State v. Mortgage Security Co. of Minnesota, Inc.
| Decision Date | 09 February 1923 |
| Docket Number | 23,014 |
| Citation | 192 N.W. 348,154 Minn. 453 |
| Parties | STATE EX REL. v. MORTGAGE SECURITY COMPANY OF MINNESOTA, INC., AND ANOTHER |
| Court | Minnesota Supreme Court |
A. B Darelius petitioned the district court for Hennepin county that it ascertain the probable amount of indebtedness of respondent corporation and levy a ratable assessment upon each share of stock. The matter was heard by Dickinson, J who ordered an assessment equal to the par value of each share of capital stock. From an order, Montgomery, J. denying their motion to set aside the order levying an assessment on the stock, Grace M. Herber, administratrix Michael Reiser, Anthony J. Adams and A. B. Swain, appealed.
Rights and liabilities of stockholders in corporation.
1. The charter of a corporation evidences the contract by which the stockholders, by becoming such, consent to be bound, and their rights and liabilities are measured and determined thereby.
Stockholders not liable for indebtedness in excess of permitted amount.
2. The charter provision limiting the amount of indebtedness which the corporation is permitted to incur is, in part, for the protection of the stockholders, and they cannot be held personally liable for debts of the corporation beyond that amount.
Stockholder not estopped from denying liability for corporate debt.
3. The fact that the corporation may be estopped from denying liability for debts which it was prohibited from contracting, does not estop the stockholder from denying personal liability therefor.
Ratification of ultra vires contracts must be unanimous.
4. It requires the unanimous approval of the stockholders to ratify ultra vires contracts of the corporation.
Individual liability of stockholder for prohibited debt.
5. Any liability that may exist against officers or stockholders individually on account of the part they took in contracting prohibited debts, is outside and distinct from their liability as stockholders.
When order levying assessment is appealable.
6. Where the court makes an order levying an assessment, in part, for debts for which the stockholders claim that they are not liable, they may have the ruling reviewed on an appeal from the order.
W. L. Hursh, for appellants.
Morphy, Bradford & Cummins and Paul J. Marwin, for respondent.
This is a proceeding by the receiver of the Mortgage Security Company to enforce the constitutional liability of the stockholders of the company for the debts of the company. The articles of incorporation authorized the company to issue 10,000 shares of common stock and 10,000 shares of preferred stock, each of the par value of $50, amounting in the aggregate to the sum of $1,000,000. It actually issued 5,992 shares of common stock of the par value of $299,600, and 6,012 shares of preferred stock of the par value of $300,600. The articles of incorporation limited the amount of indebtedness to which the corporation should at any time be subject to the sum of $100,000. The debts proved and allowed against the corporation in this proceeding exceed $900,000. The entire assets of the corporation other than the amounts which may be collected from the stockholders will not exceed $200,000. The court made an assessment against the stockholders of the par value of each and every share of stock both common and preferred. Certain of the stockholders, on behalf of themselves and all other stockholders, made an application to vacate the order levying the assessment and for a rehearing and reconsideration of the matters determined by the order. The application was denied and they appealed.
The statute requires the certificate of incorporation to specify "The highest amount of indebtedness or liability to which the corporation shall at any time be subject." G.S. 1913, § 6147. Pursuant to this requirement the certificate in question provides that "the highest amount of indebtedness or liability to which this corporation shall at any time be subject shall be the sum of one hundred thousand dollars."
The assessment was made on the theory that the limitation on the power of the corporation to incur debts was not a limitation on the liability of the stockholders, and that they are liable, up to the par value of their stock, for the full amount of the indebtedness outstanding. The stockholders contend that the limitation on the power to incur debts was placed in the charter, in part, for their protection; that the corporation could not lawfully incur debts beyond the specified amount; and that they cannot be held personally liable for more than that amount. So far as we are aware, this precise question has not been presented to this court heretofore, although questions which bear upon it have been considered frequently.
The charter of a corporation consists of the certificate or articles of incorporation together with the laws under which it was organized. The charter evidences the contract by which the stockholder, by becoming such, consents to be bound. It measures and determines his rights, obligations and liabilities, and also the nature and extent of the powers conferred on the corporation, and defines and limits the field of corporate activities. 1 Dunnell, Minn. Dig. § 1992, and citations; 7 Am. & Eng. Enc. 695, and citations; 14 C.J. 161, 843. The charter provisions limiting the amount of indebtedness which a corporation may incur forms a part of the contract between the corporation and its stockholders, and marks the limit of the power given to the corporation to contract debts as the representative of the stockholders. The corporation may lawfully incur debts, for authorized purposes, so long as the total indebtedness is kept within the prescribed limit, and the stockholders are bound by the contracts creating such debts, but the corporation cannot lawfully incur debts which carry the total indebtedness beyond the prescribed limit, and contracts creating such debts are ultra vires and not binding on the stockholders.
It is true that the law will not permit a corporation, which has received and had the benefit of money or property acquired through an ultra vires contract, to interpose its want of power to make the contract for the purpose of defeating payment of the debt which it assumed to incur. But this rule rests on the broad principle that no one shall be allowed to enrich himself at the expense of another through his own wrongful act, and does not give validity or effect to the contract except to the extent necessary to protect other parties. Auerbach v. Le Sueur Mill Co. 28 Minn. 291, 9 N.W. 799, 41 Am. St. 285; Delaware F.M.F. Ins. Co. v. Wagner, 56 Minn. 240, 57 N.W. 656; Bell v. Mendenhall, 78 Minn. 57, 80 N.W. 843; Kraniger v. People's Bldg. Soc. 60 Minn. 94, 61 N.W. 904; Erb v. Yoerg, 64 Minn. 463, 67 N.W. 355; Davis v. National Casualty Co. 115 Minn. 125, 131 N.W. 1013; Northland Produce Co. v. Stephens, 116 Minn. 23, 133 N.W. 93. Such ultra vires contracts can be ratified and validated only by the unanimous consent of the stockholders. Kraniger v. People's Bldg. Soc. 60 Minn. 94, 61 N.W. 904; Olson v. Warroad M. Co. 136 Minn. 310, 161 N.W. 713; Fergus Falls W.M. Co. v. Boyum, 136 Minn. 411, 162 N.W. 516, L.R.A. 1918A, 919. The Constitution provides:
Each stockholder in any corporation, excepting those organized for the purpose of carrying on any kind of manufacturing or mechanical business, shall be liable to the amount of stock held or owned by him. Article 10, § 3.
This provision creates a liability, contractual in its nature, which the stockholder assumes by becoming a stockholder. Hanson v. Davison, 73 Minn. 454, 76 N.W. 254; 14 C.J. 973, and cases there cited.
Stockholders in corporations organized to carry on an exclusively manufacturing or mechanical business are not subject to this liability, but stockholders in all other corporations are subject to it. Many cases have arisen involving the question whether the business carried on by a corporation was such as to subject its stockholders to this liability, and it has uniformly been held that this question must be determined solely by the powers given the corporation in its charter. If the business to be carried on, as set forth in the charter, might include something not strictly within the field of a manufacturing or mechanical business, it is settled that the stockholders are subject to this liability. Oswald v. St. Paul Globe Pub. Co. 60 Minn. 82, 61 N.W. 902; St. Paul B. Co. v. Minneapolis D. Co. 62 Minn. 448, 64 N.W. 1143; Gould v. Fuller, 79 Minn. 414, 82 N.W. 673; Merchants' Nat. Bank v. Minnesota Thresher Mnfg. Co. 90 Minn. 144, 95 N.W. 767; Meen v. Pioneer Pasteurizing Co. 90 Minn. 501, 97 N.W. 140; Graff v. Minnesota Flint Rock Co. 147 Minn. 58, 59, 179 N.W. 562. And this is true, although the corporation in fact confined its business exclusively to manufacturing. Arthur v. Willius, 44 Minn. 409, 46 N.W. 851; First Nat. Bank v. Winona Plow Co. 58 Minn. 167; 59 N.W. 997; Merchants Nat. Bank v. Minnesota Thresher Mnfg. Co. 90 Minn. 144, 95 N.W. 767. On the other hand, if the business to be carried on, as set forth in the charter, did not extend beyond manufacturing, it is settled that the stockholders are exempt from the constitutional liability, even if the corporation in fact engaged in other business. Nicollet Nat. Bank v. Frisk-Turner Co. 71 Minn. 413, 74 N.W. 160, 70 Am. St. 334; Senour Mnfg. Co. v. Church P. & F. Mnfg. Co. 81 Minn. 294, 84 N.W. 109. Persons dealing with a corporation are bound to take notice of the powers given, and of the limitations imposed, by its charter. 1 Dunnell, Minn. Dig. § 2017, and citations.
In Ward v. Joslin, 186 U.S. 142, 22 S.Ct 807, 46 L.Ed. 1093, the Supreme Court of the United States had under consideration...
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