Star Mills v. Bailey

• Decision Date: 11 October 1910
• Citation: 140 Ky. 194,130 S.W. 1077
• Parties: STAR MILLS v. BAILEY.
• Court: Kentucky Court of Appeals

130 S.W. 1077

140 Ky. 194

STAR MILLS v. BAILEY.

Court of Appeals of Kentucky.

October 11, 1910

Appeal from Circuit Court, Daviess County.

Action by Hugh Bailey against the Star Mills. From a judgment for plaintiff, defendant appeals. Reversed and remanded for judgment as directed.

C. W Wells and W. Foster Hayes, for appellant.

Watkins & Birkhead, for appellee.

O'REAR J.

Appellant is a manufacturing and trading corporation. Appellee was a stockholder, as well as secretary and treasurer, of the corporation, and in March of 1906 one Newton was its president. At that time it was needing money. It had, as it was empowered by its charter to do, authorized the issual and sale of $2,000 of preferred stock at par. Newton offered for the company to sell appellee Bailey five shares of the preferred stock at par. Bailey on June 1, 1906, paid on account of the corporation $500 of its debts. One Vanarsdall had succeeded Newton as president. A note for $500 was then executed by Vanarsdall to Bailey for $500, secured by a pledge of five shares of the preferred stock of the corporation. The order of the board of directors authorizing the sale of the preferred stock, and the charter of the corporation, provided that such stock should bear 6 per cent per annum interest, which should be paid before any dividend was paid on the common stock, and upon liquidation of the corporation the holders of the preferred stock were to be paid in full, with 6 per cent. per annum interest as dividends, before holders of common stock received anything. The certificates of the preferred stock also contained the foregoing provision. Appellee brought suit against appellant upon the note of $500. The answer was a plea of non est factum. It also set out what was claimed to be the real transaction, namely, that appellant sold appellee the five shares of preferred stock in March of 1906, the certificate being then signed and left in the stock book until paid for, and was then delivered to appellee. The reply was a traverse of the affirmative plea. Upon this issue two witnesses only were called. One was appellee Bailey. The other was Newton, the former president. The action was in equity, owing to the allegations and prayer of the petition seeking a sale of the alleged collateral. The judgment was in favor of appellee Bailey upon the note, subject to certain credits which will again be adverted to, and canceled the stock certificate. This appeal is from that judgment.

The question for decision is mainly one of fact. The chancellor's finding on the facts, treated as cases in equity always, is given the weight which is accorded from his superior opportunity for knowing the witnesses and their credibility. Still, if the burden was so that even that consideration would not be enough to preponderate in appellant's behalf, the judgment ought not to stand. A trading corporation may borrow money when not interdicted by its charter. It may execute its note to evidence the debt so made. A corporation, even a trading corporation, acts only through its officers actually empowered to do so, or by the acts of those permitted by it to do the thing in question. The former is the strictly legal way in which the corporation acts. The latter may bind it, not because they are empowered to do so, but because, having been held out or suffered to act in such capacity on the corporation's behalf so that those dealing with it are misled into the belief that the officers are so empowered in fact, the corporation is estopped to deny their legal authority.

The power of this corporation to borrow the $500 and to execute its note for it is beyond all dispute. Whether it did borrow the money and execute its note is the question of fact to be decided. The president of a corporation has not the inherent power to borrow money for it, and to execute a note on its behalf. Such power must be delegated to him either by the by-laws or resolutions of its governing body, or by its charter, or by its custom of dealing. There is nothing in the charter or by-laws of appellant authorizing its president to act in that behalf. Nor was there a resolution of record to that effect made by its governing body, which is its board of directors. The transaction according to the testimony of appellee was that Newton, Vanarsdall, and Bailey (appellee), constituting the board of directors, met on June 1, 1906, at the company's place of business, discussed the need of $500 for the corporation's use, and borrowed that sum from appellee Bailey, for which the note sued on was executed, and the stock put up as collateral. No record was made of the meeting, although the corporation kept a book in which was recorded the acts of its board. A corporate board of directors must act as a board in order to bind the corporation. When a board can delegate a power and intends to, it should act in an official meeting, and by its records. If this were not so, unofficial, casual meetings of the men who constituted the board, and parol statements thereat, would be the warrant on which would be bound the stockholders whom they represented. That is what might have been done by a copartnership. But a corporation is a different thing from a copartnership. The law creating it distinguishes between the two in several particulars; one being the manner of acting. The corporation being artificial, it can act only in the manner allowed by law. Being distinct from its directors, their acts are not its acts unless they act in the manner required by law. Therefore in delegating power to an officer strictly it speaks by its record. It is true that it may by custom become estopped, as already remarked, and may be held for acts of its officers ultra vires when it has subsequently ratified them, or has accepted the benefits of the unauthorized act. But, as that latter feature of corporate action is not raised in this case, it need not be noticed further. This transaction was not with a stranger unacquainted with the corporation's records, and not knowing the power of its officers. It was just the contrary. Appellee was himself the official to make and keep the records, as well as one of the board of directors and a stockholder. Hence, if it is ever to be again asserted that a corporation should act by its proper officers, and speak by its record, this is the case in which to say it. So there was not a record of the alleged loan, and none of the authority of President Vanarsdall to execute the note.

Aside from the view just advanced, Newton testified that there was not a meeting of the board of directors on June 1, 1906, or at any time, in which it was proposed or agreed to borrow the $500 from appellee, at which witness Newton was present. Vanarsdall did not testify. Thus is presented the very evil which the rule requiring corporate action to be generally of record was intended to avoid. If it be conceded that the record was not essential, was merely convenient and valuable and the fact in dispute might be established by parol, and if it also be conceded that the two witnesses are equally credible, the evidence is balanced. The burden was on the plaintiff, appellee. ...