an association has been upheld as a contract. In the case of unincorporated associations "A provision for expulsion, although unreasonable as a bylaw as being against common right, may if assented to by a member, be binding on him as a contract." 5

Even though a rural electric cooperative had a bylaw providing that under certain conditions it would reimburse a member for the cost of a transmission line built by him, it was held that this did not prevent the association from entering into a special agreement with an applicant for membership differing from the terms of the bylaw, the court emphasizing that membership in the cooperative was not a matter of right.

6

Legal liabilities may result from a failure of officers and directors to observe bylaws. They, as well as the managers, are in law simply agents, and agents are bound by the instructions of their principals. Ordinarily bylaws are adopted by the members of an association, and they constitute instructions, rules or restrictions for the management of an association. Even in a case in which the bylaws were adopted by the directors, the court, in a suit brought against the manager who was also a director, said:

The board of directors could not bind the association by any ratification of transactions which the bylaws expressly prohibited, because the bylaws applie:1 as much to the directors as to the defendant, and furnished the rules of conduct for all officers of the association.

Cooperative associations engaged in the handling of grain generally have bylaws prohibiting the manager or any officer from speculating in grain; and if a loss follows from a violation of such a bylaw, the association may recover.9

The term "constitution" is frequently used in connection with bylaws. So far as an incorporated association is concerned, the expression has no place. Incorporated associations have articles of incorporation (charters) but do not have constitutions. The use of the term with respect to incorporated associations only creates confusion. A "constitution" has been held to be be only only an inappropriate name for a bylaw.10

'Bessette v. St. Albans Co-Operative Creamery, 107 Vt. 103, 176 A. 307. 'Elfer v. Marine Engineers Beneficial Association No. 12, 179 La. 383, 154 So. 32; 5 C. J. 1355.

6

8

Ford v. Peninsula Light Company, 164 Wash. 599, 4 P. 2d 504.

'Dome Realty Co. v. Rottenberg, 285 Mass. 324, 189 N. E. 70.

Hoffman v. Farmers' Co-Op. Shipping Ass'n, 78 Kan. 561, 97 P. 440, 443. See also 7 R. C. L. sec. 426.

9

Hoffman v. Farmers' Co-Op. Shipping Ass'n, 78 Kan. 561, 97 P. 440.

10 Supreme Lodge K. of P. v. Kutscher, 179 Ill. 340, 53 N. E. 620.

Liability of Association for Promotion Expenses

What is the liability of a corporation on contracts made or obligations incurred by its promoters or those who are active in forming and organizing it? The answer is that, as a general rule, it is not liable unless after its formation it recognizes and ratifies the contracts or obligations. This question arises in connection with the work done. or contracts made incident to the promotion of a corporation and prior thereto by those who are active in bringing about the existence of the corporation.

11

In a North Dakota case,11 in which the claim involved arose out of work done by a stock subscription solicitor in obtaining subscribers to the capital stock of a corporation to be organized, it was said:

It is elementary that a corporation is not liable upon contracts entered into by its promoters. Before the corporation comes into existence, it can have no representative, and no one is capable of acting for it. Those interested in promoting it may nevertheless contemplate the ultimate payment by the corporation of the legitimate promotion expenses. But the corporation does not become liable for such expenses, in the absence of a subsequent undertaking in some form.

In a Montana case 12 appears the following:

In the absence of statute, a corporation will be held liable for services rendered by its promoters before incorporation, only when by express action taken after it becomes a legal entity it recognizes or affirms such claim; and a mere silence of the board of directors, or failure to object when the claim is mentioned, is not such an assumption or adoption as will bind the corporation.

It is true that, as a rule, a corporation usually pays the necessary legitimate expenses and costs incurred by those who brought about its formation, but the corporation is not liable for such charges unless it elects to pay them.13 On the other hand, of course the promoters are liable for such expenses and costs and may, in addition, be liable for injuries to their employees and others.14

Limitation on Indebtedness

The common law places no limit upon the amount which a corporation may borrow. The amount borrowed may be greater than the capital stock.15 The general rule is that a debt contracted by a corporation in excess of the limit fixed by statute or by the charter is

"Davis v. Joerke, 47 N. D. 39, 181 N. W. 68, 70.

12

Kirkup v. Anaconda Amusement Co., 59 Mont. 469, 197 P. 1005, 1007; Cushion Heel Shoe Co. v. Hartt, 181 Ind. 167, 103 N. E. 1063, 50 L. R. A. (N. S.) 979. 13 Kridelbaugh v. Aldrehn Theatres Co., 195 Iowa 147, 191 N.W. 803. "Farmers' Gin and Milling Company v. Jones, (Tex. Civ. App.), 147 S. W. 668. 15 Cook on CORPORATIONS, 8th ed., sec. 760.

valid and enforceable against the corporation. A national bank purchased furniture and executed three promissory notes in payment thereof at a time when the amount of its indebtedness exceeded that allowed by a Federal statute. In a suit brought on the notes it was held that the notes were enforceable against the bank. In this case, it was said, "We hold, therefore, that an indebtedness which a national bank incurs in the exercise of any of its authorized powers, and for which it has received and retains the consideration, is not void from the fact that the amount of the debt surpasses the limit prescribed by the statute, or is even incurred in violation of the positive prohibition of the law in that regard." 16 In an Iowa case 17 it was said, "A corporate debt contracted in excess of the maximum limitation in its articles of incorporation is not void because of such excess." In the case of a corporation there are no public records by which one about to extend credit to it can ascertain the amount of indebtedness already incurred at the time credit is extended, and this furnishes a sufficient reason for holding a corporation liable in cases like those just discussed.

17

As pointed out elsewhere, officers and directors are liable to the corporation for all damages suffered by it if they exceed the limit of indebtedness fixed by the statute, charter, or bylaws. And directors and officers are made personally liable by statute in some States to third persons for debts in excess of the statutory amount.18

In a Nebraska case involving a cooperative association the directors executed their accommodation notes therefor in an amount greatly in excess of the indebtedness which the association was authorized to incur under its charter. Ultimately suit was brought against the association, and it was claimed that no recovery could be had because the amount of indebtedness exceeded that allowed by the charter. The court held, however, that the association was liable because the money had been used in the business for the benefit of the association. and had not been returned, the court saying, "The right of recovery depends upon the receipt and retention of benefits under or by virtue of the ultra vires contract." 19 An association may be estopped from

18 Weber v. Spokane National Bank, 64 F. 208. See also H. Scherer & Co. v. Everest, 168 F. 822. See also Grand Valley Water Users' Association v. Zumbrunn, 272 F. 943.

17 Junkin v. Plain Dealer Pub. Co., 181 Iowa 1203, 165 N. W. 339.

18

Annotation "Right of individual creditor to enforce for his own benefit personal liability of directors or officers of corporation for incurring excessive debts," 43 A. L. R. 1147.

19

19 Simmons v. Farmers' Union Co-op. Ass'n of Bradshaw, 114 Neb. 463, 208 N. W. 144.

denying liability for debts created in excess of the amount fixed in its charter.20

It appears to be the general rule that, if a corporation exceeds its debt limit, no objection can be raised by either the corporation itself or persons who became its creditors after the debt limit had been reached.21 In Kentucky, however, when a corporation becomes insolvent, until the creditors whose debts do not exceed the charter limits have been paid in full, creditors whose debts are in excess of the charter limits are not entitled to participate in the distribution of assets.22 In some jurisdictions, before a contract which would cause a corporation to exceed its debt limit has been performed by either party, it may be repudiated by the corporation.23

Lien on Stock

If a statute under which a corporation is incorporated or the general law of the State gives a corporation a lien on the stock of a stockholder for debts due the corporation by him, strangers, even though without actual notice, and residents of other States, buy the stock subject to the lien. The Supreme Court of the United States has said: 24 "When, by general law, a lien is given to a corporation upon the stock of a stockholder in the corporation for any indebtedness owing by him to it, that lien is valid and enforceable against all the world * * * "" If the statute under which an association or corporation is to be incorporated authorizes the inclusion of a provision in the articles of association or the certificate of incorporation giving the corporation a lien on its stock for any indebtedness due it by a stockholder, such a provision, if included, is also valid against all the world.25

In a New York case 26 the articles of association provided that "No shareholder of the association shall be permitted to transfer his shares or receive a dividend or interest thereon, who shall owe to the association a debt which shall have become due, until such debt be paid,

20 New York Canning Crops Co-op. Ass'n, Inc., v. Slocum, 126 Misc. Rep. 30, 212 N. Y. S. 534.

"Sioux City Terminal Railroad & Warehouse Company v. Trust Company of North America, 82 F. 124, Aff'd in 173 U. S. 99, 19 S. Ct. 341, 43 L. Ed. 629, 7 Fletcher CYCLOPEDIA CORPORATIONS, Perm. Ed. sec. 3619.

22

First National Bank of Covington v. D. Keefer Milling Company, 95 Ky. 97, 23 S. W. 675; American Southern National Bank v. Smith, 170 Ky. 512, 186 S. W. 482; Anderson v. Kentucky Title Trust Company of Louisville, 5 F. Supp. 384. 23 Lewis v. Fifth-Third National Bank, 274 F. 587.

24 Hammond v. Hastings, 134 U. S. 401, 10 S. Ct. 727, 33 L. Ed. 960. "Union Bank of Georgetown v. Laird, 2 Wheat. 390, 4 L. Ed. 269.

"Gibbs v. Long Island Bank, 83 Hun. 92, 31 N. Y. S. 406, 63 N. Y. St. Rep. 854.

unless by and with the consent of the board of directors of the association." On the face of each certificate of stock involved was the statement "Subject to the conditions and stipulations contained in the articles of association." Although the plaintiff had no actual knowledge of the limitation on the transfer of stock, he was held bound by the provision in the articles of association.

At least in some States if the purchaser or assignee of stock has actual or constructive notice of a bylaw giving the corporation a lien on the stock, it is effective, and the corporation is not obliged to recognize the purchaser or assignee of the stock unless the lien is given effect.27

Subscriber, Stock, Capital Stock

"A subscriber is one who has agreed to take stock from the corporation on the original issue of such stock." 28 The shares of stock into which the capital stock of the corporation is divided may consist of common stock or common and preferred stock. In Cook on Corporations it is also said: 28a

By common stock is meant that stock which entitles the owners of it to an equal pro rata division of profits, if any there be; one stockholder or class of stockholders having no advantage, priority or preference over any other shareholder or class of stockholders in the division. By preferred stock is meant stock which entitles its owners to dividends out of the net profits before or in preference to the holders of the common stock. Common stock entitles the owner to pro rata dividends equally with all other holders of the stock except preferred stockholders; while preferred stock entitles the owner to a priority in dividends.

Usually the dividend rate on preferred stock is fixed, whereas that on common stock in commercial corporations is generally not fixed. Under the statutes of many States the right to vote at meetings of the stockholders is limited to the common-stock holders, and many of the statutes providing for incorporation of cooperative associations authorize bylaws that limit the right to vote to common-stock holders of the corporation.

*

* the capital stock is usually divided into equal portions called shares ; and a share of the capital stock of a corporation is, therefore, the interest or right which the owner has in the management of the corporation, in its surplus profits, and upon dissolution, in all of its assets remaining after the payment of its debts.29

27 Iowa-Missouri Grain Co. v. Powers, 198 Iowa 208, 196 N. W. 979, 33 A. L. R. 1268.

28 1 Cook on CORPORATIONS, 8th ed., sec. 10, p. 51.

28 a 1 Cook on CORPORATIONS, 8th ed., sec. 12, p. 76.