporation. The' company was incorporated in 1879 under the general corporation act; it being provided in the articles of incorporation that the general business of the corporation proposed to be transacted is the manufacture of glass in all its forms, and for all the purposes for which it is manufactured. The capital stock was fixed at $12,000.

By the fourth paragraph it was provided: “The business and affairs of the corporation shall be conducted by the following officers, viz.: A president, a secretary, and a general superintendent; and said officers shall be stockholders, and elected on the last Monday in July of each year, except in the year 1879. The said corporators shall fill said offices until the . last Monday in July, 1880, and until their successors are elected regularly under these articles. The office of president, until the first regular election, shall be filled by said Edward Bull; that of secretary, by William Cromey; and that of superintendent, by John Stanger, Sr.” By the fifth paragraph it was provided: “The highest amount of indebtedness or liability to wliich said corporation shall at any one time subject itself shall be $8,000.” The company thereupon engaged in the business of glass-making, and continued it until April 27, 1887, when a deed of assignment was filed for the benefit of its creditors. In September, 1888, the assignee filed his petition for a settlement. There had been a good deal of litigation between the creditors of the corporation, the material evidence in which was considered as evidence in this action. The appellants were authorized to represent, not only their own claims, but the claims of others of like character. The Kentucky National Bank claims under a mortgage for $48,600 and interest.

This mortgage was dated December 20, 1885, and was recited to be from the Kentucky Class Works Company, and Ed Bull and Robert F. Bull as stockholders in said company, to the Kentucky National jBank, to secure a previous indebtedness of $48,-600, represented by various notes bearing date at various intervals during the year 1S85, and to convey by way of mortgage the land of the Kentucky Class Works Com.pany, the machinery and plant, goods, and wares, and materials for manufacture, with the right, however, in the company to retain possession of and work up the materials, and continue the manufacture of glassware; the proceeds of sales to be applied to the payment of the indebtedness secured by the mortgage. The instrument concfude's: “In testimony whereof said parties of the first part have set their hands and seal hereto; and said Kentucky Class Works Company,- by its president, has hereto set its name and affixed its corporate seal, and caused this instrument to be attested by its secretary, the day and year herein first above written. Kentucky Class Works Company. [Seal.] E. Bull. E. Bull, Pres. Attest: Wm. Cromey, Secretary. R. F. Bull. R. F. Bull, Vice-President.”

The first question for decision is whether the mortgage is void for the reason that it was executed without authority from the board of directors.

It will be observed that the articles of incorporation do not provide for any board of directors but commit the entire management of the business of the company to three executive officers. It appears that the company never had a meeting, never adopted any by-laws, and never had an election, but that the president and secretary named in the articles continued to act as president and secretary until after the execution of the mortgage — R. F. Bull being nominally vice-president — and that it had no general superintendent. The stock of the company was owned entirely by Edward Bull' and Robert F. Bull, except ten shares belonging to John. Bull’s estate,.of which William Cromey, the secretary, was the trustee up to May following the date of the mortgage, when he ceased to be trustee, or to act as secretary. The person named in the articles of incorporation as general superintendent appears never to have taken stock, or acted in that capacity. The business was managed by the president, who made the contracts, superintended the business, borrowed money, drew checks for it, and attended to all matters of business. The mortgage appears to have been executed because the bank was about to cease extending credit to the company.

Under these circumstances, and with these articles of incorporation before us, can it -be justly said that the mortgage was invalid because its execution was not authorized by a board of directors? There are numerous authorities to the effect that where a corporation loosely commits all its business affairs to a superintendent or president, and acquiesces in such management for a great length of time, the acts of the corporation through such officers will be held valid to the extent of giving preference after insolvency. Thompson on Corporations, sec. 6179, referring to Poole v. West Point Butter Association, 30 Fed. Rep., 513 (opinion by Mr. Justice Brewer).

In McElroy v. Minnesota Percheron Horse Co., 96 Wis., 317 [71 N. W., 652], it was said: “A corporation may so conduct its affairs as to confer by implication upon its president powers much beyond those strictly incident to his office, even to the extent of exercising the entire powers of the corporation, which by the articles are vested solely in the board of directors.” In that case it appeared that “the corporation affairs for about five years had been conducted by the president and by his predecessor in office, without any objections or protests whatever by' the stockholders or directors, so far as appears from the records. No election of directors by stockholders was had during that time, and no meeting whatever held, except one a few months before the making of the contract, at which the only business transacted was to fill the places of several directors who had resigned, which was done by those who remained.”

In Sherman v. Fitch, 98 Mass., 59, a mortgage not authorized by a vote of the board was held to be valid as against the assignee, the court there saying: “Such an act by the president and general manager of the business of-the corporation, with the knowledge and concurrence of the directors, or with their subsequent and long-continued acquiescence, may properly be regarded as the act of the corporation.”

See, also Eureka Iron Works v. Bresnahan (Mich.) [27 N. W., 524]; Gordon v. Preston, 26 Am. Dec., 75; Thompson on Corporations, secs. 6165, 5318.

In the case at bar the entire management of the business of the corporation was intrusted by the articles to the company’s executive officers. It can not justly be said that it was necessary that they should have a formal meeting to authorize the action to be taken by them, for executive officers do not act by resolution. The board of directors in a properly managed corporation is a deliberative body. It acts by resolution, and directs what the executive of the corporation, shall do. But when the executive is to take action, and acts within the scope of his authority, his acts are binding.

The corporation was undoubtedly authorized to mortgage its property, that power being necessarily implied in the power to contract debts. Thompson on Corporations, sec. 6133. That was a part of the business of the corporation, and the executive officers are authorized to transact it.

We conclude, therefore, that the mortgage was not invalid by reason of its execution by the president, secretary and all the stockholders except one, and with the knowledge and concurrence of the trustee of that one.

And this brings us to consider the next question — to what extent, if any, the mortgage was invalid because of its execution for an amount in excess of the liability which the articles of incorporation permit to be incurred.

Were this question between the corporation and the bank, there' would be little difficulty. In this case it appears that the money was actually received by the company, and used in its business, and the company would be estopped from refusing to make restitution of that whereof it had received the benefit. The doctrine is thus stated in Thompson on Corporations, sec 5705: “By the American law, where there is a statute imposing a limit upon corporations in respect of the amount of debts which they can incur, a creditor who does not know that the limit has been exceeded, and who has no reasonable ground to believe that such is the fact, may enforce the obligation of the contract against the corporation. The true ground upon which this doctrine is based has been already adverted to. It is that, although parties dealing with corporations will be conclusively bound to know the extent of the powers which the statute law has accorded to them, yet where their power to act in a given case depends upon their previous action, which, from its very nature is known only to them, and not to the public dealing with them— in other words where the question is whether their power has been exhausted, and this depends upon a knowledge of antecedent extrinsic facts, which knowledge is in the breasts of the corporate officers, and not accessible to the public — then there is an implied warranty on the part of the corporation, through its officers, that the power has not been exhausted, and that the conditions do not exist which render it unlawful for the corporation to contract the debt; so that to allow the corporation to avoid the repayment of the debt on this ground, where it has had and enjoyed the benefit of the contract, would be to allow it to make its own wrong the means of defrauding the innocent public. It is immaterial on what ground the courts which hold that the corporation can not be permitted to repudiate an honest debt upon such a plea place themselves, whether they say that the statute is directory merely, or that the corporation is estopped from setting up the defense after having enjoyed the benefit of the contract — especially where the money borrowed has been used in conducting the legitimate corporate business, with the knowledge and consent of all its officers and stockholders.. The judges are in all cases driven to the conclusion by the mere stress of justice.”

It would seem, also, from the same section, that even in some cases of municipal obligations the excessive indebtedness may be recovered in a common-law action, as for money had and received.

But as between other creditors and the creditor whose own debt was in excess of the limitation there arises a different question. A creditor whose own debt against the corporation does not transgress the limitation — who does not know, and has no reason to know, that the limitation had been exceeded, has a right to rely upon the “implied warranty on the part of the corporation, through its officers, that the power has not been exhausted, and that the conditions do not exist which render it unlawful for the corporation to contract the debt.” And this reason, it seems to us, applies equally as against the creditor who participated in creating the excessive indebtedness, and was bound to know that it was so doing. The bank was charged with knowledge of the indebtedness limit in the articles of incorporation of the company. In the face of that knowledge, it joined with the company in the creation of an indebtedness against it far in excess of what the company was authorized to incur. The bank knew that the indebtedness was being exceeded; the other creditors did not; and this puts them, in our judgment, upon an entirely different footing.

An immense number of citations have been made by counsel. Most of them are cases between the corporation and the creditor, or between the shareholders and the creditor, in which the corporation or shareholders sought to evade tlie payment of the excessive indebtedness on the ground that it was ultra vires.

We are well aware, however, that there is quite a respectable number of cases, in which it has not only been held that the excessive indebtedness is enforceable against the mortgagor, but that subsequent creditors stand in no better light than the mortgagor himself. Among them are Central Trust Co. of New York v. Columbus, H. V. & T. Ry. Co., 87 Fed. Rep., 815; Allis v. Jones, 45 Fed. Rep., 148; Sioux City Terminal R. Co. v. Trust Co. of North America, 27 C. C. A. 73, 82 Fed. Rep., 133. Those cases proceed upon the assumption that, in the case of a violation of the statute or charter, as the Legislature imposed no penalties, the court could not do so. “The remedy for the violation of this statute,” said the court in the case in 82 Federal Reporter, “is not the destruction of the contracts which evidenced it, but the ouster and dissolution of the corporation, at the suit of the State. The State alone can complain of it and the debtor can not usurp its functions.” So, in the case in 87 Federal Reporter, the court, through Judge Lurton, said: “For such a violation of the limits imposed by law upon the power of' the coal and railroad company to create indebtedness, the State alone should be heard to complain.”

In this Commonwealth such a doctrine would render the inhibition of the statute an absolute dead letter. Of what avail would it be to obtain a judgment of ouster and dissolution of the corporation at the suit of the State, when it could be reincorporated in half an hour’s time? What attention would be paid to this inhibition in the statute by persons contracting with corporations, if the only penalty for a violation of the statute were a possible dissolution of the corporation? Moreover, it is hard to discover what ground the Attorney General would have for hoping to succeed in a suit for ouster and dissolution of a corporation for the offense of making a valid contract.

But it is sufficient to say that this is not the doctrine in Kentucky. In this State it has been adjudged that such a contract, made in violation of law, while enforceable as between the parties, is not enforceable by either participant as against the rights of third persons.

In the case of First National Bank of Covington v. The D. Kiefer Milling Co., 95 Ky., 97 [23 S. W., 675], the indebtedness of the milling company to the First National Bank was far in excess of that allowed by the company’s charter. It was held that “a person dealing with a corporation must, at his peril, take notice of the charter or articles of incorporation.” Said the court, referring to this excess of indebtedness forbidden by the charter: “Whether, if this was simply a contest between the bank and the milling company, violation and disregard by the latter of the provision of the articles of incorporation would be a sufficient defense, we need not determine; but the enforcement of that provision is demanded by the assignee for the benefit of other creditors, who have been prejudiced by the unauthorized and illegal dealing of the bank with an unfaithful officer of the milling company, whereby its insolvency was precipitated, if not actually caused, and in such' a case a participant in the fraudulent transaction, not other innocent creditors, should suffer.”

While the fraudulent action of an officer of the company, whose embezzlement had rendered the company insolvent, was mentioned in connection with the matter under discussion, the point at issue was not, as counsel seems to suppose, whether the indebtedness of the bank was rendered invalid by reason of the fraud of the officer, but, as a glance at the beginning of the paragraph quoted and as the previous paragraph will show, the “unauthorized and illegal dealing” referred to was unauthorized and illegal because in violation of the company’s charter. That was the ground upon which the cause was decided, and that is the law of this State.

We do not for a moment controvert the proposition so vigorously and so'frequently insisted on by counsel, that in equity neither party to an ultta vires transaction will be heard to allege its invalidity while retaining its fruits. What we hold is that neither of the participants in a contract forbidden by law is in as good a position as a third person not so participating.

Nor is it any answer to this proposition to say that the other creditors “had full notice of record of the existence of the bank’s debt and of the bank’s mortgage, and, if they and the bank are to be held to have constructive notice of the limitation to $8,000 of debt in the glass works charter, then appellants also knew that the company had no power to create any other debts at the time they created theirs.” There is no similarity between the knowledge of charter limitations, with which a person dealing with a corporation is charged, and the constructive notice given by virtue of the registration laws. They are based upon entirely different theories. A corporation exercises a delegated power. Its very existence is an emanation of sovereignty. Independent of the fact that its articles are accessible in the county clerk’s office or in the office of the Secretary of State, every one dealing with it is bound, at his peril, to know the limitations of its powers, just as a person dealing with an agent must, at his peril, ascertain the extent of the agent's authority. On the other hand, the theory of the registration act is not.to give notice of the existence of indebtedness against a person whose mortgage has been recorded. The record is not intended to give actual notice of anything. If a person dealing with a mortgagor has actual notice of an unrecorded mortgage, he is bound by that knowledge, and as to him there is not the slightest necessity for recording it. So, a person trading with a corporation whose mortgage to another has been recorded is not in any wise chargeable with notice of the mortgage, and still less, if possible, with notice' of the amount of debt thereby secured. If he should take a second mortgage upon the incumbered property, he would be chargeable, not with actual notice of either the mortgage or the debt secured by it, but would be chargeable with constructive notice of the fact that that particula/r property had been incumbered; and this constructive notice would operate to the extent — and no further — of giving the previously recorded mortgage priority over his. The record of a mortgage gives no actual notice of anything whatever. In dealing with a corporation, as with a natural person, the party has a right to ignore the record and take his chances in the trade. As matter of course, if he does so the constructive notice of the record will give to the recorded mortgage priority over his debt as to the incumbered property. But the record was not intended to give actual notice of either the existence of the mortgage, or the amount of the debt secured by it, but only to give a constructive notice of the fact that the property was incumbered, which constructive notice would give priority to that mortgage over all persons acquiring subsequent liens upon that property. If it were shown that these appellants had examined the record, and had actual knowledge of the terms of the instrument, they would be chargeable with actual knowledge of whatever it showed, just as they would if it had been shown them on the street.

The mortgage was legal, and should be upheld. To the extent the claim secured by'it was legal, it should be up. held. As to the amount in excess of the legal indebtedness, the creditor is entitled, not to enforce its contract, but, as between it and the company, to restitution in an action for the money had and received.

It appears that the company desired to buy a Cohansey bottle-grinding machine; and, not having money enough, it procured an advance of $625 for that purpose from the Kentucky National Bank, and, to secure it, gave the bank what is, in form, a warehouse receipt, reciting that it had been received “in our mill-house.” It needed soda-ash for use in its business, obtained from the bank an advance of $650, to pay for twenty-nine barrels of ash, and issued another warehouse receipt, reciting that the soda-ash was “received in our mixing-house, at corner Fourth and C streets.” And to secure an advance of $850 it gave the bank another warehouse receipt on two hundred gross quart, standard fruit-jars, recited to have been “received in our warehouse No. 1, at corner Fourth and C streets.” The validity of these receipts is called in question.

While the argument of counsel for appellees upon this subject is exceedingly plausible, and the statute (Kentucky Statute, section 4768), as well as some authorities cited, lends seeming force to it, it can not be that the statute was intended 'by the Legislature to receive a construction such as that contended for. Such a construction would utterly abrogate the registration laws as to personalty, and would enable a man to pledge the piano in his parlor, or the furniture in his room, by a secret pocket lien, not required to be registered.

The machine here pledged was intended to be used in the business, was deposited in the mill-house, and doubtless used. The soda-ash was bought for use in the business, and placed in the mixing-house. The jars were part of the stock of the concern. We are unable to see that, in any just sense, they were received in store, within the meaning of the statute.

It results, therefore, that the rehearing is granted, and that the judgment must be reversed and the cause remanded, with directions to adjudge to the Kentucky National Bank a prior lien upon the property to the extent of $8,000, and no more, to adjudge the warehouse receipts to be null and void, and to adjudge the appellants entitled to a pro rata distribution of the remaining assets, and for further proceedings consistent herewith.

The whole court sitting.

JUDGE PAYNTER dissents.

JUDGE GUPPY dissents ebom so much oe the opinion as holds THE MORTGAGE VALID FOR ANY PURPOSE.

JUDGE DuRELLE delivered the following response to petition FOR EXTENSION OF THE OPINION.

The petition for extension of the opinion presents certain questions, the decision-of which is rendered necessary by the last opinion.

The question of the validity of the assignment was litigated between the assignee and one of the parties appellant, decided in the affirmative, and the decision affirmed on appeal. We are of opinion, under all the circumstances of this case, that the assignment was valid.

It is urged that, the assignee having made payments to the Kentucky National Bank since the estate came into his hands, those payments should be applied to the reduction of the indebtedness to secure which we have held that the bank had a valid mortgage; and this contention, we are satisfied, is correct. Those payments were made by the assignee after the estate came into his hands, for the purpose of being administered and distributed to the creditors of the assignor, with due regard to their priorities. It is not to be presumed, therefore, that the assignee made any payment upon any claim to any creditor, except in the order in which such claim was entitled to payment out of the fund in his hands as assignee. Payments otherwise made, unless the estate proved sufficient to pay all claims of higher grade, would have been illegal, and the assignee would not have been entitled to credit therefor. But being presumed to have been made on the claim with respect to which the bank was entitled to priority,, those payments must be applied to the reduction of that claim, viz., the $8,000 held to be secured by the mortgage; and the assignee is therefore entitled to credit for those payments in the settlement of his accounts.

An entirely different question is presented as to the payments made to the bank by the glass works company prior to the assignment. In the opinion we have held that as between the parties to the transaction, • viz., the bank and the glass works company, the bank had a cause of action for the entire amount advanced by it. There were therefore two claims of the bank to which the payments might have been applied. Clearly, neither party to the transaction made any specific application of the payments; for it is evident that neither of the immediate parties regarded the bank’s claim as other than a single claim, all of which was of the same dignity.

The court,-therefore, will apply the undirected payments, following the rule in this State, which is that, where neither debtor nor creditor applies the payment, equity will apply it to the debt which is unsecured, in preference to applying it to the one which is secured. Burks et ux. v. Albert, 4 J. J. Marsh., 97, and 20 Am. Dec., 209. To the extent indicated, the opinion is extended.