This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
A contract of suretyship in no way beneficial to the corporation is ultra vires.1 The courts are divided as to the power of a corporation to enter into contracts of guaranty as an incidental means of carrying on its business. It is often stated as an abstract proposition that a corporation may guarantee performance of the contracts of others whenever it is reasonably necessary or proper for carrying its own express powers into effect;2 but like other abstract rules this form of statement is of little practical value. Some authorities hold that a contract of suretyship is invalid where not expressly authorized, even if on an independent consideration3 or if very beneficial to the corporation. Thus it cannot guarantee performance of a contract for erecting a plant to get the sale of iron work for the plant to the contractor whose contract it guarantees;4 nor can it sign an appeal bond as surety in order to keep the defendant in business so that he can continue to buy beer of the corporation,5 or to obtain a preference in collecting claims by suit ;6 nor can a bank become surety on a replevin bond ;7 nor can a railway guarantee expenses of a festival to induce an increase in passenger traffic.8
10 Leonard, etc., Co. v. Bank, 86 Fed. 502; 30 C. C. A. 221.
11 Pratt v. Mfg. Co., 64 Fed. 589; Schufeldt v. Smith, 139 Mo. 367; 40 S. W. 887; Reed Bros. Co. v. Bank, 46 Neb. 168; 64 N. W. 701; Andres v. Morgan, 62 O. S. 236; 78 Am. St. Rep. 712; 56 N. E. 875. Apparently contra, Lamkin v. Mfg. Co., 72 Conn. 57; 44 L. R. A. 786; 43 Atl. 593, 1042, where it seems to be held that the corporation may assume the partnership debts, but is not otherwise liable.
12 Andres v. Morgan, 62 O. S. 236; 78 Am. St. Rep. 712; 56 N. E. 875.
13 Dominion, etc., Co. v. Publishing Co., 32 N. B. 692; Farmers' Bank v. Steamboat Co., 108 Ky. 447; 56 S. W. 719.
14 Jacobs, etc., Co. v. Banking, etc., Co., 97 Ga. 573; 25 S. E. 171; Monument National Bank v. Globe Works, 101 Mass. 57; 3 Am. Rep. 322; American, etc., Bank v. Gluck, 68 Minn. 129; 70 N. W. 1085; National Bank of Republic v. Young, 41 N. J. Eq. 531; 7 Atl. 488.
15 Wheeler v. Bank, 188 111. 34; 80 Am. St. Rep. 161; 58 N. E. 598; reversing, 85 111. App. 28.
1 Wheeler v. Bank, 188 111. 34; 80 Am. St. Rep. 161; 58 N. E. 598.
Other authorities uphold contracts of guaranty which are adapted to give collateral assistance to the chief business of the corporation. Thus it has been held that a corporation formed for the purpose of selling lumber may become surety on the bond of a contractor in order to secure the sale of lumber to him.9 A railroad, to obtain consent for its right of way, may
2 Zabriskie v. R. R. Co., 23 How. (U. S.) 381; Marbury v. Land Co., 62 Fed. 335; 10 C. C. A. 393; Tod v. Land Co., 57 Fed. 47; Mercantile Trust Co. v. Kiser, 91 Ga. 636; 18 S. E. 358; Ellerman v. Chicago, etc., Co., 49 N. J. Eq. 217; 23 Atl. 287; Holmes v. Willard, 125 N. Y. 75; 11 L. R. A. 170; 25 N. E. 1083.
3 Great Northwest, etc., Ry. v. Charlebois (1899), App. Cas. 114; Ward v. Joslin, 105 Fed. 224; 44 C. C. A. 456; Rogers v. Belting Co., 184 111. 574; 56 N. E. 1017; reversing, Jewell Belting Co. v. Rogers, 84 111. App. 249.
4 Humboldt, etc.. Co. v. Milling Co., 62 Fed. 356; 10 C. C. A. 415.
5 Best Brewing Co. v. Klassen, 185 111. 37; 76 Am. St. Rep. 26; 50 L. R. A. 765; 57 N. E. 20.
6 Kelly, etc., v. Varnish Co., 90 111. App. 287.
7 Sturdevant Bros. v. Bank, -Neb. - ; 95 N. W. 819; affirming on rehearing, 62 Neb. 472; 87 N. W. 156. (It not appearing that such course of action was necessary to protect the bank's interests.)
8 Davis v. R. R. Co., 131 Mass. 258; 41 Am. Rep. 221.
9 Central Lumber Co. v. Kelter, 201 111. 503; 66 N. E. 543; affirming. 102 111. App. 333; F. Witt-mer, etc., Co. v. Rice, 23 Ind. App. 586; 55 N. E. 868; Wheeler, etc., guarantee the value of lots or agree to pay the difference between a fixed price and what the lots will bring at auction.10 A corporation formed to sell land may agree to join with another person in repurchasing land sold and to divide the profit and loss with such co-purchaser in order to diminish its own losses;11 a guaranty by a brewing company of the rent of a hotel in which its beer is sold has been upheld ;12 a hotel may subscribe toward the expenses of a military encampment to draw trade;13 a corporation formed to manufacture and deal in merchandise may make a subscription to secure the location of a post-office in an adjoining building in order to increase its trade;14 and a lumber company may guarantee bonds of a railroad to carry its lumber to market.15 A corporation formed to lay out and sell lots and promote a town may guarantee the location and operation of a railway in order to induce a store to move to the town,16 and a street railway company may subscribe to induce a baseball company to locate its grounds on said car line.17 So where a debtor corporation had given a creditor corporation an order for the proceeds of the sale of certain articles in process of manufacture, it was held that the creditor corporation might guarantee payment for finishing such articles.18 A corporation cannot guarantee the bonds of another corporation19
Co. v. Land Co., 14 Wash. 630; 45 Pac. 316; Interior Woodwork Co. v. Prasser, 108 Wis. 557; 84 N. W. 833.
10 Vanderveer v. Ry. Co., 82 Fed. 355.
11 Bates v. Beach Co., 109 Cal. 160; 41 Pac. 855; same case, Bates v. Babcock, 95 Cal. 479; 30 Pac. 605.
12 Winterfield v. Brewing Co., 96 Wis. 239; 71 N. W. 101.
13 Richelieu Hotel Co. v. Encampment Co., 140 111. 248: 33 Am. St. Rep. 234; 29 N. E. 1044.
14 B. S. Green Co. v. Blodgett. 159 111. 169; 50 Am. St. Rep. 146; 42 N. E. 176.
15 Mercantile Trust Co. v. Kiser, 91 Ga. 636; 18 S. E. 358.
16 Arkansas, etc., Co. v. Lincoln, 56 Kan. 145; 42 Pac. 706.
17 Temple, etc., Ry. Co. v. Hell-man, 103 Cal. 634; 37 Pac. 530.
18 Flint, etc., Co. v. Mfg. Co. (Ind.), 56 N. E. 858.
19 Louisville, etc., Co. v. Ohio, etc., Co., 69 Fed. 431; Northside Ry. Co. v. Worthington, 88 Tex. 562; 53 Am. St. Rep. 778; 30 S. W. 1055. (A land company was not allowed to guarantee bonds of a street railway company to secure passenger service to the addition laid out by the land company.) nor dividends on stock,20 though it may guarantee bonds of another company which it has taken for a debt, in order to effect a sale.21 A corporation which may lease another road may guarantee the bonds of such other road as a consideration for the lease.22 A corporation cannot assume individual debts of a stockholder,23 or give a mortgage,24 or issue corporate securities,25 or stock therefor,26 though where a corporation receives its assets in fraud of the creditors of the chief stockholders and issues stock for such assets it may buy the judgments and secure release of the assets from attachment ;27 and it cannot assume the debts of another corporation except to the extent of the assets which it receives.28 While the conflict in some of the cases cited is hopeless, many of them may be reconciled by this statement of the rule. Where the contract of guaranty is the consideration of a valid contract of sale, to or by the corporation, it is valid. The corporation may agree to pay for the goods, as well as it may pay cash for them, and it makes no difference to whom the money is to be paid. But where the contract of guaranty is merely collateral to the authorized contract of sale, and forms an inducement therefor, the conflict is hopeless. Where power is given to one corporation to aid another, it may do so by guaranteeing its bonds.29