Chattanooga National Building & Loan Ass'n v. Denson
Headline: Out-of-state loan company’s mortgage is voided as the Court holds a foreign building-and-loan association was doing business in Alabama, making its loan unenforceable and barring enforcement of the contract.
Holding: The Court ruled the loan and mortgage were an exercise of corporate functions in Alabama, so the foreign building-and-loan association was doing business there and the contract is void and unenforceable.
- Makes out-of-state lenders’ Alabama loans unenforceable if they don’t meet Alabama’s business-registration rules.
- Requires foreign companies to designate a local place of business and authorized agent before doing business.
- Drafting contracts under another State’s law or paying a fee won’t avoid Alabama’s requirements.
Summary
Background
A Tennessee building and loan association made a loan to one of its Alabama stockholders and took a note and mortgage as security. The instruments were dated and payable in Tennessee and stated they were governed by Tennessee law, but the association had solicited stock subscriptions and loan applications in Alabama and handled parts of the transaction there. Alabama law and the State’s constitution require foreign corporations to meet conditions before doing business, and the question arose whether this loan amounted to doing business in Alabama.
Reasoning
The Court focused on whether the association was exercising corporate functions inside Alabama. Relying on Alabama decisions, the Court explained that any act performed in the exercise of corporate functions by a foreign corporation that has not complied with the State’s requirements makes its contracts illegal and unenforceable. The association’s secretary admitted soliciting applications and paying a license fee but had not designated a known place of business or an authorized agent as required. The Court rejected the argument that drafting the note and mortgage in Tennessee made the loan a Tennessee transaction and distinguished other cases cited by the association. Because the contract was made in violation of Alabama law, the Court held it could not be enforced.
Real world impact
Lenders from other States that perform corporate functions inside Alabama must fully comply with Alabama’s rules or risk having their contracts declared void. Simply executing documents under another State’s law or paying a fee will not avoid Alabama’s requirements. The decree of the lower court was affirmed.
Dissents or concurrances
Mr. Justice Harlan dissented.
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