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

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

ERROR TO THE CIRCUIT COURT

FOR THE DISTRICT OF WISCONSIN

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

MR. JUSTICE NELSON delivered the opinion of the Court:

As the two stockholders (Rockwell and Fleming), though not made defendants by the bill, were permitted by leave of the court to appear and put in answers in the name of the Milwaukee & Minnesota Company, it is material to inquire into the effect to be given to them. That they cannot

Page 69 U. S. 302

be regarded as the answers of the corporate body is manifest, as a corporation must appear and answer to the bill, not under oath, but under its common seal. And an omission thus to appear and answer according to the rules and practice of the court entitle the complainants to enter an order that the bill be taken pro confesso. A further objection to the practice of permitting a party to appear and answer in the name of the corporation is the inequality that would exist between the parties to the litigation. The corporation not being before the court, it would not be bound by any order or decree rendered against it, nor by any admissions made in the answer or stipulations that might be entered into by the parties or their counsel. It is thus apparent that while the name of the corporation is thus used as a real party in the litigation so far as the rights and interests of the complainants are concerned, it is an unreal and fictitious party so far as respects any obligation or responsibility on the part of the respondents.

It is insisted, however, that the directors of this company refused to appear and defend the bill filed against them, and for the fraudulent purpose of sacrificing the interests of the stockholders, and hence the necessity, as well as the propriety and justice, of permitting the defense by a stockholder in their name.

Undoubtedly, in the case supposed, it would be a reproach to the law, and especially in a court of equity, if the stockholders were remediless. But in such a case, the court in its discretion will permit a stockholder to become a party defendant, for the purpose of protecting his own interests against unfounded or illegal claims against the company, and he will also be permitted to appear on behalf of other stockholders who may desire to join him in the defense. But this defense is independent of the company and of its directors, and the stockholder becomes a real and substantial party to the extent of his own interests and of those who may join him, and against whom any proceeding, order, or decree of the court in the cause is binding, and may be enforced. It is true, the remedy is an extreme one, and

Page 69 U. S. 303

should be admitted by the court with hesitation and caution, but it grows out of the necessity of the case and for the sake of justice, and may be the only remedy to prevent of flagrant wrong. A complainant, if he chooses, may compel a corporation to appear and answer by a writ of distringas, or be may join with the corporation, a director, or officer, if he desires a discovery under oath. But we are not aware of any other except a complainant who can compel and appearance or answer.

Now although the appearance and answers of the stockholders (Rockwell and Fleming) were irregularly allowed by the court, as each was permitted to appear and answer in the name of the company, yet, as the defense set up is doubtless the same as that which they would have relied on if they had been admitted simply as stockholders, we are inclined to regard the answers the same as if put in by them in that character, in the further views we shall take of the case. Each one swore to the truth of his answer in the usual way.

Before we enter upon an examination of the merits of the case, it will be proper to dispose of the CROSS-BILL filed by Fleming against the complainants.

This bill was filed in the name of the company alone, signed by their solicitors and counsel. The name of Fleming does not appear. And in addition to this, it appears that Fleming, in his petition for leave to appear and answer the bill in the name of the company, also asked leave to file a cross-bill. Leave was granted to put in the answer, but not to file the bill. The filing of it subsequently, therefore, was an irregularity for which the court below very properly afterwards set it aside. The cross-bill, so much spoken of in the argument, is thus out of the case. In this connection, we may as well refer to the answers of the judgment creditors, who were made parties defendant to the bill of complaint.

Sebre Howard recovered a judgment in the United States district court, on the 28th November, 1859, against the La

Page 69 U. S. 304

Crosse & Milwaukee Railroad Company, for the sum of $16,379.86; and Graham & Scott, a judgment in a state court of Wisconsin, on the 25th November, 1858, against the same company for the sum of $29,820.71; and another judgment in the same court, on the 21st September, 1858, for the sum of $11,188.15; and also a judgment against the same company, in the United States district court, on the 11th January, 1860, for the sum of $44,413.18. This latter judgment appears from the answer, as we understand it, to have been founded on the two previous judgments in the state court. Now it appears that each of these judgments were recovered after the date of the third mortgage of the La Crosse & Milwaukee Company, upon the foreclosure of which the Milwaukee & Minnesota Company was formed. The liens of these judgments were subsequent to this mortgage, and were cut off by its foreclosure. Indeed, the judgment of Howard of November, 1858, and the last judgment of Graham & Scott, which was recovered in 1860, never were liens upon any interest in the road of the La Crosse & Milwaukee Company, the defendants in the judgments, as the equity of redemption had already passed to the purchaser under the sale to Barnes in the foreclosure of the third mortgage, and afterwards became vested in the Milwaukee & Minnesota Company. These judgment creditors, therefore, according to their answers, have no interest in the subject matter of this litigation. We may add, that as replications were filed to the answers, the proof of these judgments should have been produced at the hearing. But the only proof of them that we have found in the record, is in a list of judgments annexed to the report of the master. They were material, and were put in issue by the replication.

These answers of the judgment creditors being thus disposed of, the issues in the case are brought down to those raised by the answers of Rockwell and Fleming in the name of the Milwaukee & Minnesota Company, which we have agreed to consider rather by indulgence than as matter of strict right, as the answers of the individual stockholders.

Page 69 U. S. 305

And this brings us to an examination of what may be called the merits of the case.

Before we take up the questions presented by these answers to the bill which bear upon the merits, it will be proper to refer to some matters there presented, and very much discussed on the argument, which, in our judgment, should be laid entirely out of the case, as tending only to confuse and embarrass the real questions involved. We refer to those parts of the answers which relate to the dealings between the La Crosse & Milwaukee Company and Chamberlain, in which the complainants in this suit were not concerned, and with which they had no connection, as, for instance, the lease of the road to Chamberlain, and the allegation of fraud against him and against the company in conducting the business of running the road under this lease. Also, in respect to other contracts between these parties in relation to the indebtedness of the company to Chamberlain and to the building and completion of unfinished portions of the road and equipping it with the rolling stock for use. These relate to the dealings of the mortgagor, the La Crosse & Milwaukee Company, with a third person over which the complainants, as mortgagees, had no control, and for which they were not responsible. These dealings were subsequent to the execution and lien of the mortgage, and could not affect prejudicially the rights of the mortgagees. They had no interest in the earnings of the road or concern in the appropriation of them until the filing of the bill and the appointment of a receiver.

The only matters, therefore, set forth in these answers and in the proofs, which have any bearing on the merits are:

1. The allegation that Chamberlain received from the La Crosse & Milwaukee Company two hundred of the bonds secured by this mortgage fraudulently and without consideration.

2. That S. R. Foster received one hundred of the bonds in the same way.

3. That J. T. Soutter, one of the trustees, received fifty-five of them, and refused to deliver them to the company.

Page 69 U. S. 306

4. That Greene C. Bronson, the other trustee, received fifteen for the stock of the company.

5. That Prentiss Dow an officer of the company, received fourteen for less than one thousand dollars.

And 6. That Chamberlain, who had covenanted, in the lease of the road from the company, to apply the proceeds derived from the use of it to the payment of the interest accruing on the bonds, withheld the payment in pursuance of a fraudulent arrangement with the trustees, or with their agents, for the purpose of bringing about a foreclosure of the mortgage, that he might be enabled to purchase the road.

These are the allegations that bear upon the merits of the controversy and deserve to be considered. We shall not, however, encumber this opinion with any very detailed explanation of them, but shall briefly refer to the proofs relating to each of these charges.

1. As to Chamberlain. It appears that he held a large claim for damages against the company on account of their failure to fulfill contracts made with him to build the Western Division of the road. The work on the road was suspended by reason of this failure. And in the fall 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 these two hundred bonds, at fifty cents on the dollar, towards payment of this claim.

2. As to S. R. Foster. He had loaned the company over one hundred and fifty thousand dollars, and had taken their bonds as security, and, among others, the one hundred in question. It appears that, at a meeting of the Board of Directors, 24 May, 1858, the matter between them was adjusted by delivery of forty land grant bonds to Foster.

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

4. As to G. C. Bronson. He had purchased fifteen thousand dollars of stock, one hundred and fifty shares, from the company, in the spring of 1857, and paid eighty cents cash on

Page 69 U. S. 307

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. The company was doubtless pressed for money at the time. At a meeting of the Board of Directors, on the 2d of September, 1858, it was resolved, that it would take into consideration the stock theretofore purchased by Judge Bronson, as he rendered many services to the company for which he had received no compensation, and afterwards, in September of the same year, it appears that the president of the company, who had induced him to purchase the stock, received it back, and delivered to him the fifteen bonds in question. The truth of the case, therefore, is that instead of receiving from the company the money he had advanced for the stock, according to their agreement, he received in place of it only bonds of the company of less than half the value; and, as it appears, nothing for his legal advice and services.

5. As to Prentiss Dow. It appears that but thirteen bonds had been received by him, and for which he paid the company, at the time, $11,400 in cash, stock, and other bonds, and was afterwards engaged in its service as agent, settling claims against the company.

In this connection, it is proper to refer to the terms, as published in a circular by the La Crosse & Milwaukee Company, and under which these bonds were negotiated and put into circulation. This paper is dated August 10, 1857. The company state, that the importance of completing the road this season to the junction of the Western Division (sixty miles from Portage), by which they would not only control the coming winter's travel of the Upper Mississippi, but receive over 300,000 acres of the land grants, have determined the Board of Directors to place before the stock and bondholders extraordinary inducements to furnish the means; that the sum of $400,000 would be required. To obtain this sum, the company now offers the holders of its stock and of unsecured bonds, a new issue of one million of 8 percent bonds &c. The terms proposed are to receive in payment for a bond of $1,000, $400 in cash, and the like

Page 69 U. S. 308

sum in the stock or unsecured bonds of the company. It was upon these terms that the directors went into the market, in the City of New York and elsewhere, for the purpose of negotiating the bonds which now constitute the subject of litigation.

6. As to the charge of collusion of the complainants with Chamberlain, in the proceedings to foreclose the mortgage. This allegation is 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 the obvious object of it on the part of the trustees was to procure the control of the net proceeds of its earnings pending the proceedings of foreclosure. For this purpose Chamberlain agreed to deposit the whole of the earnings 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 provided for in the lease, as the exigencies and proper working of the road might require. The trustees, in order to secure the fidelity of the officers and agents of Chamberlain, connected with the earnings of the road and the receipt of its revenues, stipulated for a supervision and control over these persons, and for the discharge of any of them from the service, in case of a dereliction of duty. They provided also for access to the books and papers relating to the revenues, management, and running of the road; also for the appointment of a receiver in case of the nonfulfillment of the agreement on the part of Chamberlain. These provisions were very important, as the revenues of the road, according to the terms of the lease, after covering running expenses and paying the interest on prior encumbrances, were to be applied to the discharge of the interest on these second mortgage bonds. The interest then due on them amounted to $40,000. It was also agreed that the proceedings of foreclosure should be conducted amicably -- that is, no unreasonable opposition should be made to them by Chamberlain. It was further agreed that the sale should be made, if practicable, subject to the lease of Chamberlain, and that no

Page 69 U. S. 309

opposition should be made to his purchase of the road at the sale under the foreclosure; but the trustees expressly 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.

It is supposed that the arrangement was entered into for the fraudulent purpose of enabling Chamberlain to purchase the road at the foreclosure sale, and thereby cut off subsequent encumbrances, and especially the rights and interests of the Milwaukee & Minnesota Company, formed under the third mortgage. But there is no evidence of this charge in the proofs, nor even of any previous dealings between the parties, tending to this conclusion. They came together for the first time after the trustees had determined to foreclose the mortgage for default in the payment of interest, and finding Chamberlain in the possession of the road, and refusing to deliver it over to the trustees, as provided for in the mortgage, but, on the contrary, insisting upon his right to run the same pending the legal proceedings, it is not strange that the trustees should have endeavored to arrange with him for a supervision and control, in the meantime, over the earnings and management of the road, and that he should forbear any unreasonable opposition to the foreclosure suit. And as to the provision relating to the purchase in case of a sale, there is nothing in it interfering with any rights that belonged to the trustees or to the prejudice of third parties, the judgment creditors, or company formed under the third mortgage. In a word, the arrangement was highly beneficial to the bondholders represented by the trustees, and prejudicial to no one concerned in the foreclosure suit.

We shall not, however, dwell longer on this branch of the case; indeed, much that we have thus far said has been rather by way of explanation, and for the purpose of clearing it of matters and issues that do not belong to it, and have served only to confuse and embarrass its consideration. In view of this object and purpose, we have referred to the two

Page 69 U. S. 310

answers of the stockholders, Rockwell and Fleming, and have endeavored to separate the irrelevant matter from that which bore upon the merits, so as to confine the examination to the latter, namely to the charges against the validity of the bonds impeached, of the number of some three hundred and eighty, in the hands, or which passed into the hands of several individuals named, and have shown, as we think, by a reference to the proofs, that these charges are not well founded. The general and sweeping allegations against the other portion of the bonds, without specification or identity, we have not specially noticed. These charges are too general to be entitled to consideration, and the proofs relied on are as general and indefinite as the allegations.

We have also shown that the judgment creditors who appeared and answered have no interest in the matters in controversy, and lastly that the charges of a fraudulent collusion between the trustees and Chamberlain rest upon suspicion instead of upon proofs.

We now come to a branch of the case which presents a more conclusive answer to all the charges, whether in allegations or in proofs of the respondents, and overrides all other views that may or can be taken of them.

As we have seen this third mortgage, under which the Milwaukee & Minnesota Company was formed, was executed and delivered to Barnes, the trustee, on the 22d June, 1858, to secure the payment of an issue of $2,000,000 in bonds, and a supplement to this mortgage was executed to the same trustee, on the 11th August following.

These two mortgages, or rather one in two parts, were, in express terms, made subject, among other encumbrances mentioned, to the bonds secured by a second mortgage on the Eastern Division of the road, to the amount of one million of dollars.

Again, the bonds issued under this third mortgage, one of which is in the proofs, have an endorsement on the back, as follows: "State of Wisconsin, La Crosse & Milwaukee Railroad Company, third mortgage sinking fund bond, seven percent,

Page 69 U. S. 311

&c.," subject, among other things, "to a second mortgage on the same line of road of $1,000,000."

At the time this third mortgage was executed, and thus made subject to the second mortgage bonds, all these bonds had been negotiated by the company, and were in circulation in the business community. They were all negotiated in the months of September, October, November, and December, 1857. This, the company, of course, well knew at the time of the execution of the third mortgage, and knew, also, of the circumstances attending the negotiation of them. They had received and were in the enjoyment of the avails of them, and with this knowledge, and under these circumstances, the third mortgage, and the bonds issued under it, were made in express terms subject to the payment and satisfaction of the bonds issued under the second. All persons, therefore, taking these third mortgage bonds, or coming in under the mortgage, took them and came in with a full knowledge that the mortgagor had made the security subject to the prior lien and indebtedness. Even if there had been any valid objection to these bonds under the second mortgage, it was competent for the obligor to waive them, and no better proof could be furnished of the waiver, than the acknowledgment of the full indebtedness, by making the subsequent security subject to it. This was a question that belonged to the obligor to determine for himself when giving the third mortgage; but, besides this, what right have those coming in under it to complain? They come in with full notice of the acknowledgment of the indebtedness and previous lien, and especially what right have the Milwaukee & Minnesota Company to complain, who purchased the equity of redemption through Barnes, their agent, subject to the previous encumbrances of $1,000,000. They have the benefit of that encumbrance by an abatement of that amount in the price of the purchase.

Without pursuing the case further, we are satisfied the decree of the court below, reducing the indebtedness of the La Crosse & Milwaukee Company to the bondholders, is

Page 69 U. S. 312

erroneous and that the decision should have been for the full amount of one million of dollars and interest.

We shall therefore reverse the decree and remit the cause to the Circuit Court of the United States for the District of Wisconsin with directions to enter a decree for all the interest due and secured by the mortgage, with costs; that the court ascertain the amount of moneys in the hands of the receiver or receivers from the earnings of the road covered by the mortgage which may be applicable to the discharge of the interest and apply it to the same; and that if the moneys thus applied are not sufficient to discharge the interest due on the first day of March, 1864, then to ascertain the balance remaining due at that date, and in case such balance is not paid within one year from the date of the order of the court ascertaining it, then an order shall be entered directing a sale of the mortgaged premises, under the direction of the court, and on bringing the proceeds into court, they shall be applied to the payment of the balance of interest, and if they exceed such balance, shall be applied to the future accruing interest down to the sale; and if they exceed that, to the principal of the bonds, in case the bondholders assent, or pro rata to those who may assent, and any remaining balance of the proceeds to be invested, under the direction of the court, for the payment of future accruing interest, and ultimately the principal.

And further that in case the interest upon the bonds is paid without a sale, the decree shall remain as security for subsequent accruing interest, and ultimately for the principal.

And further that the court may pay out of moneys in the hands of the receiver or out of the proceeds the taxed costs of the trustees in the proceedings for the foreclosure of the mortgage not taxed and received from the defendants in those proceedings, and also such counsel fees in behalf of the trustees as the court in its discretion may seem right to allow.

Decree accordingly.

[Footnote 1]

This case was decided at the last term.

[Footnote 2]

For an understanding of the position of this road, its Eastern Division &c., see diagram, infra, p. <|69 U.S. 610|>610.

[Footnote 3]

There seemed to be some confusion about these dates &c., not perfectly understood by the reporter.

[Footnote 4]

See 1 Wall. p. 68 U. S. 411, note.

[Footnote 5]

Whether this decree directed also a sale of any portion of the rolling stock was one of the questions litigated by the parties in a second appeal, reported infra, p. <|69 U.S. 609|>609.