In 1893 the Terminal Company also mortgaged, in favor of the Union Loan & Trust Company, an Iowa corporation, the property previously mortgaged, as above stated; this second mortgage being to secure 190 promissory issory notes, 50 whereof were for $1,000 each, and 140 whereof were for $5,000 each, the total aggregating $750,000. All the notes referred to in this mortgage bore the date of the deed, which contained [173 U.S. 99, 101] the following covenant: 'The said party of the first part [that is, the mortgagor] hereby covenants that the said premises are free from all incumbrances, excepting a deed of trust made on the 1st day of January, A. D. 1890, by said party of the first part to the Trust Company of North America of Philadelphia, to secure the sum of one million two hundred and fifty thousand ($1,250,000) dollars of bonds; and the said party of the first part will warrant and defend the title unto the said party of the second part, its successors and assignees, against all persons whomsoever claiming the same, subject to the lien of the said prior deed of trust.'
On the 10th day of October, 1893, in the United States circuit court for the Northern district of Iowa, a bill was filed by certain national banks, citizens of other states than the state of Iowa, against the Terminal Company, E. H. Hubbard, as assignee of the Union Loan & Trust Company, and others, having for its object the foreclosure of the second mortgage above referred to. Without fully recapitulating the averments of the bill, it suffices to say that it alleged that the notes which were secured by the second mortgage had been placed in the hands of the Union Loan & Trust Company in part for the benefit of certain claims against the Terminal Company held by the complainants; that the Union Loan & Trust Company had, in April, 1893, made an assignment to E. H. Hubbard for the benefit of all its creditors; and that Hubbard had succeeded to the rights nd obligations of the company of which he was assignee, and in which capacity he held the notes secured by the second mortgage, and the benefit of which the complainants were entitled to invoke for the purpose of procuring the payment of their claims. A receiver was prayed for and was appointed.
On the 23d of December, 1893, the Terminal Company, reciting the fact that the notes which were secured by the second mortgage for $750,000 had been drawn, and the mortgage given for the benefit of certain outstanding creditors whose claims amounted to $728,000, and that the notes covered by the second mortgage had been placed in the hands of the Union Loan & Trust Company for the benefit of such [173 U.S. 99, 102] creditors; that the company had made an assignment to Hubbard, assignee, and in that capacity he had received the notes in question; that in a suit pending in the Northern district of Iowa, to foreclose said second mortgage, a question had arisen whether such creditors were entitled to avail themselves of the benefit of the second mortgage: Therefore, in order to allay any such question, and to give the creditors intended to be covered by the second mortgage an undoubted right to claim under it, the deed conveyed absolutely to Hubbard, trustee, the property covered by the mortgage, giving to the trustee full power to realize and apply the property and rights to the discharge of the debts secured, or intended to be secured, as above stated. It suffices, for the purpose of this case, to give this outline of the deed in question, without stating all the various clauses found in it intended to accomplish the purpose which it had in view. The deed, however, contained this declaration: 'This conveyance is made, however, with full notice of the assertion of the following claims against the said property, to wit: A certain mortgage or trust deed to the Trust Company of North America, of Philadelphia, Pennsylvania, as trustee, to secure certain bonds for the sum of one million two hundred and fifty thousand ($1,250,000) dollars, and also certain mechanics' liens to the amount of about $55,000, and also certain judgments to the amount of about $ 20,000. Nor shall said first party (that is, the transferror) be understood to covenant that there are not other claims than those hereinbefore expressly mentioned, none of which, however, are to be considered and assumed by said second party (Hubbard, trustee); nor by the acceptance of this deed is he in anywise held to admit the validity of said trust deed liens, judgments, or of any claims made or that may arise thereunder; nor shall this deed be held in any manner to operate as the merger of said mortgage to said Union Loan & Trust Company, but said mortgage shall at all times be kept in full force, until all persons and corporations entitled and claiming benefits thereunder shall consent to its discharge, or so long as it may be necessary to keep said mortgage in force for the protection [173 U.S. 99, 103] of the title herein conveyed, or any interest claimed by virtue hereof.'
Default having taken place in the payment of the interest on the bonds secured by the first mortgage, the Trust Company of North America, as the trustee, filed its bill in the circuit court of the United States for the Northern district of Iowa for foreclosure. On the 20th of June, 1894, the court ordered the two foreclosure suits-that is, the one previously brought by certain national banks in October, 1893, and the one brought by the Trust Company of North America-to be consolidated, and appointed the same person who had been made receiver under the first bill also the receiver under the second. On July 23, 1895, the Credits Commutation Company, a corporation organized under the laws of the state of Iowa, filed its suit against the Terminal Company in the state court of Iowa in and for Woodbury county. It was alleged that the Credits Commutation Company had become the holder and owner of a large number of the claims against the Terminal Company, which were intended to be secured by the second mortgage, and for whose benefit the deed to H bbard, trustee, had been made. The relief sought was a judgment against the Terminal Company, 'without prejudice to any rights or interests which the plaintiff ( the Credits Commutation Company) may have as a holder of said notes in the said trust deed'; that is, the deed of trust to Hubbard, trustee for the benefit of the note holders, as already mentioned. On the day the suit was filed the Terminal Company answered, admitting the correctness of the claim, and judgment was then entered for $692,096.95, with interest, the whole without prejudice to the rights of the parties under the deed of trust, as prayed for.
The Terminal Company, in its answer to the suit for foreclosure brought by the Trust Company of North America, relied upon many defenses, only one of which need be referred to; that is, that the bonds and the mortgage in favor of the said Trust Company of North America were ultra vires. However, it may be observed that the Terminal Company by its answer asserted that the rights of those entitled to claim [173 U.S. 99, 104] under the second mortgage or the conveyance, made for their benefit to Hubbard, trustee, were paramount to the claims of the Trust Company of North America, or the bondholders under the first mortgage in favor of that company. The Credits Commutation Company intervened in the foreclosure proceedings, averring that the bonds secured by the deed in favor of the Trust Company of North America were void, because the Terminal Company at the time the bonds were executed was without lawful power to issue them or to secure them by mortgage. It was also claimed that, in virtue of the judgment rendered in the state court, the Credits Commutation Company was a creditor of the Terminal Company to the amount of the judgment, and was entitled to avail itself of the rights accruing to it from the deed of conveyance made by the Terminal Company to Hubbard, trustee, and therefore that the Credits Commutation Company was entitled to be paid from the proceeds of the property sought to be foreclosed before the holders of the bonds secured by the deed which had been made in favor of the Trust Company of North America.
The trial court decided in favor of the validity of the bonds issued to the Trust Company of North America and of the mortgage securing the same. 69 Fed. 441. On appeal to the circuit court of appeals for the Eighth circuit, the judgment of the trial court was affirmed. 46 U. S. App. 523, 27 C. C. A. 73, and 82 Fed. 124. The case then, by the allowance of a writ of certiorari, was brought to this court.
J. C. Coombs and H. J. Taylor, for petitioners.
Asa F. Call and J. H. Call, for respondent.
Mr. Justice WHITE, after making the foregoing statement, delivered the opinion of the court.
The errors assigned and the discussion at the bar confine [173 U.S. 99, 105] the question to be decided solely to the validity of the negotiable bonds of the Terminal Company, which were issued to the Trust Company of North America, and which were sold in open market to innocent purchasers for value, and the proceeds of which inured to the benefit of the Terminal Company. The issue for decision is restricted to this question, since all the errors assigned, and the contentions based upon them, depend on the assertion that the bonds issued to the Trust Company of North America, and the mortgage by which their payment was secured, were wholly void. This complete want of power in the Terminal Company is predicated upon certain requirements of the law of the state of Iowa existing at the time of the incorporation of the Terminal Company, and of a provision in the charter of that company inserted therein in compliance with the Iowa statute. The law of Iowa relied on is section 1611 of the Iowa Code of 1897, contained in the portion thereof relating to the organization of corporations, and is as follows:
The part of the foregoing section commanding the insertion in the charter of incorporated companies of the amount of liability for which the corporation could at one time be subject, and limiting such amount to two- thirds of the capital stock, originated in the state of Iowa in the year 1851, and was continuously in force from the time of its adoption, in the year in question, up to the period when it was embodied in the Code of 1897. Iowa Code 1851, 676; Code 1873, 1061. The subsequent portions of the section creating exceptions as to certain classes of railway bonds, and as to bonds secured by an actual transfer of real-estate securities, originated, the one in 1884 and the other in the year 1886, and continued in force until they were also incorporated in the Iowa Code of 1897. 20 Iowa Laws, c. 22; 21 Iowa Laws, c. 57. And section 1622 of the Iowa Code also contains the following cognate provision: '... If the indebtedness of any corporation shall exceed the amount of indebtedness permitted by law, the directors and officers of such corporation knowingly consenting thereto shall be personally and individually liable to the creditors of such corporation for such excess.'
The portion of the charter of the Terminal Company fixing, in obedience to the statutory requirement, the amount of the debt which could at any one time exist, was as follows:
As the sum of the bonds which were issued and secured by the mortgage in favor of the Trust Company of North America exceeded the statutory limit and the amount stated in the charter, the question which arises first for consideration is this: Did this fact render them void? and, secondarily, was the issue of bonds taken from our the operation of the general rule laid down in the statute by the exceptions mentioned in the [173 U.S. 99, 107] latter portions thereof? As the claim that the bonds were void is based on the statutory provisions above referred to, it follows that we are compelled to primarily ascertain the meaning and operation of the state law. In making this inquiry, we are constrained, in the first place, to inquire what construction has been placed upon the Iowa statute by the supreme court of that state; for it is an elementary principle that this court, in interpreting a state statute, will construe and apply it as settled by the court of last resort of the state, and will hence only form an independent judgment, as to the meaning of the state law, when there was no binding construction of such state statute by the court of last resort of the state. Nobles v. Georgia, 168 U.S. 398 , 18 Sup. Ct. 87; First Nat. Bank v. C ehalis Co., 166 U.S. 440 , 17 Sup. Ct. 629; Morley v. Railway Co., 146 U.S. 166 , 13 Sup. Ct. 54, and authorities there cited.
The subject-matter of the creation by an Iowa corporation of a debt in excess of the maximum amount fixed in its charter in accordance with the requirement of the statute, and also in excess of the sum limited by the state law, was considered by the supreme court of the state of Iowa in Garrett v. Plow Co. (1886) 70 Iowa, 697, 29 N. W. 395. The case was this: An action was brought in chancery to foreclose a mortgage executed by the Burlington Plow Company, an Iowa corporation, to the plaintiff, as a trustee for certain of its creditors, upon real estate and personal property. The authorized capital stock of the corporation was $50,000. The maximum limit imposed by the articles of incorporation was the maximum imposed by the statute; that is, two-thirds of the amount of the capital stock. The corporation had contracted an indebtedness in excess of the limitation fixed by the statute and fixed by the charter; that is, with an authorized capital stock of $50,000, it had contracted an indebtedness exceeding $50,000, of which total indebtedness the sums pressed in the foreclosure suit were a part. The defense to the suit was twofold: First, that the total debt of the corporation, including that sued on, was in excess of the two-thirds limitation; and, second, that the mortgage was void because it had been granted to protect certain directors [173 U.S. 99, 108] of the corporation to the prejudice of its general creditors. The fact that the debt exceeded the two-thirds allowed by the charter and the statute was admitted on the face of the record and stated by the court in its opinion to be unquestioned. The court said (page 701, 70 Iowa, and page 397, 29 N. W.):
Again referring to the same subject, the court said (page 702, 70 Iowa, and page 398, 29 N. W.):
In Warfield v. Canning Co. (1887) 72 Iowa, 666, 34 N. W. 467, where a debt had been confessedly contracted by a corporation in excess of its charter limitation, confining the power of the corporation to create a debt to a sum not exceeding one-half of the capital stock actually paid in, the court, in considering the legal consequences of such excessive debt, said (page 672, 72 Iowa, and page 469, 34 N. W.):
It follows, then, that at the time of the issue of the bonds in favor of the Trust Company of North America, and of the execution of the deed of mortgage by which such bonds were secured, the supreme court of the state of Iowa had, in two cases, declared the law of that state to be that a debt contracted in excess of the maximum limitation stated in the charter, in virtue of the provisions of the statute requiring that such maximum limit should be fixed, was not void, although the consequence of contracting a debt beyond the limitation might be to entail upon the officers of the corporation a personal liability for the amount thereof.
Light is thrown upon the condition of the law of the state of Iowa, on the question now before us, by a decision of the supreme court of that state, wherein it was called upon to consider issues arising from the identical contracts which are involved in this case. The cause was adjudged in the supreme court of Iowa after the decision of the trial court in this cause, and after that of the circuit court of appeals. Without deciding that the construction given the statute by the supreme court of the state of Iowa at the time and under the circumstances stated is necessarily controlling on this court, such interpretation, conceding that it is not controlling, is manifestly relevant for the purpose of elucidating the previous decisions of the supreme court of Iowa, and as indicating what was the settled law of that state at the time the contract in question was entered into, and prior to the time when the controversy which this case presents originated in the courts of the United States. The decision in question is Beach v. Wakefield (1898) 76 N. W. 688 (not yet reported in the official reports of the state of Iowa). The case, as stated in the report thereof, was this: Beach, a subcontractor, commenced proceedings to establish and foreclose a mechanic's [173 U.S. 99, 110] lien on a depot built by the Terminal Company. Wakefield was the principal contractor for building the depot. He denied in part the claim of Beach, and sought also, on his own behalf, to be recognized as having a mechanic's lien upon the depot. The Terminal Company, the Trust Company of North America, and the Credits Commutation Company were parties to the cause. The decree of the supreme court of Iowa recognized in part a mechanic's lien on the depot building paramount to the mortgage in favor of the Trust Company of North America, but adjudged that the bonds issued to the Trust Company of North America and the mortgage by which they were secured were paramount to the claim of the Credits Commutation Company and others holding junior mortgage rights. In considering the legal result of the creation of a debt in excess of the statutory limitation, the court said (page 694):
Again, in commenting on the same subject the court said (page 695):
Recurring to the legal consequence, under the Iowa statute, of contracting a debt in excess of the statutory limit, the court said (page 695):
The argument, then, reduces itself to this: Although it was conclusively settled by the decisions of the state of Iowa, at the time the contract in question was entered into, that a debt contracted by a corporation in excess of the statutory limitation was in no sense of the word void, but, on the contrary, was merely voidable, that we nevertheless should, in enforcing the state statute, disregard the construction affixed to it by the supreme court of the state of Iowa, and hold that the act of the corporation, in exceeding the limit of debt imposed by the statute or fixed in the charter in compliance with the statute, was absolutely void. But to so decide would violate the elementary rule previously referred to, under which this court adopts and applies the meaning of a state statute as settled by the court of last resort of the state. As, then, under the Iowa law, the fact that the corporation contracted a debt in excess of the charter or statutory limitation did not render the debt void, but, on the contrary, such debt, by the settled rule in Iowa, was merely voidable, and was enforceable against the corporation and those holding under it, and gave rise only to a right of action on the part of the state because of the violation of the statute, or entailed, it would seem, a liability on the officers of the corporation for the excessive debt so contracted, it follows that the whole foundation upon which the errors assigned in this court must rest is without support in [173 U.S. 99, 112] respect of federal law, and therefore the decrees below were correctly rendered.
It is claimed, however, that this court is not obliged to follow the Iowa decisions interpreting the statute of that state, because it is assumed that those decisions proceed alone upon the principle of estoppel. Estoppel, it is argued, is a matter of general, and not of local, law, upon which this court must form an independent conclusion, even although in doing so it may disregard the rule established in the state of Iowa by the supreme court of that state. Whatever, it is argued, may be the rule in state courts, in this court it is settled that a corporation cannot be estopped from asserting that it is not bound by a corporate act which is absolutely void; citing, among other cases, Pullman's Palace-Car Co. v. Central Transp. Co., 171, U. S. 138, 18 Sup. Ct. 808; Bank v. Kennedy, 167 U.S. 362 , 17 Sup. Ct. 831; McCormick v. Bank, 165 U.S. 538 , 17 Sup. Ct. 433; Central Transp. Co. v. Pullman's Pallace-Car Co., 139 U.S. 24 , 11 Sup. Ct. 478.
But we are not called upon, in the case before us, to decide the question thus raised, since it rests upon an assumption that the court of Iowa has decided that the corporation was by estoppel prevented from complaining of a void act. But the supreme court of Iowa has not so decided. On the contrary, while in the course of its opinions it has referred to the doctrine of estoppel, it expressly, in the cases cited, made the application of the doctrine depend upon the legal conclusion found by it, that the act of a corporation in contracting a debt in excess of the statutory limit was not void, but merely voidable, and for this reason the corporation, or those holding under it, could not be heard to assail the act in question. The decisions of this court which are relied upon considered the application of the doctrine of estoppel to corporate acts absolutely void, and not its relation to contracts which were merely voidable. Whether, as an independent question, if we were enforcing the Iowa statute, we would decide that the issue of bonds by a corporation in excess of a statutory inhibition was not void, but merely voidable, need not be considered, since, as we have said, in applying an Iowa law, we follow [173 U.S. 99, 113] the settled construction given to it by the supreme court of that state.
It necessarily follows that the decrees of the circuit court and of the circuit court of appeals were correct, and both are therefore affirmed.