De La Vergne Refrigerating Machine Company v. German Savings Institution/Opinion of the Court

The principal question in this case is whether, under the laws of New York providing for the organization of manufacturing corporations, such corporations are authorized to purchase the stock of a rival corporation for the purpose of suppressing competition and obtaining the management of such corporation.

The facts of the case are substantially as follows: The Consolidated Ice Machine Company (hereinafter referred to as the Consolidated Company) was a corporation organized under the laws of Illinois, and was engaged in the business of manufacturing and selling refrigerating and ice-making machines. The entire amount of issued stock of such corporation was $100,000, held in various proportions by the plaintiffs in this consolidated cause. Having become insolvent, the company, on October 14, 1890, made an assignment under the general laws of Illinois, for the benefit of creditors, to one Jenkins, who, at the date of the contract sued upon, was engaged in winding up its business. The assignment on its face purported to convey to Jenkins and his successors in trust the entire real and personal 'property and effects of every kind and description' belonging to the corporation, 'or in which it has any right or interest,' the same being fully and particularly enumerated and described in an inventory, which, however, does not appear in the record. Its assets consisted mainly of a plant for the manufacture of refrigerating and ice-making machines in Chicago; of patent rights, outstanding accounts, and the goodwill of its business, which appears to have been an extensive one.

It is asserted by the plaintiffs, who are stockholders in this company, that the assets exceeded in value the liabilities of the company, and that the company was not in reality insolvent, but had assumed contracts to such an extent that, with its limited capital, it was unable to carry them out.

However this may be, subsequently to the assignment, and on April 16, 1891, the company itself, by its president as party of the first part, and its stockholders as parties of the second part, entered into an agreement with the De la Vergne Refrigerating Machine Company, a corporation organized under the laws of New York (hereinafter called the Refrigerating Company), as party of the third part, and John C. De la Vergne, of the state of New York, president of that company, party of the fourth part. This agreement is the basis of the action. After reciting that the Refrigerating Company was willing to acquire such right as the Consolidated Company and its stockholders could assign in and to the assets of such company; that under the laws of Illinois the Consolidated Company was not entitled to the post session of its assets in the hands of the assignee until its obligations had been discharged; that the Refrigerating Company was incorporated with a stock of $350,000 when its assets were worth $1,400,000; and that its stockholders were considering a plan of increasing the stock to $2,000,000, of which $1,000,000 was to be turned over to the Consolidated Company under the terms of the agreement.

Therefore, in view of these facts, the Consolidated Company and its stockholders covenanted with the Refrigerating Company and its president, De la Vergne, to sell and convey unto the Refrigerating Company all their right, title, and interest in and to the assets of the party of the first part, subject to the payment of its obligations, and subject to the custody thereof in the legal custodian, R. E. Jenkins, assignee as aforesaid.

The second clause contained a covenant to issue to the stockholders of the Consolidated Company fully paid-up stock in the Refrigerating Company to the amount of $100,000 in certain specified proportions to each stockholder.

By the fourth clause, the stockholders agreed within ten days from the date of the agreement to assign to De la Vergne, for the benefit of the Refrigerating Company, all stock of the insolvent company which had been issued, and which they guaranteed had been paid in full; and within sixty days thereafter the Refrigerating Company and its president agreed to issue and deliver to the stockholders of the Consolidated Company stock in the Refrigerating Company to the amount of $100,000.

By the fifth clause, the stockholders in the Consolidated Company covenanted to accept, in lieu of the stock of the Refrigerating Company, $100,000 in cash, at the option of De la Vergne, the president of the company.

By the seventh clause, the stockholders of the Consolidated Company agreed that for a period of ten years they would not enter into or become engaged in the selling or making of refrigerators or ice machines, directly or indirectly, within the United States, excepting the state of Montana.

Within the ten days provided by the agreement, certificates representing one thousand shares of the stock of the Consolidated Company, with written assignments executed by the parties who held the certificates, were delivered to De la Vergne, although ninety-five of these shares were held by P. J. Lingenfelder and Leo Rassieur as executors, and ninety were held by them as trustees under the will of one Jungenfeld, deceased. These shares were assigned by the parties without an order authorizing them to do so from the probate court of St. Louis, in the state of Missouri, in which the estate of Jungenfeld was in the process of administration. Two days after the receipt of these certificates De la Vergne's attorney wrote to Mr. Rassieur, calling his attention to certain technical defects, which were immediately remedied by suitable instruments of further assurance. No objection was then made that the assignments of the executors and trustees were insufficient for want of an order of the probate court authorizing the same.

In the following July demands were several times made by Mr. Rassieur for himself and his associates for the $100,000 in stock or money stipulated by the contract, but no response was received until September, when Mr. Fitch, acting for the Refrigerating Company, announced for the first time that the defendants declined to carry out their part of the contract. The reasons for the refusal do not seem to have been substantial ones. The letter contained an announcement that Mr. De la Vergne's counsel was ready to return the papers sent to him to whomsoever was legally entitled to their custody. There was no reconveyance to the Consolidated Company of whatever was covered by the contract, the covenant of its stockholders to refrain from transacting business for ten years was never released, and none of the certificates and assignments of stock were ever delivered back. It appeared, however, that in the meantime the Refrigerating Company had secured the former New York office of the Consolidated Company; had employed its agent in making contracts with former customers of that company, which contracts were taken in the name of such agent. He was, however, furnished with the means by which they were carried out, and assignments were taken from him, which practically secured the goodwill of the company, although the Chicago assets were allowed to go to sale by the assignee. At this sale Mr. De la Vergne was present and offered for the tangible assets the sum of $25,000.

In their answer as amended, defendant set up as justification for a refusal to perform the contract that no assets of the Consolidated Company ever came into the possession of the defendants, since all, including the goodwill, had been transferred to Jenkins, the assignee, for the benefit of its creditors, and remained in his possession and control until they were disposed of under the direction of the probate court for the benefit of creditors, and that they were insufficient to discharge the liabilities; that the contract sued upon purporting to be executed on behalf of the Refrigerating Company by De la Vergne, its president, was executed without authority; that no benefit of any kind ever accrued to the company under the contract; that the company never received any of the consideration moving to it under the contract; that it never received any of the assets of the Consolidated Company, nor any of the stock; that it never in any manner ratified or approved the contract, but, on the contrary, rejected the same, and that the plaintiffs well knew at the time of making the contract that De la Vergne had no power or authority to bind the Refrigerating Company; that the defendants notified the plaintiffs that they would not be bound by the contract, and that such rejection of the contract was acquiesced in by the plaintiffs, and that, relying upon such acquiescence, the defendants abandoned all interests in the Consolidated Company; that the contract was in reality for the stock of the Consolidated Company, and that the Refrigerating Company was not authorized by its charter, by the laws of New York or of Illinois, to purchase such stock, and that the agreement was ultra vires; and further, that the Refrigerating Company had no authority to stipulate for an increase in its capital stock, as was attempted under the contract, and that the contract was against public policy and wholly void.

1. The main defense pressed upon our consideration is one which does not seem to have been called to the attention of the circuit court, and one upon which the judges of the circuit court of appeals were equally divided in opinion. It is that the president of the Refrigerating Company had no authority to sign the contract in question, and that the agreement itself was ultra vires the corporation.

As the general assignment to Jenkins, executed October 14, 1890, was most sweeping in its terms, and included all the real and personal property and effects of every kind and description belonging to the corporation, or in which it had any right or interest, it was doubtless sufficient to pass the goodwill of the business, which was an incident either to the premises, to the name of the corporation, or to the tangible property with which the business was carried on. Churton v. Douglas, Johns. V. C. (Eng.) 174, 188; Menendez v. Holt, 128 U.S. 514, 32 L. ed. 526, 9 Sup. Ct. Rep. 143; Metropolitan Bank v. St. Louis Dispatch Co. 149 U.S. 436, 37 L. ed. 799, 13 Sup. Ct. Rep. 944; Willett v. Blanford, 1 Hare, 253; Wedderburn v. Wedderburn, 22 Beav. 84; Bradbury v. Dickens, 27 Beav. 53; Williams v. Wilson, 4 Sandf. Ch. 379; Sheppard v. Boggs, 9 Neb. 257; Wallingford v. Burr, 17 Neb. 137.

This was evidently the view taken by the assignee, since he subsequently advertised the goodwill of the business for sale, and sold the same under an order of the court to Clarence A. Knight and Otto C. Butz, who afterward sold the same, including certain of the assets, to John Featherstone's Sons.

It is difficult, even if the contract were legally executed, to see what assets of value belonging to the Consolidated Company passed to the Refrigerating Company under it, except perhaps the possibility that the assets would prove more than sufficient to pay the debts; or that a settlement might be effected with a majority in number and amount of the creditors, when, under the laws of Illinois, the assignor would be entitled to a reconveyance and redelivery of the assigned assets. In such case the goodwill would doubtless return with the other assets to the assignor, i. e., the corporation, but not to the stockholders, and the right to sue for a breach of the contract would belong to the corporation, or its assignee. There was also a covenant that the Consolidated Company would not engage in a similar business within ten years from the date of the contract. The Refrigerating Company, however, did not avail itself of this opportunity to compromise with the creditors of the Consolidated Company, but allowed the assignee to dispose of the assets, which, on a forced sale, lacked $150,000 of being sufficient to pay the debts of the Consolidated Company.

In addition to this, however, there was no corporate action taken authorizing any such conveyance by the corporation, and such conveyance would not, under the laws of Illinois which conform in this particular to the general law, be within the power of the stockholders, even though they all signed it without formal action at a meeting held for that purpose. Sellers v. Greer, 172 Ill. 549, 40 L. R. A. 589, 50 N. E. 246; Hopkins v. Roseclare Lead Co. 72 Ill. 373; Humphreys v. McKissock, 140 U.S. 304, 312, 35 L. ed. 473, 475, 11 Sup. Ct. Rep. 779; Allemong v. Simmons, 124 Ind. 199, 23 N. E. 768; Smith v. Hurd, 12 Met. 371, 385, 46 Am. Dec. 690; England v. Dearborn, 141 Mass. 590, 6 N. E. 837; Cook, Stockholders, § 709.

It is true that the president of the Consolidated Company assumed to sign the contract as president, and to bind the company, but it is scarcely necessary to say that the president of a corporation has no power as such to make a general conveyance of the assets of the corporation without at least the assent of the board of directors. England v. Dearborn, 141 Mass. 590, 6 N. E. 837; Titus v. Cairo & F. R. Co. 37 N. J. L. 98, 102; McCullough v. Moss, 5 Denio, 567; Fulton Bank v. New York & S.C.anal Co. 4 Paige, 129, 134; Walworth County Bank v. Farmers' Loan & T. Co. 14 Wis. 325; Stokes v. New Jersey Pottery Co. 46 N. J. L. 237; Morawetz, Priv. Corp. § 537; 4 Thomp. Corp. § 4622.

The stockholders not only assumed to convey the property of the corporation without title thereto as well as without the requisite authority so to do, but, acting as individuals, they sold 'all their right, title, and interest in and to the assets' of the corporation, 'subject to the payment of its obligations, and subject to the custody thereof in the legal custodian, R. E. Jenkins, assignee as aforesaid.' As this transfer was no broader in its terms than those employed in the assignment by the company to Jenkins, and as the stockholders in any event would not have the power to transfer the assets of the corporation, this sale could operate only upon their stock; and that this was the intention is evident from the fourth clause of the contract, by which the stockholders agreed, within ten days from the date of the contract, to assign to De la Vergne all the stock of the Consolidated Company which had been issued, and which they guaranteed had been paid in full, and also by the fact that the certificates for such stock were all assigned by the holders and forwarded to De la Vergne. But again, it is difficult to see what the Refrigerating Company gained by this transfer of stock. Doubtless it gave them the control of the Consolidated Company, but as that company had assigned everything to Jenkins, including the goodwill, there was nothing left of value in the ownership of the stock. Apparently it could only operate upon the possibility that, by some favorable turn of fortune, the assets might prove more than sufficient to pay the debts, and thus the stock would become of some real value. However this may be, it is quite evident that one of the main objects of the transfer was to get possession of the stock and the right to use the name of the Consolidated Company, assuming that this did not pass to the assignee as part of the goodwill of the business.

But as the powers of corporations, created by legislative act, are limited to such as the act expressly confers, and the enumeration of these implies the exclusion of all others, it follows that unless express permission be given to do so, it is not within the general powers of a corporation to purchase the stock of other corporations for the purpose of controlling their management. First Nat, Bank v. ''National Exch. Bank'', 92 U.S. 122, 128, 23 L. ed. 679, 681; Sumner v. Marcy, 3 Woodb. & M. 105; Morawetz, Priv. Corp. § 431; 1 Thomp. Corp. § 1102; People, Peabody, v. Chicago Gas Trust Co., 130 Ill. 268, 8 L. R. A. 497; Milbank v. New York L. E. & W. R. Co. 64 How. Pr. 20; ''Mechanics' & W. M. Mut. Sav. Bank & Bldg. Asso. v. Meriden Agency Co.'' 24 Conn. 159.

Not only is this true as a general rule, but by the law of the state of New York, under which this corporation was organized, i. e., 'An Act to Authorize the Formation of Corporations for Manufacturing, Mining, Mechanical, or Chemical Purposes,' passed Feb. 17, 1848 (Laws 1848, chap. 40), it was declared in § 8 that 'it shall not be lawful for such company to use any of their funds in the purchase of any stock in any other corporation.' This language is clear and explicit, and evidently covers purchases of stock in other corporations, whether engaged in the same or different business.

In this connection, however, our attention is called to an act passed by the legislature of New York June 7, 1853 (Laws 1853, chap. 333), amendatory of the act of 1848, the 2d section of which enacts that 'the trustees of such company may purchase mines, manufactories, and other property necessary for their business, and issue stock to the amountof the value thereof in payment therefor.' The position of the plaintiffs in this connection is that, under the authority to purchase 'other property necessary for their business,' it was competent for manufacturing corporations to purchase the stock of other similar corporations. But we do not so read the act. Its evident object was to permit manufacturing corporations to purchase mines from which they could extract their own ore, or manufactories of raw material, such as pig iron or lumber, which could furnish to them material to be worked up into their own products; and in case such purchases involved a larger outlay than their present resources would justify, to issue new stock 'to the amount of the value thereof in payment therefor.' But there is nothing to indicate that the legislature intended to authorize them to purchase the stock of competing corporations, or corporations engaged in other business. It is only property necessary for their own current business they were authorized to purchase.

Another act amending the general corporation act of 1848, passed April 28, 1866 (chap. 838), was intended for a similar purpose. By section three it was enacted that 'it shall be lawful for any manufacturing company heretofore or hereafter organized under the provisions of this act, or the act hereby amended, to hold stock in the capital of any corporation engaged in the business of mining, manufacturing, or transporting such materials as are required in the prosecution of the business of such company, so long as they shall furnish or transport such materials for the use of such company, and for two years thereafter and no longer; and the trustees of such company shall have the same power with respect to the purchase of such stock and issuing stock therefor as are now given by law with respect to the purchase of mines, manufactories, and other property necessary to the business of manufacturing companies. But the capital stock of such company shall not be increased without the consent of the owners of two thirds of the stock, to be obtained as provided by sections twenty-one and twenty-two of the act herebe amended.' N. Y. Laws 1866, chap. 838.

The object of this act was evidently much the same as that of the prior act of 1853, that is, to enable manufacturing corporations to produce their own ore and manufacture their own raw materials. To meet the exigencies of this statute it is necessary that the company whose stock is purchased should at the time of the purchase be engaged in the business of mining, manufacturing, or transporting such materials as are required in the prosecution of the business of the purchasing company; and the right is limited to such time as they shall furnish or transport such materials for the use of such company, and for two years thereafter. It clearly has no application to a case where a manufacturing company purchases the stock of an insolvent rival concern which has ceased to do business, and whose stock is bought for the evident purpose of preventing a reorganization, and of obtaining its patronage.

In the Revised Statutes of New York of 1889 (vol. 3, p. 1959), there is also an act, to which our attention is called by a supplemental brief, permitting manufacturing companies to increase or diminish their capital stock to any amount which may be sufficient and proper for purposes of the corporation, and also to extend their business to any other manufacturing business subject to the provisions of the act.

That neither of these acts were intended to give authority to corporations to purchase stock of other corporations engaged in the same business is evident from a subsequent act approved June 7, 1890, to take effect May 1, 1891, the 40th section of which provides that '. . . no corporation shall use any of its funds in the purchase of any stock of its own or any other corporation, unless the same shall have been bona fide pledged, hypothecated, or transferred to it, by way of security for, or in satisfaction or part satisfaction of, a debt previously contracted in the course of its business, or shall be purchased by it at sales upon judgments, orders, or decrees which shall be obtained for such debts, or in the prosecution thereof. But any domestic corporation transacting business in this state, and also in other states or foreign countries, may invest its funds in the stocks, bonds, or securities of other corporations owning lands in this state or such states, if dividends have been paid on such stocks continuously for three years immediately before such loans are made, or if the interest on such bonds or securities is not in default, and such stock, bonds, or securities shall be continuously of a market value 20 per cent greater than the amount loaned or continued thereon.' N. Y. Laws 1890, chap. 564, art. 3, p. 1073.

Had the former acts given the unlimited authority to purchase insisted upon by the plaintiffs this act would have been entirely unnecessary, and, instead of enlarging the power previously possessed, would have operated as a restriction upon it. That this act of 1890 does not assist the plaintiffs is evident not only from the fact that the act did not take effect until after the contract was made, but from the further fact that it merely authorizes corporations to invest their funds in the stocks, bonds, or securities of other corporations if dividends have been paid for three years before the loans are made, or if the interest on their securities is not in default, and such securities are worth 20 per cent greater than the amount loaned thereon. This act evidently refers to loans and not to purchases, since the section expressly provides that no corporation shall use its funds in the purchase of any stock, either of its own or any other corporation, unless by way of security for antecedent debts.

The truth is, that the legislature of New York, instead of repealing the prohibitory clause in the original act of 1848, concerning the purchase of stock in other corporations, has modified it but slightly, by slow degrees, and in special cases, to enable a manufacturing corporation to control more perfectly its own legitimate business operations, and has thereby manifested the more clearly its intention to preserve the original inhibition.

Our conclusion upon this branch of the case is that, as the main, if not the sole, object of the purchase from the plaintiffs was to acquire their stock in the Consolidated Company, such purchase was ultra vires the Refrigerating Company.

2. Is this defense available to the Refrigerating Company? Whatever doubts might have been once entertained as to the power of corporations to set up the defense of ultra vires to defeat a recovery upon an executed contract, the rule is now well settled, at least in this court, that where the action is brought upon the illegal contract it is a good defense that the corporation was prohibited by statute from entering into such contract, although in an action upon a quantum meruit it may be compelled to respond for the benefit actually received.

The earliest case in which this doctrine is distinctly laid down is that of Pearce v. Madison & I. R. Co. 21 How. 441, 16 L. ed. 184, in which it appears that two railroad companies, which had been consolidated, gave their promissory notes in payment for a steamboat to run in connection with the railroads. It was held that, as there was no authority in the railroad companies to engage in running steamboats, there could be no recovery on the notes, and that as the plaintiff was not the owner of the boat and had sued upon the notes as an indorsee, there could be no recovery. The same doctrine has been applied to leases ultra vires a corporation, and it has been uniformly held that there could be no recovery upon the lease itself, though there might be in an action for use and occupation of the property. Pittsburgh, C. & St. L. R. Co. v. Keokuk & H. Bridge Co. 131 U.S. 371, 384, 33 L. ed. 157, 161, 9 Sup. Ct. Rep. 770; ''Central Transp. Co. v. Pullman's Palace Car Co.'' 139 U.S. 24, 48, 35 L. ed. 55, 64, 11 Sup. Ct. Rep. 478; S.C.. 171 U.S. 138, 43 L. ed. 108, 18 Sup. Ct. Rep. 808; McCormick v. ''Market Nat. Bank'', 165 U.S. 538, 550, 41 L. ed. 817, 822, 17 Sup. Ct. Rep. 433; Thomas v. West Jersey R. Co. 101 U.S. 71, 25 L. ed. 950; ''California Nat. Bank v. Kennedy'', 167 U.S. 362, 42 L. ed. 198, 17 Sup. Ct. Rep. 831; Buckeye Marble & Freestone Co. v. Harvey, 92 Tenn. 116, 18 L. R. A. 252; Union P. R. Co. v. Chicago, R. I. & P. R. Co. 163 U.S. 564, 41 L. ed. 265, 16 Sup. Ct. Rep. 1173.

The doctrine that no recovery can be had upon the contract is based upon the theory that it is for the interest of the public that corporations should not transcend the limits of their charters; that the property of stockholders should not be put to the risk of engagements which they did not undertake; that if the contract be prohibited by statute everyone dealing with the corporation is bound to take notice of the restrictions in its charter, whether such charter be a private act or a general law under which corporations of this class are organized. Zabriskie v. Cleveland, C. & C. R. Co. 23 How. 381, 398, 16 L. ed. 488, 497; Thomas v. West Jersey R. Co. 101 U.S. 71, 25 L. ed. 950; Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co. 118 U.S. 290, and 630, 30 L. ed. 83, and 284, 6 Sup. Ct. Rep. 1094, and 7 Sup. Ct. Rep. 24; ''Oregon R. & Nav. Co. v. Oregonian R. Co.'' 130 U.S. 1, 25, 32 L. ed. 837, 841, 9 Sup. Ct. Rep. 409; Pittsburgh C. & St. L. R. Co. v. Keokuk & H. Bridge Co. 131 U.S. 384, 33 L. ed. 161, 9 Sup. Ct. Rep. 770.

As the action in this case is upon the contract, and as the contract was prohibited by the charter of the Refrigerating Company, there can be no recovery upon it.

The difficulty with the position of the plaintiffs in this case is this: If the purchase of the stock was the main object of the contract the consideration was an illegal one, and the promise of the Refrigerating Company to furnish its own stock in payment was ultra vires. If, upon the other hand, the object of the contract was to obtain the assets and goodwill of the Consolidated Company upon payment of its debts, then the promise of the Refrigerating Company to pay the plaintiffs therefor was without consideration, since the assets were the property of the Consolidated Company and not of its stockholders, and anything realized by the sale of such assets belonged to the company or its assignee, and should be devoted first to the payment of its debts. If there were anything of value beyond the control of the stock which passed to the Refrigerating Company under the contract, the assignee could not be dispossessed of it until all the debts were paid or compromised, when it would revert to the corporation but not to the plaintiffs. Their title to sue must rest upon their ownership of the stock, and if the defense of ultra vires be sustained, we know of no theory upon which the plaintiffs can recover. It certainly cannot be true that the plaintiffs can take to themselves the $100,000 stipulated by this contract and leave creditors of the corporation unpaid to the extent of $150,000.

The judgment of the Circuit Court of Appeals and of the Circuit Court must therefore be reversed, and the case remanded to the Circuit Court for the Eastern District of Missouri with directions to grant a new trial.

Mr. Justice Brewer and Mr. Justice McKenna dissented.