New Orleans Debenture Redemption Co. v. Louisiana
180 U.S. 320 (1901)

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U.S. Supreme Court

New Orleans Debenture Redemption Co. v. Louisiana, 180 U.S. 320 (1901)

New Orleans Debenture Redemption Co. v. Louisiana

No. 129

Argued December 13-14, 1900

Decided February 25, 1901

180 U.S. 320

Syllabus

For the purpose of procuring a decree enjoining a corporation from acting as such on the ground of the nullity of its organization, it is not necessary that the individual corporators or officers of the company be made defendants, and process be served upon them as such; but the state by which the corporate authority was granted is the proper party to bring such an action through its proper officer, and it is well brought when brought against the corporation alone.

The state has the right to determine, through its courts, whether the conditions upon which a charter was granted to a corporation have been complied with.

This is a writ of error to the Supreme Court of the State of Louisiana, brought for the purpose of reviewing a judgment of that court affirming a judgment of the civil District Court for the Parish of Orleans decreeing the charter of the corporation plaintiff in error, under color of which it claimed corporate

Page 180 U. S. 321

existence, to be null, void, and of no effect. The suit was in the nature of a quo warranto. The Attorney General of Louisiana, pursuant to statute, filed a petition in the trial court against the New Orleans Debenture Redemption Company of Louisiana, Limited, as sole defendant, and in that petition alleged that the defendant was not organized for any purpose for which the law authorized the formation of corporations in the State of Louisiana; that it was a debenture company formed for the sole purpose of selling or borrowing money upon its own obligations or debentures, to be paid for in monthly installments, the company binding itself to pay the holders of debentures a profit of fifty percent upon the amount invested. A description of the manner in which the business was to be conducted was given in the petition, and it was alleged that the whole system amounted to a mere gambling venture, demoralizing as such, and was unlawful. It is also alleged that the company, in its modes of organization, had not complied with the requirements prescribed for corporations of any of the classes authorized by law, and that the act (No. 36 of the Laws of 1888) under which it claimed to have incorporated did not authorize the business which the company was doing. It was also alleged that the company and its officers, agents, managers, directors, and stockholders were unlawfully exercising a corporate franchise, and were acting as a corporation in the state without having been legally incorporated, and in violation of law, and that the public interest and common justice required that the company be enjoined from declaring forfeited or lapsed the rights of any debenture holder who did not continue paying his monthly installments during the pendency of the suit, and the prayer was that the affairs of the company be liquidated according to law under the direction of the court for the common benefit of all creditors and other persons interested according to their respective rights. The Attorney General further prayed that, if it should be held that the organization of the company was authorized by law, that then the charter be forfeited on account of the subsequent violation of law by the company in not insisting upon cash in payment for its shares or stock. A preliminary injunction was asked and granted, enjoining the

Page 180 U. S. 322

defendant from forfeiting or declaring lapsed the rights of any debenture holder during the pendency of the suit. This preliminary injunction was, upon an order to show cause, subsequently dissolved.

Process was served upon the president of the company in accordance with its charter. The defendant appeared and filed "peremptory exceptions to the petition, founded on law," which were overruled by the court. The defendant thereupon answered denying the material allegations in the complaint, and alleging that it was a duly and legally constituted private corporation, organized in conformity with the laws of the state, and expressly authorized by act No. 36 of the Laws of the year 1888, for the pursuit of the private enterprise and purposes set forth in its charter, and that stock had been issued to the extent of $50,000 and paid for to it, and that, in doing business, it had made many legal contracts which were outstanding, and that its debenture holders wished the company to keep on doing business, and it denied any gambling or wagering feature in connection with its contracts.

By supplemental answer, it alleged that the purpose of the suit was to deprive the defendant, a duly and legally organized corporation under the laws of the state, of the legal right to engage in or pursue its business in any manner, and that the suit as instituted and prosecuted had for its object one which was in violation of the Constitution of the State of Louisiana and of the Constitution and laws of the United States in that it deprived the defendant of its property without due process of law, and denied to it the equal protection of the laws of the State of Louisiana and of the United States, and that it violated the laws of the United States in that the purpose of the suit was to deprive the defendant of its lawful right to pursue a lawful business, and was an unlawful discrimination against the defendant and a denial to it of the equal protecting of the laws in the pursuit of its business.

The parties went to trial and evidence was given in support of the petition as to the character of the business, and also that the stock which had been issued by the defendant to shareholders had not in fact been paid for in cash as required by the

Page 180 U. S. 323

statute. The charter was put in evidence, from which, together with testimony taken in the case, it appeared that in all probability the company would be unable to perform its contracts with those who remain debenture holders until the maturity of their debentures, without the benefit which the company was to receive from lapses and forfeitures on the part of other debenture holders, resulting in a forfeiture to the company of all prior payments made by such holders. Ability to pay was even then claimed to be a matter of great doubt. It was stated by the trial court that, with fair management and in the five years of its existence, the company had more liabilities than assets. Much evidence was given on the trial of the case for the purpose of showing the general character of the business transacted by the company, and that it was, as alleged in the petition, of a gambling nature, and hence against the public policy of the state, and illegal.

There was no contradictory evidence on the trial regarding the facts as to the manner and plan of conducting the business of the defendant. Whether that business as thus conducted by it as a corporation and under its charter was or was not illegal became a simple question of law. The trial judge held in favor of the state, deciding that the business done by the defendant was an unlawful business, not permitted to be pursued by any corporation, and that defendant was illegally doing business as a corporation, and decreed that the pretended charter under color of which the defendant claimed corporate existence was null and of no effect. A decree was thereupon entered adjudging that the president, secretary, and general manager, as also the agents, directors, stockholders, and members of the so-called corporation, were and had ever been without legal authority to act in a corporate capacity in the name of the defendant or under color of its pretended charter. It was also decreed that the injunction theretofore issued prohibiting and restraining the company, its officers, directors, agents, and representatives, from removing the assets and funds of the company from the state or beyond the jurisdiction of the court, and from receiving any money or installments from its debenture holders, and from paying out any money on surrenders or withdrawals, or in redemption

Page 180 U. S. 324

of debentures, and from making loans on and from forfeiting any of said debentures, or the rights of any of the holders thereof, should be and was thereby confirmed and made absolute, and the company and its officers, representatives, and members were perpetually enjoined and restrained from acting in a corporate capacity.

A motion for a new trial was made and the constitutional objections again advanced, but the motion was denied.

After the entry of the final decree and the denial of the motion for a new trial, one August M. Benedict, a resident of the Parish of Orleans, presented his petition to the trial court, in which he alleged that he had been appointed by the Governor of the state the liquidator of the defendant, after the Governor had been officially informed of the judgment rendered by the court, and be asked to be recognized as such liquidator. The trial court, upon the presentation of the petition, with the annexed commission of the Governor, made an order recognizing Benedict as liquidator upon his taking oath and furnishing bond in the sum of $10,000; the court further ordered that the officers of the defendant transfer and turn over to the liquidator all the assets, books and other property of whatever nature or kind belonging to the defendant corporation. The liquidator duly filed his bond, which was approved, and letters were granted him by the judge of the trial court. Thereupon the defendant corporation prayed for a suspensive and devolutive appeal to the supreme court, which was granted. Upon the same day, a petition under the Louisiana practice was duly presented by the individual stockholders and the board of directors of the company to the court for leave to intervene in the suit, and in the petition they alleged the giving of judgment in the case against the company, which was the sole defendant therein, and that none of the individual incorporators or other persons interested were ever in any manner made parties to the suit, and that the sole issue in the suit was in regard to the legality of the business done by the company and the legality and validity of the charter adopted and executed by the corporators, and they represented that the right to be a corporation or the right to legal existence as such was not a franchise of the corporation

Page 180 U. S. 325

itself, but belonged to the corporators solely and exclusively. The petitioners further represented that they and each of them felt aggrieved by the judgment and by the injunction which had been issued and by the order for the appointment of a liquidator, and the order for the transfer of the property to his possession, all of which they alleged had been highly prejudicial to their legal rights, and they therefore asked to intervene in the cause for the purpose of taking and prosecuting an appeal, devolutive and suspensive, from the final judgment, and from all orders, decrees, or proceedings had in the cause, including the order and proceedings under the writ of injunction therein ordered or issued, and including all orders, decrees, and proceedings made or had therein for the appointment of a receiver or liquidator for said company, to the end that, on said appeal they might be enabled to be heard and to obtain a reversal of all such proceedings.

Service of the petition was made on the Attorney General, who accepted the same, waived citation, and acquiesced in the order granting the petitioners leave as asked for. Thereupon the directors and stockholders duly appealed to the supreme court from the final judgment and also from the various orders in regard to the liquidator. All of these appeals were heard in the supreme court and the decree of the court below was affirmed, but the separate appeal taken by the shareholders from the order recognizing Benedict as liquidator under the Governor's appointment was sustained, reserving to the State of Louisiana and all other parties in interest the question whether the appointment of a liquidator lies with the Governor, or of a receiver with the court, or with the parties in interest; such question to be thereafter determined by the court below as an open question. The company and the stockholders sued out writs of error to bring up the final decree of the state court for review.

Page 180 U. S. 326

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