RICHMOND GUANO CO. v. FARMERS' COTTON SEED OIL MILL & GINNERY CO. et al., 126 F. 712

MORRIS, District Judge. This was a creditors’ bill filed by the Richmond Guano Company, a corporation of Virginia, against the Farmers’ Cotton Seed Oil Mill & Ginnery Company, a corporation of South Carolina, and the City National Bank of Greenville, S. C. The complainant alleged that it was a creditor of the oil mill company for $18,591.30 upon three promissory notes executed by the oil mill company and given to it for goods furnished. That the oil mill company was also indebted to the City National Bank in the sum of $7,500, which the bank was threatening to put in suit.

That there were other claims against the oil mill company amounting to $13,500, on which suits had been entered. That if the suits were allowed to go to judgment the result would be disastrous to other creditors. That the directors were not in accord as to the proper course to pursue, and incapable of rescuing tlie company from its difficulties. The prayer for relief was that all creditors be required to prove their claims and be enjoined from enforcing their claims otherwise than in this suit, and for the appointment of a receiver to take possession of and sell all the assets, and for other relief.

Upon the bill and affidavits the Circuit Court appointed a temporary receiver, and after a hearing appointed a permanent receiver. Afterwards a sale of all the property of the oil mill company, except its choses in action, was decreed, and under it the property was sold and the money brought into court for distribution. The defendant the City National Bank, by answer which it filed, denied the validity of the claim set up by the complainant, upon the ground that it arose from a transaction which the oil mill company had no- corporate authority to make and which was ultra vires.

The trial judge who heard the case below so decreed, and disallowed the complainant’s claim in the distribution among creditors. This disallowance constitutes the first assignment of error in this appeal by the complainant.

In the charter of the Farmers’ Cotton Seed Oil Mill & Ginnery Company the general purpose of the corporation and the nature of the business it proposed to do is stated to be “to build and establish a cotton seed oil mill, and ginnery in connection therewith, and to compress cotton seed oil; to' buy cotton seed; to sell their products; manipulate and compound cotton seed meal with other substances and elements so as to make fertilizers to be sold for fertilizing lands, and to gin and compress cotton into bales for the market.” The transactions with the Richmond Guano Company consisted of contracts signed in December, 1900, and March, 1901, for, in all, 1,500 tons of the Richmond Guano Company’s brands of fertilizers, to be delivered to the mill company in car-load lots at Greenville, S.

C., or at certain other points, at prices named. It was agreed by these contracts that all fertilizers sold by the oil mill company for cash should be settled for in cash on or before May 1, 1901, and on that day notes for the remainder should be given, payable one half November x, 1901, and the other half December 1, 1901. It was agreed that ail the fertilizers and all the proceeds thereof were to remain the property of the Richmond Guano Company, and be held by the oil mill company in trust for it until settlement in full.

It was further agreed that all notes taken from purchasers for credit sales should be made payable not later than October 15, 1901, and should be turned over to the Richmond Guano Company on or about May 1, 1901, as collateral for the payment of the promissory notes given by the oil mill company.

On the evidence in the record it seems to us that no question can be made but that the fertilizers called for by the contracts, and for the purchase price of which promissory notes were given by the oil mill company to> the guano company, amounting to $18,591.30, were furnished, and were sold by the oil mill company without manipulation of any kind, and a large percentage never came to the mill, but by the direction of t-he oil mill company was shipped to other places.

So far as the oil mill company is concerned, it is a clear case of dealing in fertilizer manufactured by another, and a distinct business not in any way incidental to the manufacture of a fertilizer by compounding cotton seed meal with other substances. .We entirely agree with the learned district judge, who heard the case below, that this was a transaction beyond the scope of the corporate power of the oil mill company, and in no way reasonably necessary or proper in order to enable it to carry on its authorized business.

Its business was to establish a cotton seed oil mill and a ginnery, to compress cotton seed oil, to gin and compress cotton into bales, to compound cotton seed meal into fertilizers, to buy cotton seed, and sell its products. None of these purposes require or imply in any way large buying and selling of fertilizers manufactured by others as a business incidental to the authorized purposes of the charter. Safety Insulated Wire & Cable Co. v. Mayor, etc., of Baltimore, 74 Fed. 363, 20 C. C. A. 454, and cases cited in the opinion.

The learned trial judge ruled that the contracts between the Richmond Guano Company and the oil mill company were ultra vires and void, and we think he was right. But we are of the opinion that the claim of the Richmond Guano Company to recover for the value of. the fertilizers shipped by it to the oil mill company, and sold by the oil mill company, does not require that the contract should be enforced as an authorized contract. The contract is not malum in se, or tainted with any fraud. It is an ordinary mercantile contract, which a creditor of the oil mill company contends should be treated as a nullity.

If it is annulled, its rescission requires that the oil mill company, upon its disaffirmance, should return the goods received under it. It cannot both disaffirm the contract and keep the goods. Or, if it has put the goods beyond its control, it must answer for their value, not in affirmance of the contract, but in consequence of its disaffirmance. We think this highly equitable principle is well established.

In Brice’s Ultra Vires, 649, the general proposition is stated that “a corporation must in every case of an ultra vires engagement, entered into in bona fides, account for any benefit derived from the engagement,” and the author comments on that proposition as follows : “Why should not a corporation be always liable to refund the money or property of a person which it has obtained from transactions beyond its capacity but not otherwise improper, or, if unable to return it in specie, to pay for the benefit that it has obtained thereby?

To say that a corporation cannot sue or be sued upon an ultra vires arrangement is one thing; to say that it may retain the proceeds thereof which have come into its possession without making any compensation whatever to the person from whom it had obtained them is something very different, and savors very much of an inducement to fraud.” Slater Woolen Co. v. Lamb, 143 Mass. 420, 9 N.

E. 823, is a case, often cited, in which a corporation authorized to manufacture woolen fabrics bought dry goods and groceries to run a general store, and when sued on the contract of sale the defendant corporation pleaded ultra vires. The Supreme Judicial Court of Massachusetts said: “If it be assumed in favor of the defendant that the contracts of sale in the case at bar were ultra vires of the corporation, they were not contracts which were prohibited, or contracts which were void as against public policy or good morals; the defect in them is that the corporation exceeded its powers in making them.

The defendant under the contracts has received the goods, and retained and used them. Either the corporation must lose the value of its property or the defendant must pay for it. In such an alternative courts have held, on one ground or another, that an action can be maintained when the sole defect is a want of authority on the part of the corporation to make the contract. We think the corporation can maintain an action of contract against the defendant to recover the value of the goods.

The defendant is not permitted to set up this want of authority as a defense; and, as the form of the transaction was that of contract, such should be the form of the action. We are not required to determine whether an action can be maintained to recover the price, as distinguished from the value of the goods, as no exception has been taken to the measure of damages.” The same general principle is stated in 5 Thompson on Corporations, §§ 6015-6018. Also in 27 Am. & Eng. Ency. of Law (1st Ed.) 366-371. Also in Main v. Casserly, 67 Cal. 127, 7 Pac. 426, and in Memphis, etc., R. R. v. Dow (C. C.) 19 Fed. 388-393.

In Logan County Bank v. Townsend, 139 U. S. 67, 11 Sup. Ct. 496, 35 L. Ed. 107, county bonds had been placed with a national bank under an agreement, which it was afterwards held the bank had no power to make, but by which it agreed to return the bonds to the plaintiff upon being tendered back the price which the bank paid the plaintiff for them. The plaintiff, under the terms of the contract, demanded their return, and the bank refused, and the plaintiff brought suit.

The Supreme Court held that if the bank was without corporate power to purchase the bonds under such an agreement, and repudiated it as a contract it had no authority to make, then it had no right to retain the bonds, and, upon being repaid the money it had paid out, should return them, and upon refusal became liable for the value of the bonds upon grounds apart from the contract under which it obtained them.

The Supreme Court held that even though the bank had no authority to purchase the bonds, yet it was not exempt-from liability to the plaintiff for the difference between the price it paid for them and their value at the time it refused to return them. In the opinion delivered by Mr. Justice Harlan many cases are cited, and this quotation is given from Marsh v. Fulton County, 10 Wall. 676-684, 19 L.

Ed. 1040: “The obligation to do justice rests upon all persons, natural and artificial, and, if a county obtains the money or property of others without authority, the law, independently of any statute, will compel restitution or compensation.” The same rule is also asserted in Spring Co. v. Knowlton, 103 U. S. 49, 26 L. Ed. 347. In Pullman’s Car Co. v. Transportation Co., 171 U. S. 138-150, 18 Sup. Ct. 808, 43 E.

Ed. 108, the same rule was applied to a contract which was not merely beyond the power of the defendant corporation to- make, but was also void as against public policy, unless by law expressly permitted. The facts were that sleeping cars and their equipments had been put into the possession of the Pullman Car Company under a lease for 99 years, which, after 15 years’ operation and acquiescence by both parties, was declared ultra vires and void.

The court held that the property originally transferred under the terms of the void lease must be returned, but, as it had been mingled with the lessee’s property and practically had disappeared, its value must be paid to the lessor. The court said, “The right to a recovery of the property transferred under an illegal contract is founded upon the implied promise to return or make compensation for it.” The court, on page 151, 171 U. S., and page 813, 18 Sup. Ct., 43 L. Ed. 108, gives a reference to a number of cases applying the principle to different facts.

There is a well-recognized distinction between executory and executed contracts in respect to the doctrine of ultra vires. Courts will not only refuse to compel execution of such contracts, but will interfere to restrain performance when their jurisdiction is properly invoked; but, when one party has received the consideration of such a contract and then disaffirms it, he cannot in good conscience be permitted to retain what he has unlawfully obtained. We know of no good reason why this principle should not be applied to the present case.

If the transaction is to be regarded as one in which the oil mill company was made the agent of the guano company to sell the goods shipped to it, all the more is it bound to return either the stipulated proceeds or the goods. It is obvious, however, that the contract partook more of the nature of a sale than of an agency.

The oil mill company agreed to give its promissory notes for the purchase price, or for that part which remained unpaid at the date when the notes were to be given, and, as collateral security for the payment of its notes, it agreed to turn over the notes taken by it from its vendees until its obligations to the Richmond Guano Company were settled in full. In Ex parte White, In re Nevill, L. R. 6 Ch. 397, and 24 L. T. 45, it was said by Mellish, R.

J.: “If the consignee be at liberty, according to the contract between him and his consignor, to sell at any price he likes, but is to be bound if he sells the goods to pay to the consignor for them at a fixed price and at a fixed time, in my opinion, whatever the parties may think, their relation is not that of principal and agent. The contract of sale which the alleged agent makes with his purchaser is not a contract made on account of his principal, for he is to pay a price which may be different, and at a time which may be different, from that fixed by the contract.

He is not guarantying the performance by the persons to whom he sells of their contract with him, which is the proper business of a del credere agent, but he is to undertake to pay a certain fixed price for the goods, at a certain fixed time, to his principal, wholly independent of what the contract may be with the persons to whom he sells, and my opinion is that, in point of law, the alleged agent in such case is making on his own account a contract of purchase with his alleged principal, and is again reselling.” In Gibney v.

Curtis, 61 Md. 192-198, these views of Rord Justice Mellish were adopted as sound, and were applied. It does not appear that any of the fertilizers were ever tendered back, and it is to be presumed that the oil mill received the benefit of them. So much as appears in the record tends to show that they were sold. The secretary and treasurer of the oil mill company states that, SO' far as he remembers, they were sold in the original packages, or repacked and sold, and there is no testimony that any of the fertilizers remained unsold.

It therefore seems that it is immaterial whether the oil mill company obtained the fertilizers as purchaser or as agent, for it is still true that it has converted the goods to its own use, and has not paid so much of the agreed price as is represented by its promissory notes, except so much as has been realized out .of the collateral notes. It does not seem to us that the giving of the collateral notes as security changes the nature of the transaction.

The transaction was made by the president of the oil mill company in good faith, and, so far as appears, at the fair wholesale price for the fertilizer contracted for, with the expectation of a profit for his company. The secretary and treasurer of the oil mill company testified that in his opinion the handling of the purchased fertilizer helped the sale of their own products to the farmers. The transaction, for all that appears, was made in good faith, and for profit and incidental advantages to the oil mill company. There is no evidence that it was not profitable to the oil mill company.

The objection to the claim of the guano company is not made by the oil mill company nor by any stockholder, but by a creditor whose dividend may have been increased by the transaction with the guano company. The goods cannot now be returned, and, as there is nothing to show that their value is different from the selling price, we can see no reason why the value of the goods, for the purposes of the oil mill company’s implied liability, should be assumed to be different from the contract price.

We think that the claim of the Richmond Guano Company, after the deduction of all proper credits derived from all sources, should be allowed. That the balance of the fee to the complainant’s solicitor, to the amount which in the record he stated he was willing to accept, should be allowed. That the commission to an attorney for collection, stipulated in the notes given to the guano company, be not allowed. The costs of this appeal to be paid out of the funds. The decree is reversed, with directions to proceed in accordance with this opinion. Reversed.