Miners' Ditch Co. v. Zellerbach

The Miners’ Ditch Company, plaintiff in this action, has been since 1859 a corporation under the laws of California, “its object being the building and maintaining of water ditches, and the sale of water in said Nevada County.” In May, 1859, said corporation owned the property in controversy, consisting of the “Miners’ Ditch,” the “Boorman’s Ditch,” and the “ Grizzly Ditches.” At that time there was another

At a meeting of the stockholders of the Eureka Lake Company, held on the 3d of September, 1860, it was resolved that a new corporation, to be called the “Eureka Lake Water Company,” should be formed, and that the Eureka Lake Company should convey to it all its property, on condition that the Miners’ Ditch Company, the plaintiff in this case, should do the same, and that the stock of the new corporation should be credited to the stockholders of the two old corporations, in the proportions agreed upon. On the second Saturday of September, 1860, there was a regular meeting of the stockholders of the Miners’ Ditch Company, which was adjourned for two -weeks. At or about the time appointed for the adjourned meeting, there was a meeting of either the

From the date of the deed in October, 1860, the Trustees of the Miners’ Ditch Company did not meet again, as a Board, until October, 1865, and during that time did not pretend to do any business, or to set up any claim to, or control of, the property described in the complaint; and it had knowledge that the Eureka Lake Water Company, and afterwards Zellerbach and Powers, had possession of the. property, and claimed ownership of the same under the said deed from the Miners Ditch Company. All the premises described in the complaint, as well as the other property claimed by defendants, and also various other ditches owned by other companies, are situate on the ridge which divides the waters of the Middle and South Forks of the Yuba River; nearly all the stockholders of the Miners’ Ditch Company lived on said ridge at the time of the transfer of the property to the Eureka Lake Water Company; the sale and transfer were public and notorious events; a majority of the stockholders

The foregoing are the facts, substantially, as found by the Court below. It also finds, as a fact, that the property described in the deed of October, 1860, was not essential to the business and existence of the Miners’ Ditch Company, but adds: “I look upon the question, however, as scarcely one of pure fact; and prefer finding the real facts upon the point. They are these: after the company had sold all its property, of course it could not have done any more business in the matter of mining or selling water, without acquiring another water right and ditch, by purchase or by location and construction; it might have purchased other ditches and water rights in the same vicinity; it might, also, have located another water right in the same stream to which its original ditch was constructed, and might have built a new ditch. It would have thus obtained a supply of water in the wet season, but not in the dry season; and the project of building a new ditch would probably not have been profitable.”

The general statute, under which these several corporations were organized, provides that the certificate filed shall, among other things, state “the objects for which the company shall be formed” (Stats. 1859, p. 93, Sec. 2); that it shall have power “to purchase, hold, sell, and convey such real and personal estate as the purposes of the corporation shall require” (Stats. 1853, p. 87, Sec. 4); and that “it shall not be lawful for the Trustees to make any dividend except from the surplus profits arising from the business of the corporation, nor to divide, withdraw, or in any way pay to the stockholders, or any of them, any part of the capital stock of the company, nor to reduce the capital stock, unless

The first point made by the appellant is: “The consolidation of the Miners’ Ditch Company and the Eureka Lake Company, by a mutual transfer and sale of their respective ditches and water rights to the Eureka Lake Water Company, in consideration of shares therein issued to the stockholders of the two former companies in proportions of two fifths and three fifths, was ultra vires, and therefore void.”. In support of the point it is argued that the transfer of all the said property of the Miners’ Ditch Company was not in pursuance of the “ purposes of the corporation,” hut was, on the contrary, destructive of those purposes, and therefore not in pursuance of the powers conferred. If wrong in this view, that then the transfer of the property of the two old corporations to the Eureka Lake Water Company, in pursuance of the understanding had between the stockholders of the two old corporations, and in payment therefor receiving certificates of stock and distributing the same among the several stockholders of the old corporations in the proportions agreed upon, was in substance withdrawing and dividing among the stockholders the capital stock of the old

In thus ingeniously grouping together in his point and argument several particulars, and constantly exhibiting them to the mind at one view, as a whole, counsel doubtless presents his case in its most plausible and formidable aspect. But in this case, as in most others, in order to attain correct conclusions it is necessary to consider separately every element that may affect the general result. In considering the cases in which the law applicable to corporations is discussed, it must," also, always be borne in mind that there are several classes of rights to which they apply, and that upon the same general state of facts, the legal consequences might be different with reference to the different classes of rights. Thus there are corporate rights—that is to say, rights which pertain to the corporation, as such—the artificial legal entity created by the Act of incorporation, considered as a single, distinct person; individual rights of the stockholders as such, and rights of the creditors of the corporation. The rights of strangers dealing with the corporation may vary according as they are considered with reference to the corporation itself, the stockholders, or the creditors of the corporation. So, also, there are several classes of corporations, such as public municipal corporations, the leading object of which is to promote the public interest; corporations technically private, but yet of a quasi public character, having in view some great public enterprise, in which the public interests are directly involved to such an extent as to justify conferring upon them important governmental powers, such as an exercise of the right of eminent domain. Of this class are railroad, turnpike, and canal companies; and corporations strictly private, the direct object of which is to promote private interests, and in which the public has no concern, except the indirect benefits resulting from the promotion of trade, and the development of the general resources of the country. They derive nothing from the Government, except

Z The term ultra vires, whether with strict propriety or not, is. I also, used in different senses. An act is said to be ultra vires when it is not within the scope of the powers of the corporation to perform it under any circumstances, or for any purpose. An act is also, sometimes, said to be ultra vires with reference to the rights of certain parties, when the corporation is not authorized to perform it without their consent; or with reference to some specific purpose, when it is not 1 authorized to perform it for that purpose, although fully ! within the scope of the general powers of the corporation, with the consent of the parties interested, or for some other ' purpose. And the rights of strangers dealing with corporations may vary, according as the act is ultra vires in one, or the other, of these senses. All these distinctions must be constantly borne in mind in considering a question arising out of dealings with a corporation. "When an act is ultra vires in the first sense mentioned, it is generally, if not always, void in toto, and the corporation "may avail itself of the plea. But when it is ultra vires in the second sense, the right of the corporation to avail itself of the -plea will depend upon ^the circumstances of the case. Cognate questions were very thoroughly and ably discussed by Mr. Justice Comstock and Mr. Justice Belden, in Bissell v. The Michigan Southern and Northern Indiana Railroad Companies, 22 N. Y. 262 , the latter ' dissenting from many of the views of the former, but both

“ That term {ultra vires) is of a very modern invention, and . I do not think it well chosen to express the only principle which it can be allowed to represent in cases of this nature. It is not to be understood as an absolute and peremptory defense in all cases of excess of power without regard to other circumstances and considerations.” [Ib. p. 275.) Mr. Justice Selden (whose views the appellant’s counsel seems to approve) says in the same case: “There are, no doubt, cases in which a corporation would be estopped from setting up this defense, although its contract might have been really unauthorized. It would not be available in a suit brought

by a bona fide indorsee of a negotiable promissory note, provided the corporation was authorized to give notes for any purpose; and the reason is, that the corporation, by giving the note, has virtually represented that it was given for some legitimate purpose, and the indorsee could not be presumed to know the contrary. The note, however, if given by a corp'oration absolutely prohibited by its charter from giving notes at all, would be voidable not only in the hands of the original payee, but in those of any subsequent holder, because all persons dealing with a corporation are bound to take notice of the extent of its chartered powers.”

The same principle is applicable to contracts not negotiable. (22 hi. Y. 289.) Mr. Justice Selden also cited the following passage from the opinion of Lord St. Leonards: “The opinions of some of the Judges in the Norwich Case favor the disposition which I feel to restrain the doctrine of ultra vires to clear cases of excess of power with the knowledge of the other party, express or implied from the nature of the corporation and of the contract entered into;” and adds: “To this I agree.” (Ib. 301.) The consequence of the distinction we have taken in respect to contracts, ultra vires in the different senses indicated, is fully recognized by the English authorities,- as well as our own, and, as it is important, and the reasoning can be no better stated in any language we may select, we shall make some extracts from the opinions in the English cases. In Mayor of Norwich v. Norfolk Railway Company, 30 E. L. & Eq. 128, Mr. Justice Earle says: “The doctrine (relating to defense of ultra vires') was introduced at law by the East Anglian Railway Company Case, and the contract there in question being a contract by one railway company to pay the costs of another railway, incurred in applying to Parliament, was judicially perceived from the terms of the contract itself, to be necessarily unconnected with the purpose of the defendant’s incorporation, and, therefore, prohibited. This is the point decided in the case. Looking to the report, with the remarks in the argument, I understand the Court to have meant, that any application

“It would or would not, according as the purpose of the contracting parties ivas or was not connected with the railway. It might be a speculation separate from the railway, and prohibited. Or, if works were wanted in a waste place, and the company found it for their interest to build a town and supply it with all requisites for inhabitancy, and, in order to secure a permanent supply of workmen of skill and responsibility, added a chapel and a theatre, with religious and secular instruction, it might be for the purpose of the railway, and valid, and, though distantly connected, the outlay might be found eventually to increase the profit from the traffic.” Again: “The case of McGregor v. The Dover and Deal Railway Company, 17 Jur. 21, S. C. 16, E. L. & Eq. 180, shows that the question at law is whether the contract was prohibited, not whether it was made in excess of the authority given to the Directors. There the contract of McGregor, that the railway company should pay costs, was held void, because such a payment by the company was prohibited by law. If a contract by the company for such a payment would have been merely an excess of authority, the contract of McGregor would have bound himself, and would not have

been absolutely void. The expression that the contracts, which are held null within the doctrine in question, are void because they are ultra vires, seems to imply that the Courts of law, in an action against a corporation upon a contract duly made and valid in form, compare the contents of the contract .with the powers supposed to be given to the Directors by the shareholders, either in the capacity of agents for them or by the statute, and hold it void if there is an excess beyond those supposed powers.” (Ib. 130, 131.)

So the same Justice recognizes the difference between cases where stockholders are suing in equity to restrain a misappropriation of the corporate funds, and a suit on a contract against the corporation by a stranger. “In these suits in equity the members of the corporation, in their individual capacity, are considered to have rights inter se analogous to those of partners inter se, and the Act incorporating the company is considered to be analogous to a partnership deed (see the judgment of Sir G-. J. Turner, L. J., in Simpson v. Denison, 10 Hare, 51; Simpson v. Denison, 13 E. L. & Eq. 359); and the question is, whether the misapplication is so unreasonable in kind and degree as to require the interference of the Court for the protection of the complaining party. From these suits passages have been cited, in which the Judges have expressed opinions on the expediency of checking with much strictness the Directors of incorporated companies having extensive powers and large capital, opinions which might be highly reasonable with reference to shareholders complaining of over speculation on the part of the Directors at their' cost; but they seem unreasonable and iniquitous if applied to the administration of the law in actions to which such corporations are parties. These suits in equity between different members of the company bear no analogy to actions at law by third persons against the corporation, either in respect of the parties to the suit, or the subject in litigation. As to the parties in actions against corporations, the members thereof, in their individual capacity, are strangers to the suit; and the rights of persons who

He further said: “My noble and learned friend showed that the mere circumstance of a covenant by Directors in the name of the company being ultra vires as between them and the shareholders, does not necessarily disentitle the covenantee to sue upon it,” and expressed a disposition “to restrain the doctrine of ultra vires to clear cases of excess of power, with the knowledge of the other party, express or implied from the nature of the corporation and of the contract entered into.” (Ib. 32.)

From the cases cited, it very clearly appears, that the question, as between stockholders and the corporation, is a very different one from that which arises between the corporation itself, and strangers dealing with it, and the principle estabfished, where the contest- arises between strangers and the corporation is, whether the act in question is one which the corporation is not authorized to perform under any circumstances, or one that may be performed by the corporation for some purposes, but may not for others. In the former case the defense of ultra vires is available to the corporation as against all persons, because they are bound to know from the law of its existence, that it has no power to perform the act. But in the latter case the defense may or may not be available, depending upon the question whether the party dealing with the corporation is aware of the intention to perform the act for an unauthorized purpose, or under circnmstances not justifying its performance. And the test as

Upon any other principle there would be no safety in dealing with corporations, and the business operations of these institutions would be greatly crippled, while the interests of the stockholders and the public, and their general usefulness, would be seriously impaired. The officers are appointed by the corporation, and if any loss results to strangers dealing with the corporation from their misrepresentation in matters within the general scope of their duties, it should fall upon the corporation, which is responsible for their appointment, rather than upon parties who have no other means of ascertaining the facts, and must rely upon their assurances or not deal with the corporation at all.

The next step in the argument is to ascertain whether the “Miners’ Ditch Company” had power to sell and convey its corporate property for any purpose; and upon this point we entertain no doubt. We have already seen by the fourth section of the Act under which it was incorporated, that the corporation was empowered, “to purchase, hold, sell, and convey such real and personal estate as the purposes of the corporation shall require.” The power to sell and convey is as broad as its power to purchase and hold, and is granted in the same terms. There is no complaint that the property was not properly acquired, and that the corporation legally owned it. Thejiis disponendi necessarily attached as an incident to the ownership. The very idea of private property, in which the public has no rights, involves the idea of a right to sell and convey, when the exigencies of the corporation require it. If a corporation could convey a part, it could convey the whole. The enterprise of the Miners’ Ditch Company may have proved unprofitable, and rendered it necessary

These are but examples of cases in which it may be in furtherance of the purposes of a corporation like the one in question, to convey a part or all of its property, and in making such conveyance for such purpose, the corporation would be acting within the general scope of its powers.

In the case now under consideration, it may be that a point had been reached whence it was impracticable to advantageously proceed in the original undertaking, and that the

It is very clear to our minds that many circumstances might arise, in view of which the lawful purposes of the corporation might require a sale and conveyance of a part, or of all, the property of the Miners’ Ditch Company. The power to sell, and the power to make a conveyance in pursuance of the sale, exists. Under many circumstances the question as to want of power, in the given case, cannot be determined by a mere comparison of the fact of a conveyance, aud the terras of the deed executed, with the powers granted by the charter. If the conveyance of the corporate property in a given instance is ultra vires, in view of the purposes for which they are made, then the want of power

There is nothing in Abbott v. American Hard Rubber Co., 33 Barb. 580 , or Conro v. Port Henry Iron Co., 12 Barb. 64 , and cases of that class, or any others that have been brought to our notice, in conflict with anything contained in the views here expressed. The former was an action by stockholders against the Directors and corporation and others, who were yarticeps criminis, to set aside a transfer of all the property of the corporation made in fraud of the rights of the com. plainants. ( 33 Barb. 594 , 595.) In view of the facts of that case the Court very properly say: “The experiment of the acting Trustees in the two hard rubber companies has the merit of boldness as well as originality. Three of them marched out of the old company laden with spoils with which they enriched themselves as stockholders of the new,

The next point is, that the deed of October 20th, 1860, from the Miners’ Ditch Company to the Eureka Lake Water Company is void, because not authorized by the Board of Trustees acting as a Board. In Gashwiler v. Willis, 33 Cal. 16 , we held a conveyance executed by the Trustees individually in pursuance of a resolution of the stockholders of a mining corporation, without any authority from the Board of Trustees acting as a Board, and not having the corporate seal attached, to be void for want of authority to execute it; and we find no reason to be dissatisfied with that decision. But in that case the party offering the deed made it affirmatively appear under what precise authority the act was performed, and there was no corporate seal affixed. The parties severally used their private seals, for the reason that there was no corporate seal, and in such cases, we held, that authority to execute the deed, and by implication, at least, to adopt a seal pro hac vice by the party assuming that power, must be shown. The seal affixed must of course be shown to be the corporate seal. These facts were not shown, and the deed was held to be inadmissible till further proof should be made. We expressly reserved the question as to what the rule would be where the regularly adopted corporate seal is shown by competent proof to be affixed to the deed. (Ib.

The rule must be as stated on principle, independent of authority. Any other would be subversive of the public interests, for no man could deal in safety with corporations, and all business transactions with these institutions would almost necessarily cease, and the end of their creation fail of accomplishment. Confidence is a necessary element in all business transactions. If strangers cannot rely, at least, prima facie upon deeds of private corporations apparently regularly executed in pursuance of the powers conferred by their charters under the corporate seal, and attested by the signatures of the officers, upon whom the control of their affairs is devolved by law, upon what may they rely ? This is the most direct, formal and solemn assurance that can possibly be given by those authorized to give assurances. It is the legally appointed mode in which the corporation speaks to the external world, and manifests its corporate will. Parties dealing with private corporations have no other reliable means of ascertaining the circumstances under which the act is done. The books, records and papers of such corporations are private property, and not open to inspection by

If it be conceded, then, that the corporation, in a contest with a party purchasing in good faith for a valuable consideration, relying upon the presumption arising upon the face of a deed apparently regularly executed under the corporate seal, and by the officers upon whom the law confers the corporate powers, may rebut the presumption, (upon which point we now express no opinion,) it is clear from the authorities cited that the burden of overthrowing the presumption in this case rested upon the corporation—the party denying the validity of the deed.

Upon the facts admitted and found then, notwithstanding the denial of authority by plaintiff' prima fade, the presumption arises, and it affirmatively appears in favor of defendant, Zellerbach, that the deed was executed by authority of the corporation. Aside from the presumption, although it is found, that it did not affirmatively appear from the other evidence whether the authority was conferred at a meeting of the stockholders only, or at a meeting of the Board of Directors, or of both, still, since the burden of overthrowing

It is claimed, also, that the testimony does not justify the finding of the Court to the effect, that the exact character of the meeting in September, at which the Trustees were authorized to convey the property of the Miners’ Ditch Company, as whether a meeting of stockholders or of the Trustees, as a meeting of both, is not clearly shown, and inferentially therefrom the finding against the plaintiff* on the issue, or to the authority of the Trustees to execute the deed. We should not be justified in setting aside the finding on this point. The evidence is very loose, at best, and we should expect to find it so. It must be .remembered that the business was loosely done, and no minutes appear to have been preserved. The meeting was held nearly seven years before the date of the finding. For five years after that time there had been no other meeting of Directors. The grantee under the deed had been in the continued possession, expending large sums of money on the property conveyed under a claim of ownership. And neither the corporation, the Trustees, nor the stockholders, from the date of the deed set up any claim, or suggested any doubt as to the validity of the conveyance. After so long silence on the part of those interested, under the circumstances of this case, there certainly should be required some very clear and conclusive testimony on the part of the plaintiff' to justify the Court below in finding affirmatively facts to overthrow the presumption raised by the law upon the other facts clearly established and found, and as to which finding the exception was taken. We think the finding of the Court clearly justified. The burden of overthrowing the presumption raised by the deed rested on the plaintiff, and we do not think it overthrown. ..

To recapitulate and apply the principles of law stated: Prior to the 29th of October, 1860, the Miners’ Ditch Company, a corporation duly organized, was the owner, and in possession, of the property in suit. On that day a deed

We need not inquire whether the conveyance could have been avoided by stockholders, or creditors, or the corporation itself, as between the Miners’ Ditch Company and the Eureka Lake Water Company, on the ground that the latter was affected with notice of the illegal purpose, if any such there was, for which the Miners’ Ditch Company made the conveyance, or whether there was in fact any illegal purpose, for the contest is not between those parties. The contest is between the Miners’ Ditch Company and Zellerbach, alone. Zellerbach, a stranger without notice—for none is found on his ¡iart—found the Eureka Lake Water Company in undisputed possession, expending vast amounts of money in improving and enlarging the works and paying off mortgages, claiming title under a deed regular on its face and

This suit is not brought by a stockholder, or a creditor. Ho person having an equitable interest has complained that the officers and Trustees have exceeded their authority, or violated the trust reposed in them to his injury. The corporation itself is plaintiff. After a five years, acquiescence, and long after the property has passed into the hands of innocent parties, who have advanced vast sums of money upon the faith of its apparent acts, paid off large liens, and greatly extended, improved, and increased the value of the property, this corporation seeks to avoid its deed. In the language of the Court below, the plaintiff says: “ True, the deed is apparently mine. I made it in the only way in which I could have made it, through my Trustees and by my corporate seal; but in the internal and secret machinery of my existence the determination to make it was not regularly and properly arrived at. It is as though a natural person sought to avoid his deed by saying:' ‘ True, my hand executed it, but my judgment dissented, and my will forbade it.’ ”

Upon the facts found, we do not see how the result could have been otherwise had the plaintiff* been a stockholder, or a creditor. But how.ever that may be, it is entirely clear to

Numerous authorities wore cited in the arguments of counsel, which we have not particularly noticed, for the reason that they do not appear to be opposed to the views we have expressed. Rights growing out of corporate relations are presented under a great variety of circumstances, and discussed in various aspects^ but tho distinctions are obvious enough to those who peruse the numerous decisions, and it would be unprofitable labor to comment upon, and distinguish each particular case. Suffice it to say, that we find nothing in the general current of authorities cited opposed to tho principles upon which this case is determined. We have said nothing to impugn the general doctrine so well established that the Act of Incorporation is an enabling Act, and corporations can only exercise such powers as arc expressly conferred upon them, together with such incidental powers as are necessary to a due exercise of those expressed, and that the powers must be exercised in the mode prescribed. Nor do we find it necessary to notice the distinction, if any there is, between common law and statutory corporations. It is presumed that no commercial, trading, manufacturing and such like corporations, created since the Revolution in this country, exist, which do not derive their existence under some statute, and probably, too, such is the case in most similar modern corporations in England. Most of the decisions upon the subject must, therefore, relate to statutory corporations.

Let the judgment be affirmed.

on petition for rehearing :

Defendant, Zellerbach, is the only one interested in the property in dispute. In rendering the decision in this case, we proceeded upon the idea that he did not appear in the record to have any knowledge of the purpose of the Miner’s Ditch Company in its conveyance to the Eureka Lake Water Company, to distribute the stock of the latter company received as the consideration of the conveyance, to the stockholders of the former, which is the fact in the case, if any there is, that renders the transaction between those corporations illegal. Our attention is now called to a fact not before brought to our notice by counsel, and overlooked when the opinion was written, that in the answer of Zellerbach stating the loan of money, through which the title was ultimately acquired by him, it is averred that the Eureka Lake Water Company “borrowed of this defendant and the defendant Powers (then partners in business under the firm of Marks & Co.) the sum,” etc. It also appears in the findings that one George C. Powers signed, as Trustee, the conveyance of the Miners’ Ditch Company to the Eureka Lake Water Company, and it is claimed that, as this is the same name as that of defendant Powers, it must be presumed that the Powers who signed the deed and who advanced the money as the partner of Zellerbach is the same person; that notice to one of the partners is notice to all, and that it therefore appears in the record that Zellerbach did have notice. Conceding this to be so, for the purposes of the decision, it becomes necessary to determine the point whether, upon that hypothesis, the Miner’s Ditch Company stands in a position to avail itself of the illegality of its contract to distribute its capital stock to the stockholders of the corporation, by conveying its property and distributing the stock of another corporation received in payment, in the mode and under the circumstances stated in our former opinion, to its stockholders. And we are of the opinion that it does not. The act of sale and conveyance was not wholly beyond the power

The plaintiff, however, claims the benefit of the maxim, because the defendant sets up the facts and prays affirmative relief. But we think the defendant, and not the plaintiff) is the party entitled to the benefit in this case. The defendant is in possession, and has been in possession for many years, with the acquiescence both of plaintiff and the stockholders, who have received and long enjoyed the consideration for the conveyance. The plaintiff brings the action to recover possession of the property conveyed. The defendants, to defeat a recovery, although it is unnecessary, set up the facts in their answer, as a defense, and the Court finds the facts in favor of the defendants, and holds upon the facts, as stated and found, that defendant has a title both in law and equity,

Rehearing denied.

Mr. Justice Sanderson did not express an opinion on the question of granting a rehearing.