Tourtelot v. Whithed
| Decision Date | 16 October 1900 |
| Citation | 84 N.W. 8,9 N.D. 467 |
| Court | North Dakota Supreme Court |
Appeal from District Court, Grand Forks County; Fisk, J.
Action by E. C. Tourtelot, receiver of the Grand Forks National Bank, against H. L. Whithed, assignee of the North Dakota Milling Company. Judgment for defendant, and plaintiff appeals.
Affirmed.
Tracy R. Bangs, for appellant.
Section 5136 and succeeding sections of the Revised Statutes constitute, with the acts since passed, a complete code of laws for the government of banking associations. Logan County Bank v. Townsend, 139 U.S. 67, 11 S.Ct. 496; California National Bank v. Kennedy, 167 U.S. 365 17 S.Ct. 831, 42 L.Ed. 200. The dealing in stocks by national banks is entirely outside of the powers conferred upon these corporations and is not banking business. California National Bank v. Kennedy, 167 U.S. 362; Bank v Hart, 38 Neb. 666, 26 L. R. A. 780. Such transactions in stocks of other corporations are void and ultra vires. Morowetz, Corp. § 433; Thompson, Corp. § 5719; Franklin County v. Lewiston, 28 Am. Rep. 9; Buckeye Marble Co. v. Harvey, 19 L. R. A. 252, n 20 S.W. 427; Miller v. Ins. Co., 20 L. R. A. 765, 21 S.W. 39; Franklin Bank v. Commercial Bank, 36 Ohio St. 350, 38 Am. Rep. 594; Hotel Co. v. Schran, 32 P 1002; German Bank v. Wulfekuhler, 19 Kan. 60; Knowles v. Sandercock, 40 P. 1047; Central Ry. Co. v. Pennsylvania Co., 31 N.J.Eq. 475; Barry v. Yates, 24 Barb. 199; Valley Co. v. Iron Works, 46 Ohio St. 40, 18 N.E. 486; Easum v. Buckeve, 51 F. 156; People v. Gas Trust, 130 Ill. 268, 22 N.E. 798; Milbank v. Ry. Co., 64 How. Prac. 20. A contract which is ultra vires as being beyond the powers conferred upon it by the legislature is not voidable only, but wholly void. Miller v. Mutual Accident Ins. Co., 20 L. R. A. 769; Central Transportation Co. v. Pullman Car Co., 139 U.S. 59, 35 L.Ed. 68; McCormick v. National Bank, 165 U.S. 550, 41 L.Ed. 821. In dealing with corporations all persons are bound to take notice, at their peril, of the extent of the powers of such corporation. Reese, Ultra Vires, § 53; Franklin v. Sav. Inst., 68 Me. 43, 28 Am. Rep. 9; Kraniger v. Building Society, 60 Minn. 94, 61 N.W. 904; Hayden v. Fire Ass'n., 80 Va. 683; Bailey v. Gas Co., 27 N.J.Eq. 196. The contract, by means of which the bank became possessed of this stock, and under which it surrendered the promissory notes of the milling company, was void. It was the duty of the bank to disaffirm the contract, and it became the duty of the bank's receiver to disaffirm the stock trafficing transaction and to sue for a restoration of its original property rights. Thomas v. Ry. Co., 101 U.S. 71; Miller v. Ins. Co., 20 L. R. A. 765; Railroad Co. v. Bridge Co., 131 U.S. 389; Central Transportation Co. v. Pullman Car Co., 139 U.S. 60; Parkersburg v. Brown, 106 U.S. 487, 27 L.Ed. 245; Pratt v. Short, 79 N.Y. 437; Ohio Life Ins. Co. v. Trust Co., 11 Humph. 1; Gas Light Co. v. Gas Co., 85 Me. 541; Miller v. Ins. Co., 20 L. R. A. 765; Greenville v. Compass Planters Press, 35 Am. St. Rep. 683, n.; Reese, Ultra Vires, § 74; Twiss v. Loan Ass'n., 87 Ia. 733; Dav v. Buggy Co., 57 Mich. 146; Anthony v. Sewing Machine Co., 5 L. R. A. 575.
Templeton & Rex, for respondent.
The stock of the milling company was not received by the bank as security but in payment of the debt, and having been so received by the bank the transaction was not ultra vires. The bank had the right to become the owner of the stock in payment of a debt, though it may not have had the right to purchase the stock as an original investment of its funds. First National Bank v. National Exchange Bank, 92 U.S. 122, 23 L.Ed. 679; Germania National Bank v. Case, 99 U.S. 620, 25 L.Ed. 448; People v. Gas Trust, 130 Ill. 268-283; Deposit Bank of Owensborough v. Barrett, 13 S.W. 337; Thomp. Corp § 5719; Howe v. Boston Carpet Co., 16 Gray 493; Miners Ditch Co. v. Zellerbach, 37 Cal. 543; Holmes & Griggs Mfg. Co. v. Holmes, Etc. Co., 127 N.Y. 252; Ellerman v. Chicago Junction Ry. Co., 49 N.J.Eq. 217-250, 23 A. 287-299. No action of the board of directors of the bank was necessary to empower Booker, as president, to accept the stock in payment of the milling company's debt. The directors had ceased to exercise any management or control over its affairs and had abandoned the entire management and control to Booker, the president. Under such circumstances Booker was in legal contemplation, the corporation, the bank, and had the same powers that the directors themselves had. Washington Savings Bank v. Butchers' and Drovers' Bank, 17 S.W. 644; Kraniger v. People, 60 Minn. 94, 61 N.W. 904; Simons v. Fisher, 55 F. 905; U.S. Bank v. First National Bank, 79 F. 296; State National Bank v. Chemical National Bank, 80 F. 859; Cocks v. Robinson, 82 F. 277-283.
Cochrane & Corliss, for respondent.
That a national bank may take stock in payment of or security for indebtedness is well settled. Fleckner v. Bank, 8 Wheat. 351; Bank v. Bank, 92 U.S. 122; Boyd v. Bank, 22 Am. Rep. 35; 1 Morse, Bank'g, §§ 60, 77 and 78; Bank v. Bank, 51 How. Prac. 320; Howe v. Boston Carpet Co., 16 Gray, 493; McCraitt v. Bank, 10 N.E. 862; Bank v. Bank, 39 Md. 611; H. & G. M. Co. v. Co., 127 N.Y. 252, 3 Am. & Eng Enc. L (2d Ed.) 798, 799; Anderson v. Bank, 5 N.D. 451, 454. The evidence shows that before the transaction in question took place the directors of the bank had utterly abandoned the affairs of the bank and left all of its affairs in the exclusive charge of Booker, its president. Under such circumstances Booker was, for all purposes, the board of directors and had the power which the board had, and therefore which the corporation itself possessed. Wing v. Bank, 61 N.W. 1009, 1013; Davenport v. Stone, 62 N.W. 723; Martin v. Webb, 110 U.S. 7; Armstrong v. Bank, 83 F. 571; 1 Morse, Bank'g, § 343. In view of the conflict of authority and of the qualified doctrine established by some of the courts permitting a corporation to purchase its own stock under certain conditions, and of the fact that other courts deny the power altogether, (see note 33 Am. St. Rep. 399, 345), it is obvious that § 2880, Rev. Codes of this state was framed for the express purpose of fixing the exact limits of such corporate power in this jurisdiction. Adams, Etc. Co. v. Deydette, 59 Am. St. Rep. 751, 756. If a corporation may buy its own stock, or make a valid agreement to buy it, in this indirect way, its stock may be diminished and destroyed and the policy of the statute which is protection to the public, be entirely defeated. Trevor v. Whitworth, 12 App. Cas. 409; 2 Thomp. Corp. § 5024; Coppin v. Greenless, 38 Ohio St. 275. The statute guards against the distribution of capital stock among the stockholders. § 2891, Rev. Codes. And yet this is precisely what is done when stockholders are allowed to sell their stock to the corporation. The agreement on the part of the company to buy back its own stock was therefore ultra vires, and being executory no claim for damages, based thereon, can possibly exist. Adams, Etc. Co. v. Deydette, 59 Am. St. Rep. 754. The capital stock of a corporation is a trust fund. 2 Thomp. Corp. § 1569; Hamor v. Taylor, 84 F. 395; Sawyer v. Hoag, 17 Wall. 610. Therefore, if a stockholder may, by a secret agreement with the corporation, place himself in a position where, in the event the corporation becomes insolvent, he may become a creditor of the corporation and cease to be a stockholder therein, all of the stockholders may make such an agreement and upon the insolvency of the corporation the creditors instead of having a corporate stock as assets out of which to collect their claims would find the stockholders to be creditors of the corporation. Agreements to transmute stockholders into creditors can not be enforced at the expense of other creditors. Adams, Etc. Co. v. Deydette, 59 Am. St. Rep. 751; Buck v. Ross, 57 Am. St. Rep. 60; Heggie v. Peoples, 107 N.C. 581; Bent v. Hart, 10 Mo.App. 143; Fraser v. Ritchie, 8 Ill.App. 554; Clapp v. Peterson, 104 Ill.App. 26; Bank v. Burch, 33 Am. St. Rep. 331; Hamor v. Taylor, 84 F. 393; Atwater v. Stromberg, 77 N.W. 963; Atwater v. Smith, 76 N.W. 253; Columbian Bank's Estate, 147 Pa. 422; Buck v. Ross, 57 Am. St. Rep. 60; Wilbur v. Stoepel, 46 N.W. 724. It is not important to show that there was any design to defraud, however innocent the transaction may be, if the effect of the sale or of enforcing the sale is to prejudice creditors, the sale is illegal. Clapp v. Peterson, 104 Ill. 26; Bank v. Burch, 33 Am. St. Rep. 334. After the bank had purchased the stock it was no longer the creditor of the company, but was a stockholder therein. Yeaton v. Eagle, Etc. Co., 29 P. 1051.
In the year 1888 the Grand Forks National Bank was duly organized and commenced business as such national bank at the city of Grand Forks, in this state. In 1896 said bank became insolvent, and the comptroller of currency took possession of its assets, and on August 6th of said year E. C. Tourtelot, the plaintiff and appellant herein, was placed in charge of the assets of said bank as receiver, and it is in that capacity that he brings this action. Some time prior to the year 1891 the North Dakota Milling Company was duly organized as a corporation under the laws of this state. In April, 1897, the said milling company made a general assignment for the benefit of creditors to the defendant and respondent, H. L. Whithed. This action was brought to compel the allowance and the pro rata payment by the assignee of alleged claims held by the said bank against the said milling company, aggregating $ 14,000, and the accrued interest thereon. These claims were presented to the said assignee, and were by him disallowed...
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