Brace v. Gauger-Korsmo Const. Co.

• Decision Date: 06 December 1929
• Docket Number: 8583.,No. 8582,8582
• Citation: 36 F.2d 661
• Parties: BRACE v. GAUGER-KORSMO CONST. CO. et al. FIDELITY BOND & MORTGAGE CO. v. SAME.
• Court: U.S. Court of Appeals — Eighth Circuit

36 F.2d 661 (1929)

BRACE v. GAUGER-KORSMO CONST. CO. et al.

FIDELITY BOND & MORTGAGE CO. v. SAME.

Nos. 8582, 8583.

Circuit Court of Appeals, Eighth Circuit.

December 6, 1929.

Lowell W. Taylor, of Memphis, Tenn. (James Love Hopkins, of St. Louis, Mo., on the brief), for appellant Brace.

W. G. Riddick, of Little Rock, Ark. (Samuel Frauenthal, of Little Rock, Ark., on the brief), for appellants Fidelity Bond & Mortgage Co. and Riddick, trustee.

A. L. Heiskell, of Memphis, Tenn., and Will G. Akers, of Little Rock, Ark. (Milton J. Anderson, of Memphis, Tenn., on the brief), for appellee Construction Company.

Samuel Frauenthal, of Little Rock, Ark., for appellee Bankers' Trust Company.

John P. Streepey, of Little Rock, Ark., for appellee Shaw.

Before VAN VALKENBURGH and GARDNER, Circuit Judges, and WOODROUGH, District Judge.

GARDNER, Circuit Judge, delivered the opinion of the court.

This is an appeal from a decree establishing and determining foreclosure of two mechanic's liens for materials and labor alleged to have been furnished and performed in constructing an apartment house under contract between the owner of record, the Rackensack Apartments Corporation, and Gauger-Korsmo Construction Company, the contractor in one case, and Percy A. Shaw, the contractor in the other case. The cases were consolidated and one decree entered. The Gauger-Korsmo Construction Company, in its suit to foreclose its lien against the Rackensack Apartments Corporation, joined numerous other defendants, including mortgagees.

The contract was entered into, signed by both parties, and delivered in Memphis, Tenn. The structure was completed February 5, 1925, and on April 30, 1925, a notice of mechanic's lien was filed. Appellant William Brace took deed to the property June 6, 1925, which deed was recorded June 8, 1925. The action was commenced June 13, 1925, by the filing of bill of complaint. William Brace was made a party to the suit by amendment filed November 17, 1927, whereupon he entered general appearance and filed answer.

The controlling questions presented on this appeal are:

(1) The construction company, a foreign corporation, not having complied with the Arkansas statute with reference to the transaction of business in Arkansas, was the contract for the construction of the apartment building void?

(2) Had the statute of limitations run as to the defendant William Brace?

(3) Was the lien rendered void by reason of having included therein nonlienable items?

(4) Did the court err in establishing the relative priority of the liens?

It is conceded that at the time the contract for the construction of the apartment house was entered into the construction company was a foreign corporation, and had not complied with the Arkansas statute (Crawford & Moses' Dig. Ark. § 1826) which required, as a condition precedent to the right to transact business in that state, that a foreign corporation file a certified copy of its articles of incorporation with the secretary of state and appoint a resident agent in that state on whom service of process might be had. This statute provides, as penalty for a failure to comply with its provisions, a fine of not less than $1,000. It also provides that: "As an additional penalty, any foreign corporation which shall fail or refuse to file its articles of incorporation or certificate as aforesaid cannot make any contract in this State which can be enforced by it either in law or in equity, and the complying with the provisions of this act after the date of any such contract, or after any suit is instituted thereon, shall in no way validate said contract." Crawford & Moses' Dig. Ark. § 1832.

The lower court held that this statute could not be invoked in the instant case because the contract was not made in the state of Arkansas. The correctness of this holding of the trial court is challenged by the appellants, and it is urged that as the contract was one to be performed in the state of Arkansas it was within the inhibition of the statute.

It is noted (1) that the statute does not in its terms declare the contract void, but that it cannot be enforced. If the statute is one affecting procedure its effect must of course be limited to the state courts, as the Legislature of Arkansas could not control by statute the procedure in equity cases in federal court. It is to be observed (2) that the statute purports to provide this as "an additional penalty" so that it is penal in character and should be strictly construed. It is, however, contended by counsel for appellants that the Supreme Court of Arkansas has construed this statute to mean that a contract made in Arkansas by a foreign corporation which has not complied with this statute is void. If so, of course this court will give effect to the statute as construed by that court. There are a number of decisions by the Supreme Court of Arkansas construing similar statutes, holding that such a contract is not void. White River Lbr. Co. v. Southwestern Imp. Ass'n, 55 Ark. 625, 18 S. W. 1055; State Ins. Ass'n v. Brinkley Co., 61 Ark. 5, 31 S. W. 157, 29 L. R. A. 712, 54 Am. St. Rep. 191; Buffalo Zinc & Copper Co. v. Crump, 70 Ark. 535, 69 S. W. 572, 91 Am. St. Rep. 87; Woolfort v. Dixie Cotton Oil Co., 77 Ark. 203, 91 S. W. 306, 307, 113 Am. St. Rep. 139, 7 Ann. Cas. 217; Waxahachie Med. Co. v. Daly, 122 Ark. 455, 183 S. W. 741; Watkins Med. Co. v. Martin, 132 Ark. 108, 200 S. W. 283, 2 A. L. R. 1230; Watkins Med. Co. v. Mosley, 139 Ark. 295, 213 S. W. 385.

The court, in Woolfort v. Dixie Cotton Oil Co., supra, says, quoting from a New Jersey case: "The tendency of judicial decisions on this subject, where the statute does not declare the contract to be void, is to a strict construction, maintaining the validity of the contract and holding that the only effect of such legislation in the state where it is enacted is to impose the prescribed penalties and the expressed disability."

In State Insurance Association v. Brinkley, supra, the court held that the contracts in that case were not void because they were Illinois contracts. In that case the contracts were insurance contracts which were sent to Chicago, Ill., to be signed and accepted by the company.

This court in Ockenfels v. Boyd, 297 F. 614, 616, had occasion to consider an analogous Arkansas statute, and in that opinion by Judge Lewis it is said, inter alia: "Furthermore, if it be assumed that the transaction was the doing of business by the corporation in the State, still its Constitution and statute have no application here; because they must be construed as prohibiting the institution of suits in the State courts of Arkansas, and not to the institution of suits growing out of such prohibited transactions in the Federal courts. Neither the Constitution nor statute declares void or voidable contracts made by a foreign corporation while doing business within the State without having theretofore complied with the requirements of the statute; and the appellee had a right to bring this suit in the Federal court notwithstanding the Arkansas Constitution and statute."

Appellants now cite and rely upon Republic Power & Service Co. v. Gus Blass Co., 165 Ark. 163, 263 S. W. 785. It is observed that this case makes no mention of the prior decisions in Arkansas, and does not purport to overrule them, and there was a dissenting opinion. In view of this uncertainty as to the construction of this statute by the Supreme Court of Arkansas, and the apparent conflict of the decisions on this question, it is doubtful whether this question has been finally put to rest by any binding decision of that court, in which event this court is at liberty to follow its own prior decision on the question, or now to give its own construction to the statute as applied to this case.

The statute on its face appears to be one affecting procedure and it does not go to the question of the validity of the contract. As a procedural statute it is not, of course, binding on this court. The statute is penal in character, and hence must be strictly construed. It has already been noted that the lower court held that the statute was not applicable because by its terms its inhibition is limited to contracts made in the state of Arkansas. If the court reached the correct conclusion, it is not material whether in reaching that conclusion it assigned correct grounds or reasons, and in our opinion the statute cannot be invoked because it does not make the contract void, and as a procedural statute it has no application to the federal courts, for the reasons stated by this court in Ockenfels v. Boyd, supra.

Counsel for appellants assert that the ruling of the lower court to the effect that the instant case is not within the statute is contrary to the decisions of the national courts, citing Diamond Glue Co. v. U. S. Glue Co., 187 U. S. 611, 23 S. Ct. 206, 47 L. Ed. 328; Chattanooga N. B. & L. Assn. v. Denson, 189 U. S. 408, 23 S. Ct. 630, 47 L. Ed. 870; Thomas v. Birmingham, etc., Co. (D. C.) 195 F. 340; Bothwell v. Buckbee, Mears Co., 275 U. S. 274, 48 S. Ct. 124, 72 L. Ed. 277. But the statutes considered by the federal courts in these cases were materially different from the Arkansas statute. The Wisconsin statute does not refer to contracts made within the state. The Wisconsin statute considered in Diamond Glue Co. v. U. S. Glue Co. provides that every contract made by such corporation affecting the personal liability thereof, or relating to property within the state before compliance with the section, shall be wholly void on its behalf. It is clear that the words "within the state" refer to property and not to contracts. The wording of the inhibition is not as to the making of contracts, but it refers to the liability of the corporation and property within the state.

In Chattanooga N. B. & L. Ass'n v. Denson, the contract was in fact signed in the state of Alabama, and the Alabama statute was much broader than the Arkansas act...