The Federal courts of the United States have not been as consistent as the English courts in their attitude toward ultra vires contracts.3 The Supreme Court, however, has steadfastly professed adherence to the doctrine of special capacity, and in the face of a swelling current of adverse authority has insisted that contracts ultra vires are absolutely void, and therefore that even though performed on one side they are unenforceable. In the leading case of Central Transp. Co. v Pullman's, etc., Co.,1 Mr. Justice Gray expounded this view in language so forceful and so frequently quoted that it has become familiar:
"A contract of a corporation, which is ultra vires, in the proper sense, that is to say, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers Conferred upon it by the legislature, is not voidable only, but wholly void, and of no legal effect. The objection to the contract is, not merely that the corporation ought not to have made it, but that it could not make it. The contract cannot be ratified by either party, because it could not have been authorized by either. No performance on either side can give the unlawful contract any validity, or be the foundation of any right of action upon it."
In the same case it was pointed out2 that while there is no remedy for breach of the contract, the receipt of property delivered or money paid upon the faith of the contract gives rise to an obligation to make restitution either in specie or in value:
"A contract ultra vires being unlawful and void, not because it is in itself immoral, but because the corporation, by the law of its creation, is incapable of making it, the courts, while refusing to maintain any action upon the unlawful contract, have always striven to do justice between the parties, so far as could be done consistently with adherence to law, by permitting property or money, parted with on faith of the unlawful contract, to be recovered back, or compensation to be made for it."
In a later suit arising from the same transaction as Central Transp. Co. v. Pullman's Co.,3 the obligation to make restitution was actually enforced, and in a number of other cases in the Federal courts the principle has been recognized and applied.1
11897, 139 U. S. 24, 59 ; US. Ct. 478. 2 At page 60.
3 Pullman's Palace Car Co. v. Central Transp. Co., 1897, 171 U. S. 138; 18 S. Ct. 808.
Cases arising from ultra vires borrowing appear to be less frequent - certainly they are less conspicuous - in America than in England. This is probably due in part to the fact that there has been little disposition in this country to adopt the restrictions which the English courts have placed upon the lender's right to recover (ante, Sec. 158). In a comparatively recent case, Aldrich v. Chemical National Bank,2 for example, the Supreme Court of the United States concludes a discussion of the question as follows:
"Without further citation of cases we adjudge, both upon principle and authority, that as the money of the Chemical Bank was obtained under a loan negotiated by the vice president of the Fidelity Bank, who assumed to represent it in the transaction, and as the Fidelity Bank used the money so obtained in its banking business and for its own benefit, the latter bank having enjoyed the fruits of the transaction cannot avoid accountability to the New York bank, even if it were true as contended that the Fidelity Bank could not consistently with the law of its creation have itself borrowed the money."3
It is true that in this case the money borrowed ultra vires was applied in payment of valid debts of the bank, and therefore that the lender would have been protected under the doctrine of the English courts of equity. But it is significant that the Supreme Court makes no reference to the English doctrine, and repeatedly emphasizes the use of the money for the bank's benefit, not merely the payment of its debts, as the basis of obligation.
1 Logan Co. Nat. Bank v. Townsend, 1891, 139 U. S. 67; 11 S. Ct. 496; Aldrich v. Chemical Nat. Bank, 1900, 176 U. S. 618; 20 S. Ct. 498; Citizens Nat. Bank v. Appleton, 1910, 216 U. S. 196; 30 S. Ct. 364, (aff. Appleton v. Citizens Bank, 1908, 190 N. Y. 417; 83 N. E. 470); Manville v. Belden Mining Co., 1883, 17 Fed. 425 (C. C, Colo.); New Castle, etc., R. Co. v. Simpson, 1884,21 Fed. 533 (C. C, Pa.); Emmerling v. First Nat. Bank, 97 Fed. 739; 38 C. C. A. 399; Richmond Guano Co. v. Farmers' Cotton, etc., Co., 1903, 126 Fed. 712; 61 C. C. A. 630. Cf. Am. Nat. Bank v. Nat. Wall Paper Co., 1896, 77 Fed. 85; 23 C. C. A. 33; 40 U. S. App. 646.
21900, 176 U. S. 618, 635 ; 20 S. Ct. 498.
3 And see Sioux City Terminal, etc., Co. v. Trust Co., 1897, 82 Fed. 124; 27 C. C. A. 73; 49 U. S. App. 523.
The case of Logan County Nat. Bank v. Townsend1 has attracted some attention and has been thought inconsistent with other decisions of the Supreme Court. In an action to recover damages for breach of contract it appeared that the bank bought certain municipal bonds from Townsend for a sum in cash, which was paid, and agreed to replace the bonds, upon demand, at the same or a less price. Subsequently Townsend demanded compliance with this agreement, but the bank refused. Said Mr. Justice Harlan :
"If it be assumed, in accordance with the bank's contention, that it was without power to purchase these bonds, to be replaced to the plaintiff, on demand, the question would still remain, whether, notwithstanding the act of Congress defining and limiting its powers, it was exempt from liability to the plaintiff for the value of the bonds, if it refused, upon demand, to replace or surrender them at the same or a less price.
"It would seem, upon the defendant's theory of its powers, to be too clear to admit of dispute that the act of Congress does not give to a national bank an absolute right to retain bonds coming into its possession, by purchase, under a contract which it was without authority to make. True, it is not under a duty to surrender possession until reimbursed the full amount due to it: it has the right to hold the bonds as security for the return of the consideration paid for them; but when such amount is returned, or tendered back to it, and the surrender of the bonds is demanded, its authority to retain them no longer exists. And from the time of such demand and its refusal to return the bonds to the vendor or owner, it becomes liable for their value upon grounds apart from the contract under which it obtained them. . . .