CHAPTER IV.

CORPORATE LIABILITY FOR MONEY LOANED TO AID UNAUTHORIZED ACTS.

EIGHTH SELECTED CASE.

BRADLEY V. BALLARD.*

1. CONTRACTS-by private corporations, whether enforcible when not within their proper powers to make them. While it is true that so long as the terms of a contract remain unexecuted on both sides, a private corporation is not estopped to say in its defense that it had not the power to make the contract sought to be enforced against it, for the reason that if thus estopped, its powers might be indefinitely enlarged; yet, such a corporation cannot, under cover of this principle, evade the payment of borrowed money on the ground that, although it had power to borrow money, it expended the money borrowed in prosecuting a business which it was not authorized to prosecute, even though the lender of the money knew that the corporation was transacting a business beyond its chartered powers, and that his money would be used in such business, provided the business itself was free from any intrinsic immorality or illegality.

2. While a contract remains executory, not only is it true the powers of the corporation cannot be extended beyond its proper limits for the purpose of enforcing the contract, but, on the application of a stockholder or of any other person authorized to make the application, a court of chancery would interfere and forbid the execution of a contract ultra vires.

3. So, too, if a contract ultra vires is made between the corporation and another person, and while it is wholly unexecuted the corporation recedes, the other contracting party would, probably, have no claim for damages. 4. But if such other party proceeds in the performance of the contract, expending money and his labor in the production of values which the corporation appropriates, the corporation can never be excused from payment on the plea that the contract was beyond its power.

* Reported in 53 Ill., 413 (1870).

5. While courts are inclined to maintain with vigor the limitations of corporate action, whenever it is a question of restraining the corporation in advance from passing beyond the boundaries of its charter, they are equally inclined, on the other hand, to enforce against, private corporations contracts, though ultra vires, of which they have received the benefit.

6. And if such corporations, to increase their profits, embark in enterprises not authorized by their charter, still, as to third persons, and when necessary for the advancement of justice, the stockholders will be presumed to have assented, since it is in their power to restrain their officers when they transgress the limits of their chartered authority.

7. MUNICIPAL CORPORATIONS, however, stand upon a different ground. They are not organized for gain, but for the purpose of government, and debts illegally contracted by their officers cannot be made binding upon the tax-payers, from the presumed assent of the latter.

Appeal from the Circuit Court of Cook County; the Hon. Erastus S. Williams, Judge, presiding.

THE opinion states the case.

Mr. Chief Justice LAWRENCE delivered the opinion of the

court.

This was a bill in chancery, brought by Bradley against Ballard and others, for the purpose of enjoining the prosecution of a suit pending in the Circuit Court of Cook county, against a corporation called "The North Star Gold and Silver Mining Company," in which complainant was a stockholder, upon certain promissory notes given by said company, and also to cancel certain other notes not yet in suit. The court sustained a demurrer to the bill, and, the complainant not asking to amend, a decree of dismissal was entered.

It appears by the averments of the bill that various persons associated themselves together in the city of Chicago, in the year 1866, and filed their articles of organization in the Circuit Court of Cook county, under the general incorporation law, whereby they became incorporated under the title above stated. The statute requires the certificate to state the town and county in which the operations of a company thus incorporated are to be carried on, and the certificate of this company stated that their operations were to be carried on in the city of Chicago, in the county of Cook, and State of Illinois. It

further appears from the bill that the company thus organized engaged in miuing in the Territory of Colorado, and in the prosecution of that work borrowed large sums of money, for. which the notes described in the bill were given, except some that are alleged to have been given for official.salaries. It is not claimed that they were not given for a full and fair consideration, but their cancellation is sought upon the ground that they were given for money borrowed to enable the company to proscute a business which it had no power to prosecute, and that this purpose was known to the lenders of the money. It is insisted that, although the business of the corporation was mining, yet, by the terms of its certificate, it had no power to prosecute that business beyond the limits of the city of Chicago, or certainly not beyond the limits of the State.

Whether this is the proper construction of the statute, is a question we do not find it necessary to decide. Conceding that it is, and that this corporation had no power to engage in mining in Colorado, we are still of opinion the complainant has not, by his bill, entitled himself to relief. He became a stockholder to the extent of $25,000, and from the name and character of the company, he must have known it was organized for the purpose of mining beyond the limits of this State. He subsequently became one of the directors of said company, and it is a legitimate inference from the bill that at least a part of these debts were created while he was thus participating in the control of the company. There is no pretense in the bill that he ever, in any mode, objected to the mining operations of the company in Colorado, or to the borrowing of money therefor, and the fair, and, indeed, unavoidable inference, from the nature of the company, the connection of the complainant with it, and the silence of the bill in this regard, is, that he did not object. On what ground, then, can he ask a court of equity to enjoin the collection of these notes?

It is said by counsel for complainant that a corporation is not estopped to say, in its defense, that it had not the power to make the contract sought to be enforced against it, for the reason that if thus estopped its powers might be indefinitely enlarged. While the contract remains unexecuted on both sides, this is undoubtedly true, but when under cover of this

principle a corporation seeks to evade the payment of borrowed money on the ground that, although it had the power to borrow money, it expended the money borrowed in prosecuting a business which it was not authorized to prosecute, it is pressing the doctrine of ultra vires to an extent that can never be tolerated, even though the lender of the money knew that the corporation was transacting a business beyond its chartered powers, and that his money would be used in such business, provided the business itself was free from any intrinsic immorality or illegality.

Neither is it correct to say that the application to corporations of the doctrine of equitable estoppel, where justice requires it to be applied, as when, under a claim of corporate power, they have received benefits for which they refuse to pay from a sudden discovery that they had not the powers they had claimed, can be made the means of enabling them indefinitely to extend their powers. If that were true it would be an insuperable objection to the application of the doctrine even for the purpose of preventing injustice in individual cases. But it is not true. This doctrine is applied only for the purpose of compelling corporations to be honest in the simplest and commonest sense of honesty, and after whatever mischief may belong to the performance of an act, ultra vires, has been accomplished. But while a contract remains executory it is perfectly true that the powers of corporations cannot be extended beyond their proper limits, for the purpose of enforc ing a contract. Not only so, but on the application of a stockholder, or of any other person authorized to make the application, a court of chancery would interfere and forbid the execution of a contract ultra vires. So, too, if a contract ultra vires is made between a corporation and another person, and while it is yet. wholly unexecuted the corporation recedes, the other contracting party would probably have no claim for damages. But if such other party proceeds in the performance of the contract, expending his money and his labor in the production of values which the corporation appropriates, we can never hold the corporation excused from payment on the plea that the contract was beyond its power.

Take, for example, the case of a corporation chartered to

build a railway from Chicago to Rock Island. Under such a charter the company would have no power to build steamboats for the purpose of running a line of such vessels between Rock Island and St. Louis. But suppose the company, notwithstanding the want of power, should make a contract for the building of a vessel, and it is built by the contractor, and accepted and used by the railway, could any court permit the corporation, when sued for the value of the vessel, to excuse itself from payment on the ground that, although it has and uses the steamer, it had no authority to do so by its charter? Or, suppose that instead of having a vessel built by a contractor it employs a superintendent to build it and hires mechanics by the day, could it escape payment of their wages on the ground that it had employed them in a work ultra vires? In cases of such a character, courts simply say to corporations, you cannot in this case raise the question of your power to make the contract. It is sufficient that you have made it, and by so doing have placed in your corporate treasury the fruits of others' labor, and every principle of justice forbids that you be permitted to evade payment by an appeal to the limitations of your charter.

We are aware that cases may be cited in apparent conflict with the principles here announced, but the tendency of recent decisions is in harmony with them. While courts are inclined to maintain with vigor the limitations of corporate action whenever it is a question of restraining the corporation in advance from passing beyond the boundaries of their charters, they are equally inclined, on the other hand, to enforce against them contracts, though ultra vires, of which they have received the benefit. This is demanded by the plainest principles of justice. 2 Kent, 11 Ed., p. 181, note; Zabriskie v. C. C. & C. R. R. Co., 23 How., U. S., 381; Bissell v. The Michigan Southern & Northern Indiana Railroad Companies, 22 N. Y., 258; Carey v. Cleveland & Toledo R. R. Co., 29 Barb., 35; Parish v. Wheeler, 22 N. Y., 490; Groff v. Am. Lin. Th. Co., 21 N. Y., 124; Argenti v. San Francisco, 16 Cal., 225; McCluer v. Manchester & L. R., 13 Gray, 124; Chapman v. R. & L. R. R. Co., 6 Ohio,