Frederick Williams v. George Gaylord/Opinion of the Court

The circuit court and the circuit court of appeals based their judgments upon the act of 1880 as construed by the supreme court of the state of California, regarding that construction as binding upon the Federal tribunals. The conclusion is attacked by petitioner, and he urges the following propositions against it:

'I. The decision of the supreme court of California, to the effect that judgment creditors may take advantage of the act of 1880, is not binding upon the Federal courts either as constructive of that statute or determinative of a local rule of property.

'II. The act of 1880 does not apply to foreign corporations because the legislation of one state has no effect upon the powers and internal management of corporations organized in other states.

'III. Even if it should be held that the California statute (Statutes of 1880, p. 131) does apply to foreign corporations, the mortgage is valid, and a decree of foreclosure and sale should be directed.'

(1) To sustain this proposition the petitioner makes a distinction between the construction of the statute and its application, conceding the binding force of the state decisions as to the former, but denying their authority as to the latter. The contention enjoins a review of the decisions of the supreme court of the state.

In McShane v. Carter, 80 Cal. 310, 22 Pac. 178, the plaintiff claimed title to mining property and certain appurtenant water rights under two deeds from the Nevada Reservoir Ditch Company, a mining corporation. He brought suit to enjoin the sale of the property under a judgment obtained against the company by one of its creditors. Judgment passed for the plaintiff in the trial court, but was reversed by the supreme court of the state. The latter court, by Hayne, Commissioner, said—

'And the important question arising on that appeal is whether the evidence is sufficient to show that the plaintiff was the owner of the property which the sheriff was proceeding to sell, and this depends upon whether the directors of said mining companies had power or authority to convey the property in the absence of a ratification by the stockholders as specified in the act of 1880.

'1. We think that the provision of said act goes to the power or authority of the directors. It cannot be construed to relate merely to their personal liability, for no penalty is imposed upon them, and to so construe it would be to practically nullify the act. In our opinion the directors of mining corporations have no power or authority to convey the mining ground without the consent of holders of two thirds of the stock, given as prescribed by the act. And it follows without such consent the title does not pass. And if this be so, the question can be raised by anyone who connects himself with the title of the corporation which owned the property, as well as by the stockholders thereof.

'Nor can the consent of the stockholders be presumed from the mere fact of the conveyance, whether under the corporate seal or not, for such consent or 'ratification' may be after the deed is executed, and hence is not necessarily or presumptively involved in the execution of such deed.'

Counsel for petitioner says that the supreme court in its opinion not only construed, but applied, the act of 1880, construed it in that portion of the opinion which denied authority to directors of mining corporations to convey mining property without the consent of the stockholders; applied it in that portion of the opinion which declares that without the consent of the stockholders the title of mining property does not pass, and that 'the question can be raised by anyone who connects himself with the title to the corporation,. . . as well as by the stockholders thereof.' This conclusion, it is asserted, is not warranted by the words of the statute, is opposed to the decisions of the courts of other states and of this court construing similar statutes, and is not binding upon the Federal courts. And it is urged that the circuit court of appeals 'failed to distinguish between a decision of the state court construing the terms outlining the effect of the statute as enacted and a decision declaring that certain other persons not mentioned or referred to in the statute may by reason of relations existing between them and the stockholders, under general principles of corporation law, become beneficiaries of the statute under consideration.' And it is further urged 'that a case of the latter class does not construe a statute or establish a local rule of property, but is merely a decision upon the general law of corporate relations.'

We are unable to accept the distinction. To accept it would deprive the state courts of the power to declare the implications of state statutes, and confine interpretation to the mere letter. The supreme court of California declared the effect of the act of 1880 as deduced from the language and purpose of the act, and this was necessarily an exercise of construction. The very essence of construction is the extension of the meaning of a statute beyond its letter, and it can seldom be done without applying some principle of law general in some branch of jurisprudence, and if whenever such application occurs the authority of the state courts to interpret the statute ceases, the Federal tribunals, instead of following, could lead those courts in declaring the meaning of the legislation of the states.

The construction of the act of 1880 was certainly directly presented to the supreme court of California, and that construction determined the judgment which was rendered. The court declared that the provisions of the act extended 'to the power or authority of the directors,' and that without the consent of holders of two thirds of the stock the title did not pass. In other words, the title remained in the corporation; the property remained the property of the corporation; and hence the deduction of the court, 'the question can be raised by anyone who connects himself with the title of the corporation which owned the property, as well as by the stockholders thereof.' And this in consequence of the statute, and it is not the less so because the statutes of other states have been interpreted differently. It could hardly be contended that the legislature of California had not the authority to make such a consequence; and whether the legislature expressed its purpose or left it to inference, whether it expressed itself clearly or obscurely, the power of the state court to declare that purpose was none the less plenary.

McShane v. Carter was followed and affirmed in ''Pekin Min. & Mill. Co. v. Kennedy'', 81 Cal. 356, 22 Pac. 679; Granite Gold Min. Co. v. Maginness, 118 Cal. 131, 50 Pac. 269; Johnson v. California Lustral Co. 127 Cal. 289, 59 Pac. 595; Curtin v. Salmon River Hydraulic Gold Min. & Ditch Co. 130 Cal. 351, 62 Pac. 552.

(2) That the act of 1880 applies to foreign corporations was decided in ''Pekin Min. & Mill. Co. v. Kennedy'', 81 Cal. 356, 22 Pac. 679. That case, however, it is said, is practically overruled by Miles v. Woodward, 115 Cal. 308, 46 Pac. 1076, 47 Pac. 360. Woodward was a stockholder in a mining corporation organized under the laws of the state of California. He brought an action against Miles, who was a director of the corporation, for $1,000 damages for the violation of an act of the state (Stat. 1880, p. 400), which required the directors of the corporation to make, or cause to be made, posted, and filed, weekly reports of the superintendent.

'It is first contended,' the court said, 'that the act in question is unconstitutional for the reason that it operates only upon domestic corporations, and thereby allows foreign corporations to transact business within this state upon more favorable conditions than are prescribed by law to similar corporations organized under the laws of this state, in violation of art. 12, § 15, of the Constitution.'

This was denied, and the act was held constitutional as being properly confined to domestic corporations because it was 'directed to the internal affairs of the corporation, and not to its outside dealings or to the conduct of its business.'

As to the conduct of the business of foreign corporations, the court said the state could 'exercise full powers of control,' but over their organization and internal government the state had no such power, because 'the laws of the state did not have extraterritorial force.' And further the court said: 'The law is designed to protect stockholders of domestic corporations, and to that end has declared that the directors of those corporations, the conduct of whose internal affairs is subject to the control of the legislature, shall do specific acts under a prescribed penalty for their failure and refusal.'

The views expressed by the court were justified by the nature of the reports required to be made. They were of matters which alone concerned the stockholders,-did not affect in any way the rights of others. To make such reports was not doing business; it was only giving information of business done. But when a corporation sells or encumbers its property, incurs debts or gives securities, it does business, and a statute regulating such transactions does not regulate the internal affairs of the corporation. And it is certainly within the power of a state to say what remedies creditors of corporations shall have over property situated within the state. Therefore Miles v. Woodward is not an authority for petitioners' position.

(3) Even if it be held that the act of 1880 applies to foreign corporations, it is nevertheless contended that the mortgage is valid, and a decree of foreclosure and sale should be directed. In support of that position it is urged that (a) the meeting of June 25, 1890, at which the execution of the bonds and mortgage were resolved upon and authorized, though denominated a meeting of incorporators, was really a meeting of stockholders; (b) if this was not so, the corporation afterward, by its action of July 30, 1890, after the board of directors was organized, ratified the mortgage by the resolution which authorized its correction; (c) that not only those who participated in the meetings held more than two thirds of the stock of the corporation, but that the president, M. J. Shoecraft, at the time of the execution of the mortgage owned two thirds of the stock. In other words, it is urged that the corporation either executed the mortgage or ratified it, and that the stockholders both authorized and concurred in its execution. The evidence of the facts involved in these claims is the minutes of the meetings set out in the statement of facts and of the following testimony of a witness (Calvin Littlefield) for complainant:

Q. It appears that the following individuals were present at that meeting, namely: M. J. Shoecraft, Calvin Littlefield, G. Livingston Morse, R. H. Pettigrew, Jr., and W. W. Tucker. Can you tell me whether these gentlemen held all of the stock of the company at that time or not? A. They did.

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Q. Do you know whether Mr. Shoecraft owned as much as two thirds of the stock of the company at the time when this mortgage gage was acknowledged? A. I do not.

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Q. Have you the certificate book of the defendant company in your possession? A. I have.

Q. Tell me, if you can, the amount of stock in the name of M. J. Shoecraft at the date when the mortgage was acknowledged, namely, July 24, 1890? A. One hundred and sixty thousand shares.

Q. Shares at what value? A. Five dollars each.

Q. What was the entire capital of the company? A. Eight hundred thousand dollars-one hundred and sixty thousand shares.

Q. Can you tell me what date this mortgage was acknowledged by the president and yourself? A. I think the date of the acknowledgment.

Q. That is what? A. Twenty-fourth day of July, 1890.

Q. Do you know why the mortgage was dated the 1st? A. Yes. [167]

Q. Can you say why? A. The arrangement with the owner,-the first of July. By agreement the mortgage was to commence when the settlement ended.

Q. You say that on the 24th day of July the whole number of shares were issued to M. J. Shoecraft? A. I do.

Q. As appears by certificate No. 1? A. Yes.

Q. Certificate No. 1 (showing) is now before you? A. Yes.

Q. Is that in a book? A. Yes.

Q. What is it? A. The stock book.

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Q. Certificate No. 1 has never been taken out of the book? A. It has not.

Q. It bears date the 24th day of July, 1890? A. It does.

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Q. Certificate No. 1, marked Exhibit 'C,' has never been separated from its stub? A. It has not.

Q. And certificate No. 2 has never been separated from its stub? A. It has not.

Q. All the other certificates about which you have testified, from No. 3 to No. 21, inclusive, have been separated from their stub at some time or other? A. Yes, sir.

The witness also testified that shares were issued in certain amounts which were named and to certain persons who were named, 'from certificate No. 1.' A number of certificates which the witness testified about were introduced in evidence. They all bore date of July 24, 1890.

But as to the effect of this testimony and of the contentions of petitioners we are not called upon to express an opinion. The statute of California prescribed the manner of ratification to be 'either in writing signed and acknowledged by such stockholders or by resolution duly passed at a stockholders' meeting called for that purpose.' This manner of ratification was held to be necessary as we have seen, in McShane v. Carter, 80 Cal. 310, 22 Pac. 178, and that case has not been limited or varied by any subsequent case. And we have no doubt of the power of the state to so prescribe, not only from its power over the manner of conveyance and the disposition of property situated within the state, but from its power over foreign corporations doing business within the state. Clarke v. Clarke, 178 U.S. 186, 44 L. ed. 1028, 20 Sup. Ct. Rep. 873; Hooper v. California, 155 U.S. 648, 39 L. ed. 297, 5 Inters. Com. Rep. 610, 15 Sup. Ct. Rep. 207. Nor can we contest that power, though we might, if we were permitted to exercise an independent judgment, construe the statute as only illustrative, and not as exhaustive of the manner of ratification.

Judgment affirmed.

Mr. Justice Harlan concurs in the judgment.