Story Case

Harry Moore was president of the "Western Realty Corporation; Simon Crackel, the treasurer. Moore was in need of money and persuaded Crackel to make him a personal loan with the added security of the corporation. Crackel issued a promissory note to the company as follows:

"January 4, 1914. I promise to pay to the Western Realty Corporation, or order, ($1,000) One Thousand Dollars, in one year from date, with (6) six per cent interest.

(Signed)

Simon Crackel."

On the back of the note he indorsed as follows: "Pay to Harry Moore, or order.

(Signed)

Western Realty Corporation, By Simon Crackel,Treas."

Moore indorsed the note to Edward Hack, who paid him $950 for the instrument. At the end of the year, as neither Moore nor Crackel were able to pay, Hack started suit against the corporation, as an indorser.

In the meantime, Moore and Crackel had resigned from the corporation. The organization maintained in defense, that it had not received any value for the indorsement, that it was executed without any charter right, and that, therefore, it was not liable. Is this a good defense?

Ruling Court Case. Monument National Bank Vs. Globe Works, Volume 101 Massachusetts Reports, Page 57, And Volume 3 American Reports, Page 322

The Globe Works, a manufacturing corporation, gave its promissory note to an associate, for him to borrow money upon it or discount it to improve his credit. The Globe Works received no consideration for the note whatever, but it was agreed between the parties that the recipient should pay the note at its maturity, so that the Globe Works would not be required to satisfy it. This arrangement was not carried out, and the holder of the note, the Monument National Bank, sued the Globe Works. The argument for the defendants consisted in the fact that the corporation had no power to give a negotiable note, but the plaintiff maintained that the issue of negotiable paper was a necessary and incidental part of any business dealings, and that since the corporation might have lawfully issued the note for a business debt, purchasers of the note do not take the risk of its having been issued for a purpose outside the business of the corporation.

The Court held that the lack of consideration for the note was no defense to the holder of it if he did not know of it. If the corporation had power to issue notes, and did issue one which was regular in form and appearance, those dealing with it have a right to rely on the validity of the act, and need not always investigate to learn if the money was properly applied. It is not like a power which the corporation does not have or which is forbidden to it, but it is a case where the power is exceeded in a particular case. Where the facts, which make it improper, are known to the corporation, and unknown and difficult to discover for other persons, it is the corporation which must take the risk, and be liable for the acts of its officials, even if improper.

The Court also held that the corporation had the general power to issue notes, although its charter did not contain an express grant, to that effect. Mr. Justice Hoar, in the opinion of the Court, pointed out that in England the rule was contrary. There, it is considered that the issue of negotiable paper is so important and dangerous a power that only express words can confer it. But in this country, the law reflects the general custom of business, which is that any credits or indebtednesses are ordinarily evidenced by negotiable instruments. Therefore, in this country, corporations, like partnerships, are presumed to have the power to issue negotiable notes whenever they are engaged in a commercial business. Not only trading or banking companies, but also manufacturing and transportation corporations, have as an incident to their main purpose, the power to issue negotiable notes.

It was therefore held (1) that the Globe Works had power to issue negotiable promissory notes as a corporation, and (2) that the absence of consideration in this case and the issue for a purpose which was not part of the corporation business but an act of accommodation only, was not a defense against a person who did not know the facts.

Judgment was given for the plaintiff. .

Ruling Law. Story Case Answer

The Courts hold that, since a corporation may borrow money and thereby contract debts, it may make provisions for their payment by drawing, indorsing, or accepting notes or bills of exchange - But at common law, a corporation has no implied power to execute or indorse commercial paper for accommodation, because this is manifestly neither necessary nor incidental to conducting its general business. If, however, the corporate power to issue commercial paper has not been restricted by the statute or charter, and the corporation has authority to issue and indorse notes and bills, a bona fide purchaser, without knowledge that the instrument was given by way of accommodation, will be protected. If, therefore, in the Story Case, Hack purchased the note, not knowing of the circumstances under which it was executed, he may recover against the corporation.