The Bank of Augusta v. Earle

Supreme Court of the United States · 1839 · Corporations

Corporationscorporationscomityinterstate contractsforeign corporationscorporate powersstate policybanking

Facts

The Bank of Augusta was a corporation created by Georgia law and had the usual banking powers, including the power to purchase bills of exchange. Its agent in Mobile, Alabama, using the bank's funds, discounted and purchased the bill sued on in Mobile for the bank's benefit and to remit the funds back to Georgia. The parties submitted a stated case asking whether those facts constituted a defense to the action on the bill. The lower court held the contract void because the bank, as a foreign corporation, could not lawfully exercise that power in Alabama.

Issue

May a corporation created by one state validly make a contract in another state through its agent when the contract is within the powers granted by its charter? More specifically, was the Georgia bank's purchase of a bill of exchange in Alabama valid, absent a showing that Alabama law or policy prohibited it?

Rule

A corporation created by statute possesses only the powers conferred by its charter, expressly or incidentally, and may make contracts outside the creating state only if its charter authorizes such acts and the law of the place where the contract is made gives express or implied sanction. By the comity prevailing among states, a corporation of one state may make contracts and sue in another state unless the host state has indicated, by law or clear policy, that such acts are repugnant to its interests or policy.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Ridge Finance, a corporation chartered in North Carolina, is authorized by its charter "to buy and sell negotiable instruments." It sends an agent to Nashville, Tennessee, to purchase a draft payable in Kentucky. Tennessee has no statute or judicial decision forbidding such purchases by out-of-state corporations.

If the seller later refuses to honor the draft and argues the purchase contract was void because Blue Ridge Finance is a foreign corporation acting in Tennessee, how should a court rule?

Explanation. A corporation created by statute has only the powers granted by its charter, but it may exercise those powers in another state through agents if the host state gives express or implied sanction. The majority presumes such sanction by interstate comity unless the host state's law or clear policy forbids the contract. Here, buying negotiable instruments is within the charter, and Tennessee has no clear prohibition, so the contract is valid. (Derived from The Bank of Augusta v. Earle (n.d.).)