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.
To have the question of the validity of ultra vires contracts raised at all, there must be some one in a position to raise such question. The first point in any proceeding to determine the validity of an ultra vires transaction is to determine whether the party attacking the contract can be allowed to raise the question.1 While this principle does not, any more than any other that has been suggested, solve all difficulties or reconcile all cases, it is a very material help in determining the validity of any given contract. First, the state can attack the validity of any ultra vires transaction by a direct proceeding in quo warranto,2 although it may decline through its courts to revoke a charter because of isolated ultra vires acts, since the essential purpose and object of such a suit is the determination of a private right.3 Second, persons not parties to the contract cannot attack it, where not directly prejudiced thereby.4 Thus, where a corporation laid oil pipes in a street, claiming under a transfer of property rights,5 or had obtained leave of the city to cross the streets,6 third persons cannot question its power to do so. Where a bank bought notes,7 or a judgment and a certificate of sale,8 or land,9 as where a foreign corporation acquired land and then conveyed it without complying with the local statutes,10 persons not parties to. the transfer cannot resist the enforcement of rights thus acquired. Thus even if a corporation bought property in an ultra vires transaction, a lessee from such corporation cannot attack the validity of such conveyance; nor can a guarantor of such rent.11 So the right of a corporation to acquire realty cannot be inquired into in an action brought by it to enforce payment of a debt.12 A creditor of a corporation cannot attack a transaction as ultra vires unless the effect of such transaction is to divert corporate assets from the payment of his debt.13 The judgment creditor of the president of a corporation cannot attack the title of such corporation to property bought by it on an execution sale of such president's property.14 So a third person,15 such as a subsequent judgment creditor,16 cannot attack a mortgage given by a corporation as ultra vires. One liable on a claim for damages cannot attack the purchase of such claim by a corporation if it is assignable,17 and one liable to a lessee of a railroad cannot attack the validity of the lease in a suit by lessee.18 So one liable on a note cannot attack the transfer of it by the payee corporation incident to a genuine sale of its business, as ultra vires.19 One who with full knowledge of the material facts has accepted an assignment of a chattel mortgage given by a corporation cannot subsequently avoid the assignment on the ground that the mortgage was ultra vires.20 So if a stockyards corporation has erected a railroad and used it for an ultra vires purpose, it can resist its unauthorized removal by a city.21 A trustee created in a trust deed given by a corporation cannot attack a conveyance to the corporation as ultra vires.22 Up to this point the courts are practically unanimous in their decisions as to who can plead ultra vires. These holdings show absolutely that an ultra vires contract is not, properly speaking, void; since a void contract or transaction may be attacked by any one whose interests are adverse to the validity of the transaction. In all these cases, it will be noticed that the person who seeks to invoke the doctrine of ultra vires is not in any way prejudiced by the ultra vires transactions, as it makes no difference to him whether the corporation or the other party to the transaction asserts the rights in question. This rule, therefore, extends no farther than its reason. A third person who is prejudiced by an ultra vires contract may attack it, as creditors when their rights are endangered by the ultra vires contract.23 Thus where a corporation has borrowed money in excess of its limit of borrowing, a subsequent creditor who did not know of such excessive debt, may attack the transaction as far as his claim is thereby diminished.24 Thus a policy holder in a corporation may raise the question of ultra vires, where such corporation has acquired his notes to use them as a set-off.25 Stockholders who act promptly may restrain the officers of the company from entering into ultra vires contracts,26 though they cannot compel the directors to avoid the contract while retaining the benefits,27 and they must act promptly.28 This leaves the question of the validity of the contract as far as the corporation itself is concerned, as the only remaining question to consider under ultra vires. In discussing the right of a corporation to avoid an ultra vires contract in order to protect non-assenting stockholders, it must first be determined whether the contract is purely ultra vires, or whether it is also subject to attack because beyond the power of the agents who made it on behalf of the corporation. In so far. as it is free from questions of agency and illegality, the legal effect of the contract depends upon how far it has been performed; whether it is wholly executory, wholly executed, or partly executed.
Lucas v. Transfer Co., 70 Ia. 541; 59 Am. Rep. 449; 30 X. W. 771.
2 See Sec. 893.
3 See Sec. 1086, et seq. Sec. 1097.
1 Benton v. Elizabeth, 61 N. J. L. 693; 40 Atl. 1132; affirming, 61 N. J. L. 411; 39 Atl. 683, 906.
2 See Sec. 1093, 1097. State v. Oil Co., 153 Ind. 483; 74 Am. St. Rep. 314; 53 L. R. A. 413; 53 N. E. 1089;
State v. Standard Oil Co., 49 O. S. 137; 34 Am. St. Rep. 541; 15 L. R. A. 145: 30 X. E. 279; State v. Dairy Co., 62 O. S. 350; 57 L. R. A. 181; 57 N. E. 62; State v. Water Co., 107 Wis. 441; 83 N. W. 697.
3 People v. Cooper, 139 111. 461; 29 N. E. 872; Cupit v. Bank, 20 Utah 292; 58 Pac. 839.
4 "None but a person directly interested in the corporation, or the state, can question such authority." John V. Farwell Co. v. Wolf, 96 Wis. 10, 14; 65 Am. St. Rep. 22; 37 L. R. A. 138; 70 N. W. 289; 71 N. W. 109 (citing Fritts v. Palmer, 132 U. S. 282; National Bank v. Whitney, 103 U. S. 99; National Bank v. Matthews, 98 U. S. 621; Natoma, etc., Co. v. Clarkin, 14 Cal. 544; Alexander v. Tolleston Club, 110 111. 65; Shewalter v. Pir-ner, 55 Mo. 218; Ragan v. McElroy, 98 Mo. 349; 11 S. W. 735). To the same effect see Springer v. Trust Co., 202 111. 17; 66 N. E. 850; affirming, 102 111. App. 294; Beach v. Wakefield, 107 Ia. 567, 591; 76 N. W. 688; 78 N. W. 197; Leazure v. Hillegas, 7 Serg. & R. (Pa.) 313; Read v. Ry., 110 Tenn. 316; 75 S. W. 1056.
5 Benton v. Elizabeth, 61 N. J. L. 693; 40 Atl. 1132; affirming, 61 N. J. L. 411; 39 Atl. 683, 906.
6 Pennsylvania, etc., R. R. Co. v. R. R. Co., 160 Pa. St. 277; 28 Atl. 784.
7 Prescott National Bank v. Butler, 157 Mass. 548; 32 N. E. 909.
8 Hennessy v. St. Paul, 54 Minn. 219; 55 N. W. 1123 (citing National Bank v. Matthews, 98 U. S. 621; National Bank v. Whitney, 103 U. S. 99; Fortier v. Bank, 112 U. S. 439; Merchants' National Bank v. Hanson, 33 Minn. 40; 53 Am. Rep. 5; 21 N. W. 849).
9 Bank v. Matthews, 98 U. S. 621.
10 Fritts v. Palmer, 132 U. S. 282.
11 Nantasket Beach Steamboat Co. v. Shea, 182 Mass. 147; 65 X. E. 57.
12 Advance Thresher Co. v. Rock-afellow, - S. D. -; 93 N. W. 652.
13 Force v. Age-Herald Co., 136 Ala. 271; 33 So. 866.
14 Scott v. Bank, - Tex. - ; 75 S. W. 7; reversing (Tex. Civ. App.), 67 S. W. 343, which denied rehearing of 66 S. W. 485.
15 Collins v. Rea, 127 Mich. 273; 86 N. W. 811; Smith v. Bank, 45 Neb. 444; 63 N. W. 796.
16 Beels v. Park Association, 54 Neb. 226; 74 N. W. 581.
17 Central Ohio, etc., Co. v. Dairy-Co., 60 O. S. 96; 53 N. E. 711; John V. Farwell Co. v. Wolf, 96 Wis. 10; 65 Am. St. Rep. 22; 37 L. R. A. 138; 70 N. W. 289; rehearing denied, 37 L. R. A. 142; 71 N. W. 109 (this claim was held not assignable). Contra, where a corporation bought certain lots and thereafter the grantor assigned to the corporation his claim against the city for damages to such lots due to the construction of a viaduct and these facts appeared on the petition, it was held that demurrer would lie. Pueblo v. Investment Co., 28 Colo. 524; 89 Am. St. Rep. 221; 67 Pac. 162.
18 Southern Pacific Co. v. United States, 28 Ct. CI. 77.
19 Ehrman v. Ins. Co., 35 O. S. 324.
20 Woodcock v. Bank, 113 Mich. 236; 71 N. W. 477.
21 Chicago v. Transit Co., 164 111. 224; 35 L. R. A. 281; 45 N. E. 430.
22 Hagerstown, etc., Co. v. Keedy, 91 Md. 430; 46 Atl. 965.
23 Washington Mill Co. v. Lumber Co., 19 Wash. 165; 52 Pac. 1067.
24 See Sec. 1070.
25 Hart v. Insurance Co., 21 Mo. 01; Straus v. Insurance Co., 5 O. S. 59; though it will not be presumed that the notes were so acquired, Hart v. Insurance Co., 21 Mo. 91.
26 Pratt v. Pratt, etc., 33 Conn. 446; Harding v. Glucose Co., 182 111. 551; 74 Am. St. Rep. 189; 55 N. E. 577; Teachout v. Ry., 75 Ia. 722; 38 N. W. 145. Thus where the contract is ultra vires and also illegal, as creating a monopoly, a stockholder may enjoin execution and performance. Harding v. Glucose Co., 182 111. 551; 74 Am. St-Rep. 189; 55 N. E. 577.
27 Alexander v. Searcy, 81 Ga., 536; 12 Am. St. Rep. 337; 8 S. E. 630; Wright v. Hughes, 119 Ind. 324; 12 Am. St. Rep. 412; 21 N. E. 907.
28 Boyce v. Coal Co., 37 W. Va. 73; 16 S. E. 501.