J;ESUP tI. tLLINOIS CENT. B,' ·CO.
I
481
pel'mile was paid to the Cedar Fa1l8 and Minnesota RaHroad; ftwoltldbe a fair and equitable between the .'. . . The Jetter or report having been submitted to the directors of the Du· buque Company, the latter authorized a lease upon the terms by Mason and Blackstone, "ex.cept that the division of earnings after $3.500 per mile shall be seventy per cent. for the Dubuque and Sioux City &ilroad Company and thirty per cent.· for the Cedar Falls and Minnesota Railroad Company, and that said lease commence' January 1, 1866;" fUr,ther, that the lease should be inliau of the drawback contract then existing between the companies. By this lease, which was dated September 27, 1866, the Dubuque Company agreed to pay to the Cedar Falls Company, during the term Qf 40 years from January 1, 1867, a fixed rental of $1,500 per mile per annum, in equal monthly installments, and a further rent, every six: 9f35 per cent. of the gross earnings of the leased property when they exceeded $3,500 per mite. per annum, and did not exceed $7,000 per mile per annum, and 30 per cent. of the gross. earnings when they exceeded the latter sum per mile per annum. The lessee enanted .to b.tke possession of the road as it was opened from station to station, and to fully .and efficiently equip, operate, qand maintain it, as· sumingallliabilities and paying all expenses incident thereto, and to the property the same' care' and attention bestowed upon' its own road. . This lease, by its terms, superseded the then existing drawback contract between the parties. 'fhe mortgage in question, this lease, must have been e.x.ecuted Rubsequently, for it recites that the Cedar Falls Company "have leased their road, constructed and to be constructed, tathe Du.. buqueandSiouxCity Railroad Company," and states the terms of the lease as they appear in the instrument of September 27, 1866 ;:01' it may have been executed on the day it bears date, in anticipation of a lease then agreed to be made. It was given to secure the proper application of the rents and profits of the Cedar Falls road, constructed and to be punctual payment of the principal and interest of constructeq, and construction bonds proposed to be issued, and which .were issued, for 81,407,000, maturing Ja.Quary 1, 1907, and bearing interest at the rate of 7 per cent. per annum, payable semi-annually. It constitutes a seeond lien on the part of the road then constructed from the junction with the Dubuque road, near Cedar Falls, to Waverly,a distance of about 14 miles, and a first lien upon the road to be constructed from Waverly to the Minnesota state line. The first lien on the 14 miles of road then was created by a recorded deed of trust to Jesup and Richmond, dlltedApril25,1864, to secure certain bonds issued by the Cedar C,Qmpany, of. which $210,000 were outstanding when the gage for 81,407,000 was made. 'rhe mortgage of September 22, 1866, recites the purpose of the Cedar Falls Company to issue certificates of stock on its railroad, constructed and to be constructed; at the rate of $21,000 per. mile, including the stOUK already issued. It also provides, among
488
FEDERAL REPORTER t
vol. 43.
things, that the Cedar Falls Company should remain in possession of its road, or in receipt of the rents and profits, so long as it was not in
default as to any of the bonds mentioned, or in applying the income, rents, and profits, as indicated in the mortgage; but that "in case of default of payment of either of said bonds or of the interest coupons, or of failure to apply the income,rents, and profits as above provided, it shall be the duty of said trustees to proceed to enforce payment by foreclosure, or to collect and disburse the income, rents, and profits in the manner above provided, as to them shall seem best for the interest of all parties concerned." ' The Dubuque Company took possession of the Cedar Falls roe.d und8r the above lease. But on the 13th day of September, 1867, it leased its own road and appurtenances to the Illinois Central Railroad Company for the term of 20 years from October I, 1867, at an anllual rental of 35 per cent. of its gross earnings during the first 10 years of the lease, and 36 per cent. during the last 10 years, .with the option, "during said term of twenty years, to take the Dubuque and Sioux City Railroad and befere-mentioned property in perpetuity, paying 36 per cent. of the gross eanlings thereof, and in that case no charge for im provements of any kind is to be made." It was also provided that, if 1he Illinois Central Railroad Company failed to give notice of its election to surrender the property at the end of 20 years, it, would be deemed to have exercised the option to keep it in perpetuity at an annual rental of 36 percent. of its gross earnings. This lease, to which was appended a copy of the Cedar Falls lease, contained a clause upon 'which Jesup, the trustee, bases, in part, his claim against the Illinois Central Railroad Company. That clause is in these words: , "It is further agreed that the party of the second part [the Illinois Central H:"Hroad Company] shall assume the lease made by the party of the first part [the Dubuque Company] with the Cedar Falls and Minnesota Railroad pany. " . The Illinois Central Railroad Company took possession of the Dubuque and Cedar Falls roads under the lease of September 13, 1867, and operated both roads, paying to the Dubuque Company, for a time, the rental stipulated in the lease of September 27, 1866, but subsequently making pa.yment directly to the Cedar Falls Company. It elected, upon due notice, to surrender the Dubuque road after the expiration of 20 years from October 1, 1867, and on the 1st of October, 1887, it did surrender to the Dubuque Company the possession of both the Dubuque and Cedar Falls roads. The Dubuque Company and the Illinois Central Railroad Company had a settlement, in which the former admitted its indebtedneas to the latter in the sum of $529,634, which was paid by a note maturing October 1, 1888. The parties agreed, in that Mttlement, that neither had any claim or demand against the other growing out of the lease of September 13, 1867. ! It is admitted that the rental accruing to the Cedar Falls, Company dU1'ing the: 20 years its road was held by the Illinois Central Railroad
JESUP Ii. ILLINOIS CENT. R. CO.
Company, that is, up to October 1, 1887, was fully paid by the latter company before tbis litigation was commenced. The original suit was instituted by Jesup and Forrest, trustees, on the 1st day of March, 1888, against the three railroad companies named in the caption. The bill, after setting out the terms of the mortgage pf September 22, 1866, and the lease of September 27, 1866, alleged that the latter was the result of nogotiations between the defendant railway companies, having in view the extension of the Cedar Falls road to the Minnesota line, so as to open that state to the Illinois Central Railroad and its connections; that said honds, aggregating $1,407,000, and the mortgage to secure the same, were made in order that the leaRe of the Cedar Falls road might be executed according to the understanding resulting from the alleged negotiationsj that the Illinois Central Railroad Company entered into possession of that part of the Cedar Falls road then constructed, and was accepted as lessee in fact in place of the Dubuque Company; that thereupon, and not before, the constructiou bonds werb placed upon the market and negotiated upon the faith of both leases, having on them, pursuant to an agreement with the Illinois Central Railroad Company, an indorsement dated New YorK, October 1, 1867, and signed by John S. Kennedy, as president of the Cedar Falls Company, in these words: "The lease of the Cedar Falls and Minnesota Railroad to the Dubuque and Sioux City Railroad Company, referred toin the Within bond, has this day .been assumed by the llIinois Central Hailroad Company, and the minimun rent which that company has thereby obligated to pay in monthly installmentzi is more than sufficient to meet the entire amount of interest on this issue of bonds;"
-that the work of constructing the remaining portion of the Cedar Falls road was carried on with the money derived from the sale of such bonds, and was accepted by the Illinois Central Raiiroad Company. which continued to operate the road, receiving the rents and income therefrom, anu paying the fixed rental thereof to the Cedar Falls Company; and that about or dnring the year 1866 the Illinois Central Railroad Company purchased and acquired 'control of the stock, and thereby of the management, of the Dubuque Company, for the purpose, among other things, of wrecking and destroying the Cedar Falls Company, and thereupon subverted the Dubuque road to its own use and purposes, causing the Dubuque Company to take steps looking to a surrender by it of the lease of the Cedar Falls road. The bill further alleged that the Illinois Central Railroad Company has neglected to perform the covenants in the lease of 1867, and to account for the earnings and income of the Cedar Falls road, in consequence of which the Cedar Falls Company has made default in the payment of the bonds and coupons mentioned in said deed oftru8t, to-wit, the semiallnual coupons due January 1, 1888; that the latter company' was insolvent, and without resources, other than said leased property; that it had not only failed to collect and properly apply the income, rents, and profits of the mortgaged property, but had misapplied some portions of
J'EDEBALBEPOBTEB,
vol. 48.,
property, before the obligation of the Illinois' ,Central Railroad Oompany to assume· the 'leaseof:Septenlber 270, beenenforced,would be injurious :to ,the:Cedar.Falls:CompallY and its stockholders, as welL as, to .the holders of the 'bonds secured by the mortgage.' . .:Thetrustees:ptay thaUt may be adjudged and decreed: .:That they uo.ne; are henceforth entitIedto receive and collect the rents, income, 'andjlrofits, arising 'fromthemortgaged premises; that they be ,.8ubrogatedto the rights and interests of the Cedar Falls Company under the lease t(j'the Dubuque Com'pany for and during the remainder of the term theirights oLthe lessor against the other defendants for an accounting of 'past; transactions under: the lease; that the :leaseof September 27., a Jawful,valid,and .subsisting instruiment, assumed by and binding ,Upon the Illinois Central RailroadCompallYi accordirig to the terms and tenor thereof; throughout the entire ,term ,of ·40 years originally. demised; tbat the latter: company-account for :the rents 1'e8elfV:ed under the lease; that the plaintiffs have judgment against it' for all rents', income\ andprofi ts now d,u,e and owing to the cedar Falls Company under: and by virtue of such lease; that the Illinois from alleging or giving out that Central Railroad Company the indorsement on said bonds was not their act and deed, and is bound It.ocolltinueto occupy theprernises Company, operating. repairing, and maintaining the same, as provided for in the !lease;. that the defendants betestrained from entering into any arrangefrom agreeing; that'saidlease is void or' voidable, pay'iihg'rehts to (ither pers6hsthan tbe plaintiff; 'that they severally account to the plaintiff for all sums of money received by them, or either of .them, for the demised premises; that the Illinois Central Railroad Company"under the direction of the court, put tbe, demised premises in good ;conditionand repair, as required by the lease, and that an accounting be had to· ascertain the amount necessary for that purpose; that, uponits refusal and neglect to pay such amount, judgment be entered therefor in .favoi' of the plaintiff'; a.nd that the plaintiff have complete, ..full, and adequate relief as may seem meet. . , The Cedar Falls Company entered its appearance, but has never filed an answer .to original bill. . Railroad Company answered, denying that it was in the lease directly or, indirectly. concerned in of the Cedar Falls road to the Dubuque Company, or that it' ever asI!umed any obligationsiorespect to that road, except those contained in ·its lease of the'Dbbuque road, and that it had fully met and performed all of those obligations; It denied that it assumed the lease of the Cedar Foallsroad, for the fullterm of 40 years, and insisted that it only agreed ·tocarr.¥:ouf,the provisions thereof.during the term for which it leased, and, shouldJ;'etain, the Dubuqu'8 road'and a ppurteliances. It denies that .lit lis: iindabtedt(jl plaintifl:orto the :Cedar Falls Company in any sum iwhateMer, because it:;hau,prior totpe institution of this acti6n, paid UNell'td:thpGedarc;Eal\s.Cnmpany ;the :the le1lSe qf
theoo;.ttnd, thata fqreclosure,and Sale of the
any
JESUP 'V.ILUN<l1S CENT.'R. CO.
491\
Septeni:ber 27; 1866'; for the .full term during which it held its road, and. : on the 1st day of October, 1887, surrendered to the Dubuque Company' both the Dubuque and Cedar Falls roads. The answer of this company is quite lengthy, but the above is a sufficient statement of the grounds upon which it resists any decree against itself. It will be remembered that some time after its answer was filed the Illinois Central Company moved that the suit be dismissed upon, the ground that the Dubuque Company was an indispensable party to the relief sought in the original suit, and, not having voluntarily appeared herein, and being an Iowa corporation, it could not be brought before the court by service of process, so as to be bound by any decree that might be Upon the hearing of this motion it was ordered. December 4, 1888, that the bill and all proceedings under it stand dismissed. unless the Dubuque Company, on or before the first Monday in February, 1889, by voluntary' appearance herein or otherwise, became subject to the authority of the court in this CRse. The Dubuque Company subsequently entered its appearance and filed an answer. It also, by leave of the court, filed a cross-bill against the trustees in the mortgage of1867 and against the Cedar Falls Company. whir.h states with much detail the facts and circumstances upon which rests its claim to have the lease of September 27 t 1866, set aside and canceled. The cross-bill proceeds, mainly, on these grounds: That Morris K.Jesup, Platt Smith, Charles L. Frost, D. Willis James, and lsaacH. Knox, continuollsly, and others from time to time, were directors. officers, and agents of the Dubuque Company; that they and their associates constituted a syndicate organIzed for the purpose ofconstructing the Cedar Falls road, not10r the purpose of operating it themselves. put as a piece of marketable property; that they did this under the cOl'porate name of the Cedar Falls Company, which, as an organization, they owned and controlled; that in negotiating and making the lease of the Cpdar Falls road, which lease was and is burdensome and, injurious to the Dubuque Company, the managing officers and directors of the latter company were, as such directors and officers, dealing with themselves, in reference to matters in which the)' were privately and perthus situated were sonally interested; that such def.lings between prohiLited bylaw and by public policy; that in said transactions,Jesup and his "associates,O' holding fiduciary relations with the Dubuque Company, knowingJyand fraudulently disregarded and sacrificed its interests for the ,purposes of profit and advantage to themselves individually as stockholders and bondholders of the Cedar Falls Company; and, consequently, that the Dubuque Company is entitled to a decree ca'nceling tile lease. in question.. It is also 'all(;'ged in the cross-bill that during the term of 20 years, . while the Cedar Falls road was controlled by the Illinois Central Railroad Company, it was a matter of no moment to the Stockholders of the Company what was the amount of rent reserved to the Cedar Company by the lease of September 27 I 1866, because the Illinois Central . . Company, in its contract with the Dubuque Company; ,
492
FEDERAL REPORTER I
had assumed such lease; that Jesup remained in the position of president and director of the Dubuque Company from the date of the executionofthe lease of 1866 until September, 1887, during which time he assumed and exercised, and was accorded by the other acting directors, the absolute and exclusive control of that company; that he dictated its policy and management, and concealed from it all knowledge of the facts; that on the day last named he and the other directors of the Dubuque Company resigned, whereby its stockholders, through a new board of directors, became at the end of 20 years for the first time possessed of the ability to ascertain the true position of that company, and to manage its affairs for its best welfare; that, until the present time, it has not had the power to institute in its own name any action for the purpose of submitting the question of the validity of said lease to judicial decision; and that, while such lease is in existence under the hands of its officers and itS corporate seal, it affords a continuous right of action at law to the Cedar Falls Company and the trustees in its mortgage for the recovery I monthly, of the stipulated rental. Other grodtlds set out in the cross-bill for the cancellation of the lease are that there was no authority under the laws of Iowa for the execution either of the lease or of the mortgage; that the lease of the Cedar Falls road was never lawfully authorized and adopted by the then directors of the Dubuque Company, three-fourths in value of the preferred stockholders not having given their written consent to it, or to the indebtedness created thereby; and that it was never lawfully or intelligently ratified or.confirmed by the stockholders of that company. Jesup, trustee, (his co-trustee, Forrest, also Ii citizen of New York, having died after this litigation commenced,) and the Cedar Falls Company filed separate answers to the cross-bill, each denying all the allegations therein contained that impeached the integrity or fairness of the mortgage of September 22, 1866, or the lease of September 27, 1866, and -contesting the right of the Dubuque Company to have the lease . i aside and canceled. . After the issues upon the cross-bill were made up, this cause was before the court upon various motions, among others, a motion of the Dubuque Company for an injunction restraining the surviving trustee, Jesup, and the Cedar Falls Company froIn commencing or prosecuting any separate acti9u against it for the recovery of rents accruing under the lease of September 27, 1866. By an ordElr entered May 13,1889, this motion was granted, upon condition thatihe Dubuque Company deposited in the registry of this court, subject to its final order, the full amount of fixed;rentals acoruing under said lease aild unpaid, namely, those accruing since October 1, 1887, at the rate of $1,500 per mile per aunum, and that it deposit further fixed rentals, as they became due and payable; such depositS, however" being without prejudice to the rights of the parties, 'or either of them, in respect to the ultimate disposition of the 6U1118 so paid into court. This order was complied with by a deposit in the registry of the court of the sum of $187,553.28, the amount of said fixed: 1:enta1s, at the above rate, from October 1, 1887, to May 1, 1889.
JESUP
v.
ILLINOIS CEN1'. R. CO.
493
'rhe injunction asked for was accordingly granted. The fixed rentals accruing since the last date have been regularly paid into court. Thomas De Witt Cuyler, Francis B. Daniels, and John E. Par8O'Tl8, for Morris K. Jesup, trustee. Stephen H. Olin and Lyman &: Jackson, for Cedar Falls & Minnesota R. Co. Benjamin F. Ayer, for Illinois Central R. Co. John N. Jewell, for Dubuque & Sioux City R. Co. Mr. Justice HARLAN, after stating the facts in the foregoing language, delivered the opinion of the court. With this general outline of the case, as disclosed by a very voluminous record, the court wtll proceed to consider the issues arising in the original suit. We have seen that by the contract of September 13, 1867, between the Dubuque Company and the Illinois Central Railroad Company, the latter agreed to assume the lease made by the Cedar Falls & Minnesota Railroad Company to the Dubuque Company. If this assumption made the Illinois Central Railroad Company liable, as between it and the Dubuque Company, for the stipulated rental of the Cedar Falls road, during the whole period of 40 years for which it was leased to the Dubuque Company, and if the latter c6mpany, after, or when, taking back that road into its own possession, could not, to the prejudice of the Cedar Falls Company or its mortgage bondholders, discharge the Illinois Central Railroad Company from such liability, theothe right of the trustee in the mortgage of September 22, 1866, to invoke the jurisdiction of a court of equity, in respect to any amount due from nte Illinois Central Railroad Company, cannot well be doubted. That mortgage refers to the lease by the Dubuque Company, and covers not only the net earnings of the Cedar Falls road, constructed and to be constructed, but the rents and moneys payable by any person or company to the Cedar Falls Company for the use of said road and appurtenances. The agreement of the Illinois Central Railroad Company to assume the lease or the Cedar Falls road created no direct obligation on its part to the Cedar Falls Company, or to the trustee in the mortgage of September 22, 1866, that could be eaforced by an action at law. Only by a suit in equity, to which the Cedar Falls Company in some form was a party, could the trustee obtain the benefit of the assumption by the Illinois Central Railroad Company of the lease of the Cedar Falls road to the Dubuque Company. National Bank v. Grand Lodge. 98 U. S. 123; Keller v. Ashford, 133 U. S. 610,620, 622, 10 Sup. Ct. Rep. 494. This point is referred to and determined, because the objection to the original suit as not being one of equitable cognizance, if sound, would be sufficient to dispose of the case as to the Illinois Central Railroad Company without reference to any other question. It therefore becomes necessary to inquire as to the scope and effect of the agreement of the Illinois Central Railroad Company to assume the lease of the Cedar Falls road. As neither· the'Cedar Falls Company nor
were to. tb.at agreement, their underafter or when. its contents became known to The inq:uiry must he. restricted to the' interitionofthe two corporations thilJ executed it. Now,when the Illinoiil RaHroad Company agreed.to assume the of the Cedar Falls rOlia, was it intended that it should become bound foi'the rent of the Cedar Falls road, Mter,it had, ,surrendered the possessionof the Dubuque road, which constituted the linkbetw'een the Illinois Central railroad and the Cedar Falls road? Of what use would the Cedar Falls b,een to th.elll,inoiil Central&ilroad Company. after the surtender the DubuquercJad? It is so clear from the whole structure of the no such intention existed uponthe IllinoisCentra,l Railroad Company or of the. Dubuque CompllDy that an analysis of its several provisions is unnecessary. Nor is, any ground to believe that the. Cedar Falls Company Or the trustee(in its m.oftgagesqpposed that they could look to the Illinois Ceptra)'!biilrolld .Com pany. for rents accruing 8ubseque.ntly to the surthat might occur) of the Cedar FaIls road to the. ])ubqque' qompallY·. Itthelllhiois Central Railroad Company had exercis,ed. its. option to tJUl Dubuque road in perpetuity, the Cedar the·.trustees in its mortgage might, perhaps, have liable fortpe rents of the. Cedar Falls. road !:luring the whole terlnot 40 ·years it was leased to the Dubuque Company. But that optio,J.l,was not exercised. The r.easonable interpretati()n of the instr.ulp\:lot' 13, 1867, taking into view its words and the circumsta9ce.il flttending llxecution, is that the IIlinoisCentral Railrond Company 1, so li)n'g;".and only so long, as it. retained the Dubuque road as lessee,wouldllieeftheobliglltions imposed'upon the Dubuque Company the Cedar Falls road . . And 'this construction is in no wisE;' by the indorsement over the signature of the president of the Qedar Company on, the bonds secured by the mortgage of 1866.. IQ re,$'pect ,tQthat indorsement, it may be s!lid that it does not the Central Railroad Company, even by way, 9fElstopnel." ,There was no act upon the part of that company, in respect to,the qOJidsor that ii1dorsement, from which an ('stoppel could arise. Tlie ipdorsemerit was notmade atthe instance or by the direction of the Iilinois Ceritra1.Rriilroad Company. Sofar record shows, it was ,entirely the,¥ork,of those interested in the negotiation of the bonds secured\>yth,e.Jportgllge of St>ptember 22, 1866. ' TheJacts set out in th ll , are true. But if the parties ma'k;ing it, or causing it tl:> be m;;lde, to state the additional fl!,ct that tllC instrument containing the of the the Cedar FaJls ,l:o,adexpressly p.r<;JvidedUjortheie,rinination ofthe lease of the Dubuque road at the. end. the pleasure of the Central Railroad Company the responsibility for such omistlion is upon them, and not upon the latter company.· , . " , " .., . . . '.' ". ,,' . . ' . Theresult is ,as the,rentals due ,the Cedar Falls Gompany up to. h ,which day its road,was sprrenderedto,. tbe Dub.uque:
th. i.n the standing of its ,
r
of
JESUP t7.ILL1NOIS CENT. R. CO.
'4%
'Company, were fully paid by the Illinois Central, Railroad Company before the' commencement of this sliit,there is rio ground whatever fora decree against that corp0ration. As to it, the original suit must be dig· missed; with costs against the plaintiff. In'resl'ect to the jurisdiction of the court to proceed in the crosB-suit Mtedhe-dismissal of the original suit as tothe Illinois Central Railroad Company, ' w.e are of opinion that a final may be passed determining, the validity of the ll".ase 1866 a,s oet:Ween the Dribuqge and Cedar Falls Companies, and the right of the trustee in the mortgage of to the funds in court. The original suit is based Upon that lease as a valid instrument for all the purposes embraced by itiand a part of ,the' relief sought is, a decree establishing the validity of the lease, and subrogating the trustee to all the rights of the Cedar Falls Company under it, with sole authority, in view as well of the default of that company and its embarrassed financial condition, as of its lilleged failure to i::ollectand properly apply the rehtsand pronts accluingfrom the mortgaged property, to receive, sue for, and havepossebsion of such rents andprbfits for the purposes expressed in the mortgage. Now the :relief sought by the is directly connected with the subject-matterof tbe originalsuit,al1lHs of an affirmative character. TheerosB-suit strikes attbe foundation <>fthe trustee's to the funds in court, namely, tbe lease of 1866,and asks a decree to protectthe Dubuque Company from any suit upon it, either by the trustee or bytbe Cedar Falls Company'. We perceive no di:ffilmltyarising out of the established rules of eqUity in the way of a comprehensive 'decree in the cross-suit that will determine -finally, as between the Dubuque Company and the Cedar Fall!!' the efficacy ,of the lease of 1866, and therefore the right of the trustee, Jesup, to'have the rents arising from tbat instrument.; Kingifbury v.' Buckner, 134 U. 8. 650,676,677, 10 Sup. Ct. Rep. 638; Hurd v. Case, 32 Ill. 45,49; Jones v. Smith,14 Ill. 229-232; Lloyd 'v. Kirkwood, 112 Ill. 329, 336. In Story's Eq. PI. § 399, note, iUs l!laid: "A distinction should be drawn between a cross-bill which seeks affi'rmative relief as to' other matters than those brought in suit by the bill; yet properly connected therewith, and; a cross-bill whichis filed simply as a means of defense, since there ,are rules applicable to one class which do, not apply other. a dhlmissal of the original bIll carries the cross-bill with it. when the latter seeks relie,f by way of defense; but it is otherwise. and reliepnay still be given upon the cross-bill. where affirmative relief is sought thereby as to collateral matters properly presented in connection with the matters, ad,judged ill the bill.I I . , So, in Chamley v.Dumany, 2 Schoales & L.718, Lorer :EI;noN "The defendant chargeable has a right to insist that be Iiable to be made a: defendant ill another suHfor the same matter that' rqity'tbElO be decided between him alld his co-defendant,and the insist that' he shall not be obliged to institute another suit for a matter thRt imay then be adjudged between the defendants; and. if ,a court of equity ,to decree, it would be a good Ca\lse .of app\l<ll, by ",
96; Ragland v. Broadnax, 29 Grat. 401.
See; a:lso,Ladnerv.Ogde1t,ol Miss.' 344;
WorreUv.Wade,'17,Iuwaj .'".;'; -,,:,:
496
FEDERAL REPORTER,
Nor is. the right to make a final decree in the cross-suit affected by the the Dubuque Company and the Cedar Falls Comp,any are botll)pwa corporations. As said in Schenck v. Peay, 1 Woolw. 175: "A cross-bill will be sustained in a federal court, where a defendant is compelled to avail himself of that moue of defense in order to protect himself from an injustice resulting to him from the position in which the cause stands, alplaintiff and defendant, or some of them, are citizens of though the the sa,me state, the defendants in such bill are already before the court, 'and are, as parties to the original bill, subject to its jurisdiction." JOne8 v.Andrews, 10 Wall. 333; Krippendorfv. Hyde, 110 U. S. 276, 4 Sup. Ct. Rep. 27; CoveU.v. Heyman, 111 U. S. 176, 179, 4 Sup. Ct. Rep. 355;,Paci.fic Railroad Co. v. Missouri Pac. R. Co., 111 U. S. 505, 522,4 Sup. Ct. Rep. 583; Gumbel v. Pitkin, 124 U. S. 131,144,8 Sup. Ct. Rep. 379; Johnson v. Christian, 125 U. S. 642, 646, 8 Sup. Ct. Rep. 989, 1135. Is, then, the Dubuque Company entitled to a decree requiring the surrender and cancellation of the lease of 1866? To what extent the Cedar Falls road,.whencompleted,would bring business to the Dubuque road, and what;was the probability of the construction of roads in Minnesota that connect that road over the Cedar Falls road with the cities of St.PaJlI au'd Minneapolis, were matters in respect to which all parties connected with the lease of 1866 had eqllalopportunity for information. Indeed, they were matters about which neither party could well mislead the other. Standing in the light of .the actual results of the lease, as now depicted, it is easy to see that those representing the Dubuque Gompauy in making that lease would have done well, if, out of abun<lant caution, they had made its continuance dependent upon the construction, withiu a reasonable or fixed time, of a road or roads directly connecting Mona with St. Paul or Minneapolis. But such error of judgment, if it can be so called, upon the part of the directors of the Dubuque Company, does not justify the cancellation of the lease. The evidence of their failure in that particular mode to guard its interests, if at· all pertinent to the present inquiry, can only be so in its bearing upon other propositions embodying the principal grounds upon which 'the' cancellation of the lease is sought. Those propositions are that the 'individuals chiefly instrumental in fastening the lease of 1866 upon the PUQuqUl:' Company for the term of 40 years were prevented from exercising a sound or impartial judgment in. its behalf, by reason 9f their personal interest in, and their relations with, the Cedar Falls Company; that they occupied at the time such relations of trust to the Dubuque Company as forbade them from representing it in a matter in which their :private interests would be promoted in proportion as the terms imposed were hard on that corporation and beneficial to the Cedar Falls Company; that the contraot in question, nominally one of lease, was yet one that cannot properly be enforced at law or in equity, being in its inception fraudulent and against public policy, and therefore one against which the affirlllative relief asked should be given, all parties in interest being bafore the court· .,
JESUP II. ILLINOIS CENT. R. CO.
497
This proposition, so far as it imputes actual fraud in the matter of the lease, is not sustained by the record. We are of opinion. upon a careful review of all the evidence, that those who participated in the making of the lease. whether on the one side or the other, believed in good faith that the completion of the Cedar Falls road to the Minnesota state line, and the leasing of it by the Dubuque Company for a term of years, at a reasonable rental, was important to, if not imperatively required by, the interests of both companies, each of which was at that time in such financial condition as to excite uneasiness in the minds of parties interested in their prosperity. We cannot perceive that there was any purpose upon the part of those to whom fraud is now imputed either to wreck the Dubuque Company, or to impose unnecessary burdens upon it for the purpose of giving increased value to the bonds and stock of the Cedar ,Falls Company. No one at that time doubted that the Cedar Falls road, if completed, would be a valuable feeder of the Dubuque road. And there was a hope, which unfortunately for all concerned was not realized, that the Cedar Fails road would shortly or ultimately form a link in a continuous of road or roads connectinK the Dubuque road directly with the cities of St. Paul and Minneapolis. The only matter that was the subject of serious discussion was as to the amount of rent to be exacted from the Dubuque Company for the use of the Cedar Flllls road. And that question was not determined in a corner, or without full opportunity consider it. In the face of the report made by Mason and Blackstone, disinterested and competent experts, as to what would be a reasonable rentalto be paid by the Dubuque Company, upon the basis of a completed road in good condition, the presumption of fraud should not be indulged, !limply because it may now appear, as the result of circumstances not foreseen, or not deemed at the time of sufficient importance to be guarded against, that the rent stipulated in the lease is larger than the business over the Cedar Falls road really justified. Much stress, in this connection, is laid upon the evidence tending to prove that the amount of bonds and stocks allowed by the Cedar Falls Company to those constructing its road was largely in excess of the actual cost of construction. Whether such be the fact or not, we need not stop to inquire. That is a matter between the Cedar Falls Company and those receiving its bonds and stock in payment for construction. It does not, in any wise, concern the Dubuque Company, nor elucidate the real issues in the present case. If it were true that, under all the circumstances as they existed in 1866, including the depreciated value of the bonds and stocks of the Cedar Falls Company, the amount allowed by it for construction was too large, that fact would not show that the Dubuq ue Company is entitled to a decree canceling the lease which it made of the Cedar Falls road. The question before the Dubuque Company in 1866 was whether, in justice to its stockholders, it could afford to pay the proposed rent for the use of the Cedar Falls road. The decision of that question did not depend upon the amount the Cedar Falls Company might pay, in stocks and bonds. for the construction of its road, but it did depend upon the amount of business that would probably be done v.43F.no."-32
498
on the:CeliarFalls road after it passed, tinder the lease, to the control of the Dubuque Compan'y,and after itS completion to Mona. There was no concealment or tnisrepreseIitation' as to the business done over ltbe 14 miles ohoad coril'ltru.cted before the'lease was made. And as to ,the' business that would bedotie on the entire line when completed to Mona, to the probability, of ultimate connection: over other roads with St; Paul or MinneapoliS, these were matters about which differences :of opinion 'would exiS't,and were' to be determined in the light of what is ea:lled Cl: railroad ' alIthe facts'andcircumstances, we are of opinion that the 'directbrs, of the Dubuque Compariy, including those' who, at the time, werenolders of the bonds and stocks of the Cedar Falls Company, and become interested in constructing the Cedar Falls road to were not guilty of actual fraud in leasing the Cedar ,Falls road upon the terms prescribed in the instrument of September '27, 1866. The ieusp seems to have beeIimade in the exercise of an honest judgIment upo#,their part as to what, under ailthe Circumstances, the best !interestSofboth companies absolutely demanded. TheexceBs, 'if any, onhe rEints agreed to bepnid by the Dubuque Company, over what the the Cedai' Falls road justified, is not such as to: raise a prefraud uponthe part of those causing the lease to be made. At xP,Oflt,. it would only show error of judgment in respect to a matter of busiIless; '! " Recufl'irigto the mainpropoeitiori advanced by the Dubuque Company',We' next inquire whether the lease of 1866 should be adjudged "oid ripon grounas of pUblic policy arising out of the relations of trust which Jesup and others" at the time, held to that company. Without statirig'in,'detail the proceedings of the various of the board of directors altha Duhuque Company at which the subject of the lea8e was mentioned or discussed; it is sufficient tosay that the lease was approved 'by nined'ire'ct()rS.' .Of that number, five, Morton, Knox, Stout, Schuch. ardt, arid Robb, had no interest whatever in the Cedar Falls Company as' stockholders,' bondholders,or creditors, and. all of that five, unless Robb Was an exception, were large holders of the stock of the Dubuque Company.' Of the remaining directors, Jesup, Frost, SmitW, and James, the time holders of outstanding bonds and stock of the Cedar Falls Company , the value of which would be increased by the compIetiM of the road. Indeed,it is a fair inference from the testimony that the directors of the DUbuque Company who were not interested in the Cedar Falls Company looked to Jesup, James, Frost, and Smith, or some dfthelIi, to provide the means for the comple,tion of the Cedar Falls road to the state line. It is also true that the four directbrs last named ex'peeted to become holders Of the bonds and stock issued on account of the additional road to be constructed from Waverly to Mona. While two dfthat number, Jesup and James, were large of the stock of the Dubuque Coinpany,theirinteresti! in 'the Cedar FallsCompatly were greater than in the other company. It is not, therefore, to be questioned that, w'henthe lease'oH866 was made, JesUp, Frost, Smith. and James
,JESUP
ILLINOIS CENT. R. CO.
499
were in a. position where their private interests in connection with the Cedar Falls Company might conflict with their, duty as directors of the Dubuque Company. They were on both sides of the question as to the lease of ,the Uedar Falls road upon the terms stipulated. As st()ckholders and bondholders of the Cedar Falls Company, they were interested in binding the Dubuque Company to pay the highest possible rent. As directors of the Dubuque Company, their duty was to protect itagainst burdens thlttcould not be prudently or safely assumed, and to advance its interests in every proper way. . . These being admitted or proven, the inquiry yet remains, to what ext,ent dothey affect the validity and binding force of the lease or justify a decree of cancellation? The attention of the court has been called to lVardeU v. Railroad 00.,103 U. S. 651, 658. That was a case of n contract authorized by railroad directors pursuant to a Bcheme by which they. were to share with the other party large, sums to be realized from the contract. ' The court said: ' "It ij! alDonK:the of the law th,at the same person rannot act for the same time, with respect to the sallie matter, as tilt" agent of an'ltller whose interests are ccm(\ictmg. ... III ... 'i'he law, thert'l'vre, will alwllys condemn the transadions of a party on his own behalf, when. in respect to the matter concerned. he is the agent of others. and will relIeve against thefl) whenever thf'ir enfol'cemf'ut is Sl:',lsllnably resisted. Directors of corporations, and all pf'rsons wh" stand in a fidUciary relation to other parties, and are clothed with power to act for them. are subjf'ct to this I'll Ie. They are not'permitted to occupv a pOflition Which will ('onllict with the est of parties they represent and are lIounrl to protect. They cannot. as ag:'nts or trustf'es, enter into \.II' authorize l'ontracts on behalf of others for whom they are' appointed to act. and then personally participate in the benefits. lIence all arrangements by directors of a railroad company, to SI'Cllre an undue advantage to at its expense, by the formation of il new company as an auxiliary to the original one, with an unul'rstandiuj{ that thl'Y, or st/me of the,U1, shall take stock in it. and then that valuable COli tracts shall be given to it, in the profits of whleh thel'. as stoJkholtlers in the hew company,are to share. are so many unlawful devices to f'nrit'h themsel"es to the dl'triment of the stockholders and creditors of the ol'jgin'll company, and will be condt'IDned whenever protJerlylll'ought lIefore the cuurt for coIIfli\!t'ration... The case from which the above extract is made, and others of like character, are citedl1s requiring a decree canceling the lense in as void upon grounds of puLlic policy. . We do not think that the cases referred to justify such a decree in this case. A contract, in the name of a corporation, by its board of directors. is not void, if otherwise unassailable, simply hecause some of the directOI'll, constituting a minority, used their position with the effect, or even for the purpose. of adyancing their. personal interests to the injury of the they assumed to represent. The lease here iQ question, as we have seen, was approved by the nine rlirectors of the Dubuque Company; five of. whom had no personal ends to subs<>rve by imposing upon the company aleallethatwas unreasonable or harsh in its terms. On thecoptrary, as already stated, at least four of that Qve were holders ofthe stock oIthe pubuque CompallY I and therefore interested to guard.
.
500
vol. 43.'
it against unnecessary or improper burdens. We need not inquire as to the extent onheir information touching the facts bearing upon the question of the proposed lease. It is sufficient to say that they approved it, and that their approval was not, so far as the record shows, obtained through misrepresentation or concealment by their co-directors, who, in view of their personal interest in the Cedar Falls Company, ought not to have participated in deciding the question of lease or in the making of the lease.' An instructive case upon this point is U. S. RollingStock Co. v. Atlantic &: G. W. R. Co., 34 Ohio, 450,465. That was a suit upon a contract by a railroad company for rolling stock. The contract was approved by eight directors of the former company, (the whole uumber of directors being thirteen, but only eight aeted,) two of the number acting being also directors of and interested in the rolling-stock company. The defense was that the rent was not fair. nor the contract binding, because of the interest which some of the' directors had in the rolling-stock company. The court said: board of directors. at the meeting of August 2,1872, was voidable in equity at the election of the company, for want of the presence at that meeting of the board of a q\lorumof directorS who were not directors ofthe plaintiff, it nevertheless appears that the board was composed of thirteen personS, a clear majority of whom were affected with no incapacity to act for the best inter('sts of the company, and who sustained no fidnciary relation to the plaintiff whatever. '.rhis majority possessed ample power to restrain and control the ar:tion of the minority, and, if the contract was voidable at the option of the company, it had full power to express the company's election if it saw fit to avoid the colltract. The fact that some of the persons compOSing this majority might vote with those who were members of both boards. and thereby createI' majority in favor of the contract. would in no wise affect the validity of the transaction, <nor relieve the boar4 from the duty to move in the matter if they desired the company's escape from liability. We have not, upon the most diligent research, been able to find a case holding a contract made between two corporations by their respective boards of directors invalid. or voidable at the election of one of the parties thereto. from the mere circumstance that a minority of its board of directors are also directors of the other company. Nor do we thiilk such a rule ought to be adopted. There is no just reason, where a qnorum of directors sustaining no relation of trust or duty to the other corporation are present, participating in the action of the board, Why such action should not be binding upon the company. in the absence of such fraud as wonld lead a court of eqUity to undo or set aside the transaction. If the mere fact that the minority of one board are members of the other gives the company an opportunity to avoid the contract without respect to its fairness, the same result would follow where such minority consisted of but one person. and notwithstanding the board might consist of twenty or more. In Ollr judgment. where a majority of the board are not ttdversely interested, and have no adverse employment, the right to avoid the contract or transaction does -not exist without proof of fraUd or unfairness; and hence the fact that five [out of thirteen] of the defendant's board of directors were members of the plaintiff's board. whatever may have. been its opinion of defendant's right to disaffirm or repudiate the contract. if exercised within a reasonable time, did not disable the defendant from subsequently affirming the contract, if satistied with its terms. or rejecting it if not; nor did it relieve it from the duty to exercise its election to avoid rescind within a reasonable time, it "If it be granted t.hat the confirmation of the contract by the defendant's ,. . '
\
$
JESUP 11. ILLINOIS CENT. R. CO.
501
not willing to abide by its terms. That it did not do this, nor tak& any steps towards its disaffirmance, but continued to act under it for nearly two YE'ars and a half, receiving the rolling stock, for the use of which it stipulated, and with which it operated the whole of its road for the whole of said period, making payment for such use in accordance with the rate fixed by the contractors. very clearly appears from the admitted facts. ... ... ... Hence the conceded facts clearly establish a ratification of the contract, and prevent the the defense from denying its validity." In determining the weight to be given to the considerations of public policy that have been pressed with 80 much force, the court cannot ignore the fact that more than 20 years elapsed after the lease in question was made before any action was taken by or in behalf of the Dubuque Company to have it canceled. During that long period no warning was given by it, or by its officers or stockholders, that any question could or ever would be made as to the integrity of the lease of 1866. On the contrary; at a meeting of its st()ckholders held March 15, 1869, a resolution approving and ratifying the lease of September 27, 1866, was confirmed by a unanimous vote of those present in person or by proxy, 27,394 shares being represented at the meeting. These proceedings were spread at large upon the records of the Dubuque Company. Now, it is said that during the whole period of 20 years while the Cedar Falls road was controlled by the Illinois Central Railroad Company, Jesup was either president or in control of the Dubuque Company, had possession of its records and papers, and dominated its proceedings, and that it was not ilhtil he and the directors whom he controlled resigned in 1887 that the Dubuque Company was in a position, or was able, to ascertain the facts, and take such steps as would right the wrong alleged to have been done to it in 1866. What facts? It is inconceivable that the fact of the lease of the Cedar Falls road to the Dubuque Company, as well as the terms of the lease, were not known, or could not easily have been known, to every director and stockholder in the Dubuque Company. If directors or stockholders of that company were ignorant for 20 years of the terms of the lease, it was because they were guilty of the grossest negligence in not making inquiry on the subject. So far from th.e directors or stockholders of the Dubuque Company being kept: in ignorance of the lease or its terms, the company disclosed the exact situation in its annual report of January 1, 1867. In that report it was said: "Since the last annual report, this company has leased the Cedar Falls and Minnesota Railroad, constructed a distance of fourteen miles from the junction to Waverly, and to be constructed sixty-two miles from Waverly to the state lint', for forty years from the 1st of January, 1867, at a rent of $1,500 per mile. and the further,sum of 35 per cent. of all gross earnings exceeding $3.500 and not exceeding $7,000 per mile per annum, and 30 pel' cent. of all gross earnings exceeding the sum of $7,000 ptll' mile per annum. Thisroad bas already been a valuable contributor in bringing business upon your road. Waverly receives and forwards more freight than any station west of Dubuque." The proof satisfactorily shows that this report went tathe stockhold- ' ers of the Dubuque Company. But if there was no proof -on the subject,
502
it would, ,be, presumed at this ',late day that it was' known to. them, or that:;everfy, stdckholder'oould know,1£:he tried to :know, all the facts. Duridg il.llthilttithe the:DUbU9.ue Compliny,ils'cifficers and stockhold9hly leav,ing the Il1Jnois Central Railroad Com'p#i;y, to treat the 01 September 27,1866; as valid and binding upon the Dubnquc CompanYiandthereforeto;be assumed by the former company during its possession of the Cedar Falls road, but inducing, as the, holders 0/ stock and of the may, Cedar to believe thatthe rental to be paid by the Dubuque C9D1pany could be looked to asa s,ecuri'ty for the fun term of 40years.,'J,'his,silence ,delay upon the part of the Dubuque Company (lJlnnot be,excusedupon;the ground suggestedjnits answer, namely, that So long astl)eIllin9is Central Railroad Company agreed to pay, and pailt, ,the rent pi the Cedar. ,Falls it was of "nomomellt" to the stockhol4ers ofthe formet CO,J;Dpany what was the of such rent. Tha,t that the question of the. (lontinuance of the lell.se only the Dubuque Company. But it was of moment to the Cedar:'Falls,qoJ;Ilpany" its bondholders and creditors, to say nothing, whether that lease wal! ;tobe, carried out ao- , of its cording ,to its' and whether the Dubuque Company intended to dispute its binQ,ing force. If, at ,the instance of the latter company, or of tl)e Jease had been abrogated shortlyaftedt \yasex- , ecuted, it maybe that the Falls Companycotddhave made with other railroad corporatiops arrangenlentS quite asJavorable as those set forth in ,Thi Company had no right. therefore, to treat it, as a hlase, to. be respected by the; Cedar Falls Company andbytpe Illinois Central Railroad. Company, so;}ong as the latter reDubqqu,eroad,but to be repudiated as soon as tained the, Illinois gentr)l.1,:Iltl.ib:oad Company ceased to be under an obligation to assume it. , . ' ,. ., " , The suggestion thAt the facts eQtitling the Duhuque Company to a decree canceling the lease could n,ot hl;lve bepn discovered by it until its own road was turlled bac;k to it by the Illinois Central Railroad Company, and until after the election otnew directorsin,1887, has no sub_ ground, upon which to rest. ,Here is alrase of a railroad, which trrated a!!yal,i,d, and acted uIWu h)' all the parties concerned for more than 20 years. At the expiration of that long period the lessee company asks 8.t Cl,lncellatiQnof ,the leas,8 because of certain 1acts which itclaillls to havejust foundoui, ,but which its stockholders and direct.. ors either Jinewor could easily have ascertained at' any time within the past 20 years.' Rnmybeliterally true; as alleged,that the particular inpividuals in c(mlrol tlie Dubuque Company,. ",hen thll cross-suit was cQIbl'lIenced, as npw holding the:. majority of its stock, did not acquir,e Jtnowledge of all,th\:lJactsconnected with the making of the lease until shortly be/ore the cQnuneneementof After surrender of the Dubuque road by the Illinois Central RaiJroad Company, the latter company, w,Uh in/onnation as to every lact bearing upon ,the question of the, reasonableness of the rentlilfixed in the leasa
.V.
CENT.· B. CO.
503
of 1866, purchasell, in its oWn' name, or in afi others, a part of thesto.ck, of. the former .colllpany, .and a board. of directors waS elected ffiendly to it or. in its interest. And cross.bill was filed the :Illinois; Central Railroad Company had. become the owner of nearly all ,the stock of the Dubuque Company, with full knowledge npon its part ofe;very fact now relied upon for the cancellation of the lease of 1866. ,In short, that company, after running the Cedar Falls road for 20 years, and thereby ascertaining, to its own satisfaction; that the bus. iness on and over it did not j.ustify the rental the Dubuque Company agreed to pay, acquired substantially the whole of the stock of that CQ,mi. .pany, and is the beneficial party in interest seeking the cancellation of the.lease. .Of" the right of the Illinois Central Company to purchase the stQck of thet>ubuque Company! no question is made. But when the alleges its ignorance, until after the new board Wall elected in 1887"of the facts (lonnected with the lease ofl866, it must be taken as referring to those now in control, and to those who are now'its stockholders. Even·if such ignorance existed upon the.part of some of those who became stQckholders of the Dubuque Corilpahyafter that corporation resumed pOf'isession of its· road, that circumstance cannot shut out of view the fact that. those whowere·in anywise interested in the Dubuque road; ,eitberaa. directors or stockholders, when the lease of 1866 was made and for:20 years thereafter, knew; or could easily have ascertained, all the drcumstances attending the execution of that instrument, as well as the nature ()f its terms and conditions. TakiJ!gaU. the evidence together, the court must proceed upon the ground that means of knowledge, plainly within' reach of ers by the exercise of the slightest diligence, is in legal effect equivalent ·to knowledge, and that the ,fact . of the lease, as well as its terms, were fully known to each stockholder and to every officer of the Dubuque Company for 20 years and more prior to this litigation. Wood v. Oarpentcr, 101 U.S. 135, 143; New Albany v. Burke, 11 Wall. 96,107 · .The fundamental error in the argument fortheJ!)ubuque Company is in the assumption thatthe lease was absolutely void by reason of Jesup .and other, directors, who were interested in the Cedar Falls Company, having partidipated in the making ofit. We have already indicated that, ·50 far as the. lease depended upon .the action of the board of directors, its technical. validity was placed beyond question '·by the· approvalof .the majority of the. directO,rs;.no one ofwhom toon arever had, so far as the record shows, any.interest in the Cedar Falls Company . But to avoid misapprehension it is well to Say that, in the judgment of the r.ourt, the lellBew9uld not have been void, even if a majority of the directors Of the Dubuque Companyoceupied the same relations to the Cedar Falls ComPlitny that Jesup, James, l!'rost,; and Smith did when the lease was made· . It would,.atmost,bave" been simplyvoidableattheelectionofthe Dubuque Company ,or, ina proper case'" at the suit of< its stockholders, and that (lIection: must. b/\ or the suitbrougbt. within such: time as was reasonable, taking into consideration all the facts and circllmstances of the case, including the nature of the property
504
FEDERAL BEPORI'En,
the lease. This last principle is illustrated in Oil Co. v. Mm'bury, 91 U. S. 587; GaB ev. v. Berry, 113 U. S. 822 1 ; and Leavenwo'l'th Co. v. Rail'Way Co., 134 U. S. 688, 704, 10 S.up. Ct. Rep. 708 et 8eq. If, as was expected, the completion of the Cedar Falls road had been followed by the construction of roads in Minnesota connecting Mona with the cities of St. Paul and Minneapolis, it may be that the lease of 1866 would have been very profitable to the DUbuque Company; in which event the courts would not have listened readily to an application by the Cedar Falls Company, after an unreasonable delay upon its part, to set aside the lease upon the ground that some of those representing it were at the time directors or stockholders of the Dubuque Company. So, if the lease had been in fact beneficial to the Dubuque Company, and if, for that reason, a majority of its directors and stockholders had desired to hold onto it, the court would not at the instance of a minority of directorsand,a minority of stockholders, have set it aside simply because some or its directors were at the time personally interested in promoting the welfate of the Cedar Falls Company; though the fact that such directors, constituting a'minority of those acting, participated in making the contract,would 'cause the whole transaction to be closely scrutinized to the end complaining stockholders, however small in number, might-not be sacrificed by those who were bound to protect their interests. This shows that the lease was not void because of the relations of some of the directors of the Dubuque Company to the Cedar Falls Company, and that it would not have been absolutely void if the majority,oisuch direotors approving the lease held such relations to the lessor company. The rule is a wholesome one that requires the court, in cases of merely voidable contracts, to withhold relief from those who, with knowledge of the facts, or with.full opportunity to ascertain the facts, unreasonably postpone applicution for relief. A contract not wholly invalid when executed, nor prohibited by law as relating to some illegal transaction, and which is therefore voidable only, may become, by the acts of the parties or by long acquiescence, binding llponthem, especially where the nature of the property which is the subject of the contract is such that its value may be affected by its relations to other property of like kind, and by the changing business of the country. If, after the making ofthe lease 'of1866, the directors 'and stockholders of the Dubuque Company had held a meeting, lind, with knowledge of the factfl, or with the means of ascertaining them, liad.dec1ared,in words, that they would postpone application to have the lease set aside until they found out by operating the. Cedar Falls road whether.it was remunerative or not to them, or until the Illinois Central Railroad Company ceased to be under obligation to pay the stipulated rent, the' case would not have been in point of law materially different from· what it appears to be from the record before us.. In so holding the court does not depart from the salutary principles announced in Wardellv. RailrQad 00., and approved in numerous II)
Sup. Ot. Rep: 525.
POTTER fl. TIBBETTS.
505
On the contrary, while that case holds that the law will always condemn the transactions of a party in his own behalf when in respect to the declares that the court matter concerned he is the agent of others, it relieve against them "whenever their is seasonably re8isted." Seasonable resistance cannot be predicated of a case of a merely voidable contract, where the party complaining has not simply been silent for 20 years, but with knowledge of the facts, or with full opportunity to ascertain them, has enjoyed the fruits of the contract, and treated it its valid. The court is of opinion that, independently of any question as to the statute of limitations of Iowa, in which state the contract of lease was made, and was to be executed, the Dubuque Company is estopped to dispute the binding force of the lease of September 27, 1866, and, therefore, is not entitled to a decree of cancellation. Other points than those above discussed are raised by the cross-bill, but they are not upon in the printed arguments, and are not, in the judgment of the court, of sufficient importance to be noticed. Let a decree be prepared and submitted to the court, recognizing the right of the plaintiff, Jesup, as surviving trustee in the mortgage of September 13, 1866, to receive the funds now in the registry of the court, and containing such other provisions as may be proper and not inconsistent with. this opinion.
will
Judge BLODGETT, who participated in the hearing and decision of this <lase, concurs in the views expressed in this opinion.
POTTER'll. TIBBETTS et
al.
(Cfn"cuit COVin, D. Minnesota.
September 16,1890.)
PRE-EMPTION CLAIMS-ENTRIES-LA.l'i'D-OFFIOE RULINGS.
The tenant of a pre-emptor cannot himself pre-empt tho same land upon hearing that bis landlord's entry has been canceled and vacated by the land-ofllce, when it afterwards turns out that sucb cancellation was void, and was vacated by the commissioner of the generalland-oftlce;
JohnB. and W. H. Sanborn, for complainant. W. P. Clnugh, Geo. Gray, Bigelow, Flandrau Squires, F. M. Dudley, Jas. McNaught, and WiUia &, Willard, for defendants. NELSON, J. A suit in equity is brought by the complainant, asserting title to the N. E. t of the N. E. t of section 26, township 47, range 27, located in this district. The legal title is in a corporation designated as the Lake Superior & Puget Sound Land Company, and it is charged that this company holds it in trust for complainant, and he prays for a ,decree ordering a conveyance of the same, and for other and further lrelief.
y.ol. 43. _i The ;following· nte.. th6: facts: ." .,,1t is adQlitted tbatthe land i:QconttClversy has, ever since the survey llhereof"been located:in the district,oOands subject ,to l;la,leatthe United States land-office in l:)t..Cloud, Mim,k That said lands were surveyed, andihe township 'plat thereof fileel with the commission,lilr of the general and a copy filed with the register and receiver at St. Cloud, May 28; 1872. That the defendant Nathaniel Tibbetts filed his declaratory statement August 22, 1872, for the N. E. ! of the N. E. ! of section 26, the S. E. t of the S.E. ! of section 23,: the S.W. ! of the S;W.:! of section. 24, a.ndthe N,W. ! of the N. W. lof section, 25, township 47 N., afrange 27 ,alleging settlement$eptember 13,1870. That all the above-described lands,werlil within the limits of the grant ofJands to the Northern, Pacific Railroad Company, by the act of congress approved July 2,1864. TlurtA.!lgust 13, 1870, the Northern Pacifi.c Railroad Company filed a plat Qfthe generalrpute of its line of opposite. and land in controversy. That the land was within .20 miles.of and onsajdline of general route. That S.eptember 15, 1870,. the secretarY,Qfthe interior ordered withdrawn fromsa)e"ordlocation by homestead or. pre-emption entry,all odd-numpered sections,oraaid line of general route, and within 20 miles thereof. of witbdrawu.lwM the local.land-otfice at St. Cloud, Minn., September 24, 1870. That October 12, 1870, .sllid road company filed an amt>nded map of general route in the'officeof the .. That said abQve-described lands are on said line of general route, as ind.iCQ,ted by said.amended map anq general route, and within '20 miles thereof. That November 7, 1870, the secretary of the interior ordered the withdrawal from sale or location. homestead or pre-emption entry, all the odd-numbered sections on said amended line of general route, and within 20 miles thereof, and that said order of withdrawal was received lit the local1and-office at St. Cloud, Minn., November 17, 1870. That the Northern Pacific Railroad Company definitely located the line of its said railroad'extendiug upposite to ftnd past the said lands, and within 20 miles thereqf, and on the 20th. day of Novembel','1871, duly filed in the office of theicommissionerof the platofthatportioIl; of said linesogElfinilely located, extending opposite to and past said land hereinbefore described.' That prior to January 6, 1873, the said Northern Pacific Railroad Company had located, constructed,and equipped its sa.id railroad along the said U.neof definite.location, ,through the township and rallge aforesaid, and fully completed and equipped its said .line .through said township and range, as provided by said act of congress; and on January 6, 187:1, the same was duly accepted };Iy the president of the United States. On the 3d;day of September, 1872, the defendant Nathaniel.Tibbetts was.permitted to prove up his; pre-emption. settlement and occupatioO'of said land,and that th6.records,oithe.locaI.lahd-offioe andof.the general land... office·sbow that the said of land were entered and paid for by the defendantNathaniel Tibbetts on that day. That on the 7th day of April, 1873, the entry of said tracts of land by Nathaniel Tibbetts, which was
PoTTE:R"'" TIBBETTel.
507
made by Georgia AgricillturalCollege scrip, number 10,054, was canceled and vacated, and that Eihibit 0, attached. to the answer herein, is a correct copy of the letter of the commissionet of the general landoffice, canceling said entry';' and that from the decision contained in said exhibit no appeal was taken by the defendant Tibbetts to the secretary of the interior. That the records of the general land-office and local land-office show that the complainant, Warren Pottel',filed a declaratory statement,'number 4,511, December 8, 1873, for the E.! of the N. E. t, and the N; i of the S. E. 26, 47 N., of range 27 W" alleging settlement September 6, 1873. That on the 6th dayaf February, 1874, the com.missioner of the general land-office ch!inged the decision made by him in the letter of April 7,1873, as appears in Exhibh D attached to the answer of the defendant corporations in this action, and permitted the delendant Nathaniel Tibbetts to enter the S. W. lof the S. W. ! of section 24 at $2.50 per acre cash; and on the 9th day of of the general land-office ordered the April, 1874, the whole. calle of the defendant Nathaniel Tibbetts reopeneq in and by his letter, E,) attached to the answer of the defendant corporations. That on the 13th day of July, 1874, the complainant, Warren Potter, made an application to make proof of his pre-emption, settlement, and claim, and to enter and pay for the E.! of the N. E. !, and the N. i of the N. E,. ! of section 26, township 47, range 27; and on the 19th day ,of December, 1874, the commissioner of the general land-office directed the l{)cal officers to order a hearing to determine the rights of the parties to the tract in controversy, namely, the N. E. t of the N. E. 1 of section 26, township 47, range 27. That on the 7th day of January, 1875, citations were issued by the register and receiver at the St. Cloud office, setting the 12th day of February following for a hearing, at which it appears by the records that both parties appeared, and that the complainant, Warren Potter, offered his proofof pre-emption, settlement, and occupation and improvements. That on the 1!>th day of June, 1874, the acting commissioner of the general Jand-office made the ruling and decision in the case which appears in Exhibit H,attached to the answer herein of the defendant corporations; That on December 19, 1874, the commissioner of the general land-office issued the letter·ofinstructions to the register and receiver of the it. Cloud office, a copy of whicH is hereto attached and marked" Exhibit A." That upon this final hearing the register and receiver of the land-office simply took the testimony offered, and tmnsmitted it to the generalland-oilice, and on the 20th day of October, 1876, the commissioner of the general land-office made the decision, a copy of which is Exhibit I of the answer herein of the defendant corporations; and, upon an appeal to the secretary of the interior, an opinion was rendered, & copy of which is Exhibit K of the answer of the defendant corporations herein. It is admitted that Exhibits A and B, attached to the defendant corporations' answer, are correct copies of the orders of withdrawal made September 15, 1870, andl November 7, 1870, along the lines of general route of the Northern Pacifio Railroad Company.
508
FEDERAL
peal froID the decision of the register and receiver to the commissioner of the general land-office. Such appeal, however. with the reasons therefor, must be filed with the land-officers within thitty days from the day of their decision, accompanied by the rejection papers, if any: also with any argument the party desires to file. These papers will then bfl forwarded by the district land-officers for review and decision. 'Iheir report should set forth the nature of the claim, whether homestead, pre-emption, timber culture, railroad, mineraI, swamp, or other state selection, with the name of parties. delicriptioll of land. number of filing, entry, list of description, and date of hearing. No appeal will be entertained unless sent up through the district land-office. The party may still further appeal from the decision of the commissioner of the generalllind-office to the secretary of the interior. This appeal must be taken witlJin sixty days after service of notice upon the party. It may be filed with the disH'ict land-officers, and by them forwarded, or it may be filed with the commissioner, and must recite the points of exception. If not appealed, the decision is by law made final. (Section 2273 of the Revised Statutes.) After appeal thirty days are usuallyallowEld for the filing of arguments, and the case is then selit to the secretary, whose decision is final and conclusive."
It is admitted by the parties that the cancellation of the entry of the land in controversy by Nathaniel Tibbetts, contained in Exhibit C, was made without any notice whatever to Nathaniel Tibbetts, or any other parties in interest, and that, upon receipt of said exhibit at the local land-office at St. Cloud, a written n9tice thereof was forthwith sent to NathaI1-iel Tibbetts by the land-officers at that point, and that the same was received by him. It isadD)itted that the following wasthe rule of practice of tpe general land-office and the department of the interior in regard to appeals during all the time that proceedings were had in the general land-office and the department of the interior relating to the entry of the land in controversy, namely: "(33) Any party aggrieved by the rejection of his claim has a right to apI
It adm'itted, subject to the objection of the complainant, that it is immaterial tha.t Exhibit D, attached to the defendant corporations' answer, is a true and correct copy of the commissioner's. decision of February 6, 1874. \ . It isadmitte,d that on the 13th of Ma:rch, A. D. 1874, the said defendant Nathaniel Tibbetts, in adcordance with said modified decision of the commissioner of the general land-office, entered. said S. W. t of the S. W. t of section 24, township 47 N., of range 27W., and paid for the same in cash.. . . It is .admitted, subject to the objection on the part of complainant, that it is immaterial that ExhibitD is a correct copy ora portion of the records of the general land-office relating to the application of Nathaniel Tibbetts to be allowed to change the alleged date of his settlement in his declaratory statement to August 5, 1870, and to enter the lands described in his declaratory statement. And I find that Exhibit E, attached to the defendant corporations'answet, is a correct copy· of the letter of the commissioner Mthe general land-office, dated April 9, 1874. It is admitted, slfbject to the objection on the part of the complainant of immateriality, that Exhibit F, attached to the defendant corporations'
POTTER tI. TIBBETTS.
509
answer, is a correct copy of the letter on file in the general land-office dated May 15, 1874, written by the attorney of the defendant the North-. ern Pacific Railroad Company. And I find that Exhibit G, attached to the defendant corporations' answer, is a correct copy of the letter of the commissioner dated May 28, 1874. It is admitted that Exhibit H, attached to the defendant corporations' answer, is a true and correct copy of the letter of the commissioner of the general land-office dated June 15, 1874. , It is admitted that on the 25th day of June, 1874, cash entry was made of all the said lands described in Tibbetts' original declaratory statement, in the name of said Tibbetts by the parties in interest, and that said lands pllssed to patent under said entry, and that the legal title to the same is now in the defendant the Lake Superior & Puget Sound Land Company. It is admitted that the complainant is a qualified pre-emptor. And I find that Tibbetts having made an affidavit subsequent to the cancellation of his pre-emption entry by the land commissioner, that his settlement on the land in suit was as early as August 5, 1870, before the map of definite location of the Northern Pacific Railroad had been filed, and before withdrawal by the secretary of the interior of the odd sections had been ordered. I find that the railroad, by its counsel, addressed a communication to the commissioner of the general land-office inter alia, saying; "I am authorized to state that the company will interpose no objection to the rehearing of the case, [the Tibbetts claim,] and withdraws from any contest for said land." I also find that on September 4, 1872, when Tibbetts' application to prove up was pending, the company filed a written consent that he be allowed to enter the land without opposition from the company. I find that after the entry of land by on the 11 th of September, 1872, he sold and conveyed, with covenants of warranty, for a valuable consideration, the land in controversy to Thomas H. Canfield, which deed was duly recorded, and on December 17, 1872, Canfield sold and conveyed the same land to the defendant the Lake Superior & Puget Sound Land Company. I find that Tibbetts had no talk with any person in relation to the purchase of the land until February, 1871, and this converaation was, in substance, that Canfield canie to him and asked if he was the man that claimed this land, and said that if there was a station built on the place he wanted the first chance to buy, a privilege from me. I find that complainant first settled on the land upon which he filed his declaratory statement 'for pre-emption as a tenant of defendant Tibbetts, and occupied a house belonging to him; and that after the entry of Tibbetts had been canceled, as heretofore stated, he built one of his own, made some improvements, and filed his statement upon being informed that the land was public land, subject to entry by the local land-officers. Concf.U8ion. The cancellation of the Tibbetts' entry was without any authority of law, and his settlement and occupation of the land in controversy did, not conflict with the railroad grant. The testimony did not show that Tibbetts had agreed to sell the land to Canfield or the
·
FEDERAL'· BEPOOTlllR ,vol.
43.
Lake Superior & Puget Sound Land Company, 6rdig any act which would entry fraudulept; authorize the by any proceedings to set aside his nor can the court say that he committed a fraud on the pre-emption law. Oanfield or his grantee had no notice of the ca!lcellation, and no opportun.ity to contest the right of the commissioner of the land-office to do so; and,.if the power could have been legally exercised. it is null and void as to them. The complainal)t could not change 'his right as lessee to that of pre-emptor, under 'the circ'umstal)ces. He was not the first settler on the land, under the pre-emption laws of the United States. Neither Canfield nor the I:.ake Superior & Puget Sound Land Company are prejudiced by the reany other action of the land deturn of the land scrip to partment, subsequent to the rights>acquired under the deed irom Tibbetts and wile to Canfield. Decree will be entered dismissing the bill.
In 1"6 1.
MASON.
(Dtstrict Court, D. Minnesota. September 8, 1890. UNITED -STATES ComnssIONER....,DISOllEDTENOE
a
. A L'Ommissioner of the oircuit oourtibf the United States has no power in a crimwho refuses to obey a subpmna, and inal proceeding before him to compel him to answer then and there for a contempt. The power to- punish for contempt is the highest exercise of judicial power, and is not an inoident. to the mere exeroille. of judicial functions; and such power cannot be upheld upon inferences and implications, but must be expressly conferred bv law. . -
01"
SUBP<ENA-CONTlWP'l'.
SAME.
At Law. On petition C07j)U8. II. D. Munn ane1 W. Lawler, for petitioner. J. M. Shaw, for respondent. NELSON, On August 28, .1890, a petition was presented to me signed by John H. Mason for a· writ of habeas corpus. The petition is sworn to, and states in substance that said Mason was imprisoned and restrained of his liberty by J. C. Donahower, who is the United States marshal of the district of Minnesota; and that the cause of such confinement or restraint is a certain preten,ded warrant. or .order, issued by R, R. Odell, as United States circuit court commissioner, within and for the district of Minnesota, directing the said as marshal, to arrest the petitioner for contempt in not obeyingan.811eged summons of said commissioner, which pretEmded warrant, as the petitioner is advised, issued without allthority of law. A writ. of habeas CorpU8 was ordered and issued, and the marshal made the following return:
J:
"United States of America, Dist1'ict of Minnesota-ss:: ." I hereby ct'rtify and return that in obedience to the annexed writ. I .herewith produce the therein named John H. Mason, and have him now before