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THE UNAUTHORIZED OR PROHIBITED
AMONG recent contributions to the literature of Corporation
Law is a paper by Judge Seymour D. Thompson entitled "The Doctrine of Ultra Vires in relation to Private Corporations." 1 The essay is worthy of unusual attention, since it seems fair to assume that the views therein expressed will be reasserted in an expanded form in the forthcoming volumes of Judge Thompson's Commentaries.2
The learned author begins his discussion with a strong statement of his conviction" that the Anglo-American law" relating to "the so-called doctrine of ultra vires" is "in a state of hopeless and inextricable confusion."3 He disclaims all intention of writing a treatise on the subject within the compass of a magazine article, but he addresses himself to an examination of principles and a statement of certain general conclusions. The discussion is cast in historical form. The author passes in review "the ancient doctrine of ultra vires"; he gives us the history of what he is pleased to call "the revolt" against it; he presents in outline the "modern doctrine"; and he concludes with a statement of his own views upon the ideal solution of the problems under discussion. If his treatment of the subject is true to the facts of legal history, the results of Judge Thompson's investigation will be accepted as an important contribution to legal literature. In the judgment of the present writer, however, there are in the essay certain points of no inconsiderable importance with respect to which there is room for at least an intelligent difference of opinion.
In the first place, it is not clear that any tribunal ever gave a consistent adherence to the doctrine which Judge Thompson calls "the ancient doctrine." In the second place, it may be doubted whether there is any justification for his view that modern developments of the law of Corporate Power are to be explained upon a
1 28 American Law Review, 376.
' Commentaries on the Law of Private Corporations. Bancroft-Whitney Co.: San Francisco, 1895. At the time of the writing of the present paper, the volume containing the chapters on Corporate Power has not made its appearance.
• Page 376.
principle of moral evolution. Again, it seems to be reasonably certain that those courts which to-day adhere to "the modern doctrine" have always recognized it in substantially its present form in other words, it is not modern. Finally, it is submitted that much of importance is lost through a failure to recognize with distinctness the operation in this field of two opposing judicial conceptions of public policy. The more or less consistent following of one or the other of these has determined the attitude of all courts which have attempted the solution of problems of Corporate Power. It may not be unprofitable to examine these points in their order. The "ancient doctrine" is thus stated by the learned author:
"A contract of a corporation which is either unauthorized by or in violation of its charter or governing statute, or which is entirely outside the scope of the powers of its creation, is void, in the sense of being no contract at all because of the want of the power of the corporation to enter into it; that such a contract will not be enforced by any species of action in a court of justice; that, being void ab initio, it cannot be made good by ratification; nor by any succession of renewals; and that no performance on either side can give validity to it, so as to enable a party to the fund [to found?] any right of action upon it. The doctrine of the courts was, that, unless a corporation was empowered by its charter or governing statute to make a given contract, it was prohibited by the principles of the common law; that when a court of justice was appealed to for its enforcement, it stood upon the footing of any other prohibited illegal or immoral contract, and, as such, was subject to the operation of the principle, that a court of justice would not aid either party to enforce it, or to get back what he had lost under it, but would leave both parties in the predicament where, by their illegal act, they had placed themselves."
Assuming for the moment that this is the correct statement of an historical legal doctrine relating to unauthorized and prohibited contracts, it is important to note the misleading implication that, at the common law, the parties to all "prohibited illegal or immoral" contracts are helpless in respect of recovering what has been lost, and that the law, in such cases, will "leave both parties in the predicament where, by there illegal act, they have placed themselves."1 Now the invalidity of an unauthorized corporate contract arises, not from the subject matter, but from the incapacity of one of the contracting parties. It is said to be
1 Pages 378, 37>
illegal but it is illegal, not because the agreement is itself immoral, but because the law denies the corporation power to enter into the agreement. It is malum prohibitum and not malum in se. It is therefore important to distinguish between "illegal prohibited contracts" and "illegal immoral contracts," which Judge Thompson seems to group together. The learned author would doubtless be ready to admit that, where the contract is prohibited merely, a plaintiff in default may recover at common law from the defendant (provided the contract is not wholly executed) to the extent that may be necessary to restore both parties to the status quo.1 Again, where the defendant is in default and the plaintiff is not, the plaintiff, speaking generally, may recover in all cases in which the parties are not in pari delicto. Indeed, Judge Thompson refers in another connection to these rights of recovery in quasi contract,3 and he cites Lord Mansfield's decision in Moses v. Macferlan. It follows, therefore, that the learned author speaks inadvertently when he assimilates to "any other prohibited contract" the case in which, for example, a railroad purchases and uses a steamboat and is absolved from all obligation to pay for it, and the further case in which an insurance company has made a prohibited loan and is cut off from all right to recover on the evidence of indebtedness. If, as the learned author necessarily implies, the defendants retained there ill-gotten gains in these cases, they did so under the operation of a principle peculiar to the law of corporations, and altogether different from that which is applicable to other prohibited contracts at the common law. With these observations we pass to the first of the several questions proposed for discussion,the question, that is, whether the "ancient doctrine" outlined by Judge Thompson ever did claim the allegiance of a court of common law. The two cases which have just been stated are used by Judge Thompson as the two leading illustrations of the doctrine under consideration. They are Pearce v. R. R. Co. and Insurance Co. v. Lawrence. In the former case the plaintiff, as indorsee of a promissory note, sued the corporation which had given the note to evidence an indebtedness for a steamboat made and delivered by the payee at the request of the corporation. The plaintiff could recover, if at all, only upon the contract, and the
court was of opinion that the contract was in excess of the defendant's corporate powers. But Mr. Justice Campbell is careful to observe that the court abstains from pronouncing any opinion upon the problem which would have arisen had the plaintiff been the vendor of the steamboat or an assignee of the vendor's interest. In other words, the liability of the defendant in a suit by the vendor in disaffirmance of the contract is not discussed. The case is not, therefore, an illustration of the "ancient doctrine." In the second of the two cases an insurance company, prohibited from discounting notes or engaging in the business of banking, nevertheless lent money upon promissory note secured by a pledge of corporate stock as collateral. In an action brought by the corporation as payee of the note, it was held that the action could not be maintained. There is here no decision to the effect that the plaintiff was without remedy. The right of recovery independently of contract is not negatived. Indeed, as is well known, another of these Utica Insurance Cases,1 reported in the same volume of Wendell, (and cited, by the way, by Judge Thompson,) contains the remark of Chief Justice Savage to the effect that, though a prohibited security taken by the corporation is void, the plaintiff may nevertheless recover on the count for money lent. The soundness of this distinction between the validity of the security and of the contract of loan may be open to question;2 but, in any event, the cases are not authorities for the proposition in support of which they are cited. While these cases are the only ones stated at length in the text as illustrations of the ancient doctrine, several others which deserve attention are cited in the notes. The most important of these are the decisions of Mr. Justice Gray in the Supreme Court of Massachusetts, and subsequently in the Supreme Court of the United States. These cases Davis v. R. R. Co. and Central Transportation Co. v. Pullman's Palace Car Co.1 were both actions based on contracts which the court treated as unauthorized. They are not in any sense ancient cases, the former having been decided in 1881, and the later in 1890. In the earlier case nothing in money or property appeared to have passed from plaintiff to defendant, so that the right of recovery in disaffirmance
1 Utica Ins. Co. v. Cadwell, 3 Wend. 296.
2 See remarks of Selden, J., in Tracy v. Talmage, 14 N. Y. 162; Keener on Quasi Contracts, p. 272.
8 Davis v. Old Colony R. R. Co., 131 Mass. 258.
4 Central Transportation Co. v. Pullman's Palace Car Co., 139 U. S. 24.
was not discussed, although distinctly recognized. In the later case the plaintiff unquestionably had a claim against the defendant to prevent the unjust enrichment of the latter. In point of fact, equitable proceedings in disaffirmance of the contract and for an accounting are to-day pending in the Circuit Court of the United States for the Eastern District of Pennsylvania.1 The other cases cited need not be reviewed in detail. The writer, after careful consideration, ventures the assertion that in no one of them is there to be found a recognition of the doctrine outlined by the learned author. Possibly, therefore, Judge Thompson is unnecessarily severe when he asserts 2 that "such was the doctrine which our ancestral lawyers mouthed with owl-like wisdom, and which our ancestral judges rolled as a sweet morsel under their tongues."
The second point for examination is the "revolt against the doctrine of ultra vires." This judicial movement is treated by Judge Thompson as a moral reformation. He begins with some remarks to the effect that half the exertions of an advocate are put forth in maintaining the wrong side in legal controversies. Then follows this somewhat startling language: "The natural result is, that, when reasoning on legal subjects, lawyers, though upright and just in their private affairs, fall into the habit of dismissing conscience and of laying moral considerations out of view. This habit follows them when they ascend the bench as judges; it has settled like a fog over the professional intellect and conscience to such an extent that we now constantly hear from high sources the infamous proposition that there is no necessary connection between the law and concrete justice or morality." In such a state of moral chaos one could scarcely have hoped to find the germs of higher life. It might well have been feared that persistence in the practice of upholding the wrong for at least one half the time would have ended in the hopeless perversion of conscience and the destruction of the moral principle. But no: Judge Thompson assures us that the renaissance of conscience had its beginning when all that was good seemed about to perish. "Nevertheless, the judicial and professional conscience, dulled as it had been by this habit of reasoning in behalf of wrong, could not forever endure a rule of law which enabled one party to a contract, perfectly innocent when made between natural persons, to keep the fruits of it, and repudiate it
1 No. 44, October Sessions, 1886. See report of one of the stages of this litigation in 65 Fed. Rep. 158.
2 Page 380.