The Circuit Court of the United States for the District of
Kentucky has jurisdiction of a suit brought by a corporation,
originally created by the Indiana, against citizens of Kentucky and
of Illinois, even if the plaintiff was afterwards and before the
suit made a corporation of Kentucky also, and pending the suit
became a corporation of both Indiana and Illinois by reason of
consolidation with a corporation of Illinois, but the court cannot,
in such a suit, adjudicate upon the rights and liabilities, if any,
of the plaintiff as a corporation of Kentucky or as a corporation
of Illinois.
A court of equity has jurisdiction of a bill by a corporation
praying that its guaranty on a great number of negotiable bonds may
be cancelled, and suits upon it restrained, because of facts not
appearing on its face.
Under a statute authorizing the board of directors of a railroad
corporation, upon the petition of a majority of its stockholders,
to direct the execution by the corporation of a guaranty of
negotiable bonds of another corporation, a negotiable guaranty
executed by order of the directors, and signed by the president and
secretary and under the seal of the first corporation, upon each of
such bonds, without the authority or assent of the majority of its
stockholders, is void as to a purchaser of such bonds with notice
of the want of such authority or assent, but is valid as to a
purchaser in good faith and without such notice.
This was a bill in equity filed April 9, 1890, in the Circuit
Court of the United States for the District of Kentucky, by the
Louisville, New Albany & Chicago Railway Company (hereafter
called the "New Albany Company"), described as "a corporation duly
organized and existing under the laws of the state of Indiana,"
against the Ohio Valley Improvement & Contract Company
(hereafter called the "Construction Company"), the Richmond,
Nicholasville, Irvine & Beattyville Railway Company (hereafter
called the "Beattyville Company"),
Page 174 U. S. 553
and the Louisville Trust Company, all corporations of the State
of Kentucky, and other citizens of Kentucky, of New York, and of
Illinois, for the cancellation of a contract between the New Albany
Company and the Construction Company, and of a guaranty endorsed by
the New Albany Company, in accordance with that contract, upon
bonds issued by the Beattyville Company, and held by the other
defendants, and for an injunction against suits thereon. The
Louisville Banking Company, a corporation of Kentucky, and other
bondholders, were afterwards made defendants by a supplemental
bill.
The bill alleged that the guaranty was fraudulently placed on
the bonds of the Beattyville Company by a minority of the
plaintiff's directors, who, as individuals, had secured the option
to buy the bonds at a low price, and also averred that the guaranty
was void for want of the presence of a quorum of the directors at
the meeting which directed it to be executed, as well as for want
of a previous petition in writing by a majority of the
stockholders, pursuant to a statute of Indiana.
Pleas to the jurisdiction, asserting that the plaintiff was a
corporation and a citizen of Kentucky, as well as demurrers to the
bill for want of equity were overruled by the court. 69 F. 431,
432; 57 F. 42.
The case was afterwards heard upon pleadings and proofs, and, so
far as is material to be stated, appeared to be as follows:
The New Albany Company, by articles of incorporation filed with
the Secretary of State of Indiana in January, 1873, reciting its
purchase at a judicial sale at New Albany of the railroad and
franchise, and all the property, real and personal, of another
railroad company, whose line of railroad ran from New Albany to
Michigan City, in the State of Indiana, and expressed to be made
"for the purpose of carrying out the design of the said purchase,
and forming a corporation of Indiana," became a corporation under
the statute of Indiana of March 3, 1865, which contained these
provisions:
"The said corporation shall have capacity to hold, enjoy and
exercise, within other states, the aforesaid faculties, powers,
rights, franchises and immunities, and such others as
Page 174 U. S. 554
may be conferred upon it by any law of this state, or of any
other state in which any portion of its railroad may be situate, or
in which it may transact any part of its business, and to hold
meetings of stockholders and of its board of directors, and to do
all corporate acts and things, without this state, as validly and
to the same extent as it may do the same within the state, on the
line of such road."
Indiana Stat. 1865, p. 68, c. 20, § 5; Rev.Stat. § 3949.
"Any railroad company incorporated under the provisions of this
act shall have the power and authority to acquire, by purchase or
contract, the road, roadbed, real and personal property, rights and
franchises of any other railroad corporation or corporations which
may cross or intersect the line of such railroad company, or any
part of the same, or the use and enjoyment thereof, in whole or in
part; and may also purchase or contract for the use and enjoyment,
in whole or in part, of any railroad or railroads lying within
adjoining states, and may assume such of the debts and liabilities
of such corporations as may be deemed proper. . . . Any railroad
company incorporated under the provisions of this act shall also
have power to consolidate with other railroad corporations in the
continuous line, either within or without this state, upon such
terms as may be agreed upon by the corporations owning the
same."
Indiana Stat. 1865, p. 68, c. 20, § 7; Rev.Stat. § 3951.
On April 8, 1880, the Legislature of Kentucky passed a statute
entitled "An act to incorporate the New Albany & Chicago
Railway Company," which took effect upon its passage, and the first
two sections of which were as follows:
"SEC 1. The Louisville, New Albany & Chicago Railway
Company, a corporation organized under the laws of the State of
Indiana, is hereby constituted a corporation, with power to sue and
be sued, contract and be contracted with, to have and use a common
seal, with the power incident to corporations, and authority to
operate a railroad."
"SEC. 2. The Louisville, New Albany & Chicago Railway
Company is hereby authorized to purchase or lease, for depot
purposes in the City of Louisville or County of Jefferson, such
Page 174 U. S. 555
real estate as may be deemed by it to be necessary for passenger
and freight depots and transfer, machine shops, and for all
switches or turnouts necessary to reach the same, and is also
authorized to connect with any railroad or bridge now operated or
used, or which may be hereafter operated or used, in said County of
Jefferson, and may build any such connecting lines, or lease or
operate the same, and for all said purposes shall have the right to
condemn all property required for the carrying out of the objects
herein named, and may bond the same, and secure the payment of any
such bonds by a mortgage of its property, rights and
franchises."
The third section of that statute directed how proceedings for
the condemnation of such real estate should be conducted in the
courts of the State of Kentucky. Kentucky Stat. sess. 1879, p. 233,
c. 858.
On May 5, 1881, the New Albany Company, describing itself as "a
corporation existing under the laws of the State of Indiana" and as
owning and operating a line of railroad from New Albany to Michigan
City in the same state, and the Chicago & Indianapolis Air-Line
Railway Company, describing itself as "a consolidated corporation
organized and existing under the laws of the States of Indiana and
Illinois" and as having in process of construction a line of
railway extending from Indianapolis, in Indiana, to a connection
with a railroad at or near Glenwood, in Illinois, so as to secure a
connection with Chicago in that state, consolidated their stock and
property under the laws of Indiana and of Illinois "so as to create
and form a consolidated corporation, to be called and known as the
Louisville, New Albany & Chicago Railway Company," by articles
of consolidation, the third of which provided, in accordance with
the statutes of Indiana, that
"the said consolidated corporation hereby created shall be
vested with all the rights, privileges, immunities and franchises
which usually pertain to railroad corporations under the laws of
the respective states of Illinois and Indiana, wherein the lines of
its railroad are situate, and shall also be vested with all and
singular the rights, powers, privileges, immunities, capacities and
franchises which before the execution
Page 174 U. S. 556
of these articles were lawfully possessed or exercised by either
of the parties hereto,"
and the ninth of which provided that "the principal place of
business and the general office of the consolidated corporation
shall be established in the City of Louisville, Kentucky."
On April 7, 1882, the Legislature of Kentucky, by a statute
entitled "An act to amend an act entitled
An act to incorporate
the Louisville, New Albany & Chicago Railway,' approved April
8, 1880," enacted that
"the Louisville, New Albany & Chicago Railway Company is
hereby authorized and empowered to endorse or guarantee the
principal and interest of the bonds of any railway company now
constructed or to be hereafter constructed within the limits of the
State of Kentucky, and may consolidate its rights, franchises and
privileges with any railway company authorized to construct a
railroad from the City of Louisville to any point on the Virginia
line, such endorsement, guarantee or consolidation to be made upon
such terms and conditions as may be agreed upon between said
companies, or it may lease and operate any railway chartered under
the laws of the State of Kentucky, provided, it shall not lease or
consolidate with any two lines of railway parallel to each
other."
Kentucky Stat. sess. 1881, p. 251, c. 870.
The New Albany Company was not shown to have formally accepted
the statutes of Kentucky of 1880 and 1882, or to have ever
organized as a corporation under those statutes. But the
defendants, as evidence that it had accepted a charter of
incorporation from the State of Kentucky, relied on the following
documents:
(1) Two deeds to it of lands in Jefferson County, made and
recorded in 1881, in which it was described as "of the City of
Louisville, Kentucky."
(2) Two mortgages executed by it to trustees in 1884 and 1886,
including its railway in Indiana and in Jefferson County, in each
of which it was described as "a corporation duly created and
existing under the laws of Indiana and Kentucky."
(3) A lease to it from the Louisville Southern Railway
Page 174 U. S. 557
Company, in 1888 (more fully stated below), in which it was
similarly described.
(4) A petition (the date of which did not appear in the
transcript) that an action brought against it in a court of the
State of Indiana might be removed into the circuit court of the
United States upon the ground that it was a corporation of
Kentucky.
(5) Proceedings in 1887, in a court of Jefferson County, for the
condemnation of lands in that county upon a petition in which
"the Louisville, New Albany & Chicago Railway Company states
that it is a corporation, and that it is duly empowered by its
charter by an act of the General Assembly of the Commonwealth of
Kentucky to purchase, lease, or condemn in said state such real
estate as may be necessary for railway, switches, side tracks,
depots, yards, and other railway purposes, and to construct and
operate a railroad in said state."
On March 8, 1883, the Legislature of Indiana passed a statute
entitled
"An act to authorize railroad companies organized under the laws
of the State of Indiana to endorse and guarantee the bonds of any
railroad company organized under the laws of any adjoining
state,"
the material provisions of which were as follows:
"SEC 1. The board of directors of any railway company organized
under and pursuant to the laws of the State of Indiana whose line
of railway extends across the state in either direction may, upon
the petition of the holders of a majority of the stock of such
railway company, direct the execution by such railway company of an
endorsement guarantying the payment of the principal and interest
of the bonds of any railway company organized under or pursuant to
the laws of any adjoining state the construction of whose line or
lines of railway would be beneficial to the business or traffic of
the railway so endorsing or guarantying such bonds."
"SEC. 2. The petition of the stockholders specified in the
preceding section of this act shall state the facts relied on to
show the benefits accruing to the company endorsing or guarantying
the bonds above mentioned. "
Page 174 U. S. 558
"SEC. 3. No railway company shall, under the provisions of this
act, endorse or guaranty the bonds of any such railway company or
companies, as is above mentioned, to an amount exceeding one half
of the par value of the stock of the railway company so endorsing
or guarantying as authorized under this act."
Indiana Stat. 1883, p. 182, c. 127; Rev.Stat. §§
3951
a-3951
c.
On December 10, 1888, the New Albany Company took a lease in
which it was described as "a corporation organized and existing
under the laws of the State of Indiana and of the State of
Kentucky," from the Louisville Southern Railroad Company, a
corporation of Kentucky, of the railroad of the latter, running
from Louisville to Burgin through sundry other places in Kentucky,
and connecting at Versailles, in that state, with a railroad then
being constructed by the Beattyville Company to Beattyville, and
which would, if completed, extend the connections of the New Albany
Company a considerable distance towards the Virginia line.
The Beattyville Company had, on October 11, 1888, made a
contract with the Ohio Valley Improvement & Contract Company by
which that company agreed to construct and equip its line of
railroad, and, in consideration thereof, the Beattyville Company
agreed to execute and issue to the Construction Company its first
mortgage bonds for $25,000 a mile, dated July 1, 1889, and payable
in thirty years, with interest at the annual rate of six percent,
and to transfer to that company the subscriptions received from
municipalities, and to issue to that company all its capital stock
except what would have to be issued on account of such
subscriptions.
On October 8, 1889, the board of directors of the New Albany
Company, as appeared by its records, passed a resolution ordering
the president and secretary to execute under the seal of the
company a contract with the Construction Company, which contract
described that company as a corporation of the State of Kentucky,
and the New Albany Company as "a corporation organized and existing
under the laws of the States of Indiana and Kentucky," and
contained these stipulations:
"Fourth. The said New Albany Company agrees to and
Page 174 U. S. 559
with the said Construction Company that it will, from time to
time, as the said first mortgage bonds are earned by and delivered
to the said Construction Company, pursuant to the terms of their
said construction contract, guaranty the payment by the said
Beattyville Company of the principal and interest of the said bonds
in manner and form following -- that is to say, by endorsing upon
each of said bonds a contract of guaranty as follows:"
" For value received, the Louisville, New Albany & Chicago
Railway Company hereby guaranties to the holder of the within bond
the payment, by the obligor thereon, of the principal and interest
thereof, in accordance with the tenor thereof."
" In witness whereof, the said railway company has caused its
corporate name to be signed hereto by its president, and its seal
to by attached by its secretary."
"Sixth. In consideration of the premises, the said Construction
Company agrees to transfer and deliver to the said New Albany
Company three-fourths of the entire capital stock of the said
Beattyville Company, the said delivery to proceed
pari
passu with the guarantying of the said bonds by the said New
Albany Company, $3,000 at par of the said stock being delivered for
each $4,000 of bonds guarantied."
This contract was dated October 9, 1889, was signed in the name
of each company by its president and secretary and under its
corporate seal, and a copy of it was spread upon the records of the
board of directors of the New Albany Company.
The charges of fraud against the directors who took part in that
meeting were disproved, and the evidence failed to establish that
the meeting was not in every respect a lawful one.
But no petition of a majority of the stockholders for the
execution of the guaranty was presented, as required by the statute
of Indiana of 1883, above cited. Nor was there any evidence that
the stockholders ever authorized or ratified the contract between
the New Albany Company and the Construction Company or the guaranty
executed in accordance therewith.
Pursuant to that contract, and before March 12, 1890, the
Page 174 U. S. 560
stock of the Beattyville Company was delivered to the New Albany
Company; a guaranty, in the terms specified in the fourth article
of that contract, and bearing the signature of the New Albany
Company, by its president and secretary, and its corporate seal,
was placed on 1,185 bonds, for $1,000 each, of the Beattyville
Company; and the bonds thus guarantied were put on the market by
the Construction Company.
On March 12, 1890, the annual meeting of the stockholders of the
New Albany Company was held, a new board of directors was elected,
and the meeting was adjourned to March 22, 1890, when it was voted
by a majority of the stockholders to reject and disapprove the
contract with the Construction Company and the guaranty placed on
the bonds of the Beattyville Company, as having been made without
legal authority or the approval of the stockholders, and to empower
the board of directors to take all proceedings necessary or proper
to cancel such contract and guaranty and to relieve the company
from an obligation or liability by reason thereof.
Many of the bonds so guarantied and put on the market, including
one hundred twenty-five bonds purchased by the Louisville Trust
Company and ten bonds purchased by the Louisville Banking Company,
were taken from the Construction Company by the purchasers in good
faith, and without notice or knowledge that there had been no
petition of a majority of the stockholders for the execution of the
guaranty, and forty-five of the bonds were purchased from the
Construction Company by the Louisville Banking Company after the
meeting in March, 1890, and with notice that the majority of the
stockholders had not petitioned for, but had disapproved, the
guaranty.
The Beattyville Company and the Construction Company went on
with the work of constructing the Beattyville Railroad until the
summer of 1890, when they both became insolvent, and their property
passed into the hands of receivers.
The plaintiff, in its bill, tendered back the stock which it had
received, and the stock was deposited in the office of the clerk of
the court.
The circuit court entered a decree for the plaintiff against
Page 174 U. S. 561
all the defendants. 69 F. 431. The Louisville Trust Company and
the Louisville Banking Company and other bondholders appealed to
the circuit court of appeals, which reversed the decree of the
circuit court and ordered the bill to be dismissed as to the
Louisville Trust Company and the Louisville Banking Company, except
as to the forty-five bonds held by the latter company, and, as to
these bonds, ordered an injunction against suits on the guaranty
against the plaintiff as a corporation of Indiana and Illinois, and
that there be stamped on each of these forty-five bonds, under its
guaranty, these words,
"This guaranty is binding only on the Louisville, New Albany
& Chicago Railway Company, a corporation of Kentucky. It is not
binding on the Louisville, New Albany & Chicago Railway
Company, a corporation of Indiana and Illinois."
75 F. 433. The plaintiff applied for and obtained these writs of
certiorari. 164 U.S. 707.
MR. JUSTICE GRAY, after stating the case as above, delivered the
opinion of the Court.
The plaintiff, the Louisville, New Albany & Chicago Railway
Company, undoubtedly became a corporation of the State of Indiana
in 1873, by its incorporation according to the general statute of
1865 of that state.
Whether it afterwards became a corporation of the State of
Kentucky also was strongly contested at the bar, and depends upon
the legal effect of the statute of Kentucky of 1880.
That statute (being the first statute of Kentucky affecting this
corporation) is described -- indeed, in its title, as well as in
the title of the statute of 1882 amending it -- as "An act to
incorporate" this company, although, in the title of the first
Page 174 U. S. 562
statute, the word "Louisville" in its name is omitted. By the
first words of the enacting part of the statute of 1880, it is "the
Louisville, New Albany & Chicago Railway Company, a corporation
organized under the laws of the State of Indiana," and not any
other corporation, or any association of natural persons, that is
"hereby constituted a corporation," with the usual powers of
corporations, and with "authority to operate a railroad." And it is
the corporation so described that, by the other provisions of that
statute, may purchase, lease, or condemn real estate required for
railroad purposes in the County of Jefferson, and may connect with
any other railroad in that county or build, lease, or operate any
such connecting line, "and may bond the same, and secured the
payment of any such bonds by a mortgage of its property, rights and
franchises," and, by the amendatory statute of 1882, may guaranty
the bonds of, or consolidate with, other corporations authorized to
construct railroads in Kentucky.
This Court has often recognized that a corporation of one state
may be made a corporation of another state by the legislature of
that state in regard to property and acts within its territorial
jurisdiction.
Ohio & Mississippi
Railroad Company v. Wheeler, 1 Black, 286,
66 U. S. 297;
Railroad Co. v.
Harris, 12 Wall. 65, 82;
Railway
Co. v. Whitton, 13 Wall. 270,
80 U. S. 283;
Railroad Co. v. Vance, 96 U. S. 450,
96 U. S. 457;
Memphis & Charleston Railroad v. Alabama, 107 U.
S. 581;
Clark v. Barnard, 108 U.
S. 436,
108 U. S.
451-452;
Stone v. Farmers' Loan & Trust
Co., 116 U. S. 307,
116 U. S. 334;
Graham v. Boston, Hartford & Erie Railroad,
118 U. S. 161,
118 U. S. 169;
Martin v. Baltimore & Ohio Railroad, 151 U.
S. 673,
151 U. S. 677.
But this Court has repeatedly said that in order to make a
corporation already in existence under the laws of one state a
corporation of another state,
"the language used must imply creation or adoption in such form
as to confer the power usually exercised over corporations by the
state, or by the legislature, and such allegiance as a state
corporation owes to its creator. The mere grant of privileges or
powers to it as an existing corporation, without more, does not do
this."
Pennsylvania Railroad v.
St. Louis, Alton & Terre Haute
Page 174 U. S. 563
Railroad, 118 U. S. 290,
118 U. S. 296;
Goodlett v. Louisville Railroad, 122 U.
S. 391,
122 U. S. 405,
122 U. S. 408;
St. Louis & San Francisco Railway v. James,
161 U. S. 545,
161 U. S.
561.
The acts done by the Louisville, New Albany & Chicago
Railway Company, under the statutes of Kentucky, while affording
ample evidence that it had accepted the grants thereby made, can
hardly affect the question whether the terms of those statutes were
sufficient to make the company a corporation of Kentucky.
But a decision of the question whether the plaintiff was or was
not a corporation of Kentucky does not appear to this Court to be
required for the disposition of this case either as to the
jurisdiction or as to the merits.
As to the jurisdiction, it being clear that the plaintiff was
first created a corporation of the State of Indiana, even if it was
afterwards created a corporation of the State of Kentucky also, it
was and remained, for the purposes of the jurisdiction of the
courts of the United States, a citizen of Indiana, the state by
which it was originally created. It could neither have brought suit
as a corporation of both states against a corporation or other
citizen of either state nor could it have sued or been sued as a
corporation of Kentucky in any court of the United States.
Ohio & Mississippi
Railroad v. Wheeler, 1 Black 286;
St. Louis
& San Francisco Railway v. James, 161 U.
S. 545;
St. Joseph Railroad v. Steele,
167 U. S. 659,
167 U. S. 663;
Barrow Steamship Co. v. Kane, 170 U.
S. 100,
170 U. S.
106.
In
St. Louis & San Francisco Railway v. James, the
company was organized and incorporated under the laws of the State
of Missouri in 1873, and owned a railroad extending from Monett, in
that state, to the boundary line between it and the State of
Arkansas. The Constitution of the State of Arkansas provided that
foreign corporations might be authorized to do business in this
state under such limitations and restrictions as might be
prescribed by law, but should not have power to appropriate or
condemn private property. The Legislature of Arkansas, by a statute
of 1881, provided that any railroad company incorporated by or
under the laws of any other state, and having a line of railroad to
the boundary
Page 174 U. S. 564
of Arkansas, might, for the purpose of continuing its line of
railroad into this state, purchase the property, rights, and
franchises of any railroad company organized under the laws of this
state, and thereby acquire the right of eminent domain possessed by
that company, and hold, construct, own, and operate the railroad so
purchased as fully as that company might have done, and that "said
foreign railroad company" should be subject to all the provisions
of all statutes relating to railroad corporations, including the
service of process, and should keep an office in the state.
Pursuant to that statute, the St. Louis & San Francisco Railway
Company, in 1882, purchased from railroad corporations of Arkansas
their railroads, franchises, and property, including a railroad
connecting at the boundary line with its own railroad and extending
to Fort Smith in Arkansas, and thenceforth owned and operated a
continuous line of railroad from Monett, in Missouri, to Fort Smith
in Arkansas. In 1889 the Legislature of Arkansas passed another
statute providing that every railroad corporation of any other
state which had purchased a railroad in this state should, within
sixty days from the passage of this act, file a copy of its
articles of incorporation or charter with the Secretary of State of
Arkansas, and should "thereupon become a corporation of this state,
anything in its articles of incorporation or charter to the
contrary notwithstanding." And the St. Louis and San Francisco
Railway Company forthwith filed with the Secretary of State of
Arkansas a copy of its articles of incorporation under the laws of
Missouri, as required by this statute.
In an action brought by a citizen of Missouri against that
company in the Circuit Court of the United States for the Western
District of Arkansas to recover for its negligence on that part of
its road within the State of Missouri, the company pleaded, to the
jurisdiction, that it was a citizen of Missouri, and the question
was certified to this Court whether the company, by filing a copy
of its articles of incorporation under the laws of Missouri with
the Secretary of State of Arkansas and continuing to operate its
railroad through that state, became a corporation and citizen of
the State of Arkansas.
Page 174 U. S. 565
This Court, speaking by MR. JUSTICE SHIRAS, upon a careful
review of the earlier cases, answered that question in the
negative.
The fundamental proposition deduced from the previous decisions
was thus stated:
"There is an indisputable legal presumption that a state
corporation, when sued or suing in a circuit court of the United
States, is composed of citizens of the state which created it; and
hence such a corporation is itself deemed to come within that
provision of the Constitution of the United States which confers
jurisdiction upon the federal courts in 'controversies between
citizens of different states.'"
The Court frankly recognized that
"it is competent for a railroad corporation organized under the
laws of one state, when authorized so to do by the consent of the
state which created it, to accept authority from another state to
extend its railroad into such state, and to receive a grant of
powers to own and control, by lease or purchase, railroads therein,
and to subject itself to such rules and regulations as may be
prescribed by the second state,"
and that "such corporations may be treated by each of the states
whose legislative grants they accept as domestic corporations."
161 U. S. 161
U.S. 562.
But the Court went on to say:
"The presumption that a corporation is composed of citizens of
the state which created it accompanies such corporation when it
does business in another state, and it may sue or be sued in the
federal courts in such other state as a citizen of the state of its
original creation."
And, after referring to the provisions of the statutes of
Arkansas of 1881 and 1889, the Court added:
"But, whatever may be the effect of such legislation in the way
of subjecting foreign railroad companies to control and regulation
by the local laws of Arkansas, we cannot concede that it availed to
create an Arkansas corporation out of a foreign corporation in such
a sense as to make it a citizen of Arkansas within the meaning of
the federal Constitution, so as to subject it as such to a suit by
a citizen of the state of its origin. In order to bring such an
artificial body as a corporation within the spirit and letter of
that Constitution, as construed by the decisions of this Court, it
would be necessary to create
Page 174 U. S. 566
it out of natural persons whose citizenship of the state
creating it could be imputed to the corporation itself."
161 U. S. 161
U.S. 562,
161 U. S.
565.
In that case, the Constitution of Arkansas denied to foreign
corporations the right of eminent domain, and the Missouri
corporation acquired that right, and owned and operated a railroad
in Arkansas, in virtue of statutes authorizing it to purchase the
property, rights, and franchises of Arkansas corporations, and
requiring it to file a copy of its articles of incorporation or
charter with the Secretary of State of Arkansas, and enacting that
it should "thereupon become a corporation of this state, anything
in its articles of incorporation or charter to the contrary
notwithstanding." Yet it was held that it was not thereby made a
corporation of Arkansas in the sense of the provisions of the
Constitution and of the acts of congress conferring jurisdiction on
the courts of the United States by reason of diverse
citizenship.
The statutes of Arkansas in that case went quite as far, to say
the least, towards constituting a corporation of another state a
corporation of the state enacting those statutes, as the statutes
of Kentucky did in the case at bar.
The consolidation of the Louisville, New Albany & Chicago
Railway Company, under the same name with a railroad company of
Illinois in 1881 clearly does not affect the question of
jurisdiction. That consolidation appears, by cases cited at the
bar, to have been in accordance with the law of Indiana, but not to
have been authorized by the law of Illinois.
Louisville, New
Albany & Chicago Railway v. Boney, 117 Ind. 501;
American Trust Co. v. Minnesota & Northwestern
Railroad, 157 Ill. 641. It may have been ratified by very
recent legislation in Illinois. Illinois Stat. June 9, 1897; Laws
of 1897, p. 28;
McAuley v. Columbus, Chicago & Indiana
Railway, 83 Ill. 348, 352. But jurisdiction of a suit, once
acquired by a court of the United States by reason of the requisite
citizenship, is not lost by a change in the citizenship of either
party pending the suit.
Morgan v.
Morgan, 2 Wheat. 290;
Clarke v.
Mathewson, 12 Pet. 164;
Koenigsberger v.
Richmond Co., 158 U. S. 41,
159 U. S.
49.
Page 174 U. S. 567
The demurrers to the bill for want of equity were rightly
overruled, and were not insisted on in this Court. The object of
the bill was that the guaranty upon a great number on negotiable
bonds, which might otherwise pass into the hands of
bona
fide purchasers, might be canceled, and suits upon the
guaranty restrained, because of facts not appearing upon its face.
The relief sought could only be had in a court of equity.
Peirsoll v.
Elliott, 6 Pet. 95,
31 U. S. 98;
Grand Chute v.
Winegar, 15 Wall. 373, 376;
Robb v. Vos,
155 U. S. 13;
Springport v. Teutonia Savings Bank, 75 N.Y. 397;
Fuller v. Percival, 126 Mass. 381.
We are, then, brought to the question of the validity of the
guaranty by the Louisville, New Albany & Chicago Railway
Company of the bonds of the Beattyville Company, as between the
parties before us, and under the circumstances shown by this
record.
A railroad corporation, unless authorized by its act of
incorporation or by other statutes to do so, has no power to
guaranty the bonds of another corporation, and such a guaranty, or
any contract to give one, if not authorized by statute, is beyond
the scope of the powers of the corporation, and strictly
ultra
vires, unlawful and void, and incapable of being made good by
ratification or estoppel.
Central Transportation Co. v.
Pullman's Palace Car Co., 139 U. S. 24, and
171 U. S. 171 U.S.
138;
Jacksonville &c. Railway v. Hooper, 160 U.
S. 514,
160 U. S. 524;
Union Pacific Railway v. Chicago, Rock Island & Pacific
Railway, 163 U. S. 564,
163 U. S. 581;
California Bank v. Kennedy, 167 U.
S. 362, 367,
167 U. S. 368;
Davis v. Old Colony Railroad, 131 Mass. 581;
Humboldt
Co. v. Variety Co., 62 F. 356.
The real question in the case is whether this guaranty was valid
under the laws of Indiana, the state by which the guarantor was
originally created a corporation and as a corporation of which it
brought this suit.
Some reliance was placed upon the statute of Indiana of 1865
authorizing any railroad company incorporated under its provisions
(as the New Albany Company was) to consolidate with any railroad
corporation having a connecting line either within or without the
state, or to acquire, by purchase or
Page 174 U. S. 568
contract, its property, rights, and franchises, or the use and
enjoyment thereof, in whole or in part, and to "assume such of the
debts and liabilities of such corporations as may be deemed
proper." It was argued that the powers thus given embraced the
contract by which the New Albany Company agreed with the
Construction Company, in consideration of receiving from it a
controlling interest in the stock of the Beattyville Company, to
guaranty the bonds of that company.
But the New Albany Company never consolidated itself with the
Beattyville Company, or acquired by purchase or contract its
property, rights, and franchises, or the use or enjoyment thereof,
in whole or in part. It is doubtful, to say the least, whether a
mere purchase of three-fourths of its stock could authorize an
assumption of its debts, under the statute of 1865, if that statute
had remained in full force. In
Hill v. Nisbet, 100 Ind.
341, cited at the bar, a purchase of the stock of one railroad
company by another was upheld not as equivalent to a purchase of
the property and franchises, but as a reasonable means to the
accomplishment of the consolidation of the two companies.
But we cannot doubt that, as was held by both courts below, the
statute of Indiana of 1883 superseded and repealed, as to matters
within its scope and terms, the provisions of all former statutes
of the state on the subject.
The statute of Indiana of 1883 is entitled
"An act to authorize railroad corporations organized under the
laws of the State of Indiana to endorse and guaranty the bonds of
any railroad company organized under the laws of any adjoining
state,"
and enacts, in section 1, that
"the board of directors of any railway company organized under
and pursuant to the laws of the State of Indiana whose line of
railway extends across the state in either direction may, upon the
petition of the holders of a majority of the stock of such railway
company, direct the execution by such railway company of an
endorsement guarantying the payment of the principal and interest
of the bonds of any railway company organized under or pursuant to
the laws of any adjoining state the construction of whose line or
lines of railway would be beneficial
Page 174 U. S. 569
to the business or traffic of the railway so endorsing or
guarantying such bonds."
Section 2 provides that such petition of the stockholders shall
state the facts relied on to show the benefits accruing to "the
company endorsing or guarantying the bonds," and section 3 provides
that "no railway company shall, under the provisions of this act,"
endorse or guaranty such bonds to an amount exceeding half the par
value of the stock of "the railway company so endorsing or
guarantying."
The Louisville, New Albany & Chicago Railway Company was a
railway company organized under and pursuant to the laws of
Indiana, and its line of railway extended across the state from
south to north. On October 8, 1889, the board of directors, at a
regular meeting, passed a resolution, entered upon its records,
authorizing the president and secretary to execute, under seal of
the company, a contract by which the company agreed with a
corporation which was constructing the railroad of the Beattyville
Company, a railroad corporation of Kentucky, to guaranty the
payment by the Beattyville Company of the principal and interest of
bonds of that company by endorsing on each bond a guaranty,
executed in like manner, by which,
"for value received, the Louisville, New Albany & Chicago
Railway Company hereby guaranties to the holder of the within bond
the payment, by the obligor thereon, of the principal and interest
thereof in accordance with the tenor thereof."
The contract, as well as the guaranty on many of the bonds, was
accordingly executed by the president and secretary, and under the
seal of the company, and the contract was spread upon the records
of the board of directors. No petition of a majority of the
stockholders for the execution of the guaranty was ever presented,
as required by the statute; there was no evidence that the
stockholders ever authorized or ratified the contract or the
guaranty; and, at the next annual meeting of the stockholders in
March, 1890, it was voted to reject and disapprove both the
contract and the guaranty as having been made without legal
authority or the approval of the stockholders.
Before that meeting was held, one hundred and twenty-five
Page 174 U. S. 570
of the bonds thus guarantied had been sold by the Construction
Company to the Louisville Trust Company, and ten bonds to the
Louisville Banking Company, each of which companies took those
bonds in good faith and without notice that no petition had been
presented by a majority of the stockholders for the execution of
the guaranty.
Forty-five more of the bonds were purchased by the Louisville
Banking Company from the Construction Company after that meeting,
and with notice that a majority of the stockholders had never
petitioned for, but had disapproved, the execution of the guaranty.
The Louisville Banking Company, thus having notice, when it took
these forty-five bonds, that the prerequisite to the execution of
the guaranty, under the statute of Indiana of 1883, had not been
complied with, was not a
bona fide holder of these bonds,
and should not be allowed to enforce the guaranty thereon against
the plaintiff.
The controverted question is whether the bonds which the
Louisville Trust Company and the Louisville Banking Company,
respectively, purchased in good faith, and without notice of the
want of the assent of the majority of the stockholders, are valid
in the hands of these companies.
The guaranty by the Louisville, New Albany & Chicago Railway
Company of the bonds of the Beattyville Company was not
ultra
vires in the sense of being outside the corporate powers of
the former company, for the statute of 1883 expressly authorized
such a company to execute such a guaranty, and its board of
directors to direct its execution by the company. The statute,
indeed, made it a prerequisite to the action of the board of
directors that it should be upon the petition of a majority of the
stockholders, but this was only a regulation of the mode and the
agencies by which the corporation should exercise the power granted
to it.
The distinction between the doing by a corporation of an act
beyond the scope of the powers granted to it by law, on the one
side, and an irregularity in the exercise of the granted powers, on
the other, is well established, and has been constantly recognized
by this court.
It was clearly indicated in two of its earliest judgments on
Page 174 U. S. 571
the subject to
ultra vires, both of which were
delivered by Mr. Justice Campbell.
In
Pearce v. Madison &
Indianapolis Railroad, 21 How. 441, two railroad
corporations of Indiana were held not to have the power to purchase
a steamboat to be employed on the Ohio River to run in connection
with their railroads, because this
"diverted their capital from the objects contemplated by their
charters, and exposed it to perils for which they afforded no
sanction. . . . Persons dealing with the managers of a corporation
must take notice of the limitations imposed upon the authority by
the act of incorporation. . . . The public have an interest that
neither the managers nor stockholders of the corporation shall
transcend their authority,"
and the contract in question "was a departure from the business"
of the railroad corporations, and "their officers exceeded their
authority."
62 U. S. 443,
62 U. S. 445.
In
Zabriskie v. Cleveland,
Columbus & Cincinnati Railroad, 23 How. 381,
the statutes of Ohio empowered railroad corporations, "by means of
their subscription to the capital stock of any other company, or
otherwise," to aid it in the construction of its road, for the
purpose of forming a connection between the two lines, provided
that no such aid should be furnished until two-thirds of the
stockholders represented and voting, at a meeting called by the
directors, should have assented thereto. The directors of three
railroad corporations made a contract with another railroad
corporation to guaranty its bonds as part of an arrangement for
connecting the four roads, and the bonds were accordingly
guarantied, and were issued to
bona fide holders without
any meeting of the stockholders having been called. But, upon
evidence that the stockholders had subsequently assented to the
transaction, the bonds were held to be valid, and the court
expressly declared that the doctrine that a corporation cannot vary
from the object of its creation, and that persons dealing with a
company must take notice of whatever is contained in the law of its
organization, does not apply to
"those cases in which a corporation acts within the range of its
general authority, but fails to comply with some formality or
regulation
Page 174 U. S. 572
which it should not have neglected, but which it has chosen to
disregard."
64 U. S. 23
How. 398.
Again, in
Central Transportation Co. v. Pullman's Palace Car
Co., 139 U. S. 24, this
Court, in summing up the result of previous decisions, stated the
same distinction as follows:
"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. When a corporation is acting within the general
scope of the powers conferred upon it by the legislature, the
corporation, as well as persons contracting with it, may be
estopped to deny that it has complied with the legal formalities
which are prerequisites to its existence or to its action, because
such requisites might in fact have been complied with. But when the
contract is beyond the powers conferred upon it by existing laws,
neither the corporation nor the other party to the contract can be
estopped by assenting to it or by acting upon it to show that it
was prohibited by those laws."
139 U.S.
139 U. S.
59.
In
St. Louis, Vandalia & Terre Haute Railroad v. Terre
Haute & Indianapolis Railroad, 145 U.
S. 393, one of the parties relied on a provision of a
statute of Illinois that it should not be lawful for any railroad
company of Illinois or its directors to consolidate its road with
any railroad out of the state, to lease its road to any railroad
company out of the state, or to lease any railroad out of the
state
"without having first obtained the written consent of all of the
stockholders of said roads residing in the State of Illinois, and
any contract for such consolidation or lease which may be made
without having first obtained said written consent, signed by the
resident stockholders in Illinois, shall be null and void. "
Page 174 U. S. 573
Of that statute this Court said:
"It did not limit the scope of the powers conferred upon the
corporation by law, an excess of which could not be ratified or be
made good by estoppel, but only prescribed regulations as to the
manner of exercising corporate powers, compliance with which the
stockholders might waive, or the corporation might be estopped, by
lapse of time or otherwise, to deny."
145 U.S.
145 U. S.
403.
A corporation, though legally considered a person, must perform
its corporate duties through natural persons, and is impersonated
in and represented by its principal officers, the president and
directors, who are not merely its agents, but are, generally
speaking, the representatives of the corporation in its dealings
with others. Shaw, C.J., in
Burrill v Nahant Bank, 2 Metc.
163, 166, 167; Comstock, J., in
Hoyt v. Thompson, 19 N.Y.
207, 216. And the appropriate form of verifying any written
obligation to be the act of the corporation is by affixing the
signatures of the president and secretary and the corporate
seal.
The bonds of the Beattyville Company were instruments negotiable
by delivery, and the guaranty endorsed upon each of them by the
Louisville, New Albany & Chicago Railway Company was signed by
the president and secretary, and under its corporate seal, and was
in terms payable to the holder thereof, and itself negotiable.
One who takes from a railroad or business corporation, in good
faith and without actual notice of any inherent defect, a
negotiable obligation issued by order of the board of directors,
signed by the president and secretary, in the name and under the
seal of the corporation, and disclosing upon its face no want of
authority, has the right to assume its validity if the corporation
could, by any action of its officers or stockholders, or of both,
have authorized the execution and issue of the obligation.
In
Merchants' Bank v. State
Bank, 10 Wall. 604, this Court stated as an
axiomatic principle in the law of corporations this
proposition:
"Where a party deals with a corporation in good faith -- the
transaction is not
ultra vires -- and he is unaware of any
defect of authority or other irregularity on the
Page 174 U. S. 574
part of those acting for the corporation, and there is nothing
to excite suspicion of such defect or irregularity, the corporation
is bound by the contract although such defect or irregularity in
fact exists. If the contract can be valid under any circumstances,
an innocent party in such a case has a right to presume their
existence, and the corporation is estopped to deny them."
10 Wall.,
77 U. S.
644-645. The proposition was supported by citations of
many English and American cases, and among them
Royal British
Bank v. Turquand (1856), 6 El. & Bl. 327. And the Justices
of this Court, while differing among themselves in the application
of the principle to municipal bonds, have always treated
Royal
British Bank v. Turquand as well decided upon its facts.
Knox Co. v.
Aspinwall, 21 How. 539,
62 U. S. 545;
Moran v. Miami
County, 2 Black 722,
67 U. S. 724;
Gelpcke v. City of
Dubuque, 1 Wall. 175,
68 U. S. 203;
St. Joseph v.
Rogers, 16 Wall. 644,
83 U. S. 666;
Humboldt v. Long, 92 U. S. 642,
92 U. S. 650.
And see 64 U. S. Cleveland,
Columbus & Cincinnati Railroad, 23 How. 331, above
cited.
Royal British Bank v. Turquand was an action upon a
bond signed by two directors, and under the seal of the company,
and given for money borrowed by a joint stock company formed under
an act of parliament limiting its powers to the acts authorized by
its deed of settlement, and whose deed of settlement provided that
the directors might so borrow such sums as should, by a resolution
passed at a general meeting of the company, be authorized to be
borrowed. The defense was that no such resolution had been passed,
and that the bond had been given without the authority of the
shareholders. The Court of Exchequer Chamber, affirming the
judgment of the Queen's Bench, without passing upon the sufficiency
of the resolution in that case, held the company liable on the
bond, and, speaking by Chief Justice Jervis, said:
"We may now take for granted that the dealings with these
companies are not like dealings with other partnerships, and that
the parties dealing with them are bound to read the statute and the
deed of settlement. But they are not bound to do more. And the
party here, in reading the deed of settlement, would find, not a
prohibition from borrowing, but a
Page 174 U. S. 575
permission to do so on certain conditions. Finding that the
authority might be made complete by a resolution, he would have a
right to infer the fact of a resolution authorizing that which on
the face of the document appeared to be legitimately done."
6 El. & Bl. 332.
The decision in
Royal British Bank v. Turquand has been
followed, and Lord Wensleydale's
dicta to the contrary, a
year later, in
Ernest v. Nicholls (1857), 6 H.L.Cas. 401,
418-419, have been disapproved or qualified, in a long line of
decisions in England.
Agar v. Athenaeum Life Assurance
Society (1858), 3 C.B. (N.S.) 725, 753-755;
Prince of
Wales Assurance Society v. Harding (1858) El., Bl. & El.
183, 221, 222;
In re Athenaeum Society (1858), 4 K. &
J. 549, 560-561;
Fountaine v. Carmathen Co. (1868), L.R. 5
Eq. 316, 321;
Colonial Bank of Australasia v. Willan
(1874), L.R. 5 P.C. 417, 448;
Mahony v. East Holyford Co.
(1875), L. R. 7 H.L. 869, 883, 893-894, 902;
County of
Gloucester Bank v. Rudry Merthyr Co. (1895), 1 Ch. 629, 633.
The only English decision cited at the bar which appears to support
the opposite conclusion is
Commercial Bank v. Great Western
Railway (1865), 3 Moore P.C. (N.S.) 295, which, unless it can
be distinguished on its peculiar circumstances, is against the
general current of authority.
See also a very able
judgment of the Court of Errors and Appeals of New Jersey,
delivered by Mr. Justice Depue, in
Hackensack Water Co. v. De
Kay, 36 N.J.Eq. 548, 559-567.
In the present case, all natural persons or corporations by whom
bonds of the Beattyville Company bearing the guaranty of the
Louisville, New Albany & Chicago Railway Company, signed by the
proper officers of the company and under its seal, were purchased
in good faith, and without notice that there had been no petition
of a majority of the stockholders for their execution, had the
right to assume that such a petition had been presented, as
required by the statute of 1883.
The records of the railroad corporation and of its board of
directors, which would naturally show whether such a petition had
or had not been filed, were private records, which a purchaser
Page 174 U. S. 576
of the bonds was not obliged to inspect, as he would have been
if the fact had been required by law to be entered upon a public
record. Brewer, J., in
Blair v. St. Louis, Hannibal &
Keokuk Railroad, 25 F. 684;
Hackensack Water Co. v. De
Kay, 36 N.J.Eq. 548, 568;
McCormick v. Market Bank,
165 U. S. 538,
165 U. S. 551;
Irvine v. Union Bank of Australia, 2 App.Cas. 366,
379.
It follows that the decree of the circuit court of appeals, so
far as it ordered the bill to be dismissed with regard to the
guaranty on the bonds which the Louisville Trust Company and the
Louisville Banking Company took in good faith, and without notice
of any want of authority to execute the guaranty, was correct.
But in regard to the guaranty on the bonds which the Louisville
Banking Company took with notice that the guaranty had not been
authorized by a majority of the stockholders, the decree of the
circuit court of appeals needs to be modified.
That court, in its opinion and decree, undertook to determine
whether the Louisville, New Albany & Chicago Railway Company
was liable upon the guaranty as a corporation of Kentucky, and as a
corporation of Illinois.
Apart from the question whether it was a corporation of
Kentucky, and from the difficulty of treating the negotiable
guaranty upon each bond as itself divisible, binding the guarantor
as a corporation of one state, and not binding it as a corporation
of another state, there is an insurmountable objection to the
decree in its present form.
The Louisville, New Albany & Chicago Railway Company is a
party to this suit as a corporation of Indiana only, and not as a
corporation of Kentucky. It could not, either as a corporation of
both states or as a corporation of Kentucky only, have brought this
suit against corporations and citizens of Kentucky in the Circuit
Court of the United States for the District of Kentucky without
ousting the jurisdiction of the court.
Ohio &
Mississippi Railroad v. Wheeler, 1 Black 286;
St. Louis & San Francisco Railway Co. v. James,
161 U. S. 545.
And, citizens of Illinois also being defendants in the bill, it
Page 174 U. S. 577
is equally impossible to take jurisdiction of the plaintiff as a
corporation of Illinois.
It necessarily follows that the rights and liabilities, if any,
that it may have as a corporation of Kentucky or as a corporation
of Illinois cannot be adjudicated in this case, and that the
decrees both of the circuit court and of the circuit court of
appeals, so far as regards the Louisville Banking Company, must be
reversed, and the case remanded to the circuit court with
directions to dismiss the bill as to the guaranty on the ten bonds
of which the Louisville Banking Company was a
bona fide
purchaser, and to enter a decree, as to the guaranty on the
forty-five bonds of which it was not a
bona fide
purchaser, that an injunction be issued against bringing suit upon
the guaranty on these bonds against the Louisville, New Albany
& Chicago Railway Company, a corporation of Indiana, and that
there be stamped on these bonds the following words:
"This guaranty is not binding on the Louisville, New Albany
& Chicago Railway Company, a corporation of Indiana, and it is
to that extent canceled, without prejudice to the rights or
liabilities, if any, that it may have as a corporation of Kentucky
or as a corporation of Illinois."
Accordingly, in the first case, the decree of the circuit
court of appeals is affirmed, and the case remanded to the circuit
court of the United States, with directions to dismiss the bill as
against the Louisville Trust Company, and, in the second case, the
decree of both those courts are reversed, and the case remanded to
the circuit court of the United States, with directions to enter a
decree is conformity with the opinion of this Court.
