888
IZDZB1L BZPOBTBB.
where it is shown that the affidavit and demand would have been unavailing, they may show, in an action by the 'bank brought on their. behalf. the deductions to which they were entitled.l A national bank may, on behalf of its stockholders, maintain a suit to enjoin the collection of a tax which has been unlawfully assessed on the shares by state authorities. 1 and on the ground of an illegal assessment arising from the failure to deduct from the valuation the debts owned by the stockholders,3 although payable in the first instance by such shareholder, if a multiplicity of suits can be thereby avoided, or injury to its credit or business is anticipated.' Where the statute requires or permits the bank to pay the tax for the shareholder, as trustee, the bank is the proper complainant seeking relief against illegal exaction.. A bill to restrain the collection of the state tax must show a statute discriminating against them, or that they are rated higher in proportion to actual valuation than other moneyed corporations.8-[ED. fl·.C. 12 Fed. Rep. 93; Evansvl1le Nat. Bank v. Britton, 105 11. S. 322. Bee sup'ra of Alban)' v. Stanley, 12 Fed. Rep. 82. IHiIls v. Nat. Alb. Exeh. Bank, 105 U. 8.319;
IHllla v. Nat. Alb. hob. Bank, 105 U.8.3191
8. C. 12 Fed. Rep. 93; Evansvl11e Nat. Bank v. Britton, 1l)j U. S. 322. BNat. Alb. Exeh. Bank v. Hm·· 6 Fed. Rep. lU9; Hill. v. Nat. Alb. Exoh. Bank, 105 U. 8.319 J I. O. 12 It'ed. Boop. 83; Cllllllllinle v. Nal. BaniL,
101 U. 8. 163; Pelton T. Nat. Bank. 101 U. S. 143; Evansville Nat. Bank v. Brltton,l05 U. S. 322. 'Olt)' Nat. Bank v. Padneah. 2 Flippin, 61. See Nat. Alb. Exeh. Bank v. Hl11s.6 Fed. Rep.lUS; reversed, 12 Fed. Rep. 93. oNat. Bank V. Cummings, 101 U. S. 163. af. Armed; Evansville Nat. Bank v. Britton. 100 U. 8.322; S. 0.12 Fed. Rep. 83; Flret Nat. Bank v. St. J'o!8ph. 46 Mlob. 626. 'German Nat. Bank v. KImball, 103 U. S. 7321 Hille v. Nat. Alb. Exell. Bank, 12lt'8d. 1Wp. is,
MZHPms
& L. R. R. CO., as reorga.nized, ". Dow. 1
(Oircuit Oourt, 8. D. N6tD YQ'1'k. February 11,1884.) 1. ULTRA VmEs-RETENTION OF BENEFITS.
me., and at the same time repudiate its
A corporation cannot retain property acquired under a transaction 'Ultra obligations under the same transactions. ·
2. OORPORATIONS-POWER TO OONTRAOT WITH STOCKHOLDER&. A corporation is not precluded from contracting with ita bondholders because they own all the stock. B. SAllE-MORTGAGE Oll' OORPORATE FRANCHISE. A corporation lawfully purchasing its franchise has implied authority to mortgage it for the purchase money. 4. SAME-CASE STATED. A railroad corporation organized in Arkansaslssued bonds secured by trust mortgage of its franchises and other property; the mortgag-e was foreclosed. and a scheme of reorganization adopted. In pursuance of which the company conveyed all its property to the trustees. and the bondholders formed a new corporation, to which the franchises and other property of the old one were conveyed by the trustees. The new corporation, thus composed entirely of the original bondholders, issued its bonds to those bondholders, secured. by mortgage of its franchises and other property; and the new bonds were received in lieu of the old. Afterwards portions of the stock passed into other bands. Held. tbat the bonds constituted a valid obligation, notWithstanding the stockholders of the contracting corporation were the contractees, and notwitstanding a provision in the constitution of Arkansas forbidding private corporations to issue stock or bonds except for value actually received.
l8ee 7 Sup. Ct. Rep. 482, and 20 Fed. Rep. 260, 76i.
oxpms .. L. B.B.
00. V. DOW.
889
In Equity. Dillon et Swayne, for plaintiff. Platt ,J Bowers, for defendant. WALLACE, J. The complainant's bill is filed against the trustees and holders of the mortgage bonds of the complainant for $2,600,000, and the mortgage upon its corporate franchises and property for securing the same, executed May 2,1877, seeking to annul the bonds and mortgage, upon the ground that they were issued and executed by the complainant without corporate power in that behalf. A brief statement of the facts relating to the creation of the mortgage bonds, their origin, considoration, and purpose, will sorve to present the legal questions involved. The complainant, created under a spec'.al act of the legislature of Arkansas, is a reorganized corporation which has succeeded to the property and franchises of a former corporation of the same name under the foreclosure of a mortgage of that oorporation, and a conveyan3e l uder the decree of foreclosure. By the terms of that mortgage, and by the provisions of the decree of foreclosure in conformity therewith, it was provided that if the trust· ees named in the mortgage should be requested so to do by a majority of the holders of the bonds secured thereby they might pnrchase the property, and, in that case, no bondholder should have any claim to the premises or the proceeds thereof, except for his pro rata share, as represented in a new corporation or company to be formed, by a majority in interest of said bondholders, for the use and benefit of the holders of the mortgage bonds. The trustees purchased at the sale, and thereupon the bondholders proceeded to organize the present corporation. There was due to the holders of the old mortgage bonds $2,600,000 of principal, and $1,300,000 of unpaid interest, and the scheme of reorganization contemplated the acceptance by the bondholders of the new mortgage bonds in place of their old ones, and of the capital stock in place of their accrued and. unpaid interest. Accordingly, by the terms of the reorganization agreement, the capital stock of the new corporation was fixed at $1,300,000, divided into 13,000 shares of $100 each, and was declared to be fuU paid; and by the same agreement the trustees who had purchased at the fore. closure sale were directed to transfer the property and franchises purchased by them to the new corporation, upon the condition, among others, that the new corporation should execute and deliver to said trustees the new mortgage bonds for $2,600,000, now sought to be set aside. Thereupon-the new corporation having agreed to accept a conveyance of the property arid franchises of the old corporation, pursuant to the terms of the reorganization agreement-the trustees conveyed the same to the new corporation, the deed of conveyance reciting the conditions upon which, as trustees, for the owners of the outstanding mortgage bonds, they were authorized to make such conveyance, and further reciting the acceptance of sucb conditions by the new corporation. The corporation accepted this conveyance and took
890 possession under it. Every certificate of shares of stock issued by it contains a recital that the holder atock subject totbe mortgage bonds in question. The new mortgage bonds were issued and delivered tQ the trustees for the holders of theontstanding mortgage bonds, and. were distributed by the trustees, pro rata,to the holders of those bonds.; The capital stock was also apportioned among the holders of bonds, pro ril(ta, and certificates delivered for the shares to whiob each bondholder was entitled. After the reorganized corporation had operated the railroad for several years, and early in· the year 1880, the majority of the stock was acqliired by Messrs. Margrand,. Gould, and Sage, in the interest of the St. Louis, Iron Mountain & Southern Railway Company. The object seems to have been to acquire control of the corporation and subordinate its management to the interests of the Iron Mountail} company. The parties who thus acquired control .now control the corporation, and, speaking through it, insist that the mortgage bonds, which were the consideration of the transfer of the property to ,the corporation, !,Lre void, and should be set aside. The case, then, is this: The complainant is a corporation which was brought into life by a body of qreditors of a pre-existing corporation, who had succeeded to all the property thereof,and who proposed to convey such to the complainant upon receiving, among other considerations, the mortgage bonds in suit. The complainant assented to this proposition, accepted a conveyance of the property, and executed its mortgage bonds. It asserts now that although it had power to acquire the property it had no lawful power to pay for it in the terms and manner promised. Its contention is founded upon a section of the charter or act of incorporation by which alone it is claimed its power to create a. mortgage is conferred, and upon a provision of the constitution of Arkansas which limits the power of corporations of that state in issuing bonds. The section of the charter relied on is section 9, Which is as follows: "The said company may at any time increase its capital toa sum sUfficient to complete road, and stock it with. any thing necessary to give it full operation and effect, either by opening books for new stock, or by selling such new stock, or by borrowing money on the credit of the company, and on the mortgage of its charter and works."
The constitutional provision is contained in article 12, and declares: "No private corporati9Ii shall issue stock or bonds except for money or property actually received, or labor done; and all fictitious increase of stock or indebtedness shall be void."
As the bonds and stock ililsu.ed by this corporation were issued for property actually received, viz., the .said railroad and all the corporate property, it is .not obvious how this oonstitutional provision has any application to the present controversy.: It is assumed in the argument of counsel for the complainant, and reiterated several times,
MEMPffiS '& L; It. ltt!JO,'V; DOW.
391
complainant recei'ved. no consideration for the mortgage bonds. 'Upon what theory this' is claimed or can be maintained is not apparent, and, indeed, is incomprehensible. The original corporation had been divested of its property by the fore.closure sale. The newly-o'rganizedcorport;ttion a reconveyance upon ,coIl to the Whether dition of executing the new old corpothe complainant is a new corporation, or ,whether it ration, need not be considered, because in either view the mortgage bonds were the consideratioI1 01' the conV'eyance. The proposition which is advanced, that the'veridors!arid the vendees were the same persons, and therefore there could be no contract or sale, iSnot,eyen technically-correct. One of thep!ittleswas the corporation; the' bondholders, by their t,fustees, were the other parties. True, the stockholders of the corporation were alsoth.Ei bondholders, but the. circumst:mce that all the stockholders of a corporation are,at the same time the several owners of property, which the corpbration wishes to buy, does not destroy the power of 'the parties to there were two corporations; eaal! corripbsed of the same stockholders, can it be seriously· contended that one corporation could not makes. eontract with' the other? A corporatIon may' contract with its directors ; why not with 'its stockholders? If the 'complainant ever acquired the l property it was by a purchase; if itcol,lld purchase, the' bondholders could! sell, and the mortgage was the consideration of the purchase' and sale. . upon tha purThe primary questions,then, are"":""First, ahasa of properly, the corporation could mortg'age what it acquired to secure the puiehase money; and, second, whether section 9 of the charter has any application to such a transaction. It is to be observed that tue complainant doe8 not question its own power to acqtiire the property conveyed to it. It caimot do this' w4ile it holds on to the property and seeks to remove the lien of the'mortgage. If it could legitimately purchase, why could it not, like an individual purchaser,. mortgage to secure the price? A corporllitioDI in order to attain its legitimate objects, may deal precisely as can :an individual who seeks to accomplish the same ends, 'unless it is prohibited by law to incur obligations as a borrower of money. "Corporations having the power to borrow money may mortgage their 'property as security. Although it was at one time a qnestion Whether expres!'l legislative consent was not required in order to authorize a mortgage of any .corporate property, ag, for example, in Steiner's Appeal, 27 Pa. St: 313, yet the rule now is that a general right to borrow money implies the power to mortgage all corporate propel'ty except: franchises, unless restrained by express: prohibition in the' act of incorpora#on, or by some ,general statute." Green's Brice's Ultra '(2d Ed.) 224. In the late case of PTtiladelphiaCi:R. R. 00. v. Sticktef",21 Amer.
392
FEDERAL REPORTER.
Law Reg. 713, the supreme court of Pennsylvania considered the question, and PAXON, J., delivering the opinion of the court, said: "So far as the mere borrowing of money is concerned it is not necessary to look into the charter of the company for a grant of express powers. It exists by necessary implication. lit lit lit The reason is plain. Such corporations are organized for the purposes of trade and business, and the bO,rrowing of lOoney and issuing obligations therefor are not only germane to the objects of their organization, but necessary to carry such objects into effect."
In Platt v. Union Pac. R. Co. 99 U. S. 48-56, Mr. Justice STRONG, speaking for the court, says: "Railroad corporations are not usually empowered to hold lands other than those needed for ro.wways and stations or water privileges. But when they are authorized to acquire and hold lands separate from their roads the authority must include the ordinary incidents of ownership-the right to /jell or to mortgage."
The right of mortgaging follows as a necessary incident to the right of managing the business of a corporation, according to the usual methods of business men. The right of a corporation to mortgage its franchises, or the property which is essential to enable it to perform its functions, is generally denied by the authorities. But does the reason upon which this denial rests have any application to a case like the present? The foundation of the doctrine is that such a mortgage tends to defeat the purposes for which the corporation was chartered, and the implied undertaking of those who obtain the charter, to construct and maintain the public work, and exercise the franchises for the public benefit. Some judicial opinion is found to the effect that there is no good reason for denying the right to make such a mortgage without legislative consent, because the transfer of the franchise to new bands through a foreclosure is, in fact, a change no greater than may take place within the original corporation, and the public interests are as safe in such new hands as they were in those of the original corporators. Shepley v. Atlantic cf St. L. R. R. 00. 55 Me. 395-407; Kennebec cf P. R. 00. v. Portland cf K. R. 00. 59 Me. 9-23; Miller v.Rutland cf: W. R. 00.36 Vt. 452-492. Here the mortgage was executed to enable the corporation to resume the exercise of its charter powers, and fulfill the purposes for which it was originally created. No precedent has been found denying to a corporation the power to execute a mortgage of everything it acquires by a purchase, when the mortgage is a condition of making the pur. chase; and there seems to be no reason, in a case like the present, for denying the power when the purchase of the mortgagor includes the franchise and the whole property of the corporation. Section 9 of the charter is not a restriction upon the implied power of the corporation to incur such obligations as are necessary to en. able it to carryon its business. It is a provision which would seem to be intended to enlarge rather than to restrict the power of the cor·
IlEMPRIS 15 L. B. B. 00. V. DOW.
393
poration in this regard. Its purpose is to authorize an increase of capital to an extent commensurate with the necessities of the corpo. ration in any of the modes usually adopted by corporations for rais, ing money-a provision which was necessary in view of section 4 of the charter, which limited the amount of increase. As a corporation has no implied authority to alter the amount of its capital stock when the charter has definitely prescribed the limit, this permission was necessary. The purchase of property by the corporation 'lor cash or on credit is not an increase of its capital. There is another ground, however, upon which the decision of the case may rest more satisfactorily. Assuming that the complainant transcended its charter powers' in creating the mortgage bonds in question, it cannot be permitted to retain the benefits of its purchase, and at the same time repudiate its liability for the ptircbaseprice. The rule is thus stated by a recent commentator: "Toe law founded on pUblic policy requires that a contract made by a corporation in excess of its chartered powers be voidable by either party while withont injustice. But after a contraot of this a rescission can be, character bas been performed by either of the parties the requirements of public policy can best be satisfied by compelling the other party to make compensation for a failure to perform 011 his side." Morawetz, Corp. § 100.
It is to be observed that in the present case there is no express statutory or charter prohibition upon the corporation to purchase the property or mortgage it for the purchase money. At most, its acts were ultra vires, because outside the restricted permission of the charter. It is not necessary, therefore, to consider the distinction made by some of the adjudications between the two classes of cases. Hitchcock v. Galveston, 96 U. S. 341. The decided weight of modern an· thority favors the conclusion that neither iParty toa transaction ultra vires will be permitted to allege its invalidity while retaining its fruits. The question has frequently been considered in cases where a corporation, suing to recover upon a contract which has been performed on its side, is met with the defense that the contract was ultra vires, or prohibited by the organic law of the corporation. Whitney Arms Co. v. Barlow, 63 N;-Y. 62; Oil Creek d: A. R. Co. v. Penn. Transp. 00. 83 Pa. St. 160; Ely v. Second Nat. Bank, 79 Pa. St. 453; Gold Minin,CJ 00. v. Nat. Bank, 96 U. S. 640; Nat. Bank v. Matthews, 98 U. S. 621. The latter case is a forcible illustration of the rule generally adopted. There a national banking association was proceeding to enforce a deed o,f trust given to secure a loan on real estate made by the association in contravention of section 5136, Rev. St., prohibiting by implication such an association from loaning on real estate, and the maker of the trust deed sought to enjoin the proceeding upon that ground. The court, speaking through Mr. Justice SWAYNE, cite with approval Sedg. St. & Const. Law, 73, in which the author states that the party who has had the benefit of the agreement will not be permitted to question its validity when the ques-
894 tionis one of by a Another clasl of 'O$.f$etl is where the corporation itself. attempts, to, set up .its own want of power" in order. to, defeat an, agreement or transaction which is an executed one .as to.the other pal't.y, and from which the corporation has derived all tthatit was entitled to. Such cases were Parish v. Wheeler, 22N:. Y. 494; Bissell v. M. S. ct N. I. R. Co. Id. 258; Hays v. Galion Gas Co. 29 Ohio St. 330-340; Attleborough Bank v. Rogers, 125,MIWS. 339; McCluer v.,Manchester R. Co. 13 Gray, 124:; Bradley v. Ballard, 55 Ill. 418; RutlandctB. R. Co.v.Proctor, 29 Vt., 93. In the.fi.rstof these cases the court say: "It is now' very well settled that a corporation cannot avail itself of the defense of ultra vires when the contrachlias been in good ·faith fUlly performed by th!'l other party, and thEl corporation has had the full benefit of the performanooand of the contract. If an action ca,nnot be brought directly upon the agreement, either equity will grant relief or an action in some other form will prevail. The present ease is phenomenal in the audacity of. the attempt to equity to assist a corporation in repudiating its obliinduce a without offering to retUl,'u the property it gations to quired by its :l1nauthorized contract with them.' The fundamental maxim is t,hat he who seeks equity must doeqnity. Every stockholder of the corporation when he acquired his stock took it with notice explicitly in his certificate that his interest as a. stockholder was snbordmate. to the rights of the holders of the mortgage bonds. It is now contended that if there is obligation Qn the pitrt of the corporation to pay for the property it purchased,it is not to pay what it agreed to, ,but to pay a less consideration, because the property was price agreed to be paid. The court ",ill not compel the not worth bondholders ente{upon any such inquiry. They are entitled to set on their own property; When the complainant offers their own to reconvey property inconsideration of which it created its mortgage honds if will have taken the first step towards reaching a position whichtilay entitle it to be heard.. It may be said, in conclusion, that there would be no difficulty, well recognized principles, in prodestruction'of their claims upon tecting .the bondholders against the theory of a vendor's lien for the money. The taking of so far from evidelfcing an intention to a mortgage by ,their evidence to the contrary waive the lien,is The bill 18 dismissed, with costs. . ". .
on
"
.',
TRUSTEES OINOINNhf saUTRERNRAtLWAY V. GUENTRBRo
3"93
TRUSTEES 01<' THE CINCINNATI SOUTHERN RAILWAY iJ. GUENTHER,
Trustee. etc. " (Circuit Court, E. D. Tenne88ee. 1. " AUTHORITY OF TAX COLLECTOR."
18, 1884.)
A tax collector has no authority to compromise a claim against a tax-payer. "
2. TAXATION-UNCONSTITUTIONAL ASSEBBMENT-ESTOPPEL.
In Tennes,ee, when taxes have .been assellsed and collected" under an unconstitutional statute, the municipality receiving them is. not estopped by such receipt from disputing tliecorrectness of the valuation and lIUlkmg a reaSSCBBment. The statute of Tenqessee empowering collectors of taxes to assess property which, bv mistake," has escaped assessmerlt in regularcourse, applies to the property·of railroads as well as to that of private individuals.
3.
SAME-ASSESSMENT BY CoLLECTOR-RAII.ROAD PROPERTY.
4" SAME-UNEQUAL VALUATIONS-VALIDITY Oll' ABBBSBMENT.
An exaggerated valuation intentionally P!lt upon a particlliar class of property renders unconstitutional a tax imposed in accordance therewith; but the tax-payer may be required to pay the amount justly due, without the formality of a new assessment. " The value of railroad property Is to be determined largely' by reference to present and prospective profits, and not by the cost of construction alone. "
5.
VALUE OF RAILROAD PROPERTY.
In Equity.
KEy, J. Complainants own a railroad extending ftomCincinnati, Ohio, to Chattanooga, Tennessee. This line of Roane county, Tennessee, for the distance of 15 miles Bnd a half. An act of the legislature of Tennessee, passed March 24, 1875, p. 100, provides for a board of railroad :tax assessors, who are to assess the taxable value of the railrol1d property of the state, and how the same is to be apportioned to the different counties through which roads run. Under this st$.tute the complainants were 'assessed for for the and on behalf of the county of Roane the sum of year 1881, which assessments were paid. .A,.t the September term, 1881. of the supreme oourt of Tennessee, it was decided that the mode of assessment pronded by the act of 1875 wlLsuncdnstitutional. Chattanooga v. Railroad 00. 7 Lea, 561. On February 15, 1882, the that the respondent issued a citation or notice to complainants assessments under the act of 1875 were' unconstitutional, and that the taxes paidforthe years 1880 and 1881 paii:lllpon an undervaluation, and notifying complainants to Rvpea'rfor the purpose of making a proper assessment. Complainants did not appear, and respondent proceeded' to make new' assessments, aocorcling· to' which the taxes due the state and Roane cOlinty for the year 1880 am9unted to $5,504.79, and for ,the year 1:881, $5,566;68.,' ,Gompl1liinants appealed from this assessment to the chairman of the county court of
O. D. McGuffy and Thornburgh if Andrews, for James Sevi.er and Luckey f£ Yoe, for respondent.
.