Swartwout v. Michigan A. L. R. Co.

• Decision Date: 03 April 1872
• Court: Michigan Supreme Court
• Parties: Lorenzo B. Swartwout v. The Michigan Air Line Railroad Company

24 Mich. 389

Lorenzo B. Swartwout v. The Michigan Air Line Railroad Company

Supreme Court of Michigan

April 3, 1872

Heard January 11, 1872

Error to St. Joseph circuit.

Judgment reversed, with costs, and a new trial ordered.

Severens & Burrows and Ashley Pond, for plaintiff in error.

Mason & Melendy and Geo. V. N. Lothrop, for defendant in error.

OPINION

Cooley J.

Swartwout was a subscriber to the capital stock of the Grand Trunk Railway of Michigan, a corporation afterwards consolidated with another, under the name of the Michigan Air Line Railroad Company. Having paid thirty-five per cent. of his subscription, he refused to pay the balance, and suit was brought for recovery. In the circuit court the plaintiff has succeeded in obtaining judgment, and Swartwout has brought the record to this court by writ of error, assigning various errors in the rulings below.

Many of the alleged errors relate to the original organization of the Grand Trunk Railway Company under the general railroad law of the state. It is insisted, among other things, that by the articles of association one of the proposed termini of the road is not indicated with sufficient precision; that the meeting of stockholders for the election of directors and the permanent organization of the company, was called before the requisite amount of stock had been subscribed; that the commissioners in determining upon the call for such meeting, which could only be made after a certain amount of subscriptions had been obtained, reckoned as a part of such amount certain sums unlawfully voted by municipalities, and that the court erred in not allowing the defense to show, by way of establishing the failure to elect a legal organization, that some of the subscriptions to the stock were conditional, and that on some the five per cent. required by law to be paid on subscribing was not paid. It is also objected that the proceedings to effect the consolidation of the Grand Trunk Railway with another organization, before referred to, were ineffectual by reason of certain irregularities, and that the circuit court erred in holding otherwise.

Before the suit below was brought, the railroad company had held meetings as well of its directors as of its stockholders; had made assessments upon the subscriptions to its capital stock and collected them in part; had assigned a portion of its road for construction, and proceeded to construct the same; and had done various other acts as a corporation, and expended large amounts of money in furtherance of the ostensible object for which the company was formed. Some of these things were done before, and some after the consolidation; and while in the proceedings of the associates there was every evidence that they intended to carry into effect the purpose indicated by their articles, we are not informed that the public authorities had interfered to call in question the validity of their assumption of corporate powers, or to take away any such powers as they might have possessed on any charge, that if originally assumed in conformity with law, they had since been forfeited.

Under these circumstances, I think the circuit judge was correct in holding that no question of the regularity of the organization of the Grand Trunk railway, or of its subsequent consolidation, could be raised by the defendant in this suit. It will be seen that the associates, under a statute which authorized them to incorporate themselves, had taken steps for that purpose; had assumed that the purpose was accomplished, and had for some time exercised corporate powers. The defendant was one of their number; he had acted with the rest in laying claim to corporate authority, and he had made payments on the assumption that the claim was well based. Important acts, extending over a long line of territory, had been done upon this assumption, and with acquiescence on the part of the public authorities. The original associates, together with those with whom they became united by the consolidation, were unquestionably a corporation de facto, whether they were such de jure or not; and as a corporation, in view of the facts in proof, it is reasonable to presume they had contracted debts and incurred obligations. The organization would be trusted in reliance upon its being the corporation it assumed to be; and parties dealing with it could not be expected to assume that the associates would be allowed to claim corporate rights for the purposes of constructing the road, and then to deny corporate existence for the purpose of avoiding the subscriptions, which were the sole consideration for their authority from the state to construct it. Where there is thus a corporation de facto, with no want of legislative power to its due and legal existence; where it is proceeding in the performance of corporate functions, and the public are dealing with it on the supposition that it is what it professes to be, and the questions suggested are only whether there has been exact regularity and strict compliance with the provisions of the law relating to incorporation; it is plainly a dictate alike of justice and of public policy, that in controversies between the de facto corporation, and those who have entered into contract relations with it, as corporators or otherwise, that such questions should not be suffered to be raised.

The injustice of requiring of every man who may deal with the associates in reliance upon the corporate personality, that he should at his peril take notice of all failures on their part in a strict compliance with the law, and that he should raise questions of usurpation of corporate authority which the state waives or passes by without notice, is too manifest to require comment. But apart from its injustice, it is obvious that all questions of regularity in the proceedings on the part of the associates in taking upon themselves corporate functions purporting to emanate from the sovereignty, are questions which concern the state rather than individuals, and should only be raised in a proceeding to which the state has seen fit to make itself a party.

The trial of an issue on a complaint by the state, of usurpation, would determine the matter finally, but the trial of the same issue in a suit with an individual would settle nothing for future controversies, but the same question might arise again and again, and perhaps be decided differently on different trials.

This point would have been open to no controversy whatever, had the plaintiff been organized under a special charter, and had we had no constitutional provision forbidding the granting of such charters. Proof of the charter and of user under it, would have been sufficient to establish a prima facie right in the plaintiff to sue: Snow v. Peacock, 2 C. & P., 215; Dutchess Manuf. Co. v. Davis, 14 Johns. 245; Williams v. Bank of Michigan, 7 Wend. 540; Penobscot, etc., R. R. Co. v. Dunn, 39 Me. 587; Jameson v. People, 16 Ill. 257; Cahill v. Kalamazoo Ins. Co., 2 Doug. 124; Way v. Billings, 2 Mich. 397; Wood v. Coosa, etc., R. R. Co., 32 Geo. 273; Baker v. Admr. of Backus, 32 Ill. 79; Cochran v. Arnold, 58 Pa. 399; Rondell v. Fay, 32 Cal. 354; A. & A. on Corp., 354. And this prima facie case an individual would not be suffered to dispute, for the reason already suggested, that the question is not to be tried in a suit where it would only arise collaterally, and where the state, as the party chiefly concerned, could not be heard by its counsel.

As was well said by Mr. Justice Bronson in a similar case: "It is unnecessary to inquire what may be the rights of the people in relation to this corporation, or as against the individuals who were concerned in getting it up and setting it in motion. The defendant does not represent the sovereign power, and has nothing to do with the question whether the company should be dissolved. So long as the state does not interfere, the company may sue, or do any other lawful act, whatever sins may have been committed in bringing the body into existence:" McFarlan v. Triton Ins. Co., 4 Denio 397.

But both in reason and on authority the ruling should be the same where an attempt has been made to organize a corporation under a general law permitting it. If due authority existed for the organization, and the question is one of regularity merely, "the rule established by law as well as reason is, that parties recognizing the existence of corporations by dealing with them, have no right to object to any irregularity in their organization, or any subsequent abuse of their powers, not connected with such dealing. As long as these are overlooked or tolerated by the state, it is not for individuals to call them in question:" Selden, J., in Methodist Ep. Union Church v. Pickett, 19 N.Y. 482. "Any other rule," as has been justly said in another New York case, "must be fraught with serious consequences, and great public mischief. Most of the persons who subscribe in good faith for the stock do not examine to see whether all the requirements of the statute in the organization of the corporation have been complied with; and if they did, would not probably discover defects like those now pointed out. The stock is sold in market from hand to hand, without any such examination. The corporation may carry on its business for years, and its stock have entirely changed hands, when its property may be destroyed by a trespasser, and in an action against him, in the name of the corporation, his only defense: 'You are not legally a corporation by reason of a defect in your constitution,' would, upon the doctrine contended for by the defendant, be successful." "The error," as is further said in the same case, "is in not recognizing the distinction between what is sufficient to constitute a...