Story Case

The Commonwealth Building and Loan Corporation was organized in a western state, under a law denying the corporation the power to borrow money more than twice the sum for which it was capitalized. This corporation was capitalized at $200,000, and had borrowed $400,000, when it negotiated with Burnham and Gilbert, bankers, for a loan of $25,000. The bankers inquired as to the association's condition, and were assured that the company had not exceeded its charter powers. Upon this representation, they made the loan. Later, the Commonwealth corporation refused to repay this amount, and maintained, in Court, the lack of power to borrow this sum of money. Is this a good defense?

Ruling Court Case. Bradbury Vs. Boston Canoe Club, Volume 153 Massachusetts Reports, Page 77

The Boston Canoe Club was incorporated for the purpose of operating and owning a club house, and for encouraging athletic exercises. It borrowed money from the plaintiff, Bradbury, and when he sued to recover it, asserted that it was not liable because it had, as a corporation, no power to borrow and could not be held for the acts of its treasurer, where he had acted beyond the powers of the corporation.

Mr. Justice Holmes said, in the opinion of the Court: "It would be impossible to argue that the defendant had not recognized and ratified the acts of its treasurer. The money was received by the corporation and used by it. The only question for us is, whether the corporation acted illegally in borrowing the money for the purpose of erecting the club house. Under its charter, and the general laws of the state, it is given power to 'hold real and personal estate, and to hire, purchase, or erect suitable buildings for its accommodation.' "We are of the opinion that the defendant had the power to lease this land and erect the club house upon it. Having this power, it was entitled to raise money for the purpose. Borrowing money is a usual and proper means of accomplishing what the statute expressly permits."

It was, therefore, decided that, even without words expressly granting the power to borrow, any corporation has that power to the extent that it is a necessary or customary way of carrying out its other powers. The Boston Canoe Club had received and employed the money borrowed from Bradbury, by its treasurer, and was, therefore, liable for the repayment of it. Judgment was given for the plaintiff.

Ruling Law. Story Case Answer

As the Ruling Court Case indicates, a corporation may borrow money, if this is necessary and appropriate for the transaction of its corporate business. Sometimes, state statutes limit the amount of money a corporation may borrow. It is held, however, that a person who lends money in good faith, acting in reliance upon the representations of those who control the corporation, and has no knowledge of the actual circumstances, may recover the amount he has loaned, even though the corporation has already borrowed beyond the authorized amount. In the Story Case, Burn-ham and Gilbert should be given judgment against the Commonwealth corporation.