5

noted above, while the contract itself will not be enforced because the corporation was incapable of making it, yet the one parting with an advantage or property will be permitted to recover in an action quasi ex-contractu the money paid or loaned or the value of the property delivered or services rendered under and pursuant to the contract. In a leading case in the Supreme Court of the United States, the court reiterated its uniform holding of the strict rule of ultra vires, and held that the contract between the two corporations, in order to bind either of them, must be within the corporate powers of both. That a contract beyond the powers conferred upon a corporation by the legislature is not voidable only, but wholly void. It cannot be ratified by either party. No performance on either side can give the unlawful contract any validity nor be the foundation of any right of action upon it. And, further, that neither the corporation nor the other parties to the contract can be estopped by assent to it or by acting upon it to show that it was prohibited. But the court, in the course of its decision, after reviewing many authorities, said:

"A contract ultra vires being unlawful and void, not because it is in itself immoral, but because the corporation by the law of its creation is incapable of making it, the courts, while refusing to maintain any action upon the unlawful contract have always striven to do justice between the parties so far as it could be done consistently with adherence to law by permitting property or money parted with on the faith of the unlawful contract, to be recovered back, or compensation to be made for it. In such case, however, the action is not maintained upon the unlawful contract, nor according to its terms; but on an implied contract of the defendant to return, or failing to do that, to make compensation for, property or money which it has no right to retain. To maintain such an action is not to affirm, but to disaffirm, the unlawful contract.”

And in an earlier case, Salt Lake v. Hollister (118 U. S. 256), the same court stated that

5 Central Transportation Company v. Pullman Palace Car Co., 139 U. S. 24.

"In cases of contracts upon which corporations could not be sued because they were ultra vires, the courts have gone a long way to enable parties who had parted with property or money on the faith of such contracts to obtain justice by the recovery of the property or the money specifically or as money had and received to the plaintiff's use."

Many cases will be found referred to in the Central Transportation Company case above cited and upholding the equitable doctrine there stated.

The State courts also generally hold that there exists an obligation, even where the corporation repudiates an ultra vires act, to restore what it has received under the contract, and the same is true of the other party to it. "However the contractual power of the corporation may be limited under its charter, there is no limitation of its power to make restitution to the other party whose money or property it has obtained through an unauthorized contract; nor, as a corporation, is it exempt from the common obligation to do justice which binds individuals, for this duty rests upon all persons alike, whether natural or artificial."'

If a corporation obtains money through an ultra vires act and uses this money to pay existing and valid indebtedness, the person from whom the money was obtained is deemed in equity to be subrogated to the rights of the creditors of the corporation whose claims were paid thereby.

Retention of Benefits; Estoppel. In holding that an ultra vires contract can be enforced, the courts following the liberal rule of ultra vires generally base their decision upon the fact that by reason of part performance one or the other of the parties has received and retains benefits under the contract, and that so long as the benefits are retained no claim can be made that one or both of the parties had no power to make the contract. Chief Justice Gilfillan, in a Minnesota case, said:

"There are few rules better settled or more strongly supported by authority with fewer exceptions in this country, • The Manchester, etc., R. R. Co. v. Concord R. Co., 66 New Hamp. 100.

corporate purposes. If negotiable paper is issued in excess of their authorized powers as between the original parties, it will be void when the transaction was affected by notice of its ultra vires character. An innocent purchaser for value is usually protected, however, as he has a right to presume that the paper was made or endorsed in the usual course of business and was binding upon the corporation. A different rule obtains, however, where an express statutory provision prohibits the issue of negotiable paper.

§ 80. Result of Ultra Vires Acts. Where a corporation does an ultra vires act or one in excess of and beyond its charter powers, it clearly has violated an express or implied prohibition of the State creating it and granting or withholding corporate powers and capacities. The State unquestionably has the right to maintain proceedings for the forfeiture of that charter and the dissolution of the corporation. This right belongs, however, to the State alone, as a corporation derives none of its powers from third parties, even those which may be involved in the ultra vires act. A forfeiture of the charter of the corporation deprives it of its legal existence. It is the equivalent of capital punishment in the case of a natural person. It is only in unusual cases and those where there has been a persistent and defiant violation of charter provisions that this extreme punishment is sought even by the State to be inflicted upon the offender. The rule was well stated in a case brought under the New York laws for a violation of statutes relative to the organization and conduct of trusts. The court here said:

"To justify forfeiture of corporate existence a State as prosecutor must show, on the part of the corporation accused, some sin against the law of its being which has produced or tends to produce injury to the public. A transgression must not be merely formal or incidental, but material and serious and such as to harm or menace the public welfare; for the State does not and should not concern itself with the quarrels of private litigants. It furnishes for them 8 People v. North River Sugar Refining Co., 121 N. Y. 582.

sufficient courts and remedies, but intervenes as a party only when some public interest requires its action."

And in a Minnesota case, the court said:

"Courts always proceed with great caution in declaring a forfeiture of franchises, and require the prosecutor seeking the forfeiture to bring the case clearly within the rules entitling him to exact so severe a penalty. Hence, if they engage in any business not authorized by the statute, it is ultra vires, or in excess of their powers, but not a usurpation of franchises not granted, nor necessarily a misuser of those granted. Acts in excess of power may undoubtedly be carried so far as to amount to a misuser of the franchise to be a corporation and a ground for its forfeiture. How far it must go to amount to this the courts have wisely never attempted to define, except in very general terms, preferring the safer course of adopting a gradual process of judicial inclusion and exclusion as the cases arise. But we think it may be safely stated as the general consensus of the authorities that, to constitute a misuser of the corporate franchise, such as to warrant its forfeiture, the ultra vires acts must be so substantial and continued as to amount to a clear violation of the condition upon which the franchise was granted, and so derange or destroy the business of the corporation that it no longer fulfills the end for which it was created. But, in case of excess of powers, it is only where some public mischief is done or threatened that the State, by the attorney-general, should interfere. If, as between the company and its stockholders, there is a wrongful application of the capital, or an illegal incurring of liabilities, it is for the stockholders to complain. If the company is entering into contracts ultra vires, to the prejudice of persons outside the corporation, such as creditors, it is for such persons to take steps to protect their interests. The mere fact that acts are ultra vires is not necessarily a ground for interference by the State, especially by quo warranto to forfeit the corporate franchises. It should also be borne in mind that acts ultra vires may justify interference on the part of the State by injunction to prohibit a continuance of the excess of powers which would not be sufficient ground for a forfeiture in proceedings in quo warranto."

State v. Minnesota Thresher Mfg. Co., 40 Minn. 213.