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
MR. JUSTICE PECKHAM, after stating the foregoing facts,
delivered the opinion of the Court.
This suit was brought against the defendant corporation alone to
obtain, among other things, a decree enjoining the company and its
officers from acting as a corporation on the ground that its
alleged charter was a nullity. It was also brought to forfeit the
charter in case it should be held that it had been legally
organized, and such forfeiture was prayed on the ground that the
company had violated the law by not receiving cash on payment of
its shares.
It is now claimed that the company defendant could not properly
have been made a sole defendant in an action to declare null its
charter to be a corporation, and that therefore a decree in such
suit declaring the company not to be a corporation (while making no
decree upon the question of a violation of the charter by not
taking payment for its stock in cash) condemns the corporators and
takes away their property without a hearing from them and is not
due process of law, they claiming that the franchise to be a
corporation was their property exclusively, and did not belong to
the corporation as such.
It is also asserted that the state was not rightfully or
properly a plaintiff in the suit, and that the institution of the
suit in the name of the state was without authority of law, and was
therefore null and void, and did not constitute due process of law.
What is meant by this latter claim is stated by the plaintiff in
error as follows:
"We do not wish to be understood as dissenting from the doctrine
of the plenary power of the state over the subject matter of
creating or authorizing such corporations, and we concede that her
power to grant or withhold charters, as well as to grant or
withhold authority to others, to constitute such corporations, is
unlimited. What we here insist is that, where the state has acted
through her legislature and authorized the organization of the
corporation, and such corporation has been constituted under her
authority, that, in common with other persons, it cannot, after its
creation, be denied the common right to pursue any lawful business
or enterprise not inconsistent
Page 180 U. S. 327
with the objects and purposes of its creation, and that is
precisely what the state is attempting by this suit to do in
relation to the company, plaintiff in error, in this cause."
The first inquiry which presents itself is as to whether it was
proper and legal to make the company alone a defendant, and as to
the sufficiency of the means by which it was brought into court in
an action where the relief sought was to declare the pretended
charter of the company a nullity from the beginning, and where an
injunction was sought to prevent the further action of the
defendant corporation.
The company claimed as a fact to be organized under the act No.
36 of the Laws of Louisiana of 1888. The first and third sections
of the act read as follows:
"SEC. 1. That it shall be lawful for any number of persons, not
less than three, upon complying with the provisions of the laws of
this state governing corporations in general, to form themselves
into and constitute a corporation for the purpose of carrying on
any lawful business or enterprise, not otherwise specially provided
for, and not inconsistent with the Constitution and laws of this
state, . . . provided, no such corporation shall engage in
stock-jobbing business of any kind."
"SEC. 3. That no stockholder of such corporation shall ever be
held liable or responsible for the contracts or defaults of such
corporations in any further sum than the unpaid balance due to the
company on the shares owned by him."
In the answer of the company, it is alleged that it was
organized by the authority of this statute and that it duly filed
its articles of association, stating therein at large the character
of its business. It was provided in that charter that all legal
process should be served upon the president of the company. The
evidence showed that the company in fact did business under its
charter and amendments for several years as a corporation, and
claimed to be legally organized as such. It also appeared from the
evidence that its stock was subscribed for by various individuals,
and was issued to such subscribers or their assigns. It also issued
its debentures and did business in accordance with the charter,
and, as claimed, under and by the authority of the act of the
legislature above mentioned. It made contracts and
Page 180 U. S. 328
it elected officers who thereafter acted as such and assumed to
represent the company as a corporation doing business under the
laws of the state. It was thus a
de facto corporation, and
those who contracted with it as such could not set up as a defense,
when sued by it upon those contracts, that it was not a corporation
or that its organization was a nullity. None but the state could
call its existence in question.
Chubb v. Upton,
95 U. S. 665;
Baltimore & Potomac Railroad Company v. Fifth Baptist
Church, 137 U. S. 568,
137 U. S. 571.
The Supreme Court of Louisiana, in this case, holds that, by the
laws of that state, the defendant as a
de facto
corporation was properly brought into court by the service of
process on its acting president. The state can therefore treat this
de facto corporation as such, for the purpose of calling
it into court and asking for a decree enjoining it from acting as a
corporation, on the ground of the nullity of the organization -- in
other words, on the ground that it has no right to be a
corporation, and that it is not a corporation
de jure. For
that purpose, it is not necessary that the individuals who were
corporators or officers of the company be made defendants and
service of process by made upon them. The company itself may be
brought into court by service upon its officer appointed pursuant
to the charter under which it assumed to act, and in which it is
provided that the president shall be served with process against
the corporation.
Section 2593, Revised Statutes of Louisiana, provides:
"An action by petition may be brought before the proper district
court or parish court by the district attorney, or district
attorney
pro tempore, and for the Parish of Orleans by the
Attorney General, or any other person interested, in the name of
the state upon his own information, or upon the information of any
private party, against the party or parties offending in the
following cases:"
"First, when any person shall usurp, intrude into, or unlawfully
hold or exercise any public office or franchise within this state;
or . . . Third, when any association or number of persons shall act
within this state as a corporation without being duly incorporated.
"
Page 180 U. S. 329
"SEC. 2595. Service shall be made in such cases . . . the same
as in other civil suits. . . ."
"SEC. 2602. When defendant, whether a person or corporation
against whom such action shall have been brought, shall be adjudged
guilty of usurping or intruding into or unlawfully holding or
exercising any office, franchise, or privilege, judgment shall be
rendered that such defendant be excluded from such office,
franchise, or privilege, and also that the plaintiff recover costs
against such defendant and such damages as are proved to have been
sustained."
The state court has held that, under these provisions, in such a
case as this, the service of process upon the defendant company is
sufficient to bring that company into court as a
de facto
corporation, even though not legally organized. If the company
actually appear pursuant to such service, it surely must be enough
so far as the corporation is concerned.
Pursuant to the service of process upon its president, the
company appeared in court, put in pleadings, set up as a defense
that it was a legal and valid corporation under the act already
cited, and claimed judgment in its favor. All this gave
jurisdiction to the court to proceed with the case and try the
issues, whether the defendant were or were not a valid corporation.
But it is said that in such suit even that question cannot be
decided, and that the presence of the individual corporators is
indispensable because, as is stated, the franchise, to be a
corporation, belongs to them, and not to the corporation itself,
and the case of
Memphis & Little Rock Railroad Company v.
Railroad Commissioners, 112 U. S. 609,
112 U. S. 619,
is cited as authority for the purpose of showing that such
franchise cannot be taken away without making the corporators
parties.
In a certain sense, the franchise to be a corporation does
belong to the corporators insofar as that it does not pass by a
mortgage by the company of its charter and franchises, and a sale
under the foreclosure of the mortgage does not confer on the
purchaser the right to be a corporation. This was held in above
case. The right to be a corporation was conferred upon certain
individuals, and the court held could not by the language used pass
to purchasers on a foreclosure, the franchise not in
Page 180 U. S. 330
fact having been mortgaged and the law not providing for such a
mortgage. But a proceeding by the state against a
de facto
corporation to forbid its acting any longer as such on the ground
that no legal right exists for it to be a corporation, we have no
doubt is well brought against the company alone, treating it as
such
de facto corporation and serving process upon its
officers in accordance with the charter or law under which it
assumes to be acting as such corporation. And as we remark in
another connection below, the shareholders or corporators by their
action in making themselves parties to the suit, appealing from the
decree and arguing their objections before the supreme court, have
cured any possible defect which might otherwise have existed
founded upon an alleged defect of parties.
The injunction which was issued as part of the judgment was
simply a means of carrying out what the court decreed, and whether
an injunction prior thereto and preliminary in its nature had been
granted
ex parte or not was immaterial. The final
injunction was part of the relief sought by the action, and when
the court decided such action in favor of the plaintiff, the
injunction was to follow as matter of course. We are of opinion
that, for the purpose of obtaining a decree declaring the charter
void and restraining the officers from acting as a corporation, the
state, through its Attorney General, was a proper party to bring
the action, and, for the reasons stated, it was well brought
against the corporation alone, and the final injunction was
properly issued.
Nor do the facts in this case furnish any foundation for the
claim on the part of the plaintiffs in error that the state, after
having granted the right to be a corporation, could not, after the
corporation was created, deny to it the common right to pursue any
lawful business or enterprise not inconsistent with the object and
purposes of its creation. The claim rests upon the proposition that
the state cannot deny to the company the common right to pursue any
lawful business or enterprise. If the business or enterprise be not
lawful, the whole argument fails. If not created for a lawful
purpose, the company was not created at all. It is not a question
of the right to do certain business after it was authorized by the
state to organize as such
Page 180 U. S. 331
corporation. Its legal creation depended upon the lawful
character of the work it was organized to do. Whether the business
be lawful is, in a case like this, a question of local law, and a
decision by the state court upon that question is not reviewable
here. The right to be a corporation was given by the state upon the
terms that the business transacted should be lawful, and it
certainly must rest with the state to determine whether the
business thus transacted by a corporation is or is not lawful.
Whether such business could be done by individuals without the
intervention of a corporation is not to the point. The state having
the right to say upon what terms and upon what conditions it will
grant the right of incorporation, it must have the right to
determine through its courts whether those conditions have been
complied with. It granted the right by the act of 1888 to transact
any lawful business as a corporation upon filing articles, etc. It
rests with its own courts to say whether the business transacted by
such assumed corporation, by virtue of that act, is or is not
lawful. Having decided that it was unlawful, the court had the
right, under the state law, to declare the charter null.
Then as to the rights of the individual corporators. Has their
property been in any way taken without due process of law by this
decree? Clearly it has not. Nor have they been denied the equal
protection of the laws. As already stated, the decree adjudges the
charter under color of which the defendant company claimed
corporate existence, to be null and void, and it enjoins the
officers and stockholders from acting as a corporation, in the
terms already set forth. This simply holds the property until it
can be properly disposed of according to law.
The original decree was entered after a trial upon the merits,
and the record shows that the officers and many of the stockholders
were present at the trial, and were witnesses and examined by the
counsel for the company, and that in truth they made the whole
defense. There was no dispute in regard to the facts, and the whole
question was resolved into one of law -- whether the business which
was confessedly conducted by the corporation was or was not a
lawful one under the laws of
Page 180 U. S. 332
Louisiana. The court refused to hear evidence that the
defendant's officers acted in good faith, believing they were
acting lawfully. That also was a question of local law, whether
such facts constituted any defense, and the decision of the court
on that subject is not reviewable here. As a result of all the
evidence, the trial court held the business transacted by the
company was unlawful for a corporation under the laws of Louisiana,
and decreed accordingly. The shareholders then, pursuant to the law
of Louisiana, petitioned the court to permit them to intervene in
the case and to appeal from the decree because they were interested
therein, and, leave being given, they appealed to and were heard in
the supreme court, and that court, while affirming the final decree
at the same time reversed the order appointing a liquidator, and
left the whole question open in regard to such appointment. The
corporators have not in any manner been impeded or embarrassed in
the presentation of their defense by not being formal parties to
the record at the trial in the court of first instance. Many were
present as a matter of fact, and the defense which they interpose
is one of law upon undisputed facts. There has been no taking of
any property belonging to shareholders, and whatever may be done
hereafter, whether by liquidator or receiver, can only be done upon
notice to them as parties to the action and after full hearing of
their claims.
It is certain, therefore, that their rights have not been
improperly interfered with or their property taken under or
pursuant to the decree of the trial court. We are of opinion that
the judgment of the Supreme Court of Louisiana must be
Affirmed.
