MERCHANTS’ NATIONAL BANK OF CINCINNATI, Plff. in Err. v.

THERESA J. WEHRMANN, Executrix of William F. Wehrmann, Deceased, et al.

(See S. C. Reporter’s ed. 295-302.)

tion — how raised. — A showing at every stage of the litigation in the state courts of the intention of a national bank to rely upon the United States banking laws for immunity against liabilities arising out of its ownership of shares in a partnership is sufficient to sustain the appellate jurisdiction of the Supreme Court of the United States, although the bank did not, in the first in-

Note. — On liow and when questions must he raised and decided in a state court in order to make a case for a writ of error from the Supreme Court of the United States — see note to Mutual L. Ins. Co. v. McGrew, 63 L.R.A. 33.

On xcliat the record must shoto respecting the presentation and decision of a Federal ques¬ tion in order to confer jurisdiction on the Su¬ preme Court of the United States on a writ of error to a state court — see note to' Hooker v. Los Angeles, 63 L.R.A. 471.

As to ichat is the record for this purpose — see note to Home for Incurables v. New York, 63 L.R.A. 329.

On the power of a national hank to take cor¬ porate stock in satisfaction of a debt by way of security — see note to First Nat. Bank v. Converse, ante, 537.

As to estoppel of a corporation to set up plea of ultra vires — see notes to Miller v. American Mut. Acci. Ins. Co. 20 L.R.A. 765, and Wood v. Corry Waterworks Co. 12 L.R.A. 168.

202 U. S.

Mebchants’ Nat.

stance, anticipate the specific and qualified ( form in which the immunity finally was denied, — especially where the highest state court, by a certificate, made part of its rec¬ ord and judgment, stated that the Federal question was involved.

bank. — A national bank may not become the absolute owner, in satisfaction of a debt, of shares represented by transferable cer¬ tificates in a partnership formed to purchase, improve, divide into lots, and sell a lease¬ hold.

by national bank.— The want of authori¬ ty of a national bank to become the absolute owner, in satisfaction of a debt, of shares represented by transferable certificates in a partnership formed to purchase, improve, divide into lots, and sell a leasehold, is a valid defense to an action against it founded upon its liability for the partnership debts.

[No. 256.]

Argued April 26, 1906. Decided May H,

IN ERROR to the Supreme Court of the State of Ohio to review a judgment af¬ firming, on a second writ of error, a judg¬ ment of the Circuit Court of Hamilton County, in that state, establishing the lia¬ bility of a national bank for the debts of a partnership because of its ownership of shares in such partnership, represented by transferable certificates. Reversed.

See Same case below, on first writ of error, 69 Ohio St. 160, 68 N. E. 1004.

The facts are stated in the opinion.

Mr. W. C. Herron argued the cause and filed a brief for plaintiff in error:

The whole question of the effect of the plaintiff in error’s becoming the owner of the shares de facto, and of the effect of the defense of ultra vires, whether it renders the whole contract void, or whether it may form the basis for some consequential lia¬ bility, is a Federal question.

S. 362, 42 L. ed. 198, 17 Sup. Ct. Rep. 831.

If the plaintiff in error took these shares intending to be a partner, and to have an interest only in the net profits of the syn¬ dicate, and if the plaintiff in error had no power to take the shares in that way, no title to the shares passed to it at all, the whole transaction was void, and no liability of any sort can be imposed upon the plain¬ tiff in error.

Ibid.

The plaintiff in error had no power, even to secure a pre-existing indebtedness, to take title to shares in a partnership deal¬ ing in land, or to make itself liable for any part of the indebtedness of such a partner¬ ship.

202 U. S. U. S., Book 50.

Bank v. Wehbmann.

First Nat. Bank v. Converse, 200 U. S. 425, ante, 537, 26 Sup. Ct. Rep. 306.

Mr. C. Bentley Matthews argued the cause and filed a brief for defendants in error :

The mere ordinary making of contracts and conducting the business of the bank and the obligations that ensue either from con¬ tract or from torts are not Federal questions. Nobody denies that a corporation, whether under the revised acts of the United States, or other acts of the state legislature, can¬ not perform acts ultra vires, but U. S. Rev. Stat. § 5136, U. S. Comp. Stat. 1901, p. 3455, expressly permits the making of con¬ tracts, and the exercise of all powers ap¬ pertaining to such companies that are usual and incidental to the carrying on of the busi¬ ness for which they are chartered, and the application of the rules of common law and equity to its acts follows as a matter of course. The application of these rules does not raise a Federal question.

Inez Min. Co. v. Kinney, 46 Fed. 832.

The reasoning in Texas A P. R. Co. v. Cody, 166 U. S. 606, 41 L. ed. 1132, 17 Sup. Ct. Rep. 703, and Texas d P. R. Co. v. Bar¬ rett, 166 U. S. 617, 41 L. ed. 1136, 17 Sup. Ct. Rep. 707, does not apply in this case because of the deprivation of the right to litigate in the United States court from the mere fact that the party is a national bank.

Where the judgment of the state court rests on two grounds, one involving a Fed¬ eral question and the other not, and it does not appear on which of the two the judg¬ ment was based, and the ground independ¬ ent of a Federal question is sufficient in it¬ self to sustain it, this court will not take jurisdiction.

Allen v. Arguimbau, 198 U. S. 149, 49 L. ed. 990, 25 Sup. Ct. Rep. 622; Leonard v. Vicksburg, S. d P. R. Co. 198 U. S. 416, 49 L. ed. 1108, 25 Sup. Ct. Rep. 750.

Persons may, by their acts or omissions to act, waive rights which they might other¬ wise have under the Constitution and laws of the United States; and the question whether they have or have not lost such rights by their failure to act, or by their ac¬ tion, is not a Federal question.

Leonard v. Vicksburg, 8. d P. R. Co. supra; Pierce v. Somerset R. Co. 171 U. S. 641, 648, 43 L. ed. 316, 319, 19 Sup. Ct. Rep. 64; Eustis v. Bolles, 150 U. S. 361, 37 L. ed. 1111, 14 Sup. Ct. Rep. 131; Seneca Nation of Indians v. Christy, 162 U. S. 283, 40 L. ed. 970, 16 Sup. Ct. Rep. 828; Gillis v. Stinchfield, 159 U. S. 658, 40 L. ed. 295, 16 Sup. Ct. Rep. 131; Speed v. McCarthy, 181 U. S. 269, 45 L. ed. 855, 21 Sup. Ct. Rep.

The rules of common law and equity, or the rule established by local custom or

65 1037

Supreme Court of the United States.

statute, equally fail to give rise to any such question provided the validity of the stat¬ ute, or construction of the statute itself, is not in question.

Pennsylvania R. Go. v. Hughes, 191 U. S. 477, 48 L. ed. 268, 24 Sup. Ct. Rep. 132.

In Chicago, I. d 2i. R ■ Co. v. McGuire, 196 U. S. 128, 49 L. ed. 413, 25 Sup. Ct. Rep. 200, it is held that if the highest state court fails to consider the question because it has not been properly made in the court below, then this court will not review its judgment unless it appears that the valid¬ ity of the statute was necessarily involved.

And in Western Electrical Supply Co. v. Abbeville Electric Light d P. Co. 197 U. S. 299, 49 L. ed. 765, 25 Sup. Ct. Rep. 481, where it was claimed that service upon an agent of a corporation was not sufficient service, which contention, though upheld by the inferior state court, was denied by the higher court, and thereupon it was claimed that the agent was not such an agent as to bring the corporation, which was a foreign corporation, into court, and was not due process of law, but the appellate court de¬ clined to consider the question, presumably because it had not been made prior to its first decision, this court refused to review it, because, even though it were a Federal question, the state supreme court might very well decline to consider it when not made in time.

In Harding v. Illinois, 196 U. S. 78, 49 L. ed. 394, 25 Sup. Ct. Rep. 176, it is said that this court will not reverse the judg¬ ment of a state court holding that an al¬ leged Federal constitutional objection was waived, where the record discloses that no authority was cited or argument advanced in support of such objection, and it is clear that the decision was based upon other than Federal grounds.

An adverse suit authorized by the stat¬ utes of Congress in the case of mining prop¬ erty is not sufficient necessarily to vest ju¬ risdiction in the Federal courts.

Shoshone Min. Co. v. Rutter, 177 U. S. 505, 44 L. ed. 864, 20 Sup. Ct. Rep. 726.

The jurisdiction of this court in cases brought up by writ of error to a state court does not extend to questions of fact or of local law, which are merely preliminary to, or the possible basis of, a Federal question.

Telluride Power Transmission Co. v. Rio Grande Western R. Co. 175 U. S. 639, 44 L. ed. 305, 20 Sup. Ct. Rep. 245.

The validity of a statute is not drawn in question, every time rights claimed under euch statute are controverted, nor is the validity of an authority every time an act done by such authority is disputed.

Cook County v. Calumet & C. Canal <£- 1038

Oct. Term,

Dock Co. 138 U. S. 635-653. 34-L. ed. 1110- 1116, 11 Sup. Ct. Rep. 435.

In this case, the papers executed by the parties made out a partnership.

Clagett v. Kilbourne, 1 Black, 346, 17 L. ed. 213; Yeoman v. Lesley, 40 Ohio St. 190; Hulett v. Fairbanks, 40 Ohio St. 233; Mc- Fadden v. Leeka, 4S Ohio St. 513, 2S N. E. 874; Chester v. Dickerson, 54 N. Y. 1, 13 Am. Rep. 550; Batty v. Adams County, 16 Neb. 44, 20 N. W. 15; Robbins v. Butler, 24 Ill. 387 ; Ludlow v. Cooper, 4 Ohio St. 1.

A partnership may exist with transfer¬ able shares.

Wadsioorth v. Duncan, 164 Ill. 360, 45 N. E. 132; TFeZZs v. Wilson, 3 Ohio, 425; Rian- hard v. Hovey, 13 Ohio, 300; Jones v. Clark, 42 Cal. 180; Lindley, Partn. 363, § 5.

In such a partnership, the indebtedness of the partnership follows the interest trans¬ ferred like a transfer of a share of the stock, as is said in Brown v. Hitchcock, 30 Ohio St. 667 ; Lindley, 6th ed. 665, Companies / Mayhew’s Case, 5 DeG. M. & G. 84S ; Wells v. Wilson, supra.

A party cannot, when a case is brought up for appellate review, assume an attitude inconsistent with that taken by him at the trial, but is restricted to the theory on which the cause was prosecuted for defend¬ ant in the court below.

Ohio & M. R. Co. v. McCarthy, 96 U. S. 258, 24 L. ed. 693.

Ibis in itself was sufficient to induce the supreme court of Ohio to ignore the change of front at that period.

Bullock v. Kilgour, 39 Ohio St. 543; Bal¬ timore d O. R. Co. v. Smith, 54 Ohio St. 562, 44 N. E. 240.

Messrs. J. H. Ralston, Joseph B. Kel- ley, and Ralston d Siddons filed a separate brief for defendant in error, Theresa J. Wehrmann :

Y\ e concede that if the bank had acquired the ownership in the syndicate property otherwise than by taking it in payment of, or as security for, a previously contracted valid indebtedness, the transaction would have been ultra vires and void, and could not be confirmed or ratified.

Earle v. Carson, 188 U. S. 52, 47 L. ed. 378, 23 Sup. Ct. Rep. 254.

But we do contend that if the bank, in order to secure, and in payment of, a valid debt due it, acquires ownership either of personal or real property, creates an in debtedness in handling or putting the same in salable condition, or in placing it on the market to realize its original debt, it is not an ultra vires act, that it can escape lia¬ bility for its own acts. And an action can be maintained in the state courts to recover

202 U. S.

Merchants’ Nat. Bank v. Wehbmann

such indebtedness under the act of August 13, 1888. The principle is not new or novel.

John A. Roebling v. First Fat. Bank, 30 Fed. 744; Cockrill v. Abcles, 30 C. C. A. 223, 58 U. S. App. 648, 80 Fed. 505 ; Cooper v. Hill, 36 C. C. A. 402, 94 Fed. 582; Lilly v. Union Nat. Bank, 99 Ill. 622; Upton v. National Bank, 120 Mass. 153; Reynolds v. First Nat. Bank, 112 U. S. 405, 28 L. ed. 733, 5 Sup. Ct. Rep. 213; First Nat. Bank v. National Exch. Bank, 92 U. S. 122, 23 L. ed. 679.

A very wide latitude is given to a bank to take property to prevent the loss of a debt, and to use and improve it temporarily until an advantageous disposition can be made of

it.

5 Cye. Law & Proc. p. 591.

Hr. William J. Shroder also filed a brief for defendant in error, Floris A. Sackett :

This court is without authority to revise the second judgment of the supreme court on the ground that the bank was denied any right or immunity properly claimed “in apt time.”

DeLamar’s Nevada Gold Min. Co. v. Nes¬ bitt, 177 U. S. 527, 44 L. ed. 873, 20 Sup. Ct. Rep. 715; Chapin v. Fye, 179 U. S. 129, 45 L. ed. 121, 21 Sup. Ct. Rep. 71; Home for Incurables v. New York, 187 U. S. 155, 47 L. ed. 117, 23 Sup. Ct. Rep. 84; Powell v. Brunswick County, 150 U. S. 433, 439, 37 L. ed. 1134, 1136, 14 Sup. Ct. Rep. 166; Loeber v. Schroeder, 149 U. S. 585, 37 L. ed. 859, 13 Sup. Ct. Rep. 934; Miller v. Cornwall R. Co. 168 U. S. 131, 42 L. ed. 409, 18 Sup. Ct. Rep. 34; Pim v. St. Louis, 165 U. S. 273, 41 L. ed. 714, 17 Sup. Ct. Rep. 322 ; Sayward v. Denny, 158 U. S. 180, 183, 39 L. e<L 941, 942, 15 Sup. Ct. Rep. 777 ; California Powder Works v. Davis, 151 U. S. 389, 393, 38 L. ed. 206, 207, 14 Sup. Ct. Rep. 350; Union Mut. L. Ins. Co. v. Kirchoff, 169 U. S. 103, 42 L. ed. 677, 18 Sup. Ct. Rep. 260; Western Electrical Sup¬ ply Co. v. Abbeville Light d P. Co. 197 U. S. 299, 49 L. ed. 765, 25 Sup. Ct. Rep. 481.

The decision of the supreme court to the effect that, by reason of its ownership of the shares, the bank was an owner in sev¬ eralty of the property, did not present a Federal question; it was a decision of the law bearing upon the rights and liabilities of a share owner upon the facts of the case of real property in Ohio.

Cramer v. Wilson, 195 U. S. 416, 49 L. ed. 258, 25 Sup. Ct. Rep. 94.

The facts establish the following points:

of the shares which represented its propor¬ tionate ownership of the property.

202 U. S.

order to secure a previously contracted debt due it.

ers in the management of the oroperty.

The acquisition of the shares under these conditions was within the powers of the bank.

Fleckner v. Bank of United States, 8 Wheat. 351, 5 L. ed. 634; First Nat. Bank v. National Exch. Bank, 92 U. S. 122, 23 L. ed. 679; Wylie v. Northampton Nat. Bank,

119 U. S. 361, 30 L. ed. 455, 7 Sup. Ct. Rep.

268; John A. Roebling Sons’ Co. v. First Nat. Bank, 30 Fed. 744; Cockrill v. Abeles,

30 C. C. A. 223, 58 U. S. App. 648, 86 Fed.

505; Royal Bank of India’s Case, L. R. 4 Ch.

Mr. Justice Holmes delivered the opin¬ ion of the court:

This is a bill for the dissolution of a partnership, a receiver and an account.

The partnership was formed to purchase, improve, divide into lots, and sell a lease¬ hold. There were forty shares in the firm, represented by transferable certificates.

The plaintiff in error took nine of these shares as security for a debt, and after¬ wards became the owner of them in satis¬ faction of the debt, subject to the question whether the transaction was within the pow¬ ers of a national bank. It was found at the trial that the partners must contribute to pay the debts of the firm, and, some of them being insolvent, the bank was charged with the full share of a solvent partner.

The supreme court of the state held this to be wrong, but decided that the bank became a part owner of the property, and that, *as it- joined in the management of the

same, it was liable for nine fortieths of the expenses, which constituted the debts of the firm. 69 Ohio St. 160, 68 N. E. 1004. A decree was entered to that effect, and the bank brought the case here.

It is objected at the outset that this court has no jurisdiction because the spe¬ cific question was not raised sufficiently up¬ on the record. But at the trial the baink ob¬ jected that under the statutes of the United States it could not be held liable as a partner, following the frame of the bill and meeting the ruling of the court. Then, when the supreme court, after discussion of the statutes, imposed the modified lia¬ bility and sent the case back, it objected that under the same statutes it could not be held liable for any proportion of the debts of the firm, and took this question on exceptions again to the supreme court.

It showed at every stage its intention to rely upon the United States banking laws for immunity, and it would be an excessive requirement to hold the bank bound in the

1039

299-301

Supreme Court of the United States.

Oct. Term,

first instance to anticipate the specific and qualified form in which the immunity final¬ ly was denied. In addition to the forego¬ ing facts, all of which appear on the record, the supreme court made a certificate part of its record and judgment, to the effect that it became and was material to con¬ sider whether the bank had power under Rev. Stat. §§ 5136, 5137, U. S. Comp. Stat, 1901, pp. 3455-3460, to become liable for the nine fortieths, as above stated, and that the decision was against the claim of the plain¬ tiff in error. Marvin v. Trout, 199 U. S. 212, 223, ante, 157, 161, 26 Sup. Ct. Rep. 31 ; Cincinnati, P. B. S. d P. Packet Co. v. Bay, 200 U. S. 179, ante, 428, 26 Sup. Ct. Rep. 208. Of course such a claim of im¬ munity under the laws of the United States, if sufficiently set up, can be brought to this court. California’ Nat. Bank v. Ken¬ nedy, 167 U. S 362, 42 L. ed. 198, 17 Sup. Ct. Rep. 831. See Meyer v. Richmond, 172 U. S. 82, 43 L. ed. 374, 19 Sup. Ct. Rep. 106.

The question of substantive law present¬ ed is not without difficulty. It is not dis¬ posed of by the general proposition that a national bank may take, by way of secu¬ rity, property in which it is not authorized to invest, and may become owner of it by foreclosure or in satisfaction of a debt. It is not disposed of even by the decisions that it may acquire stock in a corporation

*in this way (First Nat. Bank v. National Exch. Bank, 92 U. S. 122, 23 L. ed. 679), and so subject itself to the liability of a stockholder for the corporate debts ( Ger¬ mania i Nat. Bank v. Case, 99 U. S. 628, 25 L. ed. 448; California Nat. Bank v. Kennedy, 167 U. S. 362, 366, 367, 42 L. ed. 198, 200, 17 Sup. Ct. Rep. 831; First Nat. Bank v. Converse, 200 U. S. 425, 438, ante, 537, 542, 26 Sup. Ct. Rep. 306) , — a proposition not shaken by Scott v. Deioeese, 181 U. S. 202, 218, 45 L. ed. 822, 830, 21 Sup. Ct. Rep.

the interest in a partnership is represented by a paper certificate in form more or less resembling a certificate of stock in a corpo¬ ration and transferable like it, a national bank can take the partnership certificate to the same extent that it could take the stock.

As the supreme court of Ohio assumes such partnerships and certificates to be valid, we assume them to be. Wells v. Wilson, 3 Ohio, 425; W alburn v. Ingilby, 1 Myl. & K. 61, 76; Re Mexican d South . American Co. 27 Beav. 474, 481, 4 De G. & J. 320; Phillips v. Blatchford, 137 Mass. 510. We may assume further, in accordance with a favorite speculation of these days, that philosophically a- partnership and a corpo¬ ration illustrate a single principle, and even that the certificate of a share in one represents property in very nearly the same 1040

sense as does a share in the other. In ei¬ ther case the members could divide the assets after paying the debts. But, from the point of view of the law, there is a very important difference, ihe corporation is legally distinct from its members, and its debts are not their debts. Therefore, when a paid-up share in a corporation is taken, no liability is assumed, apart from statute, but simply a right equal in value to a cor¬ responding share in the assets and good will of the concern after its debts are paid.

If the right is worth something, it is a prop¬ er security; and if it is worth nothing, no harm is done. It is true that a statute may add a liability, but when, as usual, this is limited to the par value of the stock, it has not been considered to affect the nature of the share so fundamentally as to prevent a national bank from taking it in pledge, with qualifications, as it might take land or bonds.

But to take a share by transfer on the books means to become *a member of the

concern. The person who appears on the books of the corporation as the stockholder is the stockholder as between him and the corporation, and his rights with regard to the corporate property are incident to his position as such. Germania Nat Bank v.

Case, 99 U. S. 628, 631, 25 L. ed.

448, 449; Pullman v. Upton, 96 U. S.

328, 24 L. ed. 818. This does not

matter, or matters less, in the ease of a corporation, for the reasons which we have stated. But when a similar transfer is made of a share in a partnership, it means that the transferee at once becomes a member of the firm and goes into its business with an unlimited personal liabil¬ ity, — in short, does precisely what a national bank has no authority to do. This the su¬ preme court of Ohio rightly held beyond the powers of the bank. U. S. Rev. Stat.

§§ 5136, 5137. It is true that it has been held that a pledgee may escape liability if it appears on the certificate and books that he is only a pledgee. Pauly v. State Loan d T. Co. 165 U. S. 606, 41 L. ed. 844,

17 Sup. Ct. Rep. 465; Robinson v. Southern Nat. Bank, ISO U. S. 295, 45 L. ed. 536,

21 Sup. Ct. Rep. 383; Rankin v. Fidelity Ins. Trust d S. D. Co. 189 U. S. 242, 249,

47 L. ed. 792, 795, 23 Sup. Ct. Rep. 5„3.’

No doubt the security might be realized without the pledgee ever becoming a mem¬ ber of the firm. It is not necessary in this case to say that shares like the present could not be accepted as security in any form by a national bank. But such a bank cannot accept an absolute transfer of them to itself. It recently has been decided that a national bank cannot take stock in a new speculative corporation, with the com-

202 U. S.

United States v. Dieckebhoff.

301, 302

mon double liability, in satisfaction of a debt. First Nat. Bank v. Converse, 200 U. S. 425, ante, 537, 26 Sup. Ct. Rep. 306. A fortiori, it cannot take shares in a part¬ nership to the same end.

We are of opinion that with the liability as partner all liability falls. The transfer of the shares to the bank was not a direct transfer of a legal interest in the leasehold, which was in the hands of trustees. It was simply a transfer of a right to have the property accounted for and to receive a share of any balance left after paying debts, and the acquisition of this right was in¬ cident solely to membership in the firm. If the membership failed the incidental

rights failed with it, and with the *rights the liabilities also disappeared. Becoming a member of the firm was the condition of both consequences. As the bank was not estopped by its dealings to deny that it was a partner, it was not estopped to deny all liability for partnership debts. See Cal¬ ifornia Nat. Bank v. Kennedy, 167 U. S. 362, 367, 42 L. ed. 198, 200, 17 Sup. Ct. Rep. 831. It seems to us unnecessary to add more in order to show that the claim against the plaintiff in error must be dis¬ missed.

Judgment reversed.

Mr. Justice Harlan, Mr. Justice Brew¬ er, and Mr. Justice McKenna dissent.