Wright v. Hughes

• Decision Date: 08 June 1889
• Docket Number: 13,761
• Parties: Wright et al. v. Hughes, Assignee, et al
• Court: Indiana Supreme Court

21 N.E. 907

119 Ind. 324

Wright et al. v. Hughes, Assignee, et al

No. 13,761

Supreme Court of Indiana

June 8, 1889

From the Marion Superior Court.

The judgment is affirmed, with costs.

J. P Baker, L. Wallace, Jr., and J. P. Dunn, Jr., for appellants.

A Baker, E. Daniels, F. Winter and J. B. Elam, for appellees.

OPINION

Mitchell, J.

This was an action by certain of the policy-holders of the Franklin Life Insurance Company, the purpose of which was to have cancelled and declared void a mortgage executed by the directors of the above named corporation to the Northwestern Mutual Life Insurance Company.

The questions for decision arise on the complaint, which is in two paragraphs, both of which are in legal effect alike. It appears that the Franklin Life Insurance Company was organized in July, 1866, under the general law which provides for the organization of mutual life and accident insurance companies. Section 3763, R. S. 1881. The company was organized upon the life plan. Its charter provided that the entire management and control of the affairs and business of the corporation should be confided to its board of directors, who were given full power over the affairs of the company. In August, 1881, the board of directors, having discovered that the business of the company had decreased and become unprofitable, and that it was being conducted at a loss, adopted a resolution authorizing the executive officers to buy in all its outstanding paid-up policies, with the view of winding up the business of life insurance, and of changing from life to accident insurance. It is averred that the change was made without the consent of the plaintiffs, who are and were policy-holders, and without any amendment of the articles of association, or the consent of the State. In January, 1882 the board of directors again resolved to continue the scheme of retiring the company's life policies, and the executive officers were accordingly directed to buy in all outstanding policies of that description, on the most advantageous terms. In executing these directions, $ 90,000, all the available assets of the company, was expended in purchasing policies, and it became necessary, in order to complete the purchases, to borrow money. Accordingly a loan of $ 37,500 was negotiated with the Northwestern Mutual Life Insurance Company. The money was obtained and used in purchasing policies. As security for the loan, which was evidenced by a bond running five years with semi-annual interest, a mortgage was executed on the real estate and office buildings of the company, the mortgagee having knowledge of the purpose for which the money was obtained and used. Subsequently the Franklin Life Insurance Company became insolvent and made a voluntary assignment. At the time the assignment was made there remained outstanding about three hundred life policies, representing a surrender value of $ 75,000, while the assets of the company, after deducting the amount of the debt secured by the mortgage in controversy, aggregated something less than $ 18,000. It is alleged that the assignee recognized the mortgage in question as a valid obligation, and that he refused to take any steps to set it aside. The plaintiffs, therefore, bring the suit as policy-holders, and ask that the mortgage be declared void, and that it be cancelled and the mortgagee restrained from asserting any claim on account thereof, or on account of the money loaned.

On appellants' behalf it is contended that the facts stated in the complaint show that the money, to secure which the mortgage was given, was borrowed so as to enable the board of directors to buy up for the company its outstanding life policies, in an unauthorized and unequal manner, with a view to effect a change of the company's business from life to accident insurance; that the corporation had neither the power to wind up its life insurance business by the method pursued, nor had it the power, under its articles of association, to engage in the business of accident insurance; and that hence the loan from and transaction with the Northwestern Mutual Life Insurance Company were ultra vires.

The proposition advanced, that a corporation can not, without the consent of the shareholders, abandon the fundamental purpose for which it was organized and engage in transactions, or embark its capital in enterprises, other than those which come legitimately within the scope of its charter, is abundantly maintained. Green's Brice's Ultra Vires, 77. Accordingly, it is the established rule that a stockholder, or other person interested, who has not consented, may invoke the aid of a court of chancery to restrain the managing directory from engaging or continuing in an enterprise which involves a material change in the original purposes or powers of the corporation, and which is not in aid of its primary object. Board, etc., v. Lafayette, etc., R. R. Co., 50 Ind. 85; McCray v. Junction R. R. Co., 9 Ind. 358; Bradley v. Ballard, 55 Ill. 413; 1 Morawetz Corp., sections 273, 274.

This rule is neither technical nor arbitrary, but has for its foundation the means of affording protection to stockholders who resort to it in good faith for the purpose of holding the corporation to the prosecution of its legitimate and proper business. Holt v. Winfield Bank, 25 F. 812.

The appellants, it may be well to remark, are not in a court of equity, asking that the corporation in which they are interested as members and policy-holders be restrained from embarking in an enterprise foreign to its original purpose, or from winding up the corporate business. These are all matters of the past. The charter of the corporation has been forfeited to the State, and its business is being wound up without objection from the plaintiffs, so far as appears. The only question here is, whether the plaintiffs, who in this proceeding occupy the place of the corporation, may now question the power of its directors, who were entrusted with the management of its affairs, to borrow the money and execute the bond and mortgage which they now seek to have cancelled and declared of no effect, after the corporation has received into its treasury and used the money which they were given to secure. The weight of modern authority supports the conclusion that private corporations, organized for pecuniary profit, may, like individuals, borrow money whenever the nature of their business renders it proper or expedient that they should do so, subject only to such express limitations as are imposed by their charters. The power to borrow carries with it, by implication, unless restrained by the charter, the power to secure the loan by mortgage. Accordingly it may be regarded as settled, that where general authority is given a corporation to engage in business, and there are no special restraints in its charter, it takes the power as a natural person enjoys it, with all its incidents and accessories; it may borrow money to attain its legitimate objects, precisely as an individual, and bind itself by any form of obligation not forbidden. New England, etc., Ins. Co. v. Robinson, 25 Ind. 536; Jones v. Guaranty, etc., Co., 101 U.S. 622, 25 L.Ed. 1030; Reichwald v. Commercial Hotel Co., 106 Ill. 439; Booth v. Robinson, 55 Md. 419; Hays v. Galion Gas Light Co., 29 Ohio St. 330; Memphis, etc., R. R. Co. v. Dow, 22 Blatchf. 48, 19 F. 388; Green's Brice's Ultra Vires, 223; 1 Morawetz Corp., sections 342, 343.

In the absence of any express or implied limitation upon ...