Opinion
Opinion filed January 2, 1935.
Corporations — Validity of Provision in Charter Permitting Directors To Require Payment of Stock Subscriptions under Penalty of Forfeiture of Previous Payments — By-law Invalid and Unenforceable as Such Enforceable as Contract — Provisions of Stock Certificate Incorporating Provisions Relating To Forfeiture of Stock for Failure To Deliver Products to Corporation in Accordance with Agreement, Acquiesced in by Stockholder, as Enforceable Contract — Contract of Stockholder as to Forfeiture of Stock under Such Conditions as Not Ultra Vires, against Public Policy, or in Restraint of Trade.
1. Provision in charter of corporation that its directors may require payment of stock subscriptions under penalty of forfeiture of all previous payments thereon is valid.
2. By-law of corporation which is invalid and unenforceable as such may be enforceable as contract against stockholders or members who were parties to its adoption or who have accepted or assented to it, except where it is beyond power of corporation to contract.
3. Where by-law of co-operative creamery corporation provided that any member refusing to deliver to creamery, milk, cream, or other produce agreed to be delivered there, in absence of reasons satisfactory to corporation, should forfeit to corporation all interest in product on hand, in surplus fund, and in stock in corporation, and such by-law was printed on face of each stock certificate, as was also substance of another by-law providing that acceptance of stock certificate by member should constitute contract between member and corporation and assent of such stockholder to by-laws and amendments thereto legally adopted, held that stockholder accepting certificates of stock without objection thereby agreed to conditions on face of certificates and was bound by by-laws, if contract was one corporation had power to make, and not contrary to public policy.
4. Such contract of stockholder, as contained on face of stock certificate of co-operative creamery association, held to be within power of corporation to make, and not to be void as against public policy.
ACTION OF CONTRACT, declaration containing common counts in assumpsit. Plea, general issue. Trial by court on agreed statement of facts at the September Term, 1933, Franklin County, Sturtevant, J., presiding. Judgment for the defendant. The plaintiff excepted. The opinion states the case. Affirmed.
M.H. Alexander for the defendant.
The defendant was incorporated as purely a co-operative association operating for the benefit of its members, not for pecuniary profit, but solely upon a non-profiting basis, receiving the product from its members and marketing it for them. In law, it is to be likened to a mutual benefit association, in which several persons or members unite, or become shareholders, for People, 109 Ill. 302. their common interest in a benefit association. Hawthorn v.
Associations or corporations banded together for their mutual interest have an inherent right to enact such by-laws as may be necessary to carry out the objects and purposes of such associations or corporations; and where the member agrees in his application, or has an agreement incorporated in a certificate, that he will comply with the by-laws of the company in force, or thereafter to be adopted, he is bound thereby, even to the extent of the forfeiture of his certificate, if so provided. Lange v. Royal Highlanders, 10 L.R.A. (N.S.) 668; 19 R.C.L. page 1192, § 13; page 1199, § 17.
While co-operative marketing associations are of comparatively recent origin, they have received legislative recognition, are not unconstitutional or contrary to anti-monopoly legislation, and receive liberal construction by the courts. Liberty Warehouse Co. v. Burley Tobacco Growers Co-operative Marketing Association, 276 U.S. 71, 92, 72 L. ed. 473, 481; Minn. Wheat Growers Marketing Association v. Huggins, 162 Minn. 471; List v. Burley Tobacco Growers Co-operative Association, 114 Ohio St., 451; Lewis Farm Bureau Cotton Growers Co-operative Association v. Clark, 160 La. 294; Dark Tobacco Growers Co-operative Association v. Dunn, 150 Tenn. 624, 266 S.W. 208; Arkansas Cotton Growers Co-operative Association v. Brown, 168 Ark. 504.
Co-operative marketing associations usually provide for liquidated damages in their membership contracts, and such provisions have been almost universally upheld. The courts have also granted equitable relief notwithstanding the provision for liquidated damages. Manchester Dairy System v. Hayward, 132 A. 15, 16; Anaheam Citrus Fruit Association v. Yosman, 51 Cal.App. 759, 197 P. 959; California Bean Growers' Association v. Rindge Land Navigation Co., 246 P. 658, 47 A.L.R. 904; Oregon Growers' Co-operative Association v. Lentz, 212 P. 911; Phez Co. v. Salem Fruit Co., 103 Ore. 514, 25 A.L.R. 1090; Washington Cranberry Growers' Association v. Moore, 117 Wn. 430, 25 A.L.R. 1077; Dark Tobacco Growers', etc. v. Dunn, supra; Milk Producers' Marketing Co. v. Bell, 234 Ill. App. 222; Elmore v. Maryland Virginia Milk Producers' Assn., Inc., 132 S.E. 521, 134 S.E. 472; Oregon Growers Co-operative Assn. v. Riddle, 116 Ore. 562, 241 P. 1011; Minn. Wheat Growers' Co-operative Marketing Assn. v. Huggins, 162 Minn. 471, 203 N.W. 420; Brown v. Ohio Poultry Products Co-operative Assn., 27 Ohio App. 426, 162 N.E. 453; Castorland Milk Cheese Co. v. Chantz, 179 N.Y.S. 131; Little v. Banks, 85 N.Y. 268; Curtis v. Manburg, 161 N.Y. 47, 55 N.E. 398; Potter v. Dark Tobacco Growers' Co-operative Assn., 201 Ky. 441, 257 S.W. 33; Poultry Products of Central California v. Murphy (Cal.App.), 221 P. 962; Washington County Egg Poultry Assn. v. Taylor, 122 Wn. 486, 210 P. 806; North Carolina Co-operative Assn. v. Bullock, 191 N.C. 464, 132 S.E. 154, 47 A.L.R. 924; Coleman Vegetable Association v. Bonetti, 267 P. 172; Milk Producers' Association of San Diego v. Webb, 97 Cal. 650; California Bean Growers' Association v. Rindge Land Navigation Co., 248 P. 658, 47 A.L.R. 904.
W.E. Tracy for the plaintiff.
A by-law for the forfeiture of property cannot be enforced by a forfeiture of property by a defaulting member. 14 C.J. 375; Kennebec, etc., R.R. Co. v. Kendall, 31 Me. 470; People v. Detroit Fire Dept., 31 Mich. 458; Cahill v. Kalamazoo Mut. Ins., 2 Dougl. 124, 43 A.D. 457; Rosenback v. Salt Springs Nat. Bk., 53 Barb. 495; In re Long Island R.R. Co., 19 Wend. 37, 32 A.D. 429; Hart v. Albany, 9 Wend. 471, 24 A.D., 165; Stuyvesant v. New York, 7 Cow. 588; Dunham v. Rochester, 5 Cow. 462; New York v. Ordrenan, 12 Johns. 122; Budd v. Multnomah St. R. Co., 15 Or. 413, 15 P. 659, 3 A.S.R. 169; March v. Fairmount Creamery Assn., 32 Pa. Super. 517.
On the same principle, it is not competent for a corporation to enforce a by-law by the penalty of the forfeiture of the shares of the corporation, unless the power so to do is expressly given in its charter. 14 C.J. 375; Hill v. Nisbet, 100 Ind. 341; Wescott v. Minnesota Min. Co., 23 Mich. 145; Williams v. Lowe, 4 Nebr. 382; Rosenback v. Salt Springs Nat. Bk., supra; Master Stevedores' Assn. v. Walsh, 2 Daily, 1; In re Long Island R.R. Co., supra; Budd v. Multnomah St. R. Co., supra; March v. Fairmount Creamery Assn., supra.
The by-law of the co-operative creamery corporation, providing for forfeiture of stockholders' shares of stock in the event that any member, without reasons satisfactory therefor to the corporation, refused to deliver at the creamery milk, cream, or other produce agreed to be there delivered, is illegal as tending to stifle competition, as in restraint of trade, and as contrary to public policy. Timothy Burns v. Wray Farmers' Grain Co., 65 Colo. 425, 11 A.L.R. 1179; Reeves v. Decorah Farm Co-op. Society, 160 Iowa, 194, 140 N.W. 844, 44 L.R.A. (N.S.) 1104; Anderson v. Shawonee Compress Co., 17 Okla. 231, 15 L.R.A. (N.S.) 846.
Present: POWERS, C.J., SLACK, MOULTON, THOMPSON, and SHERBURNE, JJ.
This is an appeal from a justice court. Declaration, the common counts in assumpsit. Plea, the general issue. There was a trial by court on an agreed statement of facts. Judgment was rendered for the defendant to recover its costs. The plaintiff excepted.
The following facts appear in the agreed statement. The plaintiff is a farmer and has lived in the town of Fairfax for many years. The defendant is a co-operative corporation organized and doing business under the provisions of No. 141 of the Acts of 1915, which act is now embodied in chapter 239 of the Public Laws. Its articles of association comply with the requirements of section 3 of the act of 1915 (P.L. 5791). It was organized for the purpose of manufacturing and selling dairy and other farm products and the purchase of general farm supplies. It has a capital stock of fifty thousand dollars divided into five thousand shares of the par value of ten dollars each. It began doing business about 1918. By-laws were adopted by its stockholders before it began doing business. The by-laws material in this case are as follows:
"Article I"
"Sec. 2. The membership of this corporation shall be confined to persons residing in Franklin County, Vermont, and actually engaged in some form of agricultural enterprise, who hold at least ten shares of stock and have been approved as an eligible candidate for membership by a majority vote of the directors.
Members shall be permitted to withdraw only as follows: The member desiring to withdraw shall give at least one month's notice of his application thereof. Such application shall be allowed only on a vote of two-thirds of all the directors present and voting at any meeting."
"Sec. 4. The acceptance by a member of a stock certificate shall constitute a contract between such member and the corporation and assent of such stockholder to these by-laws and to amendments legally adopted."
"Sec. 5. Each member of the corporation becomes subject to and accepts and agrees to abide by these rules and regulations and all future amendments enacted by the corporation."
"Article IX"
"Sec. 4. If any member of the corporation desires to dispose of his share or shares, he shall first offer to sell the same to the corporation at par value; if the corporation declines to purchase, the member may find a purchaser acceptable to the corporation and have his share or shares transferred to said purchaser on the books of the corporation in accordance with the rules. * * *"
"Sec. 5. Any member, without reasons satisfactory therefor to the corporation, refusing to deliver at the creamery the milk, cream, or other produce agreed to be there delivered, shall forfeit to the corporation all interest in the product on hand, in the surplus fund, and stock in the corporation."
This last quoted by-law is printed on the face of each certificate of stock, and below it is printed: "By the acceptance of this certificate the owner thereby assents to and agrees to abide by all By-laws, Rules, and Regulations of this Corporation and amendments thereof legally adopted."
The plaintiff became a member of the defendant some time about the year 1919, and continued his membership until August 15, 1926, during which time he received certificates for forty-eight shares of the capital stock of the defendant. On August 15, 1926, he, without giving reasons therefor, refused to further deliver milk or milk product to the creamery of the defendant as he had agreed to do, and he gave no notice of his withdrawal as called for by the by-laws, and since then he has not delivered any milk or milk product to the defendant, although requested so to do.
A meeting of the directors of the defendant was held on December 3, 1926, the plaintiff and other stockholders having been notified to appear on that day "to state their reasons why their stock should not be forfeited." The plaintiff did not appear at the meeting, and his stock was thereupon declared forfeited by the directors of the defendant.
The substance of the contention of the plaintiff is that section 5, of Article IX of the by-laws of the defendant, which provides for the forfeiture of the corporate stock of a member who, without reasons satisfactory to the defendant, refuses to deliver at its creamery milk, cream, or other produce agreed to be delivered there, is invalid and unenforceable because the defendant did not have the legal power to adopt a by-law providing for the forfeiture of such stock.
That a provision in the charter of a corporation that its directors may require payment of stock subscriptions under the penalty of forfeiture of all previous payments thereon is valid, is recognized by this Court in Connecticut Passumpsic Rivers R.R. Co. v. Bailey, 24 Vt. 465, 58 A.D. 181; and Rutland Burlington R.R. Co. v. Thrall, 35 Vt. 536.
G.L. 4908 (P.L. 5802) provides, among other things, that the by-laws of a corporation "may contain any other provisions regulating the affairs of the corporation, which are consistent with law and with the articles of association." The defendant contends that this provision of the statute does not apply to the defendant and that it did not give it authority to adopt the bylaw in question. However that may be, it is not necessary to consider that question.
It is well settled that a by-law which is invalid and unenforceable as such may be enforceable as a contract against stockholders or members who were parties to its adoption or who have accepted or assented to it, except where it is beyond the power of the corporation to contract. 8 Fletcher Cyc. Corp. 736; Clark Marshall on Corporations, § 493; New England Trust Company v. Abbott, 162 Mass. 148, 38 N.E. 432, 27 L.R.A. 271; Jennings v. Bank of California, 79 Cal. 323, 21 P. 852, 5 L.R.A. 233, 12 A.S.R. 145; Blue Mt. Forest Assn. v. Borrowe, 71 N.H. 69, 51 A. 670; Weiland v. Hogan, 177 Mich. 626, 143 N.W. 599.
In 8 Fletcher Cyc. Corp., supra, it is said: "The power of a natural person to make contracts not prohibited by law, is, in its scope, far beyond the power of a corporation to adopt bylaws, and although a regulation, adopted by the corporation, be not enforceable, considered strictly as a by-law, it may be enforceable as a contract against a stockholder or member or director who agrees to be bound by it, provided it is not of itself illegal or ultra vires the corporation."
In New England Trust Company v. Abbott, supra, the court said: "The defendant contends that these by-laws are void. We have not found it necessary to consider that question, and we express no opinion upon it. We think that the case may well stand on the ground that the defendant's testator entered into an agreement with the plaintiff to do what the plaintiff now seeks to compel his executor to do. It is manifest that a stockholder may make a contract with a corporation to do or not to do certain things in regard to his stock, or to waive certain rights, or to submit to certain restrictions respecting which the stockholders might have no power of compulsion over him."
In Clark Marshall on Corporation, supra, the authors referring to provisions for the forfeiture of stock for the nonpayment of stock subscriptions, say: "It is perfectly competent, however, even in the absence of any provision in the charter or general law, for a stockholder to expressly agree to a forfeiture or sale for nonpayment, as by a provision in the contract of subscription or indorsed on the certificate of stock. And even when a by-law to this effect is adopted without the unanimous consent of all the stockholders, those who do consent will not be heard to complain of a forfeiture or sale of their shares in accordance with its provisions."
The by-law in question is printed on the face of each certificate of stock issued to, and accepted by, the plaintiff, and, also, there is printed thereon the substance of by-laws, article I, § 4, that: "The acceptance by a member of a stock certificate shall constitute a contract between such member and the corporation and assent of such stockholder to these by-laws and to amendments legally adopted."
By accepting the certificates of stock without objection, the plaintiff must be held to have agreed to the conditions on the face of the certificates, and to be bound by the by-laws. The fact that the conditions were contained in by-laws, which may have been invalid as such, a question we do not consider, does not render his agreement void if the contract was in substance one which the corporation had the power to make, and it was not contrary to public policy.
No provision of our statute law nor any rule of common law has been called to our attention which prohibited the defendant from making such a contract. We have recognized the fact that a stockholder can make a valid contract with a corporation for the forfeiture of his stock for nonpayment of a stock subscription, and we know of no reason why a stockholder cannot contract with a corporation for the forfeiture of his stock for failure to comply with other conditions. We are of the opinion that the defendant had the power to make the contract in question.
The contract was not void as being against public policy. It was wholly of private concern between the plaintiff and the other members of the defendant in their corporate capacity. Nothing appears in the record from which it can be said that it was injurious to the interests of the public or contravened some established interest of society. Osgood v. Central Vermont Ry. Co., 77 Vt. 334, 60 A. 137, 70 L.R.A. 930. Nor, on the record, can it be said that it was illegal as being in restraint of trade.
Judgment affirmed.