Henry Ward v. Edward Joslin/Opinion of the Court

When a case is tried by the court without a jury, its findings on questions of fact are conclusive, although open to the contention that there was no evidence on which they could be based. The question remains whether or not the facts found are sufficient to support the judgment, and rulings to which exceptions are duly preserved may be reviewed.

Plaintiff excepted to the refusal of the court to rule that upon all the evidence plaintiff was entitled to recover as matter of law, and also to the refusal to make other rulings requested, and to the rulings made. The correctness of these rulings was questioned in fifteen errors assigned in the circuit court of appeals, but they need not be recapitulated.

The circuit court found as facts that the guaranties on which plaintiff's judgment in the state court was based were not guar anties of the payment of securities negotiated by the company; that the business which the corporation was authorized to do was 'to buy and sell personal property, including stocks, bonds, bills, notes, real and chattel mortgages, and choses in action of every kind and description, and to transact the business of a loan and trust company;' that the guaranty of these notes was not within the reasonable and proper scope of the business of the company; and that defendant had no notice that the company was assuming to guarantee the payment of claims not negotiated by itself. The court referred to a resolution of the board of directors authorizing the guaranty of securities negotiated by the company, and found this guaranty not within its scope.

This corporation was organized in 1888 under the general laws of Kansas, authorizing the creation of loan and trust companies, by voluntary association as prescribed, with the powers, among others, 'to make by-laws, not inconsistent with existing laws, for the management of its property, the regulation of its affairs, and for the transfer of its stock;' and 'to enter into any obligation or contract essential to the transaction of its ordinary affairs.' The charter of each corporation was required to set forth 'the purpose for which it is formed;' and the statute provided that: 'No corporation created under the provisions of this act shall employ its stock, means, assets, or other property, directly or indirectly, for any other purpose whatever, than to accomplish the legitimate objects of its creation.' Kan. Comp. Laws 1885, p. 210, chap. 23, §§ 5, 6, 11, 26.

The purposes for which the corporation was formed were set forth in its charter, and were as found by the circuit court. The by-laws provided for a loan committee with power 'to discount or purchase bonds, bills, notes, and other evidences of debt,' but did not embrace the power to guarantee. As before stated, the circuit court found that these guaranties were not 'within the reasonable and proper scope of the business, as contemplated by the parties.'

The purview of the words 'loan and trust' does not appear to have been defined by statute or decision in Kansas, but the declaration alleged that this company was organized 'for the purpose of transacting a general investment loan and trust business, buying and selling commercial paper, obligations and securities,' and it must be assumed that the general rule is applicable that such companies have no implied power to lend their credit, or to bind themselves by accommodation indorsements. They may guarantee paper owned by them, or paper which they negotiate in due course of business and the proceeds of which they receive, but the naked power to guarantee the paper of one third party to another is not incidental to the powers ordinarily exercised by them. The power as exercised here was certainly not 'essential to the transaction of its ordinary affairs,' nor within 'the legitimate objects of its creation.' And so far as the question might be resolved by the usage in Kansas, the findings were adverse to plaintiff.

In Commercial Bank v. Cheshire Provident inst. 59 Kan. 361, 41 L. R. A. 175, 53 Pac. 131, a judgment against a bank on a guaranty, where the record did not contain any of the evidence, and there was a general finding for plaintiff, was sustained. The court said that it must be presumed that the guaranty 'was executed for a valuable consideration, by the duly authorized officers of the bank, and in due course of business;' and that while 'it is true that, in this case, the paper itself does not indicate that the Commercial Bank ever owned it, nevertheless it may have received the proceeds and the guaranty may have been made strictly in the interest of the bank.' But the findings in this case take it out of the range of that decision, and forbid resort to presumption to make out validity.

We are of opinion that, upon the facts found, the guaranties were given without authority.

The 2d section of article 12 of the Constitution of Kansas provides as follows: 'Dues from corporations shall be secured by individual liability of the stockholders to an additional amount equal to the stock owned by each stockholder; and such other means as shall be provided by law; but such individual liabilities shall not apply to railroad corporations, nor corporations for religious or charitable purposes.' In Woodworth v. Bowles, 61 Kan. 569, 60 Pac. 331, it was held that this constitutional provision was not self-executing, but required legislative action to give it effect.

Section 32 of chapter 23 of the Compiled Laws of Kansas of 1885 provided that when an execution had been issued against a corporation, and property could not be found on which to levy it, then 'execution may be issued against any of the stockholders, to an extent equal in amount to the amount of stock by him or her owned, together with any amount unpaid thereon;. . . or the plaintiff in the execution may proceed by action to charge the stockholders with the amount of his judgment.'

Section 44: 'If any corporation, created under this or any general statute of this state, except railway or charitable or religious corporations, be dissolved, leaving debts unpaid, suits may be brought against any person or persons who were stockholders at the time of such dissolution, without joining the corporation in such suit;. . .' Section 45: 'If any stockholder pay more than his due proportion of any debt of the corporation, he may compel contribution from the other stockholders by action.' Section 46: 'No stockholder shall be liable to pay debts of the corporation, beyond the amount due on his stock, and an additional amount equal to the stock owned by him.' These sections were all carried forward into the Compiled Laws of 1889, with the same chapter and numbers, but that compilation also gives a general number, and the general number of § 32 is 1192. There was no compilation from 1889 to 1897. Sections 32, 44, 45, and 46 reappear in §§ 49, 50, 51, and 53 of chapter 66 of the General Statutes of 1897.

The word 'dues' thus appears to have been regarded as equivalent to debts or that which is owing. Mr. Justice Story in United States v. State Bank, 6 Pet. 29, 36, 8, L. ed. 308, 310, said, in construing the statute there referred to: 'The whole difficulty arises from the different senses in which the term 'due' is used. It is sometimes used to express the mere state of indebtment, and then is an equivalent to owed or owing. And it is sometimes used to express the fact that the debt has become payable.' In Whitman v. National Bank, 176 U.S. 559, 44 L. ed. 587, 20 Sup. Ct. Rep. 477, it was said that 'the word 'dues' is one of general significance, and includes all contractual obligations.' Can an obligation which a corporation had no right to incur be a contractual obligation and the basis of 'dues,' as that word is used in the state Constitution? We do not think so. It appears to us that it was not intended by that instrument to impose individual liability on stockholders in respect of risks which they had not undertaken.

One of the grounds on which the doctrine of ultra vires rests, is that the interest of the stockholders ought not to be subjected to such risks. Rights of stockholders must be considered as well as those of creditors, and they should not be held directly liable unless such liability was within their contract in legal contemplation.

The rule in this court is that a contract made by a corporation beyond the scope of its powers, expressed or implied, cannot be enforced, or rendered enforceable, by the application of the principle of estoppel. The rule in Kansas seems to be that when the contract has been executed and the corporation has received the benefits of it, the corporation is estopped from questioning its validity, and so in respect of evidences of indebtedness purchased before maturity in good faith and without notice Atchison, T. & S. F. R. Co. v. Fletcher, 35 Kan. 236, 10 Pac. 596; Sherman Center Town Co. v. Morris, 43 Kan. 282, 23 Pac. 569; Alexandria, A. & S. F. R. Co. v. Johnson, 58 Kan. 175, 48 Pac. 847. But we are not persuaded that if the defense of ultra vires had been interposed in the action against this company, and the facts had been found to be as they have been found here, the defense would not have been sustained in the courts of Kansas. If, however, under the state decisions, the corporation would be held estopped from denying the liability, it does not follow that the stockholders must therefore be held liable, if the obligation was in fact incurred without authority. In other words, alleged liabilities incurred without authority, and which do not come within the meaning of the word 'dues,' as used in the state Constitution, cannot be properly treated as brought within the scope of that word, simply because the corporation may be so situated as to be estopped from denying their validity.

Whether in this case the corporation would have been estopped if it had made the defense of ultra vires, it did not make it, and judgment went against it. We have held such judgments conclusive in proceedings under the Kansas Constitution. ''Hancock Nat. Bank v. Farnum'', 176 U.S. 640, 44 L. ed. 619, 20 Sup. Ct. Rep. 506. But we did not there hold that it was not open for a stockholder to show that the judgment was not enforceable against him when rendered against the corporation on a contract beyond its power to make. It must be remembered that in the case before us the right of action accrued, and the action was accordingly averred to have been brought, 'by virtue of the Constitution and the statutes of the state of Kansas in such case made and provided.' We think it was not error to permit the stockholder to go behind the judgment so far as to show, or, at all events, to insist, for the judgment record introduced below disclosed the invalidity of the guaranties, that he was not liable under that Constitution and those laws.

In Schrader v. ''Manufacturers' Nat. Bank'', 133 U.S. 67, 33 L. ed. 564, 10 Sup. Ct. Rep. 238, it was ruled that, although the individual liability of the stockholders of a national bank, as imposed by and expressed in the statute, was for all its contracts, debts, and engagements, 'that must be restricted in its meaning to such contracts, debts, and engagements as have been duly contracted in the ordinary course of its business;' and that a judgment recovered against the bank in a suit commenced some years after it went into liquidation 'was not binding on the stockholders in the sense that it could not be re-examined.'

In Brownsville Taxing Dist. v. Loague, 129 U.S. 493, 32 L. ed. 780, 9 Sup. Ct. Rep. 327, it was held that if a petitioner for a writ of mandamus to compel the levy of a tax to pay a debt evidenced by a judgment recovered on coupons of municipal bonds is obliged to go behind the judgment in order to obtain his remedy, and it appears that the bonds were void, and that the municipality was without power to tax to pay them, the principle of res judicata does not apply upon the question of issuing the writ. The petition in that case set up the judgment, and averred that 'petitioner's only remedy to enforce the collection of his judgments is that awarded by the act authorizing the issue of the bonds from which the coupons were detached upon which said judgments were obtained.' And we held that as the relator was compelled to go behind the judgments as money judgments merely, 'to obtain the remedy pertaining to the bonds, the court cannot decline to take cognizance of the fact that the bonds are utterly void, and that no such remedy exists.'

As then the provision of the Constitution of the state of Kansas, if properly construed, imposes the liability in question only in respect of corporate indebtedness lawfully incurred, that is to say, in respect of dues resulting in regular course of business and in the exercise of powers possessed, plaintiff cannot recover in this action by virtue of the Constitution and laws of the state, on the facts found, and the judgment must be affirmed.

As to the denial of the motion for new trial it is not within our province to interfere with the discretion of the circuit court.

Judgment affirmed.

Mr. Justice Gray did not hear the argument, or take any part in the decision.