California Bank v. Kennedy, 167 U.S. 362 (1897)

Mr. Justice White,

after stating the case, delivered the opinion of the court.

Before discussing the merits, we will briefly consider and dispose of a suggestion that no Federal question appears by the record to have been properly raised below, and, therefore, there is a want of jurisdiction in this court to review the judgment. The answer averred that if any stock of the savings bank appeared to have been issued to the national bank, it was “issued without authority of this corporation defendant, and without authority of law.” In view of the fact that the defendant was a national bank, deriving its powers from the statutes of the United States, the averment that a particular transaction of the character of the one in question, if entered into, was without authority of law, can, in reason, be construed only to relate to the law controlling and governing the conduct

of the corporation, that is, the law of the United States. But if there were ambiguity on this subject, it is entirely removed by the grounds which were presented on the motion for a neiv trial and the specifications of error which formed the basis of the appeal which was taken to the Supreme Court of the State of California, for in both the motion and specifications the want of power under the laws of the United States was clearly asserted. . The Supreme Court of the State interpreted the case brought to it from the court below as presenting the question of the power of the corporation under the law of the United-.States to become a stockholder in a savings bank, for in the opening sentence of its opinion it said:

The suggestion as to the want of jurisdiction is, therefore, without merit.

The Federal questions which therefore arise on the record may be thus stated: 1st, do the statutes of the United States, Rev. Stat. § 5136 et seq., relating to the organization and powers of national banks, prohibit them from purchasing or subscribing to the stock of another corporation? and, 2d, if a .national bank does not possess such power, can the want of authority be urged by the bank to defeat an attempt to enforce against it the liability of a stockholder ?

As to the first question. — It is settled that the United States statutes relative to national banks constitute the measure of the authority of such corporations, and that they cannot rightfully exercise any powers except those expressly granted, or which are incidental to carrying on the business for which they are established. Logan County Bank v. Townsend, 139 U. S. 67, 73. No express power to acquire the stock of'another corporation is conferred upon a national bank, but it has been held that, as incidental to the power to loan money ’ oh personal security, a bank may in the usual course of doing

such business accept stock of another corporation as collateral, and by the enforcement of its rights as pledgee it may become the owner of the collateral and be subject to liability as other stockholders. National Bank v. Case, 99 U. S. 628. So, also, a national bank may be conceded to possess the incidental power of accepting in good faith stock of another corporation, as security for a previous indebtedness. It is clear, however, that a national bank does not possess the power to deal in stocks. The prohibition is implied from the failure to grant the power. First National Bank v. National Exchange Bank, 92 U. S. 122, 128.

On behalf of the plaintiff belqw it was admitted at the trial that the stock of the savings bank was not “ taken as security or anything of the kind,” and it is not disputed in the' argument at bar that the transaction by which this stock was placed in the name of the bank was one not in the course of the business of banking for which the bank was organized.

2.- The transfer of the stock in question to the bank being unauthorized by law, does the fact that, under some circumstances, the bank might have legally acquired stock in the corporation estop the bank from setting up the illegality of the transaction ?

Whatever divergence of opinion may arise on this question from conflicting adjudications in some of the state courts, in this court it is settled in favor of the right of the corporation to plead its want of power, that is to say, to assert the nullity of an act which is an ultra vires act. The cases of Thomas v. Railroad Company, 101 U. S. 71; Pennsylvania Railroad v. St. Louis, Alton &c. Railroad, 118 U. S. 290; Oregon Railway & Navigation Co. v. Oregonian Railway Co., 130 U. S. 1; Pittsburgh, Cincinnati &c. Railway v. Keokuk & Hamilton Bridge Co., 131 U. S. 371; Central Transp. Co. v. Pullman’s Car Co., 139 U. S. 24; St. Louis &c. Railroad v. Terre Haute & Indianapolis Railroad, 145 U. S. 393; Union Pacific Railway v. Chicago &c. Railway, 163 U. S. 564, and McCormick v. Market Nat. Bank, 165 U. S. 538, recognize as sound doctrine that the powers of corporations'are such only as are conferred upon them by statute, and that, to quote from the

opinion of the court in Central Transp. Co. v. Pullman's Palace Car Co., 139 U. S. 24, 59 to 60:

This language was also cited and expressly approved in Jacksonville &c. Railway v. Hooper, 160 U. S. 514, 524, 530.

As said in McCormick v. Market National Bank, 165 U. S. 538, 549 :

The doctrine thus enunciated is likewise that which obtains in England. Ashbury Railway Carriage & Iron Co. v. Riche, L. R. 7 H. L. 653 ; Attorney General v. Great Eastern Railway Company, 5 App. Cas. 473; Baroness Wenlock v. The River Dee Company, 10 App. Cas. 354; Trevor v. Whitworth, 12 App. Cas. 409; Ooregum Gold Mining Co. of India v. Roper, (1892) App. Cas. 125; Mann v. Edinburgh Northern Tramways, (1893) App. Cas. 69.

Applying the principles of law thus settled to the case at bar, the result is free from doubt.

The power to purchase or deal in stock of another corporation, as we have said, is not expressly conferred upon national banks, nor is it an act which may be exercised as incidental to the powers expressly conferred. A dealing in stocks is consequently an ultra vires act. Being such, it is without efficacy. Pearce v. Railroad Company, 22 How. 441, 445. Stock so acquired creates no liability to the creditors of the corporation whose stock was attempted to be transferred. (Cook on Stock and Stockholders, vol. 1, p. 435, note 1 to sec. 316, and authorities there cited.)

In the Royal Bank of India's case, L. R. 4 Ch. 252 (1869), while it was held by the Court of Appeal that, as incidental to the power to advance money on a deposit of shares of stock, a corporation might do such acts as were reasonable and proper for making the security available, it was conceded' that a purchase of stock of another company as a speculation would have been ultra vires, and, despite acts of ownership exercised by the company, the shares might be repudiated at any time.

Sir C. J. Selwyn, L. J., said (p. 261) :

Sir G. M. Giffard, L. J., said (p.. 262):

In Ex parte Liquidators of the British Nation Life Assurance Association, L. R. 8 Ch. Div. 679, (1879) the Court of Appeals (Lords Justices James, Baggally and Thesiger) dis

charged an order of an arbitrator which had put the British Nation Association on the list of contributories of the British Commercial Insurance Company, a corporation in the process of being wound up. Pursuant to authority conferred by its deed of settlement, the.British Nation Association had, through its directors, purchased the business of the British Commercial Insurance Company. Under the agreement entered into between the companies, certain stock of the British Commercial Company was transferred to the trustees appointed by the British Nation Company. Subsequently this stock was transferred into the name of the association, and it was sought to hold it liable as a stockholder, because of its alleged ownership of such stock. Lord Justice James delivered the opinion of the court, holding that while the British Nation Association was empowered to purchase for investment shares of a certain character, it was not empowered to purchase stock which would practically constitute it a partnership in business speculations or adventures, and that the transfer of the stock in question into the name of the bank was ultra vires and void. It was further held that the shareholders who had transferred the stock to the British Nation Association had no power, as between themselves and the association, to transfer their liability to the latter, and that —

The case before the court was declared to be not one of a person induced to become a shareholder, and who had become a shareholder by fraud, but that of a person who had never in fact become a shareholder.

The circumstance that the dealing in stocks by which, if at all, the stock of the California Savings Bank was put in the name of the California National Bank, was one entirely outside of the powers conferred upon the bank, and was in nowise the transaction of banking business or incidental to the exercise of the powers conferred upon-the bank, distinguishes this case from the class of cases relied upon by the defendant

in error. National Bank v. Whitney, 103 U. S. 99; National Bank v. Matthews, 98 U. S. 621. The difference between those cases and one.like this was referred to in McCormick v. Market National Bank of Chicago, supra, and it is, therefore, unnecessary to particularly review them. The claim that the bank in consequence of the receipt by it of dividends on the stock of the savings bank is estopped from questioning its ownership and consequent liability, is but a reiteration of the contention that the acquiring of stock by the bank under the circumstances disclosed was not void but merely voidable. ■ It would be a contradiction in terms to assert that there was a total want of power by any act to assume the liability, and yet to say that by a particular act the liability resulted. The transaction being absolutely void, could not be confirmed or ratified. As was said by this court in Union Pacific Railway v. Chicago &c. Railway, 163 U. S. 564, speaking through Mr. Chief Justice Fuller (p. 581):

It follows from the foregoing that the judgment of the Supreme Court of California against the bank was erroneous, and it must, therefore, be

Mr. Justice Harlan dissented.