Camden & Atlantic Railroad v. May's Landing & Egg Harbor City Railroad

Van Syckel, J.

This was an action of debt brought in the Supreme Court, to recover the rent alleged to be due from February, 1881, to June 1st, 1882, on a lease of its road executed in 1873 by the defendant in error to the plaintiff in ■error, for the term of nine hundred and ninety-nine years. The Mays Landing and Egg Harbor road was built under a •charter obtained in 1871, and since its completion in 1872 it has been in the possession of the Camden and Atlantic Company as lessee, until February, 1881, at which time the latter ■company ceased to operate it, and refused to recognize the validity of the lease.

The defence to the action is rested upon the want of power in the lessee company to execute the lease.

The Camden and Atlantic Railroad was completed from ■Camden to Atlantic City in the early part of 1862, under a ■charter granted in 1852. This road I will hereafter, for brevity, style the main line, and the Mays Landing and Egg Harbor road, the branch road.

The branch road rests its own authority to make a lease, .and the authority of the main line to accept a lease, upon the .seventeenth section of the charter of the.branch, which provides that the said branch road is authorized to lease its railroad to, or consolidate with, any other railroad company, which is thereby authorized to take such lease and operate the same for such time or times, and on such terms, as the said parties may- agree upon. This language is unquestionably broad enough to confer upon both companies the power requisite to enter into a valid contract for a lease, and no doubt could arise in this case if the powers of one railroad company can be amplified by provisions in the charter of another.

The title of the act incorporating the branch road is: “An act to incorporate the Mays Landing and Egg Harbor City Eailroad Company.” Under that clause of our state constitution which provides that “to avoid improper influences which may result in intermixing in one and the same act such things as have no proper relation to each other, every law shall embrace but one object, and that shall be expressed in the title,” can the seventeenth section of the branch road charter be upheld so far as it purports to confer additional franchises upon other railroads ? It seems to me to be very clear that this question must be answered in the negative.

This charter manifestly embraces two distinct objects: it confers power upon the branch road to construct its line and to lease it, and attempts to enlarge the authority of all other railroad corporations by permitting them to accept a lease. There is no indication in the title that such legislation was contemplated. The constitutional restraint could not be invoked for a more salutary purpose than to suppress a scheme to amplify corporate powers in a way which effectually conceals the intention to do so. Jersey City v. Elmendorf, 18 Vroom 283.

So far as the grant of authority to the main line is concerned, the seventeenth section is unconstitutional. The necessary power to the main line, if it exists, must be sought for in its own charter.

The Camden and Atlantic road had authority, under its charter, to build the branch road from Mays,Landing to Egg Harbor City, but, as before stated, did not exercise that right, the branch road having been constructed under a charter subsequently granted in 1871.

In Branch v. Jessup, 106 U. S. 468, Mr. Justice Bradley held that the power granted to a railroad company to construct a particular line of railroad carried with it by implication the right to purchase such line of railroad subsequently built by another corporation. The doctrine, I think, is sound, and the right to lease for nine hundred and ninety-nine years would co-exist with the right to purchase. This would establish the power of the main line to enter into the lease if the right to construct the branch had survived until the lease was executed. But by reference to the seventeenth section of the charter of the main line, (Pamph. L. 1852, p. 271,) it will be observed that its power in this respect expired by limitation on the 1st day of August, 1862. The section reads as follows : ■ “ That if the said railroad shall not be completed and in use at the expiration of ten years from the 1st day of August next ensuing, that then and in that case this act shall be void.” .

Under the rules which apply to the construction of legislative grants of power, the only interpretation which this language will reasonably bear is that the authority derived through the charter must be exercised within ten years from August 1st, 1852, and that such portion of the road as should not then be constructed could not thereafter be built under the granted authority.

In Morris and Essex R. R. Co. v. Central R. R. Co., 2 Vroom, 205, it was expressly adjudged that the power of a corporation to take the land of an individual is determined by the expiration of the term limited for its exercise, after which the right of eminent domain derived from its charter no longer exists in the company.

The branch road was not constructed until the year 1871, nine years after the expiration of the time limited to the main line for the enjoyment and exercise of its granted powers. At that time the main line, having no longer the right of eminent domain, was without the power to build the branch road, and consequently in the loss of that authority is involved the deprivation of all. power which would flow from it. It must therefore be conceded that the execution of the lease on the part of the Camden and Atlantic road was ultra vires.

The rule is well settled, both in England and in this country, that an executory contract, ultra vires, cannot be validated by the acquiescence of every stockholder of the company. It is also generally conceded that an ultra vires contract fully executed cannot be receded from. Field on Corp., §§ 263, 264; Green’s Brice’s Ultra Vires 371, 372, 373; 1 Wood on Railroads, §§ 171, 172, 173; Thomas v. Railroad Co., 101 U. S. 71.

The courts have differed upon the question whether the plea of ultra vires is available by a corporation in an action brought against it for not performing its side of the contract, where the transaction is complete, and nothing remains to be done by the party seeking relief.

Ashbury Railway Co. v. Riche, 7 H. of L. 653, is the leading English case.

The company, by its directors, entered into an agreement with Riche to give him the construction of a railway from Antwerp to Tournay. After Riche had entered upon the work, and executed it in part, the company repudiated the contract as one ultra vires.

Riche then brought an action to recover damages for breach of contract.

The case was referred to a barrister to state a special case, and the question of ultra vires was that on which the decision was to depend. ' The court was to be at liberty to draw inferences of fact. In the Court of Exchequer two of the three judges were of opinion that the plaintiff should have judgment, and when the case came before the Exchequer Chamber it was heard before six judges, who, being equally divided in opinion, the judgment was affirmed. On appeal to the house of lords, the judgment was reversed, pronouncing the contract ultra vires, and declaring that it was without the power of the shareholders to validate it by their acquiescence. Mr. Justice Folger, in 78 N. Y. 187, distinguishes the English case on the ground that the contract with Riche was prohibited by an act of parliament. Although the court did not rest its decision on that ground, Lord Chelmsford adverted to that fact to distinguish the cases of Spachman v. Evans and Evans v. Smallcomb, where the act of the directors was not prohibited by statute, but was merely not warranted by the deed of •settlement of the company. In affirming the judgment now under review it is not necessary to dissent from the conclusion reached in this case. The agreement with Eiche was not fully ■executed on either side, and it was one in which payment to him of the money he had expended in behalf of the company under the agreement, would have done complete justice. The suit being for damages for breach of the contract, would have ■embraced profits which might have resulted from its execution. If the suit had been maintained it would have given the plaintiff a measure of relief greater than was necessary to restore him to the status he occupied before the contract was made.

In Parish v. Wheeler, 22 N. Y 494, Chief Justice Com-stock, in delivering the opinion of the court, said that a corporation cannot defend itself against a claim for money paid at its request to one who advanced the price of a steamboat purchased for it, on the ground that the purchase was ultra vires, although the plaintiff, when he paid the money, knew .all the facts. He declared that corporations, like individuals, in dealing with other parties, must live up to the rules of common honesty.

In the previous case of Bissell v. Michigan Southern R. R. Co., 22 N. Y. 258, the same learned judge expressed the view that where a corporation has received the consideration of its unauthorized contract, and restitution will not do complete justice, the other party may sue directly on the contract.

He said that the plea of ultra vires, according to its just .meaning, imports, not that the corporation could not make the unauthorized contract, but that it ought not to have been made. Such a defence therefore rests upon the violation of trust or duty towards the shareholders, and is not entertained where its allowance will do a greater wrong to innocent third parties. The acquiescence of the shareholders in the abuse will prevent the interposition of such a plea. This case was decided without an expression of opinion by a majority of the court on this point, but in the later case of Kent v. Quicksilver Mining Co., 78 N. Y. 159, Judge Folger delivered the opinion, in which the entire court concurred, giving the fullest approval to the views of Chief Justice Comstock, in the cases cited. The case was one in which the directors had done an act which the company had no power to do, and in which there was not full execution on both sides. It was not of that class of cases where an authorized act was executed in an' unauthorized manner. The transaction was clearly ultra vires, and in that aspect it was dealt with by the court. The English and American cases were cited, and the cause was ably and elaborately argued.

The propositions maintained by the court were that acts of a corporation, which are not, per se, illegal, or malum prohibitum, or contrary to public policy, but which are ultra vires, affecting only the interests of stockholders, may be made good by the assent of shareholders, so that strangers to them, dealing in good faith with the corporation, will be protected in reliance on those acts.

That it needed not that there be an express assent upon the-part of shareholders to work an equitable estoppel upon them. "When they neglect to promptly and actively condemn the unauthorized act, and to seek judicial relief after knowledge of' it, their acquiescence will be presumed.

That when the public is concerned to restrain a corporation within the- limit of the power given to it by its charter, an assent of the stockholders to the use of unauthorized power will be of no avail.

In Whitney Arms Co. v. Barlow, 63 N. Y 62, the Court of Appeals of New York enforced the ultra vires contract against the other party where it had been performed on the part of the corporation. In addition to the estoppel, which in that case applied to the person dealing with the company, it is true that none of his rights were infringed by the fact that the transaction was ultra vires the company, and he could not, for that reason also, interpose that defence. But where shareholders are chargeable with consenting to an undertaking which they have permitted to be executed, they waive their pre-existing rights, which would be affected by the unauthorized act, and became equally subject to the estoppel.

Chief Justice Ruger, in Woodruff v. Erie Railway Co., 93 N. Y. 609, in an opinion from which there was no dissent, gave his full approval to the previous cases, and held that under an ultra vires lease the lessee is estopped from questioning its validity in an action to recover the stipulated rent.

In Bradley v. Ballard, 55 Ill. 413, Chief Justice Lawrence said that when the contract is executed the doctrine of estoppel is applied 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 the ultra vires act has been accomplished. The case was one in which money was borrowed and notes given by a corporation, to enable it to prosecute a business which the lender knew it had no right to undertake.

In Terry v. Eagle Look Co., 47 Conn. 141, the Eagle Lock 'Company entered into an unauthorized agreement with another company to purchase its stock and run it as a separate company. The Connecticut court held that after the contract had been executed and the defendant company had been permitted for five years to transact business under the arrangement, it would not be interfered with.

In McCutcheon v. Steamboat Co., 13 Penna. 13, a foreign corporation had taken a lease of real estate without authority in its charter, and in an action for the rent, the court enforced the contract.

In Darst v. Gale, 83 Ill. 137, the Peoria Marine and Eire Insurance Company executed a deed of trust to secure payment of certain bonds upon which the company had received the ¡money. The bill was filed to enjoin the trustee from selling the premises, and to declare the deed of trust void. The court refused to allow the plea of ultra vires to prevail, on the ground that a private corporation cannot be heard in such a defence where the contract has been performed by the other party and the corporation has had the benefit of the contract and the performance. The language of Chief Justice Lawrence in Bradley v. Ballard was cited with approbation: “That-it would be pressing the doctrine of ultra vires to an extent that can never be tolerated, even though the lender knew that the corporation was transacting a business beyond its corporate powers, provided the business itself was free from any intrinsic immorality or illegality.”

These views were re-affirmed in Ward v. Johnson, 95 Ill. 215, and in Peoria Road v. Thompson, 103 Ill. 187.

Id Amerman v. Niles, 9 C. E. Green 13, the Chancellor refused to entertain the defence of ultra vires to a mortgage executed by a corporation to secure a debt to the defendants.

Thomas v. Railroad Co., 101 U. S. 71, is relied upon by the plaintiff in error. In that case the lease was held to be-ultra vires, and therefore void.

Mr. Justice Miller, for the court, referred to the English cases, and said that although the American cases were conflicting, the preponderance of authority was that an extra virescontract, but partly executed, could not be enforced. He, however, held .the lease there to be contrary to public policy, for the reason that the lessor company had no power to make-the lease, and that thereby it disabled itself to perform the duties which it had undertaken in accepting its charter from the state, and he therefore treated the contract as one forbidden by the law. He did not question that the lessee would be-liable for the rental for the period during which it had enjoyed the term.

It is to be observed in this case that by the surrender of the lease the lessor was left in his former position, and the rental being paid, no apparent injustice was done.

In the case of the Mutual Life and Fire Insurance Co. v. McKelway, 1 Beas. 133, the defendant was unsuccessful in his attempt to recede from his contract, but it was not a 'suit by one ’ of the parties to the unauthorized contract to enforce it against the other. The proceeding was instituted in behalf of corporators as to whom, the learned jurist who decided the case was careful to observe, that it did not appear that they insured upon the faith of the ultra vires contract, or that they became corporators after the contract was entered into, or in' consequence of it.

In the conflict of judicial decision on this subject, this court may adopt and should adopt the rule which will produce the best results in the administration of justice. In my judgment the true rule is that when the transaction is complete, and the party seeking relief has performed on his part, the plea of ultra vires by the corporation which has acquiesced in it, is inadmissible in an action brought against it for not performing its side of the contract, in all those instances where the party who has performed cannot, upon rescission, be restored to his former status.

In the cases maintaining the contrary doctrine the reasoning of the courts has been:

1. That corporators might, by ratifying corporate acts by their acquiescence, indefinitely extend and amplify their granted powers.

2. That consent on the part of those who do an act which they have no power to do cannot make it legal.

3. That to hold that an act performed in executing a void contract makes all its parts valid, is to say that the more that is done under an unauthorized contract, the stronger is the claim to its enforcement by the courts.

To the first objection a sufficient answer is that the state may interpose its authority at any time and compel an abandonment of the act in excess of power, and, if need be, revoke the charter of the company for its usurpation.

When the state challenges the legality of the transaction, the paramount and only question is whether it has bestowed upon the company the requisite authority to engage in it.' When the question arises between the company and the other party to the contract, other legal principles apply in determining whether the contract shall be observed. It will be admitted that where there is an absence of authority on the part of a corporation to do an act, the requisite power cannot be imported into the transaction, either by the consent of stockholders or by the execution of the contract by the other party to the agreement. The contract must necessarily continue to be ultra vires. No such effect has been attributed in any of the cases to acquiescence or unilateral performance. The basis upon which the enforcement of the contract in such cases rests is that the company is estopped from setting up its own unauthorized act, and its own incapacity, to evade performance on its part, after receiving the fruits of the bargain. The power of the company is not amplified, the agreement is none the more legal, in the sense that there was authority to execute it; the court simply refuses to entertain the defence, which common honesty forbids the company to make. A man may become bound by the act of an unauthorized agent, and be held liable to the contract made for him, not on the ground that the agent in fact had any authority, but for some conduct on the part of the alleged principal which precludes him from raising the question of authority.

No reason is perceived why the rules of fair dealing, which are so rigorously applied to natural persons, shall not pertain as strictly to private corporations. No instance is known where a natural person can set up in his own behalf, and for his own advantage, his want of authority to do an act for which he has received the consideration from the other party. Transactions which are immoral, illegal, forbidden by statute, or contrary to public policy, are not embraced in this discussion ; they cannot furnish the basis for a legal cause of action.

Why is it that extra vires contracts are recognized as unassailable, and are permitted to stand as the foundation of rights acquired under them, after they have been executed on both sides ?. Such execution imparts no additional power to the corporate body. It does not transmute the negative into the positive. The absence of power is as apparent after as before performance. Why is it that corporations are compelled to pay money borrowed in excess of authority, and to pay the stipulated rent for premises unlawfully leased, for the period of occupation ?

The law does not imply a contract to pay the bondholders the money thus received. It is illogical to say that the law will imply a contract by the company which it has no power to make for itself. A contract cannot be implied where an express contract cannot be made. The law recognizes the obligation ; it precludes or estops the attempt to evade it. Apply to it what legal phrase you may, the underlying principle is that the corporation cannot set up its own infirmity when it is unconscionable to do so. The law forbids the defence on account of the flagrant injustice which would otherwise be done. The question of corporate power is not entertained.

To enable recompense to be had to this extent, the contracts are respected, not that they rest in authority, but because good conscience requires it.

How then can recognition of the estoppel be denied where the contract has been executed on the one side, and the party performing cannot, upon rescission, be restored to his former 4status?

"Why should the corporate body be permitted to plead its own wrongful act, and set up its own infirmity as a bar to the recovery by the other party of what it should in right and justice be accorded ?

It is true that a person cannot, by his own act, acquire a right against another; the other must, in some way, bind himself. The acquiescence in the contract, in virtue of which the other party performs, and the acceptance of its benefits, constitute the binding acts, and raise the estoppel. I am unable to see how, upon a just conception of the legal principles involved, a different rule can be applied where the corporation has acquiesced in the contract, and the other party, by performance on his part, has been led into a position from which he cannot be extricated.

Misconception arises from failing to distinguish between those rights which parties acquire as between themselves, and the rule by which corporate authority must be measured and limited when the state interposes to assert its prerogative.

Nor does the liability of the company rest upon the doctrine of ratification.

In its ordinary legal acceptation ratification applies to such. contracts as a party lias authority to make. Bepeated affirmations of a contract by one who has no authority to enter into it, cannot supply the requisite authority.

But acquiescence in it, upon which the other party acts, may, and does, upon settled legal principles, preclude the parties from starting the question of power as between themselves. There is, in fact, a subsisting contract, actually executed in due and legal form, which, under the rule stated, is unimpeachable, except at the instance of the state. It is thus, in legal contemplation, impressed with the vigor and incidents of a valid contract as between the parties, and there is no-difficulty in enforcing it in a suit at law.

It is like the case of one who makes, in legal form, a conveyance of real estate which he has no power to convey, and not like the case where the true owner fails to do some act which- may operate as an equitable estoppel to his setting up his title against the person who has been misled by his conduct. In the former case the grantee could maintain an action at law against the grantor to recover possession of the premises granted. In the latter case the relief must be sought in a court of equity.

But whether the rule which I have formulated shall be applied to this case or not, the judgment below should, in my opinion, be affirmed, upon the ground that the lease in this case must be regarded as substantially a contract as fully executed on both sides as those unauthorized contracts in which money-has been loaned to or work done for a corporation, for which it has issued its bonds to the creditor.

The agreement was entered into November 3d, 1871, between the Camden and Atlantic Bailroad Company, and the Mays Landing and Egg Harbor City Bailroad Company, in and by which it was agreed that if the latter company would construct the branch road in a specified manner, on or before the 1st day of July, 1872, the former company would guarantee the bonds of the latter company to the amount of $37,500, to be used in the construction of the said road, and take a lease for the same, when completed, for nine hundred and ninety-nine years at a specified rental.

In pursuance of this agreement the bonds were issued by the branch road, and guaranteed by the main line. The road was built under the direction of the main line, and the lease executed.

Every term of this agreement on both sides has been fulfilled, and the agreement, in all respects, substantially executed.

The annual report of the directors of the main line to the stockholders for the year ending December 31st, 1871, recited the terms of this agreement in detail.

' Annually thereafter, until 1879, the existence of the lease, and the income and disbursements incident to the operation of the branch were duly reported to the stockholders of the main line, during all which time no attempt was made to avoid the lease.

We must impute to the stockholders of the main line utter neglect of their affairs, if we say that they did not have notice of the agreement to build the branch road, and of the lease executed in pursuance thereof.

The only reasonable inference from the circumstances proven is that they had knowledge of the transaction, and that it was engaged in and consummated with their approval and acquiescence. This case presents all the features which have led the judicial mind, in the cases cited, to establish the .distinction between executory and executed contracts, in which respect it essentially differs from the Thomas case, in 101 U. S. This was not, as in the case in the federal court, the mere leasing of a road owned by the lessor, where the repudiation of its terms would restore both parties to their former status.

Here the lessor built the road, not for itself, but at the instance of and for the lessee, with the proceeds of bonds guaranteéd by the lessee to promote and effect the scheme. ■The branch road was a mere instrument in the hands of the main line to consummate the undertaking.

By the clearly expressed contract of the parties the road was to be the road of the lessee, the lessor to have only the fixed rentals.

The lessor has fulfilled every term of its agreement, and put the lessee in possession of all that it stipulated for. Nothing remains on the part of the lessor to be done. We must look at the substance of things in applying legal principles. The lease for nine hundred and ninety-nine years is practically an absolute transfer of the road to the lessee, and the rental a mere mode of paying the lessor for the work done and money expended in constructing the road for the lessee, instead of paying a fixed principal sum. The case does not, in effect and substance, differ from what it would have been if the main line had employed the branch road to construct the branch at a stipulated price, and had issued its bonds in payment, after completion and acceptance of the work.

All the cases concede that under such circumstances the contract must be treated as executed.

If the contract had been to compensate the branch road for the work, by the bonds of the main line securing the payment of an annuity for nine hundred and ninety-nine years, and those bonds had been delivered, would it be asserted that it was, in substance, the less an executed agreement ?It is the merest verbiage and form, whether it is termed a lease securing a rental for nine hundred and ninety-nine years, or a bond securing an annuity for a like term.

The injustice and inadmissibility of permitting the main line to repudiate its bonds after it has been in occupancy of the road for more than seven years, because the road proved to be unprofitable, would not be more glaring than the inequity of the defence interposed here to the payment of the rental. The work undertaken to be done was fully executed by the branch road, and the manner in which it is to be paid for is immaterial, so far as the principle involved is concerned. There is no consideration of justice and fair dealing, which, in the cases referred to, led to the rejection of the offer by the corporations to set up their own incapacity in avoidance of their just obligations, which is not most forcibly presented by this case. It cannot, in the application of legal principles, be dissociated from executed contracts without disregarding the reasons which lie at the foundation of the rule. If the lease is subject to the defence of ultra vires, the guarantee of the bonds is also incapable of enforcement, and thus loss will likewise fall upon those who advanced money, upon the faith of the guaranty, to be used under the direction of the lessee, and for its purposes.

If such a doctrine is established, who can answer for the solvency of our insurance companies, savings banks and moneyed institutions ?

It is a matter of common knowledge that corporate bodies, in many instances, through misconception of their powers, or otherwise, have exceeded the legal limits of their authority.

An action to enforce against the main line its guaranty of these bonds could not be classed with those cases in which companies have been required to return the money they had received on ultra vires contracts, or to pay rentals for the period of occupancy.

If the invalidity of the contract and the right to repudiate it be conceded, the law cannot raise an implied obligation on the ruins of the contract upon which to found a recovery. The liability of the defendant upon the bonds must rest, if it exists at all, upon the contract of guaranty.

The money was not paid to the main line, but to the obligor of the bonds, and no obligation can be implied on the part of the defendant to repay it. The validity of the guaranty contract must be affirmed, or no action can lie against the defendant.

In the destruction of the contract there must be an entire absence of legal liability.

The legal doctrine, which must be invoked to maintain an action by the bondholders on the guaranty, will support the judgment ip this case.

The doctrine of estoppel by acquiescence, in cases which present the characteristics which appear here, can work no inequity, for it may safely be presumed that the parties to be affected by an engagement are competent to determine what will best promote their own interest, and for any error in judgment they, and not others, should suffer.

The contrary doctrine, affording so easy an escape from the consequences of their acts, invites them to overstep the boundaries of their authority.

There can be no dissent from the assertion that good faith and honest dealing unite in forbidding that the defence here set up shall be successfully interposed. In my opinion, the law is against it, and the judgment below should be affirmed.

Dixox, J.

I vote to affirm, upon the ground that the Camden and Atlantic Railroad Company cannot set up that its own charter has become void under section 17, so long as it continues to exercise the powers granted by the charter, and that unless the charter is considered as avoided under section 17, the power to build the branch road continued when this lease was made, and consequently, according to Branch v. Jessup, 106 U. S. 468, the power to lease then existed.

What would be the result if some one besides the corporation itself were alleging the invalidity of the charter, need not now be considered.