Standard Livestock Co. v. Bank of California

For some years prior to August 9, 1917, L. B. McMurtry owned the Ridgewood Ranch, located between Willitts and Ukiah, in Mendocino County. Prior to that date the owner had become financially involved. He owed the First Federal Trust Company, on notes past due secured by mortgage on the ranch, over $85,600. At the same time he owed the Bank of California $52,500 on unsecured notes. Other creditors existed and were pressing their claims. On the date last mentioned McMurtry executed to William R. Pentz a grant, bargain and sale deed conveying to Pentz the entire title. At the same time Pentz executed a defeasance reciting that the deed was made as security for McMurtry’s indebtedness to the bank and agreeing that the property should be reconveyed upon the payment of the indebtedness. Pentz was one of the assistant cashiers of the bank, and, it may be added, he was the brother-in-law of McMurtry. McMurtry received the defeasance but did not record it. The deed to Pentz was duly recorded. After these things had occurred B. P. Noonan and McMurtry discussed the making of a lease under the terms of which the entire ranch would be leased to Noonan except that McMurtry would reserve hunting and fishing privileges, the right to remove tanbark and also thirty acres on which stood the farmhouse occupied by McMurtry and his family. Before the lease was ready to be signed Noonan was informed of the deed to Pentz and was told by McMurtry that the lease could be drawn in Pentz’s name'and that Pentz would exécute it. Accordingly the lease was so drawn. It was dated November 1, 1917, and by its terms it purported to lease the lands from December 1, 1917, to June 1, 1923. The rent provided therein was $5,000 per annum payable in semi-annual installments. Plaintiff paid the first two installments to Pentz and both were immediately turned over to McMurtry. Plaintiff

[1] As stated above, the record contained no evidence of a written authorization from any person, natural or artificial, authorizing Pentz to act as his agent and execute the lease. On its face the lease purports to be the lease of Pentz as lessor; however, it is the claim of the respondent that Pentz acted as the agent of an undisclosed principal, the Bank' of California., Counsel do not cite authorities, and we know of none, that Pentz, by virtue of his office as assistant cashier, had authority to bind his principal, the appellant, by making a lease of the appellant’s lands in his own name or in appellant’s name. (14a C. J. 440.) It will be conceded that in many eases a person is entitled to prove that another is an undisclosed principal. However, in every case that proof cannot be made in exactly the same way. In some cases there is “indispensable” evidence which it is necessary to produce in order to prove the fact. “The law makes certain evidence necessary to the validity of particular acts, or the proof of particular facts.” (See. 1967, Code Civ. Proc.) “No estate or interest in real property, other than for leases for a term not exceeding one year, . . . can be created . . . otherwise than by operation of law, or a conveyance or other instrument in writing, subscribed by the party creating . . . the same, or by his lawful agent thereunto authorized by writing.” (Code Civ. Proc., sec. 1971.) “In the following cases the agreement is invalid, unless the same or some note or memorandum thereof be in writing, and subscribed by the party charged, or by his agent. Evidence, therefore, of the agreement, cannot be received without the writing or secondary evidence of its contents: ... 5. An agreement for the leasing for a longer period than one year . . . ; and such agreement, if made by an agent of the party sought to be charged, is invalid, unless the authority of the agent is in writing, subscribed by the party sought to be charged.” (Code Civ. Proc., sec. 1973.) The foregoing rules were of particular importance in the instant case. If it had not been that the law prescribed the particular kind of proof necessary to show the agency, if any, of Pentz, there was testimony offered which could have been used to support the contention of the plaintiff, and there was testimony offered which

Still claiming that the lease was not its contract, the appellant claims that as it is a national bank it had no 'power under the provisions of the National Bank Act and the decisions of the federal courts, to make, and that it did not make or execute, the lease; and, in this connection the appellant claims that the rules defining and limiting its powers are to be found in the federal statutes as construed by the federal courts. To this point the respondent replies that even a national bank may accept a conveyance of land to secure an existing indebtedness. To that reply the appellant answers that, admitting for the sake of argument, that Pentz, acting for the bank, received the deed as a mortgage to secure the bank for the money already loaned, that then and in that event the lease was invalid whichever way one looks at it. [2] If the conveyance is treated as a mortgage manifestly a mortgagee, not in possession, may not execute a lease. And, although the appellant had a right to take a conveyance to secure a pre-existing debt, nevertheless lands so obtained may not be retained as an investment because the National Bank Act provides, “But no such association shall hold the possession of any real estate under mortgage, or the title and possession of any real estate purchased to secure any debts due to it, for a longer period than five years.” (Rev. Stats., sec. 5137.) Notwithstanding the above provision, the deed from McMurtry to Pentz was dated August 9, 1917, and the lease was dated November 1, 1917, and by its terms it did not expire until June 1, 1923—nearly a year after the time would have expired during which the bank was legally entitled to hold the title. If the bank could so transcend the provisions of the statute for. the period of ten months, it could do the same thing for ten years, or any other period of time. In reply to this proposition it- may be said that, conceding the lease was not valid for the full period of time for which it was written, that it would be a valid lease to August 9, 1922. But such a contention is not sound. [3] Such a lease is not

[4] Moreover, conceding that the bank would have the right to take title to the land for the purpose of protecting itself against loss, nevertheless, in so taking and holding the title, the bank was not entitled to enter into any speculative contract. These contentions are supported by the provisions of the Revised Statutes and by the decisions hereinafter referred to. [5] The Revised Statutes, sections 5133, 5343 (U. S. Comp. Stats., sec. 9658; 6 Fed. Stats. Ann., 2d ed., p. 651; 7 Fed. Stats. Ann., 2d ed., p. 918), constitute the measure of the authority of national banks, and such banks cannot rightfully exercise any powers except those expressly granted, or such incidental powers as are necessary to carry on the national bank business. (Logan County Bank v. Townsend, 139 U. S. 67 , 73 [ 35 L. Ed. 107 , 11 Sup. Ct. Rep. 496 , see, also, Rose’s U. S. Notes]; California Bank v. Kennedy, 167 U. S. 362 , 366 [ 42 L. Ed. 198 , 17 Sup. Ct. Rep. 831 ].) It is not even contended that the Revised Statutes contain a clause authorizing a national bank to purchase land to secure itself from loss or otherwise, and thereafter execute a lease to the land and insert in the lease a covenant for quiet enjoyment as against the acts of those holding the paramount title. It is patent therefore that the bank did not have the express power. [6] It will not be disputed that the bank had every necessary incidental power to carry on. a national bank business; but, it is hardly open to argument that the power to enter into a contract containing the covenant in question is not necessary to the transaction of a national bank business. It is patent that it is not necessary. National banks have been in existence in nearly every county in nearly every state in the Union for many years. The transactions of those banks have included the bulb of the business transacted in America. In preparing this case, although the attorneys on each side have been most industrious and have prepared most extensive and comprehensive briefs, neither counsel has been able to find a single case where a national bank had entered into such a contract. Not being contented with the search made by

“ ‘A contract of a corporation, which is ultra vires, in the proper sense, that is to say, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers conferred upon it by the legislature, is not voidable only, but wholly void, and of no legal effect. The objection to the contract is, not merely that the corporation ought not to have made it, but that it could not make it. The contract cannot be ratified by either party, because it could not have been authorized by either. No performance on either side can give the unlawful contract any validity, or be the foundation of any right of action upon it.’

“This language was also cited and expressly approved in Jacksonville etc. Railway v. Hooper, 160 U. S. 514 , 524, 530 [ 40 L. Ed. 415 , 16 Sup, Ct. Rep. 379 , see, also, Rose’s U. S. Notes].

“As said in McCormick v. Market National Bank, 165 U. S. 538 , 549 [ 41 L. Ed. 817 , 17 Sup. Ct. Rep. 433 ]:

“ ‘The doctrine of ultra vires, by which a contract made by a corporation beyond the scope of its corporate powers is unlawful and void and will not support an action, rests, as this court has often recognized and affirmed, upon three distinct grounds: The obligation of anyone contracting with a corporation to take notice of the legal limits of its powers; the interest of the stockholders not to be subject to risks which they have never undertaken; and, above all, the interest of the public that the corporation shall not transcend the powers conferred upon it by law. (Pearce v. Madison & Indianapolis Railroad, 21 How. 441 [ 16 L. Ed. 184 , see, also, Rose’s U. S. Notes]; Pittsburg, Chicago etc. Railway v. Keokuk & Hamilton Bridge Co., 131 U. S. 371 , 384 [ 33 L. Ed. 1579 , 9 Sup. Ct. Rep. 770 ]; Central Transp. Co. v. Pullman’s Palace Car Co., 139 U. S. 24 , 48 [ 35 L. Ed. 55 , 11 Sup. Ct. Rep. 478 ].)’

“The doctrine thus enunciated is likewise that which obtains in England. (Ashbury Railway Carriage & Iron Co. v. Riche, L. R. 7 H. L. 653; Attorney General v. Great

As showing how strictly the federal courts have ruled the questions concerning attempts on the part of national banks to exceed the powers conferred upon them, and as showing that the contract in the instant case was void, we call attention to the following additional eases:

In Burrows v. Niblack, 84 Fed. 111 [ 28 C. C. A. 130 ], the circuit court of appeals for the seventh circuit was called upon to consider a transaction in which the Chemical National Bank of Chicago attempted to purchase 100 shares of its capital stock from one of its stockholders. There was no claim that the stockholder owed the bank or that the purchase was made to protect the bank against a pre-existing debt. The trial court held that the purchase was invalid and that.the receiver of the bank should have judgment for the moneys paid on the purchase. The circuit court of appeals affirmed the judgment.

In the case entitled Edward P. Allis Co. v. Standard Nat. Bank, 110 Fed. 47 , the court was called upon to determine the liability of the defendant bank growing out of a contract made by the bank to save itself from loss on a preexisting debt. The debtor became insolvent. To protect itself the defendant entered into a purported contract under which it attempted to join with others in operating a sawmill that had formerly been operated by the debtor. Instead of collecting the debt of $15,000 it sunk $36,601 more, and the plaintiff claimed the right to recover yet other moneys. The court held that the defendant bank, even under the facts stated, had no power to carry out the terms of such a contract.

In the ease of Cooper v. Hill, 94 Fed. 582 [ 36 C. C. A. 402 ],.the circuit court of appeals of the eighth circuit had under consideration the act of a board of directors of a national bank in handling loans made to a mining company. The bank had loaned the company moneys and had thereafter obtained judgment in the sum of $4,500. The bank caused one of its directors, who was also cashier, to take and hold title to the mining claims. Thereafter the di

■ In the case of First National Bank v. Converse, 200 U. S. 425 [ 50 L. Ed. 537 , 26 Sup. Ct. Rep. 306 , see, also, Rose’s U. S. Notes], the court was considering these facts: In May, 1884, the Northwestern Manufacturing and Car Company was a corporation engaged in the manufacturing business at Stillwater, Minnesota. At the date mentioned the car company owed a large amount of debts which it was unable to pay, among which was a sum due to the First National Bank of Ottawa. In the financial distress that followed the creditors, including the bank, formed the Minnesota Thresher Manufacturing Company and the bank took stock therein, exchanging its claim against the car company therefor. Later the thresher company became insolvent and the suit was brought to collect a stockholder’s liability. The thresher company inserted in its articles of incorporation that it was to purchase and hold the stock of the Northwestern Manufacturing and Car Company and that it was to manufacture and sell steam engines. The court held that the business of the thresher company was speculative. and then the court says: “To concede that a national bank has ordinarily the right to take stock in another corporation as collateral for a present loan or as security for a pre-existing debt, does not imply that because a national bank has lent money to a corporation it may become an organizer and take stock in a new and speculative venture; in other words, do the very thing which the previous decisions of this court have held cannot be done.”

The Revised Statutes provide that a national bank shall not “transact any business, except such as is incidental and preliminary to its organization, until it has been authorized by the controller of the currency to commence the business of banking.” Before receiving such authorization from the controller the Market National Bank of Chicago attempted to lease premises for its banking business. In an action brought to recover rent under that purported contract it was held that no recovery could be had. (McCormick v. Market Bank, 165 U. S. 538 [ 41 L. Ed. 817 , 17 Sup. Ct. Rep. 433 , see, also, Rose’s U. S. Notes].)

It is quite impossible, after reading the foregoing cases, to form any other conclusion than this;, that a national bank may not exercise any powers except those expressly granted or such incidental powers as are necessary to carry on the national bank business; that the supreme court of the United States has the power to examine into that question whenever it is presented; that the scope of such examination by that court extends to an examination not only of the contracts or purported contracts but of the statutes both state and federal which in any way enter into and form a part of the purported contract; that when from such an examination it appears that the national bank has entered into a contract in excess of its delegated powers and Which in truth and in fact is speculative, that is, carries “an unlimited personal liability,” that then and in that event the supreme court of the United States will decline to uphold a judgment enforcing any liability against the bank. We think this lease must be so classified.

The appellant in its answer pleaded in bar the judgment in the foreclosure proceedings hereinabove referred to.

“No provision was made by this decree to protect the leasehold of the Standard Livestock Company, or for the application of any of the proceeds of the sale to its interest in the premises. The decree, however, directs if there remain any balance after applying the proceeds as therein specifically directed, the same ‘be returned into court to abide the further order thereof. ’ . . .

“It seems to us that the main issue in this proceeding, namely, the right of the purchaser at this sale to possession of the entire interest and estate in these premises on receipt of his deed, freed from the leasehold or other subsequent interests, is not open to dispute. The decree was allowed to become final without appeal, motion for new trial, or other attempt to avoid or modify it. The owners of the leasehold were parties’ to the action. Their interest was declared subject and subordinate to plaintiff’s mortgage. The entire interests covered by the mortgage and lease were subject to sale and ordered sold and foreclosed in satisfaction of plaintiff’s claim. No provision was made for making this sale subject to the leasehold interest, and the court could no more have subordinated the rights of plaintiff to that of the lessees in making this sale than it could to the rights of the subordinate lienholders under subsequent mortgages. Bach, in the order of preference of his claim, was entitled to redeem but no redemption was made. As to all lien claimants other than the plaintiff, the leasehold was decreed to be prior and superior, and the lessees should have been entitled to take precedence to these in the distribution of the surplus proceeds of the sale after plaintiff’s demand had been satisfied. . . .

“We are satisfied that petitioner is entitled to possession of the premises freed from the claims of this lease.

“No judgment of court in ejectment or unlawful detainer could give him any clearer right to possession than he has under this judgment and sale. This is not a case where the rights of parties in possession who are not bound by the record in the foreclosure action are involved, and where an independent title or right of possession is claimed. Here the rights of the contenders for possession have been fully adjudicated and it only remains to put the plain provisions of such adjudication into execution.” (Italics ours.) But the respondent contends all of that language is obiter. With this contention we do not agree. We think it was of the very essence of the mandamus proceeding that the supreme court should have ascertained whether the appellant had any rights that had not been litigated. In so ascertaining the supreme court used the language quoted. We have examined that language most carefully and do not find that the supreme court used a word as obiter. However, be that as it may, we still think that the language used was sound and that this court should follow it whether the language is obiter or otherwise. In 15 Cal. Jur. 136, sec. 189, it is said: “In the latter case (a judgment pleaded in bar) a final adverse judgment on the merits operates and is pleadable as a complete bar to the second action, regardless of what may or may not have been presented in support or defense of the claim in the prior action.” (In Grew v. Pratt, 119 Cal. 139 , at page 149 [ 51 Pac, 38 , 42], the court said: “It may be stated as a general proposition, that a judgment is conclusive, not only as to the subject matter in controversy in the action upon which it is based, but also in all other actions involving the same question, and upon all matters involved in the issues which might have been litigated and decided in the case; the presumption being that all such issues were really met and decided.” [7] The rule applies to matters both in respect to those of claim and those of defense. (Estate of Bell, 153 Cal. 331 , 340 [ 95 Pac. 372 ].) In a case very similar in some respects to this case, the whole subject received careful consideration by the supreme court of New York. (Pakas v. Hollingshead, 184 N. Y. 211 [ 112 Am. St. Rep. 601 , 6 Ann. Cas. 60, 3 L. R. A. [N. S.] 1042, 1045, 77 N. E. 40 ].)

[8] As stated above, when the Federal Trust Company commenced the action in foreclosure it made Pentz and the

Several cases have been decided in New York which are directly in point. Clarkson v. Skidmore, 46 N. Y. 297 , is probably the leading case. Larkin v. Misland, 100 N. Y. 212 [ 3 N. E. 79 ], is particularly in point. The defendant Agnes Misland complained regarding the report of a referee who did not report her rights in the surplus fund. On the hearing of the matter the lessee did not make any proof of the value of her leasehold interest. The court held that the special term was justified in ruling that the lessee had shown no loss by the extinction of her estate which should be compensated out of the surplus. In the case of Title Guarantee & Trust Co. v. Twenty-first Street & Fifth Avenue Corporation, 110 Misc. Rep. 126 [ 180 N. Y. Supp. 358 ], the court said: “Furthermore, where the breach of a covenant for quiet enjoyment is due to the foreclosure of a mortgage on the property, a tenant is entitled to recover substantial damages, measured by the value of the unexpired term, less rents reserved, and to look for reimbursement to the surplus moneys which may be realized on the foreclosure sale.” In

The fact that it does not seek general damages in this case, but merely special damages, does not better its condition. To hold otherwise would be in effect to hold that the respondent is entitled at will to split its cause of action. In the ease at bar it is not even claimed that there was more than one breach of the covenant of quiet enjoyment. For that one breach the respondent was entitled to maintain one action and not several. (1 C. J. 1111, sec. 285; Herriter v. Porter, 23 Cal. 385 , 387.) Its cause of action ripened and the respondent was entitled to sue thereon immediately after the foreclosure proceeding had been commenced and the respondent had been made a party thereto. (McGary v. Hastings, 39 Cal. 360 , 367 [ 2 Am. Rep. 456 ]; McAlester v. Landers, 70 Cal. 79 , 83 [ 11 Pac. 505 ]; McCormick v. Marcy, 165 Cal. 386 , 389 [ 132 Pac. 449 ]; Agoure v. Lewis, 15 Cal. App. 71 , 73 [ 113 Pac. 882 ]; Sullivan v. Superior Court, supra.) [9] It will not be contended seriously that when a person has a cause of action he may voluntarily split it or so divide it as to make it the subject of two or more actions. (1 C. J. 1106 and 1111.) The rule remains the same, even though such a claimant is involuntarily summoned into court and commanded to set forth his claim.

The judgment is reversed.

Langdon, P. J., and Nourse, J., concurred.

The application for a transfer and hearing by this court after decision by the district court of appeal is denied. We are satisfied with the conclusion reached by the district court upon the first question discussed in its opinion, namely, that the defendant bank cannot be held liable as an undisclosed principal upon the covenants of warranty in the lease executed by Pentz, in the absence of any written authority therefor. This conclusion is determinative of the case and renders unnecessary a consideration of the other questions discussed in that opinion. For this reason we neither approve nor disapprove what is said in that opinion upon the other two points discussed therein.

Lennon, J., Shenk, J., and Waste, J., concurred.