.:: .FEDERAl, .'. REPORTER.
,. I,'i)
(Circuit (J()'1J,rt, S. D.New Yor1C. March 19,1888.) 1. RAlLRPAD'
' .
.' AND '
't ,
' PROSPECTUS-
'The 6()mplainants. 8cting as 8 syndicate. purchased pari of an issue of railway, mortgage bonds offered foi: sale to the public by a prospectus issued by , the of .the raihvay,company·. Trustees had been appointed by an agreement between the s'everal cOnstituent companies composing the railway company to receive and disburse the proceeds of the bonds for certain specified objectll, among them the payment oithe debts of the constituent companies. In a suit ,brought by complainants against the railway company, the trustees, .'and varioull'defendants to 'whom the trust6esbad paid part of the proceeds of' the bonds; 'the bill that theprospootus' contained'various untrue and, fraqd'llelltreprese;ntatlOns; that the complainants relying thereon ,had beeu" t()purchase tb!! bonds by I that the trustees and the, other defennant! who had recelved part. oftl:1e proceeds were when they re-, ccivedthe: money of the false and fraudulent character of the prospectus; and theprospectqs also contained a that the of the. bondsshoiIld be used to complete the constructIOn of the raIlway, and not for the extii1ction of liabilities of the but the proceeds were applied in part ,by the trustees. and were rAceived by ,the other defend· ants in of such liat)Hities. with knowledge of thi, promise., The objectof the !!'nit was (1) to resCind thepurchaile for fraud. andcb.arge the trusteesandioo recipients of ,the moneys from them as trustees 6;2l maleficio; and (2) to enfOrce the promise of the prospectus as a.promiseto'the purchasers of bondl! in tlle .nature ofa trust, and c(l):npelthe trustees and the recipients from them ,to account for the part appropriated 'contrary to the promise. Held. that compla.inants were merely creditors of the company, and as such, even were the, issue presented by the !,Jill, cpuld not assail t)levalidity of the agree1Jlent appointing the trustees, nor question the doingllof the trustees as Such. ' " ' , ' 2.., SAlIE""""PLEADtNG-MUL'1'1FARIOUSNESfil. If the bill preeellted a case seeking relfef because of the invalidity of the trust agreeJ;llellt, or the violation of tlle provisions of that agreement by the, trustees, the 'conjunction of such a cause of action with the causes of action Arising' upon the prospectu's would render thebitl multifarious; and the join,.' der IlIt\U!es 'of action so ,wholly disconnected would render the bill so ob. noxlOull that the court 8ua 8ponte would refuse to tolerate it.
RIGIlTSOF BONDHOLDERS.
s:
Equity' WIn,not refuse jurisdiction of a suit to recover moneys obtained by fraud, wnen, the money in part has passed into the hands' of several third parties wlthk;nowledgeof the fraud, and the object of the suit is to reach. what remains in the hande of the original wrong·doers, and follow the rest and, reach it in'the hands of the other defendants. In such a case the remedy is' moreadeq:nate alid complete in equity than at law. SAME-MISRIllPRESEN'l'ATION IN PROSPECTUS.
OF CONTRACTS-FRAUD.
4.
by prospectus, except as between promoters and shareholders; isto be triedbythe ordinary criterion of !llisrepresentation. But a of 'a prospectus may require that a' :reasonable construction ot. the ,future tIlns8'should be, given to words mthe past or present tense. ' A right of rescission because of misr.epreseI\tations in a, prospectus must rest upon cOIl,cerningmaterial facts, and not of mere of opinion. and 'must relate to existing 'facts, and not to'niatters of future conduct or expectation. It cannot be founded upon the breach of purepromis· 80ry statements. "" " ' '
3.
8AlIE.
6.
SAME.
Unless promissory statements are such as imply that a certain condition of things, or state of facts, exists at the time to form the basis of the promised
BANQUE FItANCO-EGYPTrENNE,V. BROWN.
future state of things, they do not give bltthto right'of rescission.' Fraud predicated.of.promises,notperfofmedfor the purpose of avoiding a contract. ' "
'1.
If a prospectus contains material false representations, those who authorize it to be Issued cannot repudiate them' as made without their authority. while retaining the fruits of the prospectus; A statement in a prospectus respecting the uses to which the moneys to be derivel! from the sale of bonds are to applied is to be construed as arepresentation of intention, or the expression of the expectation and purpose o,f the. promoters, if the language falls short of a distinct and unequivocal promise.
, .
,,"
,
8. SAME.
9: SAME-'-FoLLOWING MONEYs INTO HANDS OF THIRD PERSONS. When.a. prospectus contains a statement which may be construed as a promise by the, promoters to, the purchasers of bonds that the moneys derived fro,lll the sale 01 the 110nds will be used for certain specified objects, ,otherwise, and the promoters upon receiving the moneys pay them ont to creditors of the company, disregarding the promise In, the prospectus,tbe bondholders, although the;yrelied upon the promise in, parting with their moneY, cannot reclaim It upon the theory of a trust, and follow it hands of those who received it lawfully from the promoters. although With notice of the promise. IUs onlY when money is held in a fiduciary ch,aracter, so tl;Iat the equitable title is in the beneficial owner. that the latter can follow it into the hands of a third person.
, Bill inEquity. The Banque Franco-Egyptienne et al., complllinanU:l, filed a bill against John Crosby Brown, Jesse Selij:(man, W. W. mau, W. B. Duncan, and the executors of James Brown, deceased, and of Treanor W. Park, deceased. Evarts, Southmayd« Choate, for complainants. Bangs, Stetson, Tracy« Mac Veagh, for John Crosby Brown and Jesse Seligman, defendants. ;renni'MJ{J « Russell, for McCullough, administrator, etc. L,rd; Day « Lord, tor executors of James Brown, deceased W AI,LACE, J. Although the pleadings and proofs in this case present a record, the real controversy is a comparatively narrow one ,when limited, as it must be upon the bill of complaint and by the confacts, to its real proportions. The complainants sue on behalf of themselves and of all other persons similarly situated. They are the members of several banking firms, aliens and citizens of France, who, together with other persons not named in the bill, were acting in concert in March, 1873, as a syndicate to market $6,250,000 bonds of the New York, Boston & Montreal Railway Company, then offered to the pubHc for subscription in London, and who became purchasers by subscription of two-thirds of the bonds., The bonds were part of an issue of $12,250,000 first mortgage bonds created by the railway company pursuant to It consolidation agreement by which several constituent companies were united and merged together as a new corporation under the laws of the state of New York. That agreement, among other things; provided for the creation by the new dompany of first and second mortgage bonds,.
164
FEDERAl, REPORTER.
to be used proportionately and upon trusts enumerated, in part for railwayoonstruction and equipment and in part to extinguish existing obligations of the constituent companies, which bonds were to be delivered to and negotiated by "disbursement trustees" to be thereafter nominated by'the new corporation, and were to constitute a fund in their hands to be distributed and applied pursuant tQ the specified trusts. Before the disbursement trustees accepted the trusts, the provisions of the dation agreement were modified by the concurrence of the immediate parties to it, and a "disbursement trust agreement" was executed, by the term.s of which the disbllfsement trustees were relieved of the duty of negotiating the bonds, the persons who were to act as such trustees were named, and the fund to arise from the negotiation of the. bonds was to be appropriated and applied upon somewhat different trusts from those origiriallyenumerated. The personsuamed in . this agreement as disbmseQlent trustees formally accepted the trusts created by it. Shortly afterwards the purchased by the complainants were offered to the public in London by Messrs. Bischoffsheim & Goldschmidt, who had undertaken with the consoli!iated company to market the bonds. The principal defendants in the suit are the trustees named in the' disbursement trust agreement, to-wit., John Crosby Brown, Jesse Seligman, William Watts Sherman, to whose hands came the greater part of the proceeds of the bonds, together with William B. Duncan and the executors of James Browri,deceased, and of Treanor W. Park, deceased. The trustees assumed to distribute the proceeds of the bonds according to the terms of the disbursement trust agreement, and Duncan, Brown, and Park were beneficiaries under the terms of that agreement, and respectively received part of the proceeds. The argument has taken a wide range, and it has been contended for the complainants-(l) That the trustees and the other original ants were parties to a scheme of deceit and fraud by which unprofitable railroad properties were to be merged together and mortgaged, the mortgage securities marketed, and the proceeds captured by the promoters; that the complainants were induced by deceit and fraud to purchase the bonds, and thus to supply the proceeds which were to be appropriated, and were kept, as plunder by promoters; and that they are entitled to resort to a court of equity, charge the defendants as trustees ex maleficio; and follow the proceeds. (2) That the complainants were induced to purchase the bonds, relying upon the truth of certain false and fraudulent representations contained in the. prospectus issued in behalf of the consolidated corporation :when the bonds were offered for sale upon the London market; that the defendants knew this when the proceeds came to their hands respectively; and, received the proceeds under such circumstances, the defendants are trustees ex maleficio even though they were innocent and· honest otherwise in their participation in the transactions complained of. And (3)r that the proceeds of the bonds were a trust fund in the hands of thetrusteesj impressed, both by express contract and constructively, with the equitable rights of the complainants to have them applied for speyified purposes; that the trustees have disre-
BANQUE FRANCO-EGYPTIENNE 'V. BROWN.
165
garded and subverted these equities by applying the proceeds to foreign objects; and consequently that they and the recipients from them with notice must account. The theory of a contract trust rests on the propositions-(l) That the complainants were entitled to avail themselves of the trusts created by the comconsolidation agreement; that this agreement was the charter of pany, and could not be materially changed without legislative sanction; that the trustees and the recipients of the fund arising from the proceeds of the bonds were bound to know that any disposition of the fund contrary to the provisions of that agreement was unauthorized; that the disbursement trust agreement, so far as it permitted a different disposition, was consequently invalid; and that it was the duty of the trustees to return the proceeds to the complainants unless they were willing and able to conform to the directions of the consolidated agreement. (2) That the prospectus, upon the faith of which the complainants bought the bonds, contained an express promise that the proceeds should be applied by the trustees in a specified manner, to-wit, should be held and applied by them for completing the construction of railroad property, while thA remaining first and second mortgage bonds should not in the mean time be offered for sale, but should be held by them for the extinction of all outstanding bonds and stock of the constituent companies; and that, if the trustees were not parties to this promise, so that it is not to be treated as a promise by them, nevertheless they knew of it when they received the proceeds,-knew that the milroad company had pledged itself accordingly, and were bound either to repudiate it and return the moneys or apply them conformably to the promise. It will be found that if the bill of complaint asserts more than two distinct causes of action or grounds of recovery against the defendants, there are but two which the evidence justifies in any view that can reasonably be taken of it. The complainants allege in substance in their bill that they loaned to the railway company the amount of money advanced upon their subscription for the company's bonds; that they subscribed for the bonds upon the faith of a prospectus issued to induce the subscription; that the prospectus contained various. representations concerning the character and value of the mortgaged property, and the condition and circumstances of the enterprise in which their money was to be used; that they knew nothing in respect to these matters but what they learned from the prospectus, except that various of the persons who were named in it as connected with the enterprise were regarded as men of wealth and high standing; that many of the material representations contained in the prospectus were false and fraudulent, put forth to stimulate a subscription on the part of persons like the complainants, ignorant of the natj.1ral features and surroundings of the said railway enterprise; that in consequence they were deluded and beguiled into subscribing for the bonds, and the disposal of the bonds to them under the circumstances involved a gross fraud and imposition upon them on the part of the railway company, its officers and agents, and on the part of the said trustees; ttnd that the complainants and other takers of the 1.A:>nds similarly situ-
:166
:FEDERAL· REPORTER.
BANQUE FRANCO-EGYPTIENNE V. BROWN.
167
prays for discovery, and for other relief to which special reference is necessary. Plainly, the averments of the bill present two principal grounds of complaint against the defendants as the basis of the relief sought: First, that the money of the complainants was obtained by deceit, of which the prospectus was the vehicle, whereby complainants are entitled to rescind their subscriptions and reclaim the money of the defendants who received it and participated in the deceit, or were cognizant of the deceit when the money came to their hands; second, that the prospectus contained a promise, in the nature of a trust to the effect stated, whereby the complainants are entitled to reclaim their money of the trustees who received it and applied it, disregarding the promise, and of the other defendants who received it with knowledge of the facts. There are allegations in the bill which may have been designed to charge that the trustees, as well as Duncan, Park, and Brown, were parties to a scheme of deceit and fraud, by which unprofitable railroad properties were to be merged together and mortgaged, the mortgage bonds marketed, and the proceeds captured by the promoters; and that the complainants were drawn into this scheme and induced to purchase the bonds, and thus supply the plunder which was to be and was appropriated by the promoters. Certainly, a considerable part of the argument for the complainants at the bar has proceeded upon the theory of such a cause of action, and that the complainants are entitled upon that theory to reclaim their money in a court of equity. But if any such charge was originally contemplated by the bill, the evidence to support it is not found in the record. Nothing in this controversy is better established by the proofs than that all the defendants, who were among the promoters of the consolidation scheme, were convinced that their enterprise offered excellent prospects of success as a practical and undertaking, and believed when the mortgage was created that the bonds subsequently bought by the complainants were a good speculative investment, and would ultimately prove a safe: and profitable one for the purchasers. A narrative of the transactions preceding the issuing of the prospectus and the sale of the bonds is necessary. The consolidation scheme originated in 1871; and negotiations ensued in which Messrs. Park, Duncan, and others,represented the Harlem Extension Railroad Company, Gen. Schultz (as agent for James Brown) and George H. Brown represented the Dutchess & Columbia Railroad Company, and Messrs. McKinney and Hoyt represented the New York & Boston Railroad Company; and a provisional agreement for a consolidation was reached in the spring of 1872. The scheme contemplated the merger of these three railway companies with two other railway companies, viz., the Putnam & Dutchess Railroad Company and the Pine Plains & Albany Railroad Company, which latter companies were to be organized to construct and bring into the proposed consolidated line intervening lines of railway. The Harlem Extension Railroad Company had been created in 1870 by the oonsolidation'of the Belluington & Rutland Railtoad,Company with the Lebanon Springs Railroad"Company, and upon
168
FEDERAL REPORTER,
the merger of those two companies assumed a mort.gage debt of the con·· stituent companies of $2,500,000. In April, 1870, the Harlem Extension Railroad Company had created a mortgage to secure its bonds to the amount of $4,000,000, $2,500,000 ofwhiQh were set apart to retire by exchange the mortgage bonds of the two constituent companies. The defendants Park and Duncan were large creditors of this company, According to the answers of these defendants, Park was a holder of $900,000 of the bonds of the Harlem Extension Railroad Company, and $300,000 of the bonds of the Lebanon Springs Railroad Company, and Duncan held $75,000 of the bOI)ds of the Harlem Extension Railroad Company, and $24,000 of the bonds of the Lebanon Springs Railroad Company; and they were the owners of ceJ:tain rolling stock in use by this company,' The railway property of the Harlem Extension Railroad Company had cost about $4,000,000. Its railroad was about 117 miles in length, and was in operation from Rutland, Vt., to Chatham Four Corners,and it was the lessee in perpetuity of the Bennington & Glastonberry Railway, Prior to the merger, as is alleged by the answers, the two constituent companies had regulnrly met their obligations, but after the merger the Harlem Extension Railroad Company lost business connections theretofore existing, and had not earned operating expenses during the year 1871. The Dutchess & Columbia Railroad Company was organized in 1866, and at the time of the negotiations had cost, with its equipments, about $2,600,000. Its rQad extended from Fishkill Landing, on the Hudson river, to Millerton Station, on the Harlem Railway, near the Connecticut line, a distance of about miles. Nearly $1,500,000 had been paid iuon its capital stock. Its first mortgage bonds ($1,500,000) had been sold at from 80 to 85 per cent. of par. It had a second mortgage for $600,000, a third for $125,000, and. a fourth for $275,000. At one time it had been leased by the Boston, Hartford & Erie Railroad Company for an annual rental of $200,000, but this company had defaulted in payment of rent, and, upon the termination of the lease, in March, 1870, the railroad was without equipment, and without means. James Brown was a large stockholder and creditor of this company, his interest approximating the suni of $1,000,000. The president of this company was his son, the defendant George H. Brown, and the defendant John Crosby Brown was the trustee of the several issues of mortgage bonds. George H. Brown held $52,000 of its stock, and $6,000 of its first mortgage bonds, and John Crosby Brown held $5,000 of the stock and 000 of its first mortgage bonus. After the termination of the lease to the Boston, Hartford & Erie Railroad Company, the railroad was without equipment, and without means to meet the interest on its mortgage debt; and thereupon James Brown purchased rolling stock and leased it to the company, and made advances to assist the company in carrying on its operations. At the time of the negotiation it was not earning operating expenses. The New York & Boston Railroad Company was organized in 1869 to build a line of railroad from the Harlem river, near New York city I to
BANQUEFRANCO-EGYPTIENNE V. BROWN.
169
Brewsters, in the county of Putnam, a distance of about 58 miles, and was in progress of construction at the time of the negotiationfl. Messrs. Hoyt & McKinney had been the principal promoters of this company. About $2,000,000 had been expended in construction. It had created first mortgage bonds for $2,000,000. Among those who had assisted the enterprise financially were the banking firm of Seligman & Co.· of which the defendant Jesse Seligman was a member. Prior to 1871 this firm had advanced the company over $160,000, and they had continued to make advances subsequently. While the consolidation scheme was pending they advanced $200,000 on $400,000 of its mortgage bonds, and $100,000 on $150,000 of the bonds. The two completed railways had experienced the usual vicissitudes of young enterprises, and at the time were unprofitable, but there is no reason to suppose that their owners regarded them as likely to be permanently so; the uncompleted one, the New York & Boston Railway, had been projected by intelligent and enterprising men, who believed in its ability to maintain itself when completed. It occurred to those interested in the three disconnected railways that by building the necessary link lines to unite them together, and merging all under one management,the three concerns could be utilized as members of an' extensive system, and a trunk railway line be formed extending from Rutland, in the state of Vermont, to New York city, having connections At the terrnini and at intervening points upon the line with other railroads, then built and in operation, ot projected; and that the new company would be able to command a much larger traffic locally than had inured to the disconnected roads, a traffic that would develop and increase with the increase of facilities and the growth of the communities along the route, and would also command a valuable independent traffic from its connections with other railroads. 'l'his was certainly not an unreasonable expectation in view of the results of many previous instances of railway consolidations, and in view of the phYllical and geographical conditions of the particular enterprise. They proposed to comtruct a railway which should be not only a north and south line, terminating at. Rutland in the north, and on tide water at the Harlem river near New York city on the south, and 'be an avenue of traffic reaching into Northern Vermont and Lower Canada, but one which by its connections with railways running east and west would derive a considerable business from the commerce between the eastern and western states. As the scheme took life and form it grew in dimensions, and the horizon of the promoters became enlarged, so as to include alliances and combinations with other important railway corporations to strengthen and fructify the new railway. Negotiations were commenced with the Erie Railway Companyand with the Central Vermont Railway Company looking to such an alliance. A .charter for I1n underground railway company in New York city was secured j and the construction of various branch roads 1(} serve as tributaries to the main line was included in the program oftheprojectors. During the latter part of 1871 and the early part of1872 the scheme gradually assumed a practical and defined form, and a
170
of was reached sa.tisfactory. to the parties havh'lg a controlling interest in the three principal railway, conwanies. In the spring of 1872,tpe preliluinary steps for carrying ol1tthe soheme of consolidation were so,far matured tllat, the,;two corporations for buildinf{ the link lines were organized, and t4e provisional agreement of consolidation referred to.vvfiS formally prepared and approved by the board of directors, resp8ctiyely, of the five constituent compl:tnies which were to consolidate, the New York & Bos.ton Railrol;\.d Oompany, the Putnam & Dutchess Railroad Oompany, the DUlchess &, Columbia Railroad Company, the & Albany Railroad Company. and the Harlem Extension Railroad' Company. This agr!1cment provided for the exchange of the capital ;st()ck of the companies for the capital stock of the new. cOljIlRany,. the paymentof the mortgage indebtedness of the constituent. conwanies by or proceeds of ,nlOrtgage bonds. to' be created: bythe new, companY.i.thepaYPJent and discharge by the COlliltitcompanies of alUheir outstanding liabilities; and the delivery of their I'espective railways to the new company;":"those of the Harlem Exteq.sion Company and the Dntchess.& Columbia Company to be deHveredincQmplete condition and good order, and, those Qf the Pine Plains & Cpmpany, the Putnam & Dutchess Company, .and the New YQrk & ,Boston O>mpany to be delivered with their tracks fully laid, graded, and bridged, and fenced according to laW,'.. The agreement furtherprovided for the, .erection by the ,new com'pany' of first mortgage the amount of $15,750,000, and bonds to the anlount ,of $5,000.000, which were to be appropriated to retire by purchase qr the bonded indebtedness of the divisional companies, andpayJor,thf;).rolling stock and equipment. of t4e new company. and for the, of the capital stock .not exchanged, and of mortgage bonds po,t,th,us liPpropriated to the genexal uses of .the company. The not show, satiElfactorUywhatwas the basis of adjustment betweell the. several constituent interes1:$"but the prOVisional agreement mortgage ,truatees should set; apart $4,000,000 first $l,OOO,OOO.secondr.nortgage '.bonds to be used for the exc,\langeor purcbaseof 'bondel1 and other indebtedness of the constituent companies, the Lebanon Springs R/l.ilrqadCompaJiY and the Bennington & Rutland Railroa;dCompaPYi$1 ,030,000 first mortgage bonds for the purchase or ,e:fCchange oOhe bonded indebtedness ofihe Pine Plains & Albany Rail· road Compa,nYi $2,500,00,0 first mortgage bonds for the exchange or bond,ed indebtednesEl of the Dutchess & Columbia Railroad Company; $1,720,000 first mortgage bonds for the exchange or purchase 'of the Putnam & Dutchess Railroad CompanYi and $3,000,000 bonds for, the exchll,nge O,r purchase of the bonded indebtedne!¥! o(the New York & 'Boston Railroad Company. It would seem from the evidence undel'standingbetweenthe promoters and the holderspf, the. underlying indebtedness of the constituent companies was that the latter were tqbe paid 55 cents in cash and 45 'cents in the stock of ,the new company per dollar for theirseclll'ities, and it was doubtless
BANQUE Jj'RANCO-EGYPTIENNE V. BROWN.
171
expected by the ,projecti)rs that a sufficient sur'plus arising from the sale of the first and second. mortgage bonds would remain to construct the several branch roads which were intended to be built. Shortly after the provisional agreement was thus approved, Messrs. Lowrey and Geo)'ge H. Brown were sent abroad as the agents of the several companies, to enlist financial assistance for the enterprise. At that time James McHenry, of London, was potent in the affairs of the Erie Railway Company, and Messrs. Bischoffsheim & Goldschmidt, of London, were its recognized financiers; and overtures had been made by the promoters to McHenry, who was then in this country, to assist them to obtain a loan. When Messrs. Lowrey and Brown arrived in London, Bischoffsheim & Goldschmidt had already been advised of their mission by McHenry. While there, Messrs. Lowrey and Brown prepared a printed report, which exhibited in detail all the physical features and conditions of the proposed railway, and statistics and estimates of the expected sources of revenue. They circulated this report extensively among leading bankers and capitalists. They took this report, together with all the documents necessary to show the previous and present status of the constit-. uent companies, and the provisions of the scheme of consolidation, to and left them with Mr. Sharp, the solicitor of Bischoffsheim & Goldschmidt, to whom they had been referred by Bischoffsheim & Goldschmidt. Before they fulfilled their errand, McHenry came to London and took part in placing the enterprise before Messrs. Bischoffsheim & Goldschmidt. It commellded itself to 'the favor of both McHenry and Bischoffsheim& Goldschmidt as one likely to be advantageous to the Erie Railway Company. As a result of the negotiations thus instituted, a tentative arrangement was made between the promoters and Bischoffsheim & Goldschmidt to the effect that, after the latter should bring out anew loan for the Erie Railway Company, which they were then about to offer, they would undertake the financiering of the new company; but that the consolidation scheme, whioh, as then devised, contemplated a mortgage of Hibout $45,000 per mile of railway, should be so modified that the first mortgage should represent $35,000 per mile, and also that a definite arrangement should be made between the promoters and the Erie Railway Company for an alliance of interestfl. AU the documents, statistical and legal, bearing upon the character and merit of the enterprise, were left by the agents of the constituent companies in the cus- ' tody of Bischoffsheim & Goldschmidt, or their solicitor, Mr. Sharp, during the pendency of the negotiations, and remained there until the present controversy first arose. The reduction of the amount per mile of the proposed first mortgage necessitated a readjustment between the promoters of the basis u'pon· the constituent properties should be provided for, the indebtedness of the company be satisfied, and the proposed enterprise he carried through. While negotiations to this end were going on between the promoters and the, various parties in interest, negotiations were also commenced with the officers of the Erie Railway Company touching an alliance and the co,operation of that company in obtaining the necessary fi':'
172
DDERAL REPORTER.
nancesfor the scheme. About the 1st of September, 1872, a contract was executed between the Erie Railroad Company and the five constituent companies, which, after reciting the proposed consolidation, a connection contemplated between the consolidated road and the Erie Railway by an underground railway to be built in the city of New York, and the ability of the Erie company,"through its friends anu agents, and through the money and influence of those interested in its securities," to assist in the negotiation of the first mortgap;e bonds proposed to be made Ly the consolidated corporation, contained the following covenant: " That the said party of the first part [the Erie Company] agrees that it will aid and assist the sl,rld parties of the secon!! part [the five companies] to negotiate the said first mortgage bonds to be issued by such proposed consolidated company to the extent above recited, upon condition that the proceeds of such bonds shall in the first place be used only for the purpose of completing said main line from High Bridge to Rutland, and to put the said line in complete working order, and for paying such claims as may now exist, and which it is necessary should be paid, in accordance with the terms of such proposed consolidation; as the same are expressed in the agreement already made relating theretp j and said parties of the second part agree that all proceeds of such con· solidated bonds, when the same are realized, :shall be so used and dispQsed of to the extent aforesaid. " The contract then defined the terms of the traffic arrangements which were thereafter to exist between the Erie Railway Company and the consolidated company, and closed with a covenant by the parties of the second part that the contract should be fully confirmed and duly executed by the consolidated company as soon as organized, and a covenant by both parties that the duration of the contract should be for the term of 50 years. About this time it became necessary for the promoters to assist the New York & Boston Railroad Company to raise money flO that it mip;ht consummate on its part the proposed scheme of consolidation. Application was made to Bischoffsheim & Goldschmidt in this behalf, and they consented to advance about $400,000 for that purpose. As a condition of that advance an agreement was entered into between the five constituent companies and Bischoffsheim & Goldschmidt, bearing date Qctoher 31, 1872, reciting the proposed consolidation of the five constituent companies, and their purpose to create and issue mortgage bonds 'at the rate ·of $35,000 per mile upon the consolidated main line, to be negotiated by Bischoff'sheim & Goldschmidt, and providing that the companies should proceed withodt delay to complete the proposed consolidation, and create and issue the proposed bonds, and place the Bame in the hands of Bischofl'sheim & Goldschmidt for sale upon commission, apd that Bischoffsheim & Goldschmidt should bring out, introduce, and' undertake tl;l.esale of the consolidated bonds, on terms therein specified as. to commission and brokerage; and should have an option to purchase the bonds at 90 per cent., less commission and brokerage. Concurrently with the execution of this contract, a written agreement in the form of a letter to Bischofl'sheim & Goldschmidt was signed by five of the promoters personally I which, among other things, contained a promise that
173
the first mortgage should be at the rate of $35,000 per mile, instead of $45,000, as originally contemplated. The promoters being now ready to proceed in perfecting the modified scheme of consolidation, such proceedings were taken that the Dutchess & Columbia Railroad Company, the Putnam & Dutchess Railroad Company, and the New York & Boston Railroad Company consolidated together by the name of the New York Boston & Northern Railroad Company; anel the Harlem Extension Railroad Company and the Pine Plains & Albany Railroad Company consolidated together under the name of the Harlem Extension Railroad Company; and shortly afterwards, and on or about December 19, 1872, the two companies consolidated as the New York, Boston & Montreal Railway Company. The agreernentsfor consolidation were ratified by the stockholders of the several constituent companies, as required by law. The consolidation agreement which thus created the new corporation was executed under authority derived from chapter 917 of the laws of New York of 1869. This statute allows directors of companies proposing to consolidate to enter into a joint agreement under the corporate seal of each company, prescribing the terms and conditions of the consolidation and the mode of carrying the same into effect; 'and requires the agreement, after the same is ratified by the stockholders of the respective companies, to be filed in the office of the secretary of state. The statute does not impose any restriction upon the contracting corporations in respect to the terms of the agreement to ,consolidate, except that the capital stock shall not exceed the sum of the capital stock of the constituent companies, and that no bonds or other evidences of debt shall be issued as a consideration for consolidation. and means of all creditThe statute also preserves unimpaired the ors of the constituent corporations, and provides that all the debts and liabilities of those corporations, except mortgages, shall attach to the new corporation, and be enforced against it. The consolidation agreement provided, among other things, that the railway company should execute and deliver to Jesse Seligman, William Watts Sherman, and John Crosby Brown, as trustees, a mortgage of all its property then existing or thereafter to be acquired (except certain equipments) to secure its bonds to the amount of $12,250,000, to be known as its consolidated first mortgage, and a second mortgage to the trustees to secure additional bonds to the amount of $12,750,000, to be known as its consolidated second mortgage; and that the said first and second mortgage bonds, when issued, should be delivered to three persons as "disbursement trustees" to be nominated and chosen by the railway company upon specified trusts. These trusts were contained in the seventh article of the agreement,and were (1) to arrange for the sale of the first mortgage bonds when issued, by negotiating in advance of the issue, and publishing a prospectus in respect to the proposed issue conf()rmably to the rules of any stock exchange, and to sign the same for the company; (2) to receive payments on account of the purchase money of the first mortgage bonds; (3) to invest the proceeds upon interest during such times as they should not be 'required for the purposes of the trust, and apply the interest to thegen-
t'1'4 objeeth>fthettust; (4) lC to: set apart the amounts of first and second mortgage bonds mentioned in the three sections of the for fuepUllposes, and oHhe'lsameiil the"mannet, thereinafter specifically: d·i):ected;" and (5) to .sell: ,and, dispose of designated amounts of first'trlortgage bonds, and a.pply:'the to specified purposes..; ;The- provisions of the fOUllth,·andfiftb trust are more fully set forth as follows:. The fourth trust prov.ides fQt the extinction of the debts of the several companies forming directly or indirectly the consolidated company., and to that end declares thatthe disbursement trustees shall set apart. hold, and dispose of specified amounts of first and second mortgage bonds, and apply the proceedsto purchase the following debts of the original companies at uote:tceeding 45 per Cent. in cash, and the balance of 55 per cent. in second ,mortgage bonds: (1) $1,729,000 first mortgage bonds and $1;838,000 second mortgage bonds to the payment or discharge of the Dutchess. & Columbia mortgage debt, and the Dutchess& Columbia unsecured debt,and any surplus to the mortgage trustees; (2) $1,552,000 first mortgage bonds and $1,650,000 of second mortgage boildsto the payment Or! discharge of the New York & Boston mortgage debt; and any oft-he consolidated company; (3) $2,903,000 oftitstQlOttgage bonds and $3,087,000 of second m.ortgage bonds to the payment and discharge of the Harlem Extension mortgagl' debt, and the HarleJ;l1 Extension unsecured debt, and the anee to. the vendors of the· Lebanoil Sprhlgs Railroad. Company and the Harlem Extension Railroad Company. The fifth trust declares that the trustees shall sell and dispose, of specified amounts of first mortgage bonds, and apply the prooeeds:,asdollows, viz.: (1) to the purchase of rolling stock and equipment; (2) $230,000 for a payment due under the Bennington &. Glastonberry Railroad Company lease; (3) $172,000 for a payment due under the Clove Branch Railroad Company lease; (4) $897,000 to complete the Putnam &. Dutchess Railroad; (5) $1,287,000' to complete the Pine Plains &. Albany Railroad; (6) 000 to complete the NewYol'k:&.£oston Railroad; (7) $1,000,000 to the payment of intereston the consolidated first mortgage bond; and (8) the batlance to the tl'(\asurer of theconsolidate.d'· Railway Company.. George H. Brown was ,selected as president of the company, and Park and Duncan were seleoted as. two of its directors. John Crosby Brown, Jesse Seligman, and, W. Watts Sherman w,ere selected as trustees under the mortgage. Other directotswere chosen who represented the several stituent interests. It iato be notieed that by the agreement of dation disbur.sementtrustees 'were, to be. selected by the consolidated company, and :at som.etime prnvious to the .issuing_of its mortgage bonds :were to negotiate and issue the. bonds, and that in order that the bonds should be ,applied to the paymentofthe outstanding indebtedness of the constituenteompanies, as well as to construotion and equipment, the ,en· tire issue was,·to be divided iilto'specific amounts applicable to thesev,. eral objects. Shortly after this· agreement was executed, the new pany found itBelfin need of funds, ,and applied its president to I
BANQUE FRANCO-EGYPl'IENNE V. BROWN.
175
Bischoffsheim& Goldschmidt for a loan. February 6, 1873, Bischoffsheim & Goldschmidt made an advance to the new company of $270,687 upon its note with collateral, and the president of the company made an agreement with Bischoflsheim & Goldschmidt in the form of a letter authorizing them in substance to exchange the collaterals for the first mortgage bonds of the consolidated company when placed in their hands for sale. Before the bonds were issued, and before the disbursement trustees nominated by the company agreed to serve as such, the instrument known as the "disbursement trust agreement," bearing date February 11, 1873, was executed. The contracting parties. to that agreement were the new corporation as party of the first part, and Seligman, Sherman, and John Crosby Brown, parties of the'second part. The latter, who. were the mortgage trustees, had likewise in the mean time been nominated as the disbursement trustees by the railway company. The instrument, after reciting the consolidation of the several railroad companies constituting the· new corporatiop., the existence of certain specified ness Of the: several companies, the execution by the consolidated companyof its first and seoond mortgage bonos, the purpose of that company to have the proceeds:and avails of these bonds applied to the: extinguishment of the indebtedness of· the several constituent oompanies, and th.e'construction, completion, and equipment of the lines of railway ·ofthe consolidated ,then recites that, since the agreement ofconsolidation was made,.negotiations for the sale of the first mortgage bonds II have resulted in an arrangement by which the same are to be sold, issued, and disposed of in accordance with the terms and conditions of a plan or prospectus for the sale thereof that has been or shall be putforth in the name of the said company at London, or as the same may be modified or altered,"and tbat the avails are to be placed in the. hands of the disbursement trustees, to be by them appropriated and applied ·solely for the· purposes and . uses thereinafter particularly designated. The agreement then the company shall place in the hands ·of the disbursement trustees th e proceeds of the entire issue of its first mortgage bonds, and $6,575,000 of its second mortgage bonds; directs the trustees to use the sarnein amounts and upon trusts specificallyenumerated, and requiles the application of the proceeds to be made pro rata up0n the·different trusts as avails oithe bonds come to their hands. The agreementcontainedthis'olause: "Whatever proceeds and avails of said bonds small be received by the said trustees, they shall appropriate, distribute,and divide to and among the several applications ·to be made tbereofj as hereinbefore provided, in the proportion f,hat. the bonds allotted. thereto bear to .the whole issue of such bonds."· The use directed constitutes the trusts of the agreement. The applications directed were as follows: (1) $1,729,000 first mortgage bonds and $1.838,000 sea(jndmortgage bonds to the payment of the mortgage and unsecured deMof the Dutchess & Columbia Railroad Company,at rates nat exoeedingA5 per cent. of the amount incash,and the balance in second mortgage bonds at pari (2) $1,552,000 first mortgage .bonds and $.1,650,000 second mortgage bonds. toihe payment of the New York
176
FEDERAL REPORTER.
& Boston Railroad Company mortgage debt, at not exceeding 45 per cent. of the amount in cash, and the balance in second mortgage bonds; (3) $2,903,000 first mortgage bonds and $3,000,000 second mortgage bonds to thl;} payment of the Harlem Extension mortgage and unsecured debt, at 45 percent. of the amount in cash, and the balance in second mortgage bonds; (4) $1,500,000 first mortgage bonds to the purchase of rolling stock and equipment for the consolidated railway, including the purchase of rolling stock sold to the company by James Brown and William Butler Duncan, $200,000 to each, respectively; (5) $230,000 first mortgage bonds for payrnent due the Bennington & Glastonberry Railroad Company upon a lease; (6) $172,000 first mortgage bonds for the payment due the Clove Branch Railroad Company upon a lease; (7) $897,000 to the completion of construction of the Putnam & Dutchess Railroad; (8) $1,287 ,000 to the payment for the construction of tlIe New York & Boston Railroad; (9) $805,000 to complete the New York & Boston Raill'oll,d; (10) $1,000,000 to the payment of interest on the consolidated first mortgage bonds; and (11) the residue of the avails and proceeds of all the bonds to the treasurer, of the consolidated company. It will be that the disbursement trust:agreementwas intended to relieve the disbursement trustees of the duty of issuing and negotiating the sale of the mortgage bonds. The recital that an arrangement for the negotiation of the bonds had been made by the company after the consolidation agreement was executed was inaccurate, because the arrangement referred to was the agreement made between the five constituent companies and Bischoft'sheim & Goldschmidt of the date of October 31, 1872, already mentioned. There was no ocCasion for the provision which had, been incorporated in th'j consolidation agreement imposing this duty upon the disbursement trustees; and doubtless the insertion of a clause to that effect was an oversight, and resulted from copying the language of the provisional consolidation agreement in that respect, which had been pre}:>ared in the spring of 1872 (or the approval of the constituent companies. 'fhemodification of the consolidation agreement introduced by the disbursement trust agreemeBt had been considered and determined upon some little time previous to the execution of the latter inbonds, strument. In order to expedite the placing of the first the companYl before the disbursement trnstagreement was executed, and on February 6th, sent Mr. Hherman abroad with a power of attorney au'thorizing him to dispose of the bonds. This ihstrument gave him plenary discretion, and authorized him to substitute agents with like powers; but it was undoubtedly intended to permit him to make the formal agreement with Bischoffsheim & Goldschmidt, in the name of the new coni-pany, which had in effect been madeiil its behalf by the five constituent companies in October previously·. Mr; Sherman carried with him duly authenticated copies of the agreement of consolidation of the first con,. solidated mortgage of the disbursement trust agreement then unsigned.· andof other documents:Whioh it is not necessary to mention. February 12th the solicitors for the consolidated company sent by mail to McHenry in London duplicate of the same papers accompanied by the nec-
BANQUE FRANCO-EGYPTIENNE 'l1. BROWN.
177
essaryevidence of the execution of the disbursement trust agreement. Shortly after Mr. Sherman's arrival in London, he executed a power of attorney to McHenry, substituting the latter as an agent with full authority to contract for the consolidated company in the negotiation of the bonds. March 14th McHenry executed, on behalf of the company, an agreement with Bischoffsheim & Goldschmidt, by which the latter mortgage bonds,were empowered to negotiate the whole issue of $6,250,000 thereof within 14 days, and the'remaining $6,000,000 "at such times and in such amounts as they should think fit, and whenever the main line of the company's railway from New York city to Rutland should be open to public traffic,"-at a price to produce not less than 90 per cent. of the par value, less commissions and charges. By the contract, the proceeds were to be paid by Bischoffsheim & Goldschmidt to the company by installments as received by them conformably to the terms of the prospectus to be issued. A prospectus announcing that Bischoffsheim& Goldschmidt were authorized to offer the bonds, and specifying the price and terms of payment, had been prepared, mainly by McHenry, in London, and had been circulated by Bischoffsheim & .Goldschmidt among some of their friends, before the formal execution of thiscoIj.tract· . The facts thus summarized, with of secondary importance,not adverted. to, in the history-of the consolidation scheme to the time the bonds were offered for sale, supply the ,data for inferences which are qpite inconsistent with the existence of any such fraudulent conspiracy on the part of the promotersas has been asserted. It appears that by the scheme, as matured, the owners of the Dutchess & Columbia Railroad were to get only about $865,000 cash for property upon which about $2,600,000 had been l!-ctually expended for construction; the owners of the Harlem Extension .Railroad Were t9 get only about $1,106,000 for property upon which about $4,000,000 had been actually expended for construction; and the owners of the New York & Hoston Railroad were to get only about $700,000 for proPerty upon which about $2,000,000 had actually been expended for construction. These cash payments were very considerably less than the then value of the properties. These properties represented a considerable investment beyond the actual cost of construction by those who had contributed the means to the several companies to build and operate their roads. As an equivalent for these properties, and for ,the moneys invested in them by stockholders, bondholders, and creditors" the parties in interest,-mainly the promoters of the consolidation,-were to have, besides the cash payments mentioned, 55 per cent. of the outlay in second mortgage bonds; to which extent, of course, their reimbursement was contingent upon the ability of the company toproyide for the interest and ultimately the principal of the first mortgage bonds. It is also manifest that the enterprise had,commended itself to men of experience and prominence in railway undertakings l who were on the spot, and familiar, not only with the general features, but largely with the details of the scheme, and had no interest as promoters, but were ponsultingtheirown interests as the owners of adjacent railv.34F.no.3-12
FEnERAL REPoR'rER.
'
ways; and these ' menhaa' 'pledgedth(jmselve-s: to' assist in 'negotiating thEdil'st: mortgage bonds among their', own' friends and btisinesscoadjutors,!' Itfurtherappears that the promoters had disseminated f411 informlitHm'of the nature of their ehtel'priseamong leading financiers and cap,italists in Lbndonearly irithesunllner of 1872, and bad endeavored to enlist the co-operation of btinkers, who,through their correspondents and branch houses in New ;Yotk city, had full facilities for discovering a exploitation; that the promoters' had at that solicited the'co-operatioh: of Bischoftsheim & Goldschmidt, whose intimate relations with McHenry and the Erie Railway Oompany gave them direct sources of authentiC and complete information; and that, after do'ing this, the promoters left their enterprise, the subject of investigaticm :a:nd criticism, to'sink or swim upon itsmerits, until the spring of 1873. It seemsuUerly improbablErthat Bischoffsheim & Goldschmidt, after ha'\'ing this long period in which'to acquaint themselves, thro.ugh their counsel and firianuial agents at'New York, and through McHenry and their associatesiD. t'heErie Railway 'Com pimy" with eVeL"ything.that was needed to be ktioWn:4oout the merits of the imterprise, would have risked their financial reputation, and 60mmitted then:lselvesto the responsibility' of marketing tbe bonds at 90 per cent. of par without resorting to informa'ti6n wholly 'independen't'ofthat conirillinicated by: the promoters; and unless they wero' parties ftO theia]]egedconspira.cy" itinust be inferred that they' 'wereconvinced,ftftera slifficieht-;investigation, that the enterprise was''lUl'1fonestone,and one to vrnichtheycould reputably lend the sanction df their name. It' is not claimed that they' 'were 'parties to the .c()Uspirady:,'lbUt, on the con'trary, this' 'is disclaimed by the counsel for thecomplamants. ':' ' , I The saHeilt mbt8al1dconsiderations thus referred to are sufficient torefote tl1echargeofsuch iii ebfispiracyob: thepalt Ofthedefendal1ts.: But 'it is proper to'refer to .other evidence in their exculpation. 'The report of Mt; 'Blirnes, 'fan engineer,and' an authorit1 ohindoubted ·qualifications, and reputation uponl 'railway projects, made in the spring Of 187'2'1 been produced. ' This report was hot to illfluence thE! pUblIc; but was procured by Joh,n Crosby Brown for·hlsown informati'on1, lind at his own 'expense, iriol'det'tosatisf)' himselHbat the enterprise wliB one with wbichhe could properly connect his name,Mt. 'Barnes nHtlie':a,' 'careJbl personal investigationo( the existing conditions ahd the prospective merits of the 'His report embodies in .,detail' afuU 5ummaryof them; and hig 'opinion was that the enterprise was ajudidousone, and that theprdposed consolidated railway would 'be for 'a larger mortgage than the first which waS subsequently created;" Thecomplairiants have compelled the productiohby:the defendants oftbeprivateletters pass,irigbetwMn various members dftheBro"'n family, and the private letoorspassing between ,the viu'ious:members Of the Selignlan: fahlily 1 dllrhlg the period from'the inceptioW'llt the scheme to the thhe tbe honds were sold in London and subsequently,and put them in evidence, to reveal the secret history of the transactions in suit. 'l'hese 'demohstratethe confidence of John i i ' v
BANQUE
BROWN.
179
Crosby ,13rown'apq.J?S$e $eligmaQ tllat the first mortgage bonds were a good and that the consolidated propfJrty ought to earp. more than enough to meet the interest upon them. The letters of George H. Brown indicate his conviction that the earnings of the property, in view of all the combinations· made or to be made, would be such as to make the.second mortgage bonds as good aathe first. The opinion of Mr. is manifes.ted by his letter to Mr. Bischoffsheim, written when he had no interest to pervert the truth. This frank, unpremeditated, confidential letter speaks trumpet-tongued in vindication of his good faith. N() letters indicating the opinion of James Brown or of Mr. Park arein evidence. James Brown was a man of advanced age when the scheme originllted, and his. interests were represented by Gen. Schultz, who had no personal motive to engage in a fraud. Mr. Park died before was taken in the cause,.and his motives and views can only be conjectured. , It has seem4:ld necessary to consider. the charge of conspiracy made against the defendants, irrespective of the. question Whether the bill of complaint contains any such charge, because thousands of pages of the printed .record are occupied by evidence·of;no pertinency to thecontroverlly,except as bep.riQgupoQ such a charge. . lfthecharge is unfounded, the defendants a.re entitled kl'the benefi.t ofavindication. Theconclusian reached. ill ,not only that the charge is unfounded, but also that it is without a shadow .of justification. The promoters did not a::;sume to be philanthropists, ,but they were not tricksters, They were well-known men ofbusiness,who concerted the consolidation Bcheme in order to mak!'l money f9r themselves. They were anxious to convert their investments in. railW4ilYs that were not produ.ctive at the time into investments that would be in the future; they convinced themselves that their enterprise bad the elements oflegitimate success; they were willing to stake a:very considerable part of their investment8\lpon the chances of its success; they expected to have to treat with men of experience, sagacity, and acuteness when they should applyfor the pecuniary means to.float their enterprise and put it on its feet; and,finally, they,sought for the means required of men who not only had as good an opportunity to judge oUhe merits as they,themselves, but whose judgment was prollJl.bly h!'ltter,because more disinterested than their own. It would be strange if the many actor::! in promoting the consolidation,. SOme of whom are not defendants in this suit, there were not those who were unscrupulous. ancleared little about the outcome so long as it was profitable to themselves. It would be strange if among the concomitants and incidents of sueh R: scheme there were not things done, and other things left undone; which Savor of recklessness, and bring reproach upon their authors,andmeasufably upon all assQciated with·thelu. These things, however, fall. farsbott of. intentional fraud, and are com mon, if not inevitable, in the.bistory oflarge projects of a speculative character ,like of motives and interl:;sts is as variou,sas this one, are the temperaJ.)}entsrandcharacters of those who jparticipate. the, case with respect to theprospectus J and the
t80
FEDERAL, REPORTER.
rights and liabilities of the parties growing out of the publication of that document, it is desirable to eliminate matters which have been argued at much length at the bar as authorizing a decree'for the complainants, but which have no.legitimateplace in the real controversy between the parties. The substantive averments of the bill, so far as it proceeds upon trust, are, in effect, that the trustees are responsible to the complainants, because they undertook a trust relationship and responsibility to the complainants by the conditions of the prospectus, and cannot justify themselves as against the complainants under any of the documents relating to the organization of the railway company, or under the disbursement trust agreement, because they were required to conform themselves to the trust of the prospectus or return the complainants their money. The bill does not attempt to place the relief sought by the complainants upon their right to enforce the provisions of the consolidation agreement, or to assail the trusts of the disbursement trust agreement as contravening the provisions of th,e consolidation agreement. Hsuch a case had been presented by the bill in conjunction with the causes of action founded upon the prospectus, the attempt to join a eauseof action to enforce an express trust-arising upon an instrument·executed before the prospectus was published, and wholly inconsistent'with the alleged trust contained in the prospectus, would have rendered the bill multifarious; and the joinder of such a, controversy with one founded upon a fraud, or a series of frauds, whereby the complainants became entitled to reclaim moneys which they were induced to loan the company, would render the bill so obnoxious to the recognized rules of pleading that a court of equity, 8ua Bponte, would refuse to tolerate it. A suit to enforce the, provisions of the consolidation' agreement upon the theory that trusts ,were created by that instrument in which the mortgage creditors of the company are beneficiaries would require the presence of all the persons and corporations to whom distribution of the proceeds of the bonds was to be made, and they are not defendants in the present bill; and would require different evidence, and the decree would proceed on widely different principles from one for the recovery of the money of the complainants that came to the hands of the trustees impressed with a different trust, or which they acquired ex delicto. In such a suit, the vast mass of evidence which appears in this record, and which was introduced to establish fraud, would have been utterly irrelevant; and the introduction of such an unnecessary and foreign issue into the bill would have been so inconvenient, oppressive,and vexatious as to impede and pervert the orderly administration ofjustice. Irrespective of any question of pleading, there is nothing in the provisions of the consolidation agreement upon which the complainants can found any right. That instrument did not create any trusts, but was an agreement between the parties who signed it for the future creation of trusts for their own benefit. Thetrllstees never became parties to it, there never was any perfect institution (jf the trust contemplated by it, and before the trust fund which the parties to it proposed to create and distribute was created the contracting parties abrogated the agreement by substituting a new one. Until the persons se-
BANQUE FRANCO-EGYPTIENNE IJ. BROWN.
181
lected to carry out the trusts declared in the new agreement became parties to that agreement and accepted the trusts, the trustees had no offi· cial existence, and assumed no personal responsibility. The only express trusts which they have ever assumed are those which they accepted when they became parties to the disbursement trust agreement. It remains to consider the case so far as it proceeds upon the theory that the defendants are responsible for the moneys claimed because they were obtained by the inducement of a prospectus which contained ulent misrepresentations of material facts, and also a promise amounting to an equitable obligation to apply the complainant's moneys in a way different from that observed. The officers of the railway company took a very subordinate part in formulating or issuing the prospectus. It was their understanding, and also that of all the promoters, that a prospectus was, to be issued and published incident to the sale of the bonds. Such a document was necessary if the bonds were to be listed with the stock exchange. The consolidation agreement contemplated that the trustees would undertake the office of negotiating the bonds and issuing of the prospectus upon which the bonds were to be offered to the public, but before they consented to act as trustees the negotiation of the bonds had been committed to Bischoffsheim & Goldschmidt by those who controlled the affairs of the company; and by the terms of the disbursement trust agreement the trustees were to receive the proceeds for distribution among the objects ann to the beneficiaries of the trust, and were relieved of the duty of negotiating the bonds. As has heen stated, the agreement between Bischoffsheim & Goldschmidt of October 31, 1872, by which they became contractors for negotiating the bonds of the company l was an agreement between them and the constituent companies afterwards composing the consolidated company; and, by force of the statute authorizing the consolidation, this agreement became obligatory upon the consolidated, company as soon as it came into being. This agreement was supplemented by the authority given to Bischoffsheim & Goldschmidt by the consolidated company upon theaJ vance made by them February 6, 1873; and when Sherman went to London with the power of attorney, his mission, so far as it related to the negotiation of the bonds, was merely to conclude formally with Bischoffsheim & Goldschmidt a contract in behalf of the consolidated company embodying the terms of the previous agreement. Mr. McHenry was the mediary selected by the officers of the company to conclude the formal contract with Bischo'ffsheim & Goldschmidt; and pursuant to the previous understanJing between the officers of the company and McHenry, Sherman substituted McHenry as agent for the company, with full powers to contract for the negotiation of the bonds, and thereupon McHenry ex,ecuted the contract with Bischoffsheim & Goldschmidt of the date of March 14, 1873. Prior to the execution of this contract, McHenry and Bischoffsheim & Goldschmidt had been engaged in the preparation of the prospectus, and Bischoffsheim & Goldschmidt had applied to the comylainants inviting them to assist ip marketing the bonds. So far as ap_pears, Sherman took no part in any of the acts of the promoters. He
,. 'FEl>ERAL':
had no interest in the enterprise, and knew nothing about its details. returned home resigned as a: trustee. The prospectus was issued and .bears date as of. the date of the contract. It was supposed at this time' by the officers of the railway company that }:lad interested himself for the company because of the allianOO which existed between it and the Erie Railroad Company, and because.the Erie Railroad Company was anxious to promote the new enterprise and bring it to a completion; but in fact McHenry was acting with. Bischoffsheir.n & Goldschmidt,andwaE!a partner with them in the profits which they were to derive by commissions and otherwise by negotiating the bonds. When the agents for the promoters, who visited London in the-summer of 1872 to solicit financial assistance, returned to this country, they left with Mr. Sharp, the solicitor of Bischoffsheim & Goldschmidt, who was also the solicitor of the Erie Railway Company in London, the printed report which they had prepared, as well as all the other instruments and papers relating tothe several companies and the proposed· of the· consolidation; and they also left with Bischoffsheim & Goldschmidt a state:ment embodying all the conditions and details oftheenterprise, which statement had been delivered by them. to Bischoffsheim & Goldschmidt as the basis for negotiations. McHenry, resorted to these materials for the preparation of the prospectus, and on February 1,1873, had prep&red one, a proof copy of'which wason that day mailed by him to the president of the consolidated company . This was received by Brownj the president, February 14th. With a view to its'preparation, McHenry had cabled Brown, on January 27th, to send a statement -of the intended appropriation of the first mortgage bonds "that werony state aut40ritatively that proceeds of said issue will completeworks.",Brown cabled him in reply, statingthllt $6,000,000 first mortgage bonds and $6,500,000 second lllol'tgage were to be appropriated to redeem old mortgage indehtedness,$3,400,OOO (first mortgage bonds) to complete' new works, $1 ,500,000 for equipment, and $1,000,000 to meet IUture h\!terest, "aU in trust for these specific purposes," and also that with the $3,'000,000 second mortga?;e bonds and $3,000,000 of unissued stock the company would· have ample mennsto com plete the whole line according to their programme; that 200 miles of lines were then in operation; !tha.f 56 more were ready for iron, and would be in operation by June; and that 50 more would be during the year: . The proof prospectusfQrwarded by McHenry to Browtl,Febrnary 1st,was prepared by'MdHtitlry in partir-om the information deriVed from this cable; It purported to offer for public subscription !'$4,9()0;000, part 'of $12,,, 250,000 ti'rst mortgage bonds." It recited the formation of the railway company by theconsolidntion of the several constituent companies, and gave the rilimes. bHhe officers, directors, al'ld trustees. 'It also contained the ' . i .... ' . " . '
He went abroad upon a pleasure trip; and as soon ashe
"By th'epurchase andcbnsolldation:or'the and by works in 'progress, these railways willftltm one main line connecting New YlJ.l'k with Boston mid Moritt'eall The entire line, including branches, win
BANQUE V;RANCO-EGYPTIENNJIJ V. BROWN.
183
350-milesinlength,of which 200 miles are now in operation, 50 more will ·be completed and in working order by June next. and the whole will be completedduring the present year. The route extends from the city of New York through the populous a.nd fertile counties of Westchester, Putnam. Dutchess, ·Columbia., and Rensselaer, in the state of :New York, counties of Rutland, Anderson, Frankliri, and Chittenden, in the state of Vermont, and the manufacturing county of Berkshire, in Massachusetts. Throughout the length of the line the local passenger and freight business promises to be very large, while in the Vicinity of New York city it will only be limited to the capacity of the railway. The Erie Railway Oompany, considering that the control of this railw8;Y and its connections is of the first importance towards securing a direct entrance into the city of New York. with acooss to Boston·.and the chief mapufacturing towns of the New England states and to thelJritish Provi nces, have entered into working with the New Y (irk, Boston & Montreal Rail way Company for a term of lift)" years, and, without any closer connection at present, the lines will practically be worked as one administration. ... ... ... The holders of the first mortgage bonds of the severallines included in the consolidation have agreed to accept 45 per cept.first mortgage bonda of the present issue. and 55 per cent. of the second mortgage bonds. Messrs. Bi!1choffaheim & Goldschmidt are authorized to offer for public SUbscripti0I1$4,900.000 of the above bonds of the New York. BOl'lton & Montreal Railway Company to complete the construction and equipment ofthe railways of the said company. the balance of $12,250,000 being resel,'vedfor the c0D.verllion of.the mortgage bonds issued by t;he s.everalcompanies York. BosLon Railway." . Upon receiving this copy of the proposed prospectus, the president of thecomp$.nyhadaconsultation with Mr. Barlow, who was&t that time the counsel. of, the Erie Railway Company and also the counsel at New York of 13iachoffslleim & Goldschmidt, and as a result of they a cable, sent February 14th, to McHenry, him to correct the. prospectus so as to offer $6,250,000 for subscription, and also directipg. him,toarr8J)ge for the sale of the. remaining 86,000.000. The purpose pf,;t;hisl;lisplltchis shown by a letter written the next day by Brown to McHenry,dn' which he uses this language: "There is One; pointupQnwhich I des.ire to touch that. is very important to us. You do Dot fi*1yunderstand, I think, that we. have contracts with the bondholders 'on the diffetMt roads to surrender their bonds and'take in: exchange. not bonds, but 45 cents in cash and 55 per cent. in second mortgage bonds at par. Under the plan of prospectus sent us. if we rightly understand it, you propose to negotiate and seU On the London IJlarket only that portion of the bonds that is not to be used for conversion, and, if we'jullge right'ij', leaveuil to settle wfth the old mortgage bondholdera'in tirst mortgage b'orids, which, not being in accordance with our contract with them, would anad"ance on our Part of the 45 per cent. cash necel.'!sary to carry out our with them. This, as you al'e aware, we are not in position to do, and theretore we have already supposed that we should receivl' through Messrs. Bischoffsheim & Goldschmidt the proceeds of the whole $12.250,000; whiehproeeeds. being placed in the hands of the disbursement tiustees,wolJ.ld be held by -them for the retiring under the contract of the old bonds.' It:wiUhaveavery damaging effect upon our credit here unless this contract, arranged· withao much care and placed in the. hands of such trustees as 'William Crosby Brown. and JesseSeligmau, can be , carried out by. us.: We may entirely misunderstand thllterms of the prospectus. and, by it may be intended tbat as soon as the $6,000,000 has been actually con-
184
verted, or, in other words, as soon as the trustees hold in their hands the 01(\ mortgages to cover the $6,000,000, or any part thereof, that then these bonds become available on the London stock exchange, and can be sold like the first issue through Messrs. Bischoffsheim& Goldschmidt under the contract." A further explanation is found in a letter of the same date written by Barlow to McHenry as follows: "The $6,000.000 (remainder first mortgage bonds) are reserved for under consolidation agreement for existing prior mortgages on the whole line. but I assume that your prospectus is so worded that if the market will take the whole issue, these surplus bonds, after cancellation of old bonds, can be sold. This is what the parties desire." McHenry answered the cable of Brown and Barlow as follows: "'Disposal of your bonds absolutely certain, but I must be allowed to manin my own time and fashion. Do not make engagements for expenditures until all is February 13th, McHenry mailed to the president of the company .another copydfthe proposed prospectus, arid this was received by him February 26th. This prospectus purported to offer $6,250,000, part of $12,250,OQO first mortgage bonds for public subscription, and contained thisst&tement: "The balaI1ce, $6,000,000. will be used fOr the extinction by conversion 'or payment of the divisional first mortgage bonds issued by the several companies now consoUdated." It also contained a statel11lmt of the estimated revenue of the railway from varioUs specified sources. Otherwise it was a substantial duplicate of the fil'stproof prospectus. In the mean time McHenry and eheim& G(jldschmidt were engaged in perfecting plans to bring out the loan. March 10th McHenry telegraphed to President Brown as follows: "Pros'pectus will be issued Thursday., I e'ngagetlle $6.000,000 firsts will be reserved lintilline opened in order to secure syndicate guarantee, but when first issue placed advances can be arranged on second half." cabled to McHenry I (March 10, 1878:) "Must. nOt engage reserve without advances on the $6.000.000 at, 87! currency net to us. Must have 45 cash on old securities to fulfill engagement;s 'and complete r9ad. For this purpose Heed proceeds of whole issue." McHenry cabled in reply, (March 11th:) "I have. $5.000,000 with syndicate to guarantee success.Cl\n manage only $6,250,000, and shallmanage $6,000,000 as circumstances, permit." What McHenry meant by this dispatch is luore fully explained in his letter of the date of March 14th, to He said: "In order tv mak,e an absolute success of this first issue and a consequent good market for further issue, I have arranged with the Paris syndicate and 'given them a large percentage for the guarantee of the subscription. I have arranged with Bischoffsheim & Goldschmidt to place at your disposal ,$1,000000 ,monthly, say on the 6th of each month, until the loan is exhausted, particulars of which will be settled by cable. In the prospectus you will see that , we havebeeh compelled to insert a clause postponing the pUblic subscription of the second issue until the main linels finished to Rutland. If it is neces·
BANQUE FRANCO-EGYPTIENNEtl. BROWN.
185
sary for you to have money before the second issue, there is nothing in the prospectus to prevent a private subscription similar to that now made for the first issue. " This was the last copy of the proposed prospectus ever seen by any of the officers of the company or any of the defendants until some time after the sale of the bonds by Bischoffsheim & Goldschmidt. The prospectus which was finally adopted, known as the "final prospectus,"was prepared by McHenry shortly before March 14th,was issued on that day by Bischoffsheim & Goldschmidt, and a copy was sent by them to the Banque Franco-Egyptienne which was received by the latter at Paris March 15th. It seems to have been the thirteenth or fourteenth revision of the various prospectuses prepared by McHenry and Bischoffsheim & Goldschmidt between the last of January and March 14th. This document, after giving the names of the officers and directors of the company, offered the bonds for public sUbscription in the following language: "Issue of $6,250,000, part of $12,250,000, first mortgage bonds (the remaining $6,000,000 being reserved for extinction of eXisting mortgages, will not be offered for subscription until the main line from New York city to Rutland is opened for public traffic) of the New York, Boston & Montreal Railway Company." It contained this further statement: "The proceeds of the present issue of $6,250,000 bonds will be held by the trustees (Messrs. John Crosby Brown, W. Watts Sherman, and Jesse Seligman) for completing the construction and for the general purposes of the collsolidated undertaking." * * * The documents connected with the company may be seen at the office of H. P. Sharp, Esq., 92 Gresham House, Old Broad Street." It repeated in Rub.stance the statements recited in the two proposed prospectuses sent by McHenry to Brown concerning the general nature and conditions of the enterprise, and its relations with the Erie Railway Company; but it amplified in somewhat florid language the paragraphs which depicted the future prospects and plans of the company. It was largely devoted to representations intended to show the advantages which might be expected to inure to the Erie Railway Company by reason of the alliance between that company and the consolidated company, and bears evidence upon its face that those who prepared it and put it in circulation designed to influence the market for Erie securities abroad by these advantages in glowing terms. There was also prepared by McHenry, and put into circulation in some instances by Bischoffsheim & Goldschmidt, a printed statement intended to supplement the advertisement of the enterprise contained in the prospectus. This also was largely devoted to showing the benefits expected to accrue to the Erie Railway Company from its relations with the consolidated railway.. Most of the statements in this paper like those in the prospectus are promis;eory; and the only material ones not found in the prospectus are that 4'the corporation will own thelines from the Battery in New York to Rutland," and "the promoters propose to complete a first-class line with low grades and easy curves, in order to transport goods at a rate that shall defy competition." Copies of a map whicp had been prepared by some
·
:FEDERAL REPORTER.
& nections, were also circulated with the prospectus by Goldschmidt. As there is no satisfactory evidence that any of the complainantsor any of theofficets of the railway company or any of the de- . fendants ever saw the printed statement, and as the map is of trivial importance in any aspect of the case, no further reference to either of these papers is necessary. At this time the complainants had organized themselves as a syndicate under the managementof the Banque l!'ranco-Egyptienne which had been formed to deal in loans brought out in London by Bischoffsheim & Goldschmidt for the Erie company and its affiliated concerns. The firm had a·house in London and in Paris. Henry L. Bischoffsheim was. the manager of the London house,and his father, Louis R. Bischoffsheim, was the head of the Paris house. The firm in each city was composed of the same persons, except that·Mr.Tallon, who was a member of the Paris firm, 'was not a membetof the' London firm. Louis R. Bischofi'sheim wMthe.preside,nt ofthllBatiqueFranco-Egyptienne, and the Paris firm of Bischoffsheim &' Goldschrnic1t were members of the syndicate., The London firm, as contractors for placing loans brought out by them in London, }lad been assisted by the Pal'is firm and the Banque FrancoEgyptienne in floatiQg the loans. ·Ih$uch operations it is customary to create and maintain a market for. the Sl:lcurities until they are ultimately absorbed by the public at prices which are. sufficiently remunerative to the contractors and their coadjutors. Thebank had formed a syndicate consisting of the same members when the London firm had recently marketed large issues of bonds for the Erie Railway Company and the Atlantic & Great Western Railway Company, and the syndicate had assisled in floating these loans, not as· partners with the contractors, but as guarantors: and subscribers for the loan u poncommissions and options.· The Paris firm of Biachoffsheim & Goldschmidt and the other members of' the' syndicate were jointly interested in the profits of these transactions, and in the subsequent dealings of the syndicate in the bonds; and the relations between the syndicate. and the London firm were such as to imply a mutual co-operation in manipulating the market for the profit of all concerned until the securities might be finally dis_ posed of to the public. Shortly prior to the making of the contract between the railway company and Bischoffsheim & Goldschmidt of London; by which the latter became contractors for bringing out the loan, Henry L. Bischoffsheim went to Paris to abtain the co-operation of the syndicate. A letter of the date of March 4th, written to' him after his return home by' Mr..May, manager of the bank, shows the state of the negotiations at that time. It is Rsfollows: .
of tIle for exhibition in London in the summer of1882, showing the' route and plan 'of the proposed railway and its branches and con-
"0 ur certainly still in existence, and. yo.ur proposition is not ot the tQ.make itdisappear, but before giVing our decision in the name pfthe I:lyndlcateit is necessary for us'toknow all the condl.tions of the busi.. ness. It 'is probable that your letterJof to;.day will give us these details, and we will $end YOUQu1' reply as quickly possible."
BANQUE ERANCO-EGYPTIENNE V. BROWN.
;187
Although a considerable part of the private correspondence passing between some of the members of the syndicate and Bischoffshehn & Goldschmidt had, been produced in evidence, the complainants hll:ve not produced the letter which was doubtless received' by Mr. Mayor by some other member of the syndicate containing the details which .Mr. ,May required and 'expected.' A paragraph in the same letter .illustrates the character of the relations between the syndicate and Bischoffsheim & Goldschmidt, and is as follows: . "The very cornplete information which you givens on the subject of the New York, West Shore & Chicago Railroad Company is conclusive. It is a matter to .be left altogether aside." .. In the 'melJ,n time negotiations were taking place between LouieR· .Bischoffsheim, representing the syndicate, and Henry L. Bischoffsheim :of London by correspondence which has not been produced. It would seem that by March 9th the information desired' of "all the conditions of the business" had been obtained by Mr..May, or by Louis offsheim, and laid before the members of the syndicate. On March 9th ,Mr. May wrote to Henry L. Bischoffsheim as follows: "We had a committee meeting this morning to discuss Montreal. (New York, Boston & Montreal Railway Company) business. and the following are the propositions which your father made to us: (1) To guaranty the whole issue in consideration of one-half per cent. commission; (2) power for the participants of the sYildicate of guaranty personally to subscribe after the close of the subscription and after knowledge of the result, to the whole extent of their share in the syndicate of guaranty, with power for yon to reduce their subscription not exceeding one-third; (3) payment by you to the Banque Franco-Egyptierine Of a commission of one-fourth per cent. on thesllbscription by theparticiparits, .that is on a minimum of tWo.thirds of the subscription. This mattet is accepted in principle, but as your father will inform you, we should prefer to have three.fourths per cent. for the guamnty of the commission instead of one-half: As soon as you inform your father by telegraph that all the above conditions. are accepted, the matter may be considered as settled, and you wiilpleaSe confirm the same to us by letter." Before tbis letter was written, a copy of a proposed prospectus, the eighth revision, had been forwarded to the bank by Bischoffsheim & Goldschmidt, and been received. March 10th the negotiations between the syndicate and the London finn were formally concluded on the part of the latter, llnd a letter embodying the contract was mailed on that day by the latter to the bank. In substance, the arrangement was that the syndicate were to guaranty that the $6,250,000 bonds about to be offered to the public by Bischoffsheim & Goldschmidt should be "placed," and any amount not placed should be taken by the syndicate; and in consideration thereof the syndicate was to have a commission of one-half percent. upon the amount, and an option of taking not less than twothirds of the issue after the result of the public subscription should be known. It was stipulated that Bischoffsbeim & Goldschmidt /ilhould not change the terms of the prospectus as to the price of the bonds and the dates of payment upon SUbscriptions, and it was further understood
188
that the syndicate should be promptly notified of the result of the public subscription. It appears that the course of business pursued by the contractors in the negotiation of such loans is to notify the public by advertisement, and by the circulation of the prospectus, when subscriptions may be made. These are generally made uptm forms of application sent by the to bankers. The application contractors, accompanying the list remains open for several days, and then the contractors proceed to make allotments to the applicants. If the applications are in excess of the loan ()ffered, the affair. is a success, and the contractors exercise their own pleasure in selecting the applicants and making allotments,or, as was contemplated in the present instance, decline to make allotments to the gE:neral public, and allot the loan,more or less of it, to themselves or their friends. The members of the syndicate were not formally notified that they had been included as participants in the guaranty, or in the subscription, until some time after the arrangement had, in the words of Mr. May, been"settled in principle i" indeed, some of them were not informed that anything of the kind was on foot until some days after the subscription had been actually made. The ba:ok, after consulting with some of the members, assumed the responsibility of representing the rest, and on the 11th of March ratified the agreement embodied in the letter of Bischoffsheim & Goldschmidt of March 10th. Thereafter the bank addressed circulars to the members ·of the syndicate, announcing that they were respectively included as participants, and allotting them respectively specified interests in the commission and the option. The complainants acquired the bonds in suit by becoming participants 'in this option. The Paris firm of Bischoffsheim & Goldschmidt, as a participant, became a subscriber for nearly $1,.500,000 of the bonds. As the prospectus·underwent revision by McHenry and Bischoffsheimand .Goldschmidt, copies of the revision were forwarded by them to the bank for inspection. As has been stated, a copy of the nnal prospectus reached the bank March 15th. March 18th Bischoffsheim & Goldschmidt telegraphed the bank as follows: " Whole public sUbscription above $9.000.000 and below $10,000,000; telegraph instructions for to-morrow." It is apparent that before this telegram was sent they had kept the bank advised of the extent of the public demand for the bonds and of the applications received. On the 17th of March they were notified that the syndicate had concluded to exercise its option, of subscription; and by a letter of the date of March 17th they notified the bank as follows: " In accordance with your instructions, we have subscribed on your account $4,166.000 first mortgage bonds of the New York, Boston & Montreal Railway, and we debit you with $41,660 in your account." By the tro-ms of the agreement with the syndicate Bischoffsheim & Goldschmidt were entitled, if the syndicate exercised its option for subscription, to reduce the subscription to one for two-thirds of $6,250,000. They did so, and allotted only the two-thirds, doubtless in order that the public might have the other third. The syndicate which, as origin-
BANQUE FRANCQ-EGYPTIENNE fl. BROWN.
189
ally formed, was to continue until August 15, 1873, unless sooner terminated, was dissolved early in April, 1873, and a new one was formed. This appears from notices given by the bank to the participants whioh are so instructive, as depicting what the syndicate really was and how its operations were managed, that a copy of one of them should be given. The circular notice dated April 14, 1873, ill as follows: " We have the honor to inform you that we have sold to a new syndicate, formedfor the purchase of bonds of American railroads, the $4,166,000 New York, Boston & Montreal first mortgage bonds subscribed by our syndicate at the time of 'the issue. As the syndicate is by this event dissolved, the participants are released from the payments mentioned in our letter of the 12th of March, 1873, and not yet made. Your interest in the syndicate being £ - - .-, we place .at your disposal at the office of Messrs. Bischoffsheim &; Goldschmidt in London .£ - - - , forming your proportionate part of the sum above mentioned." On the same day the bank sent a circular letter to the participants as follows: . " We have the honor to confirm to you that you are included for a participation of £ ---,in a syndicate formed with a capital of £3,200,000 to purchase and deU mortgage bonds of railways of the United States of America. This syndicate will exist until the 31st day of December, 1873. The synd icate has already secured the purchase of $633,000 Atlantic & Great Western first mortgage bonds at 80; $4,166,000 New York, Boston & Montreal first mortgage bonds at 82; $4,445,000 Erie Company convertible gold bonds at 82; total £1,702,669. You will therefore kindly pay to the credit of the Banque Franco-Egyptienne, at the office of Messrs·.Bischoffsheim & Goldllchmidt in London, 10 per cent. on your partiCipation, viz.· £ - , for your proportional part in the call made by the syndicate." The syndicate did not, however, dissolve December 31st. The following extracts letter sent by the bank to the participants, of the date of December 3lstj explain why the syndicate was not dissolved. " The dur.ation of the syndicate of whieh you have vested the management in us being Ii,mited to the 31st of this month, we desire to explain to you the cours6. it sE!ems to us to pursue at this moment in our joint interest. The crisis which prevails in America, and which took place so soon after the formation of our syndicate, has led to a certain depreciation in all railroad securitIes, and bas restricted their sales. Although the securities held by the syndicate have been relati vely speaking less injured by the crisis, we have not thought of selling them at prices which seemed to us below their real value. So far as concerns the Erie convertible gold bonds, and the small balance of Atlantic & Great Western first mortgage, we think that it is necessary to return to each the portion represented by his participation. The market for these two securities is suffiCiently settled and their value is high enough to prevent this division of securities from leading to any inconvenience. So far as concerns the bonds of the New York, Boston & Montreal Railway, we are convinced that it is extremely important to remain united for some time still, ll.B a joint course of action will alone allow us to carryon negotiations to the advantage of the participants. We will therefore send you, as soon as theaccounts of the syndicate ate settled, your share of Atlantic & Great Western .and of Erie bonds as likewise the cash balance which may be due to you. You will thus remain a participant in the syn,dicate of $4,166,000 New York, Boston. &; Montreal bonds."
i
.. , ,',' FEDER!N.IJ ',REPORTER.: "
:.?! ,,'
The relations which ex.,i-ated' between t1Iresynaicataand & Goldschmidt in the transactiono{ .marketingand.··dealing with the bonds are by what took. place· between :them ,January and Fehruaryof 1874,. In 'January the l'IlHWfli)T,oompanylwas barrassen,and thecoUipons forsemi.arlllual interest on the bonds were to mature February 1st; c,'Bischoffsheim '&Goldsehmidt wrote the bank, January,,2.3d, as follows:. ""'" ".Atter oonsideratioIl, We tbiilkthat it Is against the interest,of' thesyndicatetollend' ett bloc tb New York so large an amount of 'coupons *, ** to' be' cashed at the office of' the New Y oi'k, Boston &-' Montreal Company, *' ... *. thus 'revealing. that company the' small quantity 'Of its bonds 1JJhtChctr8 in the hands of the public. .. " .:, . ,
syndicate acceptedanci acted, upon the :suggestion. ' About the same time the bank and the syndicate acquired information of certain which the London firm had received in the ation of the hands for the railway company. To quote the testimony of Mr. :May, time learned the otherenterpl'l8es as, to whlCh they' had dealIngs wIth ,this taken speoial concernjng which it had not informed them. It wRS. a consequence of these discoveries, that the bank and syndicate, desiring to. enrorce their Claim agitinstthe house of Bischoffshehn"&:G()ld,schmidt, of London, and the estate of Mr. Louis R.. Bischoffshehn, entered into lln arrangement in February, 1874,wherehy the bank li.lld the !lyndicate obtainedsatisfactiori6fthl;lirclaims." This arrangement' :was an of the date of February 19, 1874, which all the members of the syndicate were parties upon one side" and Bischoffsheim & Goldschmidt of London, and heirs of Louis R. . Bischoffsheimof Paris,:were parties upon the othel'side. By its terms the 'syndicate until Augustl, 1876,' Bischoffsheim & Goldschmidt a.greed to pay the interest upon the bonds at their owntisk during the'continuance of the syndioate, and also to account to the syndicate for aRlosses upon the bonds at the selling Price of 70 cents on the dollar. They also agreed; to bear jointly with the" heirs of R. Bischoffsheim one-half oeany further loss to the syndicate arising by a ,fllll in the price of the bonds below 70 cents per. dollar. Under this ar.rangernent the syndicate has received over $1,000,000. So far as the statementS of the prospectus require consideration as misrepreseritil.tions which were intended to induce persons to buy the bonds, they, may be divided into three classes-those relating to eiisting facts, those which are Ilierely matters of opinion, and those of the chaJ;,acter of promissory representations. If the complainants are entitled to resort tOll. court of equity to obtain a recission of their purchase of the bonds; and to reolaim the money they Were induced to advanc.e,because ofmisrepresentati6ns in the prospecttls,theymustrelY' Upon niisrepresentatlolls concerning material facts,al1d,pdtastQ n1erematters of opinion, and which relate to existing facts, or be predicated of what was llntrue.at the time. andnot of matters of future conduct or expectation. Misrepresentation by prospectus, except as between promoters and share-
to
BANQUE FltANCO-EGYPTIENNE V. BROWN.
191
holders, is to be tried :by the ordinary· criterion of misrepresentation. What was said. by the lord chancellor, in HaUow8 v. Fernie, 3 Ch. App. 467, of the .prelimiuary character of a prospectus is peculiarly apposite to the documenOnquestion: "Everyone knawsJthat it is intended to usher a ,company into existence. No one is surprisecJ to ,find that a future tense must be given to words in the past or pres.ent This ought always to be borne in mind when a construction is.to be put upon the language ot a prospectus." Almost all in the prospectus, except those concerning the legal organization of the company, the amount of its bonds and stock, and the names of its officers and directors, are expressions of what is proposed to be done, and relate to the future plans of the promoters of the e:xpectedresultsof the enterprise. The only other statements which are not of this character, or are not mere expressions of opinion, are found in the paragraph which states that of the system '.'200 miles are now in operation, 56 miles more will be in. working order by June, and is intended to be completed during the present year,"and the paragraphwhich,after reciting the advantages which the Erie Railroad Company will derhre from the· enterprise, refers to the "working arrangements" entered into :between the two companies for the" tf'rm of fifty years." The only statement in these two paragraphs which was untrue was the. one in ,reference to the number of miles of railway then in operation. In fact less than 190 miles were then in operation instead of 200. This misrepresentatio.n doubtless originated in the cable message of Brown to McHenry of January 27th, and being accepted as true by, McHenry, was incorporated by him into the prospectus. It was a statementmade py Brown upon insufficient and erroneous data, put forth carelessly by the impulsiYe and over sanguine author without any deliberate purpose to deceive, in the belief that it was substantially true. The description ofthe proposed railway as one "extending from New York city to Rutland '1apdas one which would afford the Erie Railway, by junction at Fishkill," a direct entrance into the city of New York, was likely to convey a wrong conception of .the location of the New York terminus of tberailway,but was literally cOl1rect. The railway, as located at the time, terminated on tide:, water at the Harlem river, the northerly boundary ,of Nt;lw ¥orkcity, whence practical access to the business .portion of tbe city was only by water communication. This fact had been expliCitly, pointed .out by the promoters to Bischofi'sheim & Goldschmidt in the coI».illunication ,addressed to them in the. summer of 1872, and in the "report" circulatedbJ' the agents in London at that time, and distinctlyappeats in the mortgage itself. Inasmuch,as the plans of thepromoters included a connection of the railway with the heart of the city, by the underground railway,for which they owned a charter, or by arrangements. with some other .rapid transit system" and the description to be ia'terprete<il as Ilpeaking of the, future, the language was not mendacious. vil:le QUhe prospectus is foundiu the highly colored and exaggerated estimates ofthEj.probablesources of revenue of the railway. These }:llen<led with arguments based ;upon the revenues I
192
and" profits of other railways that the presentation of the prospects of the enterprise was well calculated to delude and deceive the inexperienced or credulous investor. Although no -legal responsibility can attach to the publication of these misleading matters of opinion, because no purchaser of bonds ,had a right to rely upon such opinions as an inducemellt to his purchase, they deserve severe reprobation, and the authors must be held morally accountable for a production which no honest and intelligent man should have sanctioned. The ardent confidence of promoters in the ultimate verification of their opinions is no excuse for putting forth reckless and fanciful estimates and assertions in such -a circular to beguile the unwary. Primarily, the moral responsibility for this prospectus, which was mendacious in spirit if not in intent, reslB on McHenry, Bischoffsheim & Goldschmidt, and such officers of the railway company, including George H. Brown, as saw the copies of the proposed prospectus sent to Brown by McHenry. No right of rescission (}an be founded upon the breach of the 'promissory statements of the prospectus. Promissory statements may be made in terms which imply that a certain condition of things exist at the time, and form the basis of the promised future state of things. When they are of this description, if they are intentionally false, they are fraudulent, and form the basis of a right of rescission; but otherwise fraud cannot be predicated of promises not" performed for the purpose of avoiding a contract. Like untruthful expressions" of expectation or opinion, even though when made they are made with intent to deceive, they are not fraudulent in legal definition, because they are not misrepresentations of existing facts." Sawyer-v. Prickett, 19 Wall. 146; Fenwick v. Grimes,5 Cranch. C. C. 439; Jorden v. Money, 5 H. L.Cas. 214; Fisher v. Oommon Pleas, 18 Wend. 608; Ex parte BurreU, 1 Ch. Div. 551; Andrew v. 8 Allen, 412. The promissory statements of the prospectus, except those which refer to the extent ofline expeoted to be completed in the following June,and the time when the whole line and branches were to be completed, relate wholly to the application to be made of the proceeds of the bonds then offered to the public, and the purpose of the officers of the railway company to apply the bonds not then offered, together with other bonds and capital stock oftha company. for the extinction of pre-existing indebtedness. The statements respecting the application of the proceeds of the bonds are to be ascribed in part to the defiant refusal of McHenry and Bischoffsheim &< Goldschmidt to accede to the plans and wishes of the officers of the company, and in part to the understanding of the latter that the terms of the prospectus would not be such as to cripple the company in carrying out the engagements contained in the disbursement trust agreement. The officers of the company were so far committed to Me1ienry and Bischoffsheim &; Goldschmidt in the negotiation of the bonds that they could not then recede without such a delay and rehabilitation of their plans for obtaining the necessary finances to carry out the scheme of consolidation as would propably have been fataJto it. McHenry and Bischoffsheim '& Goldschmidt understood this perfectly well. They also knew that the company required the proceeds of the whole'issue of first
BANQUE FBANCO-EGYPTIENNE tI. BROWN.
193
mortgage bonds, or should have understood it, because the disbursement trust agreement had previously been placed in their possession and was then in their possession, or in that of Mr. Sharp, their solicitor. But it suited their purposes to .off'er only a part of the issue of first mortgage bonds at that time, doubtless because they believed that the bonds wonld bring a better price than if the whole issue were offered to the public then. With full knowledge of the situation, they insisted upon dictating the conduct of the affairs in a manner to suit themselves. The officers of the railway company did not eee the final prospectus until March 27th, and at that time regarded the statement respecting the application of the proceed!:! of the bonds as Jlno practical importance in view of the representations of McHenry that there was nothing in the prospectus to prevent a private issue of the remaining $6,000,000, and that he had arranged with Bischoffsheim & Goldschmidt to advance $1.000,000 monthly until the loan was exhausted. But it is quite unnecessary at present to consider who was responsible for these statements of the prospectus, because as promissory representations merely they are of no consequence in passing upon this branch of the case. Inasmuch as the railway company received the proceeds of the bonds through subscriptions made by the complainants pursuant to the conditions of the prospectus, it must be regarded as the responsible author of the prospectus, and liable as a principal for the aots of its agents; and Bischoffsheim & Goldschmidt, who issued the as well as McHenry, are to be deemed the agents of the company as between it and the public. In this view, if the prospectus contained any actionable false representations, the railway company cannot repUdiate them while retaining the money; and even though they were not designedly false, if they were untrue the purchasers of the bonds became entitled to reclaim the moneys if they were induced to purchase in reliance upon such statements. The seller of property must be presumed to know whether the representations which he makes of it are false or true; and it is immaterial to a purchaser, who confides in them, whether the misrepresentations proceeded from fraud or mistake. Smith v. Richard8, 13 Pet. 26. The misrepresentation of the length of railway lines in actual operation at the time the prospectus was issued might or might not be important and material to the purchasers of the bonds. A difference of a dozen miles more or less could hardly be considered a serious matter to the purchasers, if the traffic of the railway was as valuable and producthrOl without them as with them; or if, as was the case here, the dozen miles and many more were speedily to be included in the security of the mortgage. If the complainants belonged to the class ,of investors who rely upon the information communicated by advertisements or a prospectus in becoming stockholders or creditors of a new company, the effect of this misrepresentation, and perhaps of other statements in the prospectus, would need to be considered, but it is impossible to believe that they trusted to the prospectus for the information which induced them to purchase the bonds. They were a body of speculators who were accustomed to embark with the bank, and co-operate through that corporation, with. Bis(;hoffsheim & Goldschmidt, v.34F.no.3-18
'FEDERAL REPORTER.
infloating 1tlie loons and trading in' the securities of the Erie Railway Compan,y and its Concerns, and because the bonds in question were of this clftssand were brought out under: such auspices, the bank assumed- the 'responsibility 'of including tbem as members of the syndicate, and committing them; as participants in the present instance; and this was done when it was understood that Bischoffsheim & Goldschmidt were to' prepare the prospectuslls they pleased except as to the time and terms of the, payments to be made. The inducement to the definitive subscription for the bonds was the informatiorr from Bischoffsheim & Goldschmidt 'that, the public wanted double the amount offered. It is utterlyimprobable that men of the astuteness and experience of the com· plainants were induced to put millions o£dollars of money into a speculatiOn:by' the confidence reposed' in ,thestntements of any prospectus. None:wb'uld have appreciated better than they the unreliability of such statements, or understood better the inaccuracies and exaggerations which generally' characterizesuchadl'ertisements, They were less interested in informing themselve,s about the real value of the bonds than ordinary investors, because they were not buying for a permanent investment but for Ii temporary one,and intended to sell tbemagain when they were properly manipulated to advance the price. Buying the bonds for their speculativemerits and not for their intrinsic "alue, the question with complainants was not what the bonds would be ultimately worth, but what "i.hey would probably sell for to the public,' within a few or months, when their price should be established by the dexterous methods of a combination of skilled' operators. They were interested in the contents and form of the prospectus because it was important to them that the bonds be, properly launched upon the market, and also because the document was designed in great part to advertise the benefits which would accrue to'the Erie Railway Company from the new railway, with the obvious motive of enhancing the price of the securities already held by the syndicate. They doubtless scrutinized it for these reasons as it passed through the several revisioIlS;they doubtless assumed that in a general way it exhibited the enterprise; but that they relied upon it for the information which induced them to buy the bonds is too incredible for belief. Many of the complainants have testified as witnesses in the cause. They state in substance that theyrelie1' upon each and all the representations of the prospectus in making sllbscription for the bonds. It is common experience, now that parties are competent witnesses, that such testimony.is always forthcoming. It iS110t improbable that sorneof the witnesses honestly think that they did rely upon these representations, and are convinced that they purchased the bonds confiding in their truth. But each witness states positively that he had no information at the time that there were underlying mortgages on the property of the railway company, and if he had 'been aWare of that fact he would not have become & subscriber. Yet this fact was distinctly Elfuted in the final prospectus, and in the whole series of previous revisions, and appeared conspicuously in two places in the,document. It was natural that the complainants
BANQUE ERANOO-EGYl'TIENNE V. BROWN.
,195
should rely uppn,.the'judgz;nent of Bischoffsheim & Goldschmidt as safer than any they ,could form tqemselves, without an independentinvestigation too expensive and dilatory to be made for the purposes of a temporary speculation. I They appreciated the moral responsibility which is assumed by such a house in offering the loan to their friends 'and to the public. They had no reason to doubt the good faith of Bischoffsheim & Goldschmidt, because the Paris firm asa member of the syndicate had of the whole interest in the venture; and the relations more than of the syndicate with Bischoffsheim & Goldschmidt, through the Parie firm and through the president of the bank, were so intimate and confidential that any departure from the duty of exercising the utmost good faith would have becn rank treachery. No commentary upon the nature of these relations, and the light in which they were regarded at the time by all concerned,is needed in view of the agreement of February 19, 1874, by which they exacted an equivalent for the "special advantages" enjoyed by Bischoffsheim & Goldschmidt, and the latter acknowlegged the justice of the claim. So implicit was their confidence in the judgment and good faith of Biachoffsheim & Goldschmidt that they did not care to examine the documents and papers relating to the railway company which they knew were in the hands of Mr. Sharp. It is quite imof all the possible to believe that the syndicate was not put information necessary to induce its members to participate in the subscription, or that "all the conditions of the business" were not given to the syndicate as required by Mr. May. This information may not have been given to all the members; but that it was given to the Paris firm, to the president of the. bank,. and to the controlling spirits of the syndicate before the subscription was made, can hardly be doubted. It was the reliance upon such information and upon the judgment and good faith of Bischoffsheirn & Goldschmidt, and not upon the statements of the prospectus, that led the memberS of the syndicate to subscribe. The conclusion that the complainants were not induced by the statements of the prospectus to buy the bonds is fatal to their case, so far as it proceeds upon misrepresentation, and dispenses with any.investigation of the evidence with a view to ascertain whether the trustees, or the recipients of money from them, believed or had any reason to suppose that the prospectus contained fraudulent representations. The question remains whether the prospectus contained a promise for a specific application of the proceeds of the bonds offered for sale which .impressed an equity upon the proceeds in favor of the comp]ainants,aniJ entitled them upon a misapplication to call the defendants to an account. This question may be disposed of briefly. Those who read the prospectus could fairly gather from its several statements the understanding eds that the railway company proposed to use the proC of the bonds then offered to complete the construction of the railway, and for such other general purposes of the undertaking as might be necessary, but not for the extinction of underlying mortgages. The statements about the res· ervation of the remaining $6,000,000 of the issue for the extinction of the outstanding existing mortgages and stock of the constituentcompa-
196
FEDERALBEPORTER.
nies are inconsistent with the idea that any part of the proceeds of the other $6,250,000 were to be used .for that purpose. But no theory of trust can be founded upon the effect of these statements. They are the mere representations of intention, the expression of the expectation and purpose of the railway company,which fall short of a promise, and do not partake of the definite and obligatory nature of a contract. Not only is there no distinct promise not to use the proceeds for the general purposes of the undertaking, but the statement is that they will be used for these purposes; and the intention Of the company not to use them for one of these purposes, the extinction of. the underlying liens, is left to inference only, and is implied from the statement that other bonds will be so used. No purchaser of 'bonds was justified in assuming that the company intended to tie itself rigidly to conditions which in the exigencies of the enterprise might become injudicious or impracticable, or in attributing 8uch a meaning to the recitals as they would bear if contained in contract. A. prospectus is an introductory proposal for a contract in which the representations mayor may not form the basis of the contract actually made. It may contain promises which are to be treated as a sort 'of floating obligation to take effect when appropriated by the persons to whom they are addressed, and amount to a contract when assented to by any person who invests his money upon the faith of them. But if the statements as to what is proposed to be done in the future are not distinctly promissory, are equivocal, and capable of different meanings, the inference is reasonable that they are not put forward or acted upon as essential stipulations. Whether the statements are to be regarded merely as the expressions of intention, or as a contract with the purchasers of the bonds that the proceeds should be devoted to the exclusive purpose of paying for the construction of uncompleted parts of the railway,the failure to make such an application of them cannot be redressed in the present action.· In the view the most favorable for the complainants they loaned their money to the railway company upon the security of the mortgage accompanying the bonds, and upon the faith of a promise by the company to use the money in a particular way for their advantage. By this transaction the railway company and the complainants did not enter into any' fiduciary relation, but simply became debtor and creditor. While the promoters of a company occupy a fiduciary relation towards those they induce to become shareholders, and the company itself is a trustee for its stockholders, bondholders stand upon a different footing. They are merely lenders upon security, and as cred. Van Weel v. Winston, itors part with their title to the money loaned. 115 U. S. 228; 6 Sup. Ct. Rep. 22. If a borrower refuses to keep his agreement with the lender to use the money borrowed in a particular .way, the lender has his remedy at law for breach of contract, or in an appropriate case may have relief in equity and compel specific performance. But there is no principle of equity which allows him to pursue the money as a trust fund when the borrower has parted with it to another who has obtained title to it as between himself and the borrower. Even where money has been obtained by deceit, so that in judgment 01
BANQUE FRANCO-EGYPTIENNE tI. BROWN.
197
law the contract of loan is voidable as between the lender and the borrower, it cannot be followed by the lender into the hands of one who has received it innocently and with a right to retain it as against the borrower. The law, from considerations of convenience and public policy, in order to give security and certainty to business transactions, adjudges that the possession of money vests the title in the holder as to all persons who receive it from him innocently upon a valid consideration, whether upon a new consideration or for an existing debt. Miller v. Race, 1 Burrows, 452; Jl.£sth v. Bank, 56 N. Y. 478; Stephens v. BOCLrd. etc., 79 N. Y. 183. In Mason v. Waite, 17 Mass. 560, a carrier to whom a sum (jf money had been intrusted lost it to the defendant gaming, and the court held it could be recovered oy the owner because the defendant received it unlawfully., but declared that had the carrier paid the money to an innocent person to satisfy a debt of his own, "the case might have been different, as it would be mischievous. to require persons who receive money in the way of business or in payment of debts to look into the authority of him from whom they receive it." Although that was an action at law, it was one for money had and received, which is of the nature of an equitable action. It is only when money is held in a fiduciary character, so that the equitable title is in the beneficial owner, that the latter can follow it into the hands of a third person. In the present case the moment the bonds were sold the equitable title to the money as modivested in the trustees by force of the consolidation fied by the disbursement trust agreement, and as soon as it was received they acquired the legal title and the equitable title vested in the beneficiaries designated by the latter instrument. The trustees were not the borrowers. They were agents for the beneficiaries of the disbursement trust agreement, whose duty it was to see that the proceeds realized from the bonds were devoted to the specific uses of that trust; and they had no other duty or power in the premises. Those who issued the prospectus and negotiated the bonds were not their agents, but were the agents of the railway company, and the trustees could not be responsible officially for their acts. If they had sanctioned the representations of the and had accepted the proceeds of the loan upon the express or implied undertaking to appropriate them exclusively to pay for the construction of uncompleted railway, they might have rendered themselves personally accountable to those for whom they undertook to act. They could not have consented to such an appropriation without disloyalty to the trusts of the disbursement trust agreement, and would have been responsible to the beneficiaries under that agreement for any disposition of the money not'authorized by the instrument. But if they had accepted the complainant's money upon a foreign trust they could not be heard to deny their own responsibility for refusing to comply with the trust. The case of Wilson v. Ohurch, 13 Oh. Div. 1, cited for the complainants, is not inconsistent with these views. In that case money was loaned upon bonds to a company which had issued a prospectus containing a statement that certain persons named would act as trustees for the bondholders and exercise their powers for the protection
-198
; :FEDERAL· REPORTER.
of the bondholders, and would retain out"of the proceeds of the bonds sufficient to pay for building a railway which was to be built for the company by another company ,arid apply the proceeds as received to pay for the work done :upon·the railway.: The proceeds were delivered by the. company to these persons who accepted them as trustees to make the promised application for the bondholders. The railway was not built, and the enterprise oontemplated by the company became impracticable, and thereupon the bondholders brought suit to recover the money in the hands of the.trustees. . The company made no claim to the money. The case was treated ·as onewhere,in the language of BRETT, L. J., "the fund contributed by the bondholders was deposited for the trust under which it was to be handed over from time to time in payment for 'work done, and otherwise it was nono be handed over." Upon the plainest principles of eqUity the fund was adjudged to be returned to the bondholders. They had never parted with their equitable title to the moneys which were, by contract, to be held and appropriated for their protection .by their own trustees. Not only was there no fiduciary relation in the present case which authorized the complainants to regard the trustees under the disbursement crust agreement as their trustees, bailees, or agents, but the complainants were not justified in relying upon any promise contained in the prospectusas a contract by the officers of the railway company to appropriate the money ina way not authorized by the disbursement trust agreement. They were bound to take notice of the limitations upon the power of the company to make any disposition of the proceeds of the bonds inconsistent with the provisions of the consolidation agreement which was the charter of the company. Whenever a corporation goes for business it carries its charler, and all persons dealing with it must take notice. of the powers and limitations thereby imposed upon its agents. Railway Co. v. Gebhard, 109 U. S. 537,3 Sup. Ct. Rep. 363; Ernest v. Nicholl8, 6 H. L. Cas. 418. An inspection of that iustrument would not have informed them of the existence of the disbursement trust agreement, but it would have informed them that the proceeds of the bonds were required to be appropriated to specific objects, and that this was a fundamental feature of the consolidated scheme. That instrument was sufficient to put. them upon inquiry, and knowledge must be imputed to them of all the facts which a sufficient would have disclosed. The prospectus itself pointed out a proper source of inquiry to all who wished to become acquainted with the documents creating the company and creating the trust whioh the trustees were to administer, and inquiry at that source would have led them to the disbursement trust agreement, and informed them that ,the promise' of the company, contained in the prospectus, was one which it was beyond the power of the company to make or fulfill. Consequently if the complainahts loaned their money to the railway company relying upon that promise, they did so at their own peril. Certainly they cannot follow it into the hands of those who never consented to receive it upon such terms, but received it because they were entitled to it as trustees of a different trust.
199
There are interesting questions oflaw in the case which have not been considered. It has been illsisted for the defendants that upon any view of the facts which might have been reached the bill ought to be dismissed because the controversy is not one of equitable cognizance, and because the complainants have separate interests and cannot join in the suit. If the suit were brought against those defendants only who were the immediate recipients of the money of the complainants, a court of law would be the appropriate and exclusive forulllfor the controversy, so far as it proceeds upon the theory of fraud or deceitj because no relief peculiar to a court of equity, such as the cancellation of documents or the award of damages unknown to courts of law, would be essential to the adequate protection of the complainants, and the only decree which would be directed would be one for the recovery of the money with interest. Buzard v. Houston, 119 U. S. 347,7 Sup. Ct. Rep. 249; Ambler v. Olwteau, 107 U. S. 586, 1 Sup. Ct. Rep. 556. But an action at law would not lie against those defendants and the defendants who it is alleged became subsequent recipients of the money with notice of the fraud. It would seem, therefore, that the complainants have the right to come into a court of equity in order to obtain a rescission of their purchase and a recovery of the proceeds from those who committed the fraud and at the same time from those who have received piut of the proceeds under circumstances which render them trustees ex 'nULlejicio, and thus obtain a remedy more adequate and complete, than they could obtain at, law. But it is unnecessary to dE'eide this question or the question whether the complainants can sue jointly, or to consider other objections which have been urged against the complainant's case. The parties who have litigated this cause so many yea.rs and at such great expense seem fairly entitled to an expofjition of the real merits of the controversy as they appearto the court, and the case should not be unnecessarily disposed of upon any technical grounds. The complainants have lost their money by buying the bonds of a company officered and commended to public confidence b)tmany of the best-known capitalists of this country. They undoubtedly supposed when they saw the names of such men connected with the enterprise as promoters or officers of the company that the enterprise had at least a reasonable chance ofsuccessj but it collapsed within a few months of the time when it was advertised in suchglowing terms. They may not have been aware when they brought this suit, and may not be aware now, that the enterprise never had any chance to live after the refusal of Bischoffsheim & Goldschmidt to advance the money which the promoters supposed they wOllldadvance pending the negotiation of the whole issue of first mortgage bonds, al1d that primarily Bischoffsheim & Goldschmidt should be considered as responsible for its failure. If the officers of the company had received the money which they expected, theuncbmpleted railways could have been built, and the consolidated railway equipped, opened for traffic, and put upon the basis of a going concern. Whether the expectations of the promoters would have been realized is a matter of conjecture only, but it is not unreason·
200
aple to suppose that the new railway would have gradually gathered strength and eventually obtained a fair traffic and become a paying property. The bill is dismissed.
CAMDEN IRON-WORKS '!1.
Fox.
(Oircult Oourt, D. Nf/IJJ Jersey. D!,cember 14, 1887.) 1. CONTRACTS-
An order. otherwise complete, to a manufacturer of iron pipe for a large quantity of that material, given and accepted August 27.1884. was in writing, and concluded in these words: "The entire delivery to be completed within - - weeks from date. We will wire you to-morrow in confirmation of these deliveries." Held, in an action by the manufacturer to recover damages for refusal of the buyer to accept the pipe when delivered, that a conversation between the parties had on August 27th prior to the execution of the contract, Rnd subsequent correspondence by mail and telegraph, were admissible to show that the blank was to be left until the buyer, who was under a contract to furnish the pipe with a per diem penalty, had ascertained what his limit was, and that he then was to, and did the next day, wire what was to go in the blank, viz., the word "nine." One who was under" a contract with a per diem penaltl to deliver iron pipe to a city, gave a written order to a manufacturer. which was accepted the same day. The time of delivery was left blank, but the understanding of the parties was that the buyer wad to telegraph the date the next day, which he did, fixing the delivery "within nine weeks from date." The order was then entered by the manufacturer. The buyer wrote from time to time urging the speedy prosecution of the work, and finally. when the period was more than up, rescinded the order as to all pipeil,ot then delivered. Held, in an action by the manufacturer for damages for refusal to accept, that time was of the essence, and that the manufacturer, having entered the order after the blank was filled, was bound thereby, and could not recover.
EVIDENCE-ADMISSIBILITY.
2. SAME-PERFORMANCE-TIME OF THE ESSENCE.
At Law. Trial by the court without a jury. S. H. Grey, for plaintiff. fJortlandt Parker and David McOlure, for defendant. WALES, J. The plaintiff brought this action to recover damages from the defendants in consequence of their refusal to accept and pay for a certain number of cast-iron water-pipes which they had ordered to be manufactured and delivered by the plaintiff. The contract between the parties was in writing, and in these words:
"Oamden Iron- Works, Phila.-GENTLEMEN: "Please enter order for 800 lengths 12 in. cast-iron water-pipes
300
..
6"....
"
-To conform ill all respects to the specifications of the V.l'. W·· city of New York. "Prices,6 in., $32.22; 12 in., $30.45 per ton of 2,000 lbs., delivered on dock N. Y. city. .. " "Delivery. You to commence making the 6·in. pipe immediatelyfollowing execution of order now in your books from N. Y. cit)', and to commence rnak·