v. COE
EAST & W. R. CO.
531
v.
EAST
& W. It. Co.
OF ALABAMA
et 01.
GRANT
et al. v.
SAME; (SCHLEY,
Intervener.)
(OircuU Court, N.D. Azabama, B. D. January 12, 1892.) 1. CORPORATIONS,;.....IsSUE OF STOCKII'OR CONSTRUOTION OF RAILROAD-CONSTITUTIONAL RESTRICTION·.
Certain stockholders and directors of a railroad company, who owned a controlling interest therein, having the best interests of the company in view, and with the concurrence of all the other stockholders, negotiated a contract on its behalf with a construction company for the building of a portion of the road for $10,000 per mile in the bonds, and $10,000 per mile in the stock, of the railroad company. Held, that as the contract appeared to be fair, under the circumstances, and involved no fraudulent overvaluation. of the work, the bonds and stock issued in accordance with its terms were not void, under Const. Ala. art. 14, § 6, pro"iding that "no corporation shall issue stock except for money, labor done, or money or property actually receiVed, and all fictitions increase of stock or indebtedness shall be void. " ISSUE 011' BONDS.
2. SAME,;"",CONTRAOTS BETWEEN COMPANIES HAVING SAME DmECTORS-RATIFIOATION-
The same persons, being also the stockholders and directors of an iron company, negotiated in good faith a contract between the railroad company and the iron company, which took the form of a resolution by the railroad company to lease a railroad oW'ned by the iron company, and.pay in stocks and bonds, and of a subBcription by the iron company to be paid in property, viz., a lease of their railroad: and the contract was ratified·. by a unanimous vote of all the stockholders of the railroad company. Held, that the contract was, at worst, only voidable, and as no fraud or intentional overvaluation appeared, and the consideration was as nearly adequate as could be expected under the circumstances, the bonds issued in accordance therewith were valid. 3,SAME-ISSUE OF HONPS-PUROHASE :BY CONTROLLING DIRECTORS AT DISCOUNT.
Subsequently:, the same retaining control of the railroad company, fore· bore to collect Interest on Its first mortgage bonds held by them, and advanced to it money fol' repairs made necessary bV an unusual fiood, and for improvements, until such fioatmg debt amounted to upwards of $300,000. For the purpose of paying this, a meeting of stockholders authorized the issue of debenture bonds of the railroad company, Iiot exceeding $500,000, to be secured by a second mortgage. The directors had previously resolved that such bond·s, when issued, should not be disposed of at less .than 65 per cent. Held, that the purchase by such persons, holding the entire fioating.debt, of the whole amou)}t of bonds authorized, paid for in snch indebtedness, and the balance in cash, was .valid. . Thereafter, in accordance with resolutio!ls of the stockholders in the company, which were assented to by all the stockholders, and which authorized the issuance of consolidated first mortgag-e bonds, in order to extend and improve the road, to .take up and retire the first mortgage bonds and debenture bOnds,' and to cancelthe first and debenture mortgages, tlie railroad company issued to the same persons' consolidated first mortgage bonds, and took up at an agreed rate the debenturebonds; purchased by them, the first mortgage bonds and stock issued to them and to the iron company, and the first mortgage bonds and stock issued to the construction company, and subsequently sold to them by that company to enable it to complete the road. Held, in an action to foreclose such consolidated. first mortgage, that subsequent purchasers from them of such consolidated first mortgage bonds were chargeable with notice of the prior bonds and mortg-ages. and of the terms on which such consolidated bonds were issued, and that, the railroad company acquiescing in the transaction, and no intention to defraud subsequent creditors being shown, such subsequent purchasers could not impeach the prior indebtedness on which such bonds were issued, in order to invalidate the balance of the bonds. Holders of first mortgage bonds of a railroad, having contracted with brokers to sell all. their bonds, transferred to the brokers a portion of the bonds, and together with the brokers fraUd. ulently procured the listing 'of the bonds in the New. York Stock Exchange. .Held, that persons Who loaned monev to the brokers on such bonds as security,relyiug either on the standing and representations oithe brokers, or onquotaUons made in the New York Stock Exchange, and produced by fictitious maniPJ11ations pf. the brokers, and not on tile false representations made by thl'l
4. SAME-RIGHTS OF BONDHOLPERS-IMPEACHtNG PRIOR INDEllTEDNESS.
5. EQTIITY-RELIEF PROM FRAUP-RELIANOE ON FALSE REPRESENTATIONS.
532
FEDERAL REPORTER,
vot 5'2.
original holders to secure the listing', and who, on nonpayment of the loans, were as security" we,l!6 nqt. on f!he ground of fraud, compelled to :buv in entitled to priorIty over sl1ch original holders in the application of the proceeds of foreclosure to the satisfaction of the bonds. 6.
Notice was given to the stockholders of an Alabama railroad company of a meeting to be lleld at a place in the state on April 20, 1887, to increase the bonded indebtedness of the corripany, 'and prior to that date every stockholder consented in , writing to the increase. On March 24, 1887, the board of directors held a meeting in the state, at which the call of the stockholders' meeting and the written consent of all the stockholders were recited, and the issuance of the bonds was authorized; and subsequently a report of the directors' meeting, recitin" the stockholders' consent. was filed wit1;l the secretary of state. Held, that there was a sufficient COmpliance with the law of Alabama providing tpat a stockholders' meeting to inthe indebtedness of a corporation must be held in the state, that the call mustetate the time, place, and object of the meetiIlg, and that a report of the must be filed with the secretary of state. 7. BAM'lil .... FoRlllCLOSURE 011' MORTGAGE TOSATISII'Y BONDS- RIGHTS OF INTERVENING
CORPORATIONS-MEBTING '011'
OTICE-REPORT.
Part of the consolidated first mortgage bonds of a railroad company were placed ill the'hands of a trust company, to be issued to a construction company on certain ceni4l.cates of the completion of an extension of the road. When the extension was practically completed, the bonds were issued on certificates to the construction company,: but were retained.by the trnst company to secure prior advances. Soon aftM-,' the construction company failed, and a oontractor, whose contract to build pai'tof the road wBS'entil'ely with the construotion company" and contained no agreement to satisfy the same in the railroad bonds,8ued the railroad company, aud obtained judgment f\lr"the balance due. Heldi that the contraotor had no claim ,on the bonds in the hands of the trust company to subject them to the satisfaction of his judgment.
Jtn>GMENT CREDITORS.
In Equity. Bill filed by the American Loan & Trust Company, trustee, for which compaiqy George S. Coe was substituted, pending the suit, as trustee and con1plainant, against the East & West Railroad CompanY of Alabama and others, to foreclose the first consolidated mortgage of said railroad company, for the equal benefit of the holders of its bonds; to the numbetofl,750j and auxiliary bill by Grant Bros. and others against the same defendants and James W. Schley, an intervening judgnieI1t creditor, to declare void 966 of the bonds, and to foreclose said mortgage for thebeoefit. of the holders of the balance of the bonds. Decree for complainant Coe, and denying the relief prayed for by complainantsG-rant Bros.. and others, and by intervener, Schley. For prior opinions rendered in the course of this .litigation, see 37 Fed. Rep. 242j 40 Fed. 'Rep. 182, 384jand 46 Fed. Rep. 102. For opinion on denial of motion to dismiss appeal of Grant Bros. from the Rep. 795. decree herein,see50 R. L. Fowler, for complainant. ' John H. Inzer, for East & W. R.Co. Calhoun, King &:S:paulding, for Grant Bros. Wager SWU:YrI,e anli A. l'rentice, for Browning Bros. F. S. Smith, for Kelly & Byrne. Webb &: Tillman, for in;tervener nnd d,efendant Schley. PARDEE, Circuit Judge. The Aqlerican Loan & Trust Company, in June, 1888, filed its billto foreclosethe consolidated first mortgage of the East & West Railroad,Omnpapy of Alabama, for the equal benefit of the holders of all or any ·of its bOhds.., The bill alleged, that the railroad
COE V. EAST & W. R. CO.
533
company had disposed of 1,750 of said bonds to bona fide holders for value, and that all of said 1,750 bonds were valid. The bill also closed the fact that the mortgaged premises were in the hands of a receiver appointed by this court. It prayed foreclosure and sale of the property for the payment of the said bonds, and that the mortgaged property be placed in the hands of the receiver to be appointed under the foreclosure bill, which was subsequently done, one receiver of this court surrendering possession to another. On the 26th of July an order was granted allowing Grant Bros. to file an auxiliary bill in behalf of themselves and all other bondholders similarly situated, which bill set up the fact that 966 of the 1,750 bonds were invalid and illegal, and were taken by the defendants W. C; Browning, Edward F. Browning, John Hull Browning, and Amos G. West from the railroad company without consideration, and were ,a fictitious debt, and that Eugene Kelly and John Byrne had acquired an interest in ,said bonds with full knowledge of all these facts. It also alleged that the bonds held by Grant Bros. and other holders for value had been acquired for a valuable consideration, without notice of any defect, and that they had been induced to buy the same by a series of misstatements and misrepresentations as to the condition of said road, the payment of its interest, and its fiscal condition, made by Edward F. Browning, J. Hull Browning, and A. G. West, or Grovesteen & Pell, a firm of brokers acting in conjunction with said last-named parties. The bill does not seek to prevent the foreclosure of the mortgage, but prays that the 966 bonds should be adjudged illegal, fictitious, fraudulent, and void, and not entitled to participate in the proceeds of ,the mortgaged premises; and that the foreclosure prayed for in the original bill of the American Loan & Trust Company should be for the equal benefit only of the said consolidated first mortgage bonds adjudged to be valid by the decree to be rendered in the Grant Bros. case. Each of the individual defendants has filed an answer denying generally and specifically all the allegations of Grant Bros.' bill of complaint, so far as said averments impeach, in any particular, the bona fides of said defendants, respectively. Subsequent to making up the issues, the American Loan & Trust Company having failed in business, and gone into the possession of a receiver, due proceedings were had by which the American Loan & Trust Company was removed as trustee under the first consolidated mortgage of the East & West Railroad of Alabama, and George S. Coe, Esq., substituted as trustee and complainant herein. To the main bill, defendant railroad company and James W. Schley have filed answers. The intervention of Schley is also at issue. Auxiliary Bill of Grant Br08. The complainants in the auxiliary bill have standing in this cause only as bona fide owners and holders of bonds issued under the mortgage granted in 1887 by the East & West Railroad Company of Alabama, in which mortgage all bonds are styled "First Consolidated Mortgage Bonds." The reoolutions of the stockholders of the East & West Railroad Company of Alabama, which authorized the
534
FEDERAL .REPORTER,
vol. 52. 80S-
issuance :ofi the first' consolidated mortgage bonds, and which was Bented to by each and every stockholder; recite that-
"The bonds,were to be issued for the purpose of providing funds for the extension and completion of the road.of the company. to widen its gauge. and to tate up and retire the present outstanding first mortgage bonds and debentQrebonds. and retiring them. and canceling said first and debenture etc. .
At the time those resolutions were passed, there was outstanding indebtednessof the East & WeRt Railroad Company of Alabama, and to a large amount represented by bonds secured by a first mortgage of the railwa.yiproperty I and by debenture bonds secured by a second mortrailway property. The holders of the first consolidated bonds are charged. with notice of the plior honds and mortgages, and oHheterms upon which their own bonds ,were issued. Oaylua y. RaiJ)road 00" 10 Hun, 295; Bt'onsDn v. Wall. 287-311. This being the case, it is very doubtful whether complainants can impeach the indebtedness which existed prior their bonds, and upon! which their bonds are based. to the At the time the first cons<:>lidated bonds were authorized and issued, every,interest consented,-every bondholder, every stockholder,and the bourd.of directors, and, so far as the record shows, every creditor; and the trarisactionwas the consolidation of two series of bonds secured by mortgages ()f different dates· into an equal' number .of bonds running a longer time, and bearing the same rate of interest. secured by one mortgage on practi<,.a)ly the same property"'; Any and all the defects of consideration, and all equities existing tc:> the prejudice of the prior bonds, were waived and extinguisbed,and it, was competent. for the railroad company to rnakesuch waiver. See Bronson v, Railroad 0>., tmpra. Even if the lluilrc:>udcomplllly' had been wronged or cheated, it would seem that subsequent creditors and subsequent purchasers have no right to question the transaction as long as the railroad company acquiesces, and no intentionto:Uefraud subsequent creditors is shown. See Graham v. Railroad 00., 102 U. S. 148. And the same case denies, in respect to such matters, that a corporation stands on any different footing from an individual debtor. The issues made up by the pleadings challenge, and inquiry has been largely made intQ, the transactions in pursuance of which the railroad company in 1882, 1883, 1884, and 1885· put out the first mortgage bonds for purehaseand construction of its railroad; and il'11886 issued its debenture bonds, and sold the same, ,to pay its fioating debt, The real basis ofthe :first mortgage bonds and of the debentures are two transactions in 1882,-thepurchase oHhe Oherokee Railroad from the Cherokee Iron Works, and the construction contract with Michael Duff assignedtoanQ'ftssumed by!the Southern Railroad Construction Company, The complainants claim that. the' Brownings and West had an interest in the Southern Railroad Construction Company, and that they' were its agents or managers, and that practically it was a mere figureThe evidence shows it to head to represent the Brownings'
<
COE V. EkST & W. R. CO.
535
have been, and to still be, for that matter,a duly intlOrporated company under the laws oOhe state of New Jersey. If all the complainants' claim in that b,ehalf be adwitted , still the contract with the Southern Railroad Oonstruction Company was binding upon the railroad company, as the same was fully and duly authorized at a meeting of stockholders held at the time the negotiations were pemIing, with full notice of all terms and details, and the same has been ratified from time to time by the stockholders and different boards of directors up to, if not since, the institution of this suit. And in this case the company in its answer still insists that it was a valid, binding contract. The various agreements in the record in relation to construction are to be considered as one contract, put in the form of a SUbscription to stock by Michael Duff,-an agreement with him to pay for construction, both stock and bonds, and the assignment to, and the assumption by, the Southern Railroad Construction Company, all in good faith and under the advice of counsel. If it be conceded that the Brownings and West, who were directors of and controlling the East & West Railroad Company of Alabama, were also interested in and controlling the Southern Railroad Construction Company, and, as claimed, were the parties who actually advanced the means to build and construct the' roa,d, received the bonds and stock issued under the contract in payment therefor, and that the complainants, acquiring an interest years after, have been injured by the transaction. and can,in this proceeding, inquire into and attack the same, the question stillis whether, under all the circumstances, the transaction was not valid. Certainly, if the contract inured to the benefit of the, railroadcompany, and was the best available method for securing the construction of the road, and there was no palpable ,overvaluation oithe work performed and moneys advanced, nor undervaluation of the stocks t\nd bonds received in payment, and it resulted in no injury to any per'Son in interest at the time, it should not be set aside on technicalities. but only in case of palpable intended violation of law. The cllse of Van -Catt v. Van Brunt, 82 N. Y. 535, is directly in point: "The right of the officers of a railroad corporation to enter into an agreement to build its road, and pay for the construction of the same in stocks and bonds. cannot be seriously questioned, and contraots of this description are frt'quently made for such a purpose. In Angell & Ames on Corporations. ,(section 590a,) it is laid down: 'An agreement is often made by railroads to .pay the persons bnilding them a certain proportion of the contract price in stock. Under such a contract the contractor is entitled to the proportion in -stock, at its current markt't value. at the time payment should have been made. And if the stock depreciate. so that it has no market value. the amount to be paid in stock must be paid in 1U0ney.' See Hart v. Lauman, 29 Harb. 410; Moore v. Railroad 00., 12 Barb. 156; Porter v. Rail1'oad 00., 32 Me.SS9. If a contract can be made to pay in part for building a portion of "theroad. it mllY also be made to pay for the whole thereof in like manner, and -there is DO valid ground for claiming that, where the contractor is entitled to stock at its market value, he would be liable for the difference between the market value and the par value thereof. There is no evidence in the record .before us to edtablish alfirmatively that thevaluo of the work done and mate-
536
FEDERAl. REPORTER,
yolo 52.
rials furnished was less 'tbanthe fair and just value of the stock, or that the road built and equipped was worth less than said stock. In fact the testi· monyshows that the amount expended exceeded the actual value of the stock and bonds which were received in consideration of the same. "The evidence also established that the stock never had any market value whatever. It is true that some of the bonds were disposed of at 50 and 65 cents· upon the dollar, and less, and in some instances by throwing in stock to the same amount, and one balf more, and in one instance taken at par in partpl;lYfIlent of a debt; but they were intrinsically valueless, and after a \ypi!e. sold for only a nominal sum, until at last no one outside of the company would take either the bonds or stock at any)'eal price. The arrange1Illlnt for the building of the road was made after full deliberation anfI consultation, with the knowledge and approval of all the directors and stockholders. It was assented to as the, only means furnished, and the only offer which could be obtained from anyone, to insure the construction of the railroad. It was thebl;!st thing could be done under the circumstances, was, entirely satisfactory, and made most clearly without any in· tention to defraud the company or its' creditors, and in perfect good faith. It is difficult to see how creditors could be'defrauded, when all the property which the company eVer had remained in its possession and under its con· trol. ",. II< '" , "It is claimed that the defendant, as director, and trustee, having wrongfuIly.appropriated the ,without paying for it, takes all the obligations of a subscriber. Tbis' depends upon the question whether the tranllfer of the stock to the defendant and the application of the sarne was 'rtdngful. It was done, as We have seeh, with the full approval of the ,stockholders, and in fact was a necessity, and, without the contract entered j.nto, n0 portion of the road could have., been built... If the defendant had l"ealized a sum beyond the amount actually there might !,>een,perhapll, ,some ground for claiming that the arrangement shollld inul"e·to. and for the benefit of the company.. As, however, this was not the fact, $nli no special ad vantage· accrued to the defendant from the contract; and as ',tMre is no proof ofauy fraud, it is not apparent that there was any wrongful appropriation of the stock and bonds, or that the stock and bonds :were diverted. from their legitiulate use. The mere fact that the held ,a certificate of the Rtockwhich was transferred to him did not make him liable, as itw8s, to all intents and purposes. paid-Up stock." This case has received some adverse criticism, (2 Mar. Priv. Corp. § 826; Cook,Stopks & S. § 47, note 5; Jackson v. Traer, 64 Iowa. 483, 20 N. W. Rep. 764;) but it has been cited with approval and its doctrines have, been reaffirmed by the court of last resort in the state of New York in the case of Barr v. Railroad Co., 125 N. Y. 263, 26 N. E. Rep. 145, Where it is said: "The respondent has questioned the legality or validity of the issue of shares upon ·which plaintiffs hase their rigb,t to sue. I do not think it is in a position to raise that question. and for several manifest reaSons. All of the stock and .bonds were issued, in payment .for the construction of the railroad, 'and were taken by a syndicate of persons who assumed the contract for the work. It is trlle:that that .syndicate was made up 9f members of the board of directors, but ,as the members of the syndicate the company, and composed the whole numberot stockholders, there was no one to object, and ,manner in which they cholle to divide up their interests in the proprietorship of the corporation, and to in shares, concerned only No principle of law forbl\de the com.pany agreeing to pay-
COE fl. EAST 4:
w. a. co.
637
for the construction of its railroad in the way or In the amount it did. Van Cott v. Van Brunt, 82 N. Y. 535. If the company's directors were interested in the work andprofita of construction, and evaded a direct contract through the form or device of an intermediary contractor, that was a matter for the company, or for its stockholders, to take hold ott But the stockholders and the members of the syndicate were the same persons, and, however wrong the transaction might be if other persons were concerned, here no injury was effected to anyone interested in the corporation. And, however illegal the transaction, there was no person apparentlyto complain of it. As the stock was issued as a part of the consideration for construction, it cannot be said that it was taken without value given, and the mode of its apportionment or division concerned only those interested in the contract through which it was received as payment. "We may concede that the contract was voidable, as a scheme concocted by the directors for sharing in the profits of construction, but the difficulty is that all the members of the corporation were assenting to it. There was, however, in fact no fraud l'racticed upon the company. Practicanv. the promoters of the corporation in this way placed a valuation upon the corporate properties and franchises, which the contribution and expenditure of their money created; and the fact that they were created for an expenditure less than the par value of the aggregate issues of capital stock and bonds does not affect the question at all... The constitution of the state of Alabama (article 14, par. 6) prescribes: "No corporation shall issue stock or bonds except for money, labor done. or money or property actually received, and all fictitious increase of stock or indebted !jss shall be void." And section 1824 of the Code of Alabama (1876) provides: "All subscriptions to the capital stock of any railroad proposed to be organ· ized under the prOVisions of this article shall be taken payable in money, labor, or property upon money value. to be named in the list of subscriptions, and, in the event of the failure to perform the labor and deliver the property according to the terms of the SUbscription, the SUbscribers shall be beund to pay the amount named in the subscription list in money." A provision in the constitution of Arkansas, almost identical with that of the state of Alabama, has been construed by the supreme court of the United States not to prevent the carrying out of an agreement by which the bondholders of a railroad stipulated that the road should be bought upon foreclosure by trustees, who should convey it to new company composed of bondholders, who should receive mortgage bonds of the new company in exchange for their old bonds, and full paid-up stock subject to the mortgage debt, without any payment of money. The court said: "But appellant disputes its liability upon the bonds given for the balance, upon the theory that they were prohibited from issuing them by the eighth section of the twelfth article of the constitution of Arkansas, adopted in 1874. That section prOVides that no 'private corporation shall issue stock or bonds except for money or property actually received or labor done; and all fictitious increase of stock or indebtedness shall be void.' In support of this view our attention is called to the fact, admitted by the demurrer, that the full value ot the property, rights. and privileges conveyed to appellant did not .exceed $1,300,000, the amount at which the capital stock was fixed i and COD-
52.
of: bonds were issuedwitQoJ,l,tf\D)' COnproperty, or IlUlor. and represented. on'y. f\ fictiti6Us lflaelJt'eidnes8. lnotber ,woms,: appellant!s vendors: were, fuUy OQmpensated' ifdt interests b1 ·taking,to themselves its entirestQck. ' "Wel,!lo cllot.icioncurintbie"view 01 the case. It does ,Dot"we,t.hink, rest UPOb'8s0l1r1d 'interpretation.otthe state constitution. ,The pIohibition against theissttlngohtock or bonds:, ,except for money or property ,actually recei ved orlabG!.'ld6ne;andagainsUbeftctitiouslncrease of stock or indebtedness. was iritendedto l tn'dtect' stQckholchlts against spoliation, and to ,guard the pu blic against securities'that WeNI'M:lsolutely worthless. One of the miscbiefs sought tciberelrledied'is the tloOdingof the :market with stock and.bonds that do not representiliR)/thlng whatevel"of 8ubstantiiIJ value. In reference to a provi· sion in the constitution of lllinois, adopted in 1870, containing a prohibition as, to,l'aiU:oad corporations slmi'lar to that imposed by the Arkans,as constitution' "'pt>ftfallprivate c6tl'brations, the supreme court of the former state, in RaU1'OdJt!, Co. I v.' Thompson, lOS Ill; 187-201, said: · The laliter part of the clau8e'oft'he constitutiollinquestion. which declares that stocks, dividends;landotbertlctitldus iincrease olthe·capital stock or indebtedness of such shaH be void,'" we think clearlypoin tsout the ,chief object which the constittitlonatconvention Bought .to accomplish in adopting, it,; and to this we·rn.tillt' look, in fora solution oftha language which precedes it. The object was doubtless to prevent reckless and unscrupulous the of building a railroad, or of accomplishing some' other legitimate corporate purpose, from fraudulently iSSUing upon the market bc;mds orstock that do not, and are not intended to, repr6fjen,tmon\ly or property of any kind, either in possession or expectancy;the stoCk or bonds hi such case 'being entirely fictitious.''' Railroad Co. v. Dow, 120 U. S. 287-297, 7 Sup. Ct. Rep. 482.
the
In the ddse bf Elyton Land 00. v. Birmingham Wareh0u8e &; Elevator Co., 9 South. Rep. 129. the supreme court of the state of Alabama, in a very opinion, reviewed all the authorities touching the question of issues pi stock. As 'the ,'law of Alabama ,governs the instant case, and as the decision is a full exposition of that law on the matter in hand by the highest of the state, I quote at length as follows: "Our us that the weight of American authority does not thestatemel)t made by Mr. Cook, in section 47 of his work on Stocks and to the effect that the attempts which have beeu made, in cases, ",bere stock was' issued fOl' property taken at an overvaluation, to hold'the party receiving such stock liable for its full par value, less the ac· tual value of tbepropertyrecelved from him. have been unsuccessful; and that, if there has been an overvaluation Which is shown to have been fraudulent,then the contract i\l to be treated .like other fraudulent contracts, and is to be adopted in toto, or rescinded in toto, and set aside. We have found no authority .at a.1l asserting exemption of the stockholders from such liability, where U"llppeared that the stock subscription was governed by a statutory regulation at all similar to section 1805 of the Code of 1876, or sec.tion 1662 of the Code of 1886. : "When legal provisions. are found which are appropriately framed to secure the existence of such responsibility, it is not permissible so to construe them as to allow a mere formal and illusory compliance therewith to defeat the objects intended to be accomplished. No· argument is needed to show that a reqUirement that the stock of a corporation shall be paid in money, or '" 'lie ... ... ... Ii< '" " '"
... COE
539
in labor or property at its money value, inures to the benefit of persons who may become creditors of the corporation, in that it requires the capital stock to be the representativ60f substantial values, and insures the existence of a fund which must be within reach for the satisfaction of debts if the affairs of the corporation are managed as contemplated by the law. It is equally clear that if a stock subscription which is required to be made payable in money, or in ltlbor or property at its money .value, and is in fact made payable in property at the designated money valuation, may be satisfied by the transfer of property. the value of which is insignificant, or merely nominal. as compared with the valuation stated, then, so far as this provision of the law looks to the protection of creditors, it might as well have allowed the SUbscription to be made payable in · chips and whetstones.' Except section 6, art. 14, of the constitution, and section 1805 of the Code of 1876, there was not, at the time of the formation of the appellee, in reference to the mode of satisfying stock subscriptions, adequate provision for the protection of such corporations. Those enactments are appropriate for this purpose. The requirements of section 1805 of the Code of 1876; that, ' in case of a failure to perform the labor or deliver the property according to the terms of the subscription, the money value thereof, as named in the list of subscription, shall be paid by the SUbscribers,' cannot be regarded as providing for a penalty to compel the performance of the labor or the delivery of the property. The evident meaning is that, in the event of such failure, the cor· poration shall receive the equivalent, and no more nor less than the equivalent, in money or the labor or the property, as the case may be. This clause of the statute is convincing that the statement of the money value of the property in which the subscription is made payable is a material feature of the contract, and that the property delivered must be of a value to correspond with that named in the subscription. As affecting the rights of creditors, the statute is simply a definite reqUirement as to what will constitute that trust fund to which persons dealing with the corporation have a right to look. The defendants in this case, in making and accepting payments on the stock subscriptions, were acting in a fiduciary capacity in reference to the fund. The performance of the contract of subscription, to be binding on creditors, should have been such as is required in the case of a contract between a trustee and one haVing knowledge of his trust obligation. In form the stock subscription was such as the statute called for. Under section 2023 of the Code of 1876, and section 8, art. 14, of the constitution, the stockholders are liable only for the unpaid stock owned by them. But the creditors are entitled to demand that the payment on the stock shall be an actual and bona jlde discharge of the liability imposed by the contract of subscription. The defendants, in making and accepting .payments in property, were bound to exercise their judgment and discretion, fairly and honestly directed to secure a substantial compliance with the terms of the contract. In the exercise of that judgment and discretion they are entitled to the benefit of whatever margin there may be for honest differences of opinion in the valuation of the property; but a deliberate and intentional overvaluation is not permissible. The transfer of the property known to be worth only $5,000 to pay a stock subscription of $200,000 does not bear the semblance of a compliance with the contract of subscription as to one of the essential terms thereof. "The taking of property at a valuation forty times greater than its actual worth, which was known to the partIes, shows upon its face the absence of a bonafide exercise of judgment and discretion ill making the valuation, and an intentional noncompliance with the requirement that the propel'ty shall be taken at its money value. The absence of the fraudulent motive on the part of a trustee does not give validity to a mere simulated execution of the trust;
540
vol. 52.
and an averment of fraud in reference thereto is unnecessary. The pal'ties beneficially interested in the trust are entitled to a substantial compliance with its terms. They are not bound by an act of mere formal compliance which reaU, involvcs their practical exclusion from the benefits intended to be secured to them. The capital stock of a corporation constitutes the basis of its oredit, and persons dealing with the corporation have a rIght to assume that the'stock has been actually paid in, or that it may be reached. The transaction whereby payment was attempted to be made, as shown by the aver· ments of the bill in this case, is not binding on creditors, because it did not constitute such a payment as was contemplated by the terms of the contract of SUbscription, and was, in effect, a palpable evasion of the reqUirements of the statute." I understand this casereally decides that where $250,000 was subscribed to the stock of a company, and issued as fully paid up, and only property to the value of $5,000 paid therefor, the subscribers were liable in money to the creditors of the company for the difference between the value of the property transferred and the amount of their subscriptions. In reaching ;the conclusion, the court discusses the whole subject, and declares the principles involved, holding that in case of subscription to the capitalst6ck of incorporated companies in Alabama payable in property, in order to release the subscribers from liability to creditors, there must be no, fraudulent overvaluation of the property; no deliberate nor intentiomil overvaluation. The property to be delivered in payment must be ofa V'alue to correspond with that named in the subscription. There must be more than a formal and illusory compliance with the law. There must be a fair ,exercise of judgment and discretion, fairly and honeljtly directed to secure a substantial compliance with the law. In the instant. case,. the evidence shows that the contract with the con· struction company was entered upon deliberately after extensive inquiry as to the best bargain the company could secure by those who were the principal oWners of the East & West Railroad Company, having no interest other.than to make the best bargain for the company that they could, and with tbe cpncurrence ofevery one of their fellow shareholders. E. F. Browning,the president of the railroad company, testifies fully to this, had acted under advice of counsel, believing he was doand a,lso ing justwhathis'duty to the company required; that from the latter part. of April, 1881, up to November, 1882, he made great effort to see if he could find any party who would build the road; he was recommended to see the Syndicate, as represented by Frederick Wolf. He saw that he believed his syndicate would undertake to Mr. Wolf, build the road, for the bonds and stock, provided the road would run to Trtistville, so as to connect with the Alabama Great Southern Railroad. Wolf inThey entered into considerable negotiations, and after tl formed him that his friends had declined to build the road at that time. Browning also made diligent search to see if he could find anyone to build the road; called 1,lpon some large builders in New York, and presented the prospectus to them; but they one and all declined to build the road for all the stock and all the bonds which he had a right to offer; and he could not find anyone who would build it on any more favorable terms,
COE V. EAST & W. R.
co.
541
nor on any terms at all, until he was introduced to the Southern, Railroad Construction Company, which company offered to build it for its bonds at $10,000 a mile, and its stock at $10,000 a mile. W. V. McCracken, a railroad builder of large experience, testifies as follows: "Question. From your knowledge of that country, and your experience as a railroad builder, was this Duff contract a fair and reasonable contract for the East & West Railroad of Alabama to make for the building of their road? Answer. I think, from what I know of the country, and what little I knew of the circumstances at the time,-my impression was.-that it was a fair and proper contract to make. Q. Did you receive any stock and bouds in payment, in whole or in part, for the building of the East Tennessee, Virginia & Georgia Railroad? A. That portion of the East Tennessee, Virginia &; Georgia at that time was called the' Cincinnati & Georgia Road.' That was the organization under which that part of the road was built, and the persons with whom I was associated, and by whom I was employed at the time, did receive stock and'bonds for the building of the road. Q. State, if you know, how many bonds and how much stock per mile those parties received for the bUilding of that road. A. My recollection is they received twenty thousand dollars of bonds and twenty thousand dollars of stock per mile. Q. Does the line of the East & West Railroad cross the road of which you have justspoken? A. The old part of it does. III III III Q. Do you recollect whether Mr. Browning at that time asked you if you wonld build this road for ten thousand dollars per mile of its bonds and the same amount per mHe of its stock? A. He either asked me whether I would build it for that. or whether I would have built it for that. My answer was, I know, very emphatic that I would not do it in either case.Q. Could you offer to-day to build a road right through the sam,e country through which the East &; West is built, and equip it as called for by the Duff contract, for ten thousand dollars per mile of its bonds and ten'thousand per mile of its stock? A. I certainly think not. I would not accept an offer to build such a road for such an amount of bonds and stock. " Gen. G. M. Dodge, an engineer and builder of railroads, of national reputation, testifies that he is experienced as a railroad builder, and that the contract of building the East & West Railroad of Alabama in 1882 was a reasonable and fair contract. G. W. Bucholz, chief engineer of the New York, Lake Erie & Westtern Railroad, testifies as follows: "Question. Did you notice what, by the terms of that contract. the East & West Railroad was to pay for the bUilding of that extension? Answer. Idid read the consideratioll; yes, sir. Q. From your experience as a railroad man, was that contract a fair and reasonable contract for the East & West Railroad Company to make for the building of that extension? A. Well, from my experience in the construction of railways, and from my general knOWledge of the country through which this railroad runs, I consider the price paid for it, or rather agreed to be paid for it in the contract, as advantageous to the rail. road company. " To the same effect is the testimony of Mr. George W. Ballou, It dealer in railroad securities and a. builder of narrow-gauge railroads. Stephen V. White, a large dealer in railroad bonds, says: "I should think that $10,000 of bonds and $10,000 of stock was a low com· pensaUon for building the road."
542 f
FEtJERAL REPORTER,
Jridge Jo1'Itl W.
.
of .directors price' menand give for oHlrat eiCtenslOn.I think It IS my· recollectIOn that It was agreed that It was a fair and reasonable contract, and that if the work could be done at that price,P:l.lpricesthE'!oad.cQuld afford.t9pay. * The, contract was discussedait the meeting; it was·talkl:\d,over. and agre4flP.. to and approved. Que.yo UQn,·. And' I understand YQu to sa,}' that cOntract met your approval ? An,Bwe"·. lt did. It, was a faJr .and reasonable contract .to make."
"A
'was haeI
tha
**.
MJ;!,ThomasB. that about thetime the construction spent sevt}ral days in examining the property, and that he coDsiders the contract, to give $10,000 a mile.in bonds and $10,000 a mile in stock, a fair ooe,-to the railroad company. All of these witnesse-s join in stating that. the contract is not only intrinsically fair, but of a c,haracter. common fo. new. railroad construction, andnllturallyresor:tedto by the East & West 'Railroad Company, and, 'as some of them suggest, such as that company could not have got along without, which Mr. E. F. Browning, its president, testifies he found by earnest to be actually the ease. I find no evidence in the of 6uspicion, tothe contraro;Y·. ltls true there are some· statements filed in the record. showing that the actual cost in money to build of the East & Wel)t RailroRg Company was less than the par, value of either the stock or bonds given. in payment; but there is noevidel1'CEHn the tecOrd to show what the actual value of the bonds and stock Certainly the fairness of a contract of the kind in ques-, tion is not t<> by the actual financial results ascertained onits completion. On the whole case as presented to me I am not prepared to find that the transaction between the East & West Railroad Company and the Company for the building of the East' & West portion or the railroad line for $10,000 per mile in bonds and $10,000 per mile in stock was any other than fair, and as liberal to the railroad company as could have been expected., Certainly, there was no fraudulent overvaluation of the labor and stock involved, nor, in my opinion, any. deliberate, intentional overvaluation, and it seems there was a fair of judgment and discretion on the part of the railroad company, fairly and honestly directed to secure a. substantial compliance with the lawaf Alabama. Common observation and experience show that building and constructing a railroad for cash in hand is one thing, and that building and constructing a railroad without cash in hand, and for the stock and bonds of the railroad company, which are onlyexpected to be valuable when the railroad shall be completed, and then depending on the earning capacity of the property, is an entirely different thing. . . It is proper to say, in addition, that E. F. Browning, the president of the railroad company, testifies that he had never any interest whatever in the Southern Railroad Construction Company, except that after the construction company proved unable, in the depression of 1883-84,
co:&:
tJ. EAST &: W. R. CO.
543
tb 'raise any mine money from the sale· of bonds, he. joined with his brothers in.buying from the construction company East & West bonds
and stock
the construction company in thatway with means
to complete the road; 'and that the other two Brownings and West also
testify, each for, himself, to 110 connection with the construction company, and no connection at any time, except as an independent buyer of bonds and stock; and that these purchases Were made, not for the profit in them, but to help out the,construction company in building the new line. And there is no evidence to the contrary; nothing but the inferences to be drawn from extracts of letters written by the parties, mainly to the general manager of the railroad, which are in the main explained and shown by the testimony not to be inconsistent with the direct fact of noninterest in the, construction company sworn to by each. The views taken of the construction contract and the authorities cited apply to a great extentto the contract with the Cherokee Iron Works Company. That the East & West Railroad Company could lawfully contract with the Cherokee,lroD Works, although all the stockholders of the one were also stockholders of the other, in the absence of fraud and misrepresentation, is indisputable; nor would the fact that the two corporations had substantially the same directors, who were the active agents negotiating the contract, ,render it void,-at worst only voidable, but subject to tatification. Oil ('.0. v. Marbury, 91 U.S. 587; Hotel Co. v. Wade, 97 U. S. 23; Richard8on'8 Ex'r v. Green, 133 U. S. 43, 10 Sup. Ct. Rep. 280; Leavenworth County Oom'rs v. Chicago, R. I. &: P. Ry. Co., 134 U. S. 707, 10 Sup. Ct. Rep. 708; Construction Co. v. Fitzgerald, 137 U. S. 110, 11 Sup. at: Rep. 36. The contract between the East & West Railroad Company of Alabama and the Cherokee IronWorks was ratified by a unanimous vote of .the stockholders of the East & West Railroad Company of Alabama at a meeting where every share of stock was represented. The subscription by the Cherokee Iron Company to the capital stock of the East & West Railroad Company of Alabama, and the lease of the Cherokee Railroad to the same company, and the agreement for the payment of such subscription for said lease in stock and bonds of the defendant railroad company should, unner the evidence, be viewed as one contract, and not as several distinct coutracts. The contract was made and entered into as one transaction, and took the form of a subscription to be paid in property,-the lease,-and the resolution to pay in bonds and stock; all under the advice of counsel, and apparently in good faith. It can no more be considered a sale for stock than for bonds; in reality it was for both. The original cost for constructingthe Cherokee Railroad, with the cost of repairs added by the Cherokee Iron Works, after that company became the owner, exceeded the par value of the stock and bonds fixed as the price to be paid. The net earning'sorthe property for 1881 were $36,859;51; for 1882, $39,. 963.41; for 1883, $36,107.50. The weil!;ht of the testimony of experts and others acquainted with the property and with railroad values is to
544
the effeot ,that the Cherokee Railroad was not overvalued. The' considerationof .$17:5,000, named in the deed made'December 1, 1882, by the Cherokee;Irol1 Company to the Brownings and West is shown to have been fixed;with the sole purpose of interests among stockholders of the iron company, and without regard to the actual value of the property. Asa .whole, .L find that the transaction was valid; the parties were able to contract, and did contract. There appears to have been no fraud or deceit between the consenting parties, nor any intentional overvaluation, and the consideration was as nearly adequate Mcould be expected under such circumstances. If, as I have concluded, the transactions with the Southern Railroad Construction Company and with the Cherokee Iron Works are unimpeachable on the part of complainants, then it follows that the transaction between the East & West Company and the Brownings, by which the debentttre bonds were acquired, was entirely just and lawful. The floating debt of the East & West Company December 1, 1886, was about $300 j OOO. This had been incurred by loss of income, costly repairs made necessary by an unusual flood, and by improvements and purchases, and also by the action of Messrs. Brownings and West in foregoing thepaymentofinterest upon mortgage bonds which they held. As long before as April 21, 1886, the board of directors, with a view to relieving this situation,had directed the calling of a meeting of the stockholderS for the purpose of taking steps for the issuance of second mortgage bonds on the company's property and franchises, in an amount not exceeding $300,000, for the purpose of paying the floating indebtedness then and thereafter to exist, and had further resolved that such second mortgage bonds,when so issued, should not be disposed of by the executivecommitteell.t less than 65 cents on the dollar. All of the money constituting this debt had been advanced by Messrs. Brownings and West. A stockhOlders' meeting, called in pursuance of the foregoing resolution, was held June 30, 1886, and by resolution authorized the "issuing bysaid(railroad company of its debenture bonds in the usual form to an amount not exceeding five hundred thousand dollars, * * * .to be secured by a mortgage or deed of trust in the usual form." A condition of these obligations, as issued, was that the company should pay, '!as interest upon the principal of its bond, such sum, not exceeding six per centum per annum, as shall remain out of the earnings of the company in each year aner paying interest on all bonds secured by existing liens upon its property and its operating ex}:lenses: * * * providing that, if less than six per centum be paid in any year,even though less be earned, the unpaid interest shall be carried forw.ard, and shall accumulate to the credit of this bond, and no dividend shall be paid upon the stock of the company until all arrears of interest upon this bond, calculating the interest thereon at six per centum per annum from date of issue, shall have been paid." The precise sum due to the Messrs. Brownings and West for advances up to the time of the delivery ofthese bonds was upwards of $300,000.
COE V. EAST & W.
n.
CO.
545
Havingtbis amount due them, Messrs. 'Brownings and West purchased from the East & West Company $500,000 debenture bonds at 65 cents, the price previously fixed by the board of directors, the aggregate price being 8325,000. This sum the purchasers immediately paid in indebt· edness of the East & West Company, and in cash. There remain to consider the charges made in the bill in regard to the dealings of the Brownings and West with Grovesteen & Pell; in substance that, confederating together to dispose of bonds of the East '& West Railroad Company of Alabama, they fraudulently procured the listing of the bonds on the New York Stock Exchange, and then by fictitious sales in the exchange procured the bonds to be quoted at a high rate,and thus induced complainants and others, innocent persons, to buy at a much higher figure than the bonds were intrinsically' worth. The case shows that the Brownings and West, the holders of about four fifths oftha bonds and securities of the East & West Railroad of Alabama, were, and had been for a long time, anxious to dispose of their interest; that some time prior to February 18. 1887, Edward F. Browning, then president of the East & West Company, was approached byPell, of Grovesteen & Pell, with reference to a purchase by his firm of the bonds and stock belonging to the Brownings and West. The reason given by Pell for desiring to make the purchase was that his firm already owned or controlled the Rome & Decatur. a parallel road then in process of construction, and desired to own them both. Browning inquired into the standing of the firm, and found it good, and their means reported to be large. Proof ofthis is found in the fact that six months later they were able to borrow large sums on collateral from. Grant Bros., the complainants, and from various perflonswho are witnesses for complainants; one of whom, W. C. Stokes, testifies that at the time, August, 1887, when he loaned money tdPell, he had known him socially for:several years, and knew no reason to doubt his word. February 18, 1887, a contract was made by and between Grovesteen & Pell, first party, Brownings and' West, second party, and the East & West Company, third party'. Grovesteen& Pell agreed to build an extension ofthe railroad, about eight miles long, to a junction with the railroad from Broken Arrow to Eden, in Alabama, to provide not If-sS than 50 new freight cars, and such' new locomotives and equipments as might be' requited for the business of the entire road. The East & West Company agreed that it would make a new consolidated mortgage to secure 815,000 of 6 per cent. bonds for each mile of completed road, "for the purpose of taking up and retiring the present outstanding first mortgage and debenture bonds of the said party of the third part." Of these bonds it would issue to Grovesteen & Pell 8150,000 in payment for eight miles of new road, and for the new cars and locomotives, and would also make to Grovesteen & Pell a further payment, in stock, at the rate of $10,000 for each mile of the extension. The Brownings and West agreed that they would" deliver to the American Loan & Trust Company, to carry out the purposes of this agreement," not less than 700 outstanding first mortgage bonds, all of the 500 outstanding debenture bonds, and v .52F.no.6-35
of East & WestJ;JoID-: papy I ;",*1 . * to be by, saidplirty Qf thet4ird ex.cpange.: on the basis of one million six. p,ft)·; thqqean4 dollars. p&;r bonds for bonds of tJ:1e one million one s/j.jd pal;tYQf dollars par.value de.the of·the .part, and. onf!. million dolYl¥l:\e of.the stO<fk. of,sai4"partyof part; the of, said bonds!ind ,stock being lin the following prqportjon" .aaid .one ·Plilliqn .one hundred thousand. dollars first. ,one cash.;flaid five hU,nd,red thoueal1d ;lll1ndred tllo:t/.8RAd dollar/:l car>hj said one dollars million.dollM8; .o.fstock" .tWQ,ll'QIl,dre,q thous.apd'dollars. cash." ·(:trove8wen&Pellfur,tper agreed·toibllY from the and West all of the pon,ds ...".,hich they' woul,d thu!!. acquire, and. also the' stock Company, the price. d,i'lposited :pyth!3xn witl1 t!;W 4.merican Loa;p & of:. the bonds, to be 85 centS·!fOf,200,. to 'Repaid for at thl;l time of the deand a higherprice,-about Iill,l,d aU deferred'ipufchases until Decem ber JO, 1,887" when 'must be, closed. NO'additional paymeI;lt for the Two hU,ndred and ,fifty tboJ1sn.nd.; dOllArs. in stopk, ,was to go with. the first lot ofbon\1s. The reyvas to remain as. /!oourity. until the. contract is fully .,. '. , In pursuan<,:eof & Pell built tpecontempMed 9( eight miles. from Broken.Arro"'Jo Eden. Theyalso paid to ,and West,.May 16,.1887, $250,000 for 300 consoliciated the at 85 ,and received also a bonus in stock all ,prOVided by the .other Or fu,rtber transactions under this contract and between the parties are disclosed by the' Itappearl'\, also, three months later, in August, 1887, Pell. borroweq $270,QOO six. loans, pledging as cpllateral $177,000 East & WestconsQls,.and $15,2"OQOfirst mortgage bonds of the Rome & DecatUf, !HQad.coJ;l1petitiYEl andsubstantiaUy: Pllrallel to the. East & West. The testimony shows. Pell Qf. controlled the Rome & Decatur I !\ndthis, asr alrelldy was his principal reason for the purchase of tpecontroLllfrth.eEij,st.&West Railr()ad. None this money was . paidto,the Browning!!! :West,or any of them. It appel}<rs further,that the of::tv!ay,June, JulY,!\nd August, 1887; PeU several times caused East &, West consolidated bonds to be sold for account of hisfirm,hy one same another, *hus causing to be reported and published by the as werein fapt fi.ctitipus sales, designed to induce. the belief that tl;1ere.ported price was jq faqt the, current value of the bonds. The price reported wlls,however"in noinstanqeany higher than the PO which Pell had .been paying to miscellaneous holders of firstplortgage bonds. . The evidence furtperdtscloses that E .. F. Bro:wning, president, made applications at times priO!: to the contract with Grovesteen &;
547 Pell to list the securities ofthefEast & West Railroad the New York Stock,Exchange, which applications contairiedm:isr'epresentations as to the earnings and operating.expenses of the toad,iufd as to the actual physical condition of the :same; and after the con.tract with Grovesteen & Pell, the said Browning 'made two' (exact 'date not given) to list 11,090 shares oNhe stock of the company, ancl'the other bonds of the comApril 14,188T, to list 1,109 of the pany; which last-mentioned applicatiori was granted after numerous examinations, before the committee of the exchange; of Mr. Browning' and Mr. Pell, of Grovesteen & Pell, about May The last-mentioned application, as prodhced by the stock exchange, .contains serious misstatements of iniportant facts relating to the valuer of the bonds': (1) That of the entire issue ofthe bonds authorized, 600 were reserved by the railroad company to build extension to Birmingham, Ala., widen gauge, and furnish additional equipment; (2) that the gauge -three feet-was then being changed to standard gauge; (3) that the road was then earning at the rate of$79,OOO, net, per year over its operating expenses. The facts being that (1) only 150 bonds were reserved, and those were so reserved to carry out the contract with Grovesteen & Pell for extension and equipment, and not to widen the gauge of the road; ilnd (2) the gauge of the road was not being changed to standard gauge, nor had any practical steps been taken therefor; and (3) the road was not earning at the rate of "$79,000, net, per year over its operating expenses," nor any respectable Sum over its operating expenses. The statementwith rell;ard to the earnings was based upon estimated receipts and doctored reports, with the aid of that lively and sanguine imagination which generally bas possession of promoters of railroads and ofinterested speculators in securities on unfinished railroads. Mr. Browriing testifies that the application produced from the stock exchange is not the one he signed, but corresponds in the above statements with one which Pell prepared for him to sign, but which he refused to sign; that he made numerous changes in the application pre'pared by Pell, and particularly so as to state that only 160 bonds were reserved for extension and equipment; and, with regard to the gauge, that the company was proposing to change the same to standard gauge; that, after thllcorrectionswere made, the whole was copied on a type-writer of the American Loan & Trust Company, signed by him, and given to Pell; thiat the application produced contains only the last page of the application copied on the typewriter of the American Loan & Trust Company, and signed by him, the first three pages being substituted; that the substitution is shown by indications as to the removal ofbrass tags, artd the fact that the first three pages are typewritten on a different typewriter frorn the 'last page. The application has been re'tained by the master, and is now in the record. An examination shows that the first three pages are typewritten on a different typewriter from the last page, t4e first three being apparently the production of the "Caligraph," and the last of a "Remington;" and the marks at the top show that originally tags or brass fasteners were used to hold the pages together,which have since been removed and a pin substituted. .
On th\} other hand, however, the application to list the stock, made time, which is not disputed by Browning, contains two of the statements in question: (1) .That the gauge is now being changed and (2) "the road is ,now earning 379,000, net, per year to over its operating expenses." And it further appeurs that, on the applicatiQn to list the bonds actually filed with the stock exchange, Mr. aPpeared twice 'in support of the and was exlength with .reference to the matters contained therein, and it wouldaeem that if there had been a substitution, as is claimed by Browning, it' ",ould then have been noticed either by him or by the committee. is some testimon,y tending to show that E. F. Browning, after the contractwith Grovesteen & Pell, and after he had vacated the presidency in fl,lvor of Pell, continued to be intimate with Pell, visiting him at his office every day up to Pell's disastrous failure, and during the time that the fictitious sales were being made in the stock exchange. Also, that E. F. Browning was on the finance committee of the American Loan & Trust Company, which loaning money on East & West Railroad securities, ,and was necessarily acquainted with the quotations on the exchange of tpe first consolidated bonds of the East & West Railroad Compll:ny, and ,thus they ]{new that they were selling at rates largely over theirYalue, and was a party to the deceit, which it is claimed was for of the bonds still owned by the Brownings and West. the ho\\'ever, is denied by Browning, who swears that he went to ,feU four or five times in relation to the terms of the contract afterand not short time QefQre Pell's failqre, Pell, to sell for his aecount, some,El Cristo stock, w1;l.iGb )jeing sold, he visited Pell's, office to collect his tnoney, and, was coiripellea to return fromoay to Jay for the sawe." That at these. he had, nothing whatever to say about the railroad, except to pal;l8' the to how it was getting alOl;1g, et,c. That he had no knowledge whatever that Pell waS selling East & West Railroad. bonds, and . hll-s ,no interest.therein, and Was.llbs,olutely ignorant oiand disconnectedwHh such transactioQ.s. That, he sold. no bonds of his own otherwise than in thePeH cpntract, and aU,thcirized .no ,sale. " The on tp.e aforesaid showing, that the Brownings and West,in conjunc.'.tipn with Pall, the value of 1.ts property and its the gauge of road and the number of bonM which would be. by these means innocent parties were induced to buy. these bOl)ds; and further,. that, under the contract between the Brownings and GrovE!steen & Pell, Grovesteen & Pell were really the qf the Brownjngs to market these bonds. Six witnesses. testify as to t4e represent!ltions on which it is clain1ed the in question, and their evidence is innocent partieli substantially as follows: Frederick Grant, complainant, sworn: "We hold thirty thOUsand dollars of those bonds. We made the loan in board the 16th day of August, 1887, through Donald, Gordon & (0. My brother hllPpened to l:>eaway at the time, and we made the loan in the board, -thirty dolll\rs,-and .Mr. Pell himself came in with that loan.
COE V. EAST & W. R. CO
549
He merely brought in thirty thousand dolIa:r;s of the East & West Alabama and six of the Rome & Decatur. The bonds were brought in by Mr. Pell. I was not familiar with thA prices. and I therefore looked at the printed list, and saw that one hundred nine and a quarter was bid for the bonds. Question. Have you the list that you looked at? .Answer. Yes, sir; I have it bere,-the very list; and I told my cashier to draw the check while Mr. Pell waited there; and he gave him a checkfortbirty tbousand dollars. And I looked over the bonds, and they seemed to be all right. That gave us a margin of considerable over twenty per cent., which is our usual margin in making loans of that kind,-in making loans on the stock exchange. The bonds bad been selling on the market at about that price, so I was told afterwards. Q. What, if any, information did you have as to the nature. character, and consideration of those East & West Railroad bonds before or at the time you made this loan? A. Well, I can answer that in a very few words: That we were simply governed by the quotation. As I said, I looked at this list; I knew it was a new bond. And there were sales made before we made the lORn on these bonds, and the qnestion came up when the concern failed whether any such bona fide sales had ever been made; and it was merely wbat they termed in the stock exchange as a · washed sale,' and tbat misled us. as it did a great many others, regarding tbe price of those bonds." Richard L; Edwards, president of the Bank of the State of New York, testifies: "Question. I will ask you to give a statement of the history of how he came to the bank, and everything tbat transpired between you and bim in connection with the securities of the East & West Railroad Company. and with your accepting the same for any loan made by Mr. Pell by your bank. AnswB1', Some time previous. I don't remember how long, probably oVer a month, just before that time, he had frequently made application to the bank for loans of $25.000, or sometimes $50,000, on dividend paying securities, and he mentioned the East & West Hailroad of Alabama bonds,-"-the' first mortgage bonds. He called attention to the market price. and was generaliy refused on the ground that we did not know anything about the bonds. Someti mes be would come in close on to three 0' clock, and beg pretty hiud for $25;000 just overnight, and I loaned him $25,UOO, I think, on about thirty or fifty of the bonds. It remained three or four days, and I submitted the loan to the board at a board meeting, and I asked the question of the board. -'of the various parties whom I thought ought to know somethinl{ abou't these securities,-but thpy did not appear to know, and so I 'called the loan; and refused to lend him, on applications made subsequently, at all ont.hose bonds. After this loan was called, a subsequent application by Pell on ihis loan, on the same securities, was refused repeatedly; and he then told me he was negotiating for the sale of all t,lle bonds through an English syndicate.the price was 107,.-and he hoped to consummate it within a few days. No application was made for a further loan for some days. He wanted to open an account with the bank, and I refused hien. I told him, no; he could not open an account with the bank, In a day or two afterwards he came back. and said he felt very much grieved at my refusal to open an account with him. I had known him some time, and he wanted to know if I would give him my reasons. I tokl him. -Yes; you are dealing in a class of securities I don't know milch about, and I dOIl't propose to loan you money on them,' and therefore I didn't think it would be very agreeable to eitber party, and not to his advantage. That ended that matter, but, probably a week or so after that, he came in and told me that he had sold all the bonds of the East & West Railroad Company of Alabama at 107, to an English
550
FEDEnAL 'REPORTEn ·. vol.
10Iln.· ..
syndicate;ttiiit bewaspresideI\tOf the road;, and wanted to open an account; didn't want toborrow·ariy. money on the bonds. ami! he 'could keep from $50iOOOtO $100,OOOln money;od deposit; Drexel,Morgau:& Co. it was arranged.through,andbe wanted to kaow if lwouldn't bpeuilIu,aecount with him. I,questioned him1ut iengthit.bout.thesaleof .thebondli.'etc., and he stated positiv,wy-..he stated so to the ,cllshier.....tllat he had sqld/all the honds, and he waSmut.of the woods, and, he. bad made,eorerso muc}wlnoney; I have forgotten thei'iimount :hementioned.' I turned around to the cashier, and asked him itO hear ,the, slime storlYfrom ¥r.Pell, and, if he thought ad visable. to,take:bis signature. He did "sOi he took his signature; He was to keep thirtythonsanddollars to forty thousand dollars on deposit, and, after he opened ,his acccount·. neatly all his, operations were confined to shifting those bonds for loan8;You could tell' that'from the checks that came in; and be finally came to me.· 80,in watching the account, Lnoticed that there were loans paid off, and I sent for him and told him that I could not afford to take up these bonds, and:asked himifhe had: to borrow: money on them; otherwise he might find himself close onto three' o'clock without those bonds and no money.. Oh, ,no,' he said, he would ·take care of tttat.' So I stopped his' certification several times until he, made deposits from the loans he had made to other parties; III one instance he made a $50,000 loan of L. Hoffman & Co. against his signature account. Then some days after that he told me he: was ready to deliver those bonds, to Drexel, Morgan & Co.; that he bad to take up his loans' around the street; and he wanted to make an arrangement for the certification of his checks to take up the loans and deliver the bonds to Drexel, Morgan & Co. ,'. He said there were over 500,000 of them; aoo11t500.000 oftbem he wanwd to deliver. I said: 'Pell, you had better goslqw. Take 100,000, and, deliver that amount on the account.' In order to get ope hundred ,thousand of the bonds, he bad so many of the Rome & Decaturs, mixed up with his loans that he checked off 180.000; I think it was Ol;le hundred and eighty. It was in different cttecks. '£he idea was to l;ake 100,000 Ells,t & West. l\nd del.iver to Drexel, Morgan & Co. at 1071 on account of his sale throqgh them to, this English syndicate. When three o'clockarrive<!, he came down with 131,000 Rome &; Decatur bonds and 84 East & West, statingtbat there waSgome misunderstanding with Drexel, Morgan & Co.· it having been intended that these boods should not go through until the following Wednesday. I think it was. possibly Thursday or Friday. On the foliowing'Wednesday he was to take up the bonds. and deliver the bOnds to Drexel, Morgan & Co.· and he came back with,tbe story that Drexel or Morgan, I remember which. had gone off on biB' yacht, and would not be back for "ten days, and nClbody knew anything about it at Drexel, MOJ;gl\n & Co.'s. Well, of course. that exposed the whole piece of rascality. and I shut right down on him, and be faUed. He clClsed, up, and I had' to take, the bonds, and work out of them as well as I could. The bonds and stock and ten shares of the American Loan & TrustColDpany's stock be also brought down with theotfJ,ersecurities. So that is the reason I call it a ' forced
S. A. Shephard. called and 8wornror.the "Question. Mr. Shephard. are you or not connected with the Bank of Montreal? If so, in what waY"'a;nd how long 'have you been so connected? An8wer. I have been connected with "the Bank of Montreal for nineteen years; thirteen years in New York. Q. In wlintposition? A. As third officer of the bank here. Q. Wcereyou so connected with them in JUly and August. 1887? A. I was.Q(: ,Did you or your bank: have any transactions with Grovesteen& Pell during'tbose times? A. Yes, sir. Q. Please state Whether your bank is now the holder or owner of any bonds of the East & West Rail-
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road: if so, bOiW many. A.lrhe bonds are not held by the bank. Q. Who are they held by? A. In.,my name. ·Q.From what did you acquire them? A. They were sold on the'exchange. Q. Sold by whom? A. Bya regular broker. "Q· .As· whose bonds were they sold? A. The Bank of Montreal. Q. State,how the Bank of Montreal, if you know, became possessed of these bonds? .4.: Made a loan to Gwvesteen & Pell. Q. Whim? * * ... A. About June; just before they failed; a few days before they failed. Q. Mr. Shephard, I w,m get you to· state which member of the firm made or transacted the loan. A. Mr. Pell. Q·. State whether or not Mr. Pell said anything in regard to those bonds. or their value or price, at the time loan was made. A.Well, 1 can't remember on that special transaction; but he was continuously ,borrowing money from the bank. Q. Well, state whether Mr. Pell said anything during the time that he was carrying on the transaction with the bank in regard to the character of the boude,-their price. A. Mr. Pell several times pointed out to me the price of these bonds on the stock exchange list,-theywere selling at a:certain price; and he did that more than once, I am very certain. The bonds were traded in the stock exchange; sold at a certain price, and bought. Q. Do you remember what those quotations werll, so pointed out to you? A. They were 109, I think, so far as I can remember. Q.Did he say anything about whether the bond was a. good bond. or anything of tbat kind? .d, Well, a bond that is selling at 109 is always suppos0dtolJe a good bond. Q. Did Mr. Pell pay his. indebtedness to the Bank of Montreal from whicll tbese ones were taken? A. No; he did not.Q. The bank sold the bonds for the debt? A. Yes, sir." Walter C. Stokes, called and sworn for the complainants, testified.as follows: "I loaned the money in the board to Grovesteen at a quarter before three. The;loan was brought in by: Mr. Pell. He. after bringing the loan into the office, came around into the customers' office, where I was, and, while waiting for his check, passed some.conversaUon.My cashier sent for me, and asked me if I wanted to make thelaan on these securities. He said, ·I wouldn't do it,' ... ... ... I looked at the securities, and said, · I don't recognize them.' I had been away for a long time, and I says, · I will have to see what Pell says,' and I went to Pell and asked him. 1 told him my cashier objected to making the loan. I didn't know the securities. He said, ·What do you want to know about them?' and I asked him whether they were the first mortgage on the road, and he said they were. I asked him whether they paid their interest, and he said, · Yes.' Then I asked bim.-still hesitating to make the asked him whether they were listed, and he said, · Certainly, they were;' and he reached over and touched the tape of the machine, and said, ·Six of them were sold to-day at 109 or 109!o'-I am not clear which; I think he said 109. I knew it was late, and he was very warm. I didn't want to make the loan. but I had known Pell socially for several years, and had no reason to doubt his veracity in any way. I didn't think very much of the strength of the house, because there had been some rumors about their condition which would have made me nervous about making the loan. I said, 'Do you know about those bonds?' and he said, · You bet your sweet life I do.' I said, · Do you consider them perfectly good,' and he said,·' 1 know they are.' It was ten minutes of three, and the pepspiration was coming from every pore in his face. I felt that I didn't want to malte the loan, but I went back to the cashier, and told him todraw check for him. I says, ·Pell says he knows all about them, and,they are the first mortgage bonds, and I don't s.ee how I can lose much on them. At any rate, call that loan at half past nine to-morrow morning, and give him a cbeck.' That was done, and the next morning the loan was called. and I sent over from the exchange
.552
voLo 52.
about bnl',past ten o'clock 'to know whether ithlid been taken up. It had not. Iwellt'over again at ll'o'clook,.and it bad not been taken up. I sent down up, and word, came back that it was all right, they would hurry it up. I waited until 12 or 12: 80,and no return, and I went down myself, not find either Gr,ovesteen or Pell;' I found the cashier, though, and he sa:id they would attend. to it. 'fhen 1 waited for an hour, until I found Gi'ovesteell"and he told me that it was all right, that we. could.,not lose a centl,andhe would see it' was taken up. I went back to illY office, and put hiqlon notice if it \Vas not takenup until half.past one or two, I would proceed to sell him aut under theTllle. * * * I proceeded to sell them out under the Irule, and they we're offered by the chairman from 109 down on the fraction Until they got down tll'lar.par, and then down to one per cent., and from that on down to 65, without bringing forth a single bid, and then. not wanting tosacriflce the property, I withdrew them." called and swprn,for the complainants: bad some money to loan at .that time, and. as I was not a mem ber of the NewY'orkStock Exchange,.I requested thetirm otE. C. Humbert & Co. to loaD ,for me some money in'·the :New York Stock Exchange. Well. they rapj)fted to me that they' had loaned out the money to Grovesteen & Pell. about exactly., hutl suppose between 12 and 2 anyhow. I was in E.,C. Hu.mbel't'sotlice;and ,a boy came in and handed in to the casbier SOme bondihin an envelope. and asked fora check for the same. Well, the cashier handed to me the bonds to see whether they were satisfactory to me, and I loojed over the bonds, and said: . 'I don't know anything about these bonds. lneVer heard of them. I don't want them.' So the cashier handed the bonds back to the boy, who was in there to get the check, and told him to go to Grov9sooen& Pell. and ask. them to send in some othercollateraI. ' Then, after It while. a short til'!1e afbel' the boy had left, Pell came in,and .he acted aHifhe was angry. and he 'Said, .. What's the matter with these bonds? Ain't they. good collateral? · · Wellt' I says,' they·may'begoodcollateral. I don It kno\\'anything:abo.llt them; II never beard otthem;' . · Well,'he says, 'they are good bonds. '., Well,'!says; 'they may. be good 'bolids. You may consider them good bonds; but I make it a r.ule llever to .loan money on anything anyhow." Well,' he said. 'if that that is not guote9in the stock is,the case. they are quoted regularly in the New York Stock Exchange, amI transactions taka place in: them regularly.' While saying so, he took. hold of the bond liskand also of the sales list, and pointed out to me where they were regularly quoted, and what ti'ansactionshad taken place. He SllYS· · Therethey;al'e. They are selling.' Lbelieve hesaid,'about 107 or 108 or 109,' And he said, 'Besides that. everybody is taking them. I have borrowed money on ·them of several banks' and brokers; and not only this,' he says, 'but they have been negotiated on the other side., by a syndicate headed by Drexel. Morgan & Co.' !::lo, on these statements. I let him have the money, of course. to my sorrow.'" co I
Sylvester Post, called and sworn for the complainants: "Question. 1 will get yOlt to state whether the firm of HutchInson Bros. at that time had any dealings with Messrs. Grovesteen & Pell. Answer. They made a loan to them f)f $25.000 the day prior to their, failure. Q. Did you receive any security fortha loan? if so. what? A. We received $25,000 East & West. ,We l'eceiYed$25,OOO East & West .Alabam:' firsts and five Rome & Decatur ,Q. Did you have a con:versation with any member of that firm inregl\rdto tbat, loan on thatday? A. With Mr.Pell. Q. Please state what it was.A. He entered our otlice a few minutes before· three with a loan for and I told him 1 didn't like the securities; we had a loan prior to
COE 11. EAST &: W.
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that. and I objected to them at that time: and he said those bonds were regularly listed on the exchange: there were daily sales of them; and he called' my attention to the bond list. I referred to that, and found that they were; I think 109 bought: I could not say definitely: sales about nine to ten; several bonds had four to six bonds. or something like that: and he said they were a perfectly good bond. I told him I rather doubted it, as the price indicated they were not a strictly first-class bond. First-class bonds at that time were at a higher, price. Q. Did he make any reply to that? A. No, further than saying they were as good as anything on the list. Q. Did your firm do anything to reduce theSE! ,bonds to ownership after the failure of Grov steen & PeU? A. We brought suit through John L. Branch, 120 Broadway. Mr. Blair, of Blair & RUdd, was appointed referee in the case. and the bonds were closed out at auction. Q. And by whom bought? A. We bought tpem in to protect ourselves." The foregoing evidence-and no· other witnesses were examined on the subject-is not sufficient to show that the complainants, or any person similarly situated, bought the first consolidated .bonds of the East & West Railroad of. Alabama on any representations the Brownings had made, either to list the bonds or otherwise. On the contrary, it tends to show that all the complaining parties became the holders of those bonds either on the standing and' representations of Pell, or through their reliance upon the quotations that were made of said bonds in the New York Stock Exchange, produced by the fictitious sales manipulatell by PeU, or both; It is true two of the witnesses testified that, if'the bonds bad not been listed, they would not have dealt in them. This falls far short of proving that they purchased the bonds for the re3:8011 that they were listed, or because of any representations made by any person'to procure the listing. The common-sense fact is, and will appear from an inspection of any list of quotations upon the New York Stock Exchange, that the mere listing of securities on the New York Stock Exchange is no criterion whatever as to the value orsuch securities; and common experience teaches that the listing of securities on the New York Stock Exchange is not a first-class test even as to the genuineness of such securities. At all events, the does not satisfy me thlrt the complainan't acquired the bonds because they were Hstedon the New York Stock Exchange, and it was only in representations, which may have led to such listing, that the Brownings were concerned. In this connection it may also be noticed that not one of the complaining parties who have testified is shown to have acquired the bonds in controversy at the prices quoted in the New YQrk Stock Exchange, or even at or near par value, but practically at about the prices fixed in the Grovesteen & Pell contract. The contract between the Brownings and Grovesteen & Pell cannot be properly construed to mean other than a contract of sale by the Brownings to Grovesteen & Pell, and I am wholly unable to construe it to be a procuration constituting Grovesteen & Pell agents for the Brownings to market bonds. The view that I have taken of the several points in the case renders it unnecessary to pass upon several other important questions presented in
vol. 52. the pleadings Jand ;prOOfs,IIl1ll:l0ng others,' to wit, that,the ,bill of Grant , Bros: ;$ defective'for want of necessary patties; that it is wuhout equity, bedausc ttie. 8: complete and Ildequ!Lte remedy at law; Rnd «laim ip' favorof Kel1i & Byrne, (purchasers of the of the negotiatiol1$ between the bondho.lders participating) .and the Brownings and West, and therefrom March 22, 1888. rnth voluln'l'ihons recdrdand briefsubmittedin this case, there may minOT complainants' hay? my.attentIOn, but the cOll"C1uslOns ,teachedon the salIent pomts are such It neeessarlly {ol1Q'WS establish a case entitling them to equitable relief in the present proceeding.' . &hley'8 O:tse. Schley's position in this case since the order of consolidation is t4at ·ofan in his behalf was commenced by filing ia bill in 188& against/the East 4!: Come AmEjri«an Loan & Trust Company, trustee, and other perapns,l o.,ut that he was a judgment creditor of the railc way .compllny I .that his judgment Wl;l.S unsatisfied, and .the railway company praying for,a l;eceiver, /l.ndthat the earn,ingsof the railway.beseqqelSttlatfld al).d; :q.pplied to the satisfaction of his; ,l/aid judgment. by the East & West RailHe also set forth.. the general mortgage road secure jts first cons.olidated bonds; prayed that the same beJorecloae.d for the;benefit of his judgment, and.:the bonds secured there:1)y, except celitain. bonds that were alleged to haNe been illegally and; fraudulently issued; and he prayed for an account of the bonded indebte.dness of the raUroad company ,and general relief. Afull$tatelllentoL$ecase and of the preliminary proceedings will reported in the ca!le of American,f.oan &; TrustQp. v! East &; W. R. 00. of Al«bama, 37 fed. Rep. 242, wherein thl} of Schley to bill, and thedemQrrer of tbe·American Loan & Trust Comthe pany. to Sohley's bill, deQying jurisdiction, were overrllled.. Thereafter, the case as to Schley was fully put atil;lsue. By stipulation of counsel, aU the testimony, relevant and material in thisinterventlon of. Schley, taken in the main case·orin the case Qf·Grant Bros., may be considered here. , The answer ,of defendant trul;ltee contains a demurrer to Schley's bill for want of equity; and the answer also, charges that his judgment is collusive, and not based on real, indebtedness of the EMt & West Railr.oad Company. ,I am not disposed, however, to pass nppnthese and other objections of a technical nature, as ,the case cal). be more satisfactorily disposed of upon the merits. . As to the geneJ;al propqsition that Schley. as a Judgment creditor, filiug a creditor's bill,and procuring.an appointment· of. a receiver thereunder, was entitled to have the net earnings of the railroad company, from the time that his receiver was appointed up to the s\lbstitution ,of a, receiver in of;thett'ustee under the bill of foreclosure, applied in reduction of hill judgQ1ent, \t only needs to be noticed that.in an in-
.<JOE !I. EAST & W.K. 00·.
i
555
quiry heretofore had, provoked by Schley on reference. to,and report of,. the special master; it was found that there were no neLearnings during the period in question.. On this hearing'schley contends (1) that the $500,000 Of debenture honds issued by the East & West Railroad Company were illegal and invalid, and that their exchange into first consolidated mortgage bonds was also invalid,; (2) that the first consolidated mortgage and the bonds issued thereunder are invalid, because of the informalities and irregularites in complying with the laws of the state of Alabama in relation to increase of indebtedness of corporationsj (3) that the American Loan & Trust Company, as fraudulently issued $75,000 of bonds to Grovesteen & Pell prior to the time when the same had been earned by said Grovesteen & Pell under the terms of the contract and the requirements of the mortgage, and that the' said trust company now holds 50 of the first consolidated borids f which should be applied to the payment of Schley's judgment, or postponed until his judgment is satisfied. 1. The debenture bonds having been exchanged for new bonds, and the debenture mortgage having been satisfied of record, the irregularities attending the. iSflue of the bonds, and the granting of the mortgage, are now immaterial; the debenture bonds were never void, but represented, beyond contest, a sufficient indebtedness to operate a good and sufficient consideration JOl' the new bonds issued in lieu thereof. 2. The informalities and irregularities alleged against the issuance of the first consolidated mortgage. bonds are (1) that such mortgage was authorized by a meeting of the stockholders held out of the state of Alabama; (2) that no notice of such meeting was given, as required by law, to increase the indebtedness; and (3) that no report of the stockholders' meetingwRs made or filed in the office of the secretary of state of Alabama, as required by law. The evidence shows that a meeting of the stockholders was called to 'meet at the ofJice of the company at the town of Cross Plains, Ala., on the 20th day of April, 1887, for the purpose of providing funds for the extension and completion of the road, to widen its gauge, and to take up and retire the outstanding mortgage bonds and debenture bonds; and that prior to that date every stockholder consented in writing to the issue of the first consolidated mortgage bonds, and to the granting of the mortgage to secure the same for all the purposes aforesaid, except to widen the gauge; that on March 25, 1887, ata meeting of the board of directors, apparently held at Cedartown, in the state of Georgia, but actually held, according to the testimony of President Browning, at the town of Cross Plains, Ala., the aforesaid call of a stockholders' meeting and the unanimous consent of the stockholders were recited, and resolutions authorizing the issuing of the first consolidated mortgage bonds for the purposes aforesaid were duly passed; and that a. report qf the directors' meeting reciting the stockholders' consent, duly certified, was filed in the offi,ce of the secretary of state of the state of Alabama, on the
556
FEDERAl.. REPOR:v£B.,
:vol. 52.
22dof October, 1887, prior to Schley's snihgainst the railroad company. On facts the law of Alabama was sufficiently complied with. The whole transaction seems to have been valid between competent, contraCting parties antecedent to Schley's becoming a creditor of the railioad company, and Schley cannot be heard at this time to question the matter, unless he avet: and prove that it was a part of a scheme to defraud subsequent creditors. Porter v. Co., 120 U. S. 671,7 Sup. Ct. Rep. 1206. ,. . , Thi$jlast aspect of the case has been sufficiently considered, and determined adversely to Schley's contention, in disposing of Grant Bros.' ;;,1 . case. 3. The contract of Schley, upon which his judgment was based, was made with<ll-rovesteen.&PeU for the building and ()()nstruction of the extension from ,Arrow, and he. was to be paid therefor. monthly u'pon statEirpents ifutnishedi by the engineer selected by the parties, except that 20 per pent. of the amount due :upon each payment was to be reserved until the completion of the entire contract. His contract Was entirely with Grovesteen &'Pell, contained no agreement to satisfy Schley'sdemlmds.inbonds oBhe railway company, and gave Schley no lien whatever on any bonds which might be issued by the railroad cbmpany to Grovesteen & Pell for building the road. . He had no contract whatever with the railroad company, and the judgment he finally obtained against the railroad company was lor money only, withoutrecognitionof any Uen j in fact, no lien of any kind was claimed in the suit. The contract ofthe railroad 'company with Grovesteen& Pell for construction provided as follows: "Payments to the party of the first part for the construction of the extension from Broken Arrow to Eden, Alabama, and of the "quipment l.ereinbefore mentioned, of the one hundred and fifty, thousand dollars par value of said consolidated bonds and stock, at the rate of ten thousand,dollars per mile ofsald extension, SPall be made by the said trustee in the following manner: On presentationof.bill of lading for shipment to the parties of the third part of at least five hundred tonsof steel rail, lleventy-five thousand dollars par value of said consolidated bonds, and upon the certiiicateof the engineer in chllrge' and of the general manager of said party. of the third part that the work has beellperformedand equipment furnished in accordance with the this agre!lment, the remainingsev"nty-five thollsand dollars par value of said consolidated bonds, and also saic;l stock at the rate of ten thouper mile.'" . sand The mortgilgtl s!3curing the first consolidated bonds provides: "But such bonds',ior any of them. shall be issued by the trustee only upon the written ordel'or demand of· the president' of the said railroad com pany, the certificate of its chief engineer. that part or parts of said railroad, in respect to which said bonds are qemanded. has, or have, at the date of said cel·titillate. been so completed ll,l!Jto be ready for the regular and continuous mnning ()f trains. which certificate shall clearly state the poillts or places from and tq which the sai(l railroad'shall have been so completed,and the 'precise length of the entire completed portion in miles, which order and certificate maY·be accepted by the trusteea& 'SUfficient eviLlence of its authority to issue said bonds as aforesaid."
. OOE '110' 'EAST' & W. R. CO.
ts57
It appears from the evidence that the bonds for 875,000 for construction, under the contract with Grovesteen & Pell, were issued about August 16, 1887, on the following certificates: "EAST & WEST RAILROAD CoMPANY OF ALABAMA, "NEW YORK, August 16th, 1887. "W. D. Snow, Esq., Secretary American Loan & T1'ust Company-DEAR SIR: We beg to notify you that the extension of the East & West Railroad Company of Alabama from Broken Arrow to Pell City, the junction point with the Georgia Pacific Railroad, is completed, making in all one hundred and twenty miles of road. Very respectfully, "Sf A. CRUIKSHANK, Sec'y. GEO. H. PELL, Pres't." "CARTERSVILLE, GA., Aug. 16th, 1887. "To W.D. Snow. Secretary American Loan & Trust Company, 115 Broad· way, New Y07'k: The completion of· the East & West Railroad to the Georgia Pacific Railroad at Pell City, on Monday, the 15th of August, gives that road now one hundred and twenty miles of track. "JOHN POSTELL, V. P. and G. M." "OFFIOE OF EAST & WEST RAILROAD OF ALABAMA, "NEW YORK, Aug. 16th, 1887. "W. D. Snow, Esq., Secretary American Loa1l & Trust Company-DEAR SIR: I desire to inform you that John Postell is acting chief engineer of the East & West Railroad of Alabama. "Very respectfully, GEO. H. PELL, President." John Postell, being examined in behalf of Schley, testifies that he was the chief engineer and general manager of the East & West Railroad Company of Alabama in the spring, summer, and fall of 1887, and gave the foregoing certificates as to the completion of the East & West Railroad to the Georgia Pacific Railroad at Pell City, on Monday, the 15th of August, 1887. On being asked whether, at the time he gave that certificate, that portion of the East & West Railroad of Alabama from . Broken Arrow to Pell City had been completed, and was ready for the regular and continuous running of trains thereon, answered: "Yes, sir; I considered practically that it was. Question. And the connection had been . A. Yes, sir. Q. Isn't that about as soon as it was completed? A. I think we had connected. running trains the next day. Q. Isn't it a fact that the trains did not begin to run on that portion of the road-regularly and'contilluously, now-until late in the fall of 1887? A. Well, it is a matter of memory with me; the schedule will show; I can't remember now whether it is.8o or not. Q. Mr. Postell, isn't it a fact that Mr. Schley, the contractor Jor the extension of that road, continued to work after the date of the certificate, in on that road, and did do work on that its construction?' A. Well, as I stated just now, the road was completed very hurriedly to make connection, in order to get the business started; and I authorized Mr. Schley to Ipave out a few of; the ties, so as we could make the connection, and then we could put them in easier afterwards with the trains on the road, as the ties were at a distance, and had to be hauled in wagons. and, it delayed the finishing of the road a week or two; and then he finished putting in the ties; perhaps he was a week or more putting them in; the road, though, was practically finished, except Pllttillg in those ties. It facilitated the work." .
com· to have he a certificate from t1,l6 !lruditor of the, company the balance due him on that date on construction of the East & West extenteby ,the engiileer, was $13,431. 72. sion', accdrtljfl!g tothe The're(furlf{ltls6 shd'ws anaccbtmt madeout against theraihoad c()mpany aInount of said iIldehtedness, from the company, sWQrn,tq:bt', the legal rate from4\lgust26, 1887.· His suit was instituted ipthecircuit of Cherokee county, Ala"jagainst the companY on November 11, 1887, and his jUdgment was obtained at the sll:IPe term 9nDecemper:16, 1887. It is thus seen that, at the time the :wvhich the were issued to & Pell, for claim for indebtedness against the company' fol' and ,on account of: auch construction ·was not in .' existence; or, ifin eXis,tence, not made known to the company, or tathe trustee un-I del' the'tridrtgage. I 'find' no record in tbe e\'idence tending to show that the trustee, in issuing the bonds upon tl'leJoortificates aforesaid, acted otherwise than in good faith. ,It w{)uldseemthat, although the certificates were not in theexact'form required' by the b,}' the. with Grovesteell Pell, it 'f.RSJ in the absence of fraud, competent for the parties in interest to waive informalities, and, as the road was practically completed,a.tthe.time and the bonds issued, noinjurycoU'ld" or did ,reslllt ·,to any pllortieS by ,reason of waiving the formalcertificaterequire,cl py, th,e ·. At least, it is difficult to see how the translloction r.elj\)lteQdn any ",ise .to the injury ,of intervener, Schley.. Tile .evidenceshpw& tbat 'certificates were made and the bonds issued. prior to of (}roves.teen & there is a arising from the showing of Schley jn that yery strong 1:l1S claiJ:n the company for the him on construction aftertb e f;lilure of G;rovesteen & Pell,. which was. about did not August 24, 1887. The evidence' the American Loan & Trust Company is now a holder of50 of the first consolidated mortgage bonds of the East & ;\Vest Railroad GpP'lpany, 11'ot very flill !LS the manner in vvhich tbe.compl\ny the bonds. EnQugh, however, appears to Show that,:when the 75 were, issued on the certificate of August by-the trust' oompanyfot' a.cconnt of Pell to se16th, ClJre iidval1cesaM loans to him at anflprior to that date;that 'afferwards Pell directed tl)e:trust company'to turn over 25 bonds toJohl1 Postell ,iil settlement a', 's,uit whichPos,tell hadprought against the railroad cOtUpanyand others; and that,on the 24th day of August,. J?ostellreoeiptedrfor25 of the said bonds I: although, in fact, he received :but:18.Itappears thatdnpresentation" of his order the trust comto delivering the bonds 'called for, claitningthat it held them l\S for tq Pell, but some sort of a compromise was effected by which 'it 'did" surrender 18, taking are-·
,EAST &·W.:g.'oo.;
f
559
ceipt for 25. The testimony of O. D. Baldwin, president of the American Loan & Trust Company, is to:theeffect that .thetrust company now holds 50 of the said bonds, and they now stand on the books of the company at $33,000"but the act'ualcost of the same is upwards of $50,000. Since the institution ofthis. suit, the American Loan & Trust Company, having failed, has been l'Emloved as trustee, and the present complainant George S. Coe substituted, so that now the American Loan & Trust Company has no further interest in this suit than as the holder the iforesaid 50 bonds. It is very doubtful whether intervener, Schley, in this litigation can maintain a claim against the holder of bonds whois not a party to the suit, for. the purpose ofappropriating any portion of tbe bonds or postponing the payment of them beyond others of the issue. On the evidence, however, it does not appear that he has. established, any' claim against the said bonds for which the court could 'give him relief, even were the proper parties before the court·. All that can be done for the intervener, Schley, in this case, seems to be to recognize. his' judgment as'R valid judgment against the East.& West Railroad Company, but inferior as a lien to that of the bondholdersunJ der the ,first consolidated mortgage, the foreclosing of which is sought in the.present'8uit. ,On the Main Gnu.- The evidence establishea the granting of themol'tr: gage,tbe foreclosure of which is the issuance of 1,750 bomds, each for 8l,000 thereunder, dated December 1, 1886, payable to the American Loan & Trust Company or bearer, December 1, 1926,in gold coin, at the office of the American Loan & Trust Company, in the city of New York, together with interest thereon at the rate of 6 per cent per annum irilike gold coin, payable in June and December of eachsuccessive year until maturity, on presentation and surrender of the coupons attached to said bonds; that tbesll.idEast&WestRailroadCompanyhas made default in the payment of the interest coupons, on Decem. ber 1,1887, and on all coupons maturing thereafter; that the said default has not been waived; and that the trustee has declared, in accordance with the terms of said mOl'tgageo, the prinoipal secured by said mortgage to be due and payable. The complainant is, therefore, entitled to a recognition of the lien Un. der the mortgage, and a decree of foreclosure as prayed for. It appearing, however, that, since the institulion of the suit and the appointment of the receiver, the receiver, under authority from the court, and with consent of parties, has issued and sold certificates to the amount of $650,000, payable on or before April 1, 1894, and drawing interest at the rate of 8 per cent., which receiver's certificates are by order of court and consent of the parties a first lien upon all the property. and franchises of the said railroad, it follows that the decree of foreclosure ttlUst recognize the lien. and priority of said receiver's certificates. The accompanying decree will be entered in the case.
of
560 MOFFETT
BEPOB'l'll:B,
vol 52.
'11. CITY OF GOLDSBOROUGH.
(Cf,rcuU Court oj Appeats, Fourth Circuit. October 11, 1892.)
No. 21. MUlfICrl>j.L'<:JORPORATIONS-'-CONTRACTS-ORDINANOES-BoND·
an ordina,lice certlloin persons tocQlJ.struct and opl'lrate gIving tb,empower to acqUlr:e the lalld, and makipg certain 1'e\tU'i1'Wrents as to purity of water, and' the replllrmg of gas }lilies, sewers, and :hithWay" dist:urbed in. J!i-Y!9g j;he watel1pipeil; . was also provided that the gran. 9perate the 20 'years, unless the city bought a pri.ce!tGbe !ftxedby agreement'or arbItratIon. There was no money consIderatIon, and fJ)1l· "'01111 was :the lmt after its passage the city required ;!iqnd as givenwltS c.onditioned be .void if the granteesfajthfully perc . fonnea them ll contract,L"d'11ring the constrUction of said works.." Held, that the , J;l,ot. constit\\t.l;l a lbin,ding1co!ltrll,Ct" and the Qt the grantees tQ theconstrnction of the :wor:li:s did Ilot render them liable on the bone; I , 411<Foo. Rep. 218, reversed., ." . : ' r
.... .
triot, ot ;North, Carolina. Action: by.tthecity Qf Goldsborough against John F.. Moffett, Henry C. Hodgkins, and John V. Clarke, as principals, and Daniel G. GlTiffin a8I,suretj1,'upon ahond; giv,tm. to secure the. performance of. an alleged contract\tiii;constructwaterwc>rks.· Jury waived ,and, trial by the court. Judglllerit -for .plaintiff,· 49 Fed. Rep. 213. Defendants bring error. Reverlel;l.: ' . iLCYWiB Mar,BhaU, fOl! plaintiffs inert-or· .F. :H. Bmbee, for defendant in error. ·BeforeBoND and GOFb', Circuit Judges,and SIMONTON, District Judge. I
In Erltod<Y..t he Circuit Court of the United States for the Eastern Dis-
'1. 1
,·r,
BONn, ,Circl;lit Juqge, This is a 'Writ of error to the circuit court of the United States for the. eastern district. of North Carolina. The facts presented;.by'lihe record, at least so farlc\s it is necessary to state them that the poin.ts raised by the :writ of error may be understood, are these: Theoityof' Goldsborough, having power so to do by its charter, did on the 29th day of March, 1887, adopt an ordinance authorizing Moffett, HOdgkins, and Clarke, .citizens of the state of New York, to Qonstruct, maintain, and operate waterwol,'ks to supply the city with water. is: "An ordinance authorizing Moffett, HodgThe style of and operate waterworks to supkins, and ply the oityof; Goldsborough, North QJ.rolina, and it!! inhabitants with water, and; ,defining their rights, duties, privileges, and The first,seotion. giv,es. the grantees power to acquire the necessary land for the pUllpo,Se:QUhe grant. The sllcond provides for the purity of the water:.· thaHn:layingtheir. pipes and mains they shallllot .obstructany high way, ahan repair any gas pipe or sewer which they disturb, and leave the highwll-ysln as good as they found them when they commenced to lay their pipes and mains. The ordinance provided that the grantees might operate the waterworks for 20 years, unless within that ti'tle the city bought them at a value to be as-