Handelsman v. Chicago Fuel Co.

• Decision Date: 10 June 1925
• Docket Number: No. 2181.,2181.
• Citation: 6 F.2d 163
• Parties: HANDELSMAN v. CHICAGO FUEL CO. In re ANNA LOAN & IMPROVEMENT CO.
• Court: U.S. District Court — Eastern District of Illinois

6 F.2d 163 (1925)

HANDELSMAN v. CHICAGO FUEL CO In re ANNA LOAN & IMPROVEMENT CO.

No. 2181.

District Court, E. D. Illinois.

June 10, 1925.

Whitnel, Whitnel & Browning, of East St. Louis, Ill., for petitioner.

Brown, Fox & Blumberg, of Chicago, Ill., and Fred B. Penwell, of Danville, Ill., for receivers.

LINDLEY, District Judge.

Upon a bill in equity receivers were appointed for the Chicago Fuel Company, hereinafter termed the corporation. The receivership is still pending. The Anna Loan & Improvement Company, hereinafter termed the association, organized under the building and loan statute of the state of Illinois, filed its intervening petition for leave to foreclose its certain mortgages, aggregating $10,000, executed prior to the receivership by the Victory Collieries Company, the then owner of the premises included in said mortgages, and now a part of the assets of the Chicago Fuel Company. It is alleged in the petition that the mortgages constitute first liens upon certain lots and houses built with the proceeds of the loan. The association is organized under the building and loan statutes of the state of Illinois, which requires such an association to file for record, with the recorder of deeds of the proper county, its certificate of organization within two years, and provides that unless such action is taken it ceases to be a corporation and has no right to exercise any of the powers conferred by its charter. The statute further provides that such association shall be organized for the purpose of making loans to persons with which to build homesteads. The Victory Collieries Company, to whom the loan was made, was a coal-mining corporation, and used these funds to build tenant houses for its miners. It is contended by the receivers that such a corporation cannot become a member of a building association; that the mortgages were therefore beyond the power of the association and are utterly void. The certificate of the association was not filed with the recorder of deeds within the time required by law. The receivers contend that this failure is fatal to the legal existence of the association. The facts show that the loans were made in good faith, and that the Victory Collieries Company received the funds and used the same in making the improvements. The questions raised will be discussed separately.

1. The failure to record the certificate from the secretary of state's office prevented the association from becoming a corporation de jure. This has been definitely decided by the Supreme Court of Illinois in People v. Mackey, 255 Ill. 144, 99 N. E. 370. That proceeding, however, was one in quo warranto brought by the state, and there is nothing in the Illinois decisions, other than the dictum in Africani Association v. Carroll, 267 Ill. 380, 108 N. E. 322, which would warrant the announcement of a rule that the doctrine may be invoked by way of defense by a private party, where the circumstances are such as to amount in law to the establishment of a corporation de facto. "From the authorities, * * * it appears that the requisites to constitute a corporation de facto are three: (1) A charter or general law under which such a corporation as it purports to be might lawfully be organized; (2) an attempt to organize thereunder; and (3) actual user of the corporate franchise. * * * In proceedings where the question whether a corporation exists or not arises collaterally, the courts will not permit its corporate character to be questioned, if it appear to be acting under color of law, and recognized by the state as such. * * * And the rule, we apprehend, would be no different if the Constitution itself prescribed the manner of incorporation. Even in such a case, proof that the corporation was acting as such, under legislative action, would be sufficient evidence of right, except as against the state, and private parties could not enter upon any question of regularity." Tulare Irrigation v. Shepard, 185 U. S. 1, 22 S. Ct. 531, 46 L. Ed. 773. There the court definitely established the rule that, where a de facto corporation exists, none but the state can call its de jure existence into question.

The facts in the present case are such as to bring it within the rule announced in B. & P. Railroad Co. v. Fifth Baptist Church, 137 U. S. 568, 11 S. Ct. 185, 34 L. Ed. 784. There the court said: "But the certificate of incorporation, as originally drawn up, taken in connection with the other evidence now introduced, * * * is clearly competent and sufficient, as between these parties, to prove that the plaintiff had in good faith attempted to legally organize as a corporation, and had long acted as such, and was at least a corporation de facto, which is all that is necessary to enable it to maintain an action against any one, other than the state, who has contracted with the corporation, or who has done it a wrong." The Illinois courts generally follow the rule announced in these cases and appear to be firmly committed to their doctrine. See Lurton v. Jacksonville Ass'n, 187 Ill. 141, 58 N. E. 218; North Ave. Ass'n v. Huber, 270 Ill. 75, 110 N. E. 312, Ann. Cas. 1917B, 587. For this reason any dicta or any indications to the contrary by implication should be ignored. It follows that, though the failure to record the certificate would be fatal in an action brought by the state in a direct attack upon the association's legal existence, yet under the facts peculiar to this case, the association having transacted business as a building and loan corporation for years, having exercised all of the franchises of such a corporation, having been prima facie authorized so to do, and there having been no deception or misleading action as against the persons with whom it did business, the doctrine of the cases above quoted from control and the petitioner's legal existence cannot be attacked in this proceeding.

It is contended that in the case of Elgin Nat. Watch Co. v. Loveland (C. C.) 132 F. 41, the court held that the right to attack the legality of incorporation of a building association under the law of Illinois extended to private parties. In discussing the question the court there said that, as the alleged user consisted only of such acts or proceedings as might have been exercised without incorporation, a corporation de facto would not be inferred therefrom. But the facts in the present case are not of such character. Here the acts could in a strict sense of the word be performed only by a building and loan association. Hence all the facts essential to the creation of a corporation de facto exist.

2. It appears that the loans made by the association were made to a corporation organized under the general law of Illinois. Building associations are under the statutes of Illinois organized solely for the purpose of making loans to homesteaders, in order to enable them to purchase or build homes for their families. Loans to nonmembers are utterly void. The question whether a corporation organized under the general law may become a member of a building and loan association for the purpose of borrowing money for the construction of dwellings for employees seems always to have been avoided by the Supreme Court of Illinois, for in the case of Kadish v. Garden City Ass'n, 151 Ill. 531, 38 N. E. 236, 42 Am. St. Rep. 256, the Supreme Court said that the question as to whether a corporation for manufacturing purposes should be allowed to become members of homestead loan associations and whether such association should be allowed to loan money for general business purposes were not decided, as their decision was not necessary to the determination of the case. But in the case of Standard Savings & Loan Ass'n v. Aldrich, 163 F. 216, 89 C. C. A. 646, 20 L. R. A. (N. S.) 393, decided by the Circuit Court of Appeals for the Sixth Circuit, Judge Lurton, afterwards Mr. Justice Lurton, commented fully upon the character of such associations and the proper interpretation of statutes limiting their power. In that case one building association had attempted to become a member of another association and to borrow from the latter funds needed in its business. The terms of the Michigan statute are almost identical with those of that of Illinois. It was held that the contract was beyond the scope of the power of the ...