M. V. Monarch Co. v. Farmers & Traders Bank , 105 Ky. 430 ( 1899 )

JUDGE BURNAM

delivered the opinion or the court.

This action is upon a bill of exchange accepted by Slack & Perkins, drawn by the M. Y. Monarch Company, and indorsed by M.. Y. Monarch and Mildred Perkins. Appellants, Slack & Perkins, the M. V. Monarch Compahy, and M. V. Monarch, filed a joint answer, in which joint and separate defenses are made. They jointly allege and plead that the obligation sued on contains usury, and ask that it be eliminated. The M. V. Monarch Company and M. V. Monarch allege that the Monarch Company is a private corporation, having the power to manufacture and sell whisky and such other powers as are incident thereto; that it has no power to become the accommodation drawer or indorser upon the paper of any other person or corporation; that its name was signed as drawer to the bill of exchange sued on, as a mere accommodation for Slack & Perkins, who discounted the bill with plaintiff, and received the entire proceeds arising therefrom; that the signing of the name of the M. V. Monarch Company as drawer of the bill, and the indorsement of same by M. V. Monarch, were without consideration, and that this fact was known to the plaintiff at the time it discounted the original bill and at the time it accepted each bill in renewal thereof; that at the date of the maturity of the bill sued on the M. V. Monarch Company had its business office in the city of Owensboro, and that plaintiff and the notary public who protested the bill knew this fact; that M. V. Monarch had his office in Ovrensboro, but resided outside the city limits; that the notary, at 6 o’clock p. m., on December 27, 1805, the date of the maturity of the paper sued on, placed a notice of protest in the postoffice at Owensboro, addressed to the M. V. Monarch Company, and also a notice addressed to M. V. Monarch, Owensboro, Ky.; that by reason of these notices having been deposited in the postoffice they were not received until "some time during the next day, December 28,1895, and that the notices could have been delivered to each of these defendants on the day of the maturity of the bill, at their respective offices; and these facts are pleaded by way of avoidance of the obligation sued on. Mildred Perkins, the last indorser, pleads in her answer that she was a mere accommodation indorser upon the bill; that the indorsement of the M. Y. Monarch Company was ultra vires, and that it is not bound thereby; and by reason thereof she claims that, under the statute, she is released. A general demurrer was sustained to the answers of the M. Y. Monarch Company, M. Y. Monarch, and Mildred Perkins, as to all the defenses relied ion except that of usury; and, the defendants failing to plead further, a judgment was rendered against all the defendants for the debt sued on, after eliminating the usury it contained; and we are asked upon this appeal to reverse that judgment, on the ground that the court erred in sustaining the demurrer as to each defense relied on by defendants.

We will consider these defenses seriatim.- First, is the M. Y. Monarch Company liable as an indorser under the allegations of the answer, which, upon demurrer, must bo taken as true? As a general rule, a corporation has no power to enter into a contract of suretyship or guaranty, or otherwise lend its credit to another, unless such contract is reasonably necessary, or is usual in the conduct of its business. Ordinarily, the simple act of becoming surety or guarantor for the contract or debt of another person or corporation is not within the implied powers of a corporation. The reason for this rule is that such a contract risks the capital and funds of the corporation in an enterprise not contemplated by the stockholders in subscribing for or purchasing its stock, prejudices the rights of its creditors, and exceeds the authority conferred by its charter. See 7 Am. & Eng. Enc. Law (2d. Ed.), 778. The reason for this rule was wed expressed in Todd v. Kentucky Union Land Co., 57 Fed.. 51, where it is said: “First. The corporate funds belong to its shareholders, and, by the very terms of the law creating it, can not be devoted to any other purposes than those indicated by its charter. Such obligations wmuld violate the fundamental terms of the agreement between the corporators themselves. Second. To do so would be to exercise a power not conferred by the State, either expressly. or impliedly. The State’s grant of the corporate franchise is for the purposes prescribed, and the execution of such obligations would be beyond the power conferred, and therefore a diversion of the corporate purposes as well as of the corporate funds.”

Thompson, in his Commentaries on the Law of Corporations (section 5721), says: “With the exception of those corporations — such as trust and guaranty companies— which are organized for the express purpose of becoming sureties for other persons or corporations, and with other exceptions elsewhere stated, it may be laid down, as a general rule, that no corporation has the power, by any form of contract or indorsement, to become a guarantor or surety for, or otherwise lend its credit to another person or corporation.” And in section 5723, in assigning the reasons and limitations, he says: “This principle is designed for the preservation of the funds of the corporation, for the benefit of those having an iiiterest in them, by preventing them from being embarked in enterprises not authorized by the charter or governing statute. Those persons are primarily the stockholders as long as the corporation continues a going concern, and it is their right that the corporate funds shall not be put to hazards or embarked in an undertaking not authorized by the contract of association. If the doctrine that the capital of the corporation is a trust fund, for the security of its creditors, is any more than an empty and idle collection of words, then the principle is also designed for the security of the creditors of the corporation, by preserving from an unauthorized dissipation a fund which, in the event of insolvency, equity impresses with a trust in their favor.”

There are, however, some exceptions to this general rule, and in a number of cases, where such contracts have been shown to be of manifest advantage to a corporation, they have been enforced. See 4 Am. & Eng. Enc. Law, 727-729; Fuld v. Brewing Co. (Com. Pl.), 18 N. Y., Supp. 456; and Holmes v. Willard [11 L. R. A., 170, 125 N. Y., 75; 25 N. E., 1083.] But there is nothing in the allegations of the petition which brings the M. Y. Monarch Company within the announced exceptions to the general rule, and the court erred in sustaining the demurrer to the plea of ultra vires relied on by the corporation.

The next question presented is, was M. V. Monarch entitled to a personal service of notice of protest, and if so, did the failure of personal service release him, and was the notice givin'in due time? In Neal, etc., v. Taylor, 9 Bush, 384, in construing the third section of the act of January 16, 1864, prescribing the duties of notaries public in protesting negotiable paper in order to fix the liability of the parties thereto, this court said: “It was evidently intended by this enactment to alter the law merchant in regard to giving notice of the protest of commercial paper, but the act itself is so indefinite in its mandatory clause that judicial construction was made necessary in order to enable notaries to know what their legal duties were by reason of its provisions. • The act required the notary, when he knows the place of residence of the parties to the bill, to give or send the notices to' them, and not to the holder of the paper; but whether he is to deliver the notices in person or send them by mail or private hands on the day of the protest, or the next day, or in a reasonable time, is nowhere stated. The notary is left in entire ignorance as to the obligation it imposes. This court, in the opinion rendered in Todd v. Edwards 7 Bush, 93, was enabled, by the aid of the law merchant in connection with the act in question, to give it the only reasonable construction to which it was susceptible, and that was: Where parties to negotiable paper were entitled to notice in order to hold them liable, and lived in the same town or city where protest was made, there should be a notice in person delivered by the notary, or left at the dwelling or business house of the party sought to be charged. The law, in such a case, requires that this notice should be delivered either on the day of dishonor of the paper or before the expiration of the business hours of the succeeding day.’ ”

And in Bondurant v. Everett, 1 Metc., 658, this court held “that where the party sought to be charged as drawer or indorser of a bill live near to, but not in or at, the place of dishonor, and the postoffice at that point is the office where he usually receives his letters or the nearest office to his residence, notice must be given to him by letter, through such office.”

There are numerous adjudications holding that the rule as to personal notice is to be restricted to cases where the party to be affected by the notice resides within the limits of the city or town in which the note is protested, and if he resides in the country, outside of those limits, but receives his mail at the postoffice at that town, a service by mail is sufficient. See Ransom v. Mack, 38 Am. Dec., 611. But it seems to be the settled rule that the holder of commercial paper is not required to give notice of dishonor on the day the paper is protested, but may give notice on the first business day thereafter, and such notice is sufficient. See 5 Am. & Eng. Enc. Law (2d Ed.), 528, and 2 Daniel, Neg. Inst., 84. The answer of appellant shows that he received the notice of protest of this paper on the first business day after it was protested, and we do not think it is a matter of any importance whether he received it through the mail or by personal delivery directly from the hands of the notary. The fact that he got the notice in time is all that is required.

In' discussing this question, 2 Daniel, Neg. Inst., p. 56, says: “If the party receives the notice, the mere manner of its transmission is wholly immaterial. A personal service of notice is good wherever it may be made, provided it be done in proper time. At an improper place, it is sufficient if it reaches the party for whom it was intended in due season. And so, likewise, if it be sent by mail, where the parties reside in the same place, it is good if it duly reaches the party addressed. The distinction between the different modes of giving notice is this: Where the holder and indorser reside in different places, the former, if he deposits the notice in the postoffice m due season has no further burden on him as to the actual receipt of it by the latter; but, where both parties live in the same town, the sender of the notice is bound to show that it was actually received by the indorser in due season.” We think the law was fully complied with, so far as the notice is concerned.

The last question to be considered is that raised by the answer of Mildred Perkins; that is, can she escape liability on the paper because the act of the corporation in becoming a drawer of the bill was ultra vires? We think not.

2 Rand. Com. Paper, Sec. 742, says: “The indorser, by placing his name on the back of a bill of exchange, note, or check, undertakes — First, that it shall be accepted and paid according to its tenor, on dne presentment .and notice of dishonor; second, that the instrument, and the signatures of all prior parties thereon, are genuine; third, that the instrument is valid according to its purport; fourth that the parties to it are competent to contract; fifth, that the indorser has the title and right to transfer. The indorsement of a bill, when delivered, implies a warranty or promise that it shall be paid on condition of due presentment and notice of dishonor. If the bill is payable in future, he undertakes that he will pay it with damages, if the drawee fails on presentment, and he is duly notified of such failure.”

Generally, an indorser of a negotiable instrument warrants to a. bona fide holder the existence of every essential necessary to constitute the instrument a valid and subsisting obligation. It is a part of the contract of indorsement that the paper indorsed has been made by a person competent to contract in that form. Bee Archer v. Shea, 14 Hun, 493; Kenworthy v. Sawyer, 125 Mass., 28; Ross v. Dixie,-7 U. C. Q. B., 414. It seems clear, from the authorities on this question, that the liability of appellant Mildred Perkins is not affected by the failure of the M. Y. Monarch Company to become liable upon its indorsement.

For the reasons indicated herein the judgment is reversed upon the appeal of the M. Y. Monarch Company, and affirmed as to the other appellants, and the cause is remanded for proceedings consistent with this opinion.