First Nat. Bank v. Winchester

• Decision Date: 05 November 1898
• Citation: 24 So. 351,119 Ala. 168
• Parties: FIRST NAT. BANK OF GADSDEN v. WINCHESTER ET AL.
• Court: Alabama Supreme Court

24 So. 351

119 Ala. 168

FIRST NAT. BANK OF GADSDEN v. WINCHESTER ET AL.

Supreme Court of Alabama

November 5, 1898

Appeal from city court of Gadsden; John H. Disque, Judge.

Bill in equity by the First National Bank of Gadsden against S. M Winchester and others for cancellation of a mortgage and of its foreclosure, and for foreclosure of the mortgages of complainant. From the dismissal of the bill on the motion of defendants Line and Winchester, complainant appeals. Affirmed.

Amos E Goodhue, for appellant.

Dortch & Martin, for appellees.

HEAD J.

The Gadsden Foundry & Machine Works was organized as a body corporate under our general incorporation laws. On March 1 1887, its only stockholders were J. E. Line, S. M Winchester, John Flinn, and William Hagen. On that day, Line and Winchester sold and assigned all their stock in the corporation to their co-stockholders, Flinn and Hagen, at the agreed price of $7,750, to be paid in the future, for which 17 promissory notes, maturing at different times, were given. These notes were not only executed by the purchasers, Flinn and Hagen, but by the corporation also, by and through Flinn as president, and Hagen as secretary. To secure them, Flinn, Hagen, their wives, and the corporation (the latter acting in its corporate name, by Flinn as president, and Hagen as secretary), at the same time, executed a mortgage on certain described real and personal property belonging to the corporation, with power of sale, etc. This mortgage recited that Flinn and Hagen were the only stockholders of the corporation. On December 24, 1891, the said Gadsden Foundry & Machine Works, to secure an indebtedness of $5,000, evidenced by four described promissory notes then made by it to A. L. Glenn, trustee (the indebtedness being alleged in the bill to have been owing to the complainant), executed to said Glenn, trustee, a mortgage on the same property as that described in said former mortgage, with power of sale, etc.; and on June 25, 1892, executed another mortgage on a part of the property to the complainant to secure an additional indebtedness of $1,250. The mortgage of March 1, 1887, to Line and Winchester, was foreclosed under the power, and the mortgagees therein became the purchasers, and have possession of the property as such purchasers. The bill is filed against the corporation and the said Line and Winchester, by the said second mortgagee, praying cancellation of said first mortgage and of the foreclosure thereof, asking foreclosure of its own mortgages, and for general relief. The respondents, Line and Winchester, moved to dismiss the bill for want of equity, which motion was sustained and the bill dismissed. The cause was not at issue as to the defendant corporation.

It is not disputable that the relation assumed by the corporation, as such, by the execution of the notes and mortgage to Line and Winchester. was that of surety to Flinn and Hagen, and that such a contract was not within its charter powers; and under the strict rule, so long and often declared by this court, rendering void ultra vires executory contracts of corporations, were are constrained to hold that the suretyship so undertaken imposed no enforceable personal obligation upon the corporation, and that the mortgage did not devest the corporate entity of its legal title to the property it purported to convey. Smith v. Insurance Co., 4 Ala. 558; Grand Lodge v. Waddill, 36 Ala. 313; Bank v. Dunkin, 54 Ala. 471; Chambers v. Falkner, 65 Ala. 448; Banking Co. v. Smith, 76 Ala. 572; Wilks v. Railroad Co., 79 Ala. 180; Machine Co. v. Wilkinson, Id. 312; Sherwood v. Alvis, 83 Ala. 115, 3 So. 307; Lime Works v. Dismukes, 87 Ala. 344, 6 So. 122; Long v. Railway Co., 91 Ala. 519, 8 So. 706; Lumber Co. v. Rees, 103 Ala. 622, 16 So. 637. Personal obligation, however, for the payment of the debt rested upon Flinn and Hagen, the debtors, and were by them expressly assumed in and by the notes and mortgage they executed; and it is not to be questioned, of course, that whatever vendible interest they had in the property, if any, passed by the mortgage for the purposes of the intended security, unless some rule of public policy applicable to the case forbade it.

The question, then, is, what interest had Flinn and Hagen in the property which by law they were competent to transfer as security for their individual debt, and what the relative rights of their mortgagees and the said subsequent incumbrancers, with notice, created by the corporation itself acting within its charter powers? As we have seen, Flinn and Hagen, when they executed the notes and mortgage now assailed, were the only stockholders of the corporation, and there were no creditors or other parties in interest to be affected. It was purely a private business corporation, organized solely for the profit of the stockholders, and in no wise to serve the public.

There seems to be no contrariety of opinion among text writers and courts to the effect that the shareholders of private business corporations, where there are no creditors or others interested, are the beneficial owners of the corporate property. Morawetz, an authority of distinction on this branch of the law, says: "A private corporation is in reality a voluntary association, formed by agreement of its members for the purposes set forth in their charter. The real or beneficial ownership of everything belonging to an ordinary trading corporation is in the persons who compose it. Each stockholder has an equitable interest in the corporate affairs; and this interest must be managed in accordance with the...