In re John B. Rose Co.

• Decision Date: 01 June 1921
• Docket Number: 225.
• Citation: 275 F. 416
• Parties: In re JOHN B. ROSE CO. Appeal of METROPOLITAN BANK.
• Court: U.S. Court of Appeals — Second Circuit

275 F. 416

In re JOHN B. ROSE CO. Appeal of METROPOLITAN BANK.

No. 225.

United States Court of Appeals, Second Circuit.

June 1, 1921

The John B. Rose Company is a corporation organized under the laws of the state of New York, and was adjudicated a bankrupt on June 11, 1918.

The Metropolitan Bank on September 24, 1918, filed proof of claim in the sum of $25,000.

The proof of claim is based upon an alleged guaranty which may be found in the margin. ^[1]

The proof of claim invokes the guaranty in respect of 16 promissory notes which aggregate something in excess of $25,000. The notes were all drawn to the order of John B Rose and were indorsed by him. They were discounted by the bank which placed the money to the credit of his individual account.

The order adjudicating the John B. Rose Company a bankrupt contained the usual provision referring the matter to a referee in bankruptcy to take such further proceedings as required by the act of Congress.

The trustee of the bankrupt moved to expunge the claim of the bank on the ground that the guaranty on which the claim rested was ultra vires the John B. Rose Company and therefore void.

The referee in bankruptcy allowed the claim. The District Court overruled the order of the referee, and on November 15, 1920 entered an order disallowing the claim and expunging it from the list of claims against the estate of the bankrupt.

The bank seeks to uphold the guaranty upon the theory that while the bank account was in the name of Rose personally, it was for the benefit of the John B. Rose Company and the subsidiary companies to which reference has been made.

Butcher Tanner & Foster, of New York City, for appellant.

Hughes, Rounds, Schurman & Dwight, of New York City (Richard E. Dwight and Allen S. Hubbard, both of New York City, of counsel), for appellee.

Before WARD, ROGERS, and HOUGH, Circuit Judges.

ROGERS Circuit Judge (after stating the facts as above).

A corporation ordinarily is without power to enter into a contract of guaranty, as such a contract is foreign to the objects of its creation and hazards its funds in a manner unwarranted by the contract which exists between it and the state, and between it and its stockholders. The existence of such a power is sometimes implied, however, when it is necessary to enable a corporation to accomplish the objects for which it is created, or when it is reasonably necessary in the conduct of its business.

It appears that the bankrupt, the John B. Rose Company, which gave the guaranty, was a corporation engaged in the excavation and sale of sand and gravel for building and construction purposes, and in the sale of brick and other building material. In carrying on its business it had barges engaged in the transportation on the Hudson river of brick, sand, and gravel. It did not itself manufacture brick, but obtained it from the Rose Brick Company and the Alpha Company. The Coney Island Construction Company and the other subsidiary companies sold the brick for the John B. Rose Company instead of the John B. Rose Company selling it direct. The John B. Rose Company had no interest in the sale of the brick except to the extent of its commission as the agent of the Rose Brick Company.

It may be assumed, unless there are special circumstances disclosed in the record which make this case an exception to the general rule, that the John B. Rose Company, being a manufacturing and sales company, had no implied power to loan its credit or to guarantee the individual paper of John B. Rose. While a corporation organized for manufacturing purposes may guarantee paper which it owns, or paper which it negotiates in due course of business and the proceeds of which it receives, it cannot be maintained that the power to guarantee the personal notes of a third person for his accommodation is possessed by it as being 'essential to the transaction of its ordinary affairs' nor within 'the legitimate objects of its creation. ' In the case of In re Prospect Leasing Co., 250 F. 707, 709, 163 C.C.A. 39, this court recently declared the rule to be fundamental that a corporation had no implied power to make accommodation paper. We did not apply the rule in that particular case because the corporation had received a valuable consideration for its indorsement inasmuch as a cause of action against the corporation was released.

In Ward v. Joslin, 186 U.S. 142, 149, 22 Sup.Ct. 807, 46 L.Ed. 1093, the court declared that ordinarily corporations have no implied power to bind themselves by accommodation indorsements, or to guarantee the paper of a third person which they do not own. And in Louisville, New Albany & Chicago Railway Co. v. Louisville Banking Co., 174 U.S. 552, 567, 19 Sup.Ct. 817, 43 L.Ed. 1081, the court declared that a railroad corporation, unless authorized by its act of incorporation or a statute, had no power to guarantee the bonds of another corporation and that such a guaranty was 'beyond the scope of the powers of the corporation, and strictly ultra vires, unlawful and void, and incapable of being made good by ratification or estoppel.'

In Jacobus v. Jamestown Mantel Co., 211 N.Y. 154, 160, 105 N.E. 210, 212, the New York Court of Appeals declared that--

'A manufacturing corporation has no power to make or indorse notes for the accommodation of others. * * * One who deals with the officers or agents of a corporation is bound to know their powers and the extent of their authority.'

The rule is so familiar and is so well established that citations in support of it are quite unnecessary. The real question involved must be whether there are any circumstances disclosed in the record which make the rule inapplicable to the case under consideration.

The document containing the guaranty is set forth in the statement preliminary to this opinion. On its face it appears to be for the personal benefit of Rose. It guarantees 'all present and future indebtedness and indebtednesses, liability and liabilities of John B. Rose,' 'whether he is or shall be alone liable, or is or shall be liable jointly with another or others. ' It appears to be an agreement which is ultra vires the corporation. In view of the apparent ultra vires character of the guaranty the burden of proof is on the creditor, in this case the Metropolitan Bank, to prove by a preponderance of evidence that each of the notes which it discounted was discounted for the benefit of the John B. Rose Company and that the moneys so derived were for the use and benefit of that company.

The guaranty given to the claimant bank appears to have been authorized at a meeting of the directors of the John B. Rose Company. But if the guaranty were otherwise ultra vires it could not be made intra vires as against creditors even if it had been authorized by all the directors and the stockholders. In re Prospect Worsted Mills (D.C.) 126 F. 1011, 1014; Murphy v. Arkansas, etc., Improvement Co. (C.C.) 97 F. 723, 727; Germania Safety Vault & Trust Co. v. Boynton, 71 F. 797, 19 C.C.A. 118; J. G. Brill Co. v. Norton, etc., St. Ry. Co., 189 Mass. 431, 75 N.E. 1090, 2 L.R.A. (N.S.) 525; Cook v. American Tubing & Webbing Co., 28 R.I. 41, 53, 65 A. 641, 9 L.R.A. (N.S.) 193.

The testimony of the president of the claimant bank as to the circumstances under which he agreed to accept the guaranty of the John B. Rose Company does not disclose that the money realized from the discounting of the notes was to be used for the benefit of the John B. Rose Company, or that any representations were made to him that the guaranty was for the benefit of the corporation. Asked to give 'the full conversation' he had on the subject with John B. Rose, he said that Rose approached him on the subject of discounting some notes:

'I told him we were willing to discount those papers. He told me they were commercial notes, and I said we would discount those notes, provided we had the notes endorsed and guaranteed by a responsible party. He offered the guaranty of the John B. Rose Company. I told him I would give him $25,000 to start with. He was satisfied. I then had a paper made out, as he told me that he required the money on January 15th.

'He took the guaranty along, and on the 15th of January his cousin or brother, a man by the name of Rose, called on me and brought me several notes, less than $25,000, and gave me that guaranty; and on the strength of that I gave instructions to discount the paper, and to open an account.'

He was asked and answered further as follows:

'Q. What did he say to you? Did he say he wanted to discount paper with you? A. Sure. Q. And what was the character of the paper he said he wanted to discount with you? A. Commercial paper. Q. Arising how? A. Commercial paper must have some commercial transaction. Q. Was it a transaction in connection with the sale of merchandise? A. I did not ask, or care. Q. Did Mr. Rose say he was in the business of buying and selling merchandise? A. No, sir. Q. What did he say? A. He said he was the president of the John B. Rose Company, manufacturers of brick, I think it was. Q. And he did not say he was in business? A. No, sir. Q. You did not so understand, either, did you? A. No. I did not care as long as there was a satisfactory guaranty.'

We have examined the record carefully to see whether any circumstances are disclosed which would justify the guaranty and we have found none. If the John B. Rose Company received any consideration for its guaranty the fact does not appear. The evidence fails to show that the money realized by the discount of the notes covered by the guaranty was obtained at the request of the John B. Rose Company for its use, or that it was applied to its benefit. On the contrary, we think it appears that the guaranty was given for...