Bowen v. Needles Nat. Bank

GILBERT, Circuit Judge,

after stating the facts as above, delivered Hie opinion of the court.

It may be stated in general that no banking corporation has the power to become a guarantor of the obligation of another, or to lend its credit to any person or corporation, unless its charter or governing-statute expressly permits it. Farmers’ & Mechanics’ Bank v. Butchers’ & Drovers’ Bank, 16 N. Y. 125, Morford v. Bank, 26 Barb. 568; Thomp. Corp. § 5721. Under section 5136 of the Revised Statutes, national banking associations are given the power to “make contracts” and “to exercise by its board of directors, or duly authorized officers or agents, subject to law, all such incidental powers as. shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling-exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions of this title.” There is in these provisions no grant of power to guaranty the debt of another, nor can such guaranty be said to be incidental to the business of'banking. It has been so held in Seligman v. Bank, 8 Hughes, 647, Fed. Cas. No. 12,642, Norton v. Bank, 61 N. H. 589, and Bank v. Pirie, 27 C. C. A. 171, 82 Fed. 799. An apparent exception is recognized in the case of the discount of promissory notes by national banks which may be transferred, with a guaranty, but it rests upon the ground that the guaranty of such paper is but an ordinary incident to its transfer in the course of banking. In People’s Bank v. National Bank, 101 U. S. 181, the court said: “To hand over with an indorsement and guaranty is one of the commonest modes of transferring the securities named.” There can be no doubt that the guaranty in the present case was ultra vires. It was aside and apart from the business of banking. The' case is not that of an officer of a bank exceeding the powers delegated to him, but it is a case where the banking association itself has exercised powers in excess of those which were conferred upon it by statute. The plaintiff, equally with the defendant bank, was bound to take notice of the statute. He had notice also that there were no funds in the bank to meet the checks, and he knew that the contract was one of guaranty pure and simple. The transaction cannot be deemed a certification of checks, as urged by the plaintiff in error. The checks were not certified. They did not bear the acknowledgment of the bank of funds in its possession equal in amount to the checks, and available for their payment. The certification of checks is in the line of banking business, and is not prohibited to national banks. The only prohibition is that the bank shall not certify a check unless the drawer has on deposit at the time sufficient money to meet the same. The penalty for violation of the prohibition is to render the bank liable to the forfeiture of its charter, and to have its affairs wound up. Rev. St. § 5208; Thompson v. Bank, 146 17. S. 240, 13 Sup. Ct. 66.

But the present case is complicated by the fact that the plaintiff in error relied upon the guaranty, and cashed the checks on the strength thereof. There is authority for holding that under such circumstances the bank is estopped to deny its liability on the guaranty, notwithstanding that the contract was ultra vires. Thomp. Corp. §§ 6017, 6025; State Board of Agriculture v. Citizens’ St. Ry. Co., 47 Ind. 407; Insurance Co. v. McClelland, 9 Colo. 11, 9 Pac. 771; Oil Creek & A. R. R. Co. v. Pennsylvania Transp. Co., 83 Pa. St. 160. “The principle, properly understood and applied, extends to every case where the consideration of the contract has passed to the corporation from the other contracting party, which consideration may, on well-understood principles, consist either of a benefit to the corporation or of a prejudice or disadvantage to the other contracting party. It is therefore not strictly necessary to the proper application'of the principle that the corporation has received a benefit from the contract, but it is sufficient that the other party has acted on the faith of it to his disadvantage; as where he has expended money on the faith of it.” Thomp. Corp. § 6017. It is contended that this doctrine finds support in the language of decisions of the supreme court, as in Hitchcock v. Galveston, 96 U. S. 341, 351, where it was said:

“But the present is not a case in which the issue of the bonds was prohibited by any statute. At most, the issue was unauthorized. At most, there was a defect'of power. The promise to give bonds to the plaintiffs in payment of what they undertook to do was, therefore, at furthest, only ultra vires; and in such a (‘ase, though specific performance of an engagement to do a thing transgressive of its corporate power may not be enforced, the corporation can be held liable on its contract. Having received benefits at the expense of the other contracting party. H cannot object that it was not empowered to perform what it promised in return.”

And the court quoted with approval from the opinion in State Board of Agriculture v. Citizens’ St. Ry. Co., 47 Ind. 407, the following words:

“Although there may be a defect of power in the corporation to make a contract. yet, "if a contract made by it is not in violation of its charter, or of any statute prohibiting it, and the corporation has, by its promise, induced a party relying on the promise, and in execution of the contract, to expend money, and perform his part thereof, the corporation is liable on the contract.”

Also, in Railway Co. v. McCarthy, 96 U. S. 258, 267, where the court said:

“The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice, or work a legal wrong.”

While the language of these expressions of the court may he said to be sufficiently broad and inclusive to justify the- contention of the plain!ill! in error, the court, in its adjudications, has limited the application of the principle to cases in which a corporation has, by the plea of ultra vires, sought to retain unjustly the fruits of a contract which 1ms been performed by the other party thereto. In all such cases the action has been maintained, nol upon the contract, nor to enforce its terms, hut upon an implied obligation resting upon the defendant resulting from the fact that it has received money or property which it ought either to return or make compensation for.

In Salt Lake City v. Hollister, 118 U. S. 263, 6 Sup. Ct. 1059, it was said:

“The courts have gone a long way to enable parties who had parted with property or money on the faith of such contracts to obtain justice by recovery of the property or the money specifically, or as money had and received to plaintiff’s use.” '■

In Louisiana v. Wood, 102 U. S. 294, where a city had received money for bonds issued by it without authority, the court said:

“The only conlract actually entered into is the one the law implies from what was done, to wit, that the city would, on demand, return the money paid to it by mistake.”

In Parkersburg v. Brown, 106 U. S. 487, 1 Sup. Ct. 442, in a similar case, the court said:

“The enforcement of such right is not in affirmance of the illegal contract, but is in disaffirmance of it, and seeks to prevent the city from "retaining the benefit which it has derived from the unlawful act.”

These citations sufficiently illustrate the ground, and the only ground, on which the supreme court has held that corporations may be liable to the payment of money on account of contracts which they have entered into ultra vires of their charter, and which have been performed by the other party to the contract. The right to relief in such cases rests upon.the fact that the defendant corporation has obtained an advantage which it cannot justly retain. The general doctrine by which the present case may be ruled is thus stated in the language of the court in Central Transp. Co. v. Pullman’s Palace-Car Co., 139 U. S. 24, 59, 11 Sup. Ct. 478, 488:

“A contract of a corporation, which is ultra Vires in the proper sense, — that is to say, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers conferred upon it by the legislature,— is not voidable only, but wholly void, and of no legal effect. The objection to the contract is not merely that the corporation ought not to have made it, but that it could not make it. The contract cannot be ratified by either party, because it could not have been authorized by either. No performance, on either side can give the unlawful contract any validity, or be the foundation of any right of action upon it.”

In the same case it was said (139 U. S. 54, 11 Sup. Ct. 486):

“It was argued in behalf of the plaintiff that, even if the contract sued on was void, because ultra vires and against public policy, yet that, having been fully performed on the part of the plaintiff, and the benefits of it received by the defendant, for the period covered by the declaration, the defendant was estopped to set up the invalidity of the contract .as a defense to this action to recover the compensation agreed on for that period. But this argument, though sustained by decisions 'in some of the states, finds no support in the judgments of this court.” 1

Later decisions of the supreme court have emphasized the views expressed in the foregoing quotations. Navigation Co. v. Hooper, 160 U. S. 514, 16 Sup. Ct. 379; Union Pac. Ry. Co. v. Chicago, R. I. & P. Ry. Co., 163 U. S. 564, 16 Sup. Ct. 1173; McCormick v. Bank, 165 U. S. 538, 17 Sup. Ct. 433; Bank v. Kennedy, 167 U. S. 362, 17 Sup. Ct. 831.

In Union Pac. Ry. Co. v. Chicago, R. I. & P. Ry. Co., Mr. Chief Justice Fuller said:

“A contract made by a corporation beyond the scope of its powers, express or implied, on a proper construction of its charter, cannot be enforced or rendered enforceable by the application of the doctrine of estoppel.”

In McCormick v. Bank, Mr. Justice Cray, speaking for the court, said:

“The doctrine of ultra vires, by which a contract made by a corporation beyond the scope of its corporate powers is unlawful and void, and will not support an action, rests, as this court has often recognized and affirmed, upon three distinct grounds: The obligation of any one contracting with a corporation to take notice of the legal limits of its powers; the interest of the stockholders not to be subject to risks which they have never undertaken; and, above all, the interest of the public that the corporation shall not transcend the powers conferred upon it by law.”

Tn Bank v. Kennedy it was said:

“It would be a contradiction In terms to assert that there was a total want of power by any act to assume the liability, and yet to say that by a particular act the liability resulted. The transaction, being absolutely void, could not be confirmed or ratified.”

In tbe case at bar the defendant bank is not in the position of having received the fruits of the unlawful contract. The plaintiff’s money was paid, not to the bank, but to Blake. It is not shown that the bank received any benefit whatever from the payment. There is no ground, therefore, upon which it can be adjudged that the bank shall make restitution. The judgment will be affirmed.