G. V. B. MIN. CO. v. FIRST NAT. BANK OF HAILEY, 95 F. 23

HAWLEY; District Judge, after stating the facts, delivered the opinion of the court. We have stated the facts in this case at great length, in order that the general expressions in this opinion may be'interpreted and understood in the light of all the circumstances disclosed by the record. The peculiar and irregular manner in which the business of the corporation, appellant herein, was transacted, necessarily leads to many complications, and presents several legal questions of an important character, as to how far such transactions can be upheld by the courts.

Conceding, as we shall, for the purposes of this opinion, that the stockholders of the corporation might have objected to being bound by the acts of Bryan and Venable, if they had made timely objections thereto, the answer is that they did not make any such objections, and are not asking for any relief herein, except under the name of the corporation.

Can appellant take any advantage of its own wrong or of any of the irregular acts of its officers? .Can it, after allowing Bryan and Venable to pursue the course they did, holding them out to the world as qualified to transact the business in the manner stated, be allowed to deny their authority? Should a court of equity visit their faults of omission or commission upon innocent parties who acted in good faith, honestly believing that Bryan and Venable had authority from the corporation?

Do the facts show, as appellant claims, that the appellee had full knowledge of the true state of facts, and acted with its eyes wide open, knowing that the acts of Bryan and Venable were without authority of law? It may be admitted that the bank seems to have transacted business with Bryan and Venable in a careless manner, without much regard to strict banking principles; but it is not shown that, as against the GL V. B. Mining Company, or any of its stockholders, it has been guilty of any wrongdoing which, under the law, in the light of all the facts, will prevent it from maintaining this suit.

Before proceeding to a discussion of the interesting legal questions involved herein, we deem it proper to make some general oh-nervations as to the nature and character of the corporation that was formed by Bryan and Venable, conducted and managed by them until July 11, 1895, and afterwards by H. K.

Thurber, because we are of opinion that, at the outset, some distinction ought to be made between genuine, bona fide corporations, organized for the legitimate purpose of conducting a business which requires a combination of .persons and of capital, to make the business (successful, as distinguished from the character of a corporation organized and conducted, as this was, with a view to conduct and carry on the business in the same manner and way as if no corporation, in fact, had been formed. In the early history of the transactions, Bryan and Venable were in fact (lie corporation.

They acted in the same manner-transacted business in the same way — as well after, as before, the corporation was formed. The court ought not overlook these peculiar facts and conditions. In endeavoring to sustain and uphold a law made for the protection of innocent stockholders, we should be careful not to announce a doctrine that would permit the leading stockholders, under the guise of a corporate name, to commit frauds by taking advantage of their own wrong.

While Bryan and Venable were directors in name, they were also the principal stockholders in fact, and were merely using the corporate name for the advantage and benefits which they might themselv.es derive therefrom. We have said that Bryan and Venable constituted the corporation from the time of its organization up to, and at the time of, the execution of the notes and mortgage upon which this suit was brought, and it might be added that they continued as such until H. K. Thurber assumed the management and control. Venable thereafter acted with the Thurber party.

In the light of the entire history of the corporation, as shown by the record in this case, it might be, perhaps, more properly said that Bryan, until July 11, 1895, by the consent of all parties interested and concerned, and H. K. Thurber thereafter, were to all intents and purposes the G. V. B.

Mining Company; that, as was said by the circuit court, “the so-called directors and officers in New York constituted simply the dumb machinery, entirely directed by these parties, and through whom they operated when it was necessary to invoke the legal status of the corporation to strengthen their hands or advance their objects.” In the consideration of the legal questions herein .presented, it must constantly be borne in mind that we are confining ourselves to the peculiar facts established by the evidence, as distinguished from the general principles applicable to the power of officers to bind the corporation.

We are called upon to deal solely with exceptions to the general rule. In this view it becomes unnecessary to discuss the various authorities cited by appellant’s counsel as to tlie general manner in which corporations, are legally authorized to transact their business. The vital question is whether, from the manner in which the G. V. B. Mining Company transacted its business, it can take advantage of its acts against the appellee. We are of opinion that, from the facts, it cannot do so.

As to the power and authority of Bryan, as president, to incur the indebtedness and to give notes in the name of the corporation, but little need be added to the general observations heretofore stated. Courts must deal with persons ahd corporations as they find them dealing with each other.

Where the president of a corporation is given full power and authority to conduct and manage its' business, and deal with the property and affairs of the corporation in such a manner, and for such a length of time, as to justify others with whom he transacts business in believing that he had authority to do the acts in the manner and way performed by him, the people with whom he transacts business have the right to deal with him upon the assumption that he has such authority; and the corporation, having knowledge of the exercise of such acts, and of the manner in which the corporate business was transacted, cannot thereafter, to the injury and prejudice of such parties, deny his authority, or disaffirm or set aside his acts.

Merchants’ Nat. Bank v. State Nat. Bank, 10 Wall. 604, 644; Martin v. Webb, 110 U. S. 7, 3 Sup. Ct. 428; Allen v. Wilson, 28 Fed. 677, 680; Poole v. West Point Butter & Cheese Ass’n, 30 Fed. 513, 520; Johnson v. Insurance Co., 46 Neb. 480, 490, 64 N. W. 1100; Carpey v. Dowdell, 115 Cal. 677, 683, 47 Pac. 695; Union Gold Min. Co. v. Rocky Mountain Nat. Bank, 2 Colo. 248, 257; Illinois Trust & Sav. Bank v. Pacific Ry. Co., 117 Cal. 332, 346, 49 Pac. 197, 202; Fay v. Noble, 12 Cush. 1, 17; Lee v. Mining Co., 56 How. Prac. 373; Calvert v. Stage Co., 25 Or. 412, 36 Pac. 24; Carrigan v.

Improvement Co., 6 Wash. 590, 34 Pac. 148; Sparks v. Transfer Co., 104 Mo. 531, 539, 15 S. W. 417. Moreover, the corporation for several years had the benefit of the money drawn from the bank, and upon divers notes, which were renewed by the notes which the mortgage was given to secure, and cannot, after such length of time, never having made any objection thereto during the transactions, be heard to deny the validity of the same. Union Gold-Mining Co. of Colorado v. Rocky Mountain Nat. Bank, 90 U. S. 640; Pittsburg, C. & St. L. Ry. Co. v. Keokuk & H. B. Co., 131 U. S. 371, 381, 9 Sup.

Ct. 770; Construction Co. v. Fitzgerald, 137 U. S. 98, 109, 11 Sup. Ct. 36; Wood v. Waterworks Co., 44 Fed. 147, 150; Railroad Co. v. Kittel, 2 C. C. A. 615, 52 Fed. 63, 73; Railway Co. v. Sidell, 14 C. C. A. 477, 67 Fed. 464, 469; Hardware Co. v. Phalen, 128 Pa. St. 110, 118, 18 Atl. 428; Allen v. Power Co., 13 Wash. 307, 309, 43 Pac. 55; Gribble v. Brewing Co., 100 Cal. 67, 71, 34 Pac. 527; Bradley v. Ballard, 55 Ill. 413, 419. In Crowley v.

Mining Co., 55 Cal. 273, 275, the court said: “The common-law rule, that a corporation has no capacity to act or to make a contract, except under its common seal, has been long since exploded in this country. Even in England, it has been found to be impracticable, so that the classes of cases which constitute exceptions to the rule have become so numerous that the exceptions have almost abrogated the rule. In the United States, nothing more is requisite than to show the authority of the agent to contract.

That authority may be conferred by the corporation at a regular meeting of the directors, or by their separate assent, or by any other mode of their doing such acts.” If this were not so, “it would,” as said by Redfield, C. J., in Bank of Middlebury v. Rutland & W. R. Co., 30 Vt. 159, 170, “become impossible to dispose of such contracts with any hope of reaching the truth and justice of the rights and duties' of the several parties involved, unit this is certainly nothing of which the corporation can complain.

It is merely holding them to such rules of action as they see fit to adopt for their own guidance and the transaction of their business.” In Sherman v. Fitch, 98 Mass. 59, 64, the court, speaking of the authority of the president to execute a. mortgage in behalf of the corporation, said: “It is not necessary that the authority should be given by a formal vole. Such

an act by the president and general manager of the business of the corporation, with tin: knowledge and concurrence of the directors, or with (heir subsequent and long-continued acquiescence, may properly be regarded as the act of the corporation.

Authority in the agent of a corporation may be inferred from the conduct of its officers, or from their knowledge and neglect to make objection, as well as in ¡he ease of individuals.” The principal contention of appellant is that, whatever the rule may he as to the indebtedness incurred by Bryan and Venable, while they controlled and managed the property of the corporation, or as to the validity of the notes executed by tlic-m as the notes of the corporation, the mortgage is absolutely void, because it was not executed in the manner provided for by the statute of Yew York, which required, as a condition precedent to the execution of the mortgage, the writ ten assent of two-thirds of the stockholders, in the manner therein provided.

Act to Amend Stock Corporation Law, approved May 18, 1892 (Laws N. Y. 1892, vol. 2, c. 688). In support of his contention appellant’s counsel cites Vail v. Hamilton, 85 N. Y. 453; Bank v. Averell, 96 N. Y. 467; In re Wendler Mach. Co., 2 App. Div. N. Y. 16, 20, 37 N. Y. Supp. 444; Sugar Co. v. Whitin, 69 N. Y. 328, 333; and Pauling v. Steel Co., 94 N. Y. 334. In the Vail Case there was no assent given as required by the statute, or in any other manner, and the court held the mortgage to be invalid.

In the Rochester Savings Bank Case, it was held, as in all the cases, that such an assent is an indispensable condition of the creation of a valid mortgage; but, where such assent was not given at the time the mortgage was executed, It would be validated, in the absence of any intervening rights, by a subsequent assent, which would operate as of the time of the execution of the mortgage and make it valid.

The court, among other things, said: “The obj'ect of the legislature, in requiring such assent, was the protection of stockholders against improvident, collusive, or unwise acts of the trustees, the governing body of the corporation, in incumbering the corporate property. Sugar Co. v. Whitin, 69 N. Y. 333. That the enactment was in the interest of stockholders is indicated by their designation as the assenting body. * * * Tlie stockholders of a corpora! ion are the equitable owners of the corporate property.

The trustees are the managers. * * * The act of 1864 put it in the power of the stockholders to prevent any incumbrance of the corporate property by the act of the trustees alone.” In Sugar Co. v. Whitin the court held that the statute under con-sidera,lion was intended simply to- protect the stockholders from improvident or corrupt acts of the officers of the corporation, and was not enacted because the mortgaging of corporate property was regarded as improper per se. In the course of the opinion, Church, C.

J., said: “Without considering the question whether any but stockholders may inter* pose the objection to the authority exercised in this case, the inference that the general purpose and design of the act was in the interest of stockholders only, has some bearing upon the question presented as to the proper rule of construction to be adopted of the paper produced as an assent of the stockholders.

The officers of a corporation are the agents of the stockholders, who occupy, in some respects, the character and position of principals, and this relation is recognized in the act in question, permitting the mortgaging of corporate property. The officers were prohibited from mortgaging, but may do it with the consent of the stockholders. The act of mortgaging is not deemed illegal; but the principal must assent in writing, and, to make the provision of practical value, the difficulty of procuring the assent of every stockholder was avoided by permitting the owner of two-thirds to assent.

It is important to observe that the statute does not prescribe any particular form of assent, nor what it shall specify or contain. It only requires an assent in writing to secure a debt by mortgage.

The statute should receive a practical, and not a technical, construction, and especially in the absence of fraud, and in the absence of any objection on the part of those for whose benefit the proviso was inserted, we are not called upon to exercise great astuteness in discovering defects which are not of such a substantial and radical character as to render the assent ineffective for the purpose designed. * * * He [appellant] seeks to gain a preference, not by objecting either that the amount of the debt or its nature was not correct and legitimate, nor claiming that he was in manner deceived or misled, but by criticising the form in which those interested saw fit to express their assent.

Assuming his right to object, we think the defects must be so radical that an intention to consent cannot be inferred.” In Pauling v. Steel Co., the court, referring to Sugar Co. v. Whitin, said: “It is, at least, doubtful whether anybody but stockholders can complain that the condition was not complied with.” The mortgage in the present case was executed by the “G. V. B. Mining Co. [L. S.], by G. V. Bryan, President,” and indorsed thereon is the following: “I hereby assent to the making of the mortgage. G. W.

Venable.” Bryan and Yenable, be it remembered, at that time owned more than two-thirds of the stock of the corporation. In fact, they owned all the stock except 352 shares, as shown by the preponderance of the evidence given at the trial. Following the reason and spirit of the decisions in the state of New York, we think the acts of Bryan and Yenable, in the absence of any allegation or proof of fraud upon their part, constituted a substantial compliance with the statute, and that the corporation is not in a position to'make any objection thereto upon this ground.

It is next claimed that the mortgage is not the deed of the corpora tion, because the seal thereto affixed by Bryan is not its corporate seal. The by-laws of the corporation provide that “the trustees shall provide a seal, with a suitable device, and containing thereon the corporate name of the company, which shall be in charge of the secretary or treasurer, and said seal shall be affixed to all certificates of stock, and to such contracts and agreements as is required by law.” The mortgage in the present case closes with the words: “In testimony whereof, the said party of the first part, by G. V.

Bryan, its president, has hereunto subscribed its name, and affixed its corporate seal, the day and year first above written.” There are several authorities which hold that, in the execution of important contracts, deeds-, and mortgages by a corporation, it is essential that the corporate seal should he attached. Many of these cases are based upon the doctrine which prevailed in former times, when the use of seals containing devices symbolical of the individual or corporation to which they belonged was quite common.

These cases are akin to others, which, for many years, declared that a seal must be impressed on wax, wafer, or some other adhesive or tenacious substance, instead of being impressed on paper; in regard to which Mr. Justice Grier, in Pillow v. Roberts, 13 How. 472, 474, said: “It is time that such objections to the validity of seals should cease.” But this admonition not having produced the effect suggested, the legislature of several of the states have enacted statutes providing just what kind of seals shall he used and how they shall be affixed. In others the use of the seal has been dispensed with.

Of course, in such states, the statute governs. While it is always safer for a corporation to use its corporate seal, if one has been adopted, in order to avoid objections, yet its use is not absolutelv necessary to (be validity of the instrument. As was said by the court in Ford v. Hill (Wis.) 66 N. W. 115, 118: “The old doctrine that corporations can act only by deed or instrument under seal lias been very much modified.

It has given way to the pressure put upon it by the great growth of corporate transad ions, and the necessity for greater freedom in their operations for the convenience of business.” Where an instrument, which requires a seal, is in all other respects properly signed and executed, it should not be declared invalid because the corporate seal was not attached, where, as here, it affirmatively appears that the “[L. 8.]” was adopted and used for the occasion as the seal of the corporation. Bank of Middlebury v. Rutland & W. R. Co., 30 Vt. 159, 171; Thayer v. Mill Co., 31 Or. 437, 444, 51 Pac. 202; 1 Mor. Priv.

Corp. (2d Ed.) § 339; 2 Cook, Stock, Stockh. & Corp. Law (3d Ed.) § 722; B. S. Green Co. v. Blodgett, 159 Ill. 169, 174, 42 N. E. 176; Proprietors, etc., v. Hovey, 21 Pick. 417, 428; Porter v. Railroad Co., 37 Me. 349; Eureka Co. v. Bailey Co., 11 Wall. 488, 491; Navigation Co. v. Hooper, 160 U. S. 514, 518, 16 Sup. Ct. 379; Tenney v. Lumber Co., 43 N. H. 343, 350; Johnston v. Crawley, 25 Ga. 316, 326; 1 Devl. Deeds, § 337.

A contract of a corporation which is ultra vires is something 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. Such a contract 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, hut 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 could give the unlawful contract any validity, or be the foundation of any right of action upon it. But, when a corporation is acting within the general scope of the powers conferred upon it by the legislature, the corporation, as well as persons contracting with it, may be estopped to deny that it has complied with the legal formalities which are prerequisites to its existence, or to its action, because such requisites might in fact have been complied with. The doctrine of ultra vires has been often said to rest upon three distinct grounds:

(1) The obligation of persons dealing with a corporation to take notice of the legal limits of its powers; (2) the interests of the stockholders not to be subjected to¡ risks which they have never undertaken; and (3) the interest of the public that the corporation shall not transcend the powers conferred upon it by law. The authorities bearing upon these general principles are well settled, and are clearly stated in Central Transp. Co. v. Pullman’s Palace-Car Co., 139 U. S. 24, 59, 11 Sup. Ct. 478, and Bank v. Kennedy, 167 U. S. 362, 368, 17 Sup. Ct. 831, and in the numerous authorities there cited.

It is manifest therefrom, as well as from the principles hereinbefore announced and hereinafter stated, that the doctrine of ultra vires has no application to this case. The corporation, as we have already shown, had the unquestioned authority and power, unde'r the law, to execute the notes and mortgage in question, and it cannot, therefore, be claimed that their execution by the president was ultra vires.

The stockholders are bound by their consent, as well as by their failure to make objections, to the manner in which the business was transacted, and the parties with whom the corporation transacted its business had the right to believe that it was not exceeding its powers'. The general public are not interested in this suit. In McCracken v. Robison, 6 C. C.

A. 400, 57 Fed. 375, 377, the court held that directors who own all the stock of a corporation are not within the rule prohibiting persons in a fiduciary relation from contracting for their own advantage in the name of the beneficiary, and such a contract, made in the name of the corporation by the unanimous consent of the directors, is not invalid, as against public policy.

Among other things, the court said: “The defendants, by confounding names with things and form with substance, have built up a theory to shelter themselves from performing their own part of the contract, which is as unsound as their own conduct is dishonest.” In Barr v. Railroad Co., 125 263, 273, 26 N.

E. 145, the court, among many other things applicable to this case, said: “If the company’s directors were interested in the work and profits of construction, and evaded a direct contract through the form or device of an intermediary contractor, that was a matter for the company or for its stockholders to take hold of; but the stockholders and the members of the syndicate were the same persons, and, however wrong the transaction might be if other persons were concerned, here no injury was effected to any one interested in the corporation, and, however illegal the transaction, there was no person apparently to complain of it.” See, also, Wood v.

Waterworks Co., 44 Fed. 146, 151, and authorities there cited. It is evident that neither Bryan nor Venable, if they had continued in charge of the corporation, could be heard to say that their acts were illegal, without authority of law, and wholly void. It cannot consistently be said that the acts of the Thurber. faction stand in any better light. When they took charge of the mines on July 11, 1895, which was within a month after the execution of the mortgage in question, they apparently endeavored to be honest and just to all parties concerned.

They continued working under the lease and agreements referred to in the foregoing statement up to October 6, 1897, with full knowledge of all the facts, without interposing any objection to the manner in which the indebtedness was incurred and mortgage executed.

Then, when they found they would not be able lo pay the debts of the corporation, as they had agreed to do and partially did, they determined to take advantage, if they could, of all the acts of Bryan, and, with Venable’s willing assistance, -save something for themselves from the general wreck, and to this end they procured their directors to pass a resolution “condemning as unauthorized the notes and mortgage in this suit, and empowering the president [Thurber] to resist this action,” and by this means they have endeavored to shield themselves from all wrong under ihe guise of the innocent name of the corporation.

As against the appellee herein, they have no superior equity, and the corporate name ought not to be used, and cannot be used, for the purpose of avoiding the payment of the debts of the corporation incurred under conditions which made the corporation liable. To so hold would lead to frauds innumerable. However improper, illegal, or unwarranted Bryan’s conduct may have been, it is transparent that be has been distanced in the race by bis competitor Thurber, and that the corporation will have to hear the sins of both.

There is but one other point to notice, 'no testimony seems to have been offered upon the allegation in the complaint concerning the alleged mistake in the description of the property mortgaged, and the decree declares that this alleged error is “corrected to conform to the intent of the parties to said mortgage as to the premises and property which should be mortgaged thereby.” It is claimed that, the mortgage expressly covered the group by name, and that, under the allegations, must have covered the Sumol claim in question; that the answer simply denies that any mistake was made, and did not deny that the Bumol was a part of the group; and that it was therefore unnecessary to prove the facts alleged in the complaint.

The objection to this part of the decree was raised for the first time on appeal, and the court might for this reason be justified in not considering it; but inasmuch as the appellee “offered to release it from the effect of the decree,” and as it is stated in the brief that it "was written into the decree through inadvertence,” we are of opinion that the decree should be modified by striking out the order and description herein referred to, but that this correction should not affect the right of appellee to recover its costs. The decree, as modified, is affirmed, with costs.