Certain unsecured creditors of a railroad company in Alabama
instituted proceedings in equity in a court of that state on behalf
of themselves and of all other creditors of the same class who
should come in and contribute to the expenses of the suit to
establish a lien upon the property of that company in the hands of
other railroad corporations which had purchased and had possession
of it. The suit was successful, and the court allowed all unsecured
creditors to prove their claims before a register. Pending the
reference before the register, the defendant corporations bought up
the claims of complainants and other unsecured creditors. Thereupon
the solicitors of complainants filed their petition in the cause to
be allowed reasonable compensation in respect of the demands of
unsecured creditors (other than their
Page 113 U. S. 117
immediate clients) who filed their claims under the decree and
to have a lien declared therefor on the property reclaimed for the
benefit of such creditors. The suit between the solicitors and such
defendant corporations was removed to the circuit court of the
United States:
Held:
(1) Within the principle announced in
Trustees v.
Greenough, 105 U. S. 527, the
claim was a proper one to be allowed.
(2) It was also proper to give the solicitors a lien upon the
property brought under the control of the court by the suit and the
decree therein, such lien being authorized by the law of
Alabama.
(3) That under the circumstances of this case, the amount
allowed by the court below was excessive.
This was an appeal from a decree of the Circuit Court of the
United States for the Middle district of Alabama in favor of the
appellees, Pettus & Dawson and Watts & Sons, adjudging them
entitled to the sum of $35,161.21, and interest thereon at eight
percent per annum from March 7, 1881, with lien, to secure its
payment, upon the roadbed, depots, side tracks, turnouts, trestles,
and bridges owned and used by the appellants, corporations of the
State of Georgia, in operating the railroad formerly belonging to
the Montgomery and West Point Railroad Company, an Alabama
corporation, and which extends from Montgomery to West Point, with
a branch from Opelika to Columbus. This property was directed to be
exposed to sale unless within a given time the said amount was
paid. This suit is the outgrowth of certain litigation in the
courts of Alabama relating to the before-mentioned and other
railroad property in which the appellants are interested. A
statement of its history is necessary to a clear understanding of
the questions now presented for determination.
On the first of September, 1870, the Western Railroad Company,
an Alabama corporation, purchased and took possession of the
railroad (main line and branch) and all other property of the
Montgomery and West Point Railroad Company, one of the terms and
conditions of such purchase being, as was claimed, that the former
company assumed the payment of all outstanding debts and
obligations of the latter and agreed to issue its capital stock,
dollar for dollar, in exchange for stock of the Montgomery and West
Point Railroad Company outstanding.
Page 113 U. S. 118
It was a part of that arrangement that the last-named company
should, as it subsequently did, surrender its charter to the state.
When this purchase was made, there were, upon the franchises and
property of the latter company, two mortgages to secure bonds
proposed to be issued -- one, June 1866, for $750,000, bonds for
the whole of which were issued; the other, May 1, 1868, for
$400,000, bonds for $45,000 of which were issued. It had also
outstanding bonds issued in 1866 and 1867, not secured by mortgage
or otherwise. The Western Railroad Company had at the time of its
purchase a mortgage of date September 15, 1868, upon its own
property and franchises to secure $600,000 of bonds then, or at
some subsequent period, guaranteed by the present appellants.
On the 15th of September, 1870, that company executed to Morris
and Lowery, trustees, a mortgage upon its property and franchises
(including the property transferred to it by the Montgomery and
West Point Railroad Company), to secure the payment of $1,200,000
of bonds, thereafter to be issued, and of which a large amount was
issued, and their payment was also guaranteed by the
appellants.
Subsequently, on March 31, 1874, those trustees commenced a suit
in the Chancery Court of Montgomery County, Alabama, against the
Western Railroad Company, the present appellants, the surviving
trustees in the mortgages executed by the Montgomery and West Point
Railroad Company, and others. Its object was to procure a sale of
the property of the former company, including that purchased from
the latter company. A final decree was passed December 18, 1874,
ordering a sale, subject, however, to a lien, in respect of the
property formerly owned by the last-named company, in favor of the
holders of its mortgage bonds, according to their respective
priorities, and, in respect of the property of the Western Railroad
Company, to a lien in favor of the holders of bonds secured by its
mortgage of September 15, 1868. The sale was had, the present
appellants becoming the purchasers.
On the 8th of May, 1875, Branch, Sons & Co., H. P. Hoadely,
and C. S. Plank -- holding bonds of the (old) Montgomery
Page 113 U. S. 119
and West Point Railroad Company not secured by mortgage --
through Pettus & Dawson and Watts & Sons, their solicitors,
exhibited a bill in equity in the same court against the present
appellants, the Western Railroad Company, the Montgomery and West
Point Railroad Company, and others. They sued for themselves as
well as for all other creditors of the last-named company who
should come in and make themselves complainants and contribute to
the expenses of the suit. Such proceedings were had -- the Georgia
corporations appearing and making defense -- that on the 1st day of
May, 1877, a final decree was entered by which it was, among other
things, adjudged that "the unsecured creditors of the Montgomery
and West Point Railroad Company, to which class complainants
belong, have a lien" upon the property transferred by it to the
Western Railroad Company; that such lien was subordinate to those
for the bonds issued under the several mortgages executed by the
Montgomery and West Point Railroad Company that were outstanding
and unpaid, but superior to that of the mortgage executed by the
Western Railroad Company after its said purchase, so far as the
property of the Montgomery and West Point Railroad Company was
covered by that mortgage, and that the property of all kinds,
belonging to the latter company, be sold to satisfy its debts
according to priority.
The cause was referred to a register to ascertain and report the
amounts due to the complainants and to such other unsecured
creditors of the Montgomery and West Point Railroad Company as
should prove their claims pursuant to the decree; also the amounts
due to holders of bonds issued under its several mortgages. Upon
appeal by the two Georgia corporations to the Supreme Court of
Alabama, that decree was affirmed. The register thereafter
proceeded with its execution. Numerous parties, including the
complainants, appeared before him and had their claims registered,
the creditors in each instance retaining in their own custody the
evidence of their respective demands. The aggregate amount of such
claims was very large.
On the 15th of April, 1879, the register not having made his
Page 113 U. S. 120
report upon these claims, Pettus & Dawson and Watts &
Sons, by leave of the court, filed in the cause their joint
petition, alleging in substance that as solicitors specially
employed by the complainants, Branch, Sons & Co., Hoadley, and
Plank, they prepared and filed the original bill, as well in behalf
of themselves as of all other unsecured creditors of the Montgomery
and West Point Railroad Company who should come in and contribute
to the expenses of the suit; conducted the proceedings to a final
decree; represented the same interests in the Supreme Court of
Alabama; that their relations to the suit were well known to the
Georgia corporations during the whole period of the litigation;
that pending the reference before the register, after the rights of
complainants and all creditors of the same class had been
established by the final decree, those corporations made a secret
arrangement with their immediate clients, whereby the claims of the
latter were paid in full, principal and interest, and whereby also
Branch, Sons & Co. and their co-complainants agreed to withhold
from their solicitors the fact of such settlement until the Georgia
corporations could buy or settle all other claims of the unsecured
creditors of the Montgomery and West Point Railroad Company; that
"afterwards said two Georgia companies, defendants to this suit,
did buy up or settle the other claims, which had been filed in the
cause, under said decree," and, "either jointly or separately,
thereby acquired possession and control of said claims so filed;"
that they also purchased and settled a large amount of claims,
which might have been, but were not, filed with the register; that
at the time of such purchase, said Georgia corporations had actual
notice that petitioners, as solicitors in that suit, claimed
reasonable compensation for such services as they rendered in
behalf of the unsecured creditors of the Montgomery and West Point
Railroad Company (other than complainants) who should come in and
take the benefit of the final decree, and also the benefit of any
lien upon said property that should be declared in favor of those
creditors, and that in equity they
"were the assignees of a part of each claim as filed to the
amount of the reasonable value of the services rendered in said
cause by petitioners for the benefit of each holder and owner
of
Page 113 U. S. 121
such claims respectively."
The prayer of the petition was that an account be taken of the
sums thus due to them as solicitors representing the unsecured
creditors of the Montgomery and West Point Railroad Company (except
the complainants and other named creditors with whom they had
special contracts for fees) who received the benefit of their
services; that they be declared to have a lien for the value of
such services on all the property of that company which had come
into the possession of the Georgia corporations, and that so much
of it as may be necessary for that purpose be sold to meet the
amounts due them.
The register reported, on the 22d of April, 1879, that there
were then no bonds or claims in the registry, except one claim,
filed in court, as to which he did not report because no one had
appeared and requested that it be audited.
Subsequently, April 24, 1879, the Georgia corporations presented
their joint petition for the removal of the suit commenced against
them by Pettus & Dawson and Watts & Sons (they being the
only defendants to the petition filed by the latter) to the circuit
court of the United States, in which court it was docketed, and,
after answer by the defendants and proof taken, proceeded to final
decree. When the cause was removed from the state court, nothing
practically remained for determination between the parties to the
record except the claim of appellees, citizens of Alabama, to a
lien upon the property in question owned by the two Georgia
corporations.
Page 113 U. S. 122
MR. JUSTICE HARLAN, delivered the opinion of the Court. He
recited the facts as above stated and continued:
In
Trustees v. Greenough, 105 U.
S. 527, we had occasion to consider the general question
as to what costs, expenses, and allowances could be properly
charged upon a trust fund brought under the control of court by
suits instituted by one or more persons suing in behalf of
themselves and of all others having a like interest touching the
subject matter of the litigation. That suit was instituted by the
holder of the bonds of a railroad company, on behalf of himself and
other bondholders, to save from waste and spoliation certain
property in which he and they had a common interest. It resulted in
bringing into court or under its control a large amount of money
and property for the benefit of all entitled to come in and take
the benefit of the final decree. His claim to be compensated out of
the fund or property recovered for his personal services and
private expenses was rejected as unsupported by reason or
authority. "It would present," said MR. JUSTICE BRADLEY, speaking
for the Court,
"too great a temptation to parties to intermeddle in the
management of valuable property or funds in which they have only
the interests of creditors, and that perhaps only to a small
amount, if they could calculate upon the allowance of a salary for
their time and having all their private expenses paid."
In respect, however, of the expenses incurred in carrying on the
suit and reclaiming the property subject to the trust, the rule,
upon a careful review of the authorities, was held to be
different.
Page 113 U. S. 123
After stating it to be a general principle that a trust estate
must bear the expenses of its administration and that where one or
more of many parties having a common interest in a trust fund
takes, at his own expense, proper proceedings to save it from
destruction and to restore it to the purposes of the trust, he is
entitled to reimbursement either out of the fund itself or by a
proportional contribution from those who accept the benefit of his
efforts, the Court said that "the same rule is applicable to a
creditor's suit where a fund has been realized by the diligence of
the plaintiff." It was consequently held that the complainant in
that case was properly allowed his reasonable costs, counsel fees,
charges, and expenses incurred in the fair prosecution of the suit,
and in reclaiming and rescuing the trust fund and causing it to be
subjected to the purposes of the trust. Are the principles
announced in that case applicable to the one now before us?
We have seen that the purchase by the Western Railroad Company
of the property of the Montgomery and West Point Railroad Company,
and the surrender by the latter of its charter, left the unsecured
creditors of the vendor company unprovided for except as the vendee
company assumed and agreed to meet the outstanding debts and
obligations of the other company. But when the present appellants
became purchasers at the sale in the suit instituted by Morris and
Lowery, trustees, they asserted their right to hold the property
originally belonging to the Montgomery and West Point Railroad
Company freed from any claim against it by the unsecured creditors
of that company. Those creditors resided in several states, and
their claims aggregated a large amount. Cooperation among them was
impracticable. If some did not move, the interests of all would
have suffered. Hence, Branch, Sons & Co. and their
co-complainants instituted suit for the benefit of themselves and
other creditors of the same class. They and their solicitors bore
the entire burden of the litigation until the lien was finally
declared and the property ordered to be sold to pay all claims
filed pursuant to the decree. The Supreme Court of Alabama held --
conclusively as between the parties before it -- that the
Montgomery and West Point Railroad Company, like any other
Page 113 U. S. 124
private corporation chartered to transact business, was a
trustee of its capital, property, and effects, first for the
payment of its creditors and afterwards for the benefit of its
stockholders; that while it was in operation according to the
design of its charter, its general creditors would have no specific
lien entitling them to sue in equity; yet, having left its debts
unpaid, and having distributed its capital, property, and effects
among its stockholders or transferred them to third persons who
were not
bona fide purchasers without notice, and having
become disorganized so that it could not be efficiently sued at
law, "a court of equity will pursue and lay hold of such property
and effects, and apply them to the payment of what it owes to its
creditors," and consequently that its creditors had a lien for the
payment of their debts on its road, appurtenances, and other
property superior to that created by the trust deed or mortgage of
September 15, 1870, executed by the Western Railroad Company.
Montgomery & West Point Railroad Co. v. Branch, 59
Ala. 139.
It thus appears that by the suit instituted by Branch, Sons
& Co. and others, the property was brought under the direct
control of the court, to be administered for all entitled to share
the fruits of the litigation. Indeed, the suit itself was an
equitable levy upon the property, and the lien arising therefrom
remained until discharged by order of the court. It is true that
the bill states that it was brought for the benefit of all
creditors who should become complainants therein; but it was
intended to be, and throughout was, conducted as a suit for the
benefit not exclusively of the complainants, but of the class to
which they belonged. It was so regarded by all connected with the
litigation.
It is clear that within the principles announced in
Trustees
v. Greenough, Branch, Sons & Co. and their co-complainants
are entitled to be allowed, out of the property thus brought under
the control of the court, for all expenses properly incurred in the
preparation and conduct of the suit, including such reasonable
attorneys' fees as were fairly earned in effecting the result
indicated by the final decree. And when an allowance to the
complainant is proper on account of solicitors' fees, it
Page 113 U. S. 125
may be made directly to the solicitors themselves, without any
application by their immediate client.
But on behalf of appellants it is insisted that the utmost which
the court may do is to charge upon the property such reasonable
expenses as complainants themselves incurred and became directly
and personally bound to meet, and since appellees have received
from the creditors, specially engaging their services, all that
those creditors agreed to pay, it cannot be said that the
compensation demanded in respect of such as were not parties,
otherwise than by filing their claims with the register, constitute
a part of the expenses incurred by the complainants. This is an
aspect of the general question not presented in
Trustees v.
Greenough.
It is true that the complainants are not shown to have incurred
any personal responsibility for solicitors' fees beyond those
stipulated, by special contract, to be paid to the appellees, and
it is equally true that there was no express contract on their part
to pay appellees such additional compensation as the court might
allow and charge upon the property. Yet it is proven that when the
appellees engaged their professional services to Branch, Sons &
Co. and other complainants named in the bill, it was understood by
the latter that their solicitors entered upon the preparations of
the suit in the belief that they had the right to demand and would
demand such additional compensation as was reasonable in respect of
unsecured creditors who accepted the fruits of their labors by
filing claims; that but for this understanding, appellees would
have stipulated for larger compensation than was agreed to be paid
by their particular clients, and that in this belief and upon that
understanding they conducted the suit. Mr. Watts, in his
deposition, says that on the occasion of his contract for a fee
with Branch, he
"stated to him that the bill which we should file, although it
should be in the name of his firm, would be for the benefit of all
the creditors of the Montgomery and West Point Railroad Company not
secured by mortgage, and that in such cases, the lawyer who filed
the bill would be entitled to a fee from all the creditors who
participated in the benefit of their labors, and that we should
charge him so small a fee, with the
Page 113 U. S. 126
expectation that we should be paid a large fee out of the fund
brought into court or condemned by our labors, and that such fee
would be allowed by order of the chancery court, and a lien
declared on the fund for the payment of such compensation, and with
such understanding the paper [special contract for fee] was
signed."
Mr. Pettus says:
"The bonds and other claims on which the bill was filed were
less than a sixth of the unsecured debts of the Montgomery and West
Point Railroad Company of the same class, and at the time that
Pettus & Dawson were employed to bring the suit, that fact was
known and discussed between the parties making the contract, and it
was also discussed between said parties that the suit, if
successful, would inure to the benefit of all the unsecured
creditors who might claim the benefit of the decree, and that
everybody who claimed the benefit of the services rendered by the
complainants' solicitors would be bound to allow complainants'
solicitors compensation out of that part of the fund distributable
to them."
There is no evidence in contradiction of these statements. Had
Branch, Sons & Co. and their co-complainants expressly
stipulated to make such reasonable compensation, in addition to the
fees they agreed to pay their solicitors, as the court might allow
in respect of other creditors filing claims, the case, it could not
well be doubted, would come within the very letter of the decision
in
Trustees v. Greenough. Without at all conceding that an
express contract of that character would have added to the power of
the court in the premises, it seems to us that the present case is
embraced by the reason of the rule announced in
Trustees v.
Greenough. When the litigation was commenced, the unsecured
bonds of the Montgomery and West Point Railroad Company was without
any value in the financial market. That litigation resulted in
their becoming worth all, or nearly all, that they called for. The
creditors who are entitled to the benefit of the decree had only to
await its execution in order to receive the full amount of their
claims, and that result was due to the skill and vigilance of the
appellees, so far as the result of litigation may in any case be
referred to the labors of counsel. When creditors filed their
claims, they had notice by the bill that the suit
Page 113 U. S. 127
was brought not exclusively for the benefit of the complainants
therein, but equally for those of the same class who should come in
and contribute to the expenses of the litigation. Those expenses
necessarily included reasonable counsel fees, which upon every
ground of justice should be estimated with reference as well to the
claims of the complainants who undertook to protect the rights of
all the unsecured creditors as of the claims of those who accepted
the fruits of the labors of complainants and their solicitors. We
are of opinion that the appellees are entitled to reasonable
compensation for their professional services in establishing a lien
in behalf of the unsecured creditors of the Montgomery and West
Point Railroad Company upon the property described in the suit
instituted by Branch, Sons & Co. and others, and that such
compensation should be made with reference to the amount of all
claims filed in the cause, although the evidence thereof may have
been retained in the custody of the respective creditors, excepting
from such estimate or calculation not only the claims of the
complainants named in the bill and of other unsecured creditors who
may have had special contracts with appellees or settled with them,
but also such claims purchased by appellants as were not filed for
allowance under the decree. The decree below proceeded upon this
basis.
The court below did not err in declaring a lien upon the
property in question to secure such compensation as appellees were
entitled to receive, for according to the law of Alabama, by one of
whose courts the original decree was rendered and by which law this
question must be determined, an attorney at law or solicitor in
chancery has a lien upon a judgment or decree obtained for a client
to the extent the latter has agreed to pay him, or, if there has
been no specific agreement for compensation, to the extent to which
he is entitled to recover,
viz., reasonable compensation
for the services rendered.
Ex Parte Lehman, 59 Ala. 632;
Warfield v. Campbell, 38 Ala. 527. That lien could not be
defeated by the corporations which owned the property purchasing
the claims that were filed by creditors under the decree. The lien
of the solicitor rests by the law of that state upon the basis that
he is to be regarded as
Page 113 U. S. 128
an assignee of the judgment or decree, to the extent of his
fees, from the date of its rendition. This right of the solicitors
is superior to any which the defendant corporations acquired
subsequent to the decree by the purchase of the claims of unsecured
creditors.
It remains only to consider whether the sum allowed appellees
was too great. We think it was. The decree gave them an amount
equal to ten percent upon the aggregate principle and interest of
the bonds and coupons filed in the cause, excluding those in
respect of which there was, between appellees and complainants and
others, special contracts for compensation. It is shown that
appellees had with the complainants contracts for small retainers
and five percent upon the sums realized by the suit. We perceive no
reason for this discrimination against creditors who were not
parties except by filing their claims after decree. One-half the
sum allowed was, under all the circumstances, sufficient. For the
error last mentioned,
The decree is reversed and the cause remanded with
directions to modify the decree so as to award to appellees only
the sum of $17,580, with interest from March 7, 1881, with the
benefit of the lien upon the property as established by the decree.
Each party will pay his costs in this Court and one-half the cost
of printing the record.
