Bronson v. La Cross & Milwaukee Railroad Co.
69 U.S. 283 (1864)

Annotate this Case

U.S. Supreme Court

Bronson v. La Cross & Milwaukee Railroad Co., 69 U.S. 2 Wall. 283 283 (1864)

Bronson v. La Cross & Milwaukee Railroad Co.{|69 U.S. 283fn1|1}

69 U.S. (2 Wall.) 283

Syllabus

1. Stockholders of a corporation who have been allowed to put in answers in the name of a corporation cannot be regarded as answering for the corporation itself. In a special case, however, where there is an allegation that the directors fraudulently refused to attend to the interests of the corporation, a court of equity will, in its discretion, allow a stockholder to become a party defendant for the purpose of protecting from unfounded and illegal claims against the company -- his own interest and the interest of such other stockholders as choose to join him in the defense.

2. The filing of a cross-bill on a petition without the leave of the court is an irregularity, and such cross-bill may be properly set aside.

3. Judgments recovered against a corporation in Wisconsin after the date of a mortgage by it are discharged by a foreclosure of the mortgage.

4. Until the filing of his bill of foreclosure and the appointment of a receiver, a mortgagee has no concern or responsibility for or in the dealings of a mortgagor with third parties, such as confessing judgment and leasing its property subject to the terms of the mortgage.

5. Where a mortgage is made in express terms subject to certain bonds secured by prior mortgage, these bonds being negotiable in form and having in fact passed into circulation before such former mortgage was given, the junior mortgagees and all parties claiming under them are estopped from denying the amount or the validity of such bonds so secured if in the hands of bona fide holders. Parties holding negotiable instruments are presumed to hold them for full value, and whether such instruments are bought at par or below it, they are, generally speaking, to be paid in full when in the hands of bona fide holders for value. If meant to be impeached, they must be impeached by specific allegations distinctly proved.

6. A court of equity, where a mortgage authorizes the payment of the expenses of the mortgagee, may pay out of funds in his hands the taxed costs and also such counsel fees in behalf of the complainants as in the discretion of the court it may seem right to allow.

Bronson and Soutter filed their bill in the Circuit Court for the District of Wisconsin to foreclose a mortgage made on the 17th August, 1857, by the La Crosse & Milwaukee Railroad Company, a corporation of Wisconsin, covering a portion of a railroad made by the said company in that

Page 69 U. S. 284

state -- the portion being between Milwaukee and Portage City, about ninety-five miles, and called the Eastern Division. [Footnote 2] The mortgage was made to the said Bronson and Soutter as trustees, to secure the payment of bonds for one million of dollars issued by the company. These bonds were payable to bearer in New York, with interest at eight percent, payable semiannually. They were registered and countersigned by the trustees, and delivered to the company, and in the autumn of 1859 had been negotiated and put into circulation. They were for $1,000 each.

The bill alleged that default had been made in the payment of interest, and prayed that the La Crosse & Milwaukee Railroad Company and all other persons claiming under it might be decreed to deliver to them, B. and S., or to their agents, and to put them into possession of, the railroad, with its appurtenances, and that all the income of the road might be applied to the payment of the moneys due and to become due on the mortgage or bonds, and that the road, with its rolling stock and franchises, might be sold &c., and that, pending the proceedings, a receiver might be appointed. The bill was filed December 9th, 1859.

An order pro confesso was entered against the company.

Certain other parties, however, besides the La Crosse & Milwaukee Railroad Company were made parties to this bill.

1. The Milwaukee & Minnesota Railroad Company. This company had been organized upon a sale of the La Crosse & Milwaukee Railroad, just named, under a third mortgage, which had been made to one Barnes, as trustee, by the debtor company, junior to that of the complainants. This Barnes mortgage, with a supplement to it, was made to secure an issue of bonds to the amount of TWO millions of dollars. The mortgage and supplement, by its terms, was made subject to certain encumbrances, and, among them, "to the bonds secured by a second mortgage on the Eastern Division

Page 69 U. S. 285

of the road to the amount of one million of dollars," the mortgage, to-wit, now sought to be foreclosed. They also had on their back the endorsement thus: "State of Wisconsin. La Crosse & Milwaukee Railroad Company, 3d mortgage sinking fund bond, seven percent &c.," subject, among other things, "to a 2d mortgage on the same line of road of $1,000,000."

This company did not appear to the bill, but permitted it to be taken as confessed.

2. Certain private individuals -- Zebre Howard, also Graham and Scott -- were made defendants, the bill alleging that they had, or claimed to have, some interest in the mortgaged premises.

Howard answered the bill, setting forth that on the 1st of May, 1858, he obtained a judgment against the debtor company in the Circuit Court of Milwaukee County for $25,586.78, and that, this judgment remaining unpaid, he commenced suit thereon in the district court of the United States and recovered judgment in that court November 28, 1859, for $16,379.86. [Footnote 3]

Graham and Scott also answered the bill, setting up a judgment in their favor, recovered in the said district court in December, 1859, for $41,008.86, founded on two former judgments in their favor in the state court.

The answer of Howard and that of Graham and Scott asserted that these judgments, respectively, were liens upon the mortgaged premises, and set forth various matters in defense against the relief prayed for by the complainants. Replications were filed to both these answers. No proof was made of these judgments other than that of their being included in a list of judgments appended to the report of a master in the case.

After the time had expired within which the Milwaukee & Minnesota Railroad Company ought to have answered, but before an order had been entered taking the bill against them pro confesso, one J. S. Rockwell, a stockholder of the

Page 69 U. S. 286

said company, presented to the court his petition charging collusion between the complainants or their agents and one Russell Sage, President of the said Milwaukee & Minnesota Company, to secure a foreclosure and sale in their cause for the purpose of extinguishing the rights of the said Milwaukee & Minnesota Company, which was alleged to be the owner of the equity of redemption of the mortgaged premises, and that the President of the said last-named company, although requested by its stockholders, had declined to make any defense in this cause. The petition prayed leave to defend the bill

"on the part of said company, as a defendant therein, and to be let in and allowed to make such defense as he may be advised is proper or necessary, in the place of said company, as a party defendant to said action, and for a reasonable time to prepare and file his answer."

Upon this petition, the court

"ordered that the said Rockwell be, and hereby is, allowed to make defense to this bill in the name of said Milwaukee & Minnesota Railroad Company, to the same extent as the said company could do under the rules and practice of this court."

In pursuance of this order, Rockwell filed his answer, entitled

"The separate answer J. S. Rockwell, who, by the order of this court is allowed to make defense to the bill &c., in the name of the Milwaukee & Minnesota Railroad Company."

This answer was signed by Rockwell individually.

Fleming, another stockholder of the Milwaukee & Minnesota Company, presented a petition charging collusion, as before charged in the petition of Rockwell, apparently upon the theory that Rockwell's was his individual answer, and not that of the company, and praying leave

"to put in an answer for said Milwaukee & Minnesota Railroad Company, and that said company may have thirty days' time to perfect the same and prepare a cross-bill as shall be necessary."

Upon this petition, the court "ordered that the said Fleming have leave to put in answer in the name of the Milwaukee & Minnesota Railroad Company." Under this order, Fleming filed an answer entitled "The answer of the Milwaukee & Minnesota Railroad Company, one of the defendants to

Page 69 U. S. 287

the bill," &c. This answer was signed "The Milwaukee & Minnesota Railroad Company, by A. Fleming, stockholder," and also, "A. Fleming, stockholder of the Milwaukee & Minnesota Railroad Company." The complainants filed replications to these answers entitled "Replications &c., to the answer of J. S. Rockwell," and "Replication &c., to the answer of the Milwaukee & Minnesota Railroad Company."

The answer of Fleming set up in general terms that the bonds of the La Crosse & Milwaukee Company for the one million of dollars were issued, and the mortgage of the road to the complainants made, in violation of the charter of the company and in fraud of the stockholders and creditors, and it then set forth six particular instances of the alleged fraud on the part of the company or its officers and directors in disposing of the bonds. These six instances being connected with the names of, 1st, Chamberlain; 2d, one S. R. Foster; 3d, J. T. Soutter, a trustee and complainant; 4th, Greene C. Bronson, another trustee and complainant; 5th, one Prentiss Dow. The 6th charge had reference to a certain leasing of the road to Chamberlain. The answer proceeded thus:

"The defendant, answering, states and shows, upon information and belief, that the said mortgage and the said one thousand bonds, to which the same is collateral security, was gotten up, contrived, and executed by the said railroad company, when the said company was well known to its board of directors to be greatly embarrassed in its pecuniary condition and affairs, for the corrupt and fraudulent purpose of disposing of said bonds or a large part thereof in payment of pretended debts to the officers and agents of said company or their friends, without any consideration to be paid therefor, or in exchange for the stock of said company, then of little or no value, held by its officers and agents or their friends, and that in point of fact a large part of said bonds were so disposed of and given away in violation of the true intent and meaning of the charter of said company, in fraud of its creditors, and of this defendant in particular;

Page 69 U. S. 288

that two hundred of said bonds, being those numbered from 651 to 825 inclusive, and from 851 to 875 inclusive, were delivered or given to the defendant, Chamberlain, in pretended payment or satisfaction of a claim of said Chamberlain for services rendered to said company or for damages sustained by him by reason of the breaking up or surrender of a contract or contracts between him and said company, which claim was wholly fictitious or was greatly over-estimated, for the fraudulent purpose of enabling him to receive and hold said bonds; that one hundred of said bonds were given to S. R. Foster of the City of New York as a security for a pretended indebtedness of said company to him, but that in truth and in fact said company was not indebted to said Foster on a fair settlement of accounts in any sum whatever, but that said Foster was largely indebted to said company; that about fifty-five of said bonds were delivered to the said complainant, J. T. Soutter, either without any consideration at all or as collateral security to or in exchange for certain bonds of the said company, theretofore issued corruptly and fraudulently, and without any legal authority whatever, by the said company, and popularly known as 'Corruption Bonds,' or 'Barstow Bonds,' and that said Soutter gave no valid or valuable consideration therefor, but that the said transfer to him of the said fifty-five bonds was fraudulent; that fifteen of said bonds were delivered to the complainant, G. C. Bronson, in exchange for stock of the said company, and was pretended to have been sold to him for the stock of said company, which stock was at the time nearly or wholly worthless; and this defendant insists that neither the said company nor its directors, officers, or agents had any authority, power, or right whatever to purchase from said Bronson said stock for or on behalf of said company and pay therefor with money or property or bonds of said company, and that said pretended sale of said fifteen bonds to said Bronson was illegal and fraudulent; that about six hundred of said bonds were sold and disposed of at the nominal price of 80 cents on the dollar, as follows, viz., forty cents on the dollar of the amount specified in the said bonds, respectively, was to be paid in money, and forty cents on the dollar of said amount in the bonds of said company, known as aforesaid as 'Barstow Bonds,' or in the said bonds known as 'Corruption Bonds,' or in the stock of said company; and that the said company received for said six

Page 69 U. S. 289

hundred bonds only about one hundred and ninety thousand dollars in cash, and that it received in said bonds known as 'Barstow Bonds' and 'Corruption Bonds,' and mostly in said Barstow bonds, so-called, about one hundred thousand dollars, and the remainder, to make up said eighty cents on the dollar, in the stock of said company, and this defendant insists that neither the said company nor its directors, officers, or agents had any authority, power or right to sell said bonds and receive the capital stock of said company in part payment therefor, and that all of said six hundred bonds, disposed of as aforesaid, are fraudulent and void, and ought to be surrendered and cancelled."

The answer further stated that one Prentiss Dow, who was an agent of the company, received fourteen of the bonds for a sum less than one thousand dollars.

It then set forth the circumstances attending a certain leasing of the road by the La Crosse & Milwaukee Company to Chamberlain and the delivery of possession of he same, with its rolling stock and appurtenances generally. According to the terms of the lease referred to, Chamberlain bound himself, after paying the interest and existing claims arising out of prior liens and encumbrances, to apply the net proceeds of the road to the accruing interest on the bonds secured by the mortgage to the complainants. And the allegation of the defendant was that Chamberlain and the complainants or their agents combined to withhold the payment of the interest for the purpose and with the intent of forcing a sale of the road and its appurtenances, under the mortgage, for the benefit of Chamberlain, that he might become the purchaser, and that the present suit was instituted in pursuance of this arrangement; that Chamberlain had funds in his hands, the proceeds of the road, to pay the interest coupons due the 1st of September, 1859. The answer then set out the title of the Milwaukee & Minnesota Company under the foreclosure of the third mortgage.

The answer of Rockwell, the other stockholder, was substantially the same as that of Fleming.

The evidence in regard to these facts was very voluminous and intricate, making what the court styled "a most complicated

Page 69 U. S. 290

and difficult case." [Footnote 4] It filled a volume of more than one thousand large pages of small pica, set "solid." The facts, too, were resolutely contested, the argument in this Court, and chiefly upon them, having lasted six days. It is not possible to present here the evidence of them. As assumed by the Court in the result and truth to have been proved, they were in substance somewhat thus, though this was not exactly the view taken of them by Mr. M. H. Carpenter, counsel of the defendants to the bill, who collocated, presented, and enforced the evidence of irregular dealing with singular eloquence and force.

1. As respected Chamberlain. This person, who had been a contractor on the western part of the road, held a claim for damages against the company on account of their failure to fulfill their contracts made with him -- a failure which arrested the progress of the work. In the autumn of 1857, upon the issue of the bonds of the company under this second mortgage, an arrangement was entered into by the company by which he received towards payment of this claim the two hundred bonds in question, not at par but at fifty cents on the dollar.

2. As respected S. R. Foster. He had lent to the company more than one hundred and fifty thousand dollars, and had taken their bonds as security. Among them were the one hundred in question. At a meeting of the board of directors, 24th of May, 1858, the matter between the parties was adjusted by delivery to him of forty bonds, called "land grant bonds." The terms on which he held them were not distinct, but it was not shown that he paid what is called their "face" -- in other words, their par.

3. As respected J. T. Soutter. The fifty-five bonds in controversy between him and the company were settled, as appeared by a receipt of one Guest, their chairman and vice-president, on 14th of September, 1858, by the delivery of other bonds to the company.

4. As respected G. C. Bronson. He had purchased fifteen

Page 69 U. S. 291

thousand dollars worth of stock from the company in the spring of 1857 and paid eighty cents, cash, on the dollar, the president at the time agreeing that the company would repurchase it at the same rate at any time thereafter if he should wish to surrender it back. In September, 1858, they did take it back, and for this delivered to him the fifteen bonds. A meeting of the board of directors on the 2d of that same September had resolved that it would take into consideration the stock theretofore purchased by Judge Bronson, as he had rendered many services to the company for which he had received no compensation.

5. As respected Prentiss Dow. It appeared that thirteen bonds had been received by him, and that for these he paid the company at the time but $11,400 in cash, stock, and other bonds, the value of which was not so entirely evident. However he was afterwards engaged in the company's service as its agent, settling claims against the company.

Without going into more particulars, it seemed that at the time these bonds were issued and afterwards, the La Crosse & Milwaukee Company were a good deal pressed for money, as it remained all along. Before issuing the bonds now in question, it had printed and circulated a letter essentially as follows, and the bonds, when made, were sold pretty generally, it rather appeared, for what they would bring, and that what they would bring was sometimes not much. The transactions, so far as the reporter could understand the immense body of testimony, had a good deal the aspect which generally marks the fiscal arrangements of unfinished and embarrassed railroad companies endeavoring to get themselves into successful operation. While resorts to equivocal expedients might have been sometimes practiced, many of the witnesses spoke without personal knowledge, and from impressions chiefly. The circular was thus:

"OFFICE OF THE LA CROSSE"

"AND MILWAUKEE RAILROAD CO."

"August 10, 1857"

"The importance of completing our road this season to the junction of the Western Division, sixty-one miles from Portage

Page 69 U. S. 292

City, by which we should not only control the coming winter's travel of the Upper Mississippi but receive over 300,000 acres of our land grant, has decided the board of directors to place before the stock and bondholders extraordinary inducements to furnish the means necessary to accomplish this object. The sum required to meet the engagements of the company and finish the road sixty-one miles beyond Portage City is about $400,000. To obtain this sum, the company now offers to the holders of its stock and unsecured bonds (now so much depreciated in market) a new issue of the million of eight percent bonds, payable in 1870, secured by a deed of trust to Hon. Greene C. Bronson, and J. T. Soutter, President of the Bank of the Republic, in New York, upon the Eastern Division of its road from Milwaukee to Portage City, ninety-five miles, subject to a prior lien of about $13,000 per mile."

"It was intended to issue this new loan exclusively to stockholders, receiving in payment $400 in the stock of this company and $400 in cash for a bond of $1,000, but it has been concluded to extend a like privilege to bondholders of the unsecured bonds of this company which are outstanding, receiving such bonds, with unpaid coupons flat, upon the same terms as the stock."

"The subscription will be paid as follows: one-fourth of the cash payment at the time of making the subscription; the remainder, with the stock or old bonds, to be surrendered either at the time of subscribing or on the first day of September, when the new bonds will bear date and be ready for delivery."

"Books are now open at this office."

"BYRON KILBOURN"

"President"

6. As to the charge of collusion of the complainants with Chamberlain in the proceedings to foreclose the mortgage. This allegation was founded upon an agreement entered into with Chamberlain on the 13th of November, 1859. At the time of this agreement, he was in possession of the road and in the receipt of its earnings, and, for the purpose of giving to the trustees the control of its earnings during the proceedings to foreclose, he agreed to deposit them with the agent of the trustees from day to day, and the trustees, on their part, agreed to appropriate them to the objects and uses

Page 69 U. S. 293

provided for in the lease as the exigencies and working of the road might require. The trustees, in order to secure the control of the agents of Chamberlain, connected with the earnings of the road and the receipts of its revenues, stipulated for a supervision over them and for the discharge of any of them from the service if desired. They provided also for access to the books and papers relative to the revenues &c., of the road; also for the appointment of a receiver in case of the nonfulfillment of the agreement on the part of Chamberlain.

The interest on the second mortgage bonds then due on them amounted to $40,000. It was now agreed that the proceedings of foreclosure should be conducted amicably, that no considerable opposition should be made to them by Chamberlain, and also that the sale should be made, if practicable, subject to the lease to Chamberlain, and that no opposition should be made to his purchase of the road at the sale under the foreclosure; but the trustees reserved the right to bid at the sale for the protection of the bondholders. The trustees also agreed that in case Chamberlain should become the purchaser, they would extend a credit of nine, and twenty-four months upon so much of the interest as had become due.

On the 3d of September, 1860, Fleming exhibited in the district court, in this cause, a CROSS-BILL in the name of the Milwaukee & Minnesota Railroad Company against the complainants for discovery in support of the answer filed by him in the name of the company, and on the same day the court made an order on the cross-bill that a subpoena should issue and service be made on the solicitor of the defendants. Subpoena was issued accordingly. On the same day, the court ordered that the said Bronson and Soutter, defendants aforesaid,

"do enter their appearance in this suit in the clerk's office on or before the day and time at which this subpoena is returnable as aforesaid; otherwise, the bill filed must be taken as confessed."

The defendants to the cross-bill moved the court to strike it from the files for the

Page 69 U. S. 294

reason that it had been filed without leave of the court, and also, subject to this motion to strike off, filed a demurrer to it. The court subsequently made an order sustaining the motion.

The cause was finally heard below, and decree passed in favor of the complainants, for FIFTY CENTS ON THE DOLLAR of the amount, principal and interest, specified in the bond secured by their mortgage to the complainants, and directing a sale of the railroad between Milwaukee and Portage. [Footnote 5] The road was at this time in the hands of a receiver.

On appeal here, the following were the principal points:

1. As to the answers of the two stockholders, Rockwell and Fleming, and of Fleming more particularly -- how far these answers of individual stockholders were to be regarded as answers of the Milwaukee & Minnesota Company.

2. Whether the cross-bill of Fleming had been properly dismissed, no leave having been asked to file it.

3. As respected the judgments of Sebre Howard and of Graham and Scott -- whether they were liens.

4. The real nature and effect of the transactions with the parties: 1. Chamberlain [his bonds]; 2. S. R. Foster; 3. J. T. Soutter; 4. Greene C. Bronson; 5. Prentiss Dow; 6. Chamberlain [his lease &c.].

5. Whether, on the whole case, and in view of the express terms of the third mortgage, that its bonds &c., were to be subject to the prior, or second mortgage, the complainants were entitled to have no more than fifty cents, as decreed them in the court below, on the dollar, or to have the full amount which the bonds on their faces called for.

Page 69 U. S. 301

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