West Penn Chemical & Manufacturing Co. v. Prentice

• Court: U.S. Court of Appeals — Third Circuit
• Citation: West Penn Chemical & Manufacturing Co. v. Prentice, 236 F. 891 (3rd Cir. 1916)
• Decision Date: 15 November 1916
• Docket Number: 2109.
• Parties: WEST PENN CHEMICAL & MFG. CO. v. PRENTICE.

236 F. 891

WEST PENN CHEMICAL & MFG. CO. v. PRENTICE.

No. 2109.

United States Court of Appeals, Third Circuit.

November 15, 1916

Robbins & Wyant, of Greensburg, Pa., and O. P. Robertson, of Pittsburgh, Pa., for plaintiff in error.

Ward Bonsall, of Pittsburgh, Pa., for defendant in error.

Before BUFFINGTON, McPHERSON, and WOOLLEY, Circuit Judges.

McPHERSON Circuit Judge.

This suit between citizens of different states is founded on a written contract signed by George D. Prentice and by the president of the West Penn Company on January 3, 1914. Whether the instrument was binding throughout upon the company is the decisive question on this writ.

Two subjects are dealt with by the writing. First, Prentice is hired as a salesman for one year at a specified salary, and undertakes to give all his services and to perform his duties to the utmost of his skill and ability for the profit and advancement of the company. Upon this branch of the case little need be said. The employment was the act of the president, but his power to hire a salesman for a year is not denied, and the verdict has settled the disputes arising out of the plaintiff's discharge before the end of the period, and out of his alleged failure to fulfill his duties. The verdict is itemized, and we are able to say with certainty that $208.07 is awarded him on this account. The remainder of the verdict amounts to $2,643.75, and belongs to the other branch of the case, which will now receive our attention.

The writing goes on to provide that Prentice is to buy 250 shares of capital stock at par, paying $2,500 cash therefor, and the company is to give Prentice an option to buy 250 shares additional within six months; but, if Prentice should not be satisfied with the investment, the company agrees to dispose of 250 shares at par at the expiration of the contract January 3, 1915; 'notice of intention of disposal to be given' by Prentice to the company 30 days previously. The option on the second 250 shares lapsed, but Prentice paid in full for the first 250, and gave the required notice. The company neither disposed of the stock nor paid its par value and in the following February this suit was brought on the contract.

Did such an agreement bind the company? It is denied that the writing is in any proper sense a corporate act, and this aspect of the case is the first reason urged upon us for reversal. While the writing recites that it is made between the company and Prentice, and while the body of it purports to bind the company, it was not executed as a corporate instrument should be executed. The attesting clause is 'In witness whereof the parties to these presents have hereunto set their hands and seals the day and year first above written. ' And the signature is: 'West Penn Chemical & Mfg. Co., (Signed) H. Messmer, Pres. (Seal.)' The corporate seal was not affixed and the secretary took no part in the execution, and, so far as appears, had no share in the transaction. Moreover, on the undisputed evidence no such contract was ever authorized by the stockholders or by the directors, and the instrument was therefore executed by the president on his own responsibility. About nine months afterwards, Prentice, who had meanwhile become a director, persuaded the person, who was then the secretary, to affix the corporate seal and to attest the paper; but neither were these acts authorized by the corporation, and they added nothing to the original status of the instrument. Taking the writing therefore as it stood on January 3d, we think it should be regarded as the act of the president undertaking to bind the company, and in that aspect we shall deal with it.

No doubt the president of a corporation is its general administrative agent, although his powers are by no means without limits. But, even if we assume for the purposes of this case that Messmer might fairly be presumed to have authority to sign such a writing in the name of his company without other evidence of corporate assent, such an act could not bind the company unless the contract were within the corporate powers. 7 Ruling Case Law, Sec. 436; Wait v. Nashua Ass'n, 14 L.R.A. 356, note; Carney v. Insurance Co., 49 L.R.A. 472, note; Lloyd v. Matthews, 7 L.R.A. (N.S.) 376, note. If the corporation itself could not make the contract, Messmer was equally powerless, and we are thus brought to consider whether the West Penn Company itself could directly have made the agreement. This is the point on which the company mainly relies, and in order to appreciate the argument we must turn to the law of Delaware, by which state the company's charter was granted.

The prevailing rule in the United States appears to be that a corporation may buy its own stock if the interest of creditors be not adversely affected, and if its power to buy be not restricted by its charter or by general law. 7 Ruling Case Law, Sec. 528 et seq. But, if one examines the cases cited on this subject in the notes to Buckeye Co. v. Harvey, 18 L.R.A. 254, Hall v. Henderson, 61 L.R.A. 621, McGregor v. Fitzpatrick, 25 L.R.A. (N.S.) 50, and Schulte v. Land Co., 44 L.R.A. (N.S.) 156, we think he will conclude that the decision of a particular case depends so largely on its own facts that the foregoing statement of the rule is valid only in a general sense, and admits of several exceptions. It seems safe to say that, where a statute restricts the power to buy, the restriction must be obeyed, although it is true that difficult questions may be met in the effort to determine the statute's meaning and scope. That such a restriction exists by the general corporation law of Delaware (25 Del. Laws, c. 154, Sec. 1) appears in section 19, which provides as follows:

'Every corporation organized under this chapter shall have the power to purchase, hold, sell and transfer shares of its own capital stock; provided that no such corporation shall use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of the capital of the corporation.'

This gives the power to buy, but a restricted power; the corporate funds may not be so used when the purchase would impair the company's capital. What this means has been recently decided by the Chancellor of Delaware in Re International Radiator Co., 92 A. 255. In that case Harris had subscribed for $5,000 of the company's stock, giving his notes therefor. The company had agreed to sell the stock for him at $7,500 before a specified date, but had failed to do so. Harris had paid the notes (which the company had discounted) and thereupon presented a claim for $7,500 in the subsequent receivership. The Chancellor held that the legal effect of the contract was to bind the company to repurchase the shares at $7,500 in case it should be unable to sell them at that price, and then went on to consider the validity of the transaction. Upon that point the opinion has this to say concerning section 19 of the Delaware statute:

'The claim is further affected by the statute in Delaware. By the General Corporation Act, under which the company was incorporated, the company could not use its funds or property to purchase shares of its own capital 'when such use would cause an impairment of the capital of the corporation.' At the time when the agreement was made with Harris, and at the time the receiver was appointed, the capital stock of the company was about $400,000, presumably issued for value, while its assets were appraised at $13,000 by the appraisers in the receivership cause. It is said that about $75,000 of stock was issued for patents, etc. But even adding this sum to the appraised value of the assets of the company, still the payment of the claim of Harris from the assets to come into the hands of the receiver will, of course, deplete the capital.

'Therefore, the question is whether an agreement of a corporation to sell shares of its

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