Story Case

In January, 1913, the First National Bank of Vin-cennes, loaned $10,000 to William Baker, and received from him, as collateral security, 100 shares in the Old Globe Stock Bank, a joint stock partnership. The loan to Baker was on a note, running for one year. This, Baker failed to pay, when it became due, and the First National Bank considered itself owner of the stock in the Old Globe Stock Bank. During the year 1914, shortly after Baker defaulted on his note, the Old Globe Stock Bank became bankrupt, leaving many creditors. These creditors now looked to the First National Bank, as a partner in the joint stock bank, for payment of their debts. The First National Bank maintained that it was not and could not be a partner, and, therefore, no partnership liability could attach to it. Is this correct?

Ruling Court Case. Mallory Vs. Hanaur Oil Works, Volume 86 Tennessee Reports, Page 598

Several corporations and individuals, engaged in the manufacture of cotton seed oil, formed a syndicate or partnership, by articles of agreement, under which all the mills were to be operated under a single management and all the profits put into a single fund, to be divided among the members. During the second year of the syndicate, the Hanaur Oil Works, at a meeting of its directors, passed a resolution, declaring that it considered the articles of agreement illegal and void, that it would no longer recognize them because they were not within the power of the corporation to make, and that it would operate its own plant, independently. This action was brought by Mallory and the other members of the partnership, for damages for the breach and repudiation of the contract.

The Court held, that the corporation had no power to enter into the partnership agreement. The formation of a partnership is usual and proper between individuals, but corporations are supposedly engaged in business on their own account. They are, themselves, associations, somewhat analogous to the partnership and impliedly a substitute for it. It is not necessary nor incidental for a corporation to form a partnership, but it is incongruous and inconsistent. Instead of managing its business and property through its directors, it puts them in full charge of all the other members of the partnership. The power to do this can not be implied, as an incident or a part of the powers expressly given, but must be conferred in express words by the statute or charter before the corporation can exercise it.

Since it was improper and ultra vires (beyond its powers) for the Hanaur Oil Works to make this syndicate agreement, it was, at all times, its duty to repudiate it. It can not be held liable in damages for reasserting the control of its own property, which it ought never to have given over. Therefore, it is not liable for the breach of the agreement. Judgment was given for the defendant.

Ruling Law. Story Case Answer

A corporation has no power to enter into a partnership in the absence of statutory authorization. In a partnership, each member has power to bind the firm and every other member through the firm. It is a fundamental rule in corporations, that a corporation must act through its directors and authorized agents. If a corporation were a member of a partnership, it would be bound by the acts of another member of the partnership, and this would result in authorizing some one outside of the corporation to act for it. Such a situation, also, would involve the corporation in new responsibilities, through agents over whom it had no control. Therefore, it is incongruous and inconsistent for a corporation to enter a partnership relation. It is apparent, also, that, if this power were allowed, corporations, trusts and monopolies would be fostered.

In the Story Case, the First National Bank is not liable as a partner, although it did, temporarily, hold partnership property, in protecting itself on a loan.