New Albany v. Burke - 78 U.S. 96 (1870)
U.S. Supreme Court
New Albany v. Burke, 78 U.S. 11 Wall. 96 96 (1870)
New Albany v. Burke
78 U.S. (11 Wall.) 96
A city subscribed to the stock of a railroad and issued bonds for a part of the subscription, agreeing to issue them for the rest of it when the road should be completed up to a certain point. The sale of the bonds was the chief source which the railroad company had of raising money to make it. The right of the city to subscribe to the road and to issue bonds being denied by taxpayers of the city, they filed bills to enjoin the levy of any tax to pay interest on the bonds. Their value in the market was thus largely destroyed. The company being in debt had pledged the bonds to creditors for a part only of their nominal value, and the embarrassments of the company increasing, the creditors threatened to sell the bonds for whatever they would bring. It being doubtful whether, with the questioned right of the city to issue them, the bonds would bring the principal and interest due on the debts for which they stood pledged, the company applied to the city to pay the sums due, take back the bonds pledged, and be discharged from the issue of the balance of the bonds (not yet issued), which the impossibility of now completing the road showed could never, by the terms of the original agreement, be called for by the company. The arrangement was concluded in 1857, both city and company acting in good faith and for the interests of the road as well as for those of the city. In 1868, a purchaser of a judgment against the company, to execution on which, in 1858, a return of nulla bona had then been made, filed a bill against the city, alleging that the compromise was illegal, and praying an ascertainment of what the city owed on its subscription (assuming it to be yet existing), and an application of so much as would pay his judgment. The court admitting that
"the subscribed capital stock of a corporation is a fund held by it in trust for its creditors, and that had the company released the city without equivalent consideration, or given its bonds away, its action would have been fraudulent, and might have been set aside by a court of equity."
1. That this transaction was not invalid.
2. That there were laches in filing the bill.
Burke and others, complainants in the court below, were equitable owners of a judgment recovered on the 14th day of November, 1857, in the Circuit Court of Floyd County, Indiana, against the New Albany & Sandusky City Junction Railroad Company, an insolvent corporation. The judgment was obtained in a suit brought by certain trustees to foreclose a mortgage given by the company to secure the
payment of 110 bonds of $1,000 each, and such proceedings were had in the suit that there was not only a decree of foreclosure and an order to sell the mortgaged property, but a personal judgment against the company. The mortgaged premises were sold under the order, and, the proceeds of sale having proved insufficient to satisfy the judgment, an execution was issued for the residue, which, December 1, 1858, was returned unsatisfied. Nothing further was done until January 29, 1868, when Burke having purchased the interest of several of the equitable owners of the judgment, this bill was filed by him and the other equitable owners whose interests he had not acquired, against the railroad company, the City of New Albany, and others. It averred the ownership of the judgment by the complainants, the failure of the company to put any portion of its railroad into operation or to lay any part of the track thereof, and its having become insolvent about the 30th day of April, 1857. It charged further that the company, having expended all its means, abandoned all further efforts to build the road, and that its roadbed and right of way had been sold. It also charged that since the year 1858 it had not kept up its organization or elected any new officers. The bill then proceeded to charge that the City of New Albany was indebted to the company in the sum of $393,000, besides interest, growing out of a subscription to its capital stock, made on the 19th of November, 1853, in part payment of which 200 bonds of $1000 each had been delivered to the company, and that certain other parties, whom the bill made defendants, were indebted in smaller sums in a similar manner. The bill further charged that none of these bonds except 7 had been negotiated by the company, but that, on the contrary, 197 of them had been returned to the city in pursuance of an illegal compromise, and that the city subscription to the stock had been cancelled. The complainants therefore charged that the city still remained a debtor to the company, and they prayed relief that the amount of debt that might be ascertained, and that so much thereof as was necessary to satisfy the judgment might be decreed to be thus applied.
To this bill the City of New Albany set up several defenses; some of form, some to the merits. Among these last, it set up:
1st. That the city was not indebted to the company when the bill was filed; that the adjustment by the city and the company was, at the time it was made (September 7, 1857), a compromise, made in good faith, by which the city ceased to be indebted to the company, and that the adjustment was effective and valid as against all persons.
2d. That if the complainants had rights against the city and might have impeached the validity of the arrangement by which the city recovered its bonds and obtained a cancellation of its subscription, they had slept so long upon these rights that a court of equity would not afford them relief.
These two defenses were the only ones which the court considered, the others having been of such a character as that if these two were sufficient, it was unnecessary to say anything about them.
As to the facts, it appeared that in November, 1853, pursuant to an ordinance of the common council of the city, a subscription had been made by the city to the stock of the railroad of $400,000, payable in city bonds upon the call of the company, and that the council assumed the power to pass an ordinance which some persons asserted to be void but which others considered had been subsequently ratified, if void originally, by an ordinance of March 7, 1855, the railroad company now, upon the passage of this ordinance of ratification, agreeing and binding itself that not more than $250,000 of bonds should be called for until the road should be completed and put into order to its junction with the Ohio & Mississippi Railroad, and then but for the purpose of furnishing it &c. Pursuant to the subscription, the officers of the city delivered to the railroad company 200 city bonds for $1,000 each, payable to bearer and redeemable in ten and payable in twenty years. At the time of thus delivering the bonds, the railroad company was actively engaged in prosecuting its enterprise, and represented to the officers of the city that it was essential to the completion of
its road that the company should obtain money by the sale of the bonds. Shortly, however, after the delivery of the bonds, and while all of them except 7 remained unsold, several suits were instituted by taxpayers of the city to resist the payment of a tax levied for the payment of interest, the ground of the suits being that the subscription was void. These suits led to protracted litigation and raised such doubts as to the validity of the bonds as to render it impossible for the railroad company to sell or negotiate them except at a ruinous sacrifice. In August, 1857, the railroad company represented to the city that in consequence of this failure to obtain money on the bonds, the company had found itself without means to carry on the work, and had abandoned its enterprise. It had apparently expended all the cash and real estate received by it in payment for stock, and had pledged the 200 city bonds (except the 7 sold) to different persons for sundry sums borrowed for the purpose of prosecuting the work. It thus had no means to pay the amounts so borrowed upon pledge of the city bonds, and it appeared that unless the city provided the means, the whole of the bonds were in danger of being sold for the payment of the loans and that, owing to the doubts cast upon their validity, the whole of them would not have sold for more than sufficient to pay the sums for which they were pledged.
The railroad company therefore proposed to the city that if the latter would provide means for the payment of the sums so borrowed and redeem the bonds from the pledgees, they should be returned to the city and cancelled.
The city, relying apparently on the representation of the railroad company as to the condition of its affairs, passed an ordinance, published immediately afterwards, by which it accepted the proposition of the railroad company upon condition that the latter would cancel the subscription of the city and consent to the repeal of all ordinances and amendments relating thereto. This condition was accepted by the railroad company, and the agreement was carried into effect. The city paid the sums of money for which the bonds were pledged, amounting to more than $36,000. All the bonds,
except the 7 that had been sold were returned to the city and cancelled, and the subscription of stock was cancelled.
The arrangement seemed to have been made in good faith by the city, and for the purpose of preventing the large amount of its bonds' being sacrificed for the payment of the debts for which they stood pledged.
As to the second of the above-mentioned defenses, it seemed that neither the complainants nor any other person had ever controverted the validity of the adjustment made between the city and the railroad company, nor instituted proceedings to have it set aside as fraudulent and void, until the bill of complaint in this case was filed more than ten years after the agreement was concluded. However, one of the complainants was a nonresident of Indiana, and swore that he never knew of the city subscription until after the suit was brought. It was shown, nevertheless, that he had gone to New Albany in 1858 in order to examine the company's concerns. His attorney knew of it, and one witness thought that he did also.
The court below decreed in favor of the complainants for the balance due on their judgments, amounting to over $70,000 in the aggregate, against the railroad company and the city, and dismissed the bill as to the other defendants. The city appealed to this Court.