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in Bissell v. Michigan Southern and Northern Indiana Railroad Company, 22 N. Y. 289, 290: "There are no doubt cases in which a corporation would be estopped from setting up this defense, although its contract might have been really unauthorized. It would not be available in a suit brought by a bona fide indorsee of a negotiable promissory note, provided the corporation was authorized to give notes for any purpose; and the reason is, that the corporation, by giving the note, has virtually represented that it was given for some legiti mate purpose, and the indorsee could not be presumed to know the contrary. The note, however, if given by a corporation, absolutely prohibited by its charter from giving notes at all, would be voidable not only in the hands of the original payee, but in those of any subsequent holder; because all persons dealing with a corporation are bound to take notice of the extent of its chartered powers. The same principle is applicable to contracts not negotiable. When the want of power is apparent upon comparing the act done with the terms of the charter, the party dealing with the corporation is presumed to have knowledge of the defect, and the defense of ultra vires is available against him. But such a defense would not be permitted to prevail against a party who can not be presumed to have had any knowledge of the want of authority to make the contract. Hence, if the question of power depends not merely upon the law under which the corporation acts, but upon the existence of certain extrinsic facts, resting peculiarly within the knowledge of the corporate officers, then the corporation would be estopped from denying that which, by assuming to make the contract, it had virtually affirmed."

This doctrine seems to us sound and reasonable; and in conformity with it, it was held, in Farmers' and Mechanics' Bank v. Empire Stone Dressing Company, 5 Bosw. 275, that an accommodation acceptance by an officer of a manufacturing corporation, on behalf of the company, was not binding, unless the consideration had been advanced upon the faith of the acceptance; but that if the consideration was paid in good faith after the acceptance, and upon the credit of it, it could be enforced.

Judgment for plaintiffs.

Note. Accord: 1858, Smead v. R. Co., 11 Ind. 104; 1865, Hall v. Auburn Tp. Co., 27 Cal. 255, 87 Am. Dec. 75; 1886, National Bank v. Young, 41 N. J. Eq. 531; 1889, National Park Bank v. G. A. M. W. & S. Co., 116 N. Y. 281; 1895, Jacob's Pharmacy Co. v. So. Bank & T. Co., 97 Ga. 573; 1898, Steiner v. Steiner L. & L. Co., 120 Ala. 128, 26 So. Rep. 494. But see next case.

Sec. 273. Same.

MURPHY ET AL. v. ARKANSAS & L. LAND IMPROVEMENT
COMPANY.1

1899. IN THE UNITED STATES CIRCUIT COURT, N. D. ARKANSAS. 97'Fed. Rep. 723-730.

[Bill to foreclose a trust deed. P. F. B. owned one-third of a 1 Statement abridged, and only part of opinion given.

951 $30,000 judgment in favor of the A. & L. R. Co. against J. D. B. In order to discharge this third, J. D. B. paid P. F. B. $6,000, and delivered to him a note for $4,000, secured by a deed of trust, executed by the Land Company, and made payable to J. D. B. or his assignee, for the purpose of enabling him to pay his claim. The note and deed were executed with the full consent of all the directors and shareholders of the Land Company, composed of J. D. B., who owned all the stock except shares necessary to qualify a son of J. D. B. and his attorney to be directors; also at a time when the corporation had ample property to pay all its debts including this claim. P. F. B. assigned the note and deed of trust in the ordinary course of business to Murphy, who brings the suit.]

*

ROGERS, District Judge. It is urged that the land company had no authority to execute accommodation paper, and hence the execution of the note was ultra vires. I incline to think that the charter of the land company is broad enough to authorize it to execute accommodation paper, but it makes no difference as to that. The land company is a private corporation. It owed no debts. The paper was issued by the consent of all the stockholders, and it has been accepted, and the consideration parted with by P. F. B. for it. Can it now be permitted to take shelter under the plea of ultra vires? I think not. In 1 Cook Corp., § 3, the author says: "A private corporation may become an accommodation indorser, distribute its assets, issue its notes, stock, or bonds below par, or, for no consideration whatever, give away its assets, or may mortgage its property for the personal benefit of a part or all of its stockholders or officers; provided, always, that all the stockholders assent, and provided that corporate creditors are not injured, and provided that no statute forbids such acts. The doctrine of ultra vires is no longer held to forbid such acts by a private corporation under such circumThe theory of a corporation is that it has no powers except those expressly given or necessarily implied. But this theory is no longer strictly applied to private corporations. A private corporation may exercise many extraordinary powers, provided all of its stockholders assent, and none of its creditors are injured. There is no one to complain except the state, and, the business being entirely private, the state does not interfere. Thus, fifty years ago the courts would have summarily declared it illegal for a business corporation to become an accommodation indorser of commercial paper, but today there is no rule of public policy which prohibits a private corporation having a capital stock from becoming the accommodation indorser of commercial paper, providing such indorsement is made with the knowledge and assent of all the directors and stockholders, and provided corporate creditors are paid."

stances.

In the subsequent discussion of the author it is shown that whatever is done by a private corporation with the assent of all of its stockholders, and where no creditor is injured, although it may be ultra vires, is lawful, and will be enforced by the courts. The principle does not

apply to railroad corporations or quasi-public corporations. Decree for plaintiff.

Note. Accord: 1890, Martin_v. Niagara Falls Paper Co., 122 N. Y. 165; 1895, Bensiek v. Thomas, 66 Fed. Rep. 104; 1897, Solomon Solar S. Co. v. Barber, 58 Kan. 419, 49 Pac. Rep. 524; 1898, Central Trust Co. v. C. H. V. & T. R. Co., 87 Fed. Rep. 815.

Sec. 274. (4) Surety or guarantor.

TOD ET AL. v. KENTUCKY UNION LAND COMPANY ET AL.1 1893. IN THE UNITED STATES CIRCUIT COURT, DISTRICT OF KENTUCKY. 57 Fed. Rep. 47-66.

[Bill in equity against the land company and others for the appointment of a receiver, and declaring an assignment under the Kentucky laws, on account of the debtor land company having made preferences which, as alleged, operated as an assignment. Decree for complainants, with a reference to a commissioner, to report as to priority of claims. The land company had guaranteed the first mortgage bonds to the extent of $2,625,000, $800,000 second mortgage bonds, and a 5 per cent. dividend upon $500,000 of the capital stock, of the Kentucky Union Railway Company; the validity of these guaranties, being assailed by other creditors, was submitted by the commissioner to the court.]

LURTON, C. J. Did the Kentucky Union Land Company have the power to bind itself by its contract guarantying the principal and interest of the first mortgage bonds issued by the Kentucky Union Railway Company?

The question, as presented on this record, is a question pure and simple as to how far the authority to execute these contracts is sustained by the corporate powers which the law has vested in this company. No question arises as to the rights of bona fide holders of these bonds for value and without notice of the facts that the bonds had not been indorsed upon their sale and transfer by the guarantying corporation. The general doctrine may be taken to be well settled in the courts of the United States that the powers of the corporation are such, and such only, as are conferred by the law under which it is incorporated. The charter is the measure of the power of every corporation, and by this test must every corporate act be tried. This rule, however, concedes the usual propositions applicable to every legisla-. tive act that what is fairly implied is as much granted as if expressly enumerated.

The power to execute accommodation paper or to guaranty for accommodation the obligations of another corporation is not expressly conferred by the charter of the land company. Ordinarily, such 1 Statement abridged, and only part of opinion given.

power is not implied from the powers conferred upon corporations, and such contracts are generally in excess of the powers of corporations, and therefore void as ultra vires, in the true sense of the term. This proposition rests upon two or more very evident reasons:

(1) The corporate funds belong to its shareholders and, by the very terms of the law creating it, can not be devoted to any other purpose than those indicated by its charter and constitution. Such obligations would violate the fundamental terms of the agreement between the corporators themselves.

(2) To do so would be to exercise a power not conferred by the state, either expressly or impliedly. The state's grant of the corporate franchises is for the purpose prescribed, and the execution of such obligations would be beyond the power conferred, and therefore a diversion of the corporate purposes, as well as of the corporate funds.

(3) Such obligations rest upon no consideration, and would not, therefore, be valid. They would amount to a donation of the corporate funds, and therefore an unlawful diversion. Mor. Priv. Corp., 423; Davis v. Railroad Co., 131 Mass. 258; Madison Plank-Road Co. v. Watertown Plank-Road Co., 7 Wis. 59; McClellan v. File Works, 56 Mich. 579, 23 N. W. Rep. 321; National Park Bank v. GermanAmerican Mutual Warehouse & Security Co., 116 N. Y. 292, 22 N. E. Rep. 567; Ætna Nat'l Bank v. Charter Oak Life Ins. Co., 50 Conn. 167.

But there is no inherent want of power in a business corporation, having the power to execute negotiable paper, to obligate itself as a surety or guarantor. If such a corporation receives commercial paper or bonds in due course of business we see no reason why, upon transferring such paper, it may not be lawful to obligate itself as indorser or guarantor. Such a contract would be a new and independent contract, and would rest upon a sufficient consideration, if entered into as a legitimate means of increasing the value of the security to be disposed of in ordinary course of business. In Railroad v. Howard the question arose as to the liability of a railroad company upon its guaranty of certain bonds issued by various counties and cities, and received by the railroad company in payment of subscription to its stock.

Upon full consideration it was held that, inasmuch as the company had received the bonds in payment of stock, it had a right to obligate itself by its own bonds for the purpose of building its road; it might lawfully, and in furtherance of its authorized purpose, guaranty such bonds as a means of augmenting their value on the market, thus producing funds to build its road. 7 Wall. 411, 412. The power of a corporation to bind itself by a guaranty, when it does so for its own benefit and as a means of selling at an augmented value, is generally conceded by the authorities. "In such cases,' says Mr. Randolph in his work upon Commercial Paper (vol. I, sec. 334), "the guaranty is an original contract of the corporation for its own benefit; the consideration moving to itself, and not to the person whose debt is guarantied."

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In the light of these principles let us look at the facts connected with the contract under consideration.

The Kentucky Union Land Company was incorporated under a special charter granted by the legislature of Kentucky in 1880. Its original corporate title was, "The Central Kentucky Lumber, Mining, Manufacturing and Transportation Company." This name was by amendment of charter in 1890, and after these bonds had been guarantied, changed to "The Kentucky Union Land Company." The original title indicated very thoroughly the large power conferred by the charter, and the composite character of the business contemplated thereunder.

The Kentucky Union Railway Company was organized under a special charter granted by Kentucky in 1854. Under its charter the stock might be subscribed for by "any individual or corporation."

Without undertaking to state the details as to how and under what circumstances, and upon what consideration, it is sufficient for the purpose of this case to say that, at the date of the contract of guaranty in question, shares of stock in the railway company to the amount of $1,800,000 were held and owned by the land company. This constituted the whole of the shares issued by that company except, perhaps, nine, which were held by the directors of the railway company in order that they might be qualified to act. The land company at the same time had acquired the title to between 300,000 and 500,000 acres of mountain lands on the line of the projected continuation of this railway. In order to the development of these lands, and to the utilization of the timber and mines thereon, it became most essential that this railway should be completed. Did the land company have power to aid in the extension and completion of this railway?

[The charter provided inter alia, that the land company might "acquire by purchase or condemnation the necessary rights of way for exporting the products of the mines and timber," and might "effect a temporary or permanent consolidation with any railroad or transpor tation company," and "the consolidated companies may have and exercise the powers of both companies."]

Now, the case, as it was presented to the land company, was this: "We have purchased, as authorized by our charter, a vast body of timbered and mineral lands. We are authorized, expressly, to utilize these lands by developing their timber and mineral interest. The intention of the legislature was that this buried natural wealth shall be utilized by the erection of sawmills, iron works, rolling mills; furniture factories, iron furnaces, and by the opening and operating of iron and coal mines. It contemplated that transportation of the products of these mines, mills and factories would be a matter of great concern. The right to condemn rights of way is conferred.”

That railroad transportation would be essential to get to market these products, and for the necessary development of the towns which must spring up around enterprises ŝo numerous, was also in contem

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