Story Case

The Centralia and Southern Railroad Company desired to raise funds for new rolling stock, and proposed to do so by means of a bond issue, secured by a deed of trust, covering all their cars and equipment. The trust deed would be in substance a chattel mortgage, transferring all the cars, engines, etc., owned by the railroad or in the future acquired by it, to a Trust Company as trustee, to be held for the benefit of the owners of the bonds, either to reconvey it to the company if the bonds were paid at their maturity, or to take possession and sell it at any time that the interest on the bonds should not be paid promptly. The railroad company was authorized "to purchase, held, and sell such real and personal property as shall be necessary for the purpose above set forth." This purpose was stated to be the operation of the railroad. The charter or the incorporation statutes did not say that a corporation or a railroad corporation had power to issue bonds or give mortgages, nor did they say that it should not have that power.

Can the railroad company lawfully execute the trust deed, and will the bond holders be able to enforce it?

Ruling Court Case. Thompson Vs. Lambert, Volume 44 Iowa Reports, Page 239

Thompson was a member of the Scott County Agricultural Society. Against his objection, that society determined to raise money for improving the means of transportation to the fair grounds which it owned, and to make loans and advances to a street railway company which was building a line out to the grounds. It gave a mortgage to secure the money borrowed, and Thompson and another member brought this action to prevent a foreclosure of the mortgage, asking the Court to declare it void because the society had no power to give a mortgage.

The Court decided that the corporation had the power to give a mortgage and that it had been properly exercised in this case. It was not necessary to decide that the corporation could properly give aid to the street railway, because if it had power to borrow for any purpose, the lender could not be required to see what happened to the money nor to take the risk of its application after once received by the corporation officers. The sole issue here was whether the loan and mortgage were beyond the corporate powers. It was decided that they were not.

Mr. Chief Justice Seevers said, in the opinion of the Court: "The statute under which this Agricultural Society was incorporated gave the corporators the right to assume any and all powers necessary and proper to carry out the objects of the corporation. They, however, declared the object of the corporation to be only "the improvement of agriculture, horticulture, mechanic arts, rural and domestic economy." The power to borrow money and execute mortgages was neither assumed nor prohibited. In the absence of any such prohibitory provision, the power to execute mortgages as security for indebtedness created for the necessary and proper purposes of carrying out the objects of the corporation, impliedly exists. For the purpose of effecting the objects of the corporation its powers are as broad and comprehensive as those of an individual, unless the exercise of the asserted power is expressly prohibited."

Since the corporation had power to give mortgages, and this one had been given under the apparent authority of the corporation in the course of its business, there was no reason why it should not be enforced against the corporation. Therefore,, the plaintiffs had no right to have the foreclosure prohibited or the mortgages declared void.

Judgment was given for the defendants.

Ruling Law. Story Case Answer

It may fairly be presumed that the state would not charter a corporation for a certain purpose and then prevent it from fulfilling that purpose. Therefore, it is a well established rule, that a corporation is deemed to have all the powers, even though not expressly stipulated in the charter, which are reasonably necessary for it to have in order to carry out its main purpose. The rule is very similar to the doctrine of the powers of the Federal Government, which, like the corporation, has no powers except those conferred upon it. But any power that is essential, and even those not strictly essential but highly convenient and desirable, are by implication conferred when the power to do the main work of the corporation is conferred. Giving mortgages is not strictly a part of any business, but it is highly desirable to any enterprise which needs to raise money, and in general, any corporation has the power to mortgage its property.

A railroad can scarcely ever be conducted without depending on outside capital at times. New improvements are made only by borrowing money, and a large amount can be borrowed only in the customary way. The Centralia and Southern Railroad Company has the power to operate its road and also to conduct all necessary and proper business operations, such as borrowing money by the sale of bonds, secured by a chattel mortgage upon its rolling stock. The mortgage is valid, and the purchasers of the bonds will be able to enforce it.