Western Maryland Railroad v. Blue Ridge Hotel Co.

Pearce, J., delivered the opinion of the Court. This is an action of covenant brought by the Blue Ridge Hotel Company of Washington County, a corporation organized under the general incorporation laws of Maryland, against the Western Maryland Railroad Company, a corporation created by an Act of the General Assembly of Maryland, ch. 304 of 1852, under the name of “The Baltimore, Carroll, and Frederick Railroad Company,” the name being changed by ch. 37 of 1853 to “The Western Maryland Railroad Company.” The covenant sued upon is contained in a sealed agreement between the parties, made October 23rd, 1883. This agreement recites the making of a previous agreement between the parties on April 2nd, 1883, whereby the said railroad company, in consideration of anticipated advantages to it from the construction by the said hotel company of a summer hotel near Pen Mar Station on the line of said railroad, had agreed to secure the payment of a dividend not exceeding five per centum per annum on the capital stock of said hotel company of one hundred thousand dollars. The agreement sued on then further set forth that since the erection of said hotel, the railroad company had in fact derived large receipts from travel and traffic to and from the station used for said hotel, known as the Blue Mountain Station, and that its receipts from travel and traffic to and from an adjoining station, known as Pen Mar Station, had, by reason of the attractions of said hotel and its neighboring property, increased to an amount exceeding the utmost liability to be assumed by it, under the contact then made, and that it was believed these receipts would be largely augmented by increasing the capacity of the hotel, and by the improvement of the grounds of the hotel company, and of its other property near Pen Mar Station; that the hotel .company had already expended in the undertaking more ³²² than its whole capital, and an additional amount, not less than $125,000, was necessary to complete improvements begun, and others contemplated, which could not be procured without the assistance to the credit-of the hotel company as thereafter stipulated in said agreement; that the hotel company was about to issue its bonds to an amount not exceeding $125,000, bearing interest at the rate of six per cent per annum and to be secured by a first mortgage upon the said hotel and its revenues, and such other of its property as should be described in said mortgage.

The agreement then further set forth that in consideratidn of the advantages expected to accrue to the railroad company from the said improvements to the hotel and its other property, and of certain privileges secured to the railroad company by the terms of said agreement for the benefit of its excursionists, the said railroad company covenanted with the said hotel company, as follows: “That if in any one year the actual net earnings of said hotel company from said hotel and other sources shall not suffice to pay five per cent dividend upon its capital stock of $100,000, and the interest at the rate of six per cent, semi-annually, upon such amount of said first mortgage bonds as may be issued for the purposes herein stated, not exceeding $125,000, the said railroad company will, in that event, allow and pay to said hotel company for its stockholders, and the holders of said bonds, such commissions upon its receipts from traffic to and from Blue Mountain and Pen Mar Stations, or any other station or stations which may be hereafter substituted for either, or both, of the above, at which the business hereby contemplated may be done, as will be sufficient to, make up said deficit to five per cent upon its capital stock, and six per cent per annum upon its bonded debt;’ ’ and the hotel company upon its part entered into a covenant designed to protect the railroad company in the proper application of the revenues of the hotel company to its economical and successful management, and of the net earnings to the dividends and interest due to its stockholders and bondholders. The declaration averred that in reliance upon this covenant of the railroad company, it issued its bonds ³²³ to the amount of $125,000, of which $122,000 were still outstanding, which sum was expended in the improvements contemplated by the agreement, and that at the close of the fiscal year of the hotel company ending October 1st, 1903, the net earnings of the hotel company were not sufficient to pay the nterest then due on said bonds, by the sum of $3,660, and xt he re was nothing available for payment of the $5,000 dividend then due to its stockholders; that demand had been duly made on defendant for said sums, and that payment had been refused. It will only be necessary to consider the defendants’ fourth plea which averred that the agreement sued on was ultra vires on the part of the railroad company, and void, and could not be enforced by suit su'ch as was brought against it. To this plea the plaintiff demurred, and the demurrer being sustained, the case went to trial on issues joined on the other pleadings, resulting in a verdict for the plaintiff for $9,433.68, and judgment thereon.

The defendant offered six prayers of which the first and second raised the same question raised by the demurrer, and were refused by the Court, no prayers being offered by the plaintiff. The question raised by the demurrer, and by the defendant’s first and second prayers, is the vital question in the case, and will now be considered. The agreement was drawn with much care and skill, and evidently with a view to the avoidance of the question raised, as is suggested by the phraseology of the covenant "to alloiv and pay such commissions upon its receipts to and from” the stations named as would make good the deficit which was the subject of the covenant, but we do not think the use of this language can disguise the real character of the transaction, or control the validity of the obligation assumed by the railroad company. If the contract would be declared ultra vires if the deficit were to be made good from the general receipts of the company, it could not be rescued from invalidity, by calling the payment to be made, commissions from traffic receipts from the particular stations named.

There is no limit to the rate ³²⁴ of commission to be paid. The full amount of the gross receipts from these two stations was pledged by that covenant if required to make good this deficit. This appears not only from the language of the covenant, but even more explicitly from the recital of the mortgage from the hotel company to the trustees of its bondholders, which assigns to said trustees “the benefit of the contract between the hotel company and the railroad company, dated October 23rd, 1883, by which the payment of the interest on the said bonds is guaranteed by the said railroad company to be paid of the receipts from the traffic at Blue Mountain and Pen Mar Stations.” , A contract which in effect pledges the total gross receipts from any source, cannot be regarded as a contract for commissions on, or, a rebate from, those gross receipts, and this contract must | be regarded as an absolute guaranty to the stockholders and bondholders of the hotel company of their dividends and interest", tp the extent to which the receipts from the stations named should be adequate for that purpose, since in the language of the contract, the payment was to be made “to the hotel company for its stockholders and bondholders.” The promise thus made was a promise “to answer for the payment of some debt, or the performance of some duty, in case of the failure of another, who is himself, in the first instance, liable to such payment or performance.” 14 Am. & Eng. Ency. of Law, 1128, 2 ed.

Its object, as declared in the recitals of the agreement was to furnish to the hotel company “assistance to its credit,” and it was at least twice designated in said agreement as a “traffic guarantee,” and we think it could not be accurately otherwise designated. It is therefore necessarily a collateral contract, but there is no question here of the Statute of Frauds, and it would make no difference so far as its validity is here concerned, if it- had been an original contract to pay the hotel company a lump sum upon the consideration stated. The question of idtra vires would still remain for consideration. , Corporations, being mere creatures of law, possess only , such powers as are expressly granted, together with, such in ³²⁵ cidental and implied powers as are necessary to carry into effect those expressly granted. “An incidental power is one that is directly and immediately appropriate to the execution of the specific power granted, and not one that has only a slight or remote relation to it. * * * It can in no case avail to enlarge the express powers, and thereby warrant the corporation to devote its efforts or its capital to other purposes than such as its charter expressly authorizes, or to engage in collateral enterprises, not directly, but only remotely connected with its specific corporate purposes.” io Cyc., 1097-1098. And it is equally well-settled that “a corporation has no power' to enter into a contract of suretyship ox guarantee, or otherwise lend its credit to another, unless the power is expressly conferred by its charter, or unless such a contract is reasonably necessary, or usual in the conduct of its business.” 7 Am. & Eng.

Ency. of Law, 188, 2 ed. The original charter powers of the Western Maryland Railroad Company are found in secs. 14, 15 and 18 of ch. 304 of the Acts of 1852. In addition to the mere power to construct a railroad from Baltimore to Westminster, and thence to some point on the Monocacy river in the direction of Hagerstown, the additional powers given are to erect warehouses or other works necessary to said road, and to contract with the Susquehannah Railroad for intersecting its road; to carry the mail and to bor- - row money no.t exceeding $200,000. Chap. 71 of 1872 gave the power to construct a railroad from the western end of the tunnel of the Balt. & Potomac R. R. to Williamsport or to Cumberland together with all buildings, stations, other works and accommodations necessary or convenient for the operation of said road, and to execute mortgages upon its property for building the road.

Sec. 8 of that Act, which is specially referred to by the Court below in the ruling upon the demurrer, set out in the record, gives power to aid any other company in the construction of its railroad, by means of subscription to its capital stock, or otherwise, for forming a connection therewith, and to consolidate with any other corporation owning a railroad, or a railroad ³²⁶ and any other property; and chap. 153 of 1884 gives the only power of. guaranty it possesses, and limits this power to the obligations of other railroad companies. In none of these Acts do we find any power, express or implied, either to engage directly in the construction and operation of a summer hotel, or to lend its credit to any other corporation engaged therein, while the Acts of 1872 and 1884, supra, seem to us, by their express limitation of the powers granted to dealing with railroad companies, or companies “.Owning a railroad and other property,” to exclude the power to engage in any other business than that of a railroad, or to guarantee the obligations of any other corporation than a railroad corporation. However the strict rules which we have cited above may have been relaxed or evaded elsewhere under the influence of competition in trade and commerce and of the modern theories of expansion of power in every direction, they are still approved by text writers of the highest authority and have been always observed and enforced by the Court in this State. Judge Seymour D. Thompson, in 10 Cyc. 1146, says: “Perhaps the most general statement which can be made of the doctrine of ultra vires, is to say that the contract of a corporation which is unauthorized by or in violation of its charter, or other governing statute, or entirely outside the scope of the purposes of its creation, is void, in the sense of being no contract at all, because of a total want of power to enter into it. ” And Mr. France in his recent excellent work on the Elements of Corporation of Law, sec. 72, says: “The transaction may be beyond the powers of the corporation, simply because it is foreign to the purposes expressed or implied in the charter; it may invoke the exercise of a power, not forbidden, but simply I ungranted, as, for example, where a railroad company undertakes to guarantee the expenses of a public festival.

In the better usage, the term ultra vires is limited to acts of the latter 'class, and many of the Courts make a distinction between transactions which are illegal, because forbidden, and those which are simply in excess of the granted powers.” ³²⁷ In Steam Navigation Company v. Dandridge, 8 G. & J. 318 , the Court said: “In Angelí and Ames on Corporations it is justly observed that a corporation and an individual stand upon very different footing. The latter, existing for the general good of society, may do all acts and make all contracts which are not in the eye of the law inconsistent with the great purpose of his creation ; whereas the former, having been' created for a specific purpose, can not only make no contract forbidden by its charter, which is, as it were, the latv of its nature, but in general can make no contract which is not necessary, either directly or incidentally, to enable it to answer that purpose. In deciding therefore whether a corporation can make a particular.contract, we are to consider in the first place, whether its charter or some statute binding upon it, forbids or permits it to make such a contract; and if the charter and valid statutory law are silent upon the subject, then, in the second place whether a power to make such a contract may not be implied on the part of the corporation as directly or incidentally necessary to enable it to fulfill the purpose of its existence, or whether the contract is entirely foreign to that purpose.” It was accordingly there held that the navigation company being incorporated only for the purpose of conveyance of passengers and freight, could not lawfully enter into a contract for breaking ice upon the waters navigated by its vessels, and towing other vessels through the track so made. And in Abbott v. Baltimore and Rappahannock Steamboat Company, 1 Md. Ch. 542 , where the company was incorporated solely for the same purpose between Baltimore and Fredericksburg; but entered into an obligation in aid of an enterprise to improve the navigation of the river near Fredericksburg upon its own route, which would result to the great advantage of the company, it was held that the contract was not within its express or implied powers, and could not be enforced against it, though the obligee had incurred large expenses upon the faith of the contract.

In the latter case the Chancellor followed the decision in the Dandridge case, supra, and that case has been repeatedly approved in this Court, upon the point ³²⁸ here involved, the latest instance being in Boyce v. Trustees M. E. Church', 46 Md. 373 . In State v. B. & O. R. R., 48 Md. 49, one of the questions was whether the receipts from certain hotels built and owned by the railroad company were subjected to the gross receipts tax imposed by the Act of 1872 upon such railroad companies, and the Court in construing the language employed in the power granted “to erect warehouses and other works necessary and expedient for the completion and operation of the road,” said on pages 76 and 77: “Hotels or buildings for the accommodation of passengers over the road are, we think, necessary to its business and therefore within its charter. * • * * The gross receipts therefore from these hotels are exempt from taxation.. The Oakland and Deer Park hotels, however, appear to have been built and are now used