California National Bank v. Kennedy/Opinion of the Court

by Edward Douglass White

United States Supreme Court

167 U.S. 362

California National Bank  v.  Kennedy

Before discussing the merits, we will briefly consider and dispose of a suggestion that no federal question appears by the record to have been properly raised below, and therefore there is a want of jurisdiction in this court to review the judgment. The answer averred that, if any stock of the savings bank appeared to have been issued to the national bank, it was 'issued without authority of this corporation defendant, and without authority of law.' In view of the fact that the defendant was a national bank, deriving its powers from the statutes of the United States, the averment that a particular transaction of the character of the one in question, if entered into, was without authority of law, can, in reason, be construed only to relate to the law controlling and governing the conduct of the corporation; that is, the law of the United States. But, if there were ambiguity on this subject, it is entirely removed by the grounds which were presented on the motion for a new trial, and the specifications of error which form the basis of the appeal which was taken to the supreme court of the state of California, for in both the motion and specifications the want of power under the laws of the United States was clearly asserted. The supreme court of the state interpreted the case brought to it from the court below as presenting the question of the power of the corporation, under the law of the United States, to become a stockholder in a savings bank, for in the opening sentence of its opinion it said:

'The Califoria National Bank, one of the defendants, has appealed upon the ground that, by virtue of the statutes under which it is organized, it had no power to become a stockholder in another corporation, and that its act in becoming such stockholder is so farultra vires that it cannot be made liable for any portion of the indebtedness of the corporation.'

The suggestion as to the want of jurisdiction is therefore without merit.

The federal questions which therefore arise on the record may be thus stated: (1) Do the statutes of the United States (Rev. St. § 5136 et seq.) relating to the organization and powers of national banks prohibit them from purchasing or subscribing to the stock of another corporation? And (2) if a national bank does not possess such power, can the want of authority be urged by the bank to defeat an attempt to enforce against it the liability of a stockholder?

As to the first question: It is settled that the United States statutes relative to national banks constitute the measure of the authority of such corporations, and that they cannot rightfully exercise any powers except those expressly granted, or which are incidental to carrying on the business for which they are established. Bank v. Townsend, 139 U.S. 67, 73, 11 Sup. Ct. 496. No express power to acquire the stock of another corporation is conferred upon a national bank, but it has been held that, as incidental to the power to loan money on personal security, a bank may, in the usual course of doing such business, accept stock of another corporation as collateral, and, by the enforcement of its rights as pledgee, it may become the owner of the collateral, and be subject to liability as other stockholders. Bank v. Case, 99 U.S. 628. So, also, a national bank may be conceded to possess the incidental power of accepting in good faith stock of another corporation as security for a previous indebtedness. It is clear, however, that a national bank does not possess the power to deal in stocks. The prohibition is implied from the failure to grant the power. First Nat. Bank v. National Exch. Bank, 92 U.S. 128.

On behalf of the plaintiff below it was admitted at the trial that the stock of the savings bank was not 'taken as security, or anything of the kind'; and it is not disputed in the argument at bar that the transaction by which this stock was placed in the name of the bank was one not in the course of the business of banking, for which the bank was organized.

2. The transfer of the stock in question to the bank being unauthorized by law, does the face that under some circumstances the bank might have legally acquired stock in the corporation estop the bank from setting up the illegality of the transaction?

Whatever divergence of opinion may arise on this question from conflicting adjudications in some of the state courts, in this court it is settled in favor of the right of the corporation to plead its want of power; that is to say, to assert the nullity of an act which is an ultra vires act. The cases of Thomas v. Railroad Co., 101 U.S. 71; Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co., 118 U.S. 290, 6 Sup. Ct. 1094; Oregon Ry. & Nav. Co. v. Oregonian Ry. Co., 130 U.S. 1, 9 Sup. Ct. 409; Pittsburgh, C. & St. L. Ry. Co. v. Keokuk & Hamilton Bridge Co., 131 U.S. 371, 9 Sup. Ct. 770; Central Transp. Co. v. Pullman's Palace-Car Co., 139 U.S. 24, 11 Sup. Ct. 478; St. Louis, V. & T. H. R. Co. v. Terre Haute & I. R. Co., 145 U.S. 393, 12 Sup. Ct. 953; Union Pac. Ry. Co. v. Chicago, M. & St. P. Ry. Co., 163 U.S. 564, 16 Sup. Ct. 1173; and McCormick v. Bank, 165 U.S. 538, 17 Sup. Ct. 433,-recognize as sound doctrine that the powers of corporations are such only as are conferred upon them by statute, and that, to quote from the opinion of the court in Central Transp. Co. v. Pullman's Palace-Car Co., supra (pages 59, 60, 139 U.S., and page 488, 11 Sup. Ct.):

'A contract of a corporation, which is ultra vires, in the proper sense (that is to say, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers conferred upon it by the legislature) is not voidable only, but wholly void, and of no legal effect. The objection to the contract is, not merely that the corporation ought not to have made it, but that it could not make it. The contract cannot be ratified by either party, because it could not have been authorized by either. No performance on either side can give the unlawful contract any validity, or be the foundation of any right of action upon it.'

This language was also cited and expressly approved in Railway Co. v. Hooper, 160 U.S. 514, 524, 530, 16 Sup. Ct. 379.

As said in McCormick v. Bank, supra (page 550, 165 U.S., and page 436, 17 Sup. Ct.):

'The doctrine of ultra vires, by which a contract made by a corporation beyond the scope of its corporate powers is unlawful and void, and will not support an action, rests, as this court has often recognized and affirmed, upon three distinct grounds: The obligation of any one contracting with a corporation to take notice of the legal limits of its powers; the interest of the stockholders, not to be subject to risks which they have never undertaken; and, above all, the interest of the public, that the corporation shall not transcend the powers conferred upon it by law. Pearce v. Railroad Co., 21 How. 441; Pittsburgh, C. & St. L. Ry. Co. v. Keokuk & Hamilton Bridge Co., 131 U.S. 371, 384, 9 Sup. Ct. 770; Central Transp. Co. v. Pullman's Palace-Car Co., 139 U.S. 24, 48, 11 Sup. Ct. 478.'

The doctrine thus enunciated is likewise that which obtains in England. Iron Co. v. Riche, L. R. 7 H. L. 653; Attorney General v. Great Eastern Ry. Co., 5 App. Cas. 473; Wenlock v. River Dee Co., 10 App. Cas. 354; Trevor v. Whitworth, 12 App. Cas. 409; Mining Co. v. Roper (1892) App. Cas. 125; Mann v. Tramways (1893) App. Cas. 70.

Applying the principles of law thus settled to the case at bar, the result is free from doubt.

The power to purchase or deal in stock of another corporation, as we have said, is not expressly conferred upon national banks, nor is it an act which may be exercised as incidental to the powers expressly conferred. A dealing in stocks is consequently an ultra vires act. Being such, it is without efficacy. Pearce v. Railroad Co., 22 How. 441, 445. Stock so acquired creates no liability to the creditors of the corporation whose stock was attempted to be transferred. 1 Cook, Stock, Stockh. & Corp. Law, p. 425, note 1 to section 316, and authorities there cited.

In Royal Bank of India's Case (1869) 4 Ch. App. 252, while it was held by the court of appeal that, as incidental to the power to advance money on a deposit of shares of stock, a corporation might do such acts as were reasonable and proper for making the security available, it was conceded that a purchase of stock of another company as a speculation would have been ultra vires, and, despite acts of ownership exercised by the company, the shares might be repudiated at any time.

'If it could have been shown that it was an act absolutely prohibited by their memorandum of articles of association, then, no doubt, a different question would have arisen. The act would have been ultra vires, and incapable of confirmation or ratification.'

'I quite agree that the Royal Bank of India had no authority to speculate in shares, and that if it had gone upon the stock exchange and bought shares as a speculation, such a proceeding would have been ultra vires, and all that has taken place would not have been enough to constitute the Royal Bank of India shareholders in this bank, or prevent them from repudiating these shares.'

In Ex parte Liquidators British Nation Life Assur. Ass'n (1879) 8 Ch. Div. 679, the court of appeals (Lords Justices James, Baggally, and Thesiger) discharged an order of an arbitrator which had put the British Nation Association on the list of contributories of the British Commercial Insurance Company, a corporation in the process of being would up. Pursuant to authority conferred by its deed of settlement, the British Nation Association had, through its directors, purchased the business of the British Commercial Insurance Company. Under the agreement entered into between the companies, certain stock of the British Commercial Company was transferred to the trustees appointed the British Nation Company. Subsequently this stock was transferred into the name of the association, and it was sought to hold it liable as a stockholder, because of its alleged ownership of such stock. Lord Justice James delivered the opinion of the court, holding that, while the British Nation Association was empowered to purchase for investment shares of a certain character, it was not empowered to purchase stock which would practically constitute it a partnership in business speculations or adventures, and that the transfer of the stock in question into the name of the bank was ultra vires and void. It was further held that the shareholders who had transferred the stock to the British Nation Association had no power, as between themselves and the association, to transfer their liability to the latter, and that—

'No other person or body of persons could be prejudiced or benefited or affected by an instrument to which they were absolutely strangers, such instrument being void as between the parties to it.'

The case before the court was declared to be not one of a person induced to become a shareholder, and who had become a shareholder by fraud, but that of a person who had never in fact become a shareholder.

The circumstance that the dealing in stocks by which, if at all, the stock of the California Savings Bank was put in the name of the California National Bank, was one entirely outside of the powers conferred upon the bank, and was in no wise the transaction of banking business, or incidental to the exercise of the powers conferred upon the bank, distinguishes this case from the class of cases relied upon by the defendant in error. Bank v. Whitney, 103 U.S. 99; Bank v. Matthews, 98 U.S. 621. The difference between those cases and one like this was referred to in McCormick v. Bank, supra, and it is therefore unnecessary to particularly review them. The claim that the bank, in consequence of the receipt by it of dividends on the stock of the savings bank, is estopped from questioning its ownership and consequent liability, is but a reiteration of the contention that the acquiring of stock by the bank under the circumstances disclosed was not void, but merely voidable. It would be a contradiction in terms to assert that there was a total want of power by any act to assume the liability, and yet to say that by a particular act the liability resulted. The transaction, being absolutely void, could not be confirmed or ratified. As was said by this court in Union Pac. Ry. Co. v. Chicago, M. & St. P. Ry. Co., 163 U.S. 564, 16 Sup. Ct. 1173, speaking through Mr. Chief Justice Fuller (page 581, 163 U.S., and page 1180, 16 Sup. Ct.):

'A contract made by a corporation beyond the scope of its powers, express or implied, on a proper construction of its charter, cannot be enforced, or rendered enforceable, by the application of the doctrine of estoppel.'

It follows from the goregoing that the judgment of the supreme court of California against the bank was erroneous, and it must therefore be reversed. And it is so ordered.

Mr. Justice HARLAN dissented.

Notes