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no surplus profits on hand, as to pay the money to a stockholder directly. Hence any unconditional promise by a corporation to pay the debt of a stockholder is a promise to violate the organic law under which corporations of this state are created."

And in Heidler v. Werner & Co. (1925) 97 N. J. Eq. 505, 128 Atl. 237, the court said that even though the question of the lawfulness of a bond secured by a mortgage, executed for one to secure the purchase price of stock sold him by a majority stockholder, was not raised by the pleadings, evidence, or arguments, it mentioned the point to avoid any inference of its giving "countenance, even sub silentio, to the idea that a corporation may lawfully execute a bond secured by mortgage on its property, to the detriment of its creditors and stockholders, as a pure accommodation to one of its officers or stockholders, or, indeed, anyone else."

Where a corporation, while insolvent, executed to one of its officers a mortgage to pay, among other claims, one for which the mortgagee was personally liable, the contract is unenforceable by the mortgagee. Stough v. Ponca Mill Co. (1898) 54 Neb. 500, 74 N. W. 868.

So, in First Sav. & T. Co. v. Romadka (1914) 132 C. C. A. 357, 216 Fed. 113, the court said that "undoubtedly the corporation may bind itself as surety or guarantor for performance of a contract made for its benefit, or in furtherance of an object within its corporate power and purposes .

;

but payment of debts owing by its stockholder to third parties, wherein the corporation has no interest, direct or indirect, is plainly not for its benefit nor within its corporate objects," and therefore a guaranty indorsed by a corporation on a note made by its stockholders was "purely an accommodation promise, not within the corporate powers, and not binding as a corporate obligation," and unenforceable against its bankrupt

estate.

And in Re Amdur Shoe Co. (1926; D. C.) 13 F. (2d) 147, it was held that a claim of the holder of promissory

notes made by an officer of a corporation, against the corporation as accommodation indorser thereon, which indorsement was authorized by the stockholders, was not provable against the corporation in subsequent bankruptcy proceedings, unless the indorsement was authorized by all the stockholders and the rights of creditors were not impaired thereby. The court remanded the cause to the referee to determine whether the indorsement prejudiced the rights of creditors, saying that if the officer executed the notes to secure money to loan the corporation, or borrowe it on behalf of the corporation, so that an obligation existed on the corporation to pay the officer or the holder the amount of the note, "then creditors would not be prejudiced by reason of the fact that the bankrupt [corporation] saw fit to become contingently liable for a sum for which it was already directly liable." However, if it should appear that the indorsement was an accommodation indorsement, without consideration, and that at the time of the indorsement the corporation was under no legal obligation to repay the amount of the note, which the officer had paid into the corporation, "then it would follow. . . . that the indorsements would be accommodation indorsements, prejudicial to creditors, and would not be binding upon the indorser; at least, the ThayerOsborne Shoe Company [holder] would have no claim provable in bankruptcy over the objection of creditors, or those representing them."

In the foregoing cases there is no intimation as to whether the claim of the creditors arose prior or subsequent to the giving of the obligation, but the court in the reported case (HESS v. CEDARHOME LUMBER Co. ante, 71) held that a mortgage given by a corporation for the purchase price of stock sold to one of its stockholders by another, with no consideration moving to the corporation, was void as against those having claims against the corporation, whether those claims arose prior or subsequent to the assumption of the mortgage.

So, in Washington Mill Co. v.

Sprague Lumber Co. (1898) 19 Wash. 165, 52 Pac. 1067, where a corporate mortgage was given for the purpose of securing the personal debt of one of the stockholders and officers, it was held that the fact that the petitioning creditor for the appointment of a receiver became such after the giving of the mortgage would not affect his rights, where there were other creditors whose rights were to be protected by the receivership, and both existing. and subsequent creditors might share in the distribution of the assets of the corporation.

And in Re Haas Co. (1904) 65 C. C. A. 218, 131 Fed. 232, it was held that it was not within the power of a corporation to execute a mortgage to secure notes given for the purchase price of stock purchased by stockholders from other stockholders, to the exclusion of creditors of the corporation, subsequent in point of time to the transaction.

But in Osborn v. Montelac Park (1895) 89 Hun. 168, 35 N. Y. Supp. 610, affirmed without opinion in (1897) 153 N. Y. 672, 48 N. E. 1106, it was held that a mortgage given by a corporation upon its property to secure the individual indebtedness of its president to a third person was valid, in the absence of objection by the corporation or its stockholders, and that, if the rights of creditors did not intervene, there was no legal objection to the mortgage. The attack in this case was made by a receiver of the corporation. The court, after remarking that the receiver represented the creditors, said that it was not shown that there was any creditor who was such at the time the mortgage was given; thus apparently implying that the subsequent creditors could not attack it.

And in Marsters v. Umpqua Valley Oil Co. (1907) 49 Or. 374, 12 L.R.A. (N.S.) 825, 90 Pac. 151, it was held that a subsequent creditor could not attack a corporate mortgage on the ground that it was for the benefit of a director and was authorized at an illegal meeting with present, such transaction not being quorum absolutely void, but only voidable at

47 A.L.R.-6.

no

the instance of the corporation or a stockholder.

And a trust deed given by a corporation to a third person to secure an indebtedness due from its president to such third person is valid as against subsequent creditors, where the corporation was itself indebted to its president in substantially the amount of the mortgage, and therefore, in effect, was securing its own debt. Merchants' Nat. Bank v. Pomeroy Flour Co. (1885) 41 Ohio St. 552. Validity as against corporation.

Where a director of a corporation who owned all the stock therein except two shares owned by two other directors sold his stock to one of the latter, the assignee of a note after maturity given by the corporation as part of the purchase price of the stock may enforce it, there being no adverse interest of creditors involved. Sargent v. Palace Café Co. (1917) 175 Cal. 737, 167 Pac. 146.

Promissory notes executed in behalf of a manufacturing and trading corporation by all of its directors, who are also all of its stockholders, in payment for the shares owned by one of such stockholders, purchased by and for the benefit of the others, cannot be repudiated by the corporation as an ultra vires transaction. Solomon Solar Salt Co. v. Barber (1897) 58 Kan. 419, 49 Pac. 524.

And in Norment v. First Nat. Bank (1917) 23 N. M. 198, 167 Pac. 731, it was held that, while it is true that one who takes the note of a corporation in payment of the debt of its officer is put upon inquiry as to the authority of the officer to negotiate the note, still the note is not void, but merely voidable at the instance of the corporation, and until it disavows the obligation it does not lie in the mouth of a party whose note has been placed as collateral security for the corporation note, to complain, and to attempt to make a defense for the corporation when the latter does not elect to make it for itself.

Notes executed by the purchaser of corporate stock and by the corporation. for part of the purchase price of the stock are enforceable where it was

agreed between the corporation and the purchaser that the latter should put into the stock and assets of the corporation, goods, wares, and merchandise equal in value to the amount of the note executed, the corporation being estopped from receiving and retaining benefits of an ultra vires contract and repudiating its obligations thereunder. Waller v. Gorman Mercantile Co. (1911) - Tex. Civ. App. —, 141 S. W. 833.

But in Houser v. Farmers' Supply Co. (1909) 6 Ga. App. 102, 64 S. E. 293, it was held that a nonsuit was properly granted in an action to recover damages against a corporation for the breach of a contract whereby the corporation agreed with one, in consideration of his becoming a stockholder, to indorse his note given to obtain money for stock purchased. The court said: "While industrial and mercantile corporations are not wholly prohibited from making contracts of guaranty and suretyship, such contracts are closely scrutinized, and are not valid unless it appears that they

were in direct furtherance of authorized corporate purposes. Ordinarily the officers of a corporation have no power to make a contract in its behalf, guaranteeing a private debt of one of its stockholders. Brandt, Suretyship, 3d ed. § 12 and note. The contract in the present case seems to have been ultra vires, and not binding on the corporation."

And although not at issue, the court in First Nat. Bank v. Winchester (1898) 119 Ala. 168, 72 Am. St. Rep. 904, 24 So. 351, said that the relation assumed by a corporation by the execution of notes and mortgages to two stockholders who had sold their stock to the remaining two other stockholders, for the purchase price of the stock, was that of surety to the purchasers of the stock, and not being a contract within its charter powers, and therefore ultra vires and void, the suretyship imposed no enforceable. personal obligation upon the corporation, and the mortgage did not devest the corporate entity of its legal title to the property it purported to convey. W. S. C.

GUMP INVESTMENT COMPANY, Appt.,

V.

W. N. JACKSON.

Virginia Supreme Court of Appeals - June 25, 1925.

(142 Va. 190, 128 S. E. 506.)

Sale, § 96 conditional — effect of recording.

An automobile financing company which permits a dealer to keep a new car in his salesroom after a pretended sale under a recorded conditional sales contract, the note representing the purchase price of which, and the contract securing the same, it has purchased, must bear the loss, where the dealer sells the car to an innocent purchaser for cash, which he retains, and becomes insolvent without satisfying the note.

[See annotation on this question beginning on page 85.]

APPEAL by complainant from a decree of the Circuit Court for Washington County in favor of defendant in an action brought to enforce a lien on an automobile. Affirmed.

The facts are stated in the opinion of the court.

Messrs. J. L. Stern and Donald T.

Stant for appellant.

Messrs. Honaker & Thompson for appellee.

(142 Va. 190, 128 S. E. 506.)

Chichester, J., delivered the opinion of the court:

The sole question for decision in this case is whether the appellee W. N. Jackson, or the appellant, the Gump Investment Company, has superior title to a certain Dodge coupé, the former claiming title by purchase on August 18, 1922, from the Joe S. Kite Company, Inc., a retail dealer in automobiles, doing business in Bristol, Va.; and the latter claiming title by virtue of an assignment by the Joe S. Kite Company of a reservation of title contract covering the same Dodge coupé, and the notes aggregating $783.30 for the deferred payments, all purporting to be signed by one Mrs. R. T. Sutton, dated June 15, 1922; the contract being docketed in Bristol, Va.

On March 29, 1923, the Gump Investment Company filed its bill against Mrs. R. T. Sutton and W. N. Jackson, setting up its lien, and praying that it be enforced, the Dodge coupé sold, and the proceeds applied to the payment of the notes. W. N. Jackson answered, claiming that he had title to the car by purchase for cash from the Kite Company, a retail dealer in Dodge automobiles, without actual notice of the lien of the Gump Company.

There is no material dispute about the facts, and the question for decision here is therefore one of law based upon facts practically agreed.

To maintain the issue on its part, the Gump Company proved that its business was that of financing automobile dealers; that it purchased the note of $783.30, signed by Mrs. Sutton, and the contract securing same, from the Kite Company, on the day it was made, and paid the Kite Company therefor on August 18, 1922; that the contract was duly recorded; that three monthly installments of $65.28 each were paid on the note, and there was a balance due of $587.47; that in December, 1922, it received notice from R. T. Sutton that the car had been sold to W. N. Jackson; and that this was

the first notice it had of the sale to Jackson.

W. N. Jackson, to maintain the issue on his part, proved that on the 9th of August, 1922, he began negotiations with the Kite Company, a retail dealer selling Dodge automobiles, through their salesman, R. T. Sutton, for a Dodge touring car, and made a deposit of $71 on account of the purchase price; that on the 18th of the same month he called on the Kite Company, and, the touring car he had ordered on the 9th not having arrived, after some further negotiations with the same R. T. Sutton, he purchased the Dodge coupé in question here, and paid $1,250 cash for it; that the coupé was new, was on display in the salesroom of the Kite Company with other cars in stock; that there were no license tags on the car, or, if any, they were dealer's tags; that Sutton told Jackson that Kite Company did not want to sell the coupé, because it was the first Dodge coupé that had come to Bristol and they wanted to keep it for demonstration. He further proved that Sutton was employed as a salesman by the Kite. Company; that there was never any delivery of the car to Mrs. Sutton, but that it was retained in the show and sales room of Kite Company, mixed with their stock in trade, and that, if the car had been used at all, it was only once or twice in demonstration; that he had no notice of the Gump Company lien, and that the Kite Company, instead of satisfying this lien by payment to the Gump Company out of the cash purchase price paid by Jackson, kept the $1,250 and paid Sutton $68.28 monthly for three months, which he in turn paid over to the Gump Company; that the Kite Company at this time became an involuntary bankrupt; and that Sutton and his wife were and are insolvent.

The learned chancellor who tried the cause decreed that Jackson was entitled to the Dodge coupé, free of the lien of the Gump Company, and dismissed the bill. From that de

cree an appeal was allowed to this court.

The contention of the appellant (Gump Investment Company) here is that the case of Rudolph v. Farmers' Supply Co. 131 Va. 305, 108 S. E. 638, is controlling in this case.

The contention of the appellee (W. N. Jackson) is that the instant case is controlled by the case of Boice v. Finance & G. Corp. 127 Va. 563, 10 A.L.R. 654, 102 S. E. 591, and the case of O'Neil v. Cheatwood, 127 Va. 96, 102 S. E. 596, which was decided upon practically the same principle which controlled in the Boice Case.

In the Rudolph Case the plaintiff sold an automobile on time payments, by written contract reserving title and duly docketed. Thereafter, without knowledge of plaintiff, the purchaser sold the automobile to a dealer in secondhand automobiles, who placed it in his stock, and afterwards sold it to defendant, a bona fide purchaser for value. It was held that the plaintiff was entitled to recover, because he was not aware of the subsequent sale to the dealer and did not stand by and permit the dealer to place the car in his salesroom and offer it to the public. It might well have been added that the very fact that the car was secondhand was sufficient to put the purchaser on notice as to possible recorded liens.

The instant case is distinguished from the Rudolph Case in two important respects. One is, that the Dodge coupé in question was not only never delivered to the alleged purchaser, Mrs. R. T. Sutton, whose note the Gump Investment Company held for the balance of the purchase price, or to any one for her, but, on the contrary, was kept under the control and dominion of the Kite Company, on its salesroom floor, mixed with other stock. The second is that the Dodge coupé was a new car, standing on the salesroom floor of a dealer in new cars.

It is true that the Gump Investment Company cannot be said to have stood by and to have permitted

the Kite Company to place the car in its salesroom and offer it for sale to the public, and that the rule of estoppel, therefore, does not apply, as it was held not to apply (and for the same reason) in the Rudolph Case. But we think the differences pointed out above distinguish the instant case from the Rudolph Case and render the principle upon which that case rests inapplicable here.

It would of course follow that the leading principle upon which the Boice Case, supra, rests is inapplicable here, because the Gump Company had no knowledge that the Kite Company had retained the car in its possession and under its control. On the contrary, as far as it was advised, it had been sold and delivered to Mrs. Sutton. But there are certain conclusions which inevitably arise from, and grow out of the Boice Case, which we think control the instant case.

One conclusion is that some duty, at least, rests upon an individual, corporate or otherwise, who finances a retail dealer, to see to it that cars upon which he has a lien are not left under the domain and control of such dealer on his salesroom floor, to be offered to the public. The business of the Gump Investment Company was to finance retail automobile dealers, and it did finance them for a profit. It assumed some risk both as to the moral and financial standing of every dealer it financed. It took a risk as to the hazard for a profit. This is the status of the Gump Investment Company in this case.

Another conclusion is that a person going into the place of business of a retail automobile dealer, and purchasing a new car commingled with the stock for sale, from the showroom of such dealer, without any actual knowledge that there is a lien upon such car, and who pays the full purchase price, and to whom the car is delivered, is ordinarily under no obligation to examine the records to ascertain whether there is a lien upon such car. This is the status of W. N. Jackson in the instant case.

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