2. Memphis Lbr. Co. v. Security Bank & Trust Co. CORPORATIONS. Cannot sue to avoid ultra vires transaction fully executed. Where there has been an ultra vires conveyance of real property or transfer of personal property fully executed and the property delivered the corporation cannot sue to avoid the tansaction and recover the property. (Post, p. 142.) Cases cited and approved: St. Louis, Vandalia & T. R. Co. v. Terre Haute & Indianapolis R. Co., 145 U. S., 393; Rogers v. N. C. & St. L. Ry., 91 Fed., 299. 3. CORPORATIONS. Court will neither assist in disaffirming ultra vires executed contracts nor entertain suits in affirmance. The court will neither entertain suits in affirmance of ultra vires contracts of corporations nor aid the parties in disaffirming them when executed. (Post, p. 142.) Cases cited and approved: Marble Co. v. Harvey, 92 Tenn., 115; Tennessee Ice Co. v. Raine, 107 Tenn., 151; Barrow v. Turnpike Co., 28 Tenn., 304. 4. CORPORATIONS. Trustee for creditors not entitled to sue to re cover ultra vires payments. As a corporation could not sue to recover payments of corporate funds on notes of its principal stockholder when ratified by the stockholders, the trustee for the benefit of its creditors was likewise precluded from such relief. (Post, pp. 142-144.) Cases cited and distinguished: Nashville Trust Co. v. Bank, 91 Tenn., 336; Stainback v. Junk Bros., etc., Co., 98 Tenn., 306. 306. 5. CORPORATIONS. Subsequent creditors not entitled to have diversion of corporate assets rescinded. Creditors of a corporation becoming such after a diversion of corporate assets to the use of the principal stockholder are not entitled to relief in absence of proof that the diversion was with any idea of defrauding them. (Post, pp. 144, 145.) Cases cited and approved: Dillard v. Dillard, 22 Tenn., 41; Nicholas v. Ward, 38 Tenn., 323; Hickman v. Perrin, 46 Tenn., 135; Vance v. Smith, 49 Tenn., 343; Graham v. La Crosse & M. R. R. Co., 102 U, S., 148. Memphis Lbr. Co. v. Security Bank & Trust Co. FROM SHELBY. Appeal from the Chancery Court of Shelby County.HON. F. H. HEISKELL, Chancellor. HARSH & HARSH and FRANCIS FENTRESS, for appellants. BOYD & BEJACH, for appellee. MR. JUSTICE GREEN delivered the opinion of the Court. From a decree dismissing the bill the complainants have appealed to this court. The Memphis Lumber Company was a corporation in Memphis capitalized at $25,000. $12,500 of the stock was owned by R. E. Lee Wilson, and the other half of the stock was owned by Whitmel Kearney and members of his family. On June 15, 1915, Kearney bought Wilson's stock and gave for the stock four notes for $4,800 each. The notes were signed by Whitmel Kearney and two of his sons. Wilson discounted the notes to defendant Security Bank & Trust Company. Two of them were afterwards paid. On July 8, 1918, the Memphis Lumber Company made a general assignment to V. R. Smith as trustee for the benefit of all its creditors. Upon investigation the trustee became convinced that the two Wilson notes above referred to which were paid, were paid with funds of the Memphis Lumber Company, and that the defendant bank, holding the said notes, received such payments under circumstances sufficient to charge it with notice that the notes were being paid with funds of the corporation. This suit Memphis Lbr. Co. v. Security Bank & Trust Co. was accordingly brought by the trustee under the assignment, the Memphis Lumber Company joining him as complainant, for the recovery of the money received by the bank in payment of the two notes on the theory that it was a trust fund which the bank took with notice of its origin. The payments made to the bank on account of these two notes, according to complainants' proof, were with checks payable to the lumber company and indorsed by the lumber company and sometimes with the lumber company's own check. It may be conceded, therefore, for the purposes of this case, that the bank took these payments under such circumstances as to put it upon notice that the notes were being paid with funds coming from the corporation. Whitmel Kearney after the purchase of Wilson's stock was the practical owner of all the stock of the Memphis Lumber Company. A smaller amount was held by his sons, his daughter and another connection, the latter being the bookkeeper. Whitmel Kearney dominated and controlled the affairs of the institution. When money was withdrawn for a payment upon the Wilson notes, it was charged on the books of the corporation to "special account-Wilson notes." Later the special account was carried over to "surplus." Finally the "surplus" account was credited with the amount paid on the notes, to-wit, $12,341.58, and this amount charged to the account of Whitmel Kearney. These transactions seem to have been known to everybody connected with the corporation, and finally the foregoing system of bookkeeping Memphis Lbr. Co. v. Security Bank & Trust Co. was expressly ratified and approved by a resolution passed at a stockholders' meeting. It seems also that there was an effort to declare a dividend by the corporation sufficient to cover the amount used by Whitmel Kearney for the payment of the two Wilson notes. It is said, however, by the complainants that the corporation was insolvent, and no dividend was justified. It thus appears that the corporation was fully cognizant of this use of its funds by Whitmel Kearney and ratified and approved his course. So the application of the corporate funds to the Wilson notes was a corporate act in effect. Although the loan or advance to Whitmel Kearney for the purpose stated may have been an ultra vires act, it was none the less the act of the corporation. The facts of this case differentiate it from several cases previously decided by this court which are relied on by the complainants. It will simplify the controversy to refer to these former cases and distinguish them at the outset. The present case is not one where corporate funds were abstracted by a corporate employee or officer without authority from the corporation. (Water Co. v. Bank, 123 Tenn., 372, 131 S. W., 447; Bank v. Bank, 132 Tenn., 157, 177 S. W., 74), and that line of cases is therefore not in point. This is not a case where the corporation has undertaken to buy in shares of its own stock. Whitmel Kearney bought the Wilson stock for himself, and gave the notes of himself and his sons for this stock. The purchase was clearly on his individual account, and not on account of Memphis Lbr. Co. v. Security Bank & Trust Co. the corporation. Therefore there is no question here involved of a decrease of the capital stock of the corporation. Whaley v. King, 141 Tenn., 1, 206 S. W., 31, Civil Service Inv. Ass'n v. Thomas, 138 Tenn., 77, 195 S. W., 775, and Cartwright v. Dickinson, 88 Tenn., 476, 12 S. W., 1030, 7 L. R. A., 706, 17 Am. St. Rep., 910, accordingly are not controlling. This is not a suit by existing creditors of the corporation to recover its assets unlawfully diverted to stockholders. This is the suit of the trustee under the general assignment. The corporation itself is really not a proper party to the suit, and its connection may be disregarded. The suit is simply one by the trustee, and it follows, owing to the nature of the trustee's right and title, which will hereafter be discussed, that Vance & Kirby v. McNabb Coal Co., 92 Tenn., 47, 20 S. W., 424, and Jennings, Neff & Co. v. Ice Co., 128 Tenn., 231, 159 S. W., 1088, 47 L. R. A. (N. S.), 1058, are not determinative. These were suits brought by creditors to recover corporate funds distributed among stockholders. We think it clear that the Memphis Lumber Company itself could not maintain this suit to reclaim from defendant bank the funds paid to said bank on account of the Wilson notes. These funds were advanced to Whitmel Kearney with the acquiescence and consent of all parties connected with the corporation, and the corporation afterwards formally ratified the proceeding. The defendant bank held these notes bearing the indorsement of R. E. Lee Wilson, a perfectly solvent indorser as the record shows, and the bank surrendered the notes and its rights |