First National Bank of Ottawa v. Converse, 200 U.S. 425 (1906)

First National Bank of Ottawa v. Converse

No. 176

Argued January 25, 1906
Decided February 19, 1906
200 U.S. 425

ERROR TO THE CIRCUIT COURT OF THE UNITED STATES

FOR THE NORTHERN DISTRICT OF ILLINOIS

Syllabus

A Minnesota manufacturing corporation having failed, the creditors, a national bank among them, organized a new corporation under the laws of Minnesota for the purchase of the capital stock, evidences of indebtedness, and assets of the corporation and for the manufacture of the same articles that it had manufactured. The bank and other creditors exchanged their claims against the old corporation for stock in the new corporation. After the incorporation and prior to the failure of the new corporation, the laws of Minnesota imposing double liability on stockholders of certain corporations were amended and a new method of procedure for enforcing them was provided. Stockholders of corporations organized exclusively for manufacturing purposes are not subject to double liability. Proceedings having been taken under the statute to enforce the double liability of the stockholders, a receiver was appointed, an assessment determined, and a judgment for the pro rata amount obtained against the national bank, which denied liability, claiming that the corporation was organized for manufacturing purposes only, and therefore the stockholders were exempt from double liability; that the provisions in the statute providing for enforcing double liability were unconstitutional under the impairment of obligation clause of the federal Constitution, and that the original taking of the stock by it as a national bank was ultra vires.Held that:

Under the construction given by the Supreme Court of Minnesota to its articles of association, the corporation was organized to engage in a purely speculative business in buying and selling the stock and assets of another corporation with power, but without any obligation, to engage independently in a manufacturing business, and did not fall within the class of corporations whose stockholders were exempted from liability.

A national bank has no power to engage in or promote a purely speculative business or to take stock in a corporation organized for that purpose, nor can the power to take such stock as a means of protecting itself from loss on preexisting indebtedness be inferred from the right to accept it as security for a present loan.

Notwithstanding its subscription, a national bank, taking stock in a corporation organized for purely speculative purposes, may plead its want of authority so to do as a defense to the claim of a receiver of such corporation for the double liability imposed by a state statute on the stockholders thereof.

For brevity, the plaintiff in error will be hereafter referred to as the bank and the defendant in error as the receiver.

The receiver commenced this action against the bank in the Circuit Court of the United States for the Northern District of Illinois. The object of the action was to recover from the bank, as the owner of 274 shares of preferred stock in the Minnesota Thresher Manufacturing Company, the amount of an assessment of $18 per share, levied upon said stock for the payment of the debts of the thresher company. A demurrer to an amended declaration having been overruled, and the bank electing not to plead further, judgment was entered for the receiver, and, on account of constitutional questions raised by the demurrer, the case was brought directly to this Court.

The averments of the amended declaration may be summarized as follows: in May, 1884, the Northwestern Manufacturing & Car Company was a corporation engaged in the manufacturing business at Stillwater, Minnesota. At the date mentioned, the car company owed a large amount which it was unable to pay, among which was a sum due to the bank for money lent. In that month, a receiver was appointed for the car company by a court of the State of Minnesota having jurisdiction. Some time afterwards, in November, 1884, the bank with other creditors, and some of the stockholders of the car company, organized, under the laws of Minnesota, a new corporation, styled the Minnesota Thresher Manufacturing Company. The articles of incorporation of the new company provided

that the objects for which said corporation was formed were the purchase of the capital stock, evidences of indebtedness issued by and the assets of the Northwestern Manufacturing & Car Company, a corporation existing under the laws of the State of Minnesota, or any portion of said capital stock, evidences of indebtedness or assets, and the manufacture and sale of steam engines of all kinds, farm implements and machinery of all kinds, and the manufacture and sale of all articles, implements, and machinery of which wood and iron or either of them form the principal component parts, and the manufacture of the materials therein used.

The thresher company exchanged its preferred stock at par for the debts of the car company and issued common stock in exchange for the preferred stock of the car company. Subsequently, at a judicial sale, the new company acquired all the assets of the car company, and paid for the same with the claims which it had acquired for issuing its preferred stock as above stated. The stock held by the bank upon which the assessment was sought to be enforced was alleged to have been acquired by the bank in the manner above stated -- that is, by an exchange of its claim against the car company for the preferred stock of the new corporation. The declaration alleged that, at the time of the acquisition of the stock by the bank as above stated, under the Constitution and laws of Minnesota, there was a double liability imposed upon the stockholders to pay the debts of the corporation in the event of its insolvency.

After the organization of the thresher company and the purchase of the assets of the car company as above stated, the thresher company carried on the manufacturing business authorized by its charter. In 1901, it became insolvent. A creditor having sued and obtained judgment, and an execution having been issued and returned unsatisfied, the creditor procured, under the provisions of chapter 76 of the General Statutes of Minnesota and the amendments thereto, the appointment of a receiver of the property of the thresher company, who duly qualified and entered upon the discharge of his duties. In the proceeding in which the receiver was appointed, creditors exhibited claims and demands against the thresher company, aggregating $443,752.17, but no property or assets of the corporation existed available to pay this indebtedness or any portion thereof.

Thereafter, upon petition of the receiver, pursuant to the provisions of chapter 272 of the General Laws of Minnesota for 1899, copied in the margin,

After compliance with the requirements of the act of 1899, the court made an assessment of eighteen dollars upon each of the shares of the stock of the thresher company, and the receiver was authorized and directed, in the event of the failure of a stockholder to pay, after due notice by mail,

to forthwith institute and prosecute such action or actions or other proceedings against such person, persons, corporation, or party liable in any court having jurisdiction, whether, in this state or elsewhere, which said receiver may deem necessary or proper for the recovery of the amount due from such person, persons, corporation, or party under the terms of this order.

After alleging the default of the bank to pay the assessment, the amended declaration prayed for a judgment against the bank for the sum of the assessment, that is, eighteen dollars per share on the 274 shares of stock of the thresher company, which stood on the books of that company in the name of the bank.

As stated at the outset, the bank demurred to the amended declaration, and, on the demurrer being overruled, stood upon the demurrer, and judgment was entered against it as prayed for. The grounds upon which the amended declaration was demurred to were as follows:

1. It does not state facts sufficient to constitute a cause of action against the defendant.

2. It does not show that plaintiff has legal capacity to institute and maintain the present action.

3. It shows that said supposed Laws of Minnesota for 1899 are in contravention of clause 1 of Section 10 of Article I of the Constitution of the United States.

4. It shows that said supposed Laws of Minnesota for 1899 are in contravention of the Fourteenth Amendment of the Constitution of the United States.

5. It shows that said supposed Laws of Minnesota for 1899, being "An Act to Provide for the Better Enforcement of the Liability of Stockholders of Corporations," are in contravention of the Constitution of the United States.

6. It shows that said supposed Laws of Minnesota for 1899 unjustly discriminate against nonresident stockholders, and are such as will not be enforced in this jurisdiction.

7. It shows that the supposed order of the court levied an assessment on stockholders that is excessive and beyond reason.

8. It does not show that the supposed corporate indebtedness is contractual, or that is has been judicially determined as against this defendant.

9. It does not show that all the necessary steps prescribed by the supposed laws of Minnesota have been taken.

10. It shows, as a basis of liability, supposed acts of the defendant which are ultra vires and void under the national bank act.

11. It states conclusions of the pleader instead of facts.

12. It does not allege a case within the jurisdiction of this Court.

13. It is, in other respects, uncertain, informal, and insufficient.