Mercer v. Steil , 97 Conn. 583 ( 1922 )

Two questions are raised by this appeal: whether the interim certificate for one hundred bonds of the par value of $1,000 each is a valid and outstanding obligation of the corporation, and if so, to what extent it is enforcible in the hands of the defendant Steil.

The only respect in which it is claimed that any part of the transaction was ultra vires, is that the certificate was pledged for less than its face value. No authority is cited to support the proposition that a private corporation may not lawfully sell or pledge its bonds for less than face value. Our statutes, § 3504, expressly confer on every corporation organized under the Corporation Act the power to mortgage its real and personal estate and to "issue promissory notes, bonds or other evidences of indebtedness." There is no requirement in the Corporation Act that such bonds shall be issued at par, and in the absence of statutory restrictions the general authority to issue bonds must be understood as authorizing the corporation to issue them on such terms as it may be able to secure. Such is the common practice. 14A Corpus Juris, §§ 2576, 2597. So, also, the power to mortgage real and personal property must include the power to pledge its own corporate bonds when issued, and a private corporation having general power to pledge cannot, by mere implication, be restricted to a pledge for face value.

As to the objections to the validity of the certificate and mortgage based on the wrongful delegation of authority by the directors, and on the defective execution of the documents, it is enough to say that so long as a private corporation acts within the powers conferred upon it by law in dealing with its own property, it is subject to the same rules of agency and estoppel as an individual. The law imputes to this corporation knowledge of the form and contents of the documents which its agents, acting within the general scope of their authority, executed in its name and for its benefit; and if these agents exceeded their authority or disobeyed their instructions in any matter of detail, the corporation was bound to elect within a reasonable time whether it would repudiate or ratify the transaction. Having accepted the loan of $70,000, the corporation was also estopped, so long as it retained the money, to repudiate in whole or in part the written contract of pledge on the faith of which the money had been advanced. And from the facts of its retention and use of the money, the law implies a ratification of the contract of pledge and of all acts of the corporate agents to make the pledge effectual. Moreover, the complaint itself discloses an actual ratification, for it alleges that the corporation has twice renewed the note and the contract of pledge written on its face. It has therefore twice reaffirmed the validity of the interim certificate and mortgage, after full knowledge of their alleged defects. The plaintiff cannot now repudiate these obligations on the ground of mere irregularity in their execution, or lack of antecedent authority which the corporation might lawfully have originally conferred upon its agents. Perry v. SimpsonWaterproof Mfg. Co., 37 Conn. 520, 539; NorwalkGaslight Co. v. Norwalk, 63 Conn. 495, 522, 28 A. 32;Louisville, N. A. C. Ry. Co. v. Louisville Trust Co.,174 U.S. 552, 19 Sup. Ct. 817.

As to the second question, the plaintiff's claim, that the certificate is enforcible by the defendant Steil only to the amount of the price which he paid for it at the sale, derives its real force from the erroneous assumption that the certificate and mortgage were invalid, and that the defendant Steil had notice of their invalidity before the sale. When the alleged invalidity disappeared, it also takes out of the case the alleged notice of invalidity, and the remaining question is whether the defendant Steil, being a bona fide purchaser of the certificate at a pledgee's sale made in conformity with the contract of pledge, acquired an absolute title. The plaintiff's contention is that he did not acquire an absolute title, but became himself a quasi-pledgee of the certificate, and entitled to enforce it only to the extent of his own advantage. It cannot, of course, be broadly contended that a purchaser of collateral security at a pledgee's sale becomes a pledgee and not an owner of the collateral; and so the claim is made in the narrower form that "one who purchases bonds from the pledgee of the corporation with knowledge that they have been pledged for less than face value, is entitled to recover from the corporation only the amount" due on the principal obligation for which said bonds were pledged as collateral security. This quotation is taken from 14A Corpus Juris, § 2617, but on examining the case of Shellenberger v. Altoona P. C. R. Co., 212 Pa. 413,61 A. 1000, which is the only case cited for that particular proposition, it is apparent that the commentator has missed the point of the decision. The bonds in that case were admittedly ultra vires and illegal, because of a general statute forbidding railway companies to issue bonds until the capital stock was fully paid; and while the purchasers knew that the bonds were pledged for less than their face value, the only point of law decided was that the trial court erred in excluding evidence that the purchasers also had full knowledge, before the sale, of the fact that the bonds were illegally issued. It was not notice of a pledge for less than face value, but notice of the inherent illegality of the bonds which the court held would, if the fact were proved, prevent the purchasers from being treated as holders in due course. This ruling is in accord with our own statutory definition of a holder in due course. General Statutes, §§ 4410, 4412. The plaintiff cited two other cases in support of the above quoted proposition: Peacock v. Phillips,247 Ill. 467, 93 N.E. 415, and Jenckes v. Rice,119 Iowa 451, 93 N.W. 384. The Illinois case involved a right of a purchaser of a personal note and mortgage held by a bank as collateral for a note of less amount made by one of the mortgagors, to foreclose the mortgage at its face value; and the decision turned on the fact that under the Illinois law the mortgage was not assigned. Hence the purchaser took it subject to all equitable defenses to which it was subject in the hands of its assignor. It is, however, expressly pointed out in that opinion that corporation bonds intended to pass from hand to hand and secured by a trust mortgage constitute an exception to that rule; and of these the court said: "To permit equitable defenses to be interposed would practically destroy such methods of raising money, and the corporation is properly estopped to deny its liability." In the Iowa case the collateral was a contract of indemnity, which was treated as nonnegotiable, and the same distinction is pointed out.

On the other hand, in the case at bar the interim certificate is a valid negotiable instrument payable to bearer. It is a collateral security within the definition laid down in In re Waddell-Entz Co., 67 Conn. 324,334, 35 A. 257. The power of sale is absolute, and necessarily so in order to make the certificate available as collateral for a bank loan. To hold that the purchaser took only the rights of a pledgee to the extent of his own advances, would nullify the contract of pledge, by making the collateral unsalable; for no one would buy it on such terms.

The power to issue, and the incidental power of pledging bonds, is conferred on private corporations for the purpose of enabling them to raise money, and there is the highest authority for the proposition that when corporate bonds secured by a trust mortgage are pledged as collateral security for a loan they are, unless the contract otherwise provides, subject to sale on default in the same way as tangible chattels similarly pledged, and are enforcible, to the extent of the security, by any bona fide purchaser before maturity, irrespective of whether he paid less than their face value. Cromwell v. County of Sac, 96 U.S. 51; Jones on Collateral Securities (3d Ed.) § 70; 3 Cook on Corporations (7th Ed.) § 763; Guaranty Trust Co. v.Galveston City R. Co., 31 C.C.A. 235, 87 F. 813; Hiscock v. Varick Bank, 206 U.S. 28, 37,27 Sup. Ct. 681, and cases cited.

There is no error.

In this opinion the other judges concurred.